##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934  For the quarterly period ended March 31, 2004
 OR o
    
    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:
001-13949 LOCAL FINANCIAL CORPORATION  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    65-0424192
(I.R.S. Employer
Identification No.)
 3601 N.W. 63RD, OKLAHOMA CITY, OK
    
    73116(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (405) 841-2298 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o Number of shares outstanding of the registrants $0.01 par value common
stock as of May 3, 2004 were as follows: 16,644,073




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LOCAL FINANCIAL CORPORATION
INDEX PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Statements of Financial Condition-
March 31, 2004 (unaudited) and December 31, 2003
    
    
    1Consolidated Statements of Operations-
For the Three Months Ended March 31, 2004 and 2003 (unaudited)
    
    
    2Consolidated Statements of Cash Flows-
For the Three Months Ended March 31, 2004 and 2003 (unaudited)
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    17Item 6. Exhibits and Reports on Form 8-K
    
    
    17Signatures
    
    
    19Index to Exhibits
    
    
    20Certification as Adopted Pursuant to Section 302Certification as Adopted Pursuant to Section 302Certification as Adopted Pursuant to Section 906




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS 
 LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share data) March 31, 2004
    
    December 31, 2003(unaudited)AssetsCash and due from banks
    
    $
    49,716
    
    
    $
    58,746Interest bearing deposits with other banks
    
    
    47,200
    
    
    
    24,400Securities:Available for sale
    
    
    118,923
    
    
    
    99,853Held to maturity
    
    
    264,526
    
    
    
    277,571Total securities
    
    
    383,449
    
    
    
    377,424Loans receivable, net of allowance for loan losses of $31,980 at
March 31, 2004 and $30,398 at December 31, 2003
    
    
    2,200,062
    
    
    
    2,240,565Federal Home Loan Bank of Topeka and Federal Reserve Bank stock, at cost
    
    
    40,126
    
    
    
    39,813Premises and equipment, net
    
    
    43,636
    
    
    
    43,625Assets acquired through foreclosure and repossession, net
    
    
    195
    
    
    
    893Intangible assets, net
    
    
    19,303
    
    
    
    19,374Current and deferred taxes, net
    
    
    60
    
    
    
    3,458Other assets
    
    
    74,901
    
    
    
    73,245Total assets
    
    $
    2,858,648
    
    
    $
    2,881,543Liabilities and Stockholders EquityDeposits:Demand
    
    $
    910,022
    
    
    $
    852,464Savings
    
    
    104,702
    
    
    
    100,424Time
    
    
    907,069
    
    
    
    946,062Total deposits
    
    
    1,921,793
    
    
    
    1,898,950Advances from the Federal Home Loan Bank of Topeka
    
    
    600,019
    
    
    
    637,219Securities sold under agreements to repurchase
    
    
    53,646
    
    
    
    66,367Senior Notes
    
    
    21,295
    
    
    
    21,295Other liabilities
    
    
    15,941
    
    
    
    20,156Junior subordinated debentures
    
    
    62,115
    
    
    
    62,115Total liabilities
    
    
    2,674,809
    
    
    
    2,706,102Commitments and contingenciesStockholders equity:Common stock, $0.01 par value, 25,000,000 shares authorized;
21,070,817 shares issued and 16,613,073 shares outstanding at
March 31, 2004 and 20,994,517 shares issued and 16,536,773 shares
outstanding at December 31, 2003
    
    
    211
    
    
    
    210Preferred stock, $0.01 par value, 5,000,000 shares authorized;
none outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    211,096
    
    
    
    210,083Retained earnings
    
    
    186,741
    
    
    
    179,590Treasury stock, 4,457,744 shares at March 31, 2004 and at
December 31, 2003, at cost
    
    
    (214,811
    )
    
    
    (214,811
    )Accumulated other comprehensive income, net of tax
    
    
    602
    
    
    
    369Total stockholders equity
    
    
    183,839
    
    
    
    175,441Total liabilities and stockholders equity
    
    $
    2,858,648
    
    
    $
    2,881,543
 The accompanying notes are an integral part of these consolidated financial statements. 1




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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data) Three Months EndedMarch 31,2004
    
    2003(unaudited)Interest income:Loans
    
    $
    31,167
    
    
    $
    33,049Securities available for sale
    
    
    1,077
    
    
    
    2,108Securities held to maturity
    
    
    2,548
    
    
    
    4,154Federal Home Loan Bank of Topeka and Federal Reserve Bank stock
    
    
    371
    
    
    
    361Other investments
    
    
    108
    
    
    
    22Total interest income
    
    
    35,271
    
    
    
    39,694Interest expense:Deposit accounts
    
    
    7,070
    
    
    
    8,960Advances from the Federal Home Loan Bank of Topeka
    
    
    6,318
    
    
    
    6,479Securities sold under agreements to repurchase
    
    
    104
    
    
    
