Thaxton (THAX) 10-Q 2003 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003   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

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)

803-285-4337

(Registrant’s telephone number, including area code)

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.

Yesx    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 8, 2003
Common Stock	6,867,280

THE THAXTON GROUP, INC.

FORM 10-Q

June 30, 2003

TABLE OF CONTENTS

Item No.		Page
	PART I Financial Information
1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2003 and December 31, 2002	2
	Consolidated Statements of Income for the three months ended June 30, 2003 and 2002	3
	Consolidated Statements of Income for the six months ended June 30, 2003 and 2002	4
	Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2002 and the six months ended June 30, 2003	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002	6
	Notes to Consolidated Financial Statements	7
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
3.	Quantitative and Qualitative Disclosures about Market Risk	15
4.	Controls and Procedures	16
	PART II Other Information
6.	Exhibits and Reports on Form 8-K	16

PART I

FINANCIAL INFORMATION

Item 1: FINANCIAL STATEMENTS

THE THAXTON GROUP, INC.

Consolidated Balance Sheets

June 30, 2003 & December 31, 2002

	June 30, 2003 (Unaudited)		December 31, 2002
Assets
Cash	$	13,670,063	$	4,593,419
Finance receivables, net		175,787,160		188,317,826
Premises and equipment, net		4,860,866		5,169,163
Accounts receivable		917,873		1,494,919
Accounts receivable from related parties		92,669		84,590
Repossessed automobiles and properties		1,183,764		687,840
Deposit		11,023,497		7,919,667
Goodwill and other intangible assets		31,452,841		31,558,407
Deferred tax asset, net		3,129,390		3,392,000
Other assets		6,939,431		6,801,891
Total assets	$	249,057,554	$	250,019,722
Liabilities and Stockholders’ Equity
Liabilities
Accrued interest payable	$	2,416,082	$	2,355,805
Notes payable		225,987,240		225,676,293
Accounts payable		1,639,449		2,377,349
Accounts payable to related parties		261,064		2,102,146
Employee savings plan		1,786,604		1,456,689
Accrued salaries and bonuses		1,455,436		1,946,970
Other liabilities		3,287,684		3,225,863
Total liabilities		236,833,559		239,141,115
Stockholders’ Equity
Preferred Stock $.01 parvalue:
Series A: 400,000 shares authorized; issued and outstanding 10,440 shares in 2003 and 2002; liquidation value $104,400 in 2003 and 2002		104		104
Series C: 50,000 shares authorized issued and outstanding in 2003 and 2002; liquidation value $500,000 in 2003 and 2002		500		500
Series E: 800,000 shares authorized, issued and outstanding in 2003 and 2002; liquidation value $8,000,000 in 2003 and 2002		8,000		8,000
Series F: 100,000 shares authorized; issued and outstanding 20,000 in March 2003 and 2002; liquidation value $200,000 in 2003 and 2002		200		200
Common stock, $.01 par value, 50,000,000 shares authorized; issued and outstanding 6,867,280 in 2003; 6,868,940 shares in 2002		68,672		68,689
Additional paid-in-capital		8,835,246		8,850,169
Retained earnings		3,311,273		1,950,945
Total stockholders’ equity		12,223,995		10,878,607
Total liabilities and stockholders’ equity	$	249,057,554	$	250,019,722

See accompanying notes to consolidated financial statements.

2

THE THAXTON GROUP, INC.

Consolidated Statements of Income

Three Months Ended June 30, 2003 and 2002

(Unaudited)

	June 30, 2003		June 30, 2002
Interest and fee income	$	19,551,465	$	19,116,223
Interest expense		3,768,607		3,621,559
Net interest income		15,782,858		15,494,664
Provision for credit losses		5,066,660		4,701,404
Net interest income after provision for credit losses		10,716,198		10,793,260
Other income:
Insurance premiums and commissions, net		4,645,237		4,074,640
Other income		597,645		616,624
Total other income		5,242,882		4,691,264
Operating expenses:
Compensation and employee benefits		8,275,912		7,917,681
Telephone, computers		664,535		564,419
Net occupancy		1,723,761		1,642,346
Reinsurance claims expense		941,446		642,695
Advertising		801,258		825,120
Collection expense		209,100		159,326
Travel		586,788		288,021
Professional fees		418,652		349,789
Office expense		619,066		563,015
Amortization expense		131,048		150,751
Other		1,179,387		1,068,747
Total operating expenses		15,550,953		14,171,910
Income before income tax expense		408,127		1,312,614
Income tax expense		153,048		447,153
Net income		255,079		865,461
Dividends on preferred stock		189,458		145,736
Net income applicable to common shareholders	$	65,621	$	719,725
Net income per common share—basic and diluted	$	0.01	$	0.10

