##### Table of Contents

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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D. C. 20549





FORM 10-Q


(MARK ONE)





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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE ACT OF 1934





FOR THE PERIOD ENDED SEPTEMBER 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 000-27086





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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)





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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 November 11, 2002Common Stock

6,870,390








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##### Table of Contents




THE THAXTON GROUP, INC.


FORM 10-Q


September 30, 2002





TABLE OF CONTENTS





Item No.



PagePART IFinancial Information1.

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

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

3Consolidated Statements of Income for the nine-months ended September 30, 2002 and 2001

4Consolidated Statement of Stockholder Equity for the year ended December 31, 2001 andthe nine-months ended September 30, 2002

5Consolidated Statements of Cash Flows for the nine-months ended September 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

164.

Controls and Procedures

16PART IIOther Information6.

Exhibits and Reports on Form 8-K

16Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002




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##### Table of Contents

Item 1: FINANCIAL STATEMENTS





THE THAXTON GROUP, INC.


Consolidated Balance Sheets


September 30, 2002 & December 31, 2001





September 30, 2002

December 31, 2001(Unaudited)AssetsCash

$
7,787,673

$
4,096,359Finance receivables, net


178,011,344


181,255,030Premises and equipment, net


4,745,363


4,246,816Accounts receivable


1,007,093


1,813,743Accounts receivable from affiliates


69,344


113,185Repossessed automobiles


775,810


952,153Deposit


7,866,842


6,710,692Goodwill and other intangible assets


32,255,726


32,481,654Deferred tax asset, net


2,910,000


2,752,000Other assets


7,353,350


8,138,673Total assets

$
242,782,545

$
242,560,305Liabilities and Stockholders EquityLiabilitiesAccrued interest payable

$
2,201,081

$
2,194,814Notes payable


216,706,678


225,033,166Accounts payable


2,023,194


1,361,490Accounts payable to related parties


1,944,625


254,043Income taxes payable


2,356,953


2,270,068Employee savings plan


1,595,950


1,083,594Other liabilities


5,457,229


4,078,594Total liabilities


232,285,710


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 6,870,390 in 2002; 6,849,355 shares
in 2001


68,704


68,493Additional paid-in-capital


8,863,203


8,831,599Retained earnings (accumulated deficit)


1,556,124


(2,624,360
)Total stockholders equity


10,496,835


6,284,536Total liabilities and stockholders equity

$
242,782,545

$
242,560,305





See accompanying notes to consolidated financial statements.




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##### Table of Contents




THE THAXTON GROUP, INC.


Consolidated Statements of Income


Three-Months Ended September 30, 2002 and 2001


(Unaudited)





2002

2001Interest and fee income

$
19,759,409

$
18,615,606Interest expense


3,732,900


4,782,926Net interest income


16,026,509


13,832,680Provision for credit losses


5,291,894


4,601,378Net interest income after provision for credit losses


10,734,615


9,231,302Other income:Insurance premiums and commissions, net


3,888,665


3,406,986Other income


634,296


970,227Total other income


4,522,961


4,377,213Operating expenses:Compensation and employee benefits


7,900,415


7,424,889Telephone, computers


698,275


572,463Net occupancy


1,672,285


1,652,977Reinsurance claims expense


642,459


460,652Advertising


713,579


719,572Collection expense


161,535


142,358Travel


371,845


330,032Professional fees


343,031


258,812Office expense


728,888


638,481Amortization expense


170,007


608,181Other


167,183


96,330Total operating expenses


13,569,502


12,904,747Income before income tax expense


1,688,074


703,768Income tax expense


573,954


344,280Net income


1,114,120


359,488Dividends on preferred stock


102,014


196,236Net income applicable to common shareholders

$
1,012,106

$
163,252Net income per common sharebasic and diluted

$
0.15

$
0.02





See accompanying notes to consolidated financial statements.




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##### Table of Contents




THE THAXTON GROUP, INC.


