LOCAL FINANCIAL CORP /NV - 10-Q Quarterly Report

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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 June 30, 2002

OR

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

For the transition period from _________________ to _________________

Commission File Number:
001-13949

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 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 [ ]

Number of shares outstanding of the registrant's $0.01 par value common
stock as of July 22, 2002 were as follows:

NUMBER OF SHARES
-----------------------------
19,179,592

LOCAL FINANCIAL CORPORATION
INDEX

PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share data)

The accompanying notes are an integral part of these consolidated financial
statements.

1

LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)

The accompanying notes are an integral part of these consolidated
financial statements.

2

LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

The accompanying notes are an integral part of these consolidated financial
statements.

3

LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2002 and December 31, 2001

(1) BASIS OF PRESENTATION

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 Corporation (the "Company") Form
10-K for the year ended December 31, 2001 as filed with the Securities
and Exchange Commission.

(2) LOANS RECEIVABLE

Loans receivable are summarized below at amortized cost (dollars in
thousands):

(3) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF TOPEKA ("FHLB")

Advances from the FHLB are summarized as follows (dollars in
thousands):

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Additionally, the Company had outstanding letters of credit with the
FHLB of approximately $99.8 million and $77.1 million at June 30, 2002
and December 31, 2001, respectively. The letters of credit have
one-year terms 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
June 30, 2002, the Company had approximately $744.2 million in eligible
assets pledged against FHLB advances.

At June 30, 2002, the Company had additional borrowing capacity of
approximately $451.0 million under the FHLB credit policy.

Scheduled principal repayments to the FHLB at June 30, 2002 are as
follows (dollars in thousands):

(4) 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 June 30, 2002 and December 31, 2001 and are summarized as
follows (dollars in thousands):

(5) STOCKHOLDERS' EQUITY

In connection with the Company's private placement in 1997, warrants to
buy 591,000 shares of common stock of the Company were issued to the
placement agent. During the six months ended June 30, 2002, 106,667
warrants were exercised for proceeds of $1.1 million. As of June 30,

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2002, warrants totaling 146,666 remain outstanding. The warrants are
exercisable for a five year period ending September 8, 2002 at an
exercise price of $10 per share.

During the six months ended June 30, 2002, the Company repurchased
150,000 shares of the Company's common stock from an officer of the
Company at market price amounting to $2.3 million.

(6) COMPREHENSIVE INCOME

Comprehensive income for the three and six-month periods ended June 30,
2002 and 2001 consists of (dollars in thousands):

(7) NET INCOME PER SHARE

Stock options and warrants to purchase 2,196,671 and 2,674,005 shares
of common stock were outstanding as of June 30, 2002 and 2001,
respectively. The stock options and warrants were included in the
computation of diluted net income per share for 2002 and 2001.

(8) 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, National
Association, (the "Bank") a national banking association. 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 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 of Financial Accounting Standards ("SFAS") No. 131,
Disclosure About Segments of an Enterprise and Related Information.

In September 2001, the Company formed Local Financial Capital Trust I
(the "Trust"), a wholly-owned finance subsidiary. The Trust does not
qualify as an operating segment under SFAS No. 131 and has no
independent operations and no other function other than the issuance of
its securities and the related purchase of 9% junior subordinated
debentures (the "Debentures") from the Company and to distribute
payments received thereon to the holders of its securities.

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(9) NEW ACCOUNTING PRONOUNCEMENTS

The Company adopted Statement 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 has determined
there was no transitional impairment loss at January 1, 2002. There was
no amortization expense for the three and six months ended June 30,
2002, whereas this expense amounted to $335,000 and $670,000 for the
three and six months ended June 30, 2001, respectively. The Company's
net income for the three and six months ended June 30, 2001, excluding
the effects of goodwill amortization, would have been $7.4 million and
$14.5 million, respectively, compared to $7.5 million and $14.5 million
for the three and six months ended June 30, 2002, respectively.
Excluding the effects of goodwill amortization, the earnings per share
for the three and six months ended June 30, 2001 would have been $.36
basic and $.35 diluted, and $.70 basic and $.68 diluted, respectively.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No.
121 and portions of APB Opinion No. 30. This statement addresses the
recognition of an impairment loss for long-lived assets to be held and
used or disposed of by sale or otherwise. This statement is effective
for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The
adoption of this statement as of July 1, 2002 had no effect on the
Company's consolidated financial position or results of operations.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. The Statement updates, clarifies and simplifies
existing accounting pronouncements. As it relates to the Company, the
statement eliminates the extraordinary loss classification on early
debt extinguishments. Instead, the premiums and other costs associated
with the early extinguishment of debt would be reflected in pre-tax
results similar to other debt-related expenses, such as interest
expense and amortization of issuance costs. The statement will be
effective for fiscal years beginning after May 15, 2002 (January 1,
2003 for the Company). Upon adoption, the Company must reclassify the
extraordinary losses incurred in prior periods (including 2001 and
2000) as pre-tax items. The result of the adoption of this statement
will not modify or adjust net income for any period and does not impact
the Company's compliance with its various debt covenants.

7

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

GENERAL

In this Form 10-Q, the Company, when discussing the future, may use
words like "anticipate", "believe", "estimate", "expect", "intend", "should" and
similar expressions, or the negative thereof. These words represent
forward-looking statements. In addition, any analysis of the adequacy of the
allowance for loan losses or the interest rate sensitivity of the Bank's assets
and liabilities represent attempts to predict future events and circumstances
and also represent forward-looking statements.

Many factors could cause future results to differ from what is
anticipated in the forward-looking statements. For example, future financial
results could be affected by (i) deterioration in local, regional, national or
global economic conditions which could cause an increