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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

|    |  |                                                                                      
|--- |  | -------------------------------------------------------------------------------------
|[X] |  | Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the fiscal year ended: December 31, 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: 1-13949

LOCAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


|                                |  |                       
|------------------------------- |  | ----------------------
|Delaware                        |  | 65-0424192            
|(State or other jurisdiction of |  | (I.R.S. Employer      
|incorporation or organization)  |  | Identification Number)
|                                |  |                       
|3601 N. W. 63rd                 |  |                       
|Oklahoma City, OK               |  |                       
|(Address of Principal           |  | 73116                 
|Executive Offices)              |  | (Zip Code)            

Registrants telephone number, including area code: (405) 841-2100

Securities registered pursuant to Section 12(b) of the Act:
Common Stock (par value $0.01 per share)
Senior Notes Due 2004
Trust Preferred Securities at $25 per share
(Title of Class)

Securities registered pursuant to Section 12(g) of the Act: None

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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

Yes [X] No [   ]

There were 16,583,673 shares of the Registrants Common Stock outstanding as of
the close of business on February 19, 2004. The aggregate market value of the
Registrants Common Stock held by non-affiliates was approximately $222.3
million (based upon the closing price of $14.33 on June 30, 2003, as reported
on the NASDAQ National Market System).

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference certain information from
the Registrants definitive proxy statement for the 2004 Annual Meeting of
Stockholders.





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TABLE OF CONTENTS



|                                                 |                                                                                                      |  |  |  |  |  |  | 
|------------------------------------------------ | ---------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                          
|                                                 | ITEM 1. BUSINESS                                                                                    
|                                                 | ITEM 2. PROPERTIES                                                                                  
|                                                 | ITEM 3. LEGAL PROCEEDINGS                                                                           
|                                                 | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         
|                                                 | ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT                                                       
|PART II                                         
|                                                 | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                   
|                                                 | ITEM 6. SELECTED FINANCIAL DATA                                                                     
|                                                 | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS       
|                                                 | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 
|                                                 | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                 
|                                                 | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE        
|                                                 | ITEM 9A. CONTROLS AND PROCEDURES                                                                    
|PART III                                        
|                                                 | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                         
|                                                 | ITEM 11. EXECUTIVE COMPENSATION                                                                     
|                                                 | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|                                                 | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                             
|                                                 | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                     
|PART IV                                         
|                                                 | ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K                          
|SIGNATURES                                      
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS      
|Independent Auditors Report                    
|Consolidated Statements of Financial Condition  
|Consolidated Statements of Operations           
|Consolidated Statements of Stockholders Equity 
|Consolidated Statements of Cash Flows           
|Notes to Consolidated Financial Statements      
|Consent of KPMG LLP                             
|Certification as Adopted Pursuant to Section 302
|Certification as Adopted Pursuant to Section 302
|Certification as Adopted Pursuant to Section 906



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LOCAL FINANCIAL CORPORATION
INDEX

|          |          |                               |                                                                                             |  |  |  |  |  | 
|--------- | -------- | ----------------------------- | ------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|Part I.   |          |                               |                                                                                             |  |  |  |  | 
|          | Item 1.  |                               | Business                                                                                    |  |  |  | 
|          | Item 2.  |                               | Properties                                                                                  |  |  |  | 
|          | Item 3.  |                               | Legal Proceedings                                                                           |  |  |  | 
|          | Item 4.  |                               | Submission of Matters to a Vote of Security Holders                                         |  |  |  | 
|          | Item 4A. |                               | Executive Officers of the Registrant                                                        |  |  |  | 
|Part II.  |          |                               |                                                                                             |  |  |  |  | 
|          | Item 5.  |                               | Market for
Registrants Common Equity and Related Stockholder Matters                       |  |  |  | 
|          | Item 6.  |                               | Selected Financial Data                                                                     |  |  |  | 
|          | Item 7.  |                               | Managements Discussion and Analysis of Financial Condition and Results of Operations       |  |  |  | 
|          | Item 7A. |                               | Quantitative and Qualitative Disclosures About Market Risk                                  |  |  |  | 
|          | Item 8.  |                               | Financial Statements and Supplementary Data                                                 |  |  |  | 
|          | Item 9.  |                               | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure        |  |  |  | 
|          | Item 9A. |                               | Controls and Procedures                                                                     |  |  |  | 
|Part III. |          |                               |                                                                                             |  |  |  |  | 
|          | Item 10. |                               | Directors and Executive Officers of the Registrant                                          |  |  |  | 
|          | Item 11. |                               | Executive Compensation                                                                      |  |  |  | 
|          | Item 12. |                               | Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters |  |  |  | 
|          | Item 13. |                               | Certain Relationships and Related Transactions                                              |  |  |  | 
|          | Item 14. |                               | Principal Accountant Fees and Services                                                      |  |  |  | 
|Part IV.  |          |                               |                                                                                             |  |  |  |  | 
|          | Item 15. |                               | Exhibits, Financial Statements, Schedules and Reports on Form 8-K                           |  |  |  | 
|          |          | Signatures                    |                                                                                             |  |  | 
|          |          | Index to Financial Statements |                                                                                             |  |  | 
|          |          | Index of Exhibits             |                                                                                             |  |  | 

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PART I




ITEM 1. BUSINESS

Cautionary Statement Regarding Forward-Looking Statements

A number of the presentations and disclosures in this Form 10-K, including
any statements preceded by, followed by or which include the words may,
could, should, will, would, hope, might, believe, expect,
anticipate, estimate, intend, plan, assume or similar expressions
constitute forward-looking statements.

These forward-looking statements, implicitly and explicitly, include the
assumptions underlying the statements and other information with respect to our
beliefs, plans, objectives, goals, expectations, anticipations, estimates,
intentions, financial condition, results of operations, future performance and
business, including our expectations and estimates with respect to revenues,
expenses, earnings, return on equity, return on assets, efficiency ratio, asset
quality and other financial data and capital and performance ratios of Local
Financial Corporation (Local Financial or the Company).

Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, these statements involve risks and
uncertainties that are subject to change based on various important factors
(some of which are beyond the Companys control). The following factors, among
others, could cause its financial performance to differ materially from its
goals, plans, objectives, intentions, expectations and other forward-looking
statements:



| |  |  | the strength of the United States economy in general and the
strength of the regional and local economies within Oklahoma;                                                                                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System;                                                    
|
| |  |  | inflation, interest rate, market and monetary fluctuations;                                                                                                                                                                
|
| |  |  | the timely development of new products and services in a
changing environment, including the features, pricing and quality of
the Companys products and services compared to the products and
services of its competitors;
|
| |  |  | the willingness of users to substitute competitors products
and services for the Companys products and services;                                                                                                         
|
| |  |  | the impact of changes in financial services policies, laws
and regulations, including laws, regulations and policies concerning
taxes, banking, securities and insurance, and the application
thereof by regulatory bodies;
|
| |  |  | technological changes;                                                                                                                                                                                                     
|
| |  |  | changes in consumer spending and savings habits; and                                                                                                                                                                       
|
| |  |  | regulatory or judicial proceedings.                                                                                                                                                                                        

If one or more of the factors affecting the Companys forward-looking
information and statements proves incorrect, then the Companys actual results,
performance or achievements could differ materially from those expressed in, or
implied by, forward-looking information and statements contained in this Form
10-K. Therefore, the Company cautions the reader not to place undue reliance
on its forward-looking information and statements.

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The Company does not intend to update its forward-looking information and
statements, whether written or oral, to reflect change. All forward-looking
statements attributable to the Company are expressly qualified by these
cautionary statements.

The Company

General.Local Financial Corporation is the holding company for Local
Oklahoma Bank (Local or the Bank). The Company was chartered in 1992 as a
Delaware corporation. Local Financial and the Bank are headquartered in
Oklahoma City, Oklahoma. References to Local or the Bank refer to Local
and its subsidiaries on a consolidated basis, as the context requires.

At December 31, 2003, the Company had consolidated assets of $2.9 billion,
substantially all of which is comprised of its 100% ownership interest in the
Bank, including consolidated deposits of $1.9 billion and consolidated
stockholders equity of $175.4 million.

As of February 2, 2004, the Bank is the fourth largest Oklahoma-based bank
ranked on total deposits. Its deposits of $1.9 billion at December 31, 2003,
represent approximately four percent of the Oklahoma market. The Company
and/or Local are presently regulated and examined by the Oklahoma State Banking
Department, the Board of Governors of the Federal Reserve System (the FRB),
and the Federal Deposit Insurance Corporation (the FDIC) and Locals deposit
accounts are insured up to applicable limits by the FDIC.

The Companys executive offices are located at 3601 NW 63rd Street,
Oklahoma City, Oklahoma 73116-2087. The Company makes available free of charge
on its website at www.localok.com its annual report on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K, and all amendments
thereto, as soon as reasonably practicable after the Company files such reports
with, or furnishes them to, the Securities and Exchange Commission (SEC).
Investors are encouraged to access these reports and the other information
about the Companys business on its website.

Merger Agreement

On January 22, 2004, International Bancshares Corporation (IBC) and
Local Financial announced that they had signed a definitive agreement pursuant
to which IBC will acquire Local Financial for approximately $385 million in
cash and stock.

Under the terms of the merger agreement, the Companys stockholders will
be entitled to elect to receive either cash or shares of IBC common stock
valued at $22.00 (subject to upward adjustment in certain circumstances), or a
combination thereof, for each share of the Companys common stock they own.
The election by the Companys stockholders will be subject to the requirement
that 75% of Local Financials shares be exchanged for cash and 25% be exchanged
for IBC stock.

The merger is expected to close in the summer of 2004 and is subject to
various closing conditions, including receipt of all requisite regulatory
approval and the approval of the Local Financial stockholders. The Boards of
Directors of IBC and the Company have approved the transaction.

IBC intends to file with the SEC a registration statement on Form S-4
concerning the transaction. The Form S-4 registration statement will include a
proxy statement/prospectus (Proxy Statement/Prospectus). Local Financial
intends to mail the Proxy Statement/Prospectus to its stockholders in
connection with the Companys 2004 Annual Meeting of Stockholders, at which the
Companys stockholders will vote upon the merger transaction with IBC.
Information regarding the interests of the Companys officers and directors in
the transaction will be included in the Proxy Statement/Prospectus.

Business Strategy

Locals business strategy is to provide its customers with the range of
banking products and services of a regional bank while retaining the appeal and
level of individualized service of a community

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bank. Management feels that the Company is well positioned to attract new
customers and increase its market share. The key components of its strategy
are:



| |  |  | Focus on Commercial Lending and Community Presence of the
Commercial Lending Officers.Locals corporate lending unit is
focused on commercial lending within Oklahoma. The Bank has added
experienced lending officers with strong community ties and banking
relationships. Although Local continues to originate commercial
loans throughout the United States through a network of mortgage
bankers and correspondent banks, it has increased its emphasis on
the origination of commercial loans within Oklahoma.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Strong Commitment to Highly-Personalized,
Relationship-Oriented Customer Service. Management believes that the
consolidation among financial institutions in Oklahoma has created
significant opportunities for the Bank due to the perceived lack of
attention being paid by many large regional and national banks to
certain customers, primarily the Banks targeted customer base of
small to medium-sized businesses (up to $100 million in annual
sales), professionals and other individuals. Local emphasizes
personalized client relationships and provides its customers with
customized financial services that address their particular needs.
In addition, the Company has streamlined its credit approval process
which management believes permits it to process loan requests more
efficiently than many of its larger competitors.                                                                                                                                                
|
| |  |  | Expanded Product Offering. The Company provides its
customers with a full range of consumer and commercial products and
services. The consumer services include checking and savings
accounts, certificates of deposit, IRAs, various loans, safe deposit
boxes, professional financial planning and online banking. Also
offered are commercial services including online commercial banking,
commercial checking, commercial lending, cash management and
investment services and real estate loans. The Company continues to
explore the addition of financial services that it does not
currently offer in an effort to diversify and increase its fee
income, strengthen its customer relationships and broaden its
product lines. The Company operates Local Securities Corporation, a
registered broker-dealer that offers retail investment products to
its customers through the branch offices.                                                                                           
|
| |  |  | Strategic Branch Locations. The Bank currently has 52 branch
offices located primarily in the major metropolitan areas of
Oklahoma City, Tulsa and Lawton, which are more densely populated
and have a higher number of businesses as compared to other areas in
Oklahoma. The Bank is working to expand the market presence of its
existing offices in these metropolitan areas while continuing to
explore other markets within Oklahoma that present opportunities for
growth.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Selective Acquisitions. Since 1998, the Company has expanded
its franchise through strategic acquisitions designed to increase
its deposits and branch office locations. In February 1998, the
Company acquired Green Country Bank, which had three branch offices
in northeastern Oklahoma. In October 1998, the Company acquired
Citizens Bank, with five offices in Lawton and one in Norman,
Oklahoma. These two acquisitions contributed $281.5 million in
assets and $238.7 million in deposits as of the respective
acquisition dates. In October 1999, Local Financial acquired
Guthrie Federal Savings Bank with one office north of Oklahoma City.
Through this acquisition, the Company acquired $45.0 million in
assets and $36.7 million in deposits. In November 2002, the Bank
acquired U.S. National Bank of Midwest City, Oklahoma with assets of
$37.0 million and deposits of $33.1 million. This acquisition
substantially broadened Locals presence in the Midwest City market

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Risks Relating to the Companys Business Strategy



| |  |  | Failure to complete the merger could negatively impact
Locals stock price.If the merger with IBC is not completed for
any reason, the price of Locals common stock may decline to the
extent that the current market price of its common stock reflects a
market assumption that the merger will be completed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The need for regulatory approvals may affect the date of
completion of the merger or may diminish the benefits of the merger.
IBC and Local must obtain regulatory approvals from all of the
appropriate agencies in order to complete the merger. Satisfying
any capital adequacy or other requirements of these regulatory
agencies may affect the date of completion of the merger. In
addition, it is possible that, among other things, restrictions and
conditions on the combined operations of the two companies may be
sought by governmental agencies as a condition to obtaining the
required regulatory approvals. This may diminish the benefits of
the merger. However, the terms of the merger agreement permit IBC
or Local to terminate the merger agreement if any materially
burdensome conditions are imposed on Local or IBC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | Local expects to incur significant costs associated with the
merger.Local estimates that it has incurred or will incur direct
transaction costs totaling approximately $18.0 million associated
with the merger, a portion of which will be incurred whether or not
the merger closes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | The Companys level of credit risk is increasing due to the
expansion of its commercial and consumer lending, the lack of
seasoning of these loan portfolios and the concentration on middle
market customers with heightened vulnerability to economic
conditions.The commercial loan portfolio has expanded
significantly since the formation of a new corporate lending unit in
1998. At December 31, 1997, commercial loans totaled $646.5 million
or 66.4% of the loan portfolio. At December 31, 2003, this
portfolio has increased to $1.8 billion or 77.7% of the loan
portfolio. The level of credit risk has increased as a result of
this shift in the loan portfolio mix. Commercial real estate loans
generally are considered riskier than single-family residential
loans because they have larger balances to a single borrower or
group of related borrowers. Commercial business loans involve risks
because the borrowers ability to repay the loan typically depends
primarily on the successful operation of the business or the
property securing the loan. Most of the commercial business loans
are made to middle market customers who may have a heightened
vulnerability to economic conditions. Moreover, all of these loans
have been made by the Company in the last several years and the
borrowers may not have experienced a complete business or economic
cycle. Consumer loans are dependent on the borrowers continuing
financial stability, and are more likely to be adversely affected by
job loss, divorce, illness and personal bankruptcy.
|
| |  |  | Changes in interest rates could adversely impact the
Companys financial condition and results of operations.The
Companys ability to make a profit, like that of most financial
institutions, substantially depends upon its net interest income,
which is the difference between the interest income earned on its
interest-earning assets, such as loans and investment securities,
and the interest expense paid on its interest-bearing liabilities,
such as deposits and borrowings. Certain assets and liabilities,
however, may react in different degrees to changes in market
interest rates. Further, interest rates on some types of assets and
liabilities may fluctuate prior to changes in broader market
interest rates, while rates on other types of assets may lag behind.
Additionally, some of the assets, such as adjustable-rate
mortgages, have features, including payment and rate caps, which
restrict changes in their interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |   |  | Factors such as inflation, recession, unemployment, money supply,
international disorders, instability in domestic and foreign financial
markets, and other factors beyond the Companys control may affect
interest rates. Changes in market interest rates will also affect the
level of voluntary prepayments on its loans and on its mortgage-backed
securities, resulting in the receipt of proceeds that the Company may
have to reinvest at a lower rate than the loan or mortgage-backed
security being prepaid. Although the Company pursues an
asset-liability management strategy designed to control its risk from
changes in market interest rates, changes in interest rates can still
have a material adverse effect on its profitability.                                                                                                                                                                                                                                                                                                                                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Companys allowance for loan losses may not be sufficient
to cover actual loan losses that may be experienced.Loan customers
may not repay their loans according to the terms of their loans, and
the collateral securing the payment of these loans may be
insufficient to assure repayment. The Company may experience
significant credit losses, which could have a material adverse
effect on its operating results. The Company makes various
assumptions and judgments about the collectibility of its loan
portfolio, including the creditworthiness of its borrowers and the
value of the real estate and other assets serving as collateral for
the repayment of many of its loans. In determining the size of the
allowance for loan losses, the Company relies on experience and
evaluation of the economic conditions. If assumptions prove to be
incorrect, the current allowance for loan losses may not be
sufficient to cover losses inherent in the loan portfolio and
adjustments may be necessary to allow for different economic
conditions or adverse developments in the loan portfolio.
|
| |  |  | A significant amount of the Companys loans are concentrated
in Oklahoma, and adverse conditions in Oklahoma could negatively
impact its operations.Because of the current concentration of the
Companys loan origination activities in Oklahoma, in the event of
adverse economic, political or business developments or natural
hazards that may affect Oklahoma and the ability of property owners
and businesses in Oklahoma to make payments of principal and
interest on the underlying loans, the Company could likely
experience higher rates of loss and delinquency on its loans than if
the loans were made more geographically diversified, which could
have an adverse effect on the Companys results of operations or
financial condition.                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | The Company depends on key personnel. The growth and
transition to a commercial bank have depended in large part on the
efforts of the executive officers and team of experienced lending
officers. Lending officers have primary contact with the customers
and maintain strong community ties and personal banking
relationships with the customer base, one of the key aspects of the
Companys business strategy and in increasing its market presence.
The unexpected loss of services of one or more of these key
employees could have a material adverse effect on the Companys
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | The Company may not be able to continue to implement aspects
of its growth strategy. The Companys growth strategy contemplates
the future expansion of its business and operations, possibly
through the addition of new product lines and the acquisition or
establishment of new offices. Implementing these aspects of the
growth strategy depends in part on its ability to successfully
identify acquisition opportunities that will complement the
Companys commercial banking approach and to successfully integrate
their operations with the Companys. If the Company is unable to
effectively implement its growth strategy, its business may be
adversely affected.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | The Companys loan origination business requires it to
maintain access to stable funding sources. The Company intends to
continue to grow internally by increasing loan originations,
particularly commercial loans within Oklahoma. In order to
successfully increase its loan originations, the Company will need
access to sufficient funds in order to fund expected loan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |   |  | growth. The Company currently funds substantially all of the loans it
originates through deposits, Federal Home Loan Bank advances and, to a
lesser extent, internally generated funds and other borrowings. As of
December 31, 2003, the Company had $235.7 million of additional
borrowing capacity with the Federal Home Loan Bank (FHLB) of Topeka.
The Bank competes for deposits primarily on the basis of rates and,
as a consequence, the Bank could experience difficulties in attracting
deposits to fund its operations if it does not continue to offer
deposit rates at levels that are competitive with other financial
institutions. To the extent it is unable to maintain its currently
available funding sources or access new funding sources on favorable
terms, it may have to reduce or curtail its loan origination
activities. Any such event would have a material adverse effect on
the Companys results of operations and financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Competition with other financial institutions could adversely
affect the Companys profitability.The Company faces substantial
competition in originating loans and in attracting deposits. This
competition in originating loans comes principally from other banks,
savings institutions, mortgage banking companies, consumer finance
companies, insurance companies and other institutional lenders and
purchasers of loans. In attracting deposits, the Bank competes with
insured depository institutions such as savings institutions, credit
unions and other banks, as well as institutions offering uninsured
investment alternatives including money market funds. These
competitors may offer higher interest rates than the Company does,
which could result in either attracting fewer deposits or in being
required to increase its rates in order to attract deposits.
Increased deposit competition could increase the Companys cost of
funds and adversely affect its ability to generate the funds
necessary for its lending operations, thereby adversely affecting
the results of operations. A number of institutions with which the
Company competes have significantly greater assets, capital and
other resources and many of such institutions have made investments
in technology, which are difficult for the Company to match. In
addition, many competitors are not subject to the same extensive
federal regulation that governs the Companys business. As a
result, many competitors have advantages over the Company in
conducting certain businesses and providing certain services.
|
| |   |  | Local expects increased competition. For a variety of reasons
including legislative developments relating to interstate branching
and the ownership of financial institutions, the consolidation within
the financial services industry will likely continue. For Local, this
trend means that the number of locally owned financial institutions
will decrease and that the Bank will increasingly compete against
larger regional and national banks. While these larger regional and
national banks will likely attract the largest Oklahoma businesses
(sales over $100 million), Local believes that these large banks are
unable to provide the relationship-oriented, customer service that
Local provides its target customer base of small and medium-sized
businesses, professionals and other individuals. Although the Bank
has been able to compete effectively in its market areas to date, it
can offer no assurance that the Bank will continue to do so in the
future, especially with the rapid changes occurring within the
financial services industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Changes in statutes and regulations could adversely affect
the Company.The Company is subject to extensive federal and state
legislation, regulation, examination and supervision. Proposed and
future legislation and regulations may have a material adverse
effect on the Companys business and operations. The Companys
success depends on its continued ability to maintain compliance with
these regulations. Some of these regulations may increase costs and
thus place other financial institutions in stronger, more favorable
competitive positions. The Company cannot predict what restrictions
may be imposed upon it with future legislation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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Lending Activities

General. In 1999, the Bank shifted its lending activities to focus
increasingly on the origination of commercial loans within the Oklahoma market.
The Bank has pursued this market by adding experienced lending officers with
strong community ties and banking relationships. The Bank will continue its
historical patterns of originating residential and consumer loans through its
own branch network and, in the case of commercial real estate loans, through a
network of real estate brokers, mortgage bankers and unaffiliated financial
institutions.

The following table presents information on the Banks consolidated loan
portfolio as of the dates indicated (dollars in thousands):

|                           |  |              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|-------------------------- |  | ------------ | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | - |  | - | --------- | -
|                           |  | December 31,
|                           |  |             
|                           |  | 2003         |           | 2002 |  | 2001 |           | 2000 |  | 1999
|                           |  |              |           |      |  |      |           |      |  |     
|Commercial(1)              |  | $            | 1,763,306 |      |  | $    | 1,695,293 |      |  | $    | 1,593,432 |   |  | $ | 1,425,382 |   |  | $ | 1,183,368 |  
|Residential real estate(2) |  |              | 370,926   |      |  |      | 276,883   |      |  |      | 237,406   |   |  |   | 280,224   |   |  |   | 362,351   |  
|Consumer(2)                |  |              | 124,969   |      |  |      | 132,924   |      |  |      | 162,665   |   |  |   | 165,693   |   |  |   | 161,327   |  
|Held for sale              |  |              | 11,762    |      |  |      | 8,576     |      |  |      | 6,263     |   |  |   | 5,922     |   |  |   | 6,801     |  
|                           |  |              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Total loans                |  |              | 2,270,963 |      |  |      | 2,113,676 |      |  |      | 1,999,766 |   |  |   | 1,877,221 |   |  |   | 1,713,847 |  
|Less:                      |  |              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Allowance for loan losses  |  |              | (30,398   | )    |  |      | (29,532   | )    |  |      | (27,621   | ) |  |   | (28,345   | ) |  |   | (28,297   | )
|                           |  |              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Loans receivable, net      |  | $            | 2,240,565 |      |  | $    | 2,084,144 |      |  | $    | 1,972,145 |   |  | $ | 1,848,876 |   |  | $ | 1,685,550 |  
|                           |  |              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  



---

|(1) |  | Commercial loans are composed of business loans and commercial real
estate loans (which includes loans secured by multi-family residential
properties).                                                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In June 2003, the Company began including home equity first mortgages as
residential real estate loans. Consequently, the Companys loan portfolio
presented above includes $64.0 million, $22.0 million and $29.7 million
reclassification from consumer loans to residential real estate loans as
of December 31, 2002, 2001 and 2000, respectively.

Loan Origination and Review.The lending activities of the Bank are
subject to the written, non-discriminatory underwriting standards and loan
origination procedures established by the Banks Board of Directors and
management. Loan originations are obtained by a variety of sources, including
direct customer solicitations, referrals from real estate brokers, mortgage
bankers, unaffiliated financial institutions, existing customers, walk-in
customers and advertising. In its present marketing efforts, the Bank
emphasizes its customized personal service, competitive rates, and an efficient
underwriting and approval process.

The Banks underwriting procedures are designed to streamline the credit
approval process. The Banks increasing emphasis on commercial and consumer
loans and its desire to meet customer needs require quicker response times than
those traditionally used in a commercial bank environment. The Bank relies, in
the case of residential real estate and consumer loans, on a credit scoring
system and, in the case of commercial loans, on a peer or senior officer
approval process, depending on the size of the loan. The Banks credit review
procedures are designed to ensure the overall integrity of its loan portfolio.
Management believes its credit approval and review processes are comparable to
those used by other similar institutions.

Commercial Loans. At December 31, 2003 and 2002, the Banks commercial
loans amounted to $1.8 billion and $1.7 billion or 77.7% and 80.2%,
respectively, of the total loan portfolio. Management believes commercial
lending affords the Bank the greatest opportunity for market growth. The
Banks current commercial loan portfolio consists of fixed-rate and
adjustable-rate loans secured by commercial real estate, inventory,
receivables, equipment and/or general corporate assets of the borrowers.
Locals commercial business lending activities are generally directed toward
small to medium size Oklahoma

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companies with annual sales up to $100 million. Commercial business loans
generally have annual maturities and prime-based interest rates. On a
selective basis, the Bank originates and purchases commercial real estate loans
secured by properties located throughout the United States. Commercial real
estate loans generally have terms to maturity of between five and ten years and
amortize over a period of up to 30 years.

The Bank imposes an in-house lending limit, which is below the statutory
lending limit. While the Oklahoma State Banking Department statutory limit is
30% of an institutions unimpaired capital and surplus (or with respect to the
Bank, approximately $78.4 million at December 31, 2003), management of the Bank
generally restricts single loans to $15 million in size, but may have exposure
to any single borrower up to the legal lending limit.

Single-Family Residential Real Estate Loans. At December 31, 2003 and
2002, the Banks single-family residential mortgage loan portfolio, which
includes home equity first mortgages, amounted to $370.9 million and $276.9
million or 16.3% and 13.1%, respectively, of the total loan portfolio. Most of
the Banks single-family residential mortgage loans are secured by properties
located in the state of Oklahoma. The majority of the single-family
residential loan portfolio consists of conforming loans (i.e., not insured or
guaranteed by a federal agency) with an average balance of below $100,000 per
loan. The single-family residential loan portfolio was originated through a
centralized residential loan origination center. Currently, the Company
retains most of its 15-year loan originations and closes most 30-year loan
originations through third party mortgage companies.

Consumer Loans. Consumer loans totaled $136.7 million and $141.5 million
or 6.0% and 6.7% of the total loan portfolio as of December 31, 2003 and 2002,
respectively, and consisted of home equity second mortgage loans, deposit
secured loans, automobile loans, property improvement loans, overdrafts, and
personal loans. Total consumer loans as of December 31, 2003 and 2002 included
$11.8 million and $8.6 million, respectively, in guaranteed student loans held
for sale. Local originates consumer loans bearing both fixed and prime-based
interest rates, primarily with terms of up to five years, other than second
mortgage loans, which may have longer terms. Under the Banks home equity
underwriting guidelines, loans are restricted to not more than $100,000, and
the loan-to-value may not exceed 90% at origination (although this is not
typical of most loans). Loans are originated directly through the branch
network.

Asset Quality

Loan Delinquencies.When a borrower fails to make a required payment on a
loan, the Bank attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made following the 15th day after a
payment is due (30th day in the case of commercial loans), at which time a late
payment is assessed. In most cases, deficiencies are cured promptly. If a
delinquency extends beyond 15 days (30 days in the case of commercial loans),
the loan and payment history are reviewed and efforts are made to collect the
loan. While the Bank generally prefers to work with borrowers to resolve such
problems, when it appears no other alternatives are available, legal action is
instituted.

Nonperforming Assets.All loans are reviewed on a regular basis and are
placed on non-accrual status when, in the opinion of management, the collection
of additional interest is deemed insufficient to warrant further accrual. As a
matter of policy, the Bank does not accrue interest on loans past due 90 days
or more except when the estimated value of the collateral and collection
efforts are deemed sufficient to ensure full recovery. Consumer loans
generally are charged off when the loan becomes over 120 days delinquent.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan. See Item 7 hereof,
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Nonperforming Assets and Allowance for Loan Losses.

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Assets acquired through foreclosure and repossession are recorded at
estimated fair value, net of estimated selling costs at the date of foreclosure
or repossession. The values of assets acquired through foreclosure and
repossession are monitored by the Bank continually through sales and rental
activities, and by updated appraisals and other valuation methods when needed.
The Company records the gain or loss on sale and net income and expense from
assets acquired through foreclosure and repossessions in other noninterest
expense in the accompanying consolidated statements of operations.

Classified Assets.The Bank adheres to internal procedures and controls
to review and classify its assets. All assets are reviewed on a periodic
basis. If warranted, all or a portion of any assets exhibiting the
characteristics of risk associated with specific classifications are assigned
those classifications. To monitor loans and to establish loss reserves, the
Bank classifies its assets into the following six categories: pass, watch,
special mention, substandard, doubtful, and loss. Under federal regulations,
each insured institution must classify its assets on a regular basis. In
connection with examinations of insured institutions, federal and state
examiners have authority to identify problem assets and, if appropriate,
classify them. Watch assets have all the characteristics of acceptable credit,
but warrant more than the normal level of supervision. Special mention assets
is a category established and maintained for assets which do not currently
expose an insured institution to a sufficient degree of risk to warrant
classification as substandard, doubtful or loss. Substandard assets have one
or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets, with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
loss is considered uncollectble and of such little value that continuance as an
asset of the institution is not warranted. If an asset or portion thereof is
classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge-off such amount. Federal examiners may disagree
with an insured institutions classifications and amounts reserved.

Allowance for Loan Losses. The Bank has established valuation allowances
for estimated inherent losses in its loan portfolio by charging earnings for
estimated losses on loans, including the related accrued interest, using a
specific and percentage reserve method. The allowance for loan losses is
established and maintained through a periodic review and evaluation of various
elements, which affect the loans collectibility and any additional allowances
required result in provisions for loan losses.

The adequacy of the Banks allowance for loan loss is assessed on a
loan-by-loan basis for all commercial loans and on a portfolio basis for
residential and consumer loans based on delinquency status. As described
above, each individual commercial loan is assigned a risk classification by the
responsible loan manager. Depending upon their risk classification, these
loans are placed on a review cycle either annually or quarterly. All loans
with risk classifications of special mention, substandard or doubtful are
reviewed quarterly and all large loans are reviewed at least annually by
officers of the loan review department. These officers are independent of the
loan origination and underwriting process. During this review, the
appropriateness of the assigned risk classification is assessed, giving
consideration to numerous factors, including a review of individual borrowers
financial status, credit standing, available collateral and other relevant
factors. On a quarterly basis, loss factors are applied to the basic risk
classifications to determine the allowance for loan loss. The loss factors are
established by management based on a number of quantitative and qualitative
factors including levels and trends of past due and nonaccrual loans; past
levels and trends on asset classifications; change in volume and mix of loans;
and collateral values. Although the risk classification and loss factor
process set forth above is used as a discipline in the establishment of the
minimum allowance required, it is not a substitute for sound judgment.
Prevailing and anticipated economic conditions, portfolio trends and other
relevant factors are considered in managements assessment of the overall
adequacy of the allowance. These other relevant factors include (i) change in
lending policies and procedures, including underwriting standards and

11



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collection, charge-off and recovery practices, (ii) changes in the nature
and volume of the portfolio, (iii) changes in the experience, ability and depth
of lending management and staff, (iv) change in the quality of the Banks loan
review system and the degree of oversight by the institutions Board of
Directors, (v) the existence and effect of any concentration of credit and
changes in the level of such concentration and (vi) the effect of external
factors such as competition on the Banks current portfolio. For more
information, see Item 7 hereof, Managements Discussion and Analysis of
Financial Condition and Results of Operations  Nonperforming Assets and
Allowance for Loan Losses.

Investment Activities

At December 31, 2003 and 2002, the Banks securities portfolio amounted to
$377.4 million and $528.3 million, respectively. The Banks securities
portfolio is managed in accordance with a written investment policy adopted by
the Board of Directors and administered by the Banks Asset/Liability
Committee. All transactions must be approved by the Asset/Liability Committee
and reported to the Board of Directors.

The Bank is authorized to invest in obligations issued or fully guaranteed
by the U.S. Government, certain federal agency obligations, certain time
deposits, negotiable certificates of deposit issued by commercial banks and
other insured financial institutions, investment grade corporate debt
securities and other specified investments such as mortgage-backed and related
securities.

The Bank invests in mortgage-backed and related securities, including
collateralized mortgage participation certificates, which are insured or
guaranteed by U.S. Government agencies and government sponsored enterprises.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) represent a participation interest
in a pool of single-family or multi-family mortgages, the principal and
interest payments on which are passed from the mortgage originators, through
intermediaries (generally U.S. Government agencies and government sponsored
enterprises) that pool and repackage the participation interests in the form of
securities, to investors such as the Bank. Such U.S. Government agencies and
government-sponsored enterprises, which guarantee the payment of principal and
interest to investors, primarily include the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage Association (FNMA) and
the Government National Mortgage Association (GNMA).

Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The term of a mortgage-backed pass-through security thus approximates
the term of the underlying mortgages.

The Banks mortgage-backed and related securities include collateralized
mortgage obligations, or CMOs, which include securities issued by entities
which have qualified under the Internal Revenue Code of 1986, as amended (the
Code), as real estate mortgage investment conduits.

Sources of Funds

General.Deposits are the primary source of the Banks funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, advances from the FHLB of Topeka and securities
sold under agreements to repurchase. Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows as well as securities sold
under agreements to repurchase are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer-term basis for general business
purposes.

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Deposits.At December 31, 2003 and 2002, total deposits for the Bank
amounted to $1.9 billion and $1.8 billion, respectively. The Bank accepts
deposits through its 52 branch offices. Deposits are solicited on a regular
basis directly through the Banks customer base and through various advertising
media within its market. The Bank offers several savings account and checking
account plans to its customers. Among savings account plans, the Bank offers
basic savings, short-term and long-term certificates of deposit, a variable
rate IRA/Keogh and regular IRAs and Keoghs. The Bank offers checking account
plans that range from a no-fee, no-interest plan to a variable-fee, bundled
product plan that includes services or products such as personalized checks,
ATM cards, overdraft protection, no annual fee Visa/MasterCard membership, safe
deposit box discounts, cash management, lock box services and assistance with
travelers checks.

Interest rates paid, maturity terms, service fees and withdrawal penalties
are established by the Bank on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates
paid by competitors, growth goals and federal regulations.

As of December 31, 2003, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000 was
approximately $338.6 million. The following table presents the maturity of
these time certificates of deposit at such date (dollars in thousands):

|                                |  |                   |         | 
|------------------------------- |  | ----------------- | ------- | 
|                                |  | December 31, 2003
|                                |  |                  
|3 months or less                |  | $                 | 88,811  | 
|Over 3 months through 6 months  |  |                   | 32,259  | 
|Over 6 months through 12 months |  |                   | 47,804  | 
|Over 12 months                  |  |                   | 169,682 | 
|                                |  |                   |         | 
|                                |  | $                 | 338,556 | 
|                                |  |                   |         | 

During 2000, the Bank implemented commercial deposit cash management
services to accommodate the needs of large commercial borrowers. As part of
this program, commercial customers are offered a cash sweep account service,
which consists of the sale of unpledged securities at a guaranteed rate with
the Banks agreement to repurchase those securities the next day. These cash
sweep accounts totaled $66.4 million and $59.7 million at December 31, 2003 and
2002, respectively, and are shown on the consolidated statements of financial
condition as Securities sold under agreements to repurchase.