See accompanying notes to consolidated financial statements.

3

THE THAXTON GROUP, INC.

Consolidated Statements of Income

Six Months Ended June 30, 2003 and 2002

(Unaudited)

	June 30, 2003		June 30, 2002
Interest and fee income	$	40,746,783	$	38,860,233
Interest expense		7,473,499		7,313,429
Net interest income		33,273,284		31,546,804
Provision for credit losses		10,252,886		8,371,672
Net interest income after provision for credit losses		23,020,398		23,175,132
Other income:
Insurance premiums and commissions, net		7,799,982		7,831,912
Other income		2,842,296		2,421,659
Total other income		10,642,278		10,253,571
Operating expenses:
Compensation and employee benefits		17,249,922		16,386,188
Telephone, computers		1,406,887		1,106,511
Net occupancy		3,469,347		3,260,061
Reinsurance claims expense		1,261,020		932,421
Advertising		1,660,642		1,511,918
Collection expense		371,644		308,902
Travel		915,452		563,568
Professional fees		763,107		619,446
Office expense		1,265,369		1,142,389
Amortization expense		230,635		300,324
Other		2,360,518		2,055,406
Total operating expenses		30,954,543		28,187,134
Income before income tax expense		2,708,133		5,241,569
Income tax expense		1,012,556		1,782,997
Net income		1,695,577		3,458,572
Dividends on preferred stock		335,249		290,193
Net income applicable to common shareholders	$	1,360,328	$	3,168,379
Net income per common share—basic and diluted	$	0.20	$	0.46

See accompanying notes to consolidated financial statements.

4

THE THAXTON GROUP, INC.

Consolidated Statements of Stockholders’ Equity

Year Ended December 31, 2002 and Six Months Ended June 30, 2003

(Unaudited)

	Common Stock			Preferred Stock		Additional Paid-in Capital			Retained Earnings			Total Stockholders’ Equity
Balance at December 31, 2001	$	68,493		$	8,804	$	8,831,599		$	(2,624,360	)	$	6,284,536
Issued 22,500 shares of common stock for compensation		225			—		44,775			—			45,000
Purchase and retirement of 2,915 shares of common stock		(29	)		—		(26,205	)		—			(26,234	)
Dividends paid on preferred stock		—			—		—			(558,843	)		(558,843	)
Net Income		—			—		—			5,134,148			5,134,148
Balance at December 31, 2002		68,689			8,804		8,850,169			1,950,945			10,878,607
Purchase and retirement of 1,660 shares of common stock		(17	)				(14,923	)					(14,940	)
Dividends paid on preferred stock		—			—		—			(335,249	)		(335,249	)
Net income		—			—		—			1,695,577			1,695,577
Balance at June 30, 2003	$	68,672		$	8,804	$	8,835,246		$	3,311,273		$	12,223,995

See accompanying notes to consolidated financial statements.

5

THE THAXTON GROUP, INC.