    107Senior Notes
    
    
    629
    
    
    
    629Junior subordinated debentures
    
    
    1,162
    
    
    
    Trust preferred securities
    
    
    
    
    
    
    1,178Total interest expense
    
    
    15,283
    
    
    
    17,353Net interest income
    
    
    19,988
    
    
    
    22,341Provision for loan losses
    
    
    (2,000
    )
    
    
    (1,800
    )Net interest income after provision for loan losses
    
    
    17,988
    
    
    
    20,541Noninterest income:Deposit related income
    
    
    5,985
    
    
    
    5,476Loan fees and loan service charges
    
    
    654
    
    
    
    653Net gains on sale of assets
    
    
    610
    
    
    
    136Other
    
    
    1,838
    
    
    
    1,560Total noninterest income
    
    
    9,087
    
    
    
    7,825Noninterest expense:Compensation and employee benefits
    
    
    8,135
    
    
    
    10,566Equipment and data processing
    
    
    1,783
    
    
    
    1,700Occupancy
    
    
    1,509
    
    
    
    1,338Advertising
    
    
    105
    
    
    
    127Professional fees
    
    
    1,531
    
    
    
    263Other
    
    
    3,338
    
    
    
    3,741Total noninterest expense
    
    
    16,401
    
    
    
    17,735Income before provision for income taxes
    
    
    10,674
    
    
    
    10,631Provision for income taxes
    
    
    3,523
    
    
    
    3,561Net income
    
    $
    7,151
    
    
    $
    7,070Earnings per share:Net income:Basic
    
    $
    0.43
    
    
    $
    0.40Diluted
    
    $
    0.41
    
    
    $
    0.38Average shares outstanding:Basic
    
    
    16,573,705
    
    
    
    17,797,691Diluted
    
    
    17,497,261
    
    
    
    18,408,968
 The accompanying notes are an integral part of these consolidated financial statements. 2




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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands) Three Months EndedMarch 31,2004
    
    2003(unaudited)Cash provided (absorbed) by operating activities:Net income
    
    $
    7,151
    
    
    $
    7,070Adjustments to reconcile net income to net cash provided by operating
activities:Provision for loan losses
    
    
    2,000
    
    
    
    1,800Deferred income tax (benefit)
    
    
    263
    
    
    
    (607
    )Accretion of discounts and amortization of deferred fees on loans
acquired and securities, net
    
    
    304
    
    
    
    200Depreciation and amortization
    
    
    1,275
    
    
    
    1,381Net change in loans held for sale
    
    
    (2,077
    )
    
    
    (2,385
    )Net gains on sale of assets
    
    
    (610
    )
    
    
    (136
    )Stock dividends received from Federal Home Loan Bank
    
    
    (313
    )
    
    
    Change in other assets
    
    
    (3,676
    )
    
    
    (2,981
    )Change in other liabilities
    
    
    1,062
    
    
    
    4,488Net cash provided by operating activities
    
    
    5,379
    
    
    
    8,830Cash provided (absorbed) by investing activities:Proceeds from principal collections on securities
    
    
    19,648
    
    
    
    111,929Purchases of securities
    
    
    (25,641
    )
    
    
    (45,869
    )Purchases of Federal Home Loan Bank and Federal Reserve Bank stock
    
    
    
    
    
    
    (1,361
    )Purchases of bank owned life insurance
    
    
    
    
    
    
    (10,000
    )Change in loans receivable, net
    
    
    40,603
    
    
    
    (56,710
    )Proceeds from disposal of assets acquired through foreclosure and repossession
    
    
    784
    
    
    
    792Purchases of premises and equipment
    
    
    (1,240
    )
    
    
    (1,975
    )Proceeds from sales of premises and equipment
    
    
    552
    
    
    
    279Net cash provided (absorbed) by investing activities
    
    
    34,706
    
    
    
    (2,915
    )Cash provided (absorbed) by financing activities:Change in transaction accounts
    
    
    61,836
    
    
    
    4,744Change in time deposits
    
    
    (38,993
    )
    
    
    (16,136
    )Change in securities sold under agreements to repurchase
    
    
    (12,721
    )
    
    
    (18,661
    )Proceeds from advances from the Federal Home Loan Bank
    
    
    46,700
    
    
    
    437,920Repayments of advances from the Federal Home Loan Bank
    
    
    (83,900
    )
    
    
    (410,704
    )Proceeds from the issuance of common stock
    
    
    763
    
    
    
    1,090Purchase of treasury stock
    
    
    
    
    
    
    (1,349
    )Net cash absorbed by financing activities
    
    
    (26,315
    )
    
    
    (3,096
    )Net change in cash and cash equivalents
    
    
    13,770
    
    
    
    2,819Cash and cash equivalents at beginning of period
    
    
    83,146
    
    
    