Consolidated Statements of Income


Nine-Months Ended September 30, 2002 and 2001


(Unaudited)





2002

2001Interest and fee income

$
58,125,642

$
54,731,895Interest expense


11,046,329


14,589,625Net interest income


47,079,313


40,142,270Provision for credit losses


13,663,566


11,210,686Net interest income after provision for credit losses


33,415,747


28,931,584Other income:Insurance premiums and commissions, net


11,720,577


10,305,809Other income


2,815,955


3,277,999Total other income


14,536,532


13,583,808Operating expenses:Compensation and employee benefits


24,286,603


23,032,888Telephone, computers


1,804,786


1,729,446Net occupancy


4,932,346


4,827,373Reinsurance claims expense


1,574,880


1,105,598Advertising


2,225,497


2,207,845Collection expense


470,437


471,649Travel


935,413


878,228Professional fees


962,477


788,655Office expense


1,871,277


1,872,201Amortization expense


470,331


1,823,241Other


1,488,589


1,482,498Total operating expenses


41,022,636


40,219,622Income before income tax expense


6,929,643


2,295,770Income tax expense


2,356,951


1,095,561Net income


4,572,692


1,200,209Dividends on preferred stock


392,207


557,151Net income applicable to common shareholders

$
4,180,485

$
643,058Net income per common sharebasic and diluted

$
0.61

$
0.09





See accompanying notes to consolidated financial statements.




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##### Table of Contents




THE THAXTON GROUP, INC.


Consolidated Statements of Stockholders Equity


Year Ended December 31, 2001 and Nine-Months Ended September 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


(14
)





(13,171
)






(13,185
)Dividends paid on preferred stock













(392,208
)


(392,208
)Net income













4,572,692



4,572,692Balance at September 30, 2002

$
68,704


$
8,804

$
8,863,203


$
1,556,124


$
10,496,835


See accompanying notes to consolidated financial statements.




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##### Table of Contents

THE THAXTON GROUP, INC.


Consolidated Statements of Cash Flows


Nine-Months ended September 30, 2002 and 2001


(Unaudited)





September 30, 2002


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


4,572,692


$
1,200,209Adjustments to reconcile net income tonet cash provided by operating activitiesProvision for credit losses


13,663,566



11,210,686Depreciation and amortization


1,670,428



3,035,895Deferred taxes


2,356,953



1,095,561Decrease in accounts receivable


850,491



1,191,499Non-cash compensation expense


45,000



20,000Decrease (increase) in other assets


(535,925
)


(4,330,949
)Increase in accrued interest payable and other liabilities


1,384,902



(1,409,175
)Net cash provided by operating activities


24,008,107



12,013,726Cash flows from investing activities:Net decrease in finance receivables


(10,419,880
)


4,117,520Net capital expenditures for premises and equipment


(1,699,464
)


(687,845
)Cash paid for deposit with Voyager


(1,156,150
)


(407,588
)Net cash provided by investing activities


(13,275,494
)


3,022,087Cash flows from financing activities:Notes payable to affiliates


1,690,582



(1,020,102
)Repurchase of common stock


(13,185
)


Dividends paid


(392,208
)


(557,151
)Net decrease in notes payable


(8,326,488
)


(16,020,984
)Issuance of preferred stock


-



200,000Net cash used by financing activities


(7,041,299
)


(17,398,237
)Net increase (decrease) in cash


3,691,314



(2,362,424
)Cash at beginning of period


4,096,359



4,482,553Cash at end of period

$
7,787,673


$
2,120,129





See accompanying notes to consolidated financial statements.




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##### Table of Contents

THE THAXTON GROUP, INC.


Notes to Consolidated Financial Statements


September 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. Substantially all
of the Companys premium finance business has been derived from customers of the 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., and Soco Reinsurance, Inc. Through a 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 accounting principles, generally accepted in the United States of America, 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 September 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 nine-months ended September 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 September 30, 2002 & 2001, and December 31, 2001 & 2000:





September 30, 2002


December 31, 2001


September 30, 2001


December 31, 2000Automobile sales contracts

$
23,493,567


$
23,121,113


$
25,176,903


$
31,196,711Direct loans


191,942,458



189,163,818



173,913,029



172,506,592Mortgage loans


14,284,247



16,468,209



17,460,615



20,738,959Premium finance contracts


4,225,208



8,618,497



9,384,065



7,527,689Commercial loans


1,792,733



3,161,875



3,558,704



3,935,945Total finance receivables


235,738,213



240,533,512



229,493,316



235,905,896Unearned interest


(35,541,614
)


(36,703,784
)


(34,247,093
)


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


(1,297,961
)


(1,798,520
)


(1,276,418
)


(1,966,062
)Insurance loss reserve


(9,123,371
)


(9,022,167
)


(8,425,054
)


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


(1,929,796
)


(2,036,818
)


(2,072,085
)


(2,406,165
)Allowance for credit losses


(12,414,594
)


(12,012,169
)


(12,021,285
)


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


2,580,467



2,294,976



2,374,745



2,375,207Finance receivables, net

$
178,011,344


$
181,255,030


$
173,826,126


$
177,943,646




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##### Table of Contents




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 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.