Borrowings.The Bank is a member of the Federal Home Loan Bank System and
is authorized to apply for secured advances from the FHLB of Topeka. The Bank
uses advances from the FHLB System to meet short-term liquidity needs and
investment activities. As of December 31, 2003 and 2002, advances from FHLB
totaled $637.2 million and $684.2 million, respectively.

In September 1997, the Company issued $80.0 million of Senior Notes, which
bear interest at the rate of 11.0%, payable semi-annually. Issuance costs were
deferred and capitalized and the unamortized balance of $116,000 is reflected
in other assets at December 31, 2003 in the consolidated statements of
financial condition. As of December 31, 2003, the Company had purchased and
retired $58.7 million of the Senior Notes, leaving $21.3 million outstanding.
The Company funds the semiannual interest payments through dividends paid to
the Company from the Bank. For additional information, see Business-Sources
of FundsBorrowings in Item 1 hereof and Note 9 of the Notes to Consolidated
Financial Statements in Item 8 hereof.

Pursuant to the Indenture, dated September 8, 1997, between the Company
and The Bank of New York, relating to the Senior Notes, upon a change of
control the Company is obligated to make an offer to purchase all of the then
outstanding Senior Notes at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest. The Company is required to
purchase all Senior Notes properly tendered in such offer. Notice of the offer
to purchase the outstanding Senior Notes must be mailed not later than the 30th
day after the change of control to the holders of the Senior Notes. The

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Senior Notes are due to mature in September 2004. The merger between IBC
and the Company would constitute a change of control for purposes of the
Indenture. Under the terms of the Indenture, if the merger transaction between
IBC and the Company closes prior to the maturity of the Senior Notes, the
Company may be required to purchase the Notes prior to their maturity date.
See BusinessMerger Agreement in Item 1 hereof.

Capital Issuances.During the fourth quarter of 2001, Local Financial
Capital Trust I (the Trust) (a Delaware business trust and wholly-owned
finance subsidiary of Local Financial) issued cumulative trust preferred
securities in a public offering for gross proceeds of $40.3 million. The
securities bear interest at a rate of 9.00% and mature in 2031. The proceeds
from the sale of the trust preferred securities and the issuance of $1.2
million in common securities to Local Financial were used by the Trust to
purchase approximately $41.5 million of 9% junior subordinated debentures of
Local Financial which have the same payment terms as the trust preferred
securities. Local Financial pays interest on the debentures to the Trust,
which in turn pays dividends on the trust preferred securities and the common
securities.

In July and October 2002, the Company formed Local Financial Capital
Trusts II and III (the Trusts) to facilitate each trust issuing adjustable
rate cumulative trust preferred securities in private placements for aggregate
proceeds of approximately $20.0 million. These securities bear interest rates
of 3.625% and 3.45% over six and three month LIBOR, respectively, and both
mature in 2032. The proceeds from the sale of the trust preferred securities
and the issuance of $310,000 each in common securities to Local Financial were
used by the Trusts to purchase approximately $20.6 million of adjustable rate
junior subordinated debentures of Local Financial, which bear interest and have
the same payment terms as the trust preferred securities. As above, Local
Financial pays interest on the debentures to the Trusts, which in turn pays
dividends on the trust preferred securities and the common securities.

All outstanding trust preferred issues are included in the Companys
consolidated statement of financial condition under the caption Mandatorily
Redeemable Trust Preferred Securities for years ended December 31, 2002 and
prior. Total unamortized deferred issuance costs of approximately $2.3 million
were capitalized and are included in other assets as of December 31, 2002. The
Company adopted FASB Interpretation No. 46 on December 31, 2003 and, as a
result, the three trusts are not consolidated in the Companys financial
statements as of that date. See Notes 1(r) and 10 to the Notes to Consolidated
Financial Statements included in Item 8 herein. All interest on the debentures
is tax deductible.

Segments.The Company operates as one segment. It uses primarily the
consolidated financial statements presented herein for purposes of assessing
performance and making operating decisions about the Company. Neither Trust I,
II or III qualifies as an operating segment under SFAS No. 131 and have no
independent operations and no functions other than the issuance of securities
and the related purchase of the debentures from the Company and to distribute
payments thereon to the holders of its securities. Local has one active
operating subsidiary, Local Securities Corporation (Local Securities), a
registered broker-dealer under the Exchange Act, which provides retail
investment products to customers of Local. While Local Securities qualifies as
a separate operating segment, it is not considered material to the consolidated
financial statements for the purposes of making operating decisions and does
not meet the 10% threshold for disclosure under Statement of Financial
Accounting Standards (SFAS) No. 131, Disclosure About Segments of an
Enterprise and Related Information.

Regulation and Supervision

The following discussion sets forth the material elements of the
regulatory framework applicable to bank holding companies and their
subsidiaries, and provides certain specific information relevant to Local
Financial. This regulatory framework primarily is intended for the protection
of depositors and the deposit insurance funds that insure deposits of banks,
and not for the protection of security holders. To the extent that the
following information describes statutory and regulatory provisions, it is
qualified in its entirety by reference to those provisions. A change in the
statutes, regulations or regulatory policies applicable to Local Financial or
its subsidiaries may have a material effect on its business.

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General. As a bank holding company, Local Financial is subject to
regulation under the Bank Holding Company Act of 1956, as amended, and to
inspection, examination and supervision by the FRB. Under the Bank Holding
Company Act, bank holding companies generally may not acquire ownership or
control of any company, including a bank, without the prior approval of the
FRB. In addition, bank holding companies generally may engage, directly or
indirectly, only in banking and those other activities as are determined by the
FRB to be closely related to banking. Under legislation adopted in 1999,
certain bank holding companies can elect to become financial holding companies
and engage in broader financial activities. See The Gramm-Leach-Bliley Act
below.

Various governmental requirements, including Sections 23A and 23B of the
Federal Reserve Act, as amended, limit borrowings by Local Financial and its
non-bank subsidiaries from Local, and also limit various other transactions
between Local Financial and its non-bank subsidiaries, on the one hand, and
Local, on the other. The FRB has also recently issued Regulation W which
codifies prior regulations under Sections 23A and 23B and provides interpretive
guidance with respect to affiliate transactions. See Regulation W below.

Local, as a bank, is subject to extensive supervision, examination and
regulation by federal and state bank regulatory authorities. Local Financial
and its subsidiaries are also affected by the fiscal and monetary policies of
the federal government and the FRB, and by various other governmental
requirements and regulations.

Liability for Local. Under FRB policy, a bank holding company is expected
to act as a source of financial and managerial strength to each of its
subsidiary banks and to commit resources to their support. This support may be
required at times when the bank holding company may not have the resources to
provide it. Similarly, under the cross-guarantee provisions of the Federal
Deposit Insurance Act, the FDIC can hold any FDIC-insured depository
institution liable for any loss suffered or anticipated by the FDIC in
connection with (1) the default of a commonly controlled FDIC-insured
depository institution; or (2) any assistance provided by the FDIC to a
commonly controlled FDIC-insured depository institution in danger of default.

Capital Requirements. Local Financial is subject to risk-based capital
requirements and guidelines imposed by the FRB, which are substantially similar
to the capital requirements and guidelines imposed by the Oklahoma State
Banking Department and the FDIC on Local. For this purpose, a depository
institutions or holding companys assets and certain specified off-balance
sheet commitments are assigned to four risk categories, each weighted
differently based on the level of credit risk that is ascribed to those assets
or commitments. In addition, risk-weighted assets are adjusted for low-level
recourse and market-risk equivalent assets. A depository institution or
holding companys capital, in turn, is divided into three tiers:



| |  |  | core, or Tier 1, capital, which consists primarily of
stockholders equity less certain identifiable intangible assets and
certain other assets;          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | supplementary, or Tier 2, capital, which includes, among
other items, certain other debt and equity investments that do not
qualify as Tier 1 capital; and
|
| |  |  | market risk, or Tier 3, capital, which includes qualifying
unsecured subordinated debt.                                                                   

Like other bank holding companies, Local Financial currently is required
to maintain Tier 1 and Total Capital (the sum of Tier 1, Tier 2 and Tier 3
capital) equal to at least 4% and 8% of its total risk-weighted assets
(including certain off-balance-sheet items, such as unused lending commitments
and standby letters of credit), respectively. At December 31, 2003, Local
Financial met both requirements, with Tier 1 and Total Capital equal to 9.89%
and 11.23%, respectively, of its total risk-weighted assets.

The FRB also requires bank holding companies to maintain a minimum
Leverage Ratio, defined as Tier 1 capital to average adjusted total assets,
of 3%, if the bank holding company has the

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highest regulatory rating and meets certain other requirements, or of 3%
plus an additional cushion of at least 1% to 2%, if the bank holding company
does not meet these requirements. At December 31, 2003, Local Financials
leverage ratio was 7.45%, which exceeded the minimum leverage ratio to which it
was subject.

The FRB may set capital requirements higher than the minimums noted above
for holding companies whose circumstances warrant it. For example, bank
holding companies experiencing or anticipating significant growth may be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the FRB has indicated that it will consider a Tangible Tier 1
Capital Leverage Ratio, which would deduct all intangibles and other indicia
of capital strength in evaluating proposals for expansion or new activities.

The Bank is subject to similar risk-based and leverage capital
requirements adopted by the Oklahoma State Banking Department. Local was in
compliance with the applicable minimum capital requirements as of December 31,
2003.

Failure to meet capital requirements could subject Local to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business, which are described
immediately below.

FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), among other things, identifies five capital categories for insured
depository institutions  well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized  and requires Federal bank regulatory agencies to implement
systems for prompt corrective action for insured depository institutions that
do not meet minimum capital requirements based on these categories. FDICIA
imposes progressively more restrictive constraints on operations, management
and capital distributions, depending on the category in which an institution is
classified. Unless a bank is well-capitalized, it is subject to restrictions
on its ability to offer brokered deposits and on certain other aspects of its
operations. An undercapitalized bank must develop a capital restoration plan
and its parent bank holding company must guarantee the banks compliance with
the plan up to the lesser of 5% of a banks assets at the time it became
undercapitalized and the amount needed to comply with the plan.

As of December 31, 2003, Local was well-capitalized, based on the prompt
corrective action ratios and guidelines described above. It should be noted,
however, that a banks capital category is determined solely for the purpose of
applying the prompt corrective action regulations and that the capital category
may not constitute an accurate representation of the banks overall financial
condition or prospects.

Dividend Restrictions. State statutory provisions limit the amount of
dividends that Local can pay to Local Financial without regulatory approval.
Dividend payments by state banks are limited to the lesser of:



| |  |  | the level of undivided profits; and                                                                                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | absent regulatory approval, an amount not in excess of net
income for the current year combined with retained net income for
the preceding two years.

At the beginning of the calendar year 2004, approximately $36.2 million of
the total stockholders equity of Local was available for payment of dividends
to Local Financial without regulatory approval.

In addition, state bank regulatory authorities have authority to prohibit
Local from engaging in an unsafe or unsound practice in conducting business.
The payment of dividends, depending upon Locals financial condition at the
time of the proposed dividend payment, could be deemed to constitute an unsafe
or unsound practice. Locals ability to pay dividends in the future is
currently, and could be further, influenced by bank regulatory policies and
capital guidelines.

16



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Deposit Insurance Assessments. The deposits of Local are insured up to
regulatory limits by the FDIC, and, accordingly, are subject to deposit
insurance assessments to maintain the Bank Insurance Fund (the BIF), which is
administered by the FDIC. The FDIC has adopted regulations establishing a
permanent risk-related deposit insurance assessment system. Under this system,
the FDIC places each insured bank in one of nine risk categories based on (1)
the banks capitalization and (2) supervisory evaluations provided to the FDIC
by the institutions primary Federal regulator. Each insured banks insurance
assessment rate is then determined by the risk category in which it is
classified by the FDIC. The annual insurance premiums on bank deposits insured
by the BIF currently vary between $0.00 per $100 of deposits for banks
classified in the highest capital and supervisory evaluation categories to
$0.27 per $100 of deposits for banks classified in the lowest capital and
supervisory evaluation categories.

Interstate Banking and Branching. Under the Riegle-Neal Interstate
Banking and Branching Efficiency Act (Interstate Act), subject to certain
concentration limits and other requirements:



| |  |  | bank holding companies, such as Local Financial, are
permitted to acquire banks and bank holding companies located in any
state;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | any bank that is a subsidiary of a bank holding company is
permitted to receive deposits, renew time deposits, close loans,
service loans and receive loan payments as an agent for any other
bank subsidiary of that bank holding company; and                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | banks are permitted to acquire branch offices outside their
home states by merging with out-of-state banks, purchasing branches
in other states and establishing de novo branch offices in other
states. The ability of banks to acquire branch offices through
purchase or opening of other branches is contingent, however, on the
host state having adopted legislation opting in to those
provisions of the Interstate Act. In addition, the ability of a
bank to merge with a bank located in another state is contingent on
the host state not having adopted legislation opting out of that
provision of the Interstate Act.

Control Acquisitions. The Change in Bank Control Act prohibits a person
or group of persons from acquiring control of a bank holding company unless
the FRB has been notified and has not objected to the transaction. Under a
rebuttable presumption established by the FRB, the acquisition of 10% or more
of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act, such as Local Financial,
would, under the circumstances set forth in the presumption, constitute
acquisition of control of the bank holding company.

In addition, a company is required to obtain the approval of the FRB under
the Bank Holding Company Act before acquiring 25% (5% in the case of an
acquirer that is a bank holding company) or more of any class of outstanding
common stock of a bank holding company, or otherwise obtaining control or a
controlling influence over that bank holding company.

The Gramm-Leach-Bliley Act. In November 1999, the Gramm-Leach-Bliley
Financial Modernization Act of 1999 (the GLBA) was signed into law, which
allows bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. Under the GLBA, a bank holding company that elects to become a
financial holding company may engage in any activity that the FRB, in
consultation with the Secretary of the Treasury, determines by regulation or
order is (1) financial in nature, (2) incidental to any such financial
activity, or (3) complementary to any such financial activity and does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system generally. The GLBA makes significant changes in U.S. banking
law, principally by repealing the restrictive provisions of the 1933
Glass-Steagall Act. The GLBA specifies certain activities that are deemed to
be financial in nature, including lending, exchanging, transferring, investing
for others, or safeguarding money or securities; underwriting and selling
insurance; providing financial, investment, or economic advisory services;
underwriting, dealing in or making a market in, securities; and any activity
currently permitted for bank holding companies by

17



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##### Table of Contents



the FRB under section 4(c)(8) of the Bank Holding Company Act. The GLBA
does not authorize banks or their affiliates to engage in commercial activities
that are not financial in nature. A bank holding company may elect to be
treated as a financial holding company only if all depository institution
subsidiaries of the holding company are well-capitalized, well-managed and have
at least a satisfactory rating under the Community Reinvestment Act. Local
Financial has not elected to be a financial holding company.

National banks are also authorized by the GLBA to engage, through
financial subsidiaries, in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the FRB, determines is financial in nature or
incidental to any such financial activity, except (1) insurance underwriting,
(2) real estate development or real estate investment activities (unless
otherwise permitted by law), (3) insurance company portfolio investments and
(4) merchant banking. The authority of a national bank to invest in a
financial subsidiary is subject to a number of conditions, including, among
other things, requirements that the bank must be well-managed and
well-capitalized (after deducting from the banks capital outstanding
investments in financial subsidiaries). The GLBA provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries.

The GLBA also contains a number of other provisions that affect Local
Financials operations and the operations of all financial institutions. One
of the provisions relates to the financial privacy of consumers, authorizing
federal banking regulators to adopt rules that will limit the ability of banks
and other financial entities to disclose non-public information about consumers
to non-affiliated entities. These limitations require more disclosure to
consumers, and in some circumstances will require consent by the consumer
before information is allowed to be provided to a third party.

USA Patriot Act of 2001.In October 2001, the USA Patriot Act of 2001
(the Patriot Act) was enacted in response to the terrorist attacks in New
York, Pennsylvania and Washington, D.C., which occurred on September 11, 2001.
The Patriot Act is intended to strengthen U.S. law enforcements and the
intelligence communities abilities to work cohesively to combat terrorism on a
variety of fronts. The potential impact of the Patriot Act on financial
institutions of all kinds is significant and wide ranging. The Patriot Act
contains sweeping anti-money laundering and financial transparency laws and
imposes various regulations, including standards for verifying client
identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.

Sarbanes-Oxley Act of 2002.In July 2002, President Bush signed into law
the Sarbanes-Oxley Act of 2002 (the SOA), implementing legislative reforms
intended to address corporate and accounting improprieties. The SOA generally
applies to all companies, both U.S. and non-U.S., that file or are required to
file periodic reports with the SEC under the Exchange Act.

The SOA includes very specific additional disclosure requirements and new
corporate governance rules, requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules
and mandates further studies of certain issues by the SEC and the Comptroller
General. The SOA represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors
and its committees.

The SOA addresses, among other matters: audit committees; certification of
financial statements by the chief executive office and the chief financial
officer; the forfeiture of bonuses and profits made by directors and senior
officers in the twelve month period covered by restated financial statements; a
prohibition on insider trading during pension plan back out periods; disclosure
of off-balance sheet transactions; a prohibition on personal loans to directors
and officers (excluding Federally insured

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##### Table of Contents



financial institutions); expedited filing requirements for stock
transaction reports by officers and directors; disclosure of a code of ethics
and filing a Form 8-K for a change or waiver of such code; real time filing
of periodic reports; the formation of a public accounting oversight board;
auditor independence; and various increased criminal penalties for violations
of securities laws.

Regulation W.Transactions between a bank and its affiliates are
governed by Sections 23A and 23B of the Federal Reserve Act. The FRB has also
recently issued Regulation W, which codifies prior regulations under Sections
23A and 23B of the Federal Reserve Act and provides interpretative guidance
with respect to affiliate transactions. Affiliates of a bank include, among
other entities, the Banks holding company and companies that are under common
control with the Bank. The Company is considered to be an affiliate of the
Bank. In general, subject to certain specified exemptions, a bank or its
subsidiaries are limited in their ability to engage in covered transactions
with affiliates:



| |  |  | to an amount equal to 10% of the banks capital and surplus,
in the case of covered transactions with any one affiliate; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to an amount equal to 20% of the banks capital and surplus,
in the case of covered transactions with all affiliates.       

In addition, a bank and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
bank or its subsidiary, as those prevailing at the time for comparable
transactions with nonaffiliated companies. A covered transaction includes:



| |  |  | a loan or extension of credit to an affiliate;                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | a purchase of, or an investment in, securities issued by an affiliate;                                               
|
| |  |  | a purchase of assets from an affiliate, with some exceptions;                                                        
|
| |  |  | the acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to any party; and
|
| |  |  | the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.                               

In addition, under Regulation W:



| |  |  | a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;                                                                                                                                                                 
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | covered transactions and other specified transactions between
a bank or its subsidiaries and an affiliate must be on terms and
conditions that are consistent with safe and sound banking
practices; and                                            
|
| |  |  | with some exceptions, each loan or extension of credit by a
bank to an affiliate must be secured by collateral with a market
value ranging from 100% to 130%, depending on the type of
collateral, of the amount of the loan or extension of credit.

Regulation W generally excludes all non-bank and non-savings association
subsidiaries of banks from treatment as affiliates, except to the extent that
the FRB decides to treat these subsidiaries as affiliates.

Under the present exemption from compliance with the quantitative limits
and collateral requirements of Regulation W and Section 23A, a bank can
purchase loans, or other extensions of credit, from an affiliate without being
subject to the 10% and 20% limitation for covered transactions as long as:



| |  |  | the extension of credit is originated by the affiliate;
| | - |  | -------------------------------------------------------

19



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##### Table of Contents





| |  |  | the bank makes an independent evaluation of the
creditworthiness of the borrower before the affiliate makes or
commits to make the extension of credit;                                                                                                                                                                                                                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the bank commits to purchase the extension of credit before
the affiliate makes or commits to make the extension of credit;                                                                                                                                                                                                                                                                                       
|
| |  |  | the bank does not make a blanket advance commitment to
purchase extensions of credit from the affiliate; and                                                                                                                                                                                                                                                                                                      
|
| |  |  | the dollar amount of the extension of credit, when aggregated
with the dollar amount of all other extensions of credit purchased
from the affiliate during the preceding 12 calendar months by the
bank and its FDIC-insured depository institution affiliates, does
not represent more than 50% of the dollar amount of extensions of
credit originated by the affiliate during the preceding 12 calendar
months.

Future Legislation. Changes in U.S. or state laws and regulations
relating to banks and other financial institutions can affect the operating
environment of bank holding companies and their subsidiaries in substantial and
unpredictable ways. Local Financial cannot accurately predict whether
legislation will ultimately be enacted, and, if enacted, the ultimate effect
that it, or implementing regulations, would have upon Local Financials
financial condition or results of operations.

Broker-Dealer Regulation.Local Securities is a registered broker-dealer
with the SEC. As a registered broker-dealer, Local Securities is subject to
various regulations and reporting requirements imposed by the SEC, as well as
by certain state authorities.

Personnel

As of December 31, 2003, the Company (on a consolidated basis) had 793
full-time employees and 105 part-time employees. The employees are not
represented by a collective bargaining agreement and the Company believes that
it has good relations with its employees.

20



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##### Table of Contents






ITEM 2. PROPERTIES

Offices and Other Material Properties

The following table provides information on the Companys consolidated
branch network as of December 31, 2003:

Oklahoma City

Metro:

Bethany Office
7723 N.W. 23rd Street
Bethany, OK 73008
Owned
Corporate Headquarters
3601 N.W. 63rd Street
Oklahoma City, OK 73116
Owned
Crown Heights Office
4716 North Western Avenue
Oklahoma City, OK 73118
Owned
Edmond Office
301 South Bryant, Suite A-100
Edmond, OK 73034
Leased
Edmond Santa Fe Office
421 South Santa Fe
Edmond, OK 73003
Owned
May Avenue Office
5701 North May Avenue
Oklahoma City, OK 73112
Owned
Midwest City-Air Depot Office
414 North Air Depot
Midwest City, OK 73110
Owned
Midwest City-Douglas Office
2200 South Douglas Blvd.
Midwest City, OK 73130
Owned
Moore Office
513 N.E. 12th Street
Moore, OK 73160
Owned 
Norman Office
2403 West Main
Norman, OK 73069
Leased
Park Avenue Office
100 Park Avenue
Oklahoma City, OK 73102
Leased
    
    Penn South Office
8700 South Pennsylvania
Oklahoma City, OK 73159
Owned
Portland Office
1924 North Portland Avenue
Oklahoma City, OK 73107
Owned
Quail Creek Office
12241 North May Avenue
Oklahoma City, OK 73120
Owned
Springbrook Office
6233 N.W. Expressway
Oklahoma City, OK 73132
Owned
Yukon Office
1203 Cornwell
Yukon, OK 73099
LeasedTulsa:
Downtown Office
111 West 5th Street 
Tulsa, OK 74103
Leased
Harvard Office
3332 East 51st Street
Tulsa, OK 74135
Leased
Hudson Office
5801 East 41st Street
Tulsa, OK 74135
Leased
Lewis Office
2250 East 73rd Street
Tulsa, OK 74136
Owned
Memorial Office(1)
8202 East 71st Street
Tulsa, OK 74133
Leased
Yale Office(1)
1951 South Yale
Tulsa, OK 74112
LeasedOther Locations:
    
    Ardmore Office
313 West Broadway
Ardmore, OK 73401
Owned
Broken Arrow Office
3359 South Elm Place
Broken Arrow, OK 74012
Leased
Chandler Office
1804 East First Street
Chandler, OK 74834
Owned
Chickasha Office
628 Grand Avenue
Chickasha, OK 73018
Owned
Claremore Office
1050 N. Lynn Riggs Blvd.
Claremore, OK 74017
Owned
Clinton Office
1002 West Frisco
Clinton, OK 73601
Owned
Commerce Office
101 N. Mickey Mantle Blvd.
Commerce, OK 74339
Owned
Duncan Downtown Office
1006 Main Street
Duncan, OK 73533
Owned
Duncan North Office
2210 North Hwy 81
Duncan, OK 73533
Owned
Elk City Office
200 East Broadway
Elk City, OK 73644
Owned
Grove Office
100 East Third
Grove, OK 74344
Owned
Guthrie Office
120 North Division
Guthrie, OK 73044
Owned
    
    Lawton Downtown Office
1 S.W. 11th Street
Lawton, OK 73501
Leased
Lawton Mall Office
#10 Central Mall
Lawton, OK 73501
Leased
Lawton Financial Center
6425 N.W. Cache Road
Lawton, OK 73505
Owned
Lawton Lee Blvd. Office
1420 S.W. Lee Blvd.
Lawton, OK 73501
Owned
Lawton Cache Road Office
2601 N.W. Cache Road
Lawton, OK 73505
Leased
Lindsay Office
420 South Main
Lindsay, OK 73052
Owned
Miami Office
123 East Central
Miami, OK 74354
Owned
Monkey Island Office
56371 E.
 Hwy 125, Suite 1
Afton, OK 74331
Leased
Muskogee Office
2401 East Chandler
Muskogee, OK 74403
Leased
Owasso Office
201 East 2nd Avenue
Owasso, OK 74055
Owned
Pauls Valley Office
700 West Grant
Pauls Valley, OK 73075
Owned
Purcell Office
430 West Lincoln
Purcell, OK 73080
Owned
 21




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Sand Springs

Office
800 East Charles Page Blvd.
Sand Springs, OK 74063
Leased
Sulphur Office
2009 West Broadway
Sulphur, OK 73086
Owned
    
    Sapulpa Office
911 East Taft
Sapulpa, OK 74066
Owned
Weatherford Office
109 East Franklin
Weatherford, OK 73096
Owned
    
    Shawnee Office
2512 North Harrison
Shawnee, OK 74804
Owned
    
    Springs Village Office
3973 South Highway 97
Sand Springs, OK 74063
Leased




---

(1)  The Bank owns the building and leases the land for this facility.





ITEM 3. LEGAL PROCEEDINGS

On December 30, 2002, the Company entered into a Settlement and
Termination Agreement with the FDIC to settle litigation relating to an
assistance agreement entered into by the Company with the FDIC in connection
with an acquisition of a federal savings bank in 1988. The liability owed to
the FDIC under the litigation was settled for approximately $24.7 million net
of the set off of certain uncollected assistance, and the 1988 assistance
agreement with the FDIC was completely terminated. All liability of the
Company to the FDIC has now been fully and completely resolved without any
adverse financial effect on the Company.

Pursuant to the terms of the Settlement and Termination Agreement with the
FDIC, the Company reserved its claim regarding the elimination of certain tax
benefits which would otherwise have been available to the Company had it not
been for the enactment of Section 13224 of the Omnibus Budget
Reconciliation Act of 1993 (OBRA). A Resolution and Modification Agreement was entered into between the prior owners and the Company under which
the prior owners agreed to pay all attorney fees and all third-party costs and
expenses as they are incurred by the Company in prosecution of the claim to a
conclusion. Under the terms of this agreement the prior owners are entitled to
be paid substantially all of any award or settlement payment received by the
Company pursuant to such claim net of taxes, if any. The Company does not
anticipate incurring any liability, loss, damage or material expense with
regard to its continuing prosecution of the OBRA claim.

In the ordinary course of business, the Company is subject to other legal
actions and complaints. Management, after consultation with legal counsel, and
based on available facts and proceedings to date, believes the ultimate
liability, if any, arising from such legal actions or complaints, will not have
a material adverse effect on the Companys consolidated financial position or
future results of operations.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of the fiscal year
covered by this annual report to a vote of the Companys security holders.




ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth the name and age of each executive officer,
his principal position with the Company, and the year he became an officer.

|                   |  |     |    |       |  |          |      |  |  |                                                     
|------------------ |  | --- | -- | ----- |  | -------- | ---- |  |  | ----------------------------------------------------
|                   |  |     |    |       |  | Officer  |      | 
|Name               |  | Age |    | Since |  | Position
|                   |  |     |    |       |  |         
|Edward A. Townsend |  |     | 61 |       |  |          | 1997 |  |  | Chief Executive Officer                             
|Jan A. Norton      |  |     | 57 |       |  |          | 1997 |  |  | President                                           
|Robert L. Vanden   |  |     | 56 |       |  |          | 1990 |  |  | Executive Vice President of the Bank                
|Richard L. Park    |  |     | 72 |       |  |          | 1997 |  |  | Executive Vice President and
Chief Financial Officer

22



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|                      |  |     |    |       |  |          |      |  |  |                                                                     
|--------------------- |  | --- | -- | ----- |  | -------- | ---- |  |  | --------------------------------------------------------------------
|                      |  |     |    |       |  | Officer  |      | 
|Name                  |  | Age |    | Since |  | Position
|                      |  |     |    |       |  |         
|Christopher C. Turner |  |     | 45 |       |  |          | 1983 |  |  | Executive Vice President of the Bank                                
|James N. Young        |  |     | 55 |       |  |          | 1998 |  |  | Executive Vice President,
President Tulsa Region of the Bank        
|Harold A. Bowers      |  |     | 60 |       |  |          | 1998 |  |  | Executive Vice President,
Chief Credit Officer of the Bank          
|William C. Lee        |  |     | 64 |       |  |          | 1998 |  |  | Executive Vice President
Operations Division of the Bank            
|Kenneth K. McIlhaney  |  |     | 60 |       |  |          | 2000 |  |  | Executive Vice President of the Bank                                
|K. Randy Roper        |  |     | 44 |       |  |          | 1998 |  |  | Executive Vice President,
President Oklahoma City Region
of the Bank

Biographical information regarding Messrs. Edward A. Townsend and Jan A.
Norton are incorporated herein by reference to the Proxy Statement/Prospectus.
Biographical information regarding Messrs. Robert L. Vanden, Richard L. Park,
Christopher C. Turner, James N. Young, Harold A. Bowers, William C. Lee,
Kenneth K. McIlhaney and K. Randy Roper are set forth below.

The executive officers serve until their successors are elected and
qualified. No executive officer is related to any director or other executive
officer of the Company by blood, marriage or adoption. There are no
arrangements or understandings between any director of the Company and any
other person pursuant to which such person was elected an executive officer.

Robert L. Vanden. Mr. Vanden was elected as a director and began serving
as Executive Vice President of the Bank in 1997. From January 1997 until
September 1997, Mr. Vanden served as President
and Chief Executive Officer of the Bank. From February 1990 through
December 1996, Mr. Vanden served as Executive Vice President of Local Federal
Bank, FSB, (the predecessor of Local) in charge of wholesale commercial
lending. Prior to joining the Bank in February 1990, Mr. Vanden served as
Executive Vice President of the Richard Gill Company and Gill Savings. In June
2000, Mr. Vanden assumed the duties of a member of the Board of Directors for
Central Oklahoma Habitat for Humanity, a non-profit organization. Mr. Vanden
still holds this position today.

Richard L. Park.Mr. Park began serving as Executive Vice President and
Chief Financial Officer of the Company and the Bank in September 1997. Mr.
Park served as Chief Financial Officer of Green Country Bank from October 1996
until it was acquired by the Company. From January 1991 through May 1996, Mr.
Park was Chief Financial Officer of Western Farm Credit Bank in Sacramento,
California, the Eleventh District Bank in the Federal Farm Credit System. Mr.
Park is a Certified Public Accountant.

Christopher C. Turner.Mr. Turner has served as Executive Vice President
of the Bank and architect of Locals retail sales culture, in charge of
residential and consumer lending, branch administration, marketing and
investment services since October 1996. Prior to that time, Mr. Turner held
various positions in the Bank including Internal Audit Director, Marketing
Director and Director of Branch Administration. Mr. Turner joined the Company
in November 1980.

James N. Young.Mr. Young has served as President of the Tulsa region
since February 1998. From 1994 to January 1998, Mr. Young served as Senior
Commercial Lending Manager for BankIV and its successors, Boatmens Bank and
NationsBank in Oklahoma City. Mr. Youngs last position with NationsBank (now
Bank of America) was President, Oklahoma City, and Senior Commercial Lending
Manager for the state of Oklahoma. From 1973 to 1994, Mr. Young served in
various commercial lending capacities with Bank of Oklahoma in both Tulsa and
Oklahoma City, his last assignment being President, Oklahoma City.

23



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Harold A. Bowers.Mr. Bowers began serving the Bank as Executive Vice
President and Chief Credit Officer in 1998. From 1981 to 1998, Mr. Bowers
served with NationsBank and its predecessor banks with both senior credit and
commercial lending management responsibilities. In 1980 and 1981, Mr. Bowers
managed the Credit Department for Bank of Oklahoma, Tulsa, Oklahoma. Mr.
Bowers started his banking career with Liberty National Bank in Oklahoma City,
Oklahoma after serving four years as an officer in the United States Air Force.
From 1970 to 1980 Mr. Bowers served in various credit capacities ultimately
serving six years as Manager of Loan Administration.

William C. Lee.Mr. Lee joined the Bank in May 1998. Mr. Lee serves as
Executive Vice President and is the Banks principal Operations Officer. Prior
to joining the Bank, Mr. Lee was Executive Vice President and Chief Financial
Officer of the Annuity Board of the Southern Baptist Convention, a pension and
insurance management company, joining that institution in July 1991. Mr. Lee
is a Certified Public Accountant.

Kenneth K. McIlhaney.Mr. McIlhaney joined the Bank in 2000 and serves as
Executive Vice President in charge of Community Banking. Mr. McIlhaney served
in various executive officer positions at Union Bank and Trust Company of
Oklahoma City, Oklahoma, from 1979 to 2000, including serving as President and
Chief Executive Officer for ten years immediately prior to joining the Bank.
Mr. McIlhaney began his banking career in 1972, serving as Executive Vice
President of United Oklahoma Bank and later serving as President of First Bank
and Trust Company of Duncan, and City National Bank and Trust Company of
Oklahoma City, Oklahoma.

K. Randy Roper.Mr. Roper began serving the Bank in December 1998 as
President of the Oklahoma City Region. From 1982 to 1998, Mr. Roper served in
various capacities for First National Bank of Oklahoma City and its successors,
First Interstate Bank of Oklahoma, N.A., Boatmens First National Bank of
Oklahoma and NationsBank specializing in energy and commercial finance. Mr.
Roper completed his tenure at NationsBank (now Bank of America) as President,
Oklahoma City.

24



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##### Table of Contents






PART II




|        |  |                                                                          
|------- |  | -------------------------------------------------------------------------
|ITEM 5. |  | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth the range of high and low closing prices
for the period indicated:

|               |  |                          |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|-------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|               |  | Years Ended December 31,
|               |  |                         
|               |  | 2003                     |       | 2002
|               |  |                          |       |     
|               |  | High                     |       | Low  |  | High |       | Low
|               |  |                          |       |      |  |      |       |    
|First quarter  |  | $                        | 15.85 |      |  | $    | 14.35 |     |  | $ | 16.01 |  |  | $ | 13.36 | 
|Second quarter |  |                          | 15.53 |      |  |      | 14.46 |     |  |   | 17.50 |  |  |   | 14.20 | 
|Third quarter  |  |                          | 18.53 |      |  |      | 14.58 |     |  |   | 17.40 |  |  |   | 13.12 | 
|Fourth quarter |  |                          | 22.11 |      |  |      | 18.60 |     |  |   | 15.02 |  |  |   | 13.24 | 

The Companys Common Stock began trading on April 22, 1998 and, as of July
15, 1999, began trading on the Nasdaq National Market System under the symbol
LFIN. On December 31, 2003, there were approximately 28 holders of record of
the Companys Common Stock, which does not include the persons or entities
holding stock in nominee or street name through various brokers and banks.

The Company has not paid and does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future. The Companys principal source
of funds to pay cash dividends on its Common Stock would be cash dividends from
the Bank. There are certain statutory limitations on the payment of dividends
by state banks. At the beginning of the calendar year 2004, approximately
$36.2 million was available for payment of dividends by the Bank to the Company
under these restrictions without regulatory approval. See Item 1. Business -
Regulation and Supervision. In connection with the issuance of the Companys
Senior Notes, the Company entered into an Indenture, dated September 8, 1997,
the terms of which could limit the Companys ability to pay dividends on its
Common Stock under certain circumstances.