    58,366Cash and cash equivalents at end of period
    
    $
    96,916
    
    
    $
    61,185Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    16,570
    
    
    $
    18,310Supplemental schedule of noncash investing and financing activities:Transfer of loans to assets acquired through foreclosure and repossession
    
    $
    86
    
    
    $
    1,157Payable on treasury stock purchase
    
    $
    
    
    
    $
    5,206
 The accompanying notes are an integral part of these consolidated financial statements. 3




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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements  (1)
    
    Pending Merger and Basis of PresentationOn January 22, 2004, International Bancshares Corporation (IBC) and
Local Financial Corporation (Local Financial or the Company)
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 has filed with the Securities and Exchange Commission (the SEC) a
registration statement on Form S-4 concerning the transaction. The Form
S-4 registration statement includes a proxy statement/prospectus (Proxy
Statement/Prospectus). Local Financial has mailed 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.The accompanying unaudited consolidated financial statements were
prepared in accordance with the instructions for Form 10-Q and,
therefore, do not include all disclosures necessary for a complete
presentation of financial condition, results of operations, and cash
flows in conformity with accounting principles generally accepted in the
United States of America. All adjustments (consisting of only normal
recurring adjustments) that are necessary, in the opinion of management,
for a fair presentation of the interim financial statements have been
included. The interim financial information should be read in
conjunction with the audited Consolidated Financial Statements and Notes
included in the Local Financial Form 10-K for the year ended December 31,
2003 as filed with the SEC.(2)
    
    Stock CompensationThe 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
compensation cost has been recognized for its stock options rights. Had
the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, and
as provided for 4




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under SFAS No. 148, Accounting for Stock-Based Compensation  Transition
and Disclosure, an amendment of SFAS No. 123, the Companys net income
for the three months ended March 30, 2004 and 2003 would have been
decreased to the pro forma amounts below (dollars in thousands, except
share data): March 31,2004
    
    2003Net income as reported
    
    $
    7,151
    
    
    $
    7,070Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for awards, net of related tax effects
    
    
    (90
    )
    
    
    (104
    )Pro forma net income
    
    $
    7,061
    
    
    $
    6,966Earnings per share:Basic  as reported
    
    $
    0.43
    
    
    $
    0.40Basic  pro forma
    
    $
    0.43
    
    
    $
    0.39Diluted  as reported
    
    $
    0.41
    
    
    $
    0.38Diluted  pro forma
    
    $
    0.40
    
    
    $
    0.38
  (3)
    
    Loans ReceivableLoans receivable are summarized below at amortized cost (dollars in thousands): March 31, 2004
    
    December 31, 2003Residential real estate
    
    $
    373,526
    
    
    $
    370,926Commercial
    
    
    1,718,443
    
    
    
    1,763,306Held for sale
    
    
    13,839
    
    
    
    11,762Consumer
    
    
    126,234
    
    
    
    124,969Total loans
    
    
    2,232,042
    
    
    
    2,270,963Less:Allowance for loan losses
    
    
    (31,980
    )
    
    
    (30,398
    )Loans receivable, net
    
    $
    2,200,062
    
    
    $
    2,240,565
  (4)
    
    Advances from the Federal Home Loan Bank of Topeka (FHLB)Advances from the FHLB are summarized as follows (dollars in thousands): March 31, 2004
    
    December 31, 2003Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageBalance
    
    Contractual Rate
    
    Balance
    
    Contractual RateFixed rate
    
    $
    600,019
    
    
    
    4.14
    %
    
    $
    627,219
    
    
    
    4.01
    %Variable rate
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    1.16$
    600,019
    
    
    
    4.14
    %
    
    $
    637,219
    
    
    
    3.97
    %
 5




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Additionally, the Company had outstanding letters of credit with the FHLB
of approximately $148.8 million and $116.7 million at March 31, 2004 and
December 31, 2003, 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 March 31, 2004, the
Company had approximately $813.5 million in eligible assets pledged
against FHLB advances.At March 31, 2004, the Company had additional borrowing capacity of
approximately $232.6 million under the FHLB credit policy.Scheduled principal repayments of advances from the FHLB at March 31,
2004 were as follows (dollars in thousands): WeightedAverageYears ending December 31,
    
    Amount
    
    Contractual Rate2004
    
    $
    
    
    
    
    
    %2005
    
    
    
    
    
    
    2006
    
    
    100,000
    
    
    
    3.352007
    
    
    
    
    
    
    2008 and thereafter
    
    
    500,019
    
    
    
    4.30$
    600,019
    
    
    
    4.14
    %
  (5)
    
    Securities Sold Under Agreements to RepurchasePeriodically, 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 March 31, 2004 and December 31, 2003 and are summarized as follows
(dollars in thousands): March 31,
    
    December 31,2004
    
    2003Average outstanding balance
    
    $
    58,869
    
    
    $
    45,268Weighted average interest rate during the period
    
    
    0.71
    %
    
    
    0.79
    %Maximum month-end balance
    
    $
    58,494
    
    
    $
    76,366Outstanding balance at end of period
    
    
    53,646
    
    
    
    66,367Weighted average interest rate at end of period
    
    
    0.70
    %
    
    
    0.72
    %Mortgage-backed securities securing the agreements
at period-end:Carrying value
    
    $
    76,056
    
    
    $
    97,752Estimated market value
    
    
    76,480
    
    
    
    97,098Accrued interest payable at the end of the period
    
    
    
    
    
    
    
 6




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(6)
    
    Stockholders EquityThe increase in stockholders equity during the three months ended March
31, 2004 came primarily as a result of earnings of $7.2 million.
Additionally, the increase in common stock and additional paid-in capital
during the three months ended March 31, 2004 of approximately $1.0
million included the exercise of 76,300 options to purchase the Companys
stock and tax benefits on employee stock options.(7)
    
    Comprehensive IncomeComprehensive income for the three months ended March 31, 2004 and 2003
consisted of (dollars in thousands): Three Months EndedMarch 31,2004
    
    2003Net income
    
    $
    7,151
    
    
    $
    7,070Other comprehensive income, net of tax:Unrealized gains on securities, net of
reclassification adjustment
    
    
    233
    
    
    
    355Comprehensive income
    
    $
    7,384
    
    
    $
    7,425
  (8)
    
    Earnings Per ShareBasic 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.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 three months ended March 31, 2004 and 2003: 7




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March 31, 2004WeightedAverageShares
    
    Per ShareNet Income
    
    Outstanding
    
    AmountBasic net income per share
    
    $
    7,151,000
    
    
    
    16,573,705
    
    
    $
    0.43Effect of dilutive securities:Options
    
    
    
    
    
    
    923,556Diluted net income per share
    
    $
    7,151,000
    
    
    
    17,497,261
    
    
    $
    0.41
 March 31, 2003WeightedAverageShares
    
    Per ShareNet Income
    
    Outstanding
    
    AmountBasic net income per share
    
    $
    7,070,000
    
    
    
    17,797,691
    
    
    $
    0.40Effect of dilutive securities:Options
    
    
    
    
    
    
    611,277Diluted net income per share
    
    $
    7,070,000
    
    
    
    18,408,968
    
    
    $
    0.38
  Stock options to purchase 1,677,990 and 1,786,640 shares of common stock
were outstanding as of March 31, 2004 and 2003, respectively, and were
included in the computation of diluted net income per share.(9)
    
    SegmentsThe 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 (the Bank).
The Bank, in turn, has one active operating subsidiary, Local Securities
Corporation (Local Securities), which is a registered broker-dealer
under the Securities Exchange Act of 1934, as amended (the Exchange
Act) 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 Statement No. 131, Disclosure About
Segments of an Enterprise and Related Information.In September 2001, July 2002 and October 2002, the Company formed Local
Financial Capital Trust I, Local Financial Capital Trust II and Local
Financial Capital Trust III, respectively, collectively (the Trusts).
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 and
March 31, 2004. 8




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(10)
    
    New Accounting PronouncementsIn December 2003, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 46 (revised December 2003) (FIN 46R),
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.The impact of the adoption of FIN 46R resulted in $60.3 million of trust
preferred securities along with $2.2 million in related deferred issuance
costs no longer being included in the consolidated statement of financial
condition of the Company beginning December 31, 2003. Instead, the
Company now reports the junior subordinated debentures issued by Local
Financial to the Trusts of $62.1 million as well as the equity investment
of subsidiaries of $4.1 million and $4.0 million at December 31, 2003 and
March 31, 2004, respectively. The deconsolidation of the Trusts as
discussed above had no impact on stockholders equity or net income at
December 31, 2003 or at March 31, 2004. The interest expense as
reflected in the consolidated statements of operation related to these
entities is shown as junior subordinated debentures in 2004 and trust
preferred securities in 2003. 9




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-Looking Statements A number of the presentations and disclosures in this Form 10-Q, 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. 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-Q. Therefore, the Company cautions the reader not to place undue reliance
on its forward-looking information and statements. 10




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##### Table of Contents



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. A reader should not place unjustified or excessive reliance on any
forward-looking statements. They speak only as of the date made and are not
guarantees, promises or assurances of what will happen in the future. Various
factors, including those described above and those described in the Companys
Form 10-K for the year ended December 31, 2003 could affect the Companys
financial performance and could cause the Companys actual results or
circumstances for future periods to be materially different from what has been
anticipated or projected. Pending Merger 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 Note 1 of the
Notes to Consolidated Financial Statements in Item 1 hereof. Financial Condition Assets.Total assets remained relatively stable at $2.9 billion for March
31, 2004 as compared to December 31, 2003. Refinancings, prompted by the low
rate environment, as well as slower loan growth for the first quarter of 2004
contributed to a slight decrease in the Companys loan portfolio of $38.9
million. Commercial loans decreased by $44.9 million or 2.5%, while
residential and consumer loans increased by $2.6 million or 0.7% and $3.3
million or 2.4%, respectively, during the three months ended March 31, 2004.
The Companys securities portfolio increased slightly by $6.0 million or 1.6%
as continuing maturities and paydowns totaling $19.6 million were partially
offset by the purchase of $25.6 million in mortgage-backed securities during
the quarter. Assets acquired through foreclosure and repossession declined
$698,000 during the quarter due primarily to the sale of the repossessed assets
of one of the Companys commercial customers. Liabilities.Total liabilities decreased by $31.3 million or 1.2% during
the three months ended March 31, 2004 due primarily to growth in the deposit
base offset by lower borrowings. Total deposits reflected an increase of $22.8
million or 1.2% during the first quarter of 2004. The Companys deposit base
continues to be comprised substantially of core deposits, which were $1.855
billion or 93.9% of total deposits, and sweep accounts (repurchase agreements)
at March 31, 2004 compared to $1.837 billion or 93.5% at December 31, 2003.
Core deposits for the Company consist of total deposits, excluding brokered
deposits, plus commercial customer sweep accounts. Advances from the FHLB of
Topeka were reduced by $37.2 million or 5.8% during the first quarter 2004, as
funding needs declined. Stockholders Equity. Stockholders equity increased from $175.4 million
at December 31, 2003 to $183.8 million at March 31, 2004. The increase in
stockholders equity came primarily as a result of earnings during the period
of $7.2 million. The increase in common stock and additional paid-in capital
during the period ended March 31, 2004 of $1.0 million included the exercise of
76,300 options to purchase the Companys stock and tax benefits on employee
stock options. At March 31, 2004, the Company and the Bank exceeded all
regulatory requirements for capital adequacy. See -Liquidity and Capital
Resources. 11




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##### Table of Contents



Results of Operations First Quarter Net Income.Local Financial recorded net income of $7.2 million or $0.41
diluted earnings per share for the first quarter of 2004 compared to $7.1
million or $0.38 diluted earnings per share for the same period in 2003.
Diluted earnings per share include the effect of the Companys share repurchase
program which resulted in 1.2 million fewer shares outstanding on average
during the first quarter of 2004 compared to the first quarter of 2003. The
most recent transaction under the Companys share repurchase program was
completed in August of 2003. Net Interest Income.The Companys net interest income declined $2.4
million or 10.5% to $20.0 million for the quarter ended March 31, 2004 compared
to the same period in 2003. The decrease in net interest income was primarily
due to a 38 basis point decline in net interest margin, which was partially
offset by a $34.1 million or 1.3% increase in average earning assets. Net
interest margin, the ratio of net interest income to average earning assets,
declined to 2.96% for the three months ended March 31, 2004 from 3.34% in the
comparative period of the prior year. The decrease of net interest margin
resulted from yields on earning assets falling more than rates paid on
interest-bearing liabilities. The yield on the securities portfolio decreased
115 basis points and the yield on the loan portfolio decreased 68 basis points
for the three months ended March 31, 2004 compared to the three months ended
March 31, 2003. However, the cost of the interest-bearing liabilities
decreased only 38 basis points compared to the same period in the prior year.
Negative rate variances resulting from the low interest rate environment will
likely continue to drive net interest income lower over the next several
quarters. On December 31, 2003, the Company adopted FASB Interpretation 46 (revised
December 2003) and deconsolidated its three trust subsidiaries. As a result,
the interest expense associated with the trust preferred securities is
reflected in the Companys consolidated statements of operations under the
caption Trust preferred securities for prior periods, while it is included
under the caption Junior subordinated debentures for the current period. See
Note 10 of the Notes to Consolidated Financial Statements in Item 1 hereof. Provision for Loan Losses.The Companys provision for loan losses
increased slightly from $1.8 million during the first quarter of 2003 to $2.0
million during the first quarter of 2004. Charge-offs (net of recoveries) in
the three-month period ended March 31, 2004 were $418,000 compared to $1.0
million in the same period in the prior year, a decrease of $598,000 or 58.9%.
The net charge-offs represent an annualized rate of 0.07% and 0.19% of average
loans for the first quarter of 2004 and 2003, respectively. 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. Noninterest Income. The components of noninterest income are deposit
related income, loan fees and loan service charges, net gains on sale of
assets, and other income. Total noninterest income increased $1.3 million or
16.1% during the three months ended March 31, 2004 compared to the same period
in the prior year. This increase was primarily due to a significant increase
in deposit related income, which consists primarily of service charges and fees
on deposit accounts, and the gain on sale of assets. Deposit related income
rose $509,000 or 9.3% during the three month comparative periods. 12




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##### Table of Contents



Additionally, the Company recognized a gain of $536,000 on the sale of
assets acquired through foreclosure during the first quarter of 2004. Noninterest expense.Total noninterest expense declined $1.3 million or
7.5% during the three months ended March 31, 2004 as compared to the same
period in 2003. This decline came primarily as a result of a decrease in
compensation and employee benefits which was partially offset by an increase in
professional fees. Compensation and employee benefits include an executive
benefit plan with a tax-offsetting bonus feature for non-qualified stock
options issued to selected officers, which is expensed under the variable
option accounting provisions. This bonus feature is expected to be paid at
2004 personal income tax rates, which resulted in a $1.6 million adjustment
during the quarter ended March 31, 2004. Professional fees for the three months
ended March 31, 2004 increased by $1.3 million and included $951,000 in legal
and investment banking fees paid in relation to the pending merger. See Note 1
of the Notes to Consolidated Financial Statements in Item 1 hereof. 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): Three Months Ended March 31,2004
    
    2003Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    CostAssetsLoans receivable(1)
    
    $
    2,243,588
    
    
    $
    31,167
    
    
    
    5.60
    %
    
    $
    2,130,782
    
    
    $
    33,049
    
    
    
    6.28
    %Securities:Available for sale(2)
    
    
    98,582
    
    
    
    1,077
    
    
    
    4.37
    
    
    
    163,885
    
    
    
    2,108
    
    
    
    5.15Held to maturity
    
    
    270,884
    
    
    
    2,548
    
    
    
    3.76
    
    
    
    330,556
    
    
    
    4,154
    
    
    
    5.03Total securities
    
    
    369,466
    
    
    
    3,625
    
    
    
    3.92
    
    
    
    494,441
    
    
    
    6,262
    
    
    
    5.07Other earning assets(3)
    
    
    92,732
    
    
    
    479
    
    
    
    2.07
    
    
    
    46,492
    
    
    
    383
    
    
    
    3.30Total interest-earning assets
    
    
    2,705,786
    
    
    
    35,271
    
    
    
    5.25
    %
    
    
    2,671,715
    
    
    
    39,694
    
    
    
    6.00
    %Noninterest-earning assets
    
    
    158,180
    
    
    
    
    
    
    
    
    
    
    
    145,133Total assets
    
    $
    2,863,966
    
    
    
    
    
    
    
    
    
    
    $
    2,816,848Liabilities and Stockholders EquityDeposits:Transaction accounts(4)
    
    $
    780,453
    
    
    
    1,710
    
    
    
    0.88
    %
    
    $
    656,524
    
    
    
    1,856
    
    
    
    1.15
    %Term certificates of deposit
    
    
    926,326
    
    
    
    5,360
    
    
    
    2.33
    
    
    
    982,598
    
    
    
    7,104
    
    
    
    2.93Total deposits
    
    
    1,706,779
    
    
    
    7,070
    
    
    
    1.67
    
    
    
    1,639,122
    
    
    
    8,960
    
    
    
    2.22FHLB advances
    
    
    613,580
    
    
    
    6,318
    
    
    
    4.07
    
    
    
    676,331
    
    
    
    6,479
    
    
    
    3.83Securities sold under agreements to repurchase
    
    
    58,869
    
    
    
    104
    
    
    
    0.71
    
    
    
    46,531
    
    
    
    107
    
    
    
    0.93Senior Notes
    
    
    21,295
    
    
    
    629
    
    
    
    11.81
    
    
    
    21,295
    
    
    
    629
    
    
    
    11.81Junior subordinated debentures
    
    
    62,115
    
    
    
    1,162
    
    
    
    7.48
    
    
    
    
    
    
    
    
    
    
    
    Mandatorily redeemable trust preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,250
    
    
    
    1,178
    
    
    
    7.82Total interest-bearing liabilities
    
    
    2,462,638
    
    
    
    15,283
    
    
    
    2.50
    %
    
    
    2,443,529
    
    
    
    17,353
    
    
    
    2.88
    %Noninterest-bearing liabilities
    
    
    223,462
    
    
    
    
    
    
    
    
    
    
    
    202,609Stockholders equity
    
    
    177,866
    
    
    
    
    
    
    
    
    
    
    
    170,710Total liabilities and stockholders equity
    
    $
    2,863,966
    
    
    
    
    
    
    
    
    
    
    $
    2,816,848Net interest-earning assets
    
    $
    243,148
    
    
    
    
    
    
    
    
    
    
    $
    228,186Net interest income/interest rate spread
    
    
    
    
    
    $
    19,988
    
    
    
    2.75
    %
    
    
    
    
    
    $
    22,341
    
    
    
    3.12
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.96
    %
    
    
    
    
    
    
    
    
    
    
    3.34
    %Ratio of average interest-earning to average
interest-bearing
    
    
    
    
    
    
    
    
    
    
    109.87
    %
    
    
    
    
    
    
    
    
    
    
    109.34
    %
   (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 the market valuation accounts. 13




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##### Table of Contents



(3)
    
    Includes interest-bearing deposits, Federal Home Loan Bank of Topeka
stock and Federal Reserve Bank stock.(4)
    
    Includes passbook, NOW and money market accounts. 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 placed 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 March 31, 2004, the Company had approximately
$232.6 million in available borrowing capacity with the FHLB. At March 31, 2004, the Company had outstanding loan commitments (including
unused lines of credit) for home equity, commercial real estate and commercial
business loans of approximately $413.9 million and an additional $12.1 million
in performance standby letters of credit. Certificates of deposit, which are
scheduled to mature within one year, totaled $595.8 million at March 31, 2004,
and borrowings, which are scheduled to mature within the same period, totaled
$21.3 million. The Company anticipates that sufficient funds will be available
to meet its current loan total 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 the maturing borrowings. In September 1997, the Company issued $80.0 million of Senior Notes. As
of March 31, 2004, the Company had purchased and retired $58.7 million of those
outstanding Senior Notes. These transactions reduced future interest costs
associated with those notes. The remaining $21.3 million of Senior Notes mature
in September 2004 and have an annual debt service requirement of $2.3 million
(or $1.15 million for each semi-annual period). 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 the
Senior Notes prior to their maturity date. See Note 1 of the Notes to
Consolidated Financial Statements in Item 1 hereof. Capital Resources. Bank holding companies are required to maintain
capital ratios in accordance with guidelines adopted by the Federal Reserve
Bank. The guidelines are commonly known as Risk-Based Capital Guidelines. On
March 31, 2004, the Company exceeded all applicable capital requirements
pursuant to the Risk-Based Capital Guidelines and was considered well
capitalized by 14




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##### Table of Contents



having a total risk-based capital ratio of 11.70%, a Tier 1 risk-based
capital ratio of 10.44% and a leverage ratio of 7.86%. The Company includes
its $60.3 million of trust preferred securities as part of its Tier 1 and total
capital ratios to the extent allowed by regulation. While FASB Interpretation
No. 46 required the Company to deconsolidate its three trust preferred security
subsidiaries, the Federal Reserve Board has announced that, until further
notice is given to the contrary, these trust preferred securities will continue
to qualify as Tier 1 and total capital. See Note 10 of the Notes to the
Consolidated Financial Statements in Item 1 hereof. Inflation and Changing Prices The consolidated financial statements and related data presented herein
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. Contractual Obligations and Commitments The following tables present contractual cash obligations and commitments
of the Company as of March 31, 2004. See Notes 4 and 5 of the Notes to the
Consolidated Financial Statements in Item 1 hereof and Liquidity and Capital
Resources (dollars in thousands): Payments due by PeriodMore ThanLess than
    
    One to
    
    Three to
    
    OverContractual Cash Obligations
    
    Total
    
    One Year
    
    Three Years
    
    Five Years
    
    Five YearsFHLB advances
    
    $
    600,019
    
    
    $
    
    
    
    $
    100,000
    
    
    $
    
    
    
    $
    500,019Securities sold under agreements to repurchase
    
    
    53,646
    
    
    
    53,646
    
    
    
    
    
    
    
    
    
    
    
    Senior Notes
    
    
    21,295
    
    
    
    21,295
    
    
    
    
    
    
    
    
    
    
    
    Junior subordinated debentures
    
    
    62,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,115Operating leases
    
    
    7,392
    
    
    
    973
    
    
    
    1,484
    
    
    
    919
    
    
    
    4,016Data processing maintenance obligation
    
    
    548
    
    
    
    274
    
    
    
    274
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    745,015
    
    
    $
    76,188
    
    
    $
    101,758
    
    
    $
    919
    
    
    $
    566,150
 Amount of Commitment Expiration Per PeriodMore ThanUnfunded
    
    Less than
    
    One to
    
    Three to
    
    OverCommitments
    
    Commitments
    
    One Year
    
    Three Years
    
    Five Years
    
    Five YearsLines of credit
    
    $
    316,419
    
    
    $
    169,318
    
    
    $
    126,194
    
    
    $
    13,129
    
    
    $
    7,778Standby letters of credit
    
    
    12,069
    
    
    
    10,855
    
    
    
    1,214
    
    
    
    
    
    
    
    Other commitments
    
    
    97,497
    
    
    
    10,943
    
    
    
    7,348
    
    
    
    28,911
    
    
    