At September 30, 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 as of, and for the quarters ended, September 30, 2002 and 2001, and the years ended December 31, 2001 and 2000, are as follows:





September 30, 2002


December 31, 2001


September 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


13,663,566



16,583,919



11,210,686



14,657,930Charge-offs


(14,630,338
)


(18,024,265
)


(12,211,504
)


(16,052,319
)Recoveries


1,369,197



1,821,960



1,391,548



1,525,588Net charge-offs


(13,261,141
)


(16,202,305
)


(10,819,956
)


(14,526,731
)Ending balance

$
12,414,594


$
12,012,169


$
12,021,285


$
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
September 30, 2002 and December 31, 2001 follows:





September 30, 2002

December 31, 2001Leasehold improvements

$
2,429,466

$
2,289,105Furniture and fixtures


3,109,512


3,054,216Equipment and automobiles


8,215,395


7,680,873Total cost


13,754,373


13,024,194Accumulated depreciation


9,009,010


8,777,378Net premises and equipment

$
4,745,363

$
4,246,816





Depreciation expense was approximately $393,000 for the quarter ended September 30, 2002
and $1,200,000 year to date, compared to $410,000 for the quarter ended, and $1,213,000 for the nine-months ended September 30, 2001.




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##### Table of Contents




(4) Intangible Assets





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





September 30, 2002

December 31, 2001Goodwill and purchase premium


37,787,321


37,683,318Insurance expirations


2,030,601


1,890,301Total cost


39,817,922


39,573,619Less accumulated amortization


7,562,196


7,091,965Intangible assets, net

$
32,255,726

$
32,481,654





The Company acquired the majority of the intangibles in connection with our acquisition of
FirstPlus Consumer Finance. Amortization expense was approximately $470,000 for the nine-months and $170,000 for the quarter ended September 30, 2002, compared to $1,823,000 for the nine-months and $608,000 for the quarter ended September 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 $1.8 million for the nine-months ended September 30,2002.





(5) Notes
Payable





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





September 30, 2002

December 31, 2001

September 30, 2001

December 31, 2000Senior Notes Payable/Lines of Credit

$
121,314,569

$
151,234,760

$
146,767,630

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


93,060,467


71,542,844


67,561,238


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


2,255,562


2,605,623Total notes payable

$
216,706,678

$
225,033,166

$
216,584,430

$
232,605,414





We generally finance our operations through cash flow from operations, borrowings under
our credit facility with Finova and the sale to public investors of our subordinated notes. As of December 31, 2001 and September 30, 2002, we had $151.2 and $121.3, respectively, outstanding under our credit facility.





Our credit facility with Finova includes a term loan and a revolving credit line used to finance receivables. Advances under the term loan accrue interest at the
prime rate plus 2%, or 6.75%, as of September 30, 2002. Advances under the revolving credit line accrue interest at the prime rate plus 1%, or 5.75%, as of September 30, 2002. The prime rate is the prime rate published by Citibank, N.A., or other
money center bank as Finova may select. The interest rates are adjusted monthly to reflect fluctuations in the designated prime rate. Accrued interest on borrowings is payable monthly.







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##### Table of Contents

The term loan is payable in twenty-three equal monthly principal and interest payments of $600,000, which began on April 15, 2001, with the
remaining principal balance due on March 31, 2003. The outstanding balance under the term loan was $7.9 million as of September 30, 2002, which reflects an $11.9 million reduction since December 31, 2001. The revolving credit line matures on July
31, 2006. Under the revolving credit line, 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 term loan and the revolving credit facility, which requires us to comply with restrictive covenants, including financial condition covenants. As of September 30,
2002, the Company met all such requirements. James D. Thaxton guarantees both the term loan and the revolving loan.





The maximum amount
we could borrow under the revolving credit line was $165 million on December 31, 2001. As of September 30, 2002, the maximum amount we could borrow under the revolving credit line was $146 million and an additional $7.8 million was available for
borrowing against existing collateral, with $33.0 million of total potential capacity available for borrowing against qualified finance receivables generated in future periods.





Beginning in 2002, the maximum borrowing amount under our revolving credit line decreases on a quarterly basis. The annual decreases will be $22 million in 2002, $16.5 million in 2003, $18 million in
2004, $18 million in 2005 and $9 million in 2006.





We also fund our liquidity needs through the sale of subordinated notes. 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 December
31, 2001, we had $65.0 million of these registered subordinated notes outstanding and $6.5 million of outstanding subordinated notes registered in predecessor state registrations. As of September 30, 2002, we had $89.2 million of these registered
subordinated notes outstanding and $3.9 million of notes outstanding 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. Although the maximum borrowing amount under our revolving credit facility will be decreasing, we anticipate that our cash flow from operations, the available borrowing amount under our senior credit facility from time to time 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 nine months and quarter ended
September 30, 2002 and 2001:





Nine-Months Ended

Three Months EndedSept. 30,2002

Sept. 30,2001

Sept. 30,2002

Sept. 30,2001BASIC & DILUTEDNet income from continuing operations

$
4,572,692

$
1,200,209

$
1,114,120

$
359,488Less:    Dividends on preferred stock


392,207


557,151


102,014


196,236Net income applicable to common shareholders (numerator)


4,180,485


643,058


1,012,106


163,252Average common shares outstanding (denominator)


6,865,642


6,883,855


6,870,698


6,849,355Income per share from continuing operations  basic and diluted

$
0.61

$
0.09

$
0.15

$
0.02





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 Divisions





The Company has two primary divisions. The consumer finance segment provides financing to consumers with limited credit histories, low incomes or past credit problems. Income 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. Income 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 nine-months ended September 30, 2002 and 2001, and the year ended December 31, 2001:





September 30, 2002 Income Statement Data

ConsumerFinance

Insurance


Other


TotalTotal Revenue

$
69,840,163

$
3,114,317


$
507,694


$
72,662,174Net Interest Income


46,698,458


(3,847
)


384,702



47,079,313Provision for credit losses


13,575,433


30,333



57,800



13,663,566Noninterest income


12,222,215


3,114,317



-



14,536,532Insurance premiums and commissions, net


9,576,392


2,944,185



-



11,720,577Noninterest expenses


37,956,534


3,354,238



511,864



41,022,636Depreciation and amortization


1,459,184


195,777



15,467



1,670,428Net income


4,816,783


(239,921
)


(4,170
)


4,572,692Balance Sheet DataTotal assets


239,090,335


2,187,006



1,505,204



242,782,545Loans, net


176,456,018


-



1,555,326



178,011,344Allowance for credit losses


12,177,187






237,407



12,414,594Intangibles


30,902,510


1,353,216



-



32,255,726December 31, 2001 Income Statement Data

ConsumerFinance

Insurance


Other


TotalTotal 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



12,012,169Intangibles


31,184,955


1,296,699



-



32,481,654




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##### Table of Contents

September 30, 2001Income Statement Data

Consumer Finance

Insurance


Other

TotalTotal Revenue

$
64,124,543

$
3,413,510


$
777,650

$
68,315,703Net Interest Income


40,141,001


(531,531
)


532,800


40,142,270Provision for credit losses


11,096,593


13,745



100,348


11,210,686Noninterest income


10,170,324


3,413,484



-


13,583,808Insurance premiums and commissions, net


7,445,039


2,860,770



-


10,305,809Noninterest expenses


36,720,243


3,323,642



175,737


40,219,622Depreciation and amortization


2,776,703


243,370



15,927


3,036,000Net income


1,446,109


(291,515
)


45,615


1,200,209Balance Sheet DataTotal assets


223,404,105


2,440,738



3,324,966


229,169,809Loans, net


170,492,051


-



3,334,075


173,826,126Allowance for credit losses


11,796,656


-



224,629


12,021,285Intangibles


31,754,806


1,338,344



-


33,093,150





ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





We are a diversified consumer financial services company. The primary divisions of our business include:





| |  |  | origination and servicing of direct consumer loans made to credit-impaired borrowers,
| | - |  | -------------------------------------------------------------------------------------




| |  |  | used automobile lending through the purchase and servicing of used automobile sales contracts,
| | - |  | ----------------------------------------------------------------------------------------------




| |  |  | insurance premium finance lending through the purchase of insurance premium finance contracts,
| | - |  | ----------------------------------------------------------------------------------------------




| |  |  | selling insurance products on an agency basis, and the factoring of accounts receivable and
| | - |  | -------------------------------------------------------------------------------------------




| |  |  | the origination and servicing of small commercial loans to small- and medium-sized businesses.
| | - |  | ----------------------------------------------------------------------------------------------



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##### Table of Contents




NET INTEREST MARGIN





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





Three-Months Ended


Nine-Months EndedSept. 30, 2002


Sept. 30, 2001


Sept. 30, 2002


Sept. 30, 2001Average net finance receivables (1)

$
196,565,954


$
181,397,185


$
192,342,547


$
178,238,918Average notes payable (1)


213,472,239



213,647,108



210,951,115



215,640,461Interest and fee income


19,759,409



18,615,606



58,125,642



54,731,895Interest expense


3,732,900



4,782,926



11,046,329



14,589,625Net interest income


16,026,509



13,832,680



47,079,313



40,142,270Average interest rate earned (1)


40.21
%


41.05
%


40.29
%


40.94
%Average interest rate paid (1)


6.99
%


8.95
%


6.98
%


9.02
%Net interest rate spread


33.22
%


32.10
%


33.31
%


31.92
%Net interest margin (2)


32.61
%


30.50
%


32.64
%


30.03
%


| | 
| | 

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

| | (2) |  | Net interest margin represents net interest income divided by average Net Finance Receivables.
| | --- |  | ----------------------------------------------------------------------------------------------




The principal component of our profitability is our net interest margin, which is the difference between interest earned on finance receivables and interest
expense paid on borrowed funds. Statutes in some states regulate the interest rates that we may charge our borrowers while in other states competitive market conditions establish the interest rates borrowers may be charged. Significant differences
exist in the interest rates earned on the various components of our finance receivable portfolio. The interest rates earned on used automobile sales contracts and real estate secured loans generally are lower than the interest rates earned on direct
consumer loans due to competition from other lenders, superior collateral and longer terms. The interest rates earned on premium finance contracts are state regulated and vary based on the type of underlying insurance and the term of the contract.





Unlike our interest income, our interest expense is sensitive to general market fluctuations in interest rates. The interest rates paid
to our primary lender, Finova, are based upon a published prime rate plus set percentages. Thus, general market fluctuations in interest rates directly impact our cost of funds. Our general inability to increase the interest rates earned on finance
receivables may impair our ability to adjust to increases in the cost of funds resulting from changes in market conditions. Accordingly, increases in market interest rates generally will narrow our interest rate spread and lower our profitability,
while decreases in market interest rates generally will widen our interest rates spreads and increase our profitability.





Results of
Operations for the Nine Months Ended September 30, 2002 and 2001





Since December 31, 2001 our gross finance receivables have
decreased approximately $4.8 million. This decrease is due mainly to the decision in our Premium Finance division to just finance captive contracts along with the slow liquidation of our Commercial loan division and real estate secured loans. The
declines in these areas was offset by growth in our more profitable direct loans.





The growth in our direct loan business, coupled with
the addition of new fees in states such as Tennessee and Texas, our interest and fee income has grown for the nine-month period ended September 30, 2002 by approximately $3.4 million to $58.1 million, or 6.2%. We expect this trend to continue as we
move to a more direct loan based business. Our interest expense decreased significantly for the period, based on the decrease in the prime interest rate. Quantified this decrease was approximately $3.5 million or 24.3%. We expect the level of
interest expense to remain constant as long as the prime interest rate remains constant.





Costs associated with our normal business
growth caused our operating expenses to increase 3.0% from $40,220,000 during the nine months of 2001 to $41,023,000 during the same period in 2002. The major component of these expenses is personnel expense.





The increase in our operating expenses was offset by our adoption of SFAS 142 accounting for Goodwill. Under SFAS No. 142, goodwill and indefinite-lived
intangible assets are no longer amortized but are reviewed at least annually for impairment. The effect of not amortizing goodwill will be an expense savings of approximately $2.4 million for the full year, and was approximately $1.8 million for the
nine-months ended September 30, 2002.





The aforementioned expense savings and increases in revenues have substantially increased our
pretax net income from approximately $2.3 million for the nine-months ended September 30, 2001 to $6.9 million for the same period ended September 30, 2002. This income, offset by our income taxes expense and dividends paid has increased our total
stockholders equity to $10.5 million at September 30, 2002 from $6.3 million at December 31, 2001.




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##### Table of Contents




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





For the three months ended our gross finance receivables have increased in our automobile secured loans and direct loan portfolios, by approximately
$2.1 million and $5.5 million, respectively. These increases are due to the continued focus on these more profitable lines of business, and we expect this trend to continue through the fourth quarter.





The change in mix and growth of our receivables has caused our interest income to increase from $18.6 million for the three-months ended September 30, 2001 to
$19.8 million for the same period ended September 30, 2002, or 6.1%. Interest expense also declined for the period by approximately $1.0 million, or 22.0%. This decline was due to the decrease of the prime rate due to the majority of our debt being
linked to the prime interest rate.





Our operating expenses increased by approximately $1.4 million for the three months ended September
2002, compared to 2001. The increases were mainly in personnel and reinsurance expense.





CREDIT LOSS EXPERIENCE


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





Sept. 30, 2002


December 31, 2001


Sept. 30, 2001


December 31, 2000Net finance receivables (1)

$
190,425,938


$
190,105,324


$
182,288,707


$
185,638,256Allowance for credit losses


12,414,594



12,012,169



12,021,285



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


6.52
%


6.32
%


6.59
%


6.27
%Dealer reserves and discounts on bulk purchases


1,929,796



2,036,818



2,072,085



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


10.35
%


10.58
%


8.23
%


10.89
%Allowance for credit losses and dealer reserves and discount on bulk purchases


14,344,390



14,048,987



14,093,370



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


7.53
%


7.39
%


7.73
%


7.56
%Provision for credit losses


13,663,566



16,583,919



11,210,686



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


13,261,141



16,202,305



10,819,956



14,526,731Charge-offs (net of recoveries) as a percentage of average net finance receivables (2)


9.19
%


8.32
%


7.91
%


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) |  | September 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:





Sept. 30, 2002


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

$
8,469,232


$
7,373,910Direct finance receivables outstanding


157,194,656



148,214,621Direct finance receivables contractually past due 90 days or more as a percentage of Direct finance
receivables


5.39
%


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


1,195,075



1,632,483Real estate secured receivables outstanding


13,307,002



15,732,857Real estate secured receivables contractually past due 90 days or more as a percentage of real estate secured
receivables


8.98
%


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


1,658,068



1,090,032Vehicle secured receivables outstanding


18,641,591



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


8.89
%


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


375,628



679,091Premium finance contracts outstanding


4,095,455



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


9.17
%


8.11
%





Finance receivable balances are presented net of unearned finance charges.




14




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##### Table of Contents




LIQUIDITY AND CAPITAL RESOURCES





We generally finance our operations through cash flow from operations, borrowings under our credit facility with Finova and the sale to public investors of our subordinated notes. As of December 31,
2001 and September 30, 2002, we had $151.2 and $121.3, respectively, outstanding under our credit facility.





Our credit facility with
Finova includes a term loan and a revolving credit line used to finance receivables. Advances under the term loan accrue interest at the prime rate plus 2%, or 6.75%, as of September 30, 2002. Advances under the revolving credit line accrue interest
at the prime rate plus 1%, or 5.75%, as of September 30, 2002. The prime rate is the prime rate published by Citibank, N.A., or other money center bank as Finova may select. 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 of $600,000, which began on April 15, 2001, with the remaining principal balance due on March 31, 2003. The outstanding balance under the term loan was $7.9 million as of September 30, 2002, which reflects an $11.9
million reduction since December 31, 2001. The revolving credit line matures on July 31, 2006. Under the revolving credit line, 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 term loan and the revolving credit facility, which requires us to comply with restrictive
covenants, including financial condition covenants. As of September 30, 2002, the Company met all such requirements. James D. Thaxton guarantees both the term loan and the revolving loan.





The maximum amount we could borrow under the revolving credit line was $165 million on December 31, 2001. As of September 30, 2002, the maximum amount we could borrow under the revolving
credit line was $146 million and an additional $7.8 million was available for borrowing against existing collateral, with $33.0 million of total potential capacity available for borrowing against qualified finance receivables generated in future
periods.





Beginning in 2002, the maximum borrowing amount under our revolving credit line decreases on a quarterly basis. The annual
decreases will be $22 million in 2002, $16.5 million in 2003, $18 million in 2004, $18 million in 2005 and $9 million in 2006.





We also
fund our liquidity needs through the sale of subordinated notes. 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 December 31, 2001, we had $65.0 million of these registered subordinated notes outstanding and $6.5 million of outstanding subordinated notes registered in predecessor state
registrations. As of September 30, 2002, we had $89.2 million of these registered subordinated notes outstanding and $3.9 million of notes outstanding 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. Although the maximum borrowing amount under our revolving credit facility will be decreasing, we anticipate that our cash flow from operations, the
available borrowing amount under our senior credit facility from time to time 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.




15




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##### Table of Contents




ITEM 3: Quantitative and Qualitative Disclosures About Market Risk





Our outstanding debt under the revolving
credit line and term loan was $151.2 million at December 31, 2001 and $121.3 million at September 30, 2002. Interest on borrowings under these facilities is based on the prime rate. Because our profitability depends on our net interest margin,
changes in the prime rate will affect on our profitability. Increases in the prime rate would adversely affect our profitability. Based on the outstanding balance at September 30, 2002, a change of 1% in the prime interest rate would cause a change
in interest expense of approximately $1.2 million on an annual basis. Based on the outstanding balance at December 31, 2001, a change of 1% in the prime interest rate would have caused a change in interest expense of approximately $1.5 million on an
annual basis.





Our outstanding receivables are not affected by external interest rate changes because we usually charge rates typically
fixed at the maximum rate allowable by law or, in states 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 credit
impaired borrowers. This causes the interest rate risk on our outstanding receivables to be minimal.





Interest rates being charged by
competitors, even those outside our markets, also influence the interest rates we are able to charge customers. A decrease in the interest rates being charged by others in the market could impact our ability to attract new customers and/or retain
the customers we currently serve. Similarly, new market entrants and the resulting increased competition for customers in our market could adversely affect our profitability.





Additionally, changes in the maximum interest rate allowable by law would affect our profitability. A decrease in the maximum rate would cause the interest rates we are able to charge to be
commensurately decreased and, as a result, our interest rate margin would be reduced. A legally imposed maximum interest rate adopted by a state where we operate that previously did not have a limit could also impair our profitability because we may
be required to reduce our interest rates to fall within the legal limit.





ITEM 4: Controls and Procedures





Our management, under the supervision and with the participation of our
principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this Quarterly Report on Form 10-Q. Based on this
evaluation, our principal executive officer and principal financial officer have concluded that the design and operation of our disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of the evaluation was completed.





PART II





Item 6. Exhibits and Reports on Form 8-K





(a) Exhibits





99.1

Certification of James D. Thaxton pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200299.2

Certification of Allan F. Ross pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002





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.


Date: November 14, 2002

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








Date: November 14, 2002

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





CERTIFICATION





I, James D. Thaxton, certify that:





1. I have reviewed this quarterly report on Form 10-Q of The Thaxton Group, Inc.;





2. Based on my
knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;





3. Based on my knowledge, the financial statements,
and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;





4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;





(b) Evaluated the
effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;





5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and





(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls;
and





6. The registrants other certifying officer and I have indicated in this quarterly report whether or
not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.





Date: November 14, 2002





By:

/S/    JAMES D.
THAXTONJames D. Thaxton, President
and Chief Executive Officer





CERTIFICATION





I, Allan F. Ross, certify that:





1. I have reviewed this quarterly report on Form 10-Q of The Thaxton Group, Inc.;





2. Based on my
knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;





3. Based on my knowledge, the financial statements,
and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;





4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;





(b) Evaluated the
effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;





5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and





(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls;
and





6. The registrants other certifying officer and I have indicated in this quarterly report whether or
not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.





Date: November 14, 2002





By:

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







16