In accordance with the terms of the merger agreement between the Company
and IBC, the Company may not pay dividends on its capital stock.

25



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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA (Dollars in Thousands, Except Per Share Data) The selected consolidated financial data of the Company set forth below
should be read in conjunction with, and is qualified in its entirety by, the
consolidated financial statements of the Company, including the related Notes,
included in Item 8 of this Annual Report. December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Statement of Financial Condition and
Other Data:Total assets
    
    $
    2,881,543
    
    
    $
    2,839,858
    
    
    $
    2,820,051
    
    
    $
    2,377,011
    
    
    $
    2,381,607Cash and due from banks
    
    
    58,746
    
    
    
    51,166
    
    
    
    50,791
    
    
    
    39,571
    
    
    
    48,122Loans receivable, net
    
    
    2,240,565
    
    
    
    2,084,144
    
    
    
    1,972,145
    
    
    
    1,848,876
    
    
    
    1,685,550Securities available for sale
    
    
    99,853
    
    
    
    163,473
    
    
    
    193,736
    
    
    
    354,048
    
    
    
    529,230Securities held to maturity
    
    
    277,571
    
    
    
    364,832
    
    
    
    430,956
    
    
    
    
    
    
    
    Nonperforming assets(1)
    
    
    10,661
    
    
    
    12,960
    
    
    
    9,627
    
    
    
    10,903
    
    
    
    7,536Deposits
    
    
    1,898,950
    
    
    
    1,829,439
    
    
    
    1,809,362
    
    
    
    1,931,793
    
    
    
    1,848,340Securities sold under agreements to
repurchase
    
    
    66,367
    
    
    
    59,696
    
    
    
    38,694
    
    
    
    38,214
    
    
    
    Senior Notes
    
    
    21,295
    
    
    
    21,295
    
    
    
    21,545
    
    
    
    41,160
    
    
    
    75,250FHLB advances
    
    
    637,219
    
    
    
    684,193
    
    
    
    728,205
    
    
    
    190,028
    
    
    
    302,035Mandatorily redeemable trust preferred
securities
    
    
    
    
    
    
    60,250
    
    
    
    40,250
    
    
    
    
    
    
    
    Junior subordinated debentures
    
    
    62,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    175,441
    
    
    
    167,880
    
    
    
    163,536
    
    
    
    156,271
    
    
    
    128,294Number of full service customer facilities
    
    
    52
    
    
    
    52
    
    
    
    51
    
    
    
    51
    
    
    
    51Approximate number of full-time
equivalent employees
    
    
    846
    
    
    
    835
    
    
    
    818
    
    
    
    810
    
    
    
    777
 For the Years Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Operations Data:Interest income
    
    $
    150,804
    
    
    $
    175,493
    
    
    $
    193,138
    
    
    $
    190,202
    
    
    $
    168,298Interest expense
    
    
    66,307
    
    
    
    82,862
    
    
    
    104,644
    
    
    
    111,852
    
    
    
    94,787Net interest income
    
    
    84,497
    
    
    
    92,631
    
    
    
    88,494
    
    
    
    78,350
    
    
    
    73,511Provision for loan losses
    
    
    (6,600
    )
    
    
    (6,600
    )
    
    
    (5,400
    )
    
    
    (2,700
    )
    
    
    (2,000
    )Net interest income after provision for
loan losses
    
    
    77,897
    
    
    
    86,031
    
    
    
    83,094
    
    
    
    75,650
    
    
    
    71,511Noninterest income
    
    
    33,774
    
    
    
    28,489
    
    
    
    23,723
    
    
    
    20,773
    
    
    
    20,840Noninterest expense
    
    
    72,547
    
    
    
    70,531
    
    
    
    66,851
    
    
    
    58,776
    
    
    
    57,871Income before provision for
income taxes
    
    
    39,124
    
    
    
    43,989
    
    
    
    39,966
    
    
    
    37,647
    
    
    
    34,480Provision for income taxes
    
    
    11,029
    
    
    
    14,974
    
    
    
    13,489
    
    
    
    13,833
    
    
    
    12,488Net income
    
    $
    28,095
    
    
    $
    29,015
    
    
    $
    26,477
    
    
    $
    23,814
    
    
    $
    21,992Earnings per share:Net income:Basic (2)
    
    $
    1.65
    
    
    $
    1.53
    
    
    $
    1.30
    
    
    $
    1.16
    
    
    $
    1.07Diluted (2)
    
    $
    1.58
    
    
    $
    1.48
    
    
    $
    1.26
    
    
    $
    1.16
    
    
    $
    1.07
 26




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##### Table of Contents



At or For the Years Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Performance Ratios(3):Return on assets
    
    
    0.99
    %
    
    
    1.04
    %
    
    
    1.01
    %
    
    
    1.00
    %
    
    
    0.99
    %Return on common equity
    
    
    16.60
    
    
    
    17.05
    
    
    
    15.65
    
    
    
    17.18
    
    
    
    17.65Dividend payout ratio(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net interest spread(5)
    
    
    2.92
    
    
    
    3.18
    
    
    
    3.11
    
    
    
    2.95
    
    
    
    3.02Net interest margin(6)
    
    
    3.14
    
    
    
    3.48
    
    
    
    3.53
    
    
    
    3.44
    
    
    
    3.46Noninterest expense to average
assets(7)
    
    
    2.55
    
    
    
    2.52
    
    
    
    2.54
    
    
    
    2.48
    
    
    
    2.61Efficiency ratio(8)
    
    
    61.61
    
    
    
    58.62
    
    
    
    58.70
    
    
    
    58.33
    
    
    
    60.35Capital Ratios of the Company:Leverage capital
    
    
    7.45
    
    
    
    7.01
    
    
    
    6.63
    
    
    
    5.61
    
    
    
    4.71Core capital
    
    
    9.89
    
    
    
    9.64
    
    
    
    9.24
    
    
    
    7.74
    
    
    
    6.81Total capital
    
    
    11.23
    
    
    
    11.45
    
    
    
    10.49
    
    
    
    9.00
    
    
    
    8.07Capital Ratios of the Bank:Leverage capital
    
    
    8.17
    
    
    
    8.07
    
    
    
    7.28
    
    
    
    7.30
    
    
    
    7.93Core capital
    
    
    10.83
    
    
    
    11.11
    
    
    
    10.16
    
    
    
    10.08
    
    
    
    11.48Total capital
    
    
    12.09
    
    
    
    12.37
    
    
    
    11.41
    
    
    
    11.34
    
    
    
    12.74Asset Quality Ratios:Nonperforming assets to total assets
at end of period(1)
    
    
    0.37
    
    
    
    0.46
    
    
    
    0.34
    
    
    
    0.46
    
    
    
    0.32Nonperforming loans to total loans
at end of period(1)
    
    
    0.43
    
    
    
    0.53
    
    
    
    0.39
    
    
    
    0.53
    
    
    
    0.40Allowance for loan losses to total
loans at end of period
    
    
    1.34
    
    
    
    1.40
    
    
    
    1.38
    
    
    
    1.51
    
    
    
    1.65Allowance for loan losses to
nonperforming loans at
end of period(1)
    
    
    3.11
    x
    
    
    2.62
    x
    
    
    3.58
    x
    
    
    2.83
    x
    
    
    4.15
    x
   (1)
    
    Nonperforming loans consist of nonaccrual loans and loans delinquent 90
days or more but still accruing interest, and nonperforming assets consist
of nonperforming loans, real estate acquired through foreclosure or
deed-in-lieu thereof and repossessions, net of writedowns and reserves.(2)
    
    Net income per share and dividends per share are based upon the weighted
average number of shares outstanding during the period. For the years
ended December 31, 2003, 2002, 2001, 2000 and 1999, the weighted average
number of shares for basic net income per share are 17,052,297,
18,912,354, 20,368,028, 20,537,209 and 20,537,209, respectively. Basic
and diluted shares are the same for each year except 2003, 2002 and 2001
wherein diluted shares are 17,758,565, 19,616,663 and 20,966,531,
respectively. See also Note 1(p) of the Notes to Consolidated Financial
Statements in Item 8 hereof.(3)
    
    With the exception of end of period ratios, all ratios are based on
average monthly balances during the periods presented.(4)
    
    The dividend payout ratio represents dividends declared per share divided
by net income per share. The Company does not presently pay dividends.(5)
    
    Net interest spread represents the difference between the weighted
average yield on interest-earning assets less the weighted average cost of
interest-bearing liabilities.(6)
    
    Net interest margin represents net interest income divided by average
interest-earning assets.(7)
    
    Noninterest expense excludes the amortization of intangibles.(8)
    
    Represents noninterest expense (exclusive of amortization of intangibles)
divided by the aggregate of net interest income before provision for loan
losses and noninterest income (exclusive of gains and losses on sales of
assets). 27




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto,
included in Item 8 hereof. General The Company is a bank holding company headquartered in Oklahoma City,
Oklahoma. Local Oklahoma Bank, the Companys banking subsidiary, has
commercial banking operations throughout the state of Oklahoma including the
major metropolitan areas of Oklahoma City, Tulsa, and Lawton. The Banks
business strategy is to provide its customers with the range of banking
products and services of a regional bank while retaining the appeal and level
of individualized service of a community bank. Management believes that as a
result of the Companys strong commitment to highly personalized
relationship-oriented customer service, its varied products, its strategic
branch locations and the long-standing community presence of its managers,
lending officers and branch personnel, it is well positioned to attract new
customers and to increase its market share of loans and deposits. For further
discussion of the Companys business strategy, see BusinessBusiness Strategy
in Item 1 hereof. On January 22, 2004, IBC and Local Financial announced they had signed a
definitive merger agreement pursuant to which IBC will acquire Local Financial.
The merger transaction is expected to close in the summer of 2004 and is
subject to various closing conditions, including receipt of all requisite
regulatory approvals and the approval of the Local Financial stockholders. The
Boards of Directors of both IBC and Local Financial have approved the
transaction. For more information on the merger agreement, see
BusinessMerger agreement in Item 1 hereof and Note 1(u) of the Notes to
Consolidated Financial Statements in Item 8 hereof. In October 2002, the Board of Directors of the Company approved its most
recent stock repurchase program under which the Company would be authorized to
repurchase in the open market from time to time, approximately 2.0 million
shares of the Companys stock. In May 2003, the Board of Directors authorized
the Company to purchase an additional 500,000 shares. Through December 31,
2003, 2.5 million shares have been repurchased under that program. The shares
repurchased by the Company under the stock repurchase program are held as
treasury shares. Changes in Financial Condition from December 31, 2002 to December 31, 2003 Cash and Cash Equivalents.Cash and cash equivalents (consisting of cash,
cash due from banks and interest-bearing deposits with other banks) amounted to
$83.1 million and $58.4 million at December 31, 2003 and 2002, respectively,
reflecting a 42.5% increase. Current economic conditions and low interest
rates have encouraged prepayments on the Companys loans and mortgage-backed
securities, resulting in an increase in excess cash and cash equivalents. The
Company typically invests those funds in overnight money funds. The Company
manages its cash and cash equivalents based upon the Companys operating,
investing and financing activities. See Liquidity and Capital Resources. Securities.The Company views its securities available for sale as a
source of asset liquidity. Liquidity is derived from this source by receipt of
interest and principal payments and prepayments; by the ability to sell these
securities at market prices; and by utilizing unpledged securities as
collateral for borrowings. Securities are identified as either held for
maturity or available for sale, based on various factors including
asset/liability management strategies, liquidity and profitability objectives,
and regulatory requirements. Held to maturity securities are carried at cost,
adjusted for amortization of premiums or accretion of discounts. Amortization
or accretion of mortgage-backed securities is periodically adjusted for
estimated prepayments. Available for sale securities are those that may be
sold prior to maturity based upon asset/liability management decisions.
Securities identified as available for sale are carried at fair value. 28




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##### Table of Contents



Unrealized gains or losses on available for sale securities, less
applicable deferred taxes, are recorded as accumulated other comprehensive
income in stockholders equity. During 2003, Local Financials securities portfolio decreased by $150.9
million or 28.6%. This decrease reflected amortization and prepayments of
$423.7 million, offset partially by $304.9 million in purchases as those funds
were reinvested. The Company had a net unrealized gain, net of tax, of
$369,000 in its available for sale securities portfolio at December 31, 2003
compared to a net unrealized gain, net of tax, of $1.4 million at December 31,
2002. The following table sets forth information regarding the carrying and
market value of the Companys securities at the dates indicated (dollars in
thousands): December 31,2003
    
    2002
    
    2001Carrying
    
    Market
    
    Carrying
    
    Market
    
    Carrying
    
    MarketValue
    
    Value
    
    Value
    
    Value
    
    Value
    
    ValueAvailable for sale:Collateralized
mortgage
obligations
    
    $
    99,853
    
    
    $
    99,853
    
    
    $
    163,473
    
    
    $
    163,473
    
    
    $
    193,736
    
    
    $
    193,736Mortgage pass-through
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    U.S. Government and
agency securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Municipal securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    99,853
    
    
    $
    99,853
    
    
    $
    163,473
    
    
    $
    163,473
    
    
    $
    193,736
    
    
    $
    193,736Held to maturity:Collateralized
mortgage
obligations
    
    $
    217,137
    
    
    $
    212,831
    
    
    $
    288,585
    
    
    $
    294,712
    
    
    $
    355,637
    
    
    $
    355,769Mortgage pass-through
securities
    
    
    26,177
    
    
    
    27,899
    
    
    
    51,101
    
    
    
    54,196
    
    
    
    75,140
    
    
    
    77,030U.S. Government and
agency securities
    
    
    34,197
    
    
    
    34,380
    
    
    
    25,046
    
    
    
    25,680
    
    
    
    
    
    
    
    Municipal securities
    
    
    60
    
    
    
    60
    
    
    
    100
    
    
    
    100
    
    
    
    179
    
    
    
    179277,571
    
    
    
    275,170
    
    
    
    364,832
    
    
    
    374,688
    
    
    
    430,956
    
    
    
    432,978$
    377,424
    
    
    $
    375,023
    
    
    $
    528,305
    
    
    $
    538,161
    
    
    $
    624,692
    
    
    $
    626,714
 Loans Receivable.The Companys loan portfolio, net of allowance,
increased $156.4 million or 7.5% during the year ended December 31, 2003
primarily as a result of increased residential and commercial loan volume.
Residential mortgage loans, which include home equity first mortgages, rose by
$94.0 million or 34.0% during the year as continuing low interest rates
generated increased levels of mortgage loan activity. Commercial loans grew,
primarily in the commercial real estate portfolio, by $68.0 million or 4.0%
during the year. Management intends to continue its growth in lending with the
primary focus being on commercial and consumer lending activities that enable
the Bank to provide other banking services to the customers. For additional
information, see BusinessLending Activities in Item 1 hereof and Note 4 of
the Notes to Consolidated Financial Statements in Item 8 hereof. 29




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##### Table of Contents



Contractual Principal Repayments and Interest Rates. The following table
sets forth scheduled contractual amortization of the Companys total loan
portfolio at December 31, 2003, as well as the dollar amount of such loans
which are scheduled to mature after one year which have fixed or adjustable
interest rates. Demand loans, loans having no schedule of repayments and no
stated maturity and overdraft loans are reported as due in one year or less
(dollars in thousands): Principal Repayments Contractually DueAfter OneIn One Year
    
    Year Through
    
    After Fiveor Less
    
    Five Years
    
    YearsResidential real estate
    
    $
    61,448
    
    
    $
    115,347
    
    
    $
    194,131Commercial
    
    
    485,593
    
    
    
    835,009
    
    
    
    442,704Consumer
    
    
    51,433
    
    
    
    61,242
    
    
    
    24,056Total(1)
    
    $
    598,474
    
    
    $
    1,011,598
    
    
    $
    660,891
   (1)
    
    Of the $1.7 billion of loan principal repayments contractually due after
December 31, 2004, $1.0 billion have fixed rates of interest and $664.3
million have adjustable rates of interest. All are presented net of
undistributed loan proceeds. Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their contractual terms because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses, which generally give the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when
current mortgage loan rates are substantially higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgages are
substantially lower than current mortgage loan rates (due to refinancing of
adjustable-rate and fixed-rate loans at lower rates). Nonperforming Assets and Allowance for Loan Losses.Nonperforming assets
(consisting of non-accruing loans, accruing loans greater than 90 days
delinquent and foreclosed assets) at December 31, 2003 decreased slightly to
$10.7 million or .37% of total assets from $13.0 million or .46% of total
assets at December 31, 2002. Although the Company is currently experiencing
lower nonperforming asset rates than most of its peers, it anticipates these
rates to increase as the slower national economy may have an impact on the
Banks middle-market commercial borrowers who typically have less ability to
withstand economic downturns. The following table presents information on the Companys nonperforming
assets at the dates indicated (dollars in thousands): December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Non-accruing loans
    
    $
    9,460
    
    
    $
    10,803
    
    
    $
    7,687
    
    
    $
    9,297
    
    
    $
    5,730Accruing loans greater than 90 days delinquent
    
    
    308
    
    
    
    464
    
    
    
    30
    
    
    
    725
    
    
    
    1,083Foreclosed assets
    
    
    893
    
    
    
    1,693
    
    
    
    1,910
    
    
    
    881
    
    
    
    723Total nonperforming assets
    
    $
    10,661
    
    
    $
    12,960
    
    
    $
    9,627
    
    
    $
    10,903
    
    
    $
    7,536Total nonperforming assets as a percentage of
total assets
    
    
    0.37
    %
    
    
    0.46
    %
    
    
    0.34
    %
    
    
    0.46
    %
    
    
    0.32
    %
 30




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##### Table of Contents



As of December 31, 2003, the Companys allowance for loan loss totaled
$30.4 million or 1.3% of total loans as compared to $29.5 million or 1.4% of
total loans at December 31, 2002. During the years ended December 31, 2003 and
2002, the Companys net charge-offs remained stable at $5.73 million and $5.69
million, respectively. The Companys process for determining the adequacy of the allowance is
based on a comprehensive analysis of the institutions loan portfolio that
considers all significant factors that affect the collectibility. The
allowance is maintained at a level that is adequate to absorb all estimated
inherent losses in the portfolio as of this date. Specific and general
valuation allowances are increased by provisions charged to expense and
decreased by charge-offs of loans, net of recoveries. Specific allowances are
provided for impaired loans for which the expected loss is measurable. General
valuation allowances are provided based on a formula, which incorporates the
factors discussed above. The Bank periodically reviews the assumptions and
formula by which additions are made to the specific and general valuation
allowances for losses in an effort to refine such allowances in light of the
current status of the factors described above. Management realizes that an
institutions past loss history should be considered in evaluating the inherent
loss potential of the loan portfolio. In addition to historical loss
experience, the Company also considers other factors likely to cause estimated
credit losses to differ from historical loss experience. Homogeneous loan
categories consist of one-to-four family residential mortgages and consumer
loans. Homogeneous loans are analyzed on a group or pool basis for evaluation
of credit quality and impairment under SFAS No. 5. Nonhomogeneous loan
categories consist of commercial loans. These assets are reviewed individually
for the purpose of evaluating credit quality and impairment under SFAS No. 114.
See BusinessAsset QualityAllowance for Loan Losses in Item 1 hereof and
Note 1(e) of the Notes to Consolidated Financial Statements in Item 8 hereof. The following table provides information on the Companys allowance for
loan losses as of the dates indicated (dollars in thousands): Years Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Balance at beginning of period
    
    $
    29,532
    
    
    $
    27,621
    
    
    $
    28,345
    
    
    $
    28,297
    
    
    $
    27,901Loans charged off:Residential real estate
    
    
    (338
    )
    
    
    (635
    )
    
    
    (805
    )
    
    
    (164
    )
    
    
    (314
    )Commercial
    
    
    (5,117
    )
    
    
    (4,121
    )
    
    
    (3,606
    )
    
    
    (1,725
    )
    
    
    (2,397
    )Consumer
    
    
    (833
    )
    
    
    (1,428
    )
    
    
    (2,178
    )
    
    
    (1,818
    )
    
    
    (1,142
    )Recoveries
    
    
    554
    
    
    
    492
    
    
    
    465
    
    
    
    1,055
    
    
    
    1,909Net loans charged off
    
    
    (5,734
    )
    
    
    (5,692
    )
    
    
    (6,124
    )
    
    
    (2,652
    )
    
    
    (1,944
    )Allowances acquired
    
    
    
    
    
    
    1,003
    
    
    
    
    
    
    
    
    
    
    
    340Provision for loan losses
    
    
    6,600
    
    
    
    6,600
    
    
    
    5,400
    
    
    
    2,700
    
    
    
    2,000Balance at end of period
    
    $
    30,398
    
    
    $
    29,532
    
    
    $
    27,621
    
    
    $
    28,345
    
    
    $
    28,297Allowance for loan losses to total
nonperforming loans at end of period
    
    
    3.11
    x
    
    
    2.62
    x
    
    
    3.58
    x
    
    
    2.83
    x
    
    
    4.15
    xAllowance for loan losses to total loans
at end of period
    
    
    1.34
    %
    
    
    1.40
    %
    
    
    1.38
    %
    
    
    1.51
    %
    
    
    1.65
    %
 31




---



##### Table of Contents



The Bank utilizes a consistent systematic process for allocation of
reserve dollars within its total loan portfolio. The reserve rates vary based
on the perceived risks inherent within the various loan types. Reserve rates
are established based on historical portfolio performance as well as specific
credit performance. The following table sets forth information concerning the allocation of
the Companys allowance for loan losses by loan category at the dates indicated
(dollars in thousands): December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Percent to
    
    
    
    
    
    Percent to
    
    
    
    
    
    Percent to
    
    
    
    
    
    Percent to
    
    
    
    
    
    Percent toTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    TotalAmount
    
    Allowance
    
    Amount
    
    Allowance
    
    Amount
    
    Allowance
    
    Amount
    
    Allowance
    
    Amount
    
    AllowanceResidential real estate
    
    $
    1,478
    
    
    
    4.86
    %
    
    $
    2,414
    
    
    
    8.17
    %
    
    $
    2,313
    
    
    
    8.37
    %
    
    $
    2,777
    
    
    
    9.80
    %
    
    $
    3,332
    
    
    
    11.78
    %Commercial
    
    
    27,359
    
    
    
    90.00
    
    
    
    24,508
    
    
    
    82.99
    
    
    
    22,021
    
    
    
    79.73
    
    
    
    21,125
    
    
    
    74.53
    
    
    
    18,963
    
    
    
    67.01Consumer
    
    
    1,561
    
    
    
    5.14
    
    
    
    2,610
    
    
    
    8.84
    
    
    
    3,287
    
    
    
    11.90
    
    
    
    4,443
    
    
    
    15.67
    
    
    
    6,002
    
    
    
    21.21Total
    
    $
    30,398
    
    
    
    100.00
    %
    
    $
    29,532
    
    
    
    100.00
    %
    
    $
    27,621
    
    
    
    100.00
    %
    
    $
    28,345
    
    
    
    100.00
    %
    
    $
    28,297
    
    
    
    100.00
    %
 32




---



##### Table of Contents



Deposits.At December 31, 2003, total deposits were $1.9 billion compared
to $1.8 billion at December 31, 2002, an increase of $69.5 million or 3.8%.
Maturing time deposits were replaced by demand and savings deposits, as the
Company continued targeting this category to increase its transaction accounts.
Demand and savings deposits increased during the year by $113.4 million or
13.5%. The Companys deposit base continues to be comprised substantially of core
deposits, which consist of total deposits, excluding brokered deposits, plus
commercial customer sweep accounts (repurchase agreements). Core deposits for
the Company were $1.837 billion or 93.5% of total deposits and sweep accounts
at December 31, 2003 compared to $1.877 billion or 99.4% at December 31, 2002.
At December 31, 2003, deposits included $128.5 million in brokered CDs, which
the Company believes will be less susceptible to early withdrawal in a rising
rate environment. The following table presents certain information regarding the Companys
commercial customer sweep accounts for the dates indicated (dollars in
thousands): At or For the YearsEnded December 31,2003
    
    2002
    
    2001Securities sold under agreements to
repurchase:Average balance outstanding
    
    $
    45,268
    
    
    $
    43,425
    
    
    $
    42,987Maximum amount outstanding at any
month-end during the year
    
    
    76,366
    
    
    
    64,701
    
    
    
    53,622Balance outstanding at end of year
    
    
    66,367
    
    
    
    59,696
    
    
    
    38,694Average interest rate during the year
    
    
    0.79
    %
    
    
    1.22
    %
    
    
    3.39
    %Average interest rate at end of year
    
    
    0.72
    %
    
    
    0.94
    %
    
    
    1.29
    %
 33




---



##### Table of Contents



The following table presents the average balance of each deposit type and
the average rate paid on each deposit type of the Company for the periods
indicated (dollars in thousands): Years Ended December 31,2003
    
    2002
    
    2001Average
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Rate
    
    Average
    
    
    
    
    
    Rate
    
    Average
    
    
    
    
    
    RateBalance
    
    Interest
    
    Paid
    
    Balance
    
    Interest
    
    Paid
    
    Balance
    
    Interest
    
    PaidNoninterest-bearing deposits
    
    $
    188,454
    
    
    $
    
    
    
    
    
    %
    
    $
    170,390
    
    
    $
    
    
    
    
    
    %
    
    $
    155,598
    
    
    $
    
    
    
    
    
    %Passbook accounts
    
    
    93,010
    
    
    
    1,029
    
    
    
    1.11
    
    
    
    76,803
    
    
    
    1,317
    
    
    
    1.71
    
    
    
    66,715
    
    
    
    1,754
    
    
    
    2.63NOW and money market accounts
    
    
    614,859
    
    
    
    6,066
    
    
    
    0.99
    
    
    
    524,500
    
    
    
    9,021
    
    
    
    1.72
    
    
    
    452,971
    
    
    
    12,778
    
    
    
    2.82Term certificates
    
    
    982,389
    
    
    
    25,845
    
    
    
    2.63
    
    
    
    1,092,278
    
    
    
    39,818
    
    
    
    3.65
    
    
    
    1,145,288
    
    
    
    61,094
    
    
    
    5.33Total deposits
    
    $
    1,878,712
    
    
    $
    32,940
    
    
    
    1.75
    %
    
    $
    1,863,971
    
    
    $
    50,156
    
    
    
    2.69
    %
    
    $
    1,820,572
    
    
    $
    75,626
    
    
    
    4.15
    %
 34




---



##### Table of Contents



Borrowings.In addition to deposits and securities sold under agreements
to repurchase, the Company utilizes advances from the FHLB of Topeka to fund
its operations. During 2003, the Companys average balance of advances
outstanding at the FHLB of Topeka was $643.7 million compared with $624.2
million in 2002, as the Company utilized borrowings to help meet loan funding
needs. The following table sets forth certain information regarding the
borrowings of the Company at or for the dates indicated (dollars in thousands): At or For the YearsEnded December 31,2003
    
    2002
    
    2001FHLB of Topeka advances:Average balance outstanding
    
    $
    643,710
    
    
    $
    624,170
    
    
    $
    521,628Maximum amount outstanding at any
month-end during the year
    
    
    712,685
    
    
    
    710,025
    
    
    
    753,036Balance outstanding at end of year
    
    
    637,219
    
    
    
    684,193
    
    
    
    728,205Average interest rate during the year
    
    
    4.01
    %
    
    
    4.10
    %
    
    
    4.23
    %Average interest rate at end of year
    
    
    3.97
    %
    
    
    3.82
    %
    
    
    3.75
    %
 In September 1997, the Company issued $80.0 million of Senior Notes, which
bear interest at the rate of 11.0%, payable semi-annually. Issuance costs were
deferred and capitalized and the unamortized balance of $116,000 is reflected
in other assets in the consolidated statement of financial condition. As of
December 31, 2003 and 2002, the Company had purchased and retired $58.7 million
of the Senior Notes, leaving $21.3 million outstanding. The Company funds the
semiannual interest payments through dividends paid to the Company from the
Bank. Pursuant to the Indenture, dated September 8, 1997, between the Company
and The Bank of New York, relating to the Senior Notes, upon a change of
control the Company is obligated to make an offer to purchase all of the then
outstanding Senior Notes at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest. The Company is required to
purchase all Senior Notes properly tendered in such offer. Notice of the offer
to purchase the outstanding Senior Notes must be mailed not later than the 30th
day after the change of control to the holders of the Senior Notes. The Senior
Notes are due to mature in September 2004. The merger with IBC would
constitute a change in control for purposes of the Indenture. If the merger
transaction between IBC and the Company closes when anticipated, the Company
may be required to purchase the Senior Notes prior to their maturity date. For
additional information, see BusinessSources of FundsBorrowings in Item 1
hereof and Note 9 of the Notes to Consolidated Financial Statements in Item 8
hereof. Stockholders Equity.Stockholders equity increased from $167.9 million
at December 31, 2002 to $175.4 million at December 31, 2003. The increase in
stockholders equity came primarily as a result of earnings during the period,
offset by an increase in treasury shares. The Company increased its shares of
treasury stock during 2003 as part of a stock repurchase program in which the
Company repurchased 1.4 million shares of its common stock at a cost of $21.0
million. See General. During 2003, 130,550 options to purchase the
Companys stock were exercised, resulting in a $1.5 million increase in
additional paid-in capital. These options had been previously issued to
officers of the Bank under the Companys 1998 Stock Option Plan. Accumulated
other comprehensive income declined $991,000 during fiscal 2003 as a result of
the decline in unrealized gains on available for sale securities. At December
31, 2003, the Company and the Bank exceeded all regulatory requirements for
capital adequacy. See Liquidity and Capital Resources. 35




---



##### Table of Contents



Results of Operations General.The Companys results of operations depend substantially on its
net interest income, which is the difference between interest income on
interest-earning assets, consisting primarily of loans receivable,
mortgage-backed and investment securities and various other short-term
investments, and interest expense on interest-bearing liabilities, consisting
primarily of deposits, FHLB of Topeka advances, Senior Notes and mandatorily
redeemable trust preferred securities. On an ongoing basis, the Companys
results of operations will be affected by the level of its noninterest income
including deposit related income, loan fees and service charges, net gains
(losses) on sales of assets and the increase in the cash surrender value of the
bank-owned life insurance; the level of its noninterest expense, such as
compensation and employee benefits, equipment and data processing expense,
occupancy expense, advertising expense and professional fees; its provisions
for losses on loans resulting from the Companys assessment of the adequacy of
its allowance for losses on loans; and provisions for income taxes. Net Income.The Company reported net income of $28.1 million, $29.0
million and $26.5 million during the years ended December 31, 2003, 2002 and
2001, respectively. Net income decreased by $920,000 or 3.2% during the year
ended December 31, 2003 as compared to the prior year primarily due to a
decrease in interest earned on the Companys loan and securities portfolios.
Net income increased by $2.5 million or 9.6% during the year ended December 31,
2002, as compared to the year ended December 31, 2001, primarily due to a
decline in interest expense paid on deposit accounts as well as increased
deposit-related income. Diluted earnings per share rose consistently over the
years ended December 31, 2003, 2002 and 2001 at $1.58, $1.48 and $1.26,
respectively. Diluted earnings per share included the effect of the Companys
share repurchase program which resulted in the repurchase of 1.4 million, 1.7
million and 1.3 million shares during the years ended December 31, 2003, 2002
and 2001, respectively. Net Interest Income.Net interest income is determined by the Companys
net interest spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. Net interest income during the years ended December 31, 2003 and 2002
reflected the overall decline in the national economy. During 2003, as rates
continued at their historically low level, the yield on the Companys
interest-earning assets decreased by 98 basis points, while the rates paid on
the Companys interest-bearing liabilities decreased only 72 basis points.
This coupled with the decline in the average net interest-earning assets of
$7.6 million or 3.2% resulted in a 26 basis point decrease in the Companys net
interest spread. The Companys net interest margin, which is the ratio of net
interest income to average earning assets, decreased from 3.48% for 2002 to
3.14% for 2003 reflecting the decline in net interest income during 2003.
During 2002, although interest rates had fallen dramatically, the Companys
interest-bearing liabilities repriced faster than its interest-earning assets
and its average net interest-earning assets increased by $10.0 million or 4.4%.
Accordingly, the Companys net interest spread increased from 3.11% in 2001 to
3.18% in 2002. Interest Income. Total interest income decreased $24.7 million or 14.1%
during the year ended December 31, 2003 to $150.8 million as compared to $175.5
million at December 31, 2002. The decline was primarily caused by the decrease
of $17.9 million or 50.9% in interest earned on the Companys securities
portfolio. Current economic conditions and low interest rates have encouraged
prepayments on the securities portfolio, resulting in both a decrease in the
average balance of the portfolio of $172.7 million as well as a decrease in the
yield earned on the portfolio of 182 basis points. Also contributing to the
decline in interest income for the year ended December 31, 2003 was the $6.3
million or 4.5% decrease in interest earned on the Companys loan portfolio.
The Company continues to increase its average balance of loans outstanding
particularly focusing on growth in the commercial portfolio. However, early
pay-offs and refinancings caused further yield declines within the portfolio as
new loans were added at current lower rates. 36




---



##### Table of Contents



Total interest income decreased by $17.6 million or 9.1% during the year
ended December 31, 2002 as compared to the year ended December 31, 2001,
primarily as a result of the decline in the average yield on interest-earning
assets, which fell from 7.70% to 6.59% or 111 basis points during the
comparative period. Interest income on loans fell $14.1 million or 9.3% during
the year ended December 31, 2002. This decline was primarily due to the
decline in the average yield, which dropped from 7.94% to 6.86% during that
same period. Interest Expense. Interest expense on deposits, which is the largest
component of the Companys interest-bearing liabilities, declined $17.2 million
or 34.3% for the year ended December 31, 2003 when compared to the prior year.
The average cost of deposits during the year ended December 31, 2003, was 1.95%
as compared with 2.96% for the same period in the prior year. This rate
decline coupled with the change in deposit mix, as maturing time deposits were
replaced with lower cost transaction accounts, led to the overall decrease in
interest expense. Similarly, during the year ended December 31, 2002, interest expense on
deposits declined $25.5 million or 33.7% as compared with the year ended
December 31, 2001. However, the decreased expense was substantially rate
driven as the average cost of deposits fell from 4.54% to 2.96% during the
period, a decrease of 158 basis points. Further contributing to the lower
rates paid on total deposits was the decline in the average balance of time
deposits as they matured and were replaced by lower priced demand and savings
accounts in response to the Companys marketing campaigns. Interest expense on FHLB advances increased $200,000 or 0.8% and $3.6
million or 16.2% during the years ended December 31, 2003 and 2002 primarily
due to an increase in the average outstanding balance of those borrowings,
which were up $19.5 million and $102.5 million, respectively. The increase in
volume offsets a decline in the average cost of those borrowings during both
comparative periods of 9 basis points and 13 basis points, respectively. During the periods presented, interest expense on Senior Notes consisted
of interest accrued with respect to the notes issued in connection with the
1997 purchase and recapitalization of the Company. During the past five years,
the Company has successfully purchased and retired $58.7 million of the
original $80.0 million 11% Senior Notes resulting in the continued decrease in
interest expense. The Company currently has three issues of mandatorily redeemable trust
preferred securities outstanding totaling $60.3 million at December 31, 2003.
Interest expense on trust preferred securities during the year ended December
31, 2003 was $4.7 million as compared with year ended 2002 of $4.0 million.
The increase in expense is attributable to the commencement of semi-annual and
quarterly interest payments on the trust preferred securities issued in July
and October of 2002. See Business  Sources of FundsCapital Issuances in
Item 1 hereof and Note 10 of the Notes to Consolidated Financial Statements in
Item 8 hereof. 37