Consolidated Statements of Cash Flows

Six Months ended June 30, 2003 and 2002

	June 30, 2003 (Unaudited)			June 30, 2002 (Unaudited)
Cash flows from operating activities:
Net income		1,695,577		$	3,458,572
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses		10,252,886			8,371,672
Depreciation and amortization		1,134,669			1,107,403
Deferred taxes		(262,610	)		1,782,997
Decrease in accounts receivable		568,968			651,350
Increase in other assets		(650,758	)		(956,615	)
Issuance of common stock as compensation		—			45,000
Decrease in accrued interest payable and other liabilities		(394,419	)		(415,770	)
Net cash used by operating activities		12,344,313			14,876,149
Cash flows from investing activities:
Net decrease in finance receivables		2,385,848			663,581
Net capital expenditures for premises and equipment		(959,081	)		(950,327	)
Cash paid for deposit with Voyager		(3,103,830	)		(1,098,336	)
Net cash provided by investing activities		(1,677,063	)		(1,385,082	)
Cash flows from financing activities:
Notes payable to affiliates		(1,880,833	)		1,251,880
Dividends paid		(335,249	)		(290,193	)
Net increase/(decrease) in notes payable		640,416			(14,732,804	)
Repurchase of common stock		(14,940	)		(6,795	)
Net cash used in financing activities		(1,590,606	)		(13,777,912	)
Net increase/(decrease) in cash		9,076,644			(286,845	)
Cash at beginning of period		4,593,419			4,096,359
Cash at end of period	$	13,670,063		$	3,809,514

See accompanying notes to consolidated financial statements.

6

THE THAXTON GROUP, INC.

Notes to Consolidated Financial Statements

June 30, 2003 and December 31, 2002

(Unaudited)

(1) Summary of Significant Accounting Policies

The Thaxton Group, Inc. (the “Company”) is incorporated under the laws of the state of South Carolina. 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 South and North 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 Thaxton RBE (“RBE”), a related party. 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 inter-company 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 June 30, 2003 and 2002, 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 six months and quarter ended June 30, 2003 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, 2003 and 2002 and December 31, 2002 and 2001:

	June 30, 2003			December 31, 2002			June 30, 2002			December 31, 2001
Direct loans	$	192,730,820		$	208,353,717		$	185,416,695		$	189,163,818
Automobile sales contracts		22,422,739			23,436,046			21,389,986			23,121,113
Mortgage loans		11,715,876			13,519,222			14,046,312			16,468,209
Premium finance contracts		4,509,290			4,025,950			4,782,630			8,618,497
Commercial loans		1,534,384			1,806,263			2,103,608			3,161,875
Total finance receivables		232,913,109			251,141,198			227,739,231			240,533,512
Unearned interest		(33,067,313	)		(39,906,714	)		(34,341,640	)		(36,703,784	)
Unearned insurance premiums, net		(1,622,788	)		(1,535,772	)		(1,092,331	)		(1,798,520	)
Insurance loss reserve		(9,105,382	)		(8,109,076	)		(9,207,565	)		(7,592,829	)
Dealer holdback and bulk purchase discount		(1,674,182	)		(1,710,542	)		(2,250,005	)		(2,036,818	)
Allowance for credit losses		(14,171,947	)		(13,963,909	)		(11,139,966	)		(12,012,169	)
Deferred loan cost, net		2,515,663			2,402,641			2,512,053			2,294,976
Finance receivables, net	$	175,787,160		$	188,317,826		$	172,219,777		$	182,684,368

7

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 June 30, 2003, 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 six months ended June 30, 2003 and 2002, and the years ended December 31, 2002 and 2001, are as follows:

	June 30, 2003			December 31, 2002			June 30, 2002			December 31, 2001
Beginning balance	$	13,963,909		$	12,012,169		$	12,012,169		$	11,630,555
Provision for credit losses		10,252,886			21,285,161			8,371,672			16,583,919
Charge-offs		(10,984,599	)		(21,140,964	)		(10,197,365	)		(18,024,265	)
Recoveries		939,751			1,807,543			953,490			1,821,960
Net charge-offs		(10,044,848	)		(19,333,421	)		(9,243,875	)		(16,202,305	)
Ending balance	$	14,171,947		$	13,963,909		$	11,139,966		$	12,012,169

The Company’s loan portfolio primarily consists of short term loans, the majority of which are originated or renewed during the current year. Accordingly, the Company estimates that the 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, 2003 and December 31, 2002 follows:

	June 30, 2003		December 31, 2002
Leasehold improvements	$	2,450,976	$	2,355,898
Furniture and fixtures		3,094,310		3,012,696
Equipment and automobiles		8,602,832		8,072,224
Total cost		14,148,118		13,440,818
Less accumulated depreciation		9,287,252		8,271,655
Net premises and equipment	$	4,860,866	$	5,169,163

Depreciation expense was approximately $452,000 and $904,000 for the three months and six months ended June 30, 2003, respectively, and $1,802,000 for the year ended December 31, 2002.