    50,295Total commitments
    
    $
    425,985
    
    
    $
    191,116
    
    
    $
    134,756
    
    
    $
    42,040
    
    
    $
    58,073
 
 ITEM 3. 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 15




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##### Table of Contents



rate movements. In general, managements strategy is to evaluate asset
and liability balances within maturity categories to control the Companys
exposure to earnings variations and variations in the value of assets and
liabilities as interest rates change over time. Managements methods for evaluating interest rate risk include an analysis
of the Companys 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. 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. 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. The following table summarizes the anticipated maturities or repricing of
the Companys interest-earning assets and interest-bearing liabilities as of
March 31, 2004, based on the information and assumptions set forth in the notes
below (dollars in thousands): More ThanThree to
    
    More Than
    
    Three YearsWithin Three
    
    Twelve
    
    One Year to
    
    to Five
    
    Over FiveMonths
    
    Months
    
    Three Years
    
    Years
    
    Years
    
    TotalInterest-earning assets(1):Loans receivable(2)
    
    $
    1,082,875
    
    
    $
    310,099
    
    
    $
    365,977
    
    
    $
    307,553
    
    
    $
    154,856
    
    
    $
    2,221,360Securities:Available for sale(3)
    
    
    7,466
    
    
    
    17,098
    
    
    
    66,767
    
    
    
    23,794
    
    
    
    2,872
    
    
    
    117,997Held to maturity
    
    
    36,888
    
    
    
    37,357
    
    
    
    73,257
    
    
    
    71,704
    
    
    
    45,320
    
    
    
    264,526Other interest-earning
assets(4)
    
    
    133,177
    
    
    
    3,865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137,042Total
    
    $
    1,260,406
    
    
    $
    368,419
    
    
    $
    506,001
    
    
    $
    403,051
    
    
    $
    203,048
    
    
    $
    2,740,925Interest-bearing liabilities:Deposits(5):Money market and NOW
accounts
    
    $
    365,942
    
    
    $
    30,826
    
    
    $
    65,142
    
    
    $
    48,748
    
    
    $
    186,975
    
    
    $
    697,633Passbook accounts
    
    
    4,303
    
    
    
    12,910
    
    
    
    26,402
    
    
    
    18,434
    
    
    
    42,653
    
    
    
    104,702Certificates of deposit
    
    
    231,495
    
    
    
    365,020
    
    
    
    244,082
    
    
    
    65,741
    
    
    
    731
    
    
    
    907,069FHLB advances(6)
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    
    500,019
    
    
    
    600,019Securities sold under
agreements to repurchase
    
    
    53,646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,646Senior Notes
    
    
    
    
    
    
    21,295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,295Junior subordinated
debentures(6)
    
    
    10,310
    
    
    
    10,310
    
    
    
    
    
    
    
    
    
    
    
    41,495
    
    
    
    62,115Total
    
    $
    665,696
    
    
    $
    440,361
    
    
    $
    435,626
    
    
    $
    132,923
    
    
    $
    771,873
    
    
    $
    2,446,479Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities
    
    $
    594,710
    
    
    $
    (71,942
    )
    
    $
    70,375
    
    
    $
    270,128
    
    
    $
    (568,825
    )
    
    $
    294,446Cumulative excess of
interest-earnings assets over
interest-bearing liabilities
    
    $
    594,710
    
    
    $
    522,768
    
    
    $
    593,143
    
    
    $
    863,271
    
    
    $
    294,446
    
    
    $
    294,446Cumulative excess of
interest-earning assets over
interest-bearing liabilities
as a percentage of total assets
    
    
    20.80
    %
    
    
    18.29
    %
    
    
    20.75
    %
    
    
    30.20
    %
    
    
    10.30
    %
    
    
    10.30
    %
   (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 16




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##### Table of Contents



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, Federal
Home Loan Bank 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)
    
    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. 
 ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this quarterly 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
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 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
disclosure. 
 PART II            OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS The Company is involved in routine legal proceedings occurring in the
ordinary course of business, which, in the aggregate, are believed by
management to be immaterial to the consolidated financial position and results
of operations of the Company. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit 31.1   Certification as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2   Certification as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32   Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 17




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##### Table of Contents



b.
    
    Reports on Form 8-K The Company filed the following Form 8-K during the quarter ended March 31, 2004:  1.
    
    On January 23, 2004, a press release announcing the execution
of an Agreement and Plan of Merger, dated January 22, 2004, between
Local Financial and IBC was filed. 18




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SIGNATURES Pursuant to the requirement 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 CORPORATIONDate: May 7, 2004
    By /s/ Edward A. TownsendEdward A. TownsendChairman of the Board
Chief Executive OfficerLOCAL FINANCIAL CORPORATIONDate: May 7, 2004
    By/s/ Richard L. ParkRichard L. ParkExecutive Vice President
Chief Financial Officer 19




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##### Table of Contents



Form 10-Q
Index to Exhibits Exhibit
    
    Description31.1
    
    Certification as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 20