---



##### Table of Contents



Average Balances, Net Interest Income, Yields Earned and Rates Paid



| |  | The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company
from interest-earning assets and the resultant average yields, (ii) the
total dollar amount of interest expense on interest-bearing liabilities
and the resultant average rates, (iii) net interest income, (iv) interest
rate spread, and (v) net interest margin. Information is based on
average daily balances during the indicated periods (dollars in
thousands):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |       |      |      |  
|-------------------------------------------------------------------------------- | ------------------------------------------------- | ---------------------------- | ------------------------------------------ | --------- | ------------------------ | --------- | -------- | ------- | ---------- | ------- | ------- | ----- | -------- | ---- | ---------- | --------- | --------- | --------- | ------- | ------- | ------ | ------- | ------ | ----- | ---- | ---- | -
|                                                                                 |                                                   |                              |                                            |           | Years Ended December 31,
|                                                                                 |                                                   |                              |                                            |           |                         
|                                                                                 |                                                   |                              |                                            |           | 2003                     |           | 2002    
|                                                                                 |                                                   |                              |                                            |           |                          |           |         
|                                                                                 |                                                   |                              |                                            |           | Average                  |           |          |         |            |         | Average |       | Average  |      |            |           |           |           | Average
|                                                                                 |                                                   |                              |                                            |           | Balance                  |           | Interest |         | Yield/Cost |         | Balance |       | Interest |      | Yield/Cost
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |           
|Assets                                                                           |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|                                                                                 | Loans receivable(1)                               |                              | $                                          | 2,213,421 |                          |           | $        | 131,610 |            |         |         | 5.95  | %        |      | $          | 2,011,278 |           |           | $       | 137,875 |        |         |        | 6.86  | %   
|                                                                                 | Securities(2)                                     |                              |                                            | 403,473   |                          |           |          | 17,292  |            |         |         | 4.29  |          |      |            | 576,199   |           |           |         | 35,200  |        |         |        | 6.11  |     
|                                                                                 | Other earning assets(3)                           |                              |                                            | 72,161    |                          |           |          | 1,902   |            |         |         | 2.64  |          |      |            | 77,356    |           |           |         | 2,418   |        |         |        | 3.13  |     
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|                                                                                 |                                                   |                              | Total interest-earning assets              |           |                          | 2,689,055 |          |         |            | 150,804 |         |       |          | 5.61 | %          |           |           | 2,664,833 |         |         |        | 175,493 |        |       |      | 6.59 | %
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|                                                                                 | Noninterest-earning assets                        |                              |                                            | 151,158   |                          |           |          |         |            |         |         |       |          |      |            | 130,674   |           |           |         |         |        |         |        |       |     
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|                                                                                 |                                                   |                              | Total assets                               |           | $                        | 2,840,213 |          |         |            |         |         |       |          |      |            |           | $         | 2,795,507 |         |         |        |         |        |       |      |      |  
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|Liabilities and Stockholders Equity                                             |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|                                                                                 | Deposits:                                         |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |       |     
|                                                                                 |                                                   | Transaction accounts(4)      |                                            | $         | 707,869                  |           |          |         | 7,095      |         |         |       | 1.00     | %    |            | $         | 601,303   |           |         |         | 10,338 |         |        |       | 1.72 | %   
|                                                                                 |                                                   | Term certificates of deposit |                                            |           | 982,389                  |           |          |         | 25,845     |         |         |       | 2.63     |      |            |           | 1,092,278 |           |         |         | 39,818 |         |        |       | 3.65 |     
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|                                                                                 |                                                   |                              | Total deposits                             |           |                          | 1,690,258 |          |         |            | 32,940  |         |       |          | 1.95 |            |           |           | 1,693,581 |         |         |        | 50,156  |        |       |      | 2.96 |  
|                                                                                 | FHLB advances                                     |                              |                                            | 643,710   |                          |           |          | 25,813  |            |         |         | 4.01  |          |      |            | 624,170   |           |           |         | 25,613  |        |         |        | 4.10  |     
|                                                                                 | Securities sold under agreements to
repurchase    |                              |                                            | 45,268    |                          |           |          | 356     |            |         |         | 0.79  |          |      |            | 43,456    |           |           |         | 532     |        |         |        | 1.22  |     
|                                                                                 | Senior Notes                                      |                              |                                            | 21,295    |                          |           |          | 2,516   |            |         |         | 11.81 |          |      |            | 21,506    |           |           |         | 2,541   |        |         |        | 11.81 |     
|                                                                                 | Mandatorily redeemable trust
preferred securities |                              |                                            | 60,250    |                          |           |          | 4,682   |            |         |         | 7.77  |          |      |            | 46,250    |           |           |         | 4,020   |        |         |        | 8.69  |     
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|                                                                                 |                                                   |                              | Total interest-bearing liabilities         |           |                          | 2,460,781 |          |         |            | 66,307  |         |       |          | 2.69 | %          |           |           | 2,428,963 |         |         |        | 82,862  |        |       |      | 3.41 | %
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|                                                                                 | Noninterest-bearing liabilities                   |                              |                                            | 210,211   |                          |           |          |         |            |         |         |       |          |      |            | 196,338   |           |           |         |         |        |         |        |       |     
|                                                                                 | Stockholders equity                              |                              |                                            | 169,221   |                          |           |          |         |            |         |         |       |          |      |            | 170,206   |           |           |         |         |        |         |        |       |     
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|                                                                                 |                                                   |                              | Total liabilities and stockholders
equity |           | $                        | 2,840,213 |          |         |            |         |         |       |          |      |            |           | $         | 2,795,507 |         |         |        |         |        |       |      |      |  
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|Net interest-earning assets                                                      |                                                   | $                            | 228,274                                    |           |                          |           |          |         |            |         |         |       |          | $    | 235,870    |           |           |           |         |         |        |         |        |      
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|Net interest income/interest rate
spread                                         |                                                   |                              |                                            |           |                          | $         | 84,497   |         |            |         | 2.92    | %     |          |      |            |           |           | $         | 92,631  |         |        |         | 3.18   | %    
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|Net interest margin                                                              |                                                   |                              |                                            |           |                          |           |          |         |            |         | 3.14    | %     |          |      |            |           |           |           |         |         |        |         | 3.48   | %    
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      
|Ratio of average interest-earning
assets to average interest-bearing
liabilities |                                                   |                              |                                            |           |                          |           |          |         |            |         | 109.28  | %     |          |      |            |           |           |           |         |         |        |         | 109.71 | %    
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |          |      |            |           |           |           |         |         |        |         |        |      

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |       |      |      |  
|-------------------------------------------------------------------------------- | ------------------------------------------------- | ---------------------------- | ------------------------------------------ | --------- | ------------------------ | --------- | -------- | ------- | ---------- | ------- | ------- | ----- | ---- | ---- | -
|                                                                                 |                                                   |                              |                                            |           | Years Ended December 31,
|                                                                                 |                                                   |                              |                                            |           |                         
|                                                                                 |                                                   |                              |                                            |           | 2001                    
|                                                                                 |                                                   |                              |                                            |           |                         
|                                                                                 |                                                   |                              |                                            |           | Average                  |           |          |         |            |         | Average
|                                                                                 |                                                   |                              |                                            |           | Balance                  |           | Interest |         | Yield/Cost
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |           
|Assets                                                                           |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|                                                                                 | Loans receivable(1)                               |                              | $                                          | 1,914,373 |                          |           | $        | 151,950 |            |         |         | 7.94  | %   
|                                                                                 | Securities(2)                                     |                              |                                            | 522,406   |                          |           |          | 36,952  |            |         |         | 7.07  |     
|                                                                                 | Other earning assets(3)                           |                              |                                            | 70,004    |                          |           |          | 4,236   |            |         |         | 6.05  |     
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|                                                                                 |                                                   |                              | Total interest-earning assets              |           |                          | 2,506,783 |          |         |            | 193,138 |         |       |      | 7.70 | %
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|                                                                                 | Noninterest-earning assets                        |                              |                                            | 120,098   |                          |           |          |         |            |         |         |       |     
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|                                                                                 |                                                   |                              | Total assets                               |           | $                        | 2,626,881 |          |         |            |         |         |       |      |      |  
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|Liabilities and Stockholders Equity                                             |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|                                                                                 | Deposits:                                         |                              |                                            |           |                          |           |          |         |            |         |         |       |     
|                                                                                 |                                                   | Transaction accounts(4)      |                                            | $         | 519,686                  |           |          |         | 14,532     |         |         |       | 2.80 | %   
|                                                                                 |                                                   | Term certificates of deposit |                                            |           | 1,145,288                |           |          |         | 61,094     |         |         |       | 5.33 |     
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|                                                                                 |                                                   |                              | Total deposits                             |           |                          | 1,664,974 |          |         |            | 75,626  |         |       |      | 4.54 |  
|                                                                                 | FHLB advances                                     |                              |                                            | 521,628   |                          |           |          | 22,045  |            |         |         | 4.23  |     
|                                                                                 | Securities sold under agreements to
repurchase    |                              |                                            | 46,600    |                          |           |          | 1,640   |            |         |         | 3.52  |     
|                                                                                 | Senior Notes                                      |                              |                                            | 36,353    |                          |           |          | 4,298   |            |         |         | 11.81 |     
|                                                                                 | Mandatorily redeemable trust
preferred securities |                              |                                            | 11,358    |                          |           |          | 1,035   |            |         |         | 9.11  |     
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|                                                                                 |                                                   |                              | Total interest-bearing liabilities         |           |                          | 2,280,913 |          |         |            | 104,644 |         |       |      | 4.59 | %
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|                                                                                 | Noninterest-bearing liabilities                   |                              |                                            | 176,754   |                          |           |          |         |            |         |         |       |     
|                                                                                 | Stockholders equity                              |                              |                                            | 169,214   |                          |           |          |         |            |         |         |       |     
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|                                                                                 |                                                   |                              | Total liabilities and stockholders
equity |           | $                        | 2,626,881 |          |         |            |         |         |       |      |      |  
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|Net interest-earning assets                                                      |                                                   | $                            | 225,870                                    |           |                          |           |          |         |            |         |         |      
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|Net interest income/interest rate
spread                                         |                                                   |                              |                                            |           |                          | $         | 88,494   |         |            |         | 3.11    | %    
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|Net interest margin                                                              |                                                   |                              |                                            |           |                          |           |          |         |            |         | 3.53    | %    
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      
|Ratio of average interest-earning
assets to average interest-bearing
liabilities |                                                   |                              |                                            |           |                          |           |          |         |            |         | 109.90  | %    
|                                                                                 |                                                   |                              |                                            |           |                          |           |          |         |            |         |         |      



---

|(1) |  | The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis, and excludes the
allowance for loan losses which is included in noninterest-earning assets.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes all securities including the market valuation accounts.                                                                                                                                                  
|   
|(3) |  | Includes interest bearing deposits, FHLB of Topeka stock and Federal
Reserve Bank stock.                                                                                                                          
|   
|(4) |  | Includes passbook, NOW and money market accounts.                                                                                                                                                                 

38



---



##### Table of Contents



Rate/Volume Analysis



| |  | The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); and (iii)
changes in rate/volume (change in rate multiplied by change in volume)
(dollars in thousands):
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                              |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |         |           |         |  
|----------------------------- | ------------------------------------------------- | ---------------------------- | ----------------------------------------------- | ------- | --------------------------------------------- | ------- | ------ | ------- | ----------- | ------ | ---------- | ------ | ----- | ----- | ------ | ------- | --------- | ------- | -
|                              |                                                   |                              |                                                 |         | Year Ended December 31, 2003 compared to 2002
|                              |                                                   |                              |                                                 |         |                                              
|                              |                                                   |                              |                                                 |         | Increase (Decrease) due to                    |         |        |         |            
|                              |                                                   |                              |                                                 |         |                                               |         |        |         |            
|                              |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |         | Total Net
|                              |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |         | Increase 
|                              |                                                   |                              |                                                 |         | Rate                                          |         | Volume |         | Rate/Volume |        | (Decrease)
|                              |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |           
|Interest-earning:             |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |        
|                              | Loans receivable                                  |                              | $                                               | (18,284 | )                                             |         | $      | 13,857  |             |        | $          | (1,838 | )     |       | $      | (6,265  | )        
|                              | Securities                                        |                              |                                                 | (10,505 | )                                             |         |        | (10,552 | )           |        |            | 3,149  |       |       |        | (17,908 | )        
|                              | Other earning assets                              |                              |                                                 | (379    | )                                             |         |        | (162    | )           |        |            | 25     |       |       |        | (516    | )        
|                              |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |        
|                              |                                                   |                              | Total net change in income on
interest-earning  |         |                                               | (29,168 | )      |         |             | 3,143  |            |        |       | 1,336 |        |         |           | (24,689 | )
|                              |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |        
|Interest-bearing:             |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |        
|                              | Deposits:                                         |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |         |          
|                              |                                                   | Transaction accounts         |                                                 |         | (4,311                                        | )       |        |         | 1,832       |        |            |        | (764  | )     |        |         | (3,243    | )      
|                              |                                                   | Term certificates of deposit |                                                 |         | (11,082                                       | )       |        |         | (4,006      | )      |            |        | 1,115 |       |        |         | (13,973   | )      
|                              |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |        
|                              |                                                   |                              | Total deposits                                  |         |                                               | (15,393 | )      |         |             | (2,174 | )          |        |       | 351   |        |         |           | (17,216 | )
|                              | FHLB advances                                     |                              |                                                 | (584    | )                                             |         |        | 802     |             |        |            | (18    | )     |       |        | 200     |          
|                              | Securities sold under agreements
to repurchase    |                              |                                                 | (190    | )                                             |         |        | 22      |             |        |            | (8     | )     |       |        | (176    | )        
|                              | Senior Notes                                      |                              |                                                 |        |                                               |         |        | (25     | )           |        |            |       |       |       |        | (25     | )        
|                              | Mandatorily redeemable trust
preferred securities |                              |                                                 | (426    | )                                             |         |        | 1,217   |             |        |            | (129   | )     |       |        | 662     |          
|                              |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |        
|                              |                                                   |                              | Total net change in expense on
interest-bearing |         |                                               | (16,593 | )      |         |             | (158   | )          |        |       | 196   |        |         |           | (16,555 | )
|                              |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |        
|Change in net interest income |                                                   | $                            | (12,575                                         | )       |                                               | $       | 3,301  |         |             | $      | 1,140      |        |       | $     | (8,134 | )      
|                              |                                                   |                              |                                                 |         |                                               |         |        |         |             |        |            |        |       |       |        |         |          

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                              |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |         |           |         |  
|----------------------------- | ------------------------------------------------- | ---------------------------- | ----------------------------------------------- | ------- | --------------------------------------------- | ------- | ------ | ------ | ----------- | ------ | ---------- | ------ | ---- | ------ | ----- | ------- | --------- | ------- | -
|                              |                                                   |                              |                                                 |         | Year Ended December 31, 2002 compared to 2001
|                              |                                                   |                              |                                                 |         |                                              
|                              |                                                   |                              |                                                 |         | Increase (Decrease) due to                    |         |        |        |            
|                              |                                                   |                              |                                                 |         |                                               |         |        |        |            
|                              |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |         | Total Net
|                              |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |         | Increase 
|                              |                                                   |                              |                                                 |         | Rate                                          |         | Volume |        | Rate/Volume |        | (Decrease)
|                              |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |           
|Interest-earning:             |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |        
|                              | Loans receivable                                  |                              | $                                               | (20,718 | )                                             |         | $      | 7,692  |             |        | $          | (1,049 | )    |        | $     | (14,075 | )        
|                              | Securities                                        |                              |                                                 | (5,038  | )                                             |         |        | 3,805  |             |        |            | (519   | )    |        |       | (1,752  | )        
|                              | Other earning assets                              |                              |                                                 | (2,048  | )                                             |         |        | 445    |             |        |            | (215   | )    |        |       | (1,818  | )        
|                              |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |        
|                              |                                                   |                              | Total net change in income on
interest-earning  |         |                                               | (27,804 | )      |        |             | 11,942 |            |        |      | (1,783 | )     |         |           | (17,645 | )
|                              |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |        
|Interest-bearing:             |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |        
|                              | Deposits:                                         |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |         |          
|                              |                                                   | Transaction accounts         |                                                 |         | (5,597                                        | )       |        |        | 2,282       |        |            |        | (879 | )      |       |         | (4,194    | )      
|                              |                                                   | Term certificates of deposit |                                                 |         | (19,344                                       | )       |        |        | (2,827      | )      |            |        | 895  |        |       |         | (21,276   | )      
|                              |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |        
|                              |                                                   |                              | Total deposits                                  |         |                                               | (24,941 | )      |        |             | (545   | )          |        |      | 16     |       |         |           | (25,470 | )
|                              | FHLB advances                                     |                              |                                                 | (640    | )                                             |         |        | 4,334  |             |        |            | (126   | )    |        |       | 3,568   |          
|                              | Securities sold under agreements
to repurchase    |                              |                                                 | (1,070  | )                                             |         |        | (110   | )           |        |            | 72     |      |        |       | (1,108  | )        
|                              | Senior Notes                                      |                              |                                                 | 1       |                                               |         |        | (1,754 | )           |        |            | (4     | )    |        |       | (1,757  | )        
|                              | Mandatorily redeemable trust
preferred securities |                              |                                                 | (48     | )                                             |         |        | 3,179  |             |        |            | (146   | )    |        |       | 2,985   |          
|                              |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |        
|                              |                                                   |                              | Total net change in expense on
interest-bearing |         |                                               | (26,698 | )      |        |             | 5,104  |            |        |      | (188   | )     |         |           | (21,782 | )
|                              |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |        
|Change in net interest income |                                                   | $                            | (1,106                                          | )       |                                               | $       | 6,838  |        |             | $      | (1,595     | )      |      | $      | 4,137 |        
|                              |                                                   |                              |                                                 |         |                                               |         |        |        |             |        |            |        |      |        |       |         |          

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                              |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |        |          |         |  
|----------------------------- | ------------------------------------------------- | ---------------------------- | ----------------------------------------------- | ------- | --------------------------------------------- | ------- | --------- | ------ | ----------- | ------ | ---------- | ------ | ---- | ------ | ------ | ------ | -------- | ------- | -
|                              |                                                   |                              |                                                 |         | Year Ended December 31, 2001 compared to 2000
|                              |                                                   |                              |                                                 |         |                                              
|                              |                                                   |                              |                                                 |         | Increase (Decrease) due to                    |         |           |        |            
|                              |                                                   |                              |                                                 |         |                                               |         | Total Net
|                              |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |        | Increase
|                              |                                                   |                              |                                                 |         | Rate                                          |         | Volume    |        | Rate/Volume |        | (Decrease)
|                              |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |           
|Interest-earning:             |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |       
|                              | Loans receivable                                  |                              | $                                               | (13,394 | )                                             |         | $         | 8,411  |             |        | $          | (715   | )    |        | $      | (5,698 | )       
|                              | Securities                                        |                              |                                                 | (224    | )                                             |         |           | 7,421  |             |        |            | (56    | )    |        |        | 7,141  |         
|                              | Other earning assets                              |                              |                                                 | (275    | )                                             |         |           | 1,964  |             |        |            | (196   | )    |        |        | 1,493  |         
|                              |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |       
|                              |                                                   |                              | Total net change in income on
interest-earning  |         |                                               | (13,893 | )         |        |             | 17,796 |            |        |      | (967   | )      |        |          | 2,936   |  
|                              |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |       
|Interest-bearing:             |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |       
|                              | Deposits:                                         |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |        |         
|                              |                                                   | Transaction accounts         |                                                 |         | (3,188                                        | )       |           |        | 3,193       |        |            |        | (670 | )      |        |        | (665     | )      
|                              |                                                   | Term certificates of deposit |                                                 |         | (3,376                                        | )       |           |        | (9,173      | )      |            |        | 423  |        |        |        | (12,126  | )      
|                              |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |       
|                              |                                                   |                              | Total deposits                                  |         |                                               | (6,564  | )         |        |             | (5,980 | )          |        |      | (247   | )      |        |          | (12,791 | )
|                              | FHLB advances                                     |                              |                                                 | (5,219  | )                                             |         |           | 16,072 |             |        |            | (5,137 | )    |        |        | 5,716  |         
|                              | Securities sold under agreements
to repurchase    |                              |                                                 | (427    | )                                             |         |           | 1,652  |             |        |            | (658   | )    |        |        | 567    |         
|                              | Senior Notes                                      |                              |                                                 | (265    | )                                             |         |           | (1,730 | )           |        |            | 260    |      |        |        | (1,735 | )       
|                              | Mandatorily redeemable trust
preferred securities |                              |                                                 |        |                                               |         |           |       |             |        |            | 1,035  |      |        |        | 1,035  |         
|                              |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |       
|                              |                                                   |                              | Total net change in expense on
interest-bearing |         |                                               | (12,475 | )         |        |             | 10,014 |            |        |      | (4,747 | )      |        |          | (7,208  | )
|                              |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |       
|Change in net interest income |                                                   | $                            | (1,418                                          | )       |                                               | $       | 7,782     |        |             | $      | 3,780      |        |      | $      | 10,144 |       
|                              |                                                   |                              |                                                 |         |                                               |         |           |        |             |        |            |        |      |        |        |        |         

39



---



##### Table of Contents



Provision for Loan Losses.The provision for loan losses is charged to
earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on (i) an estimate by management of loan losses
that occurred during the current period and (ii) an ongoing adjustment of prior
estimates of losses occurring in prior periods. To serve as a basis for making
this provision each quarter, the Company maintains an extensive credit risk
monitoring process that considers several factors, including among other
things, current economic conditions affecting the Companys customers, the
payment performance of individual large loans and pools of homogeneous small
loans, portfolio seasoning, changes in collateral values, and detailed reviews
of specific large loan relationships. For large loans deemed to be impaired
due to an expectation that all contractual payments will probably not be
received, impairment is measured by comparing the Companys recorded investment
in the loan to the present value of expected cash flows discounted at the
loans effective interest rate, the fair value of the collateral or the loans
observable market price. While management endeavors to use the best
information available in making its evaluations, future adjustments to the
allowance for loan losses may be necessary if economic conditions change
substantially from the assumptions used in making the evaluations. In
addition, regulatory examiners may require the Company to recognize additions
to its allowance based upon their judgments about information available to them
at the time of their examination.

The Company established provisions for loan losses of $6.6 million, $6.6
million and $5.4 million during the years ended December 31, 2003, 2002 and
2001, respectively. During such respective periods, loan charge-offs (net of
recoveries) amounted to $5.7 million, $5.7 million and $6.1 million. The net
charge-offs were 0.26%, 0.28% and 0.32% of average loans during the same
comparative periods, reflecting the Companys uncompromising commitment to
asset quality.

Noninterest Income.Total noninterest income amounted to $33.8 million,
$28.5 million and $23.7 million during the years ended December 31, 2003, 2002
and 2001, respectively. The Company has, as a result of the soft economy and
low rate environment, placed an increased emphasis on developing new sources of
income. Revenue diversification through increasing fee income has proven to be
a successful tool for countering these tightening effects. Fee related income
on the Companys loans and deposits, which are the main components of
noninterest income increased for the years ended December 31, 2003 and 2002 by
$4.8 million or 22.8% and $4.0 million or 23.6%. In addition, other
noninterest income, which includes the increase in the cash surrender value of
bank-owned life insurance, increased by $264,000 or 4.0% for the year ended
December 31, 2003 compared to the prior year and by $528,000 or 8.8% for the
year ended December 31, 2002 compared to the prior year. The Bank purchased an
additional $10 million in bank-owned life insurance in each of the years ended
December 31, 2003 and 2001.

Noninterest Expense.Total noninterest expense increased slightly by $2.0
million or 2.9% during the year ended December 31, 2003, as the Company
continued its focus on controlling discretionary expenses. This increase was
primarily attributable to a $1.2 million or 2.7% increase in compensation and
employee benefits expense. In addition, noninterest expense for the year ended
December 31, 2003 included a $400,000 or 33.3% increase in professional fees.
This increase included additional fees incurred as a result of the
Sarbanes-Oxley Act of 2002, fees paid for tax planning services and higher
legal fees. Total noninterest expense increased $3.7 million or 5.5% during
the year ended December 31, 2002 as compared to the prior year. This increase
was primarily attributable to increases in compensation and employee benefits
expense which includes the cost of fully accruing the tax-offsetting bonus
feature of stock options issued to selected officers and was partially offset
by the elimination of $1.3 million in goodwill that would have been amortized
in 2002 under prior accounting rules.

Provision for Income Taxes.During the years ended December 31, 2003,
2002 and 2001, the Company recognized $11.0 million, $15.0 million and $13.5
million, respectively, of provisions for income taxes including in 2003 a
decrease in tax reserves relating to prior years following resolution of the
FDIC litigation discussed in the Notes to the Consolidated Financial
Statements. At

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December 31, 2003, the Company had approximately $57.0 million of net
operating loss carryforwards available for state income tax purposes. The
state net operating loss carryforwards expire in varying amounts between 2011
and 2014. At December 31, 2003, 2002 and 2001, a valuation allowance for all
available state net operating loss carryforwards was established as it was
determined to be more likely than not that the benefit of the deferred tax
asset would not be realized. Historically, the Company has generated income
for federal income tax purposes. Based on the Companys current strategy, no
valuation allowance for other deferred tax assets has been established as the
Company believes it is more likely than not that sufficient income for federal
income tax purposes will be realized. See Notes 12 and 13 of the Notes to
Consolidated Financial Statements in Item 8 hereof.

Liquidity and Capital Resources

Liquidity.Liquidity refers to the Companys ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to
outstanding borrowings and to pay operating expenses. It is managements
policy to maintain greater liquidity than required in order to be in a position
to fund loan originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. The Company
monitors its liquidity in accordance with guidelines established by the Company
and applicable regulatory requirements. The Companys need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. The Company can minimize the cash required
during the times of heavy loan demand by modifying its credit policies or
reducing its marketing effort. Liquidity demand caused by net reductions in
deposits is usually caused by factors over which the Company has limited
control. The Company derives its liquidity from both its assets and
liabilities. Liquidity is derived from assets by receipt of interest and
principal payments and prepayments, by the ability to sell assets at market
prices and by utilizing unpledged assets as collateral for borrowings.
Liquidity is derived from liabilities by maintaining a variety of funding
sources, including deposits, advances from the FHLB, securities sold under
agreements to repurchase and other short and long-term borrowings.

The Companys liquidity management is both a daily and long-term function
of funds management. Liquid assets are generally invested in short-term
investments such as overnight money funds and short-term government agency
securities. If the Company requires funds beyond its ability to generate them
internally, various forms of both short and long-term borrowings provide an
additional source of funds. At December 31, 2003, the Company had $235.7
million in available borrowing capacity with the FHLB.

At December 31, 2003, the Company had outstanding loan commitments
(including unused lines of credit) for home equity, commercial real estate and
commercial business loans of approximately $410.2 million and an additional
$10.6 million in performance standby letters of credit. Certificates of
deposit, which are scheduled to mature within one year, totaled $609.2 million
at December 31, 2003, and borrowings consisting of FHLB advances and Senior
Notes, which are scheduled to mature within the same period, totaled $48.5
million. The Company anticipates that it will have sufficient funds available
to meet its current loan commitments and that, based upon past experience and
current pricing policies, it can adjust the rates of certificates of deposit to
retain a substantial portion of its maturing certificates and also, to the
extent deemed necessary, refinance any maturing borrowings.

During the years ended December 31, 2002 and 2001, the Company made
interest payments on the Senior Notes funded through dividends from the Bank.
During the years ended December 31, 2002 and 2001, the Company purchased and
retired $250,000 and $19.6 million, respectively, of the Senior Notes, which
had been issued in connection with the Companys recapitalization in 1997.
This move reduced interest costs associated with those notes. The Senior Notes
have an interest cash debt service requirement of $2.3 million for 2004. The
Senior Notes are due to mature in September 2004. However, in the event that
the transaction between IBC and the Company closes when anticipated, the
obligation of

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the Company pursuant to the Indenture may result in the purchase of those
Notes prior to their maturity date. For additional information, see Business
 Sources of Funds  Borrowings in Item 1 hereof and Note 9 of the Notes to
Consolidated Financial Statements in Item 8 hereof.

On December 31, 2001, Trust I began quarterly interest payments on its
9.00% trust preferred securities, which had been issued earlier that year.
These trust preferred securities have an annual interest debt service of $3.6
million. During 2003, the Company began semiannual and quarterly interest
payments on the trust preferred securities issued by the newly formed Trusts II
and III, respectively. These securities bear interest rates of 3.625% and
3.45% over six and three month LIBOR, respectively. The Company intends to
fund all trust preferred security payments through dividends from the Bank.
See Business  Sources of Funds  Capital Issuances in Item 1 hereof and Note
10 of the Notes to Consolidated Financial Statements in Item 8 hereof.

Capital Resources.During the fourth quarter of 2001, Trust I issued
trust preferred securities for an aggregate price of approximately $40.3
million. In two separate issuances during 2002, the Company issued a total of
$20.0 million additional trust preferred securities. See   Liquidity and
Capital Resources  Liquidity. The trust preferred securities are used as
Tier I Capital to the extent allowable by regulatory guidelines.

Federally insured institutions such as the Company and the Bank are
required to maintain minimum levels of regulatory capital. See Business 
Regulation and Supervision  Capital Requirements in Item 1 hereof. The
following table reflects the Companys and the Banks actual levels of
regulatory capital and applicable regulatory capital requirements at December
31, 2003 (dollars in thousands):

|             |               |  |                  |      |        |  |         |         |        |  |         |       |        |  |   |         |  |  |  |      |   |  |   |         | 
|------------ | ------------- |  | ---------------- | ---- | ------ |  | ------- | ------- | ------ |  | ------- | ----- | ------ |  | - | ------- |  |  |  | ---- | - |  | - | ------- | 
|             |               |  | Minimum Required |      | Actual |  | Excess 
|             |               |  |                  |      |        |  |        
|             |               |  | Percent          |      | Amount |  | Percent |         | Amount |  | Percent |       | Amount
|             |               |  |                  |      |        |  |         |         |        |  |         |       |       
|The Company: |               |  |                  |      |        |  |         |         |        |  |         |       |        |  |   |         |  |  |  |      |   |  |   |        
|             | Leverage      |  |                  | 4.00 | %      |  | $       | 114,829 |        |  |         | 7.45  | %      |  | $ | 214,008 |  |  |  | 3.45 | % |  | $ | 99,179  | 
|             | Core capital  |  |                  | 4.00 |        |  |         | 86,590  |        |  |         | 9.89  |        |  |   | 214,008 |  |  |  | 5.89 |   |  |   | 127,418 | 
|             | Total capital |  |                  | 8.00 |        |  |         | 173,179 |        |  |         | 11.23 |        |  |   | 243,004 |  |  |  | 3.23 |   |  |   | 69,825  | 
|             |               |  |                  |      |        |  |         |         |        |  |         |       |        |  |   |         |  |  |  |      |   |  |   |         | 
|The Bank:    |               |  |                  |      |        |  |         |         |        |  |         |       |        |  |   |         |  |  |  |      |   |  |   |        
|             | Leverage      |  |                  | 4.00 | %      |  | $       | 114,734 |        |  |         | 8.17  | %      |  | $ | 234,288 |  |  |  | 4.17 | % |  | $ | 119,554 | 
|             | Core capital  |  |                  | 4.00 |        |  |         | 86,496  |        |  |         | 10.83 |        |  |   | 234,288 |  |  |  | 6.83 |   |  |   | 147,792 | 
|             | Total capital |  |                  | 8.00 |        |  |         | 172,991 |        |  |         | 12.09 |        |  |   | 261,363 |  |  |  | 4.09 |   |  |   | 88,372  | 

Inflation and Changing Prices

The consolidated financial statements and related data presented in Item 8
hereof have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement of
financial position and operating results in terms of historical dollars (except
with respect to available for sale securities which are carried at market
value), without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially
all of the assets and liabilities of the Company are monetary in nature. As a
result, interest rates have a more significant impact on the Companys
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services.

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Contractual Obligations and Commitments

The following tables present quantifiable, long-term contractual cash
obligations and commitments of the Company as of December 31, 2003. See Notes
7, 8, 9 and 10 of the Notes to the Consolidated Financial Statements in item 8
hereof and   Liquidity and Capital Resources (dollars in thousands):

|                                               |                                    |       |                        |          |  |             |           |            |        |            |          |         |      |   |           |     |  |   |         |         | 
|---------------------------------------------- | ---------------------------------- | ----- | ---------------------- | -------- |  | ----------- | --------- | ---------- | ------ | ---------- | -------- | ------- | ---- | - | --------- | --- |  | - | ------- | ------- | 
|                                               |                                    |       | Payments Due By Period
|                                               |                                    |       |                       
|                                               |                                    |       |                        |          |  |             |           |            |        |            |          |         |      |   | More than |     |  |   |        
|                                               |                                    |       |                        |          |  |             | Less than |            | One to |            | Three to |         | Over
|Contractual Cash Obligations                   |                                    | Total |                        | One Year |  | Three Years |           | Five Years |        | Five Years
|                                               |                                    |       |                        |          |  |             |           |            |        |           
|FHLB advances                                  |                                    | $     | 637,219                |          |  | $           | 27,200    |            |        | $          | 110,000  |         |      | $ |          |     |  | $ | 500,019 |        
|Securities sold under agreements to repurchase |                                    |       | 66,367                 |          |  |             | 66,367    |            |        |            |         |         |      |   |          |     |  |   |        |        
|Senior Notes                                   |                                    |       | 21,295                 |          |  |             | 21,295    |            |        |            |         |         |      |   |          |     |  |   |        |        
|Junior subordinated debentures                 |                                    |       | 62,115                 |          |  |             |          |            |        |            |         |         |      |   |          |     |  |   | 62,115  |        
|Operating leases                               |                                    |       | 7,279                  |          |  |             | 963       |            |        |            | 1,424    |         |      |   | 813       |     |  |   | 4,079   |        
|Data processing maintenance obligation         |                                    |       | 822                    |          |  |             | 274       |            |        |            | 548      |         |      |   |          |     |  |   |        |        
|                                               |                                    |       |                        |          |  |             |           |            |        |            |          |         |      |   |           |     |  |   |         |        
|                                               | Total contractual cash obligations |       | $                      | 795,097  |  |             | $         | 116,099    |        |            | $        | 111,972 |      |   | $         | 813 |  |   | $       | 566,213 | 
|                                               |                                    |       |                        |          |  |             |           |            |        |            |          |         |      |   |           |     |  |   |         |        

|                          |                   |             |          |          |           |             |                                            |            |          |            |         |         |  |   |           |        |  |   |        |        | 
|------------------------- | ----------------- | ----------- | -------- | -------- | --------- | ----------- | ------------------------------------------ | ---------- | -------- | ---------- | ------- | ------- |  | - | --------- | ------ |  | - | ------ | ------ | 
|                          |                   |             |          |          |           |             | Amount of Commitment Expiration Per Period
|                          |                   |             |          |          |           |             |                                           
|                          |                   |             |          |          |           |             |                                            |            |          |            |         |         |  |   | More than |        |  |   |       
|                          |                   |             | Unfunded |          | Less than |             | One to                                     |            | Three to |            | Over   
|Commitments               |                   | Commitments |          | One Year |           | Three Years |                                            | Five Years |          | Five Years
|                          |                   |             |          |          |           |             |                                            |            |          |           
|Lines of credit           |                   | $           | 310,269  |          |           | $           | 162,750                                    |            |          | $          | 135,803 |         |  | $ | 11,629    |        |  | $ | 87     |       
|Standby letters of credit |                   |             | 10,642   |          |           |             | 7,988                                      |            |          |            | 2,654   |         |  |   |          |        |  |   |       |       
|Other commitments         |                   |             | 99,972   |          |           |             | 9,968                                      |            |          |            | 7,221   |         |  |   | 27,863    |        |  |   | 54,920 |       
|                          |                   |             |          |          |           |             |                                            |            |          |            |         |         |  |   |           |        |  |   |        |       
|                          | Total commitments |             | $        | 420,883  |           |             | $                                          | 180,706    |          |            | $       | 145,678 |  |   | $         | 39,492 |  |   | $      | 55,007 | 
|                          |                   |             |          |          |           |             |                                            |            |          |            |         |         |  |   |           |        |  |   |        |       

Critical Accounting Policies

The Company considers its Allowance for Loan Losses policy as a policy
critical to the sound operations of the Bank. The Company provides for loan
losses each period by an amount resulting from both (a) an estimate by
management of loan losses that occurred during the period and (b) the ongoing
adjustment of prior estimates of losses occurring in prior periods. The
provision for loan losses increases the allowance for loan losses, which is
netted against loans on the consolidated statements of financial condition. As
losses are confirmed, the loan is written down, reducing the allowance for loan
losses. See Business  Asset Quality contained in Item 1 herein and Note
1(e) of the Notes to Consolidated Financial Statements in Item 8 hereof for
further information regarding the Companys provision and allowance for loan
losses policy.

Recent Accounting Pronouncements

In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51which addresses how a business enterprise should evaluate whether
it has a controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. FIN 46R replaces
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which
was issued in January 2003. The Company adopted FIN 46R on December 31, 2003
and, as a result, the three trusts were not consolidated in the Companys
consolidated financial statements at December 31, 2003.

The impact of this adoption resulted in the Mandatorily Redeemable Trust
Preferred Securities of approximately $60.3 million and deferred issuance costs
of approximately $2.2 million relating to the trust preferred securities no
longer being included in the consolidated statement of financial condition at
December 31, 2003. Additionally, the adoption resulted in junior subordinated
debentures of

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approximately $62.1 million and equity investment of subsidiaries of
approximately $4.1 million relating to the Trusts included in the consolidated
statement of financial condition at December 31, 2003. The deconsolidation of
the three trusts as discussed above had no impact on stockholders equity or
net income at December 31, 2003.

The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,as
of January 1, 2002 and no longer amortizes goodwill. As of the date of
adoption, the Company had unamortized goodwill in the amount of approximately
$15.5 million, which was subject to the transition provisions of Statement No.
142. The Company determined there was no transitional impairment loss at
January 1, 2002. There was no amortization expense for the years ended
December 31, 2003 and 2002, whereas this expense amounted to $1.3 million for
the year ended December 31, 2001. The Companys net income for the year ended
December 31, 2001, excluding the effects of goodwill amortization, would have
been $27.8 million compared to $28.1 million and $29.0 million for the years
ended December 31, 2003 and 2002, respectively. Excluding the effects of
goodwill amortization, the earnings per share for the year ended December 31,
2001 would have been $1.37 basic and $1.32 diluted as compared to $1.65 basic
and $1.58 diluted and $1.53 basic and $1.48 diluted for the years ended
December 31, 2003 and 2002, respectively.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34 (Interpretation
No. 45).Interpretation No. 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. Interpretation No. 45 also clarifies that a guarantor
is required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of Interpretation No. 45 are applicable to guarantees issued or
modified after December 31, 2002 and did not have a material effect on the
Companys consolidated financial statements.

In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(Statement No. 150). Statement No. 150 requires issuers to classify as
liabilities (or assets in some circumstance) three classes of freestanding
financial instruments that embody obligations for the issuer. The adoption of
Statement No. 150 did not have a material effect on the Companys consolidated
financial statements.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset and Liability Management

Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. It is the objective of the Company
to attempt to control risks associated with interest rate movements. In
general, managements strategy is to match asset and liability balances within
maturity categories to limit the Companys exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time. The Companys asset and liability management strategy is formulated and
monitored by the Asset/Liability Management Committee, which is comprised of
the Chief Executive Officer, the President, the Chief Financial Officer, the
Director of Retail Operations and the Portfolio Manager of the Company, in
accordance with policies approved by the Board of Directors of the Company.
The Asset/Liability Management Committee meets monthly or as needed to review,
among other things, the sensitivity of the Companys assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and sale activity, and maturities and prepayments of
loans, investments and borrowings. The Asset/Liability Management Committee
also approves and establishes pricing and funding decisions with respect to
overall asset and liability composition and reports to the Board of Directors.

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One of the primary goals of the Companys Asset/Liability Management
Committee is to effectively increase the duration of the Companys liabilities
and/or effectively contract the duration of the Companys assets so that the
respective durations are matched as closely as possible. This duration
adjustment can be accomplished either internally by restructuring the Companys
statement of financial condition, or externally by adjusting the duration of
the Companys assets and/or liabilities through the use of hedging contracts,
such as interest rate swaps, caps and floors. The Companys current strategy
is to hedge internally through the use of core transaction deposit accounts
which are not as rate sensitive as other deposit instruments and FHLB advances,
together with an emphasis on investing in shorter-term or adjustable rate
assets which are more responsive to changes in interest rates, such as U.S.
Government agency mortgage-backed securities with variable maturities,
short-term U.S. Government agency securities and commercial and consumer loans.
The foregoing strategies are more fully described below.

A commonly used method for evaluating interest rate risk includes an
analysis of the interest rate sensitivity gap, which is defined as the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. Normally, during a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive
gap would tend to affect net interest income adversely. Due to differences
between institutions statements of financial condition, these variances may
affect institutions differently. Because different types of assets and
liabilities with the same or similar maturities may react differently to
changes in overall market rates or conditions, changes in interest rates may
affect net interest income positively or negatively even if an institution were
perfectly matched in each maturity category.

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The following table summarizes the anticipated maturities or repricing of
the Companys interest-earning assets and interest-bearing liabilities as of
December 31, 2003, based on the information and assumptions set forth in the
notes below (dollars in thousands):

|                                                                                                            |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |           |         |           | 
|----------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ----------------------------- | ------- | --------- | ------------ | --------- | ------- | ------- | ----------- | ------- | --------- | ------- | ----------- | ------- | ------- | ------- | --------- | ------- | -------- | ------- | ------- | ------- | ------- | --------- | ------- | --------- | 
|                                                                                                            |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         | More Than |         |          |         |         |         |         |           |        
|                                                                                                            |                                                |                               |         |           |              |           |         |         | Three to    |         | More Than |         | Three Years |         |         |         |           |         |          |         |        
|                                                                                                            |                                                |                               |         |           | Within Three |           | Twelve  |         | One Year to |         | to Five   |         | Over Five   |         |         |         |          
|                                                                                                            |                                                |                               |         |           | Months       |           | Months  |         | Three Years |         | Years     |         | Years       |         | Total  
|                                                                                                            |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |        
|Interest-earning assets (1):                                                                                |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |          
|                                                                                                            | Loans receivable (2)                           |                               | $       | 1,100,840 |              |           | $       | 309,760 |             |         | $         | 373,163 |             |         | $       | 309,213 |           |         | $        | 168,527 |         |         | $       | 2,261,503 |        
|                                                                                                            | Securities:                                    |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |           |        
|                                                                                                            |                                                | Available for sale (3)        |         |           | 5,608        |           |         |         | 12,467      |         |           |         | 50,057      |         |         |         | 16,738    |         |          |         | 14,415  |         |         |           | 99,285  |          
|                                                                                                            |                                                | Held to maturity              |         |           | 16,653       |           |         |         | 57,457      |         |           |         | 72,198      |         |         |         | 68,630    |         |          |         | 62,633  |         |         |           | 277,571 |          
|                                                                                                            | Other interest-earning assets (4)              |                               |         | 122,959   |              |           |         |        |             |         |           |        |             |         |         |        |           |         |          |        |         |         |         | 122,959   |        
|                                                                                                            |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |           |        
|                                                                                                            |                                                |                               | Total   |           | $            | 1,246,060 |         |         | $           | 379,684 |           |         | $           | 495,418 |         |         | $         | 394,581 |          |         | $       | 245,575 |         |           | $       | 2,761,318 | 
|                                                                                                            |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |           |        
|Interest-bearing liabilities:                                                                               |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |          
|                                                                                                            | Deposits (5):                                  |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |           |        
|                                                                                                            |                                                | Money market and NOW accounts |         | $         | 315,934      |           |         | $       | 31,497      |         |           | $       | 66,503      |         |         | $       | 49,722    |         |          | $       | 190,485 |         |         | $         | 654,141 |          
|                                                                                                            |                                                | Passbook accounts             |         |           | 4,127        |           |         |         | 12,382      |         |           |         | 25,323      |         |         |         | 17,681    |         |          |         | 40,911  |         |         |           | 100,424 |          
|                                                                                                            |                                                | Certificates of deposit       |         |           | 248,515      |           |         |         | 361,231     |         |           |         | 251,015     |         |         |         | 81,994    |         |          |         | 3,307   |         |         |           | 946,062 |          
|                                                                                                            | FHLB advances (6)                              |                               |         | 37,200    |              |           |         |        |             |         |           | 100,000 |             |         |         |        |           |         |          | 500,019 |         |         |         | 637,219   |        
|                                                                                                            | Securities sold under agreements
to repurchase |                               |         | 66,367    |              |           |         |        |             |         |           |        |             |         |         |        |           |         |          |        |         |         |         | 66,367    |        
|                                                                                                            | Senior Notes                                   |                               |         |          |              |           |         | 21,295  |             |         |           |        |             |         |         |        |           |         |          |        |         |         |         | 21,295    |        
|                                                                                                            | Junior subordinated debentures (6)             |                               |         | 20,620    |              |           |         |        |             |         |           |        |             |         |         |        |           |         |          | 41,495  |         |         |         | 62,115    |        
|                                                                                                            |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |           |        
|                                                                                                            |                                                |                               | Total   |           | $            | 692,763   |         |         | $           | 426,405 |           |         | $           | 442,841 |         |         | $         | 149,397 |          |         | $       | 776,217 |         |           | $       | 2,487,623 | 
|                                                                                                            |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |           |        
|Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities                            |                                                | $                             | 553,297 |           |              | $         | (46,721 | )       |             | $       | 52,577    |         |             | $       | 245,184 |         |           | $       | (530,642 | )       |         | $       | 273,695 |          
|                                                                                                            |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |          
|Cumulative excess of
interest-earning assets over
interest-bearing liabilities                              |                                                | $                             | 553,297 |           |              | $         | 506,576 |         |             | $       | 559,153   |         |             | $       | 804,337 |         |           | $       | 273,695  |         |         | $       | 273,695 |          
|                                                                                                            |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |          
|Cumulative excess of
interest-earning assets over
interest-bearing liabilities as
a percent of total assets |                                                |                               | 19.20   | %         |              |           | 17.58   | %       |             |         | 19.40     | %       |             |         | 27.91   | %       |           |         | 9.50     | %       |         |         | 9.50    | %        
|                                                                                                            |                                                |                               |         |           |              |           |         |         |             |         |           |         |             |         |         |         |           |         |          |         |         |         |         |          



---

|(1) |  | Adjustable-rate loans and securities are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they mature and fixed-rate loans and securities are included in the
periods in which they are scheduled to be repaid, based on scheduled
amortization, in each case as adjusted to take into account estimated
prepayments based on, among other things, historical performance.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Balances have been reduced for nonaccrual loans.                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) |  | Does not include unrealized gain on securities classified as available
for sale.                                                                                                                                                                                                                                                                                                                                                        
|   
|(4) |  | Comprised of cash and due from banks, deposits with other banks, FHLB
stock and Federal Reserve Bank stock.                                                                                                                                                                                                                                                                                                                             
|   
|(5) |  | Adjusted to take into account assumed annual decay rates, which were
applied against money market, NOW and passbook accounts.                                                                                                                                                                                                                                                                                                           
|   
|(6) |  | Additionally, adjustable rate FHLB advances and junior subordinated
debentures are included in the period in which interest rates are next
scheduled to adjust rather than in the period in which they mature, while
fixed rate FHLB advances and junior subordinated debentures are included
in the period in which they are scheduled to mature.                                                                                      

Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As
a result, the Asset/Liability Management Committee also regularly reviews
interest rate risk by forecasting the impact of alternative interest rate
environments on net interest income and economic value of equity (EVE), which
is defined as the net present value of an institutions existing assets,
liabilities and off-balance sheet instruments, and evaluating such impacts
against the maximum

46



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##### Table of Contents



potential changes in net interest income and EVE that is authorized by the
Board of Directors of the Company.

The following tables set forth for the indicated dates the estimated
dollar and percentage change in the Companys net interest income over a
four-quarter period and EVE based on the indicated changes in interest rates
assuming an instantaneous uniform change in interest rates at all maturities.

|                    |  |                      |        |                      |  |           |    |           |  |  |         |     |  |  |     |  
|------------------- |  | -------------------- | ------ | -------------------- |  | --------- | -- | --------- |  |  | ------- | --- |  |  | --- | -
|                    |  | December 31, 2003    |        | December 31, 2002   
|                    |  | Net Interest Income  |        | Net Interest Income 
|                    |  | (next four quarters) |        | (next four quarters)
|                    |  |                      |        |                     
|                    |  | Estimated            |        |                      |  |           |    | Estimated |  |  |         |    
|Change (in Basis    |  | Change               |        |                      |  |           |    | Change    |  |  |         |    
|Points) in Interest |  | from Base            |        | % Change             |  | from Base |    | % Change 
|Rates (1)           |  | (000s)              |        | from Base            |  | (000s)   |    | from Base
|                    |  |                      |        |                      |  |           |    |          
|+200                |  |                      | 10,433 |                      |  |           | 13 |           |  |  | 8,315   |     |  |  | 10  |  
|+100                |  |                      | 5,539  |                      |  |           | 7  |           |  |  | 4,485   |     |  |  | 5   |  
|0                   |  |                      | 82,744 | (1)                  |  |           |   |           |  |  | 85,501  | (1) |  |  |    |  
|-100                |  |                      | (4,323 | )                    |  |           | (5 | )         |  |  | (3,819  | )   |  |  | (4  | )
|-200 (2)            |  |                      |        |                      |  |           |    |           |  |  | (13,004 | )   |  |  | (15 | )

|                    |  |                   |         |                   |  |           |     |           |  |  |          |   |  |  |     |  
|------------------- |  | ----------------- | ------- | ----------------- |  | --------- | --- | --------- |  |  | -------- | - |  |  | --- | -
|                    |  | December 31, 2003 |         | December 31, 2002
|                    |  | EVE               |         | EVE              
|                    |  |                   |         |                  
|                    |  | Estimated         |         |                   |  |           |     | Estimated |  |  |          |  
|Change (in Basis    |  | Change            |         |                   |  |           |     | Change    |  |  |          |  
|Points) in Interest |  | from Base         |         | % Change          |  | from Base |     | % Change 
|Rates (1)           |  | (000s)           |         | from Base         |  | (000s)   |     | from Base
|                    |  |                   |         |                   |  |           |     |          
|+200                |  |                   | 22,131  |                   |  |           | 11  |           |  |  | 17,745   |   |  |  | 8   |  
|+100                |  |                   | 14,564  |                   |  |           | 7   |           |  |  | 18,403   |   |  |  | 8   |  
|0                   |  |                   | 206,643 |                   |  |           |    |           |  |  | 218,480  |   |  |  |    |  
|-100                |  |                   | (27,732 | )                 |  |           | (13 | )         |  |  | (44,486  | ) |  |  | (20 | )
|-200 (2)            |  |                   |         |                   |  |           |     |           |  |  | (101,178 | ) |  |  | (46 | )



---

|(1) |  | The base net interest income is an estimate made by utilizing
yields and rates on assets and liabilities in the existing statement of
financial condition as of the dates shown adjusted for assumptions
based on, among other things, future loan and deposit changes and
estimated loan prepayment speeds.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The   200 bps shock currently produces illogical results due to
the current level of rates and will be suspended until rates rise to
levels where the results will be more informative.                                                                                                                    

The decrease in net interest income (NII) for the next four quarters
when projected as of December 31, 2003 in the base case is primarily due to the
compression in net interest margin largely caused by a drop in yields on
forecasted interest earning assets. The increased sensitivity in the NII as
projected in the up shocks is chiefly due to a greater percentage of adjustable
rate loans at December 31,

47



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##### Table of Contents



2003 and a shift in deposit mix to a greater dependence on savings and
demand deposits and less on certificates of deposit.

The decrease in EVE from December 31, 2002 to December 31, 2003 in the
base case is principally due to the repurchase of Local Financial stock during
2003. In addition, the fair value of loans declined as a result of the
contraction in the duration of loans and lower yields. The decreased
sensitivity of EVE in the down shocks as of December 31, 2003 is primarily
caused by a longer duration in securities. The increased sensitivity of EVE as
of December 31, 2003 in the up shocks is predominately because of the decline
in duration of loans.

The model reflects only the effects of assumptions made by management
while running the different interest rate shocks. The only variables between
the different rate shocks are the interest rates, prepayment speeds and the
rate of replacement for prepaying securities. The prepayment assumptions used
in the model are based on historical and market estimates.

Standard present value calculation methodology is used to discount the
estimated future cash flows of assets and liabilities at appropriate discount
rates.

Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Companys operations to changes in interest
rates are reasonable; however, the interest rate sensitivity of the Companys
assets and liabilities and the estimated effects of changes in interest rates
on the Companys net interest income and EVE could vary substantially if
different assumptions were used or actual experience differs from the
historical experience on which they are based.

The preceding discussion about the Companys risk management activities
includes forward-looking statements that involve risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Consolidated Financial Statements at F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE




There were no changes in and/or disagreements with accountants on
accounting and financial disclosure during the years ended December 31, 2003
and 2002.




ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this annual report, the Company
carried out an evaluation, under the supervision and with the participation of
the Companys management, including the Companys Chief Executive Officer along
with the Companys Chief Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures pursuant to
the Exchange Act Rule 13a-15(b). Based upon that evaluation, the Companys
Chief Executive Officer along with the Companys Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Companys periodic SEC filings. There have been no significant changes in the
Companys internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect the Companys internal
control over financial reporting.

Disclosure controls and procedures are the Companys controls and other
procedures that are designed to ensure that information required to be
disclosed by the Company in the reports that the Company files or submits under
the Exchange Act is recorded, processed, summarized and reported

48



---



##### Table of Contents



within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that the Company files under the Exchange Act is
accumulated and communicated to the Companys management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information with respect to directors required in response to this
Item is incorporated herein by reference from the Proxy Statement/Prospectus to
be included as part of the registration statement on Form S-4 to be filed with
the SEC by IBC in connection with the merger transaction. The information with
respect to executive officers of the Company can be found in Part I, Item 4A
hereof.

The Company has adopted a code of ethics for all employees, including its
executive officers, and will provide to any person without charge, upon

request, a copy of such. To obtain a copy of the code of ethics, contact the
Companys Chief Financial Officer, Richard L. Park.




ITEM 11. EXECUTIVE COMPENSATION

The information required in response to this Item is incorporated herein
by reference from the Proxy Statement/Prospectus to be included as part of the
registration statement on Form S-4 to be filed with the SEC by IBC in
connection with the merger transaction.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required in response to this Item is incorporated herein
by reference from the Proxy Statement/Prospectus to be included as part of the
registration statement on Form S-4 to be filed with the SEC by IBC in
connection with the merger transaction.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required in response to this Item is incorporated herein
by reference from the Proxy Statement/Prospectus to be included as part of the
registration statement on Form S-4 to be filed with the SEC by IBC in
connection with the merger transaction.




ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required in response to this Item is incorporated herein
by reference from the Proxy Statement/Prospectus to be included as part of the
registration statement on Form S-4 to be filed with the SEC by IBC in
connection with the merger transaction.




PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements.The following financial statements for the Years
Ended December 31, 2003, 2002 and 2001 are filed as part of this report:

Independent Auditors Report

49



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##### Table of Contents





|       |  | Consolidated Statements of Financial Condition as of December 31, 2003
and 2002.                                                                
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|      
|       |  | Consolidated Statements of Operations for the Years Ended December 31,
2003, 2002 and 2001.                                                     
|      
|       |  | Consolidated Statements of Stockholders Equity for the Years Ended
December 31, 2003, 2002 and 2001.                                           
|      
|       |  | Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001.                                                     
|      
|       |  | Notes to Consolidated Financial Statements                                                                                                      
|      
|(a)(2) |  | Financial Statement Schedules.                                                                                                                  
|      
|       |  | No financial statement schedules are included because they are not
required, not applicable, or the required information is contained
elsewhere.
|      
|(a)(3) |  | Management Contracts or Compensatory Plan Arrangements                                                                                          
|      
|       |  | See exhibits marked with an asterisk in Item 15(c) below.                                                                                       
|      
|(b)    |  | Reports on Form 8-K                                                                                                                             
|      
|       |  | On October 17, 2003, Local Financial Corporation announced by press
release its earnings for the quarter ended September 30, 2003.              
|      
|(c)    |  | List of Exhibits.                                                                                                                               

|        |  |                                                                                                                                                                                     
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                     
|Number  |  | Description of Exhibit                                                                                                                                                              
|        |  |                                                                                                                                                                                     
|2.1     |  | Agreement and Plan of Merger, dated as of January 22, 2004, among
International Bancshares Corporation, LFC Acquisition Corp. and Local
Financial Corporation (Local Financial)(1)
|        |  |                                                                                                                                                                                     
|3.1     |  | Certificate of Incorporation of Local Financial(2)                                                                                                                                  
|        |  |                                                                                                                                                                                     
|3.2     |  | Certificate of Amendment of Local Financial(2)                                                                                                                                      
|        |  |                                                                                                                                                                                     
|3.3     |  | Bylaws of Local Financial(2)                                                                                                                                                        
|        |  |                                                                                                                                                                                     
|4.1     |  | Form of Common Stock certificate of Local Financial(2)                                                                                                                              
|        |  |                                                                                                                                                                                     
|4.2     |  | Indenture between Local Financial and The Bank of New York (BONY), as
Trustee, dated September 8, 1997(2)                                                                         
|        |  |                                                                                                                                                                                     
|4.3     |  | Form of Senior Note (included in Exhibit 4.2)(2)                                                                                                                                    
|        |  |                                                                                                                                                                                     
|4.4     |  | Indenture between Local Financial and BONY, as Trustee, dated September 20, 2001(5)                                                                                                 
|        |  |                                                                                                                                                                                     
|4.5     |  | Form of Debenture (included in Exhibit 4.6)                                                                                                                                         
|        |  |                                                                                                                                                                                     
|4.6     |  | Junior Subordinated Indenture between Local Financial and BONY dated July
30, 2002(6)                                                                                               
|        |  |                                                                                                                                                                                     
|4.7     |  | Form of Floating Rate Junior Subordinate Note due 2032 (included in
Exhibit 4.6)                                                                                                    
|        |  |                                                                                                                                                                                     
|4.8     |  | Indenture of Local Financial with Wilmington Trust Company, as Trustee,
dated October 29, 2002(6)                                                                                   
|        |  |                                                                                                                                                                                     
|4.9     |  | Form of Floating Rate Junior Subordinate Debt Security due 2032 (included
in Exhibit 4.8)                                                                                           
|        |  |                                                                                                                                                                                     
|10.1    |  | Local Financial Stock Option Plan(2)*                                                                                                                                               
|        |  |                                                                                                                                                                                     
|10.2    |  | Local Financial Stock Option Agreement between Local Financial and Edward
A. Townsend, dated September 8, 1997(2)*                                                                  
|        |  |                                                                                                                                                                                     
|10.3    |  | Local Financial Corporation 1998 Stock Option Plan, as amended July 26,
2000(4)*                                                                                                    
|        |  |                                                                                                                                                                                     
|10.4    |  | Form of Severance Agreement, dated January 1, 1999(3)*                                                                                                                              
|        |  |                                                                                                                                                                                     
|10.5    |  | Amended and Restated Employment Agreement between Local Financial and
Edward A. Townsend, effective October 1, 2000(4)*                                                             
|        |  |                                                                                                                                                                                     
|10.6    |  | Amended and Restated Employment Agreement between Local Financial and Jan
A. Norton, effective October 1, 2000(4)*                                                                  

50



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|        |  |                                                                                                                                                                                                                                                   
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                   
|Number  |  | Description of Exhibit                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                   
|10.7    |  | 1998 Non-qualified Stock Option Agreement between Local Financial and
Edward A. Townsend dated September 23, 1998(3)*                                                                                                                             
|        |  |                                                                                                                                                                                                                                                   
|10.8    |  | 1998 Non-qualified Stock Option Agreement between Local Financial and Jan
A. Norton dated September 23, 1998(3)*                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                   
|10.9    |  | Change of Control, Non-Competition/Non-Solicitation Agreement between
Local Financial and Local Oklahoma Bank, N.A., and Edward A. Townsend
dated January 30, 2001(4)*                                                                            
|        |  |                                                                                                                                                                                                                                                   
|10.10   |  | Change of Control, Non-Competition/Non-Solicitation Agreement between
Local Financial and Local Oklahoma Bank, N.A., and Jan A. Norton dated
January 30, 2001(4)*                                                                                 
|        |  |                                                                                                                                                                                                                                                   
|10.11   |  | Amended and Restated Declaration between Local Financial, BONY and BONY
(Delaware), as Trustees, and the Administrative Trustees of the Local
Financial Capital Trust I, dated September 20, 2001(5)                                              
|        |  |                                                                                                                                                                                                                                                   
|10.12   |  | Preferred Securities Guarantee Agreement between Local Financial and
BONY, as Guarantee Trustee, dated as of September 20, 2001, regarding
trust preferred securities(5)                                                                          
|        |  |                                                                                                                                                                                                                                                   
|10.13   |  | Amended and Restated Trust Agreement of Local Financial Capital Trust II
by and among Local Financial, BONY and BONY (Delaware), as Trustees, and
the Administrative Trustees named therein, dated July 30, 2002(6)                               
|        |  |                                                                                                                                                                                                                                                   
|10.14   |  | Guarantee Agreement between Local Financial and BONY, as Guarantee
Trustee, dated July 30, 2002, regarding Local Financial Capital Trust II
capital securities(6)                                                                                 
|        |  |                                                                                                                                                                                                                                                   
|10.15   |  | Amended and Restated Declaration of Trust of Local Financial Capital
Trust III by and among Local Financial, Wilmington Trust Company as
Delaware and Institutional Trustee, and the Administrators named therein,
dated as of October 29, 2002(6)
|        |  |                                                                                                                                                                                                                                                   
|10.16   |  | Guarantee Agreement dated as of October 29, 2002, executed by Local
Financial and Wilmington Trust Company, as Guarantee Trustee, regarding
Local Financial Capital Trust III capital securities(6)                                               
|        |  |                                                                                                                                                                                                                                                   
|21.0    |  | See Companys business description herein                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                   
|23.0    |  | Consent of KPMG LLP                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                   
|31.1    |  | Certification as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                   
|31.2    |  | Certification as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                   
|32      |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                            



---

|(1) |  | This exhibit was filed with Local Financials Current Report on form 8-K
filed with the Security Exchange Commission on January 23, 2004 and is
incorporated by reference herein.    
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | These exhibits were filed with the Local Financials Registration
Statement Form S-1, Registration No. 333-43727 dated January 5, 1998, and
are incorporated by reference herein.    
|   
|(3) |  | These exhibits were filed with the Local Financials Annual Report on
Form 10-K for the year ended December 31, 1998 and are incorporated by
reference herein.                       
|   
|(4) |  | These exhibits were filed with the Local Financials Annual Report on
Form 10-K for the year ended December 31, 2000 and are incorporated by
reference herein.                       
|   
|(5) |  | These exhibits were filed with the Local Financials Registration
Statement on Form S-3, Registration No. 333-68372, dated August 24, 2001,
and are incorporated by reference herein.
|   
|(6) |  | These exhibits were filed with Local Financials Annual Report on Form
10-K for the year ended December 31, 2002 and are incorporated by
reference herein.                           

*     Exhibits identified with an asterisk are management contracts or are
compensatory plans or arrangements.

51



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

|     |  |                |  |                             |  |                                                       
|---- |  | -------------- |  | --------------------------- |  | ------------------------------------------------------
|     |  |                |  | LOCAL FINANCIAL CORPORATION
|     |  |                |  |                             |  |                                                       
|Date |  | March 12, 2004 |  | By:                         |  | /s/ Edward A. Townsend                                
|     |  |                |  |                             |  |                                                       
|     |  |                |  |                             |  | Edward A.
TownsendChairman and Chief Executive Officer
|     |  |                |  |                             |  |                                                       
|Date |  | March 12, 2004 |  | By:                         |  | /s/ Richard L. Park                                   
|     |  |                |  |                             |  |                                                       
|     |  |                |  |                             |  | Richard L. ParkExecutive Vice President and           
|     |  |                |  |                             |  | Chief Financial Officer                               

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|     |  |                |  |     |  |                                       
|---- |  | -------------- |  | --- |  | --------------------------------------
|Date |  | March 12, 2004 |  | By: |  | /s/ Robert A. Kotecki*                
|     |  |                |  |     |  |                                       
|     |  |                |  |     |  | Robert A. Kotecki, Director           
|     |  |                |  |     |  |                                       
|Date |  | March 12, 2004 |  | By: |  | /s/ Joseph A. Leone*                  
|     |  |                |  |     |  | Joseph A. Leone, Director             
|     |  |                |  |     |  |                                       
|Date |  | March 12, 2004 |  | By: |  | /s/ George Nigh*
George Nigh, Director
|     |  |                |  |     |  |                                       
|Date |  | March 12, 2004 |  | By: |  | /s/ Jan A. Norton                     
|     |  |                |  |     |  | Jan A. Norton, Director               
|     |  |                |  |     |  |                                       
|Date |  | March 12, 2004 |  | By: |  | /s/ Edward A. Townsend                
|     |  |                |  |     |  | Edward A. Townsend, Director          
|     |  |                |  |     |  |                                       
|Date |  | March 12, 2004 |  | By: |  | /s/ William D. Breedlove*             
|     |  |                |  |     |  | William D. Breedlove, Director        
|     |  |                |  |     |  |                                       
|Date |  | March 12, 2004 |  | By: |  | /s/ J. David Rosenberg*               
|     |  |                |  |     |  | J. David Rosenberg, Director          
|     |  |                |  |     |  |                                       
|Date |  | March 12, 2004 |  | By: |  | /s/ Andrew M. Coats*                  
|     |  |                |  |     |  | Andrew M. Coats, Director             



---

|      |  |                                                       
|----- |  | ------------------------------------------------------
|* By: |  | /s/ Richard L. Park

Richard L. Park, Attorney in fact

52



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors Report
    
    
    F-1Audited Consolidated Financial Statements:Consolidated Statements of Financial Condition
as of December 31, 2003 and 2002
    
    
    F-2Consolidated Statements of Operations
for the Years Ended December 31, 2003, 2002 and 2001
    
    
    F-3Consolidated Statements of Stockholders Equity
for the Years Ended December 31, 2003, 2002 and 2001
    
    
    F-4Consolidated Statements of Cash Flows
for the Years Ended December 31, 2003, 2002 and 2001
    
    
    F-5Notes to Consolidated Financial Statements
for December 31, 2003, 2002 and 2001
    
    
    F-7
 53




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##### Table of Contents



Independent Auditors Report The Board of Directors and Stockholders
Local Financial Corporation: We have audited the accompanying consolidated statements of financial condition
of Local Financial Corporation and subsidiaries (the Company) as of December
31, 2003 and 2002, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Local Financial
Corporation and subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. As discussed in Note 1(r) to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 46R,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,
effective December 31, 2003 and adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, effective
January 1, 2002. KPMG LLPOklahoma City, OklahomaJanuary 30, 2004
 F-1




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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Financial Condition December 31, 2003 and 2002
(dollars in thousands, except share data) 2003
    
    2002AssetsCash and due from banks
    
    $
    58,746
    
    
    $
    51,166Interest bearing deposits with other banks
    
    
    24,400
    
    
    
    7,200Securities:Available for sale
    
    
    99,853
    
    
    
    163,473Held to maturity
    
    
    277,571
    
    
    
    364,832Total securities
    
    
    377,424
    
    
    
    528,305Loans receivable, net of allowance for loan losses of $30,398 at December 31, 2003
and $29,532 at December 31, 2002
    
    
    2,240,565
    
    
    
    2,084,144Federal Home Loan Bank of Topeka and Federal Reserve Bank stock, at cost
    
    
    39,813
    
    
    
    38,187Premises and equipment, net
    
    
    43,625
    
    
    
    42,415Assets acquired through foreclosure and repossession, net
    
    
    893
    
    
    
    1,693Intangible assets, net
    
    
    19,374
    
    
    
    19,695Current and deferred taxes, net
    
    
    3,458
    
    
    
    9,428Other assets
    
    
    73,245
    
    
    
    57,625Total assets
    
    $
    2,881,543
    
    
    $
    2,839,858Liabilities and Stockholders EquityDeposits:Demand
    
    $
    852,464
    
    
    $
    756,476Savings
    
    
    100,424
    
    
    
    82,983Time
    
    
    946,062
    
    
    
    989,980Total deposits
    
    
    1,898,950
    
    
    
    1,829,439Advances from the Federal Home Loan Bank of Topeka
    
    
    637,219
    
    
    
    684,193Securities sold under agreements to repurchase
    
    
    66,367
    
    
    
    59,696Senior Notes
    
    
    21,295
    
    
    
    21,295Other liabilities
    
    
    20,156
    
    
    
    17,105Junior subordinated debentures
    
    
    62,115
    
    
    
    Mandatorily redeemable trust preferred securities
    
    
    
    
    
    
    60,250Total liabilities
    
    
    2,706,102
    
    
    
    2,671,978Commitments and contingenciesStockholders equity:Common stock, $0.01 par value, 25,000,000 shares authorized; 20,994,517 shares
issued and 16,536,773 shares outstanding at December 31, 2003 and 20,863,967
shares issued and 17,785,323 shares outstanding at December 31, 2002
    
    
    210
    
    
    
    209Preferred stock, $0.01 par value, 5,000,000 shares authorized; none outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    210,083
    
    
    
    208,599Retained earnings
    
    
    179,590
    
    
    
    151,495Treasury stock, 4,457,744 shares at December 31, 2003 and 3,078,644 shares at
December 31, 2002, at cost
    
    
    (214,811
    )
    
    
    (193,783
    )Accumulated other comprehensive income, net of tax
    
    
    369
    
    
    
    1,360Total stockholders equity
    
    
    175,441
    
    
    
    167,880Total liabilities and stockholders equity
    
    $
    2,881,543
    
    
    $
    2,839,858
 The accompanying notes are an integral part of these consolidated financial statements. F-2




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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Operations For the Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands, except share data) Years ended December 31,2003
    
    2002
    
    2001Interest income:Loans
    
    $
    131,610
    
    
    $
    137,875
    
    
    $
    151,950Securities available for sale
    
    
    5,458
    
    
    
    9,992
    
    
    
    36,952Securities held to maturity
    
    
    11,834
    
    
    
    25,208
    
    
    
    Federal Home Loan Bank of Topeka and Federal Reserve Bank
stock
    
    
    1,620
    
    
    
    1,767
    
    
    
    1,989Other investments
    
    
    282
    
    
    
    651
    
    
    
    2,247Total interest income
    
    
    150,804
    
    
    
    175,493
    
    
    
    193,138Interest expense:Deposit accounts
    
    
    32,940
    
    
    
    50,156
    
    
    
    75,626Advances from the Federal Home Loan Bank of Topeka
    
    
    25,813
    
    
    
    25,613
    
    
    
    22,045Securities sold under agreements to repurchase
    
    
    356
    
    
    
    532
    
    
    
    1,640Senior Notes
    
    
    2,516
    
    
    
    2,541
    
    
    
    4,298Trust preferred securities
    
    
    4,682
    
    
    
    4,020
    
    
    
    1,035Total interest expense
    
    
    66,307
    
    
    
    82,862
    
    
    
    104,644Net interest income
    
    
    84,497
    
    
    
    92,631
    
    
    
    88,494Provision for loan losses
    
    
    (6,600
    )
    
    
    (6,600
    )
    
    
    (5,400
    )Net interest income after provision for loan losses
    
    
    77,897
    
    
    
    86,031
    
    
    
    83,094Noninterest income:Deposit related income
    
    
    23,475
    
    
    
    19,110
    
    
    
    15,015Loan fees and loan service charges
    
    
    2,478
    
    
    
    2,031
    
    
    
    2,083Net gains on sale of assets
    
    
    1,032
    
    
    
    823
    
    
    
    628Other
    
    
    6,789
    
    
    
    6,525
    
    
    
    5,997Total noninterest income
    
    
    33,774
    
    
    
    28,489
    
    
    
    23,723Noninterest expense:Compensation and employee benefits
    
    
    44,137
    
    
    
    42,957
    
    
    
    36,703Equipment and data processing
    
    
    6,636
    
    
    
    6,201
    
    
    
    6,561Occupancy
    
    
    5,091
    
    
    
    4,703
    
    
    
    3,978Advertising
    
    
    685
    
    
    
    685
    
    
    
    539Professional fees
    
    
    1,600
    
    
    
    1,200
    
    
    
    1,486Other
    
    
    14,398
    
    
    
    14,785
    
    
    
    17,584Total noninterest expense
    
    
    72,547
    
    
    
    70,531
    
    
    
    66,851Income before provision for income taxes
    
    
    39,124
    
    
    
    43,989
    
    
    
    39,966Provision for income taxes
    
    
    11,029
    
    
    
    14,974
    
    
    