8

(4) Intangible Assets

Intangible assets consisted of the following at June 30, 2003 and December 31, 2002:

	June 30, 2003		December 31, 2002
Goodwill (not amortized)	$	34,582,895	$	34,582,895
Insurance expirations (6.3 years)		2,030,601		2,034,906
Total cost		36,613,496		36,617,801
Less accumulated amortization		5,160,655		5,059,394
Intangible assets, net	$	31,452,841	$	31,558,407

The Company acquired the majority of the intangibles in connection with the acquisition of FirstPlus Consumer Finance. Amortization expense was approximately $131,000 and $231,000 for the 2^nd quarter and six months ended June 30, 2003 and $631,000 for the year ended December 31, 2002.

(5) Notes Payable and Notes Payable to Affiliates

At June 30, 2003, and December 31, 2002, notes payable consisted of the following:

	June 30, 2003		December 31, 2002
Senior Notes Payable/Lines of Credit	$	109,611,920	$	123,219,272
Subordinated Notes payable to individuals with varying maturity dates and rates ranging from 5¼% to 12%		114,107,582		100,125,379
Other subordinated notes payable to companies with varying maturity dates and rates ranging from 4¼% to 10%		2,267,738		2,331,642
Total notes payable	$	225,987,240	$	225,676,293

The Company finances its operations through cash flow from operations, borrowings under its credit facility with FINOVA Capital Corporation (“FINOVA”) and the sale to public investors of its subordinated notes.

On February 24, 2003, the Company amended its credit facility with FINOVA. The Company now only has a revolving credit line with FINOVA which it uses to finance receivables. Advances under the revolving credit line accrue interest at the prime rate plus 1%, or 5.00% as of June 30, 2003. 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 this designated prime rate. Accrued interest on borrowings is payable monthly.

As of June 30, 2003 the Company had $109.6 million outstanding under the revolving credit. Principal is due in full on the maturity date and can be prepaid without penalty. Maximum borrowings under the credit facility as of June 30, 2003 are limited to the lesser of $130.5 million, or 85% of eligible consumer finance receivables, as defined by the agreement. As of June 30, 2003 the Company had an additional $20.9 million available to borrow against existing collateral. The Company’s maximum borrowing amount decreases on a quarterly basis and will decrease $9 million during the remainder of 2003, $18 million in 2004, $18 million in 2005 and $9 million in 2006. The credit facility matures in 2006 and requires the Company to comply with restrictive covenants, including financial condition covenants such as minimums for net income, net worth, and net cash flows, as well as a leverage ratio limit. As of June 30, 2003, the Company met all such requirements.

Substantially all of the Company’s and its subsidiaries’ assets secure the credit facility. James D. Thaxton guarantees the repayment obligations under the credit facility.

The Company also funds its liquidity needs through the sale of subordinated notes. In February 1998, the Company began offering subordinated notes in several states by registering $50 million of subordinated notes with the Securities and Exchange Commission (“SEC”). In May 2001, the Company registered an additional $75 million offering of subordinated notes with the SEC. In December

9

2002, the Company registered an additional $125 million offering of subordinated notes. 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 are currently being offered with interest rates ranging from 6.50% 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 the Company to comply with any financial covenants nor do they impose any material restrictions on the operations of our business.

As of June 30, 2003, the Company had $112.0 million of these registered subordinated notes outstanding and $2.1 million notes registered in predecessor state registrations. To date, the Company has used the proceeds from the sale of these notes to reduce, on a temporary basis, the amount of its revolving credit facility with FINOVA. The Company intends 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 its business. It enables the Company to reduce its overall borrowing costs, particularly during periods of increasing interest rates. In addition, it allows the Company to hedge the interest rate risk inherent in its variable rate credit facility, and to diversify its sources of borrowed funds.

(6) Earnings Per Share Information

The following is a summary of the earnings per share calculation for the six months and three months ended June 30, 2003 and 2002:

	Six Months Ended				Three Months Ended
	June 30, 2003		June 30, 2002		June 30, 2003		June 30, 2002
BASIC & DILUTED
Net income from continuing operations		1,695,577	$	3,458,572	$	255,079	$	865,461
Less: Dividends on preferred stock		335,249		290,193		189,458		145,736
Net income applicable to common shareholders (numerator)		1,360,328		3,168,379		65,621		719,725
Average common shares outstanding (denominator)		6,867,724		6,863,533		6,867,338		6,871,666
Income per share from continuing operations—basic and diluted	$	0.20	$	0.46	$	0.01	$	0.10

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.

10

(7) Business Divisions

The Company has two primary divisions. The consumer finance division 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 divisions for the six months ended June 30, 2003 and 2002, and the year ended December 31, 2002:

June 30, 2003 Income Statement Data	Consumer Finance		Insurance			Other			Total
Total Revenue	$	48,644,767	$	2,463,544		$	280,750		$	51,389,061
Net Interest Income		33,066,031		(3,949	)		211,202			33,273,284
Provision for credit losses		10,224,334		23,355			5,197			10,252,886
Noninterest income		8,178,734		2,463,544			—			10,642,278
Insurance premiums and commissions, net		5,585,264		2,214,718			—			7,799,982
Noninterest expenses		28,490,281		2,323,324			140,938			30,954,543
Depreciation and amortization		995,225		132,017			7,427			1,134,669
Net income		1,715,407		(46,434	)		26,604			1,695,577
Balance Sheet Data
Total assets		246,139,611		1,622,084			1,295,859			249,057,554
Loans, net		174,452,776		—			1,334,384			175,787,160
Allowance for credit losses		13,971,947		—			200,000			14,171,947
Intangibles		30,187,305		1,265,536			—			31,452,841
December 31, 2002 Income Statement Data	Consumer Finance		Insurance			Other			Total
Total revenue	$	98,360,774	$	4,176,452		$	647,512		$	103,184,738
Net interest income		65,237,007		—			491,272			65,728,279
Provision for credit losses		20,988,326		152,820			144,015			21,285,161
Noninterest income		20,276,467		4,176,452			—			24,452,919
Insurance premiums and commissions, net		15,460,245		3,935,906			—			19,396,151
Noninterest expenses		53,911,091		4,163,069			350,514			58,424,674
Depreciation and amortization		2,151,616		260,778			20,579			2,432,973
Net income (loss)		5,529,167		(333,469	)		(61,550	)		5,134,148
Balance Sheet Data
Total assets		246,140,243		2,306,479			1,573,000			250,019,722
Loans, net		186,711,563		—			1,606,263			188,317,826
Allowance for credit losses		13,763,909		—			200,000			13,963,909
Intangibles		30,234,418		1,323,989			—			31,558,407

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June 30, 2002 Income Statement Data	Consumer Finance		Insurance			Other		Total
Total Revenue	$	46,473,658	$	2,035,965		$	364,181	$	49,113,804
Net Interest Income		31,182,623		—			364,181		31,546,804
Provision for credit losses		8,336,472		—			35,200		8,371,672
Noninterest income		8,217,606		2,035,965			—		10,253,571
Insurance premiums and commissions, net		5,899,464		1,932,448			—		7,831,912
Noninterest expenses		25,627,051		2,208,452			351,631		28,187,134
Depreciation and amortization		967,413		129,635			10,355		1,107,403
Net income		3,564,130		(113,841	)		8,283		3,458,572
Balance Sheet Data
Total assets		229,774,606		2,279,914			1,918,528		233,973,048
Loans, net		170,329,576		—			1,890,201		172,219,777
Allowance for credit losses		10,926,559		—			213,407		11,139,966
Intangibles		30,994,776		1,382,443			—		32,377,219

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 have been 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. Since 1991, we have evolved into a diversified consumer financial services company engaged in the origination and servicing of Direct 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 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.

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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 quarters and six months ended June 30, 2003 & 2002.

	Three Months Ended						Six Months Ended
	June 30, 2003			June 30, 2002			June 30, 2003		June 30, 2002
Average Net Finance Receivables (1)	$	197,848,547		$	189,550,484		198,438,545		$	190,230,844
Average notes payable(1)		223,408,397			208,036,538		222,875,403			209,690,553
Interest and fee income		19,551,465			19,116,223		40,746,783			38,860,233
Interest expense		3,768,607			3,621,559		7,473,499			7,313,429
Net interest income		15,782,858			15,494,664		33,273,284			31,546,804
Average interest rate earned		39.53	%		40.34	%	41.07	%		40.86	%
Average interest rate paid		6.75	%		6.96	%	6.71	%		6.98	%
Net interest rate spread		32.78	%		33.38	%	34.36	%		33.88	%
Net interest margin(2)		31.91	%		32.70	%	33.54	%		33.17	%

(1) Averages are computed using month-end balances during the year presented and are only net of unearned interest and dealer reserves.

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

Results of Operations for the Three Months Ended June 30, 2003 and 2002

Our gross finance receivables increased $2,313,000 to $232,913,000 for the three months ended June 30, 2003. Comparatively in 2002 for the same period our gross receivables increased $4,507,000 to $227,739,000. The difference in growth is due to direct loan growth is not occurring at the same rate due to overall economic conditions.

Due to the year over year increase in our receivables our interest income increased to $19,551,000 for the current three month period from $19,116,000 for the same three month period last year. Our interest expense remained flat at $3,769,000 compared to $3,622,000 for the prior year three month period.

As to be expected with overall business growth our operating expenses also increased to $15,551,000 in 2003 from $14,172,000 in 2002 or 9.7%. This increase is related to normal growth of our business and an increase in salaries and bonuses as well as reinsurance claims expense from the prior year.

Due to the increases in expenses for the three month period our current year pretax income decreased to $408,000 in 2003 compared to $1,313,000 in 2002.

Results of Operations for the Six Months Ended June 30, 2003 and 2002

For the six months ended since December 31, 2002 we incurred the normal liquidation of the loans we added during the fourth quarter of 2002. Our gross finance receivables declined by $18,228,000 to $232,913,000 since December 31, 2002. Comparatively in 2002 for the same period our gross receivables declined $12,794,000 to $227,739,000. This is due to our normal business activity of our customers paying off the loans they took out during the 4^th quarter of the previous year. The greater decline in 2003 is attributed to a change in the mix of our portfolio to shorter term direct loans and less growth during the 2^nd quarter of 2003.

Due to the year over year increase in our receivables our interest income increased to $40,747,000 for the current six month period compared to $38,366,000 for the same period last year. Our interest expense remained flat this year at $7,473,000 compared to $7,313,000 in the prior period.

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Our overall business growth caused our operating expenses to increase to $30,955,000 for the six months in 2003 from $28,187,000 in 2002 or 9.8%. This increase is related to normal growth of our business and an increase in salaries and bonuses as well as reinsurance claims expense from the prior year.

Due to the increases in expenses and an increase of approximately $1.8 million in our provision for loan losses, our pretax net income for the six months ended declined to $2,708,000 in 2003 compared to pretax income of $5,242,000 in 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, 2003			December 31, 2002			June 30, 2002			December 31, 2001
Net finance receivables (1)	$	188,424,723		$	200,475,472		$	174,618,146		$	190,105,324
Allowance for credit losses		14,171,947			13,963,909			11,139,966			12,012,169
Allowance for credit losses as a percentage of net finance receivables (1)		7.52	%		6.97	%		6.38	%		6.32	%
Dealer reserves and discounts on bulk purchases		1,674,182			1,710,542			2,250,005			2,036,818
Dealer reserves and discounts on bulk purchases as percentage of Net Automobile Sales Contracts at period end		9.00	%		9.03	%		14.25	%		10.58	%
Allowance for credit losses and dealer reserves and discount on bulk purchases		15,846,129			15,674,451			13,389,971			14,048,987
Allowance for credit losses and dealer reserves as a percentage of finance receivables		8.41	%		7.82	%		7.67	%		7.39	%
Provision for credit losses		10,252,886			21,285,161			8,371,672			16,583,919
Charge-offs (net of recoveries)		10,984,599			19,333,421			9,243,875			16,202,305
Charge-offs (net of recoveries) as a percentage of average net finance receivables (2)		11.66	%		9.64	%		10.58	%		8.32	%

(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 commercial finance receivables.

(2) June 30, 2003 and 2002 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,			December 31,
	2003			2002
Direct Finance Receivables Contractually past due 90 days or more	$	11,132,161		$	8,279,602
Direct Finance Receivables outstanding		162,353,198			173,357,576
Direct Finance Receivables Contractually past due 90 days or more as a percentage of Direct Finance receivables		6.86	%		4.78	%
Real Estate Secured Receivables Contractually past due 90 days or more		751,520			912,571
Real Estate Secured Receivables outstanding		11,032,311			12,607,572
Real Estate Secured Receivables Contractually past due 90 days or more as a percentage of Real Estate Secured receivables		6.81	%		7.24	%
Vehicle Secured Receivables Contractually past due 60 days or more		739,645			737,068
Vehicle Secured Receivables outstanding		18,602,003			18,947,831
Vehicle Secured Receivables Contractually past due 60 days or more as a percentage of Vehicle Secured receivables		3.98	%		3.89	%
Premium finance contracts contractually past due 60 days or more		199,468			294,959
Premium finance contracts outstanding		4,373,372			3,900,293
Premium finance contracts contractually past due 60 days or more as a percentage of premium finance contracts		4.56	%		7.56	%

Finance receivable balances are presented net of unearned finance charges.

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LIQUIDITY AND CAPITAL RESOURCES

We 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.

On February 24, 2003, we amended our credit facility with FINOVA. We now only have a revolving credit line with FINOVA which we use to finance receivables. Advances under the revolving credit line accrue interest at prime rate plus 1%, or 5.00% as of June 30, 2003. 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 this designated prime rate. Accrued interest on borrowings is payable monthly.

As of June 30, 2003 we had $109.6 million outstanding under the revolving credit line. Principal is due in full on the maturity date and can be prepaid without penalty. Maximum borrowings under the credit facility as of June 30, 2003 are limited to the lesser of $130.5 million, or 85% of eligible consumer finance receivables, as defined by the agreement. As of June 30, 2003 we had an additional $20.9 million available to borrow against existing collateral. Our maximum borrowing amount decreases on a quarterly basis and will decrease $9 million during the remainder of 2003, $18 million in 2004, $18 million in 2005 and $9 million in 2006. The credit facility matures in 2006 and requires us to comply with restrictive covenants, including financial condition covenants such as minimums for net income, net worth, and net cash flows, as well as a leverage ratio limit. As of June 30, 2003, we met all such requirements.

Substantially all of our and our subsidiaries’ assets secure the credit facility. James D. Thaxton guarantees the repayment obligations under the credit facility.

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. In December 2002, we registered an additional $125 million offering of subordinated notes. 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 are currently being offered with interest rates ranging from 6.50% 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, 2003, we had $112.0 million of these registered subordinated notes outstanding and $2.1 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 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, 2003. We estimate our cash outflow to be approximately $25 million for 2003.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our outstanding debt under the revolving credit line was $109.6 million at June 30, 2003. 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 June 30, 2003, a change of 1% in the prime interest rate would cause a change in interest expense of approximately $1.1 million on an annual basis.

Our outstanding receivables are not affected by external interest rate changes because we usually charges 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.

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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 our interest rates may be reduced 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 the evaluation was completed.

PART II

OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1 Certification of James D. Thaxton pursuant to Section 302 of the Sarbanes-Oxley Act

31.2 Certification of Allan F. Ross pursuant to Section 302 of the Sarbanes-Oxley Act

32.1 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 2002

32.2 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.

(Registrant)

Date: August 11, 2003	By:  /s/ JAMES D. THAXTON   James D. Thaxton   President and Chief Executive Officer
Date: August 11, 2003	By:  /s/ ALLAN F. ROSS   Allan F. Ross   Vice President, Treasurer, Secretary, and Chief Financial Officer

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