    13,489Net income
    
    $
    28,095
    
    
    $
    29,015
    
    
    $
    26,477Earnings per share:Net income:Basic
    
    $
    1.65
    
    
    $
    1.53
    
    
    $
    1.30Diluted
    
    $
    1.58
    
    
    $
    1.48
    
    
    $
    1.26
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Stockholders Equity For the Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands) AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    Other
    
    TotalCommon
    
    Paid-in
    
    Retained
    
    Treasury
    
    Comprehensive
    
    StockholdersStock
    
    Capital
    
    Earnings
    
    Stock
    
    Income
    
    EquityBalance, December 31, 2000
    
    $
    205
    
    
    $
    206,758
    
    
    $
    96,003
    
    
    $
    (151,274
    )
    
    $
    4,579
    
    
    $
    156,271Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    26,477
    
    
    
    
    
    
    
    
    
    
    
    26,477Net change in unrealized gains on securities available
for sale, net of reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (470
    )
    
    
    (470
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,007Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,757
    )
    
    
    
    
    
    
    (17,757
    )Issuance of common stock  warrants exercised
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19Purchase of stock warrants
    
    
    
    
    
    
    (1,004
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,004
    )Balance, December 31, 2001
    
    
    205
    
    
    
    205,773
    
    
    
    122,480
    
    
    
    (169,031
    )
    
    
    4,109
    
    
    
    163,536Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    29,015
    
    
    
    
    
    
    
    
    
    
    
    29,015Net change in unrealized gains on securities available
for sale, net of reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,749
    )
    
    
    (2,749
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,266Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,752
    )
    
    
    
    
    
    
    (24,752
    )Issuance of common stock  warrants exercised
    
    
    2
    
    
    
    1,281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,283Issuance of common stock  options exercised
    
    
    2
    
    
    
    1,962
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,964Purchase of stock warrants
    
    
    
    
    
    
    (721
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (721
    )Tax benefits from employee stock options
    
    
    
    
    
    
    304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304Balance, December 31, 2002
    
    
    209
    
    
    
    208,599
    
    
    
    151,495
    
    
    
    (193,783
    )
    
    
    1,360
    
    
    
    167,880Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    28,095
    
    
    
    
    
    
    
    
    
    
    
    28,095Net change in unrealized gains on securities available
for sale, net of reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (991
    )
    
    
    (991
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,104Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,028
    )
    
    
    
    
    
    
    (21,028
    )Issuance of common stock  options exercised
    
    
    1
    
    
    
    1,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,305Tax benefits from employee stock options
    
    
    
    
    
    
    180
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180Balance, December 31, 2003
    
    $
    210
    
    
    $
    210,083
    
    
    $
    179,590
    
    
    $
    (214,811
    )
    
    $
    369
    
    
    $
    175,441
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows For the Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands) Years ended December 31,2003
    
    2002
    
    2001Cash provided (absorbed) by operating activities:Net income
    
    $
    28,095
    
    
    $
    29,015
    
    
    $
    26,477Adjustments to reconcile net income to net cash provided by
operating activities:Provisions for loan losses
    
    
    6,600
    
    
    
    6,600
    
    
    
    5,400Deferred income tax (benefit)
    
    
    (1,100
    )
    
    
    (2,498
    )
    
    
    1,829Accretion of discounts and amortization of deferred fees
on loans acquired and securities, net
    
    
    1,673
    
    
    
    (2,208
    )
    
    
    (4,619
    )Depreciation and amortization
    
    
    5,097
    
    
    
    4,391
    
    
    
    5,315Net change in loans held for sale
    
    
    (3,186
    )
    
    
    (2,313
    )
    
    
    (341
    )Net gains on sale of assets
    
    
    (1,032
    )
    
    
    (823
    )
    
    
    (628
    )Stock dividends received from Federal Home Loan Bank
    
    
    (314
    )
    
    
    
    
    
    
    Change in other assets
    
    
    7,344
    
    
    
    2,276
    
    
    
    1,138Change in other liabilities
    
    
    (138
    )
    
    
    (2,451
    )
    
    
    (1,086
    )Net cash provided by operating activities
    
    
    43,039
    
    
    
    31,989
    
    
    
    33,485Cash provided (absorbed) by investing activities:Proceeds from sales of securities available for sale
    
    
    28,768
    
    
    
    54,239
    
    
    
    19,813Proceeds from principal collections on securities
    
    
    423,669
    
    
    
    339,809
    
    
    
    264,017Purchase of securities
    
    
    (304,881
    )
    
    
    (299,690
    )
    
    
    (551,999
    )Purchases of Federal Home Loan Bank and
Federal Reserve Bank stock
    
    
    (1,425
    )
    
    
    (3,988
    )
    
    
    (22,796
    )Proceeds from the sale of Federal Home Loan Bank stock
    
    
    113
    
    
    
    8,279
    
    
    
    Purchase of bank owned life insurance
    
    
    (10,000
    )
    
    
    
    
    
    
    (10,000
    )Change in loans receivable, net
    
    
    (160,178
    )
    
    
    (91,158
    )
    
    
    (129,219
    )Proceeds from disposal of assets acquired through
foreclosure and repossession
    
    
    2,322
    
    
    
    2,448
    
    
    
    1,910Purchases of premises and equipment
    
    
    (6,415
    )
    
    
    (6,417
    )
    
    
    (4,869
    )Proceeds from sales of premises and equipment
    
    
    283
    
    
    
    63
    
    
    
    8Cash paid in acquisition of Citizens Financial Corporation, net of
cash and cash equivalents received
    
    
    
    
    
    
    1,257
    
    
    
    Net cash provided (absorbed) by investing activities
    
    
    (27,744
    )
    
    
    4,842
    
    
    
    (433,135
    )
 (Continued) F-5




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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 2003, 2002 and 2001
(dollars in thousands) Years ended December 31,2003
    
    2002
    
    2001Cash provided (absorbed) by financing activities:Change in transaction accounts
    
    $
    113,429
    
    
    $
    106,826
    
    
    $
    37,588Change in time deposits
    
    
    (43,918
    )
    
    
    (119,876
    )
    
    
    (160,019
    )Change in securities sold under agreements to repurchase
    
    
    6,671
    
    
    
    21,002
    
    
    
    480Proceeds from advances from the Federal Home Loan Bank
    
    
    1,125,741
    
    
    
    1,169,260
    
    
    
    2,637,818Repayments of advances from the Federal Home Loan Bank
    
    
    (1,172,715
    )
    
    
    (1,213,272
    )
    
    
    (2,099,641
    )Proceeds from the issuance of common stock
    
    
    1,305
    
    
    
    3,247
    
    
    
    19Proceeds from the issuance of trust preferred securities
    
    
    
    
    
    
    20,000
    
    
    
    40,250Payments of trust preferred securities issuance costs
    
    
    
    
    
    
    (420
    )
    
    
    (1,949
    )Purchase of Senior Notes
    
    
    
    
    
    
    (250
    )
    
    
    (19,615
    )Purchase of treasury stock
    
    
    (21,028
    )
    
    
    (24,752
    )
    
    
    (17,757
    )Purchase of stock warrants
    
    
    
    
    
    
    (721
    )
    
    
    (1,004
    )Net cash provided (absorbed) by financing activities
    
    
    9,485
    
    
    
    (38,956
    )
    
    
    416,170Net change in cash and cash equivalents
    
    
    24,780
    
    
    
    (2,125
    )
    
    
    16,520Cash and cash equivalents at beginning of year
    
    
    58,366
    
    
    
    60,491
    
    
    
    43,971Cash and cash equivalents at end of year
    
    $
    83,146
    
    
    $
    58,366
    
    
    $
    60,491Supplemental disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    65,905
    
    
    $
    81,665
    
    
    $
    104,300Income taxes
    
    $
    14,850
    
    
    $
    12,500
    
    
    $
    13,083Supplemental schedule of noncash investing and financing activities:Transfer of loans to assets acquired through foreclosure and
repossession
    
    $
    1,522
    
    
    $
    1,702
    
    
    $
    2,996Transfer of investments from available for sale
to held to maturity
    
    $
    
    
    
    $
    
    
    
    $
    430,956
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001  (1)
    
    Organization and Summary of Significant Accounting Policies  Local Financial Corporation (Local Financial or the Company) is a bank
holding company, which owns 100% of the outstanding common stock of Local
Oklahoma Bank (Local or the Bank). In September 2001, Local Financial
formed Local Financial Capital Trust I (the Trust) as a wholly- owned
subsidiary. The Trust was formed to facilitate the issuance of 1,610,000 shares
of 9.00% cumulative trust preferred securities at $25 per share.
In July and October 2002, Local Financial formed Local Financial Capital
Trusts II and III (the Trusts), respectively, to facilitate each trust
issuing 10,000 shares of adjustable rate cumulative trust preferred
securities at $1,000 per share. The accounting and reporting practices
of Local Financial and its subsidiaries reflect industry practices and
are in accordance with accounting principles generally accepted in the
United States of America. The more significant policies are described
below.In November 2002, Local purchased 100% of the capital stock of Citizens
Financial Corporation (Citizens) that owned U.S. National Bank, N.A.
Citizens was subsequently dissolved and U.S. National Bank, N.A. was
merged into the Bank. The accompanying consolidated financial statements
reflect the results only from its acquisition date of November 2002.  (a)
    
    Principles of Consolidation  The accompanying consolidated financial statements include the
accounts of Local Financial and its wholly owned subsidiaries,
which are the three trusts and Local, as well as Locals only
active subsidiary, Local Securities Corporation (Local Securities).
As discussed in Note 1(r), the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51(FIN 46R) on December 31, 2003. As a
result, the three trusts are not consolidated with Local Financial
at December 31, 2003. See Note 1(r).Local is an insured depository institution, which obtains deposit
funds primarily through retail branches throughout the State of
Oklahoma and lends those funds throughout the United States. Local
Securities is a registered broker-dealer under the Securities
Exchange Act of 1934, as amended, and provides retail investment
products to customers of Local. Local Financial and its
subsidiaries are collectively referred to as the Company. All
significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements.In preparing the consolidated financial statements, management is
required to make estimates and assumptions. Those estimates and
assumptions relate principally to the determination of the
allowance for loan losses, the valuation of assets acquired through
foreclosure and repossession and the fair value of financial
instruments. Actual results could differ from those estimates.
The accounting policies for these items and other significant
accounting policies are presented below. (Continued) F-7




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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001  (b)
    
    Statements of Cash Flows  For the purpose of the consolidated statements of cash flows, the
Company defines cash and cash equivalents as cash and due from
banks and interest bearing deposits with other banks.  (c)
    
    Securities  The Companys investment portfolio consists primarily of
mortgage-backed securities. Mortgage-backed securities are made up
of mortgage-backed pass-through certificates and
mortgage-derivative securities such as collateralized mortgage
obligations and real estate mortgage investment conduits. Local
does not own any principal only, interest only or residual tranches
mortgage-backed securities. The Company classifies its securities
as held to maturity, available for sale or held for trading.
Trading securities are bought and held principally for the purpose
of selling them in the near term. Held to maturity securities are
those securities for which the Company has the ability and intent
to hold until maturity. Securities are classified as available for
sale when such securities may be sold at a future date or if there
are foreseeable circumstances under which the Company would sell
such securities prior to maturity. At December 31, 2003 and 2002,
the Company had classified all its investment securities as either
held to maturity or available for sale. No investment securities
within the portfolio were held for trading purposes at December 31,
2003 and 2002.Securities classified as available for sale are recorded at their
estimated market value. Changes in the estimated market value of
securities available for sale are included in stockholders equity,
net of deferred taxes, as accumulated other comprehensive income.
Unrealized losses on available for sale securities, which are
judged to be other than temporary, are charged to earnings in the
consolidated statements of operations. Securities held to maturity
are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts. Gains and losses on available
for sale securities are computed on a specific identification
basis. Premiums and discounts are amortized or accreted in the
consolidated statements of operations to approximate a level yield
over the life of the related security.Investments in Federal Reserve Bank (FRB) and Federal Home Loan
Bank of Topeka (FHLB) stock are required investments and are
carried at cost.  (d)
    
    Loans Receivable  Loans receivable are recorded at the contractual amounts owed by
borrowers, less deferred fees and costs, unearned interest, the
allowance for loan losses, nondisbursed funds, and discounts on
loans acquired or originated. Interest on loans is credited to
income as earned, to the extent deemed collectible. Discounts on
loans and unearned interest on consumer loans are accreted into
interest income to approximate a level yield over the contractual
lives of the loans, adjusted for actual prepayments. (Continued) F-8




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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001  Loans are generally placed on nonaccrual status when they become 90
days past due. Previously accrued but uncollected interest on
loans placed on nonaccrual status is reversed unless determined to
be fully collectible. Payments received on nonaccrual loans are
generally applied to principal as they are received. Upon full
collection of the principal balance or determination that future
collection of principal is probable, interest income is recognized
as received.  (e)
    
    Provision and Allowance for Loan Losses  Each period the provision for loan losses in the consolidated
statements of operations results from the combination of a) an
estimate by management of loan losses that occurred during the
current period and b) the ongoing adjustment of prior estimates of
losses occurring in prior periods.To serve as a basis for making this provision each quarter, the
Company maintains an extensive credit risk monitoring process that
considers several factors including: current economic conditions
affecting the Companys customers, the payment performance of
individual large loans and pools of homogeneous small loans,
portfolio seasoning, changes in collateral values, and detailed
reviews of specific large loan relationships. For large loans
deemed to be impaired due to an expectation that all contractual
payments, including interest, will probably not be received,
impairment is measured by comparing the Companys recorded
investment in the loan to the present value of expected cash flows
discounted at the loans effective interest rate, the fair value of
the collateral or the loans observable market price.The provision for loan losses increases the allowance for loan
losses, a valuation account which is netted against loans on the
consolidated statements of financial condition. As the specific
customer and amount of a loan loss is confirmed by gathering
additional information, taking collateral in full or partial
settlement of the loan, bankruptcy of the borrower, etc., the loan
is written down, reducing the allowance for loan losses. If,
subsequent to a writedown, the Company is able to collect
additional amounts from the customer or obtain control of
collateral worth more than previously estimated, a recovery is
recorded, thus increasing the allowance for loan losses.  (f)
    
    Loan Origination Fees, Loan Commitment Fees and Related Costs  The Company defers loan origination fees, loan commitment fees and
the incremental direct costs (principally compensation and benefits
relating to successful underwriting efforts) relative to loans
originated. These deferred fees and costs are amortized into
interest income to approximate a level yield over the life of the
related loans, adjusted for actual prepayments.Other loan fees such as loan servicing fees and late payment fees
are included as a component of noninterest income in the
accompanying consolidated statements of operations. (Continued) F-9




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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001  (g)
    
    Loans Held for Sale and Gains and Losses from the Sale of Loans  Loans originated and intended for sale are carried at the lower of
cost or estimated market value in the aggregate. Net unrealized
losses are recognized through a valuation allowance by charges to
income. There were no loans other than student loans held for sale
at December 31, 2003 and 2002.Gains and losses resulting from the sale of loans are determined by
the specific identification method and reflect the extent that
sales proceeds exceed or are less than the carrying value of the
loans sold. In some cases, the Company sells loans and continues
to service such loans for the investor. In these cases, the
Company recognizes either a servicing asset, at its allocated
previous carrying amount based on relative fair value, or a
servicing liability at fair value. Any servicing assets recognized
as part of the sale are amortized as a deduction from servicing
income in proportion to and over the period of
estimated net servicing income. To the extent sales of loans
involve the sale of part of a loan or a pool of loans, the cost
basis is allocated based upon the relative fair value of the
portion sold and the portion retained.Periodically, the Company may securitize residential real estate
loans held for investment with the Federal National Mortgage
Association (FNMA) and retain all of the interest in the FNMA
security. No gain or loss is recognized as the securitization does
not qualify as a sale. The Companys current carrying value is
allocated between securities held to maturity and a servicing asset
based on the relative fair values.  (h)
    
    Loan Servicing  Loans serviced by the Company for others are primarily the result
of the Company selling loans while retaining the servicing of those
loans. These loans are not included with loans receivable or any
other asset in the accompanying consolidated statements of
financial condition. Fees earned for servicing loans owned by
investors are reported as income when the related loan payments are
collected. Loan servicing costs are charged to expense as
incurred. Loans serviced for others totaled approximately
$74,993,000 and $113,473,000 at December 31, 2003 and 2002,
respectively. Net servicing fees earned totaled approximately
$84,000, $81,000 and $550,000 for the years ended December 31,
2003, 2002 and 2001, respectively, and are included as a component
of loan fees and loan service charges in the accompanying
consolidated statements of operations.At December 31, 2003 and 2002, unamortized servicing assets were
approximately $575,000 and $918,000, respectively, and are included
in other assets. Amortization of these assets totaling
approximately $343,000, $649,000 and $400,000 was charged against
loan servicing income for the years ended December 31, 2003, 2002
and 2001, respectively. The Company anticipates amortization
expense on the remaining servicing assets will average
approximately $271,000 per year over the next two years.
Impairment of servicing assets is assessed based on the fair value
of those assets. Fair values are estimated using discounted cash
flows based on a current market interest rate. At December 31,
2003 and 2002, the carrying value of servicing assets was not
impaired. (Continued) F-10




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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001  (i)
    
    Bank Owned Life Insurance  The Company has purchased life insurance on its key managers. The
balance was approximately $52,466,000 and $39,604,000 at December
31, 2003 and 2002, respectively, and is included in other assets in
the consolidated statements of financial condition. The increase
in the cash surrender value is included in other noninterest income
in the consolidated statements of operations and amounted to
approximately $2,862,000, $2,350,000 and $2,000,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.  (j)
    
    Commissions  Commission revenues on annuities and life insurance are recorded
when the policies are written and are therefore earned. Securities
transactions and related commission revenue and expenses are
recorded on a trade date basis. Commission revenue of $3,880,000,
$4,325,000 and $3,731,000 for the years ended December 31, 2003,
2002 and 2001, respectively, was included in other noninterest
income in the consolidated statements of operations.  (k)
    
    Premises and Equipment  Buildings, building improvements, furniture, fixtures and equipment
are stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the related assets.
Estimated lives range from 25 to 40 years for buildings and
building improvements and 3 to 10 years for furniture, fixtures and
equipment.Maintenance and repairs are charged to expense as incurred and
building improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or
otherwise disposed of are eliminated from the accounts and any
resulting gains or losses are credited or charged to income.  (l)
    
    Assets Acquired Through Foreclosure and Repossession  Assets acquired through foreclosure and repossession are recorded
at estimated fair value, net of estimated selling costs at the date
of foreclosure or repossession. The values of assets acquired
through foreclosure and repossession are monitored by the Company
continually through sales and rental activities and by updated
appraisals and other valuation methods when needed. The Company
records the gain or loss on sale and net income and expense from
assets acquired through foreclosure and repossessions in other
noninterest expense.  (m)
    
    Deferred Issuance Costs  The Company capitalizes all costs related to the issuance of Senior
Notes. The unamortized issuance costs on the Senior Notes at
December 31, 2003 and 2002 of (Continued) F-11




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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001  approximately $116,000 and $289,000,
respectively, are included in other assets in the consolidated
statements of financial condition. Deferred issuance costs are
amortized over the life of the Senior Notes as a yield adjustment
to interest expense on Senior Notes in the consolidated statements
of operations.  The three trusts capitalize all costs related to the issuance of
trusts preferred securities. The unamortized issuance costs on the
trust preferred securities at December 31, 2002 of approximately
$2,281,000 are included in other assets in the December 31, 2002
consolidated statements of financial condition. The three trusts
are not consolidated at December 31, 2003 and as such these costs
are not included in the December 31, 2003 consolidated statement of
financial condition. See Note 1(r). Deferred issuance costs are
amortized over the life of the trust preferred securities as a
yield adjustment to interest expense on trust preferred securities
in the consolidated statements of operations.  (n)
    
    Intangible Assets  Intangible assets consist of goodwill and core deposit intangible
assets. Goodwill was approximately $18,640,000 at December 31,
2003 and 2002. Goodwill represents the excess cost over fair value
of net assets acquired and for periods prior to December 31, 2001
was being amortized on a straight-line basis over a 15-year period.
For periods through December 31, 2001, the Company evaluated the
recoverability of goodwill by assessing whether the amortization of
the asset balances over their remaining lives could be recovered
through projected cash flows. The amount of impairment, if any,
was measured based on projected discounted cash flows. No
impairment was recognized at December 31, 2001.For periods beginning on January 1, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets. As a result, for
periods beginning after December 31, 2001, goodwill and intangible
assets with indefinite useful lives no longer will be amortized,
but instead will be tested for impairment at least annually. To
accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units. The Company will then
determine the fair value of each reporting unit and compare it to
the reporting units carrying amount. To the extent a reporting
units carrying amount exceeds its fair value, an indication exists
that the reporting units goodwill may be impaired and the Company
must perform the second step of the impairment test. In the second
step, the Company must compare the implied fair value of the
reporting units goodwill, determined by allocating the reporting
units fair valued to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with SFAS No. 141, Business
Combinations, to its carrying amount. If the carrying amount of
reporting unit goodwill exceeds the implied fair value of the
goodwill, an impairment loss is recognized in an amount equal to
that excess. The results of this analysis (determined using the
market value of price to earnings and price to book value of recent
sales of financial institutions) did not require the Company to
recognize an impairment loss in 2003 or 2002. (Continued) F-12




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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001  In connection with the acquisition of Citizens (see Note 2), the
Company recorded a core deposit intangible asset with an
unamortized balance of approximately $734,000 and $1,055,000 at
December 31, 2003 and 2002, respectively. The Company evaluates
the recoverability of core deposit intangible assets by assessing
whether the amortization of the asset balances over their remaining
lives can be recovered through undiscounted cash flows. The amount
of impairment, if any, is measured as the difference between the
carrying amount and fair value of the asset. The core deposit
intangible asset was determined to have a useful life of
approximately 12 years and will be amortized based upon the
estimated percentage decline of the future income generated by the
acquired deposits. Core deposit intangible asset amortization
expense for the years ended December 31, 2003 and 2002 was
approximately $321,000 and $15,000, respectively. The Company
expects amortization expense to range from approximately $214,000
to $64,000 over the next five years.  (o)
    
    Income Taxes  Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for
income taxes.  (p)
    
    Earnings Per Share  Basic net income per share is based upon the weighted average
number of shares outstanding during the period. Stock options and
warrants to purchase common stock are considered in diluted income
per share calculations, if dilutive, and are computed using the
treasury stock method. (Continued) F-13




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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |  |  | The following table reconciles the net income and weighted average
shares outstanding used in the calculation of basic and diluted net
income per share for the years ended December 31, 2003, 2002 and
2001.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |         |   |            |   |             |  |            |         |           |   |      |  | 
|------------------------------ | ------- | - | ---------- | - | ----------- |  | ---------- | ------- | --------- | - | ---- |  | 
|                               |         |   | 2003      
|                               |         |   |           
|                               |         |   |            |   |             |  | Weighted   |         |           |   |     
|                               |         |   |            |   |             |  | Average    |         |           |   |     
|                               |         |   |            |   |             |  | Shares     |         | Per Share
|                               |         |   | Net Income |   | Outstanding |  | Amount    
|                               |         |   |            |   |             |  |           
|Basic net income per share     |         | $ | 28,095,000 |   |             |  | 17,052,297 |         |           | $ | 1.65 | 
|                               |         |   |            |   |             |  |            |         |           |   |      | 
|Effect of dilutive securities: |         |   |            |   |             |  |            |         |           |   |      | 
|                               | Options |   |            |  |             |  |            | 706,268 |           |   |      |  | 
|                               |         |   |            |   |             |  |            |         |           |   |      | 
|Diluted net income per share   |         | $ | 28,095,000 |   |             |  | 17,758,565 |         |           | $ | 1.58 | 
|                               |         |   |            |   |             |  |            |         |           |   |      | 

|                               |         |   |            |   |             |  |            |         |           |   |      |  | 
|------------------------------ | ------- | - | ---------- | - | ----------- |  | ---------- | ------- | --------- | - | ---- |  | 
|                               |         |   | 2002      
|                               |         |   |           
|                               |         |   |            |   |             |  | Weighted   |         |           |   |     
|                               |         |   |            |   |             |  | Average    |         |           |   |     
|                               |         |   |            |   |             |  | Shares     |         | Per Share
|                               |         |   | Net Income |   | Outstanding |  | Amount    
|                               |         |   |            |   |             |  |           
|Basic net income per share     |         | $ | 29,015,000 |   |             |  | 18,912,354 |         |           | $ | 1.53 | 
|                               |         |   |            |   |             |  |            |         |           |   |      | 
|Effect of dilutive securities: |         |   |            |   |             |  |            |         |           |   |      | 
|                               | Options |   |            |  |             |  |            | 704,309 |           |   |      |  | 
|                               |         |   |            |   |             |  |            |         |           |   |      | 
|Diluted net income per share   |         | $ | 29,015,000 |   |             |  | 19,616,663 |         |           | $ | 1.48 | 
|                               |         |   |            |   |             |  |            |         |           |   |      | 

|                               |          |   |            |   |             |  |            |         |           |   |      |  | 
|------------------------------ | -------- | - | ---------- | - | ----------- |  | ---------- | ------- | --------- | - | ---- |  | 
|                               |          |   | 2001      
|                               |          |   |           
|                               |          |   |            |   |             |  | Weighted   |         |           |   |     
|                               |          |   |            |   |             |  | Average    |         |           |   |     
|                               |          |   |            |   |             |  | Shares     |         | Per Share
|                               |          |   | Net Income |   | Outstanding |  | Amount    
|                               |          |   |            |   |             |  |           
|Basic net income per share     |          | $ | 26,477,000 |   |             |  | 20,368,028 |         |           | $ | 1.30 | 
|                               |          |   |            |   |             |  |            |         |           |   |      | 
|Effect of dilutive securities: |          |   |            |   |             |  |            |         |           |   |      | 
|                               | Warrants |   |            |  |             |  |            | 64,841  |           |   |      |  | 
|                               | Options  |   |            |  |             |  |            | 533,662 |           |   |      |  | 
|                               |          |   |            |   |             |  |            |         |           |   |      | 
|Diluted net income per share   |          | $ | 26,477,000 |   |             |  | 20,966,531 |         |           | $ | 1.26 | 
|                               |          |   |            |   |             |  |            |         |           |   |      | 

(Continued)

F-14



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| | (q) |  | Segments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company operates as one segment. The operating information
used by the Companys chief operating decision-maker for purposes
of assessing performance and making operating decisions about the
Company is the consolidated financial statements presented herein.
The Company has one active operating subsidiary, namely, Local
Oklahoma Bank, a state chartered bank. The Bank, in turn, has one
active operating subsidiary, Local Securities Corporation, which is
a registered broker-dealer under the Securities Exchange Act of
1934 and provides retail investment products to customers of the
Bank. While Local Securities qualifies as a separate operating
segment, it is not considered material to the consolidated
financial statements for the purposes of making operating decisions
and does not meet the 10% threshold for disclosure under SFAS No.
131, Disclosure About Segments of an Enterprise and Related
Information.
|
| |     |  | In September 2001, the Company formed Local Financial Capital Trust
I. Then, in July 2002 and October 2002, the Company formed Local
Financial Capital Trust II and Local Financial Capital Trust III,
respectively. All are wholly-owned finance subsidiaries. They do
not qualify as operating segments under SFAS No. 131 and have no
independent operations and no other function other than the
issuance of their securities and the related purchase of the junior
subordinated debentures from Local Financial and to distribute
payments referred thereon to the holders of their securities.
Additionally, these trusts are not consolidated in the consolidated
statement of financial condition at December 31, 2003. See Note
1(r).                                                                                                                                                                                                     
|
| | (r) |  | New Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |     |  | In December 2003, the FASB issued FASB Interpretation No. 46
(revised December 2003), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51which addresses how a
business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R
replaces FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued in January 2003. The Company
adopted FIN 46R on December 31, 2003 and, as a result, the three
trusts were not consolidated in the Companys financial statements
at December 31, 2003.                                                                                                                                                                                                                                                                    
|
| |     |  | The impact of this adoption resulted in the Mandatorily Redeemable
Trust Preferred Securities of approximately $60,250,000 and
deferred issuance costs of approximately $2,202,000 relating to the
trust preferred securities no longer included in the consolidated
statement of financial condition at December 31, 2003.
Additionally, the adoption resulted in junior subordinated
debentures of approximately $62,115,000 and equity investment of
subsidiaries of approximately $4,067,000 relating to the Trusts
included in the consolidated statement of financial condition at
December 31, 2003. The deconsolidation of the three trusts as
discussed above had no impact on stockholders equity or net income
at December 31, 2003.                                                                                                                                                                                                    

(Continued)

F-15



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |  |  | The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets,as of January 1, 2002 and no longer amortizes goodwill. As
of the date of adoption, the Company had unamortized goodwill in
the amount of approximately $15,548,000, which was subject to the
transition provisions of Statement No. 142. The Company determined
there was no transitional impairment loss at January 1, 2002.
There was no amortization expense for the years ended December 31,
2003 and 2002, whereas this expense amounted to $1,340,000 for the
year ended December 31, 2001. The Companys net income for the
year ended December 31, 2001, excluding the effects of goodwill
amortization, would have been $27,817,000 compared to $28,095,000
and $29,015,000 for the years ended December 31, 2003 and 2002,
respectively. Excluding the effects of goodwill amortization, the
earnings per share for the year ended December 31, 2001 would have
been $1.37 basic and $1.32 diluted as compared to $1.65 basic and
$1.58 diluted and $1.53 basic and $1.48 diluted for the years ended
December 31, 2003 and 2002, respectively.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a
rescission of FASB Interpretation No. 34(Interpretation No. 45).
Interpretation No. 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under guarantees issued. Interpretation No. 45 also
clarifies that a guarantor is required to recognize, at inception
of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of
Interpretation No. 45 are applicable to guarantees issued or
modified after December 31, 2002 and did not have a material effect
on the Companys consolidated financial statements.                                                                                                                                                                                                              
|
| |  |  | In May 2003, the FASB issued Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity(Statement No. 150). Statement No. 150
requires issuers to classify as liabilities (or assets in some
circumstance) three classes of freestanding financial instruments
that embody obligations for the issuer. The adoption of Statement
No. 150 did not have a material effect on the Companys
consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

(Continued)

F-16



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| | (s) |  | Stock Compensation                                                                                                                                                                                                                                                           
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In September 1997, the Board of Directors adopted a stock option
plan. The stock option plan has 2,100,370 shares of common stock
authorized and provides for the granting of stock options intended
to comply with the applicable requirements of the Internal Revenue
Code.
|
| |     |  | Stock option activity during the years indicated was as follows:                                                                                                                                                                                                             

|                             |                       |  |           |          |                  |   |       |       | 
|---------------------------- | --------------------- |  | --------- | -------- | ---------------- | - | ----- | ----- | 
|                             |                       |  | Number of |          | Weighted-Average
|                             |                       |  | Shares    |          | Exercise Price  
|                             |                       |  |           |          |                 
|Balance at December 31, 2000 |                       |  | 2,085,005 |          |                  | $ | 10.00 |      
|                             | Granted               |  |           | 15,000   |                  |   |       | 10.00 | 
|                             |                       |  |           |          |                  |   |       |      
|Balance at December 31, 2001 |                       |  | 2,100,005 |          |                  |   | 10.00 |      
|                             | Granted               |  |           | 35,000   |                  |   |       | 14.42 | 
|                             | Exercised/Repurchased |  |           | (211,365 | )                |   |       | 10.00 | 
|                             | Forfeited             |  |           | (22,000  | )                |   |       | 10.00 | 
|                             |                       |  |           |          |                  |   |       |      
|Balance at December 31, 2002 |                       |  | 1,901,640 |          |                  |   | 10.08 |      
|                             | Exercised/Repurchased |  |           | (132,950 | )                |   |       | 10.00 | 
|                             | Forfeited             |  |           | (13,200  | )                |   |       | 10.00 | 
|                             |                       |  |           |          |                  |   |       |      
|Balance at December 31, 2003 |                       |  | 1,755,490 |          |                  | $ | 10.09 |      
|                             |                       |  |           |          |                  |   |       |      



| |  |  | Awards under the Companys stock option plan vest over periods
ranging from three to five years. The stock options expire ten
years from the effective dates of the respective option agreements.
At December 31, 2003, the range of exercise prices and
weighted-average remaining contractual life of outstanding options
was $10.00 to $17.37 and 5.36 years, respectively. At December 31,
2003, 1,546,490 options were exercisable with a weighted-average
exercise price of $10.02 compared to 1,532,578 options at December
31, 2002 with a weighted-average exercise price of $10.00 and
1,562,275 options at December 31, 2001 with a weighted-average
exercise price of $10.00.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The per share weighted-average fair value of stock options granted
for the years ended December 31, 2002 and, 2001 was $4.69 and
$5.67, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: risk-free
interest rate of 2.73% and 4.30%, respectively, volatility rate of
31.52% and 37.06%, respectively, expected life of 5 years for each
period, and no expected dividend yield.                                                                                                                                                                                                                                          
|
| |  |  | The Company applies the intrinsic-value based method of accounting
prescribed by APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Under this method,
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise
price. Accordingly, no                                                                                                                                                                                                                                                                                                                                   

(Continued)

F-17



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |  |  | compensation cost has been recognized for its stock option rights.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123,
Accounting for Stock Based Compensation, as amended by SFAS No.
148, Accounting for Stock-based Compensation-Transition and
Disclosure,the Companys net income for the years ended December
31, 2003, 2002 and 2001 would have been decreased to the pro forma
amounts below.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                        |                       |   |                                           |      |      |   |        |      |  |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | - | ----------------------------------------- | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                        |                       |   | Years ended December 31,                 
|                                                                                                                                        |                       |   |                                          
|                                                                                                                                        |                       |   | 2003                                      |      | 2002 |   | 2001  
|                                                                                                                                        |                       |   |                                           |      |      |   |       
|                                                                                                                                        |                       |   | (dollars in thousands, except share data)
|Net income as reported                                                                                                                  |                       | $ | 28,095                                    |      |      | $ | 29,015 |      |  | $ | 26,477 |     
|Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
awards, net of related tax effects |                       |   | (400                                      | )    |      |   | (446   | )    |  |   | (472   | )   
|                                                                                                                                        |                       |   |                                           |      |      |   |        |      |  |   |        |     
|Pro forma net income                                                                                                                    |                       | $ | 27,695                                    |      |      | $ | 28,569 |      |  | $ | 26,005 |     
|                                                                                                                                        |                       |   |                                           |      |      |   |        |      |  |   |        |     
|Earnings per share:                                                                                                                     |                       |   |                                           |      |      |   |        |      |  |   |        |     
|                                                                                                                                        | Basic  as reported   |   | $                                         | 1.65 |      |   | $      | 1.53 |  |   | $      | 1.30 | 
|                                                                                                                                        |                       |   |                                           |      |      |   |        |      |  |   |        |     
|                                                                                                                                        | Basic  pro forma     |   | $                                         | 1.62 |      |   | $      | 1.51 |  |   | $      | 1.28 | 
|                                                                                                                                        |                       |   |                                           |      |      |   |        |      |  |   |        |     
|                                                                                                                                        | Diluted  as reported |   | $                                         | 1.58 |      |   | $      | 1.48 |  |   | $      | 1.26 | 
|                                                                                                                                        |                       |   |                                           |      |      |   |        |      |  |   |        |     
|                                                                                                                                        | Diluted  pro forma   |   | $                                         | 1.56 |      |   | $      | 1.46 |  |   | $      | 1.24 | 
|                                                                                                                                        |                       |   |                                           |      |      |   |        |      |  |   |        |     



| |     |  | Additionally, two employees are entitled to a tax offset bonus for
their stock options. Bonus compensation of approximately
$5,296,000 and $5,121,000 was recorded in compensation and employee
benefits in the consolidated statements of operations for the years
ended December 31, 2003 and 2002, respectively.                                                                                        
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (t) |  | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                          
|
| |     |  | Certain reclassifications were made to the 2002 and 2001
consolidated financial statements to conform to the 2003
presentation.                                                                                                                                                                                                                                                                            
|
| | (u) |  | Subsequent Event                                                                                                                                                                                                                                                                                                                                                                                           
|
| |     |  | On January 22, 2004, International Bancshares Corporation (IBC) of
Laredo, Texas and Local Financial signed a definitive agreement
pursuant to which IBC will acquire Local Financial. The
transaction is expected to close in the summer of 2004 and is
subject to various closing conditions, including receipt of all
requisite regulatory approvals and the approval of Local
Financials stockholders.

(Continued)

F-18



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|(2) |  | Acquisition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On November 5, 2002, Local acquired 100% of the outstanding common shares
of Citizens and its subsidiary, U.S. National Bank, N.A for cash.
Citizens was subsequently dissolved and U.S. National Bank, N.A. was
merged into the Bank. The results of operations of Citizens are included
in the consolidated financial statements since that date. The fair value
of assets and liabilities acquired at the date of acquisition primarily
related to approximately $25,420,000 loans receivable, $33,127,000
deposits and $1,097,000 in other liabilities.                                                         
|   
|    |  | Intangible assets acquired of approximately $4,162,000 were allocated
between goodwill of $3,092,000 and core deposit intangible asset of
$1,070,000 in accordance with the provisions of SFAS 142. The core
deposit intangible asset was determined to have a useful life of
approximately 12 years and will be amortized based upon the estimated
percentage decline of the future income generated by the acquired
deposits. Amortization of these assets totaling approximately $321,000
and $15,000 was charged against other noninterest expense for the years
ended December 31, 2003 and 2002, respectively.
|   
|(3) |  | Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | Actual maturities of collateralized mortgage obligations and mortgage
pass-through securities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. U.S. Government and municipal
securities generally mature within five years.                                                                                                                                                                                                                                                                                 



| | (a) |  | Securities Available for Sale                                                               
| | --- |  | --------------------------------------------------------------------------------------------
|
| |     |  | A comparative summary of securities available for sale is as
follows (dollars in thousands):

|                   |                                     |  |           |         |            |  |            |       |        |  |           |     |  |  |   |         | 
|------------------ | ----------------------------------- |  | --------- | ------- | ---------- |  | ---------- | ----- | ------ |  | --------- | --- |  |  | - | ------- | 
|                   |                                     |  |           |         |            |  | Gross      |       | Gross  |  | Estimated
|                   |                                     |  | Amortized |         | Unrealized |  | Unrealized |       | Market
|                   |                                     |  | Cost      |         | Gains      |  | Losses     |       | Value 
|                   |                                     |  |           |         |            |  |            |       |       
|December 31, 2003: |                                     |  |           |         |            |  |            |       |        |  |           |     |  |  |   |        
|                   | Collateralized mortgage
obligations |  | $         | 99,285  |            |  | $          | 757   |        |  | $         | 189 |  |  | $ | 99,853  | 
|                   |                                     |  |           |         |            |  |            |       |        |  |           |     |  |  |   |         | 
|December 31, 2002: |                                     |  |           |         |            |  |            |       |        |  |           |     |  |  |   |        
|                   | Collateralized mortgage
obligations |  | $         | 161,381 |            |  | $          | 2,092 |        |  | $         |    |  |  | $ | 163,473 | 
|                   |                                     |  |           |         |            |  |            |       |        |  |           |     |  |  |   |         | 



| |  |  | The weighted average coupon rate was 5.02% and 5.34% at December
31, 2003 and 2002, respectively.
| |  |  | -------------------------------------------------------------------------------------------------

(Continued)

F-19



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |  |  | At December 31, 2003, securities with a total estimated market
value of $52,972,000 were pledged to secure various deposits and
borrowings. No available for sale securities were pledged at
December 31, 2002. Accrued interest receivable on securities
available for sale of approximately $411,000 and $718,000 were
included in other assets at December 31, 2003 and 2002,
respectively.                                                        
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Proceeds from sales of securities available for sale for the years
ended December 31, 2003, 2002 and 2001 were approximately
$28,768,000, $54,239,000 and $19,813,000, respectively. Gross
gains of approximately $319,000, $867,000 and $151,000 were
realized for the years ended December 31, 2003, 2002 and 2001,
respectively. These gains are included in net gains on sale of
assets in the accompanying consolidated statements of operations.
|
| |  |  | Gross unrealized losses on available for sale securities by length
of time that individual securities have been in a continuous
unrealized loss position at December 31, 2003 are as follows
(dollars in thousands):                                                                                                                                                                                                                                  

|                                    |  |                     |        |                     |  |           |     |            |  |           |   |            |  |   |   |  |  |   |        |  |  |   |     | 
|----------------------------------- |  | ------------------- | ------ | ------------------- |  | --------- | --- | ---------- |  | --------- | - | ---------- |  | - | - |  |  | - | ------ |  |  | - | --- | 
|                                    |  | Less than 12 Months |        | 12 Months or Longer |  | Total    
|                                    |  |                     |        |                     |  |          
|                                    |  | Estimated           |        | Gross               |  | Estimated |     | Gross      |  | Estimated |   | Gross     
|                                    |  | Market              |        | Unrealized          |  | Market    |     | Unrealized |  | Market    |   | Unrealized
|                                    |  | Value               |        | Losses              |  | Value     |     | Losses     |  | Value     |   | Losses    
|                                    |  |                     |        |                     |  |           |     |            |  |           |   |           
|Collateralized
mortgage
obligations |  | $                   | 45,252 |                     |  | $         | 189 |            |  | $         |  |            |  | $ |  |  |  | $ | 45,252 |  |  | $ | 189 | 
|                                    |  |                     |        |                     |  |           |     |            |  |           |   |            |  |   |   |  |  |   |        |  |  |   |     | 



| |  |  | At December 31, 2003, the unrealized losses on two fixed rate
collateralized mortgage obligation securities with an estimated
market value of approximately $45,252,000 were caused by interest
rate changes. These issues are fully collateralized tranches,
backed by either FHLMC, FNMA or AAA-rated private issuers. Because
the decline in fair value is attributable to changes in interest
rates and not credit quality, and because the Company has the
ability to hold these investments until maturity, these investments
are not considered other-than-temporarily impaired.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(Continued)

F-20



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| | (b) |  | Securities Held to Maturity                                                               
| | --- |  | ------------------------------------------------------------------------------------------
|
| |     |  | A comparative summary of securities held to maturity is as follows
(dollars in thousands):

|                   |                                     |   |           |         |            |   |            |       |        |   |           |       |  |   |         |         | 
|------------------ | ----------------------------------- | - | --------- | ------- | ---------- | - | ---------- | ----- | ------ | - | --------- | ----- |  | - | ------- | ------- | 
|                   |                                     |   |           |         |            |   | Gross      |       | Gross  |   | Estimated
|                   |                                     |   | Amortized |         | Unrealized |   | Unrealized |       | Market
|                   |                                     |   | Cost      |         | Gains      |   | Losses     |       | Value 
|                   |                                     |   |           |         |            |   |            |       |       
|December 31, 2003: |                                     |   |           |         |            |   |            |       |        |   |           |       |  |   |         |        
|                   | Collateralized mortgage
obligations |   | $         | 217,137 |            |   | $          | 140   |        |   | $         | 4,446 |  |   | $       | 212,831 | 
|                   | Mortgage pass-through
securities    |   |           | 26,177  |            |   |            | 1,722 |        |   |           |      |  |   |         | 27,899  | 
|                   | U.S. Government and agencies        |   |           | 34,197  |            |   |            | 188   |        |   |           | 5     |  |   |         | 34,380  | 
|                   | Municipal securities                |   |           | 60      |            |   |            |      |        |   |           |      |  |   |         | 60      | 
|                   |                                     |   |           |         |            |   |            |       |        |   |           |       |  |   |         |         | 
|                   |                                     | $ | 277,571   |         |            | $ | 2,050      |       |        | $ | 4,451     |       |  | $ | 275,170 |        
|                   |                                     |   |           |         |            |   |            |       |        |   |           |       |  |   |         |         | 
|December 31, 2002: |                                     |   |           |         |            |   |            |       |        |   |           |       |  |   |         |        
|                   | Collateralized mortgage
obligations |   | $         | 288,585 |            |   | $          | 6,178 |        |   | $         | 51    |  |   | $       | 294,712 | 
|                   | Mortgage pass-through
securities    |   |           | 51,101  |            |   |            | 3,098 |        |   |           | 3     |  |   |         | 54,196  | 
|                   | U.S. Government and agencies        |   |           | 25,046  |            |   |            | 634   |        |   |           |      |  |   |         | 25,680  | 
|                   | Municipal securities                |   |           | 100     |            |   |            |      |        |   |           |      |  |   |         | 100     | 
|                   |                                     |   |           |         |            |   |            |       |        |   |           |       |  |   |         |         | 
|                   |                                     | $ | 364,832   |         |            | $ | 9,910      |       |        | $ | 54        |       |  | $ | 374,688 |        
|                   |                                     |   |           |         |            |   |            |       |        |   |           |       |  |   |         |         | 



| |  |  | The weighted average coupon rate was 4.11% and 5.96% at December
31, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                             
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | At December 31, 2003 and 2002, securities held to maturity with a
total amortized cost of $138,609,000 and $253,894,000,
respectively, were pledged to secure various deposits and
borrowings. Accrued interest receivable on securities held to
maturity of approximately $1,144,000 and $1,882,000 was included in
other assets at December 31, 2003 and 2002, respectively.

(Continued)

F-21



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |  |  | Gross unrealized losses on held to maturity securities by length of
time that individual securities have been in a continuous
unrealized loss position at December 31, 2003 are as follows
(dollars in thousands):
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    |  |                     |         |                     |  |           |       |            |  |           |   |            |  |   |   |  |  |   |         |  |  |   |       | 
|----------------------------------- |  | ------------------- | ------- | ------------------- |  | --------- | ----- | ---------- |  | --------- | - | ---------- |  | - | - |  |  | - | ------- |  |  | - | ----- | 
|                                    |  | Less than 12 Months |         | 12 Months or Longer |  | Total    
|                                    |  |                     |         |                     |  |          
|                                    |  | Estimated           |         | Gross               |  | Estimated |       | Gross      |  | Estimated |   | Gross     
|                                    |  | Market              |         | Unrealized          |  | Market    |       | Unrealized |  | Market    |   | Unrealized
|                                    |  | Value               |         | Losses              |  | Value     |       | Losses     |  | Value     |   | Losses    
|                                    |  |                     |         |                     |  |           |       |            |  |           |   |           
|Collateralized
mortgage
obligations |  | $                   | 175,375 |                     |  | $         | 4,446 |            |  | $         |  |            |  | $ |  |  |  | $ | 175,375 |  |  | $ | 4,446 | 
|                                    |  |                     |         |                     |  |           |       |            |  |           |   |            |  |   |   |  |  |   |         |  |  |   |       | 



| |  |  | At December 31, 2003, the unrealized losses on the eight fixed rate
collateralized mortgage obligation securities with an estimated
market value of approximately $175,375,000 were caused by interest
rate changes. These issues are fully collateralized tranches,
guaranteed by either FHLMC or FNMA. Because the decline in fair
value is attributable to changes in interest rates and not credit
quality, and because the Company has the ability and intent to hold
these investments until maturity, these investments are not
considered other-than-temporarily impaired.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Loans Receivable                                                               
|--- |  | -------------------------------------------------------------------------------
|   
|    |  | Loans receivable are summarized below at amortized cost (dollars in
thousands):

|                           |                           |                       |           |              |           |      |           |         |           | 
|-------------------------- | ------------------------- | --------------------- | --------- | ------------ | --------- | ---- | --------- | ------- | --------- | 
|                           |                           |                       |           | December 31,
|                           |                           |                       |           |             
|                           |                           |                       |           | 2003         |           | 2002
|                           |                           |                       |           |              |           |     
|Residential real estate(1) |                           | $                     | 370,926   |              |           | $    | 276,883   |        
|Commercial                 |                           |                       | 1,763,306 |              |           |      | 1,695,293 |        
|Held for sale              |                           |                       | 11,762    |              |           |      | 8,576     |        
|Consumer(1)                |                           |                       | 124,969   |              |           |      | 132,924   |        
|                           |                           |                       |           |              |           |      |           |        
|                           |                           | Total loans           |           |              | 2,270,963 |      |           |         | 2,113,676 | 
|Less:                      |                           |                       |           |              |           |      |           |        
|                           | Allowance for loan losses |                       |           | (30,398      | )         |      |           | (29,532 | )        
|                           |                           |                       |           |              |           |      |           |        
|                           |                           | Loans receivable, net |           | $            | 2,240,565 |      |           | $       | 2,084,144 | 
|                           |                           |                       |           |              |           |      |           |        



| |  | (1) In June 2003, the Company began including home equity first mortgage
loans as residential real estate loans. Consequently, loans receivable
as of December 31, 2002 include a $64.0 million reclassification from
consumer loans to residential real estate loans.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Accrued interest receivable on loans of approximately $8,177,000 and
$8,629,000 was included in other assets at December 31, 2003 and 2002,
respectively.                                                                                                             

(Continued)

F-22



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |  | An analysis of the allowance for loan losses is as follows (dollars in
thousands):
| |  | ----------------------------------------------------------------------------------

|                             |                           |                       |        |                          |        |      |        |        |        |   |        |        |        |  
|---------------------------- | ------------------------- | --------------------- | ------ | ------------------------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                             |                           |                       |        | Years ended December 31,
|                             |                           |                       |        |                         
|                             |                           |                       |        | 2003                     |        | 2002 |        | 2001  
|                             |                           |                       |        |                          |        |      |        |       
|Balance at beginning of year |                           | $                     | 29,532 |                          |        | $    | 27,621 |        |        | $ | 28,345 |       
|                             | Allowance acquired        |                       |        |                         |        |      |        | 1,003  |        |   |        |       |       
|                             | Loans charged off         |                       |        | (6,288                   | )      |      |        | (6,184 | )      |   |        | (6,589 | )     
|                             | Recoveries                |                       |        | 554                      |        |      |        | 492    |        |   |        | 465    |       
|                             |                           |                       |        |                          |        |      |        |        |        |   |        |       
|                             |                           | Net loans charged off |        |                          | (5,734 | )    |        |        | (5,692 | ) |        |        | (6,124 | )
|                             | Provision for loan losses |                       |        | 6,600                    |        |      |        | 6,600  |        |   |        | 5,400  |       
|                             |                           |                       |        |                          |        |      |        |        |        |   |        |       
|Balance at end of year       |                           | $                     | 30,398 |                          |        | $    | 29,532 |        |        | $ | 27,621 |       
|                             |                           |                       |        |                          |        |      |        |        |        |   |        |       



| |  | Other than Oklahoma, the Company has granted commercial real estate loans
to customers principally in California, Texas, New York, Arizona and
Florida. The remainder of the Companys portfolio is significantly
concentrated in Oklahoma. Although the Company has a diversified loan
portfolio, a substantial portion of the debtors ability to honor their
loan contracts is dependent upon the overall economy as well as the
economy of the respective states.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2003, 2002 and 2001, the Company classified approximately
$20,416,000, $6,168,000 and $2,817,000, respectively, of loans as
impaired, as defined by SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. At December 31, 2003, 2002 and 2001, these loans
had an impairment allowance of approximately $2,422,000, $1,026,000 and
$706,000, respectively, which was measured using the collateral value
method. The average recorded investment in impaired loans for the years
ended December 31, 2003, 2002 and 2001 was approximately $18,745,000,
$7,080,000 and $3,476,000, respectively. Interest payments received on
impaired loans are recorded as interest income, unless collection of the
remaining recorded investment is doubtful, at which time the loan is
placed on nonaccrual status and payments received are recorded as
reductions of principal. The Company recognized interest income on
impaired loans of approximately $1,074,000, $291,000 and $10,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.
|
| |  | At December 31, 2003 and 2002, loans to directors, officers and employees
of the Company aggregated approximately $9,780,000 and $6,951,000,
respectively. In managements opinion, such transactions were made on
substantially the same terms as those prevailing at the time for
comparable transactions with other persons and did not involve more than
normal risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

(Continued)

F-23



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|(5) |  | Premises and Equipment                                                   
|--- |  | -------------------------------------------------------------------------
|   
|    |  | Premises and equipment consisted of the following (dollars in thousands):

|                                               |  |              |         |      |  |   |         |  
|---------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2003         |         | 2002
|                                               |  |              |         |     
|Land                                           |  | $            | 6,831   |      |  | $ | 5,852   |  
|Buildings and building improvements            |  |              | 33,613  |      |  |   | 32,890  |  
|Furniture, fixtures and equipment              |  |              | 36,066  |      |  |   | 32,195  |  
|                                               |  |              |         |      |  |   |         |  
|                                               |  |              | 76,510  |      |  |   | 70,937  |  
|Less accumulated depreciation and amortization |  |              | (32,885 | )    |  |   | (28,522 | )
|                                               |  |              |         |      |  |   |         |  
|                                               |  | $            | 43,625  |      |  | $ | 42,415  |  
|                                               |  |              |         |      |  |   |         |  



|    |  | Depreciation and amortization expense relating to premises and equipment
for the years ended December 31, 2003, 2002 and 2001 was approximately
$4,776,000, $4,376,000 and $3,975,000, respectively.                             
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(6) |  | Deposit Accounts                                                                                                                                                                                                                 
|   
|    |  | Accrued interest on deposit accounts of approximately $4,224,000 and
$3,966,000 was included in other liabilities in the accompanying
consolidated statements of financial condition at December 31, 2003 and
2002, respectively.
|   
|    |  | The aggregate amount of certificates of deposit with a denomination
greater than $100,000 was approximately $295,000,000 and $195,000,000 at
December 31, 2003 and 2002, respectively.                                           
|   
|    |  | Contractual maturities of time deposits at December 31, 2003, are
summarized as follows (dollars in thousands):                                                                                                                  

|                          |  |        |         |         | 
|------------------------- |  | ------ | ------- | ------- | 
|Years ending December 31, |  | Amount
|                          |  |       
|2004                      |  |        | $       | 609,235 | 
|2005                      |  |        |         | 219,426 | 
|2006                      |  |        |         | 32,100  | 
|2007                      |  |        |         | 70,443  | 
|2008 and thereafter       |  |        |         | 14,858  | 
|                          |  |        |         |        
|                          |  | $      | 946,062 |        
|                          |  |        |         |         | 

(Continued)

F-24



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|(7) |  | Securities Sold Under Agreements to Repurchase                                                                                                                                                                                                                                                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Periodically, the Company provides securities sold under agreements to
repurchase to customers as a part of the commercial banking operations.
The securities underlying the agreements were under the Companys control
at December 31, 2003 and 2002 and are summarized as follows (dollars in
thousands):

|                                                                  |                        |   |        |        |      |   |        |        | 
|----------------------------------------------------------------- | ---------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                                                  |                        |   | 2003   |        | 2002
|                                                                  |                        |   |        |        |     
|Average outstanding balance                                       |                        | $ | 45,268 |        |      | $ | 43,425 |       
|Weighted average interest rate during the year                    |                        |   | 0.79   | %      |      |   | 1.22   | %     
|Maximum month-end balance                                         |                        | $ | 76,366 |        |      | $ | 64,701 |       
|Outstanding balance at end of year                                |                        |   | 66,367 |        |      |   | 59,696 |       
|Weighted average interest rate at end of year                     |                        |   | 0.72   | %      |      |   | 0.94   | %     
|Mortgage-backed securities securing the agreements
at period-end: |                        |   |        |        |      |   |        |       
|                                                                  | Carrying value         |   | $      | 97,752 |      |   | $      | 66,931 | 
|                                                                  | Estimated market value |   |        | 97,098 |      |   |        | 68,501 | 
|Accrued interest payable at the end of the year                   |                        |   |       |        |      |   |       |       



|(8) |  | Advances from the Federal Home Loan Bank of Topeka                      
|--- |  | ------------------------------------------------------------------------
|   
|    |  | Advances from the FHLB are summarized as follows (dollars in thousands):

|              |  |              |         |      |  |             |      |      |  |   |         |             |  |  |      |  
|------------- |  | ------------ | ------- | ---- |  | ----------- | ---- | ---- |  | - | ------- | ----------- |  |  | ---- | -
|              |  | December 31,
|              |  |             
|              |  | 2003         |         | 2002
|              |  |              |         |     
|              |  |              |         |      |  | Weighted    |      |      |  |   |         | Weighted   
|              |  |              |         |      |  | Average     |      |      |  |   |         | Average    
|              |  |              |         |      |  | Contractual |      |      |  |   |         | Contractual
|              |  | Balance      |         | Rate |  | Balance     |      | Rate
|              |  |              |         |      |  |             |      |     
|Fixed rate    |  | $            | 627,219 |      |  |             | 4.01 | %    |  | $ | 674,193 |             |  |  | 3.85 | %
|Variable rate |  |              | 10,000  |      |  |             | 1.16 |      |  |   | 10,000  |             |  |  | 1.81 |  
|              |  |              |         |      |  |             |      |      |  |   |         |             |  |  |      |  
|              |  | $            | 637,219 |      |  |             | 3.97 | %    |  | $ | 684,193 |             |  |  | 3.82 | %
|              |  |              |         |      |  |             |      |      |  |   |         |             |  |  |      |  



| |  | Additionally, the Company had outstanding letters of credit with the FHLB
of approximately $116,725,000 and $93,855,000 at December 31, 2003 and
2002, respectively. The letters of credit have one-year terms or less
and were pledged to secure certain deposits.                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The FHLB requires the Company to hold eligible assets with a lending
value, as defined, at least equal to FHLB advances and letters of credit
issued. Eligible assets can include such items as first and second
mortgage loans, multifamily mortgage loans, commercial and construction
real estate loans, small business loans and investment securities, which
are not already pledged or otherwise encumbered. At December 31, 2003,
the Company had approximately $813,434,000 in eligible assets pledged
against FHLB advances.

(Continued)

F-25



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |  | At December 31, 2003, the Company had additional borrowing capacity of
approximately $235,678,000 under the FHLB credit policy.
| |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  | Scheduled principal repayments of advances from the FHLB at December 31,
2003 were as follows (dollars in thousands):          

|                          |  |        |         |         |  |  |             |      |  
|------------------------- |  | ------ | ------- | ------- |  |  | ----------- | ---- | -
|                          |  |        |         |         |  |  | Weighted   
|                          |  |        |         |         |  |  | Average    
|                          |  |        |         |         |  |  | Contractual
|Years ending December 31, |  | Amount |         | Rate   
|                          |  |        |         |        
|2004                      |  |        | $       | 27,200  |  |  |             | 1.15 | %
|2005                      |  |        |         | 10,000  |  |  |             | 1.16 |  
|2006                      |  |        |         | 100,000 |  |  |             | 3.35 |  
|2007                      |  |        |         |        |  |  |             |     |  
|2008 and thereafter       |  |        |         | 500,019 |  |  |             | 4.30 |  
|                          |  |        |         |         |  |  |             |     
|                          |  | $      | 637,219 |         |  |  | 3.97        | %   
|                          |  |        |         |         |  |  |             |      |  



|(9) |  | Senior Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Senior Notes of $21,295,000 at 11% issued to various investors were
outstanding at December 31, 2003 and 2002. During 2002 and 2001, the
Company purchased and retired $250,000 and $19,615,000, respectively, of
Senior Notes. No Senior Notes were purchased and retired during 2003.
The purchase and retirement of the Senior Notes resulted in a gross loss
of $11,000 and $2,508,000 together with a related tax benefit of $4,000
and $878,000 for the years ended December 31, 2002 and 2001,
respectively. The gross losses are included in other noninterest expense
in the consolidated statements of operations. Senior Notes are due
September 8, 2004 and pay interest semiannually. Senior Notes are
general unsecured obligations of Local Financial and will rank senior to
such other indebtedness as the Company may incur that is not expressly
subordinated to the Senior Notes. The indenture generally restricts the
incurrence of additional indebtedness by the Company, except for certain
junior indebtedness.
|   
|    |  | Pursuant to the Indenture, dated September 8, 1997, between the Company
and The Bank of New York, relating to the Senior Notes, the Company is
obligated to make an offer to purchase all of the then outstanding Senior
Notes at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, in the event of a change of control of
the Company. The Company is required to purchase all Senior Notes
properly tendered in such offer. Notice of the offer to purchase the
outstanding Senior Notes must be mailed not later than the 30th day after
the change of control to the holders of the Senior Notes. The Senior
Notes are due to mature in September 2004. However, in the event that
the transaction between IBC and the Company closes when anticipated, the
obligation of the Company pursuant to the Indenture may result in the
purchase of those Notes prior to that time.                                                                                                        

(Continued)

F-26



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|(10) |  | Junior Subordinated Debentures and Mandatorily Redeemable Trust Preferred Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | On September 20, 2001, and October 3, 2001, Local Financial Capital Trust
I, a Delaware business trust and wholly-owned finance subsidiary of Local
Financial, issued 1,400,000 and 210,000 shares, respectively, of its
9.00% trust preferred securities at $25 per share for an aggregate price
of approximately $40,250,000, all of which was outstanding at December
31, 2001. The trust preferred securities will mature on September 30,
2031. The proceeds from the sale of the trust preferred securities and
the issuance of $1,245,000 in common securities to Local Financial were
used by the Trust to purchase approximately $41,495,000 of 9% junior
subordinated debentures of Local Financial which have the same payment
terms as the trust preferred securities. Distributions on the trust
preferred securities and on the common securities issued to Local
Financial are payable quarterly beginning December 31, 2001.                       
|    
|     |  | On July 30 and October 22, 2002, the Company formed Local Financial
Capital Trusts II and III (the Trusts), respectively, to facilitate each
trust issuing 10,000 shares of adjustable rate cumulative trust preferred
securities at $1,000 per share for an aggregate price of approximately
$10,000,000. These securities bear interest rates of 3.625% and 3.45%
over the six and three month LIBOR, respectively, and both mature in
2032. The proceeds from the sale of the trust preferred securities and
the issuance of $310,000 each in common securities of each trust to Local
Financial were used by the Trusts to purchase $20,620,000 of adjustable
rate junior subordinated debentures of Local Financial which bears
interest and have the same payment terms as the trust preferred
securities. As above, the debentures will pay interest to the Trusts,
which will in turn pay dividends on the trust preferred securities and
the common stock.
|    
|     |  | Except under certain circumstances, the common securities issued to the
Company by the three trusts possess sole voting rights with respect to
matters involving those entities. Under certain circumstances, the
Company may, from time to time, defer the debentures interest payments,
which would result in a deferral of distribution payments on the related
trust preferred securities and, with certain exceptions, prevent the
Company from declaring or paying cash distributions on the Companys
common stock and any other future debt ranking equally with or junior to
the debentures.                                                                                                                                                                                                                                                                                                                                                             
|    
|     |  | Subject to any applicable regulatory approvals, the trust preferred
securities and the common securities issued by the three trusts to the
Company are redeemable in whole or in part on or after certain dates, or
at any time in whole, but not in part, from the date of issuance upon the
occurrence of certain events. The Federal Reserve Board has announced
that until notice is given to the contrary, the trust preferred
securities would continue to qualify as Tier 1 Capital, to the extent
permitted, for regulatory capital adequacy determination purposes. The
obligations of the Company with respect to the issuance of the trust
preferred securities constitute a full and unconditional guarantee by the
Company of the three trusts obligation with respect to the trust
preferred securities subject to certain limitations.                                                                                                           
|    
|     |  | With the adoption of FIN 46R on December 31, 2003, these trusts are not
consolidated with the Company in the statement of financial condition as
of December 31, 2003. See Note 1(r).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

(Continued)

F-27



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|(11) |  | Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                  
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | Comprehensive income consists of net income and net unrealized gains
(losses) on securities available for sale, net of reclassification
adjustment, and is presented in the consolidated statements of
stockholders equity. Reclassification adjustment consists of realized
gains and losses on securities available for sale included in the
consolidated statements of operations.
|    
|     |  | The changes in the components of other comprehensive income (loss) are
reported net of income taxes for the periods indicated as follows
(dollars in thousands):                                                                                                                                                                                                                      

|                               |                                                                   |   |                              |        |        |   |        |     |  |   |      |      |  
|------------------------------ | ----------------------------------------------------------------- | - | ---------------------------- | ------ | ------ | - | ------ | --- |  | - | ---- | ---- | -
|                               |                                                                   |   | Year ended December 31, 2003
|                               |                                                                   |   |                             
|                               |                                                                   |   | Pre-tax                      |        | Tax    |   | Net   
|                               |                                                                   |   | Amount                       |        | Effect |   | Amount
|                               |                                                                   |   |                              |        |        |   |       
|Unrealized loss on securities: |                                                                   |   |                              |        |        |   |        |     |  |   |      |     
|                               | Unrealized holding loss arising during the
period                 |   | $                            | (1,205 | )      |   | $      | 421 |  |   | $    | (784 | )
|                               | Less reclassification adjustment for gains
included in net income |   |                              | (319   | )      |   |        | 112 |  |   |      | (207 | )
|                               |                                                                   |   |                              |        |        |   |        |     |  |   |      |     
|Other comprehensive loss       |                                                                   | $ | (1,524                       | )      |        | $ | 533    |     |  | $ | (991 | )   
|                               |                                                                   |   |                              |        |        |   |        |     |  |   |      |      |  

|                               |                                                                   |   |                              |        |        |   |        |       |  |   |        |        |  
|------------------------------ | ----------------------------------------------------------------- | - | ---------------------------- | ------ | ------ | - | ------ | ----- |  | - | ------ | ------ | -
|                               |                                                                   |   | Year ended December 31, 2002
|                               |                                                                   |   |                             
|                               |                                                                   |   | Pre-tax                      |        | Tax    |   | Net   
|                               |                                                                   |   | Amount                       |        | Effect |   | Amount
|                               |                                                                   |   |                              |        |        |   |       
|Unrealized loss on securities: |                                                                   |   |                              |        |        |   |        |       |  |   |        |       
|                               | Unrealized holding loss arising during the
period                 |   | $                            | (3,362 | )      |   | $      | 1,177 |  |   | $      | (2,185 | )
|                               | Less reclassification adjustment for gains
included in net income |   |                              | (867   | )      |   |        | 303   |  |   |        | (564   | )
|                               |                                                                   |   |                              |        |        |   |        |       |  |   |        |       
|Other comprehensive loss       |                                                                   | $ | (4,229                       | )      |        | $ | 1,480  |       |  | $ | (2,749 | )     
|                               |                                                                   |   |                              |        |        |   |        |       |  |   |        |        |  

|                               |                                                                   |   |                              |      |        |   |        |     |  |   |      |      |  
|------------------------------ | ----------------------------------------------------------------- | - | ---------------------------- | ---- | ------ | - | ------ | --- |  | - | ---- | ---- | -
|                               |                                                                   |   | Year ended December 31, 2001
|                               |                                                                   |   |                             
|                               |                                                                   |   | Pre-tax                      |      | Tax    |   | Net   
|                               |                                                                   |   | Amount                       |      | Effect |   | Amount
|                               |                                                                   |   |                              |      |        |   |       
|Unrealized loss on securities: |                                                                   |   |                              |      |        |   |        |     |  |   |      |     
|                               | Unrealized holding loss arising during the
period                 |   | $                            | (572 | )      |   | $      | 200 |  |   | $    | (372 | )
|                               | Less reclassification adjustment for gains
included in net income |   |                              | (151 | )      |   |        | 53  |  |   |      | (98  | )
|                               |                                                                   |   |                              |      |        |   |        |     |  |   |      |     
|Other comprehensive loss       |                                                                   | $ | (723                         | )    |        | $ | 253    |     |  | $ | (470 | )   
|                               |                                                                   |   |                              |      |        |   |        |     |  |   |      |      |  

(Continued)

F-28



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|(12) |  | Income Taxes                                                                                                                                                                               
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | The provision for income taxes has been allocated as follows, including
the tax effect of the changes in unrealized gains (losses) on available
for sale securities (dollars in thousands):

|                       |  |                          |        |      |  |      |        |   |  |   |        |  
|---------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                       |  | Years ended December 31,
|                       |  |                         
|                       |  | 2003                     |        | 2002 |  | 2001
|                       |  |                          |        |      |  |     
|Income from operations |  | $                        | 11,029 |      |  | $    | 14,974 |   |  | $ | 13,489 |  
|Stockholders equity   |  |                          | (533   | )    |  |      | (1,480 | ) |  |   | (253   | )
|                       |  |                          |        |      |  |      |        |   |  |   |        |  
|                       |  | $                        | 10,496 |      |  | $    | 13,494 |   |  | $ | 13,236 |  
|                       |  |                          |        |      |  |      |        |   |  |   |        |  



| |  | Components of the provision for income taxes from operations are as
follows (dollars in thousands):
| |  | ---------------------------------------------------------------------------------------------------

|                                      |  |                          |        |      |  |      |        |   |  |   |        | 
|------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                      |  | Years ended December 31,
|                                      |  |                         
|                                      |  | 2003                     |        | 2002 |  | 2001
|                                      |  |                          |        |      |  |     
|Current income tax expense            |  | $                        | 12,129 |      |  | $    | 17,472 |   |  | $ | 11,660 | 
|Deferred income tax (benefit) expense |  |                          | (1,100 | )    |  |      | (2,498 | ) |  |   | 1,829  | 
|                                      |  |                          |        |      |  |      |        |   |  |   |        | 
|                                      |  | $                        | 11,029 |      |  | $    | 14,974 |   |  | $ | 13,489 | 
|                                      |  |                          |        |      |  |      |        |   |  |   |        | 



| |  | The effective income tax rates differ from the statutory federal income
tax rate of 35%. A reconciliation of the provision for income taxes
based on the statutory rates with the effective rates is as follows
(dollars in thousands):
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   |                                                  |   |                          |        |      |   |        |        |   |   |        |        |  
|---------------------------------- | ------------------------------------------------ | - | ------------------------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                   |                                                  |   | Years ended December 31,
|                                   |                                                  |   |                         
|                                   |                                                  |   | 2003                     |        | 2002 |   | 2001  
|                                   |                                                  |   |                          |        |      |   |       
|Income tax at statutory rate (35%) |                                                  | $ | 13,693                   |        |      | $ | 15,396 |        |   | $ | 13,988 |       
|                                   | Effect of state income tax, net of federal       |   |                          | 1,477  |      |   |        | 1,212  |   |   |        | 1,220  |  
|                                   | Change in valuation allowance                    |   |                          | (1,477 | )    |   |        | (1,212 | ) |   |        | (1,220 | )
|                                   | Other, net                                       |   |                          | (1,195 | )    |   |        | (422   | ) |   |        | (499   | )
|                                   | Decrease in tax reserves relating to
prior years |   |                          | (1,204 | )    |   |        |       |   |   |        |       |  
|                                   | Refund of excise tax                             |   |                          | (265   | )    |   |        |       |   |   |        |       |  
|                                   |                                                  |   |                          |        |      |   |        |        |   |   |        |       
|                                   | Provision for income taxes                       |   | $                        | 11,029 |      |   | $      | 14,974 |   |   | $      | 13,489 |  
|                                   |                                                  |   |                          |        |      |   |        |        |   |   |        |       

(Continued)

F-29



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |  | Current income tax payable for 2003 and receivable for 2002 of
approximately $7,543,000 and $60,000 are included in the caption current
and deferred taxes, net in the consolidated statements of financial
condition at December 31, 2003 and 2002, respectively. Deferred income
tax assets and liabilities are included in current and deferred taxes,
net in the consolidated statements of financial condition and consisted
of the following (dollars in thousands):
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 |                                                   |  |              |        |      |  |        |        |  
|-------------------------------- | ------------------------------------------------- |  | ------------ | ------ | ---- |  | ------ | ------ | -
|                                 |                                                   |  | December 31,
|                                 |                                                   |  |             
|                                 |                                                   |  | 2003         |        | 2002
|                                 |                                                   |  |              |        |     
|Deferred income tax assets:      |                                                   |  |              |        |      |  |        |       
|                                 | State net operating loss carryforwards            |  | $            | 2,242  |      |  | $      | 2,140  |  
|                                 | Allowance for loan losses                         |  |              | 10,249 |      |  |        | 9,946  |  
|                                 | Accrued compensation                              |  |              | 3,960  |      |  |        | 2,608  |  
|                                 | Other                                             |  |              | 1,074  |      |  |        | 1,548  |  
|                                 |                                                   |  |              |        |      |  |        |       
|                                 |                                                   |  | 17,525       |        |      |  | 16,242 |       
|                                 |                                                   |  |              |        |      |  |        |       
|Deferred income tax liabilities: |                                                   |  |              |        |      |  |        |       
|                                 | Stock dividends receivable (FHLB)                 |  |              | (596   | )    |  |        | (596   | )
|                                 | Depreciation and amortization                     |  |              | (2,827 | )    |  |        | (2,231 | )
|                                 | Deferred loan fees                                |  |              | (597   | )    |  |        | (551   | )
|                                 | Unrealized gains on available for sale securities |  |              | (199   | )    |  |        | (732   | )
|                                 | Other                                             |  |              | (63    | )    |  |        | (624   | )
|                                 |                                                   |  |              |        |      |  |        |       
|                                 |                                                   |  | (4,282       | )      |      |  | (4,734 | )     
|                                 |                                                   |  |              |        |      |  |        |       
|                                 | Net deferred tax asset                            |  |              | 13,243 |      |  |        | 11,508 |  
|Valuation allowance              |                                                   |  | (2,242       | )      |      |  | (2,140 | )     
|                                 |                                                   |  |              |        |      |  |        |       
|                                 | Deferred tax asset, net                           |  | $            | 11,001 |      |  | $      | 9,368  |  
|                                 |                                                   |  |              |        |      |  |        |        |  



| |  | At December 31, 2003, the Company had approximately $57,000,000 of
operating loss carryforwards available for state income tax purposes.
The state net operating losses expire in varying amounts between 2011 and
2014.                                                                                                                                                                                                                                                                                                                                                                      
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During 1997, the Company established a valuation allowance for the
portion of the available state net operating loss carryforwards for which
it was determined to be more likely than not that the benefit of the
deferred tax asset would not be realized. Based on the strategy of
current management and federal taxable income for the years ended
December 31, 2003, 2002 and 2001, no valuation allowance for other
deferred tax assets has been established as the Company believes it is
more likely than not that sufficient income for federal income tax
purposes will be realized.
|
| |  | As a result of the Small Business Job Protection Act, the Company was
required to change its method of accounting for bad debts from the
reserve method to the direct charge-off method for income tax purposes
during 1997. The Company is required to recapture the excess of the
qualifying and nonqualifying tax loan loss reserves over the base year
tax loan loss reserves over                                                                                                                                                                                                        

(Continued)

F-30



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|     |  | a six-year period, beginning in its tax year ended June 30, 1999. At
December 31, 2003, the recapture amount is estimated to be $0 and the
qualifying and nonqualifying base year tax reserves totaled approximately
$10,647,000 and $1,421,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred
tax liability has not been recognized for the tax bad debt reserve and
supplemental reserves of the Company that arose in tax years that began
prior to December 31, 1987. At December 31, 2003, the portion of the tax
bad debt reserve and supplemental reserves attributable to pre-1988 tax
years was approximately $15,921,000. The amount of unrecognized deferred
tax liability at December 31, 2003 was approximately $5,572,000. This
deferred tax liability could be recognized if certain distributions are
made with respect to the stock of Local, or the bad debt reserve is used
for any purpose other than absorbing bad debt losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|     |  | The Company has two tax contingencies. The first relates to deductions
taken on amended returns filed during 2003 for the tax years ended June
30, 1999 through December 31, 2001. The refunds requested on these
amended returns amounted to approximately $7,000,000. At December 31,
2003, the Company has received approximately $2,000,000 of the total
refund requested. Until such time as all the refunds have been resolved
with the IRS, the Company has established a reserve equal to the
$2,000,000 received and has not recognized any benefit for the remaining
$5,000,000. The second tax contingency, which is also approximately
$7,000,000, relates to permanent differences applicable to prior periods
taken as deductions in 2002 and was received by the Company during 2003.
The Company has recorded a reserve equal to the amounts received pending
final resolution with the IRS. Both reserves are included in current
income taxes payable. The increase in the deferred tax asset for state
net operating losses relating to these two tax contingencies of
approximately $1,579,000 has been fully reserved in the deferred tax
valuation allowance at December 31, 2003.
|    
|(13) |  | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    
|     |  | Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each
customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Company upon
extension of credit, is based on managements credit evaluation of the
counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and
income-producing commercial properties. At December 31, 2003 and 2002,
the Company had approximately $410,241,000 and $342,764,000,
respectively, of outstanding loan commitments (including unused lines of
credit) for home equity, commercial real estate and commercial business
loans approved but nonfunded.                                                                                                                                                                                                                                                    
|    
|     |  | Standby letters of credit and financial guarantees written of
approximately $10,642,000 and $9,488,000 at December 31, 2003 and 2002,
respectively, are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The Company holds marketable securities as collateral
supporting those commitments for which collateral is deemed necessary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

(Continued)

F-31



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |  | The Company leases certain real estate and equipment under operating
leases. For the years ended December 31, 2003, 2002 and 2001, lease
expense totaled approximately $1,142,000, $1,120,000 and $1,068,000,
respectively. Future obligations under operating leases at December 31,
2003 are summarized as follows (dollars in thousands):
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          |  |        |   |           | 
|------------------------- |  | ------ | - | --------- | 
|Years ending December 31, |  | Amount
|                          |  |       
|2004                      |  |        | $ | 962,805   | 
|2005                      |  |        |   | 825,228   | 
|2006                      |  |        |   | 599,272   | 
|2007                      |  |        |   | 465,016   | 
|2008 and thereafter       |  |        |   | 4,426,522 | 
|                          |  |        |   |           | 
|                          |  |        | $ | 7,278,843 | 
|                          |  |        |   |           | 



| |  | The Company has been involved in litigation with the U.S. Government.
The litigation related to an assistance agreement entered into by the
Company with the FDIC in connection with an acquisition of a federal
savings bank in 1988. Prior to the purchase of the Company in 1997 from
its two prior owners, a reserve account in the amount of approximately
$7,673,000 had been established relating to amounts that might be owed
under the assistance agreement. Additionally, as part of the purchase of
the Company in 1997, $10,000,000 of the purchase price was deposited by
the Company into an escrow account, of which $9,943,000 remained on
deposit. Any amounts the Company might ultimately owe to the FDIC had to
be paid first from these two accounts. If the amounts in these two
accounts were not sufficient to satisfy the Companys obligations to the
FDIC, the prior owners had contractually agreed to pay the difference.                                                                                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | After protracted negotiations between the Company, the prior owners and
the FDIC, on December 30, 2002, the liability owed to the FDIC under the
litigation was settled for approximately $24,660,000 net of the set off
of certain uncollected assistance, and the 1988 assistance agreement with
the FDIC was completely terminated. As part of this settlement, all
monies held in the above-mentioned reserve account and escrow account
were paid to the FDIC. The remaining portions of the total amount paid
to the FDIC under the terms of the settlement were (i) a cash payment by
the Company in the sum of $2,177,000 which was equal to the unrecorded
tax benefit received by the Company for the income tax deduction that
became available for it to apply on its 2002 federal income tax liability
as the Company is able to deduct the interest portion of the total
payment being made to the FDIC; and (ii) the prior owners cash payment
of the entire remaining balance required to be paid to the FDIC in the
settlement amounting to approximately $4,867,000. As a result of the
foregoing, any potential liability of the Company to the FDIC has now
been fully and completely resolved without any adverse financial effect
on the Company.
|
| |  | Pursuant to the terms of the Settlement and Termination Agreement with
the FDIC, the Company reserved its claim regarding the elimination of
certain tax benefits which would otherwise have been available to the
Company had it not been for the enactment of Section 13224 of the Omnibus
Budget Reconciliation Act of 1993 (OBRA). A Resolution and Modification
Agreement was entered into between the prior owners and the Company under
which the prior owners agreed to pay all attorney fees and all
third-party costs and expenses as they are incurred                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

(Continued)

F-32



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|     |  | by the Company in prosecution of the claim to a conclusion. Under the
terms of this agreement the prior owners are entitled to be paid
substantially all of any award or settlement payment received by the
Company pursuant to such claim net of taxes, if any. The Company does
not anticipate incurring any liability, loss, damage or material expense
with regard to its continuing prosecution of the OBRA claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | In the ordinary course of business, the Company is subject to other legal
actions and complaints. Management, after consultation with legal
counsel, and based on available facts and proceedings to date, believes
the ultimate liability, if any, arising from such legal actions or
complaints, will not have a material adverse effect on the Companys
consolidated financial position or future results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(14) |  | Regulatory Matters                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|     |  | Local Financial and Local are subject to various regulatory capital
requirements administered by the Federal Reserve and the Oklahoma State
Banking Department. Failure to meet minimum capital requirements can
initiate certain mandatoryand possible additional
discretionaryactions by regulators that, if undertaken, could have a
direct material effect on Local Financials and Locals consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Local Financial and
Local must meet specific capital guidelines that involve quantitative
measures of Local Financials and Locals assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Local Financials and Locals capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
|    
|     |  | Quantitative measures established by regulation to ensure capital
adequacy require Local Financial and Local to maintain minimum amounts
and ratios (set forth in the following table) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and
of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2003, that Local Financial and
Local met all capital adequacy requirements to which they are subject.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|     |  | As of December 31, 2003 and 2002, the most recent notification from the
Federal Reserve and the Oklahoma State Banking Department categorized
Local and Local Financial as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized Local and Local Financial must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since those notifications
that management believes have changed Locals and Local Financials
category.                                                                                                                                                                                                                                                                                                                                                                                   

(Continued)

F-33



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001

|                         |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                       |  |  |      |   |  |                        |         |  |  |  |       |  
|------------------------ | ---------------------------------------- |  | ------ | ------- | ----------------- |  | ----------------- | ----- | ----- |  | ---------------------- | ------- | --------------------- |  |  | ---- | - |  | ---------------------- | ------- |  |  |  | ----- | -
|                         |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                       |  |  |      |   |  | To Be Well Capitalized
|                         |                                          |  |        |         |                   |  |                   |       |       |  | Minimum For Capital    |         | For Prompt Corrective
|                         |                                          |  | Actual |         | Adequacy Purposes |  | Action Provisions
|                         |                                          |  |        |         |                   |  |                  
|                         |                                          |  | Amount |         | Ratio             |  | Amount            |       | Ratio |  | Amount                 |         | Ratio                
|                         |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                      
|                         |                                          |  |        |         |                   |  |                   |       |       |  | (dollars in thousands) |         |                       |  |  |      |   |  |                       
|Local Financial          |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                       |  |  |      |   |  |                        |         |  |  |  |      
|As of December 31, 2003: |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                       |  |  |      |   |  |                        |         |  |  |  |      
|                         | Total capital (to risk weighted assets)  |  | $      | 243,004 |                   |  |                   | 11.23 | %     |  | $                      | 173,179 |                       |  |  | 8.00 | % |  | $                      | 216,474 |  |  |  | 10.00 | %
|                         | Tier I capital (to risk weighted assets) |  |        | 214,008 |                   |  |                   | 9.89  |       |  |                        | 86,590  |                       |  |  | 4.00 |   |  |                        | 129,884 |  |  |  | 6.00  |  
|                         | Tier I capital (to average assets)       |  |        | 214,008 |                   |  |                   | 7.45  |       |  |                        | 114,829 |                       |  |  | 4.00 |   |  |                        | 143,536 |  |  |  | 5.00  |  
|Local                    |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                       |  |  |      |   |  |                        |         |  |  |  |      
|As of December 31, 2003: |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                       |  |  |      |   |  |                        |         |  |  |  |      
|                         | Total capital (to risk weighted assets)  |  | $      | 261,363 |                   |  |                   | 12.09 | %     |  | $                      | 172,991 |                       |  |  | 8.00 | % |  | $                      | 216,239 |  |  |  | 10.00 | %
|                         | Tier I capital (to risk weighted assets) |  |        | 234,288 |                   |  |                   | 10.83 |       |  |                        | 86,496  |                       |  |  | 4.00 |   |  |                        | 129,744 |  |  |  | 6.00  |  
|                         | Tier I capital (to average assets)       |  |        | 234,288 |                   |  |                   | 8.17  |       |  |                        | 114,734 |                       |  |  | 4.00 |   |  |                        | 143,418 |  |  |  | 5.00  |  
|Local Financial          |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                       |  |  |      |   |  |                        |         |  |  |  |      
|As of December 31, 2002: |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                       |  |  |      |   |  |                        |         |  |  |  |      
|                         | Total capital (to risk weighted assets)  |  | $      | 232,492 |                   |  |                   | 11.45 | %     |  | $                      | 162,398 |                       |  |  | 8.00 | % |  | $                      | 202,998 |  |  |  | 10.00 | %
|                         | Tier I capital (to risk weighted assets) |  |        | 195,752 |                   |  |                   | 9.64  |       |  |                        | 81,199  |                       |  |  | 4.00 |   |  |                        | 121,799 |  |  |  | 6.00  |  
|                         | Tier I capital (to average assets)       |  |        | 195,752 |                   |  |                   | 7.01  |       |  |                        | 111,752 |                       |  |  | 4.00 |   |  |                        | 139,691 |  |  |  | 5.00  |  
|Local                    |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                       |  |  |      |   |  |                        |         |  |  |  |      
|As of December 31, 2002: |                                          |  |        |         |                   |  |                   |       |       |  |                        |         |                       |  |  |      |   |  |                        |         |  |  |  |      
|                         | Total capital (to risk weighted assets)  |  | $      | 250,683 |                   |  |                   | 12.37 | %     |  | $                      | 162,185 |                       |  |  | 8.00 | % |  | $                      | 202,732 |  |  |  | 10.00 | %
|                         | Tier I capital (to risk weighted assets) |  |        | 225,288 |                   |  |                   | 11.11 |       |  |                        | 81,093  |                       |  |  | 4.00 |   |  |                        | 121,639 |  |  |  | 6.00  |  
|                         | Tier I capital (to average assets)       |  |        | 225,288 |                   |  |                   | 8.07  |       |  |                        | 111,651 |                       |  |  | 4.00 |   |  |                        | 139,564 |  |  |  | 5.00  |  



|     |  | Management intends to continue compliance with all regulatory capital
requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | State regulations allow Local to pay dividends during a calendar year up
to the amount that would reduce its surplus capital ratio, as defined, to
one-half of its surplus capital ratio at the beginning of the calendar
year, adjusted to reflect its net income to date during the calendar
year. At the beginning of calendar year 2004, under applicable
regulations without prior regulatory consent, the total capital available
for the payment of dividends by Local to Local Financial was
approximately $36,222,000.
|    
|(15) |  | Stockholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    
|     |  | During 2003, the Company increased its shares of treasury stock as part
of a stock repurchase program in which the Company purchased 1,379,100
shares of its common stock at a cost of approximately $21,028,000. The
increase in common stock and additional paid-in capital during the year
ended December 31, 2003 of approximately $1,485,000 included the exercise
of 130,550 options to purchase the Companys stock.                                                                                                    

(Continued)

F-34



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|     |  | During the year ended December 31, 2002, the Company increased its
treasury stock by 1,739,300 shares at a cost of approximately
$24,752,000. The increase in common stock and additional paid-in capital
during the year ended December 31, 2002 of approximately $2,830,000
included the exercise of 196,365 options and 128,333 warrants, which was
somewhat offset by the 125,000 warrants purchased.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(16) |  | Employee Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|     |  | On November 1, 1999, the Company established a nonleveraged employee
stock ownership plan (the ESOP Plan) that covers substantially all of its
full-time employees. Contributions to the ESOP Plan are discretionary as
determined by the Board of Directors of the Company. Contributions shall
be allocated and credited to those participants who accrue credited
service for such plan year and who are employed on the last day of the
plan year. Contributions will be allocated to participants in the ratio
in which each participants compensation bears to the total compensation
of all participants. Common stock of the Company credited to Plan
participants amounting to approximately 289,000 and 263,000 shares were
being held by the ESOP Plan at December 31,2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|     |  | The Company has a qualified, contributory 401(k) plan. Eligible
employees of the Company may elect to defer a portion of their salary and
contribute to the 401(k) plan to fund retirement benefits. Effective
October 1, 2001, the 401(k) plan was amended to allow Company matching
contributions of 100% of a participants elective 401(k) deferral not to
exceed 2% of a participants eligible compensation. The cost of this
benefit for the years ended December 31, 2003, 2002 and 2001 was
approximately $537,000, $500,000 and $125,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(17) |  | Fair Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    
|     |  | SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that the Company disclose estimated fair values for its
financial instruments. Fair value estimates, methods and assumptions set
forth below for the Companys financial instruments, are made solely to
comply with the requirements of SFAS No. 107.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|     |  | Fair values are based on estimates or calculations at the transaction
level using present value techniques in instances where quoted market
prices are not available. Because broadly traded markets do not exist
for most of the Companys financial instruments, the fair value
calculations attempt to incorporate the effect of current market
conditions at a specific time. Fair valuations are managements
estimates of the values, and they are often calculated based on current
pricing policy, the economic and competitive environment, the
characteristics of the financial instruments, expected losses and other
such factors. These calculations are subjective in nature, involve
uncertainties and matters of significant judgment and do not include tax
ramifications; therefore, the results cannot be determined with
precision, substantiated by comparison to independent markets and may not
be realized in an actual sale or immediate settlement of the instruments.
The Company has not included certain material items in its disclosure,
such as the value of the long-term relationships with the Companys
depositors, since this intangible is not a financial instrument. There
may be inherent weaknesses in any calculation technique, and changes in
the underlying assumptions used, including discount rates and estimates
of future cash

(Continued)

F-35



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |  | flows, could significantly affect the results. For all of these reasons,
the aggregation of the fair value calculations presented herein do not
represent, and should not be construed to represent, the underlying value
of the Company.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table presents a summary of the Companys financial
instruments, as defined by SFAS No. 107 (dollars in thousands):                                                                                                        

|                      |                                                   |  |                   |           |                   |  |          |           |            |  |   |           |  |  |   |           | 
|--------------------- | ------------------------------------------------- |  | ----------------- | --------- | ----------------- |  | -------- | --------- | ---------- |  | - | --------- |  |  | - | --------- | 
|                      |                                                   |  | December 31, 2003 |           | December 31, 2002
|                      |                                                   |  |                   |           |                  
|                      |                                                   |  | Carrying          |           | Estimated         |  | Carrying |           | Estimated 
|                      |                                                   |  | Value             |           | Fair Value        |  | Value    |           | Fair Value
|                      |                                                   |  |                   |           |                   |  |          |           |           
|Financial Assets      |                                                   |  |                   |           |                   |  |          |           |            |  |   |           |  |  |   |          
|                      | Cash and cash equivalents                         |  | $                 | 83,146    |                   |  | $        | 83,146    |            |  | $ | 58,366    |  |  | $ | 58,366    | 
|                      | Securities available for sale                     |  |                   | 99,853    |                   |  |          | 99,853    |            |  |   | 163,473   |  |  |   | 163,473   | 
|                      | Securities held to maturity                       |  |                   | 277,571   |                   |  |          | 275,170   |            |  |   | 364,832   |  |  |   | 374,688   | 
|                      | Loans receivable, net                             |  |                   | 2,240,565 |                   |  |          | 2,268,975 |            |  |   | 2,084,144 |  |  |   | 2,138,602 | 
|                      | FHLB stock and FRB stock                          |  |                   | 39,813    |                   |  |          | 39,813    |            |  |   | 38,187    |  |  |   | 38,187    | 
|Financial Liabilities |                                                   |  |                   |           |                   |  |          |           |            |  |   |           |  |  |   |          
|                      | Deposits                                          |  |                   | 1,898,950 |                   |  |          | 1,909,927 |            |  |   | 1,829,439 |  |  |   | 1,843,827 | 
|                      | Advances from the FHLB                            |  |                   | 637,219   |                   |  |          | 676,666   |            |  |   | 684,193   |  |  |   | 735,451   | 
|                      | Securities sold under agreements
to repurchase    |  |                   | 66,367    |                   |  |          | 66,367    |            |  |   | 59,696    |  |  |   | 59,696    | 
|                      | Senior Notes                                      |  |                   | 21,295    |                   |  |          | 22,140    |            |  |   | 21,295    |  |  |   | 23,153    | 
|                      | Junior subordinated debentures                    |  |                   | 62,115    |                   |  |          | 64,887    |            |  |   |          |  |  |   |          | 
|                      | Mandatorily redeemable trust
preferred securities |  |                   |          |                   |  |          |          |            |  |   | 60,250    |  |  |   | 61,216    | 



| |  | The following are descriptions of the methods used to determine the
estimated fair values:
| |  | ------------------------------------------------------------------------------------------



| | (a) |  | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The carrying amount is a reasonable estimate of fair value because
of the relatively short period of time between the origination of
the instrument and its expected realization.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (b) |  | Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |     |  | The fair value of investment securities, except certain municipal
securities, is estimated based on bid prices published by financial
news services or price quotations received from securities dealers.
The fair value of certain municipal securities is not readily
available through market sources other than dealer quotations, so
fair value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted
instruments and the instruments being valued. The estimated fair
value of FHLB and FRB stock approximates the carrying value as of
December 31, 2003 and 2002.

(Continued)

F-36



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| | (c) |  | Loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The fair valuation calculation process differentiates loans based
on their financial characteristics, such as product classification,
loan category, pricing features and remaining maturity. Prepayment
estimates are evaluated by product and loan rate. In establishing
the credit risk component of the fair value calculations for loans,
the Company considered several approaches, including the use of
variable discount rates based on relative credit quality,
forecasting cash flows, net of projected losses and secondary
market pricing for certain third party loan sale transactions.
After evaluating such information, the Company concluded that the
allowance for loan losses represented a reasonable estimate of the
credit risk component of the fair value of loans at December 31,
2003 and 2002.
|
| |     |  | The fair value of commercial real estate loans, other real estate
mortgage loans, real estate construction loans, and commercial
business loans is calculated by discounting contractual cash flows
adjusted for prepayment estimates using discount rates that reflect
the Companys current pricing for loans with similar
characteristics and remaining maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |     |  | For real estate single family first and junior lien mortgages, fair
value is calculated by discounting contractual cash flows, adjusted
for prepayment estimates, using discount rates based on the
Companys current pricing for loans of similar size, type,
remaining maturity and repricing characteristics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |     |  | For other consumer loans, the fair value is calculated by
discounting the contractual cash flows, adjusted for prepayment
estimates, using discount rates based on the Companys current
pricing for loans of similar size, type, and remaining maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (d) |  | Deposit Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |     |  | SFAS No. 107 states that the fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits,
interest-bearing checking and savings deposits and market rate
savings, is equal to the amount payable on demand at the
measurement date. Although SFAS No. 107s requirements for these
categories are not consistent with the market practice of using
prevailing interest rates to value these amounts, the amount
included for these deposits in the previous table is their carrying
value at December 31, 2003 and 2002. The fair value of
certificates of deposit and other time deposits is calculated based
on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for similar
duration deposits.                         
|
| | (e) |  | All Other Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | The estimated fair value of FHLB advances is provided by the FHLB
of Topeka. For securities sold under agreements to repurchase, the
carrying amount is a reasonable estimate of fair value due to the
short maturity. The estimated fair value of Senior Notes,
mandatorily redeemable trust preferred securities and the junior
subordinated debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

(Continued)

F-37



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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



| |     |  | is based on current quoted market prices. Commitments to extend
credit are related primarily to variable rate loans originated at
current market rates. The estimate of fair value of these
commitments is considered to be immaterial.                   
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (f) |  | Limitations                                                                                                                                                                                                                                               
|
| |     |  | The information presented in this note is based on market quotes
and fair value calculations as of December 31, 2003 and 2002.
These amounts have not been updated since these dates; therefore,
the valuations may have changed since that point in time.

(Continued)

F-38



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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|(18) |  | Supplemental Quarterly Financial Information (unaudited)                                                                                                           
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | Following is a summary of the unaudited interim results of operations for
the years ended December 31, 2003 and 2002 (dollars in thousands, except
per share data):

|                                         |            |         |        |         |      |         |        |         |      |        |        |      |      |  |        |  |      |  |         |  |      | 
|---------------------------------------- | ---------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | ---- | ------ | ------ | ---- | ---- |  | ------ |  | ---- |  | ------- |  | ---- | 
|                                         |            |         |        | First   |      | Second  |        | Third   |      | Fourth |        | Full
|2003                                     |            | Quarter |        | Quarter |      | Quarter |        | Quarter |      | Year  
|                                         |            |         |        |         |      |         |        |         |      |       
|Interest income                          |            | $       | 39,694 |         |      |         | 37,313 |         |      |        | 36,928 |      |      |  | 36,869 |  |      |  | 150,804 | 
|Net interest income                      |            | $       | 22,341 |         |      |         | 20,645 |         |      |        | 20,481 |      |      |  | 21,030 |  |      |  | 84,497  | 
|Provision for loan losses                |            | $       | 1,800  |         |      |         | 1,800  |         |      |        | 1,500  |      |      |  | 1,500  |  |      |  | 6,600   | 
|Income before provision for income taxes |            | $       | 10,631 |         |      |         | 10,732 |         |      |        | 9,740  |      |      |  | 8,021  |  |      |  | 39,124  | 
|Net income                               |            | $       | 7,070  |         |      |         | 7,091  |         |      |        | 6,950  |      |      |  | 6,984  |  |      |  | 28,095  | 
|Earnings per share:                      |            |         |        |         |      |         |        |         |      |        |        |      |      |  |        |  |      |  |         | 
|                                         | Net income |         |        |         |      |         |        |         |      |        |        |      |      |  |        |  |      |  |         |  |     
|                                         |            | Basic   |        | $       | 0.40 |         |        |         | 0.41 |        |        |      | 0.41 |  |        |  | 0.42 |  |         |  | 1.65 | 
|                                         |            | Diluted |        | $       | 0.38 |         |        |         | 0.40 |        |        |      | 0.40 |  |        |  | 0.40 |  |         |  | 1.58 | 

|                                         |            |         |        |         |      |         |        |         |      |        |        |      |      |  |        |  |      |  |         |  |      | 
|---------------------------------------- | ---------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | ---- | ------ | ------ | ---- | ---- |  | ------ |  | ---- |  | ------- |  | ---- | 
|                                         |            |         |        | First   |      | Second  |        | Third   |      | Fourth |        | Full
|2002                                     |            | Quarter |        | Quarter |      | Quarter |        | Quarter |      | Year  
|                                         |            |         |        |         |      |         |        |         |      |       
|Interest income                          |            | $       | 45,016 |         |      |         | 44,147 |         |      |        | 44,542 |      |      |  | 41,788 |  |      |  | 175,493 | 
|Net interest income                      |            | $       | 23,197 |         |      |         | 22,894 |         |      |        | 23,831 |      |      |  | 22,709 |  |      |  | 92,631  | 
|Provision for loan losses                |            | $       | 1,800  |         |      |         | 1,800  |         |      |        | 1,500  |      |      |  | 1,500  |  |      |  | 6,600   | 
|Income before provision for income taxes |            | $       | 10,585 |         |      |         | 11,171 |         |      |        | 11,478 |      |      |  | 10,755 |  |      |  | 43,989  | 
|Net income                               |            | $       | 7,079  |         |      |         | 7,465  |         |      |        | 7,370  |      |      |  | 7,101  |  |      |  | 29,015  | 
|Earnings per share:                      |            |         |        |         |      |         |        |         |      |        |        |      |      |  |        |  |      |  |         | 
|                                         | Net income |         |        |         |      |         |        |         |      |        |        |      |      |  |        |  |      |  |         |  |     
|                                         |            | Basic   |        | $       | 0.37 |         |        |         | 0.39 |        |        |      | 0.39 |  |        |  | 0.39 |  |         |  | 1.53 | 
|                                         |            | Diluted |        | $       | 0.36 |         |        |         | 0.37 |        |        |      | 0.37 |  |        |  | 0.38 |  |         |  | 1.48 | 

(Continued)

F-39



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|(19) |  | Parent Company Financial information                                                                 
|---- |  | -----------------------------------------------------------------------------------------------------
|    
|     |  | Condensed financial information for Local Financial Corporation is as
follows (dollars in thousands):

Statements of Financial Condition

|                                      |                                             |                                            |   |              |         |      |   |          |         | 
|------------------------------------- | ------------------------------------------- | ------------------------------------------ | - | ------------ | ------- | ---- | - | -------- | ------- | 
|                                      |                                             |                                            |   | December 31,
|                                      |                                             |                                            |   |             
|                                      |                                             |                                            |   | 2003         |         | 2002
|                                      |                                             |                                            |   |              |         |     
|Assets:                               |                                             |                                            |   |              |         |      |   |         
|                                      | Cash and due from banks                     |                                            | $ | 504          |         |      | $ | 778      |        
|                                      | Investment in subsidiaries                  |                                            |   | 258,145      |         |      |   | 250,500  |        
|                                      | Other assets                                |                                            |   | 1,289        |         |      |   | 1,155    |        
|                                      |                                             |                                            |   |              |         |      |   |         
|                                      |                                             | Total assets                               |   | $            | 259,938 |      |   | $        | 252,433 | 
|                                      |                                             |                                            |   |              |         |      |   |          |        
|Liabilities and stockholders equity: |                                             |                                            |   |              |         |      |   |         
|                                      | Senior Notes                                |                                            | $ | 21,295       |         |      | $ | 21,295   |        
|                                      | Other liabilities                           |                                            |   | 1,087        |         |      |   | 1,143    |        
|                                      | Junior subordinated debentures              |                                            |   | 62,115       |         |      |   | 62,115   |        
|                                      |                                             |                                            |   |              |         |      |   |         
|                                      |                                             | Total liabilities                          |   |              | 84,497  |      |   |          | 84,553  | 
|                                      |                                             |                                            |   |              |         |      |   |         
|                                      | Common stock                                |                                            |   | 210          |         |      |   | 209      |        
|                                      | Additional paid-in capital                  |                                            |   | 210,083      |         |      |   | 208,599  |        
|                                      | Retained earnings                           |                                            |   | 179,590      |         |      |   | 151,495  |        
|                                      | Treasury stock                              |                                            |   | (214,811     | )       |      |   | (193,783 | )      
|                                      | Accumulated other comprehensive
income, net |                                            |   | 369          |         |      |   | 1,360    |        
|                                      |                                             |                                            |   |              |         |      |   |         
|                                      |                                             | Total stockholders equity                 |   |              | 175,441 |      |   |          | 167,880 | 
|                                      |                                             |                                            |   |              |         |      |   |         
|                                      |                                             | Total liabilities and stockholders equity |   | $            | 259,938 |      |   | $        | 252,433 | 
|                                      |                                             |                                            |   |              |         |      |   |          |        

(Continued)

F-40



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001

Statements of Operations

|                                       |                                                  |               |        |                          |        |      |        |        |        |  |        |        |        | 
|-------------------------------------- | ------------------------------------------------ | ------------- | ------ | ------------------------ | ------ | ---- | ------ | ------ | ------ |  | ------ | ------ | ------ | 
|                                       |                                                  |               |        | Years ended December 31,
|                                       |                                                  |               |        |                         
|                                       |                                                  |               |        | 2003                     |        | 2002 |        | 2001  
|                                       |                                                  |               |        |                          |        |      |        |       
|Income:                                |                                                  |               |        |                          |        |      |        |        |        |  |        |       
|                                       | Dividend income from subsidiaries                |               | $      | 24,642                   |        |      | $      | 6,422  |        |  | $      | 6,431  |       
|                                       | Equity in undistributed earnings
of subsidiaries |               |        | 8,636                    |        |      |        | 27,163 |        |  |        | 25,122 |       
|                                       |                                                  |               |        |                          |        |      |        |        |        |  |        |       
|                                       |                                                  | Total income  |        |                          | 33,278 |      |        |        | 33,585 |  |        |        | 31,553 | 
|Expense:                               |                                                  |               |        |                          |        |      |        |        |        |  |        |       
|                                       | Interest expense                                 |               |        | 7,261                    |        |      |        | 6,614  |        |  |        | 5,346  |       
|                                       | Directors fees                                  |               |        | 153                      |        |      |        | 90     |        |  |        | 104    |       
|                                       | Other                                            |               |        | 525                      |        |      |        | 446    |        |  |        | 2,984  |       
|                                       |                                                  |               |        |                          |        |      |        |        |        |  |        |       
|                                       |                                                  | Total expense |        |                          | 7,939  |      |        |        | 7,150  |  |        |        | 8,434  | 
|Income before benefit for income taxes |                                                  |               | 25,339 |                          |        |      | 26,435 |        |        |  | 23,119 |       
|                                       | Benefit for income taxes                         |               |        | (2,756                   | )      |      |        | (2,580 | )      |  |        | (3,358 | )     
|                                       |                                                  |               |        |                          |        |      |        |        |        |  |        |       
|                                       |                                                  | Net income    |        | $                        | 28,095 |      |        | $      | 29,015 |  |        | $      | 26,477 | 
|                                       |                                                  |               |        |                          |        |      |        |        |        |  |        |        |       

(Continued)

F-41



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##### Table of Contents



LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001

Statements of Cash Flows

|                                                     |                                                                                              |                                                  |         |                          |        |      |        |         |         |   |        |         |         |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------- | ------------------------ | ------ | ---- | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                                                     |                                                                                              |                                                  |         | Years ended December 31,
|                                                     |                                                                                              |                                                  |         |                         
|                                                     |                                                                                              |                                                  |         | 2003                     |        | 2002 |        | 2001   
|                                                     |                                                                                              |                                                  |         |                          |        |      |        |        
|Cash provided (absorbed) by operating activities     |                                                                                              |                                                  |         |                          |        |      |        |         |         |   |        |        
|                                                     | Net income                                                                                   |                                                  | $       | 28,095                   |        |      | $      | 29,015  |         |   | $      | 26,477  |        
|                                                     | Adjustments to reconcile net income to net
cash provided (absorbed) by operating
activities: |                                                  |         |                          |        |      |        |         |         |   |        |         |        
|                                                     |                                                                                              | Equity in undistributed earnings of
subsidiaries |         |                          | (8,636 | )    |        |         | (27,163 | ) |        |         | (25,122 | )
|                                                     |                                                                                              | Change in other liabilities                      |         |                          | (56    | )    |        |         | 279     |   |        |         | (669    | )
|                                                     |                                                                                              | Change in other assets                           |         |                          | 46     |      |        |         | 1,581   |   |        |         | (663    | )
|                                                     |                                                                                              |                                                  |         |                          |        |      |        |         |         |   |        |        
|Net cash provided by operating activities            |                                                                                              |                                                  | 19,449  |                          |        |      | 3,712  |         |         |   | 23     |        
|Cash absorbed by investing activities:               |                                                                                              |                                                  |         |                          |        |      |        |         |         |   |        |        
|                                                     | Investment in subsidiaries                                                                   |                                                  |         |                         |        |      |        | (1,314  | )       |   |        | (3,194  | )      
|                                                     |                                                                                              |                                                  |         |                          |        |      |        |         |         |   |        |        
|Net cash absorbed by investing activities            |                                                                                              |                                                  |        |                          |        |      | (1,314 | )       |         |   | (3,194 | )      
|Cash provided (absorbed) by financing activities:    |                                                                                              |                                                  |         |                          |        |      |        |         |         |   |        |        
|                                                     | Proceeds from issuance of common stock                                                       |                                                  |         | 1,305                    |        |      |        | 3,247   |         |   |        | 19      |        
|                                                     | Purchase of treasury stock                                                                   |                                                  |         | (21,028                  | )      |      |        | (24,752 | )       |   |        | (17,757 | )      
|                                                     | Purchase of Senior Notes                                                                     |                                                  |         |                         |        |      |        | (250    | )       |   |        | (19,615 | )      
|                                                     | Proceeds from issuance of junior subordinated
debentures                                     |                                                  |         |                         |        |      |        | 20,620  |         |   |        | 41,495  |        
|                                                     | Purchase of stock warrants                                                                   |                                                  |         |                         |        |      |        | (721    | )       |   |        | (1,004  | )      
|                                                     |                                                                                              |                                                  |         |                          |        |      |        |         |         |   |        |        
|Net cash provided (absorbed) by financing activities |                                                                                              |                                                  | (19,723 | )                        |        |      | (1,856 | )       |         |   | 3,138  |        
|Net change in cash and cash equivalents              |                                                                                              |                                                  | (274    | )                        |        |      | 542    |         |         |   | (33    | )      
|Cash and cash equivalents at beginning of year       |                                                                                              |                                                  | 778     |                          |        |      | 236    |         |         |   | 269    |        
|                                                     |                                                                                              |                                                  |         |                          |        |      |        |         |         |   |        |        
|Cash and cash equivalents at end of year             |                                                                                              | $                                                | 504     |                          |        | $    | 778    |         |         | $ | 236    |        
|                                                     |                                                                                              |                                                  |         |                          |        |      |        |         |         |   |        |        

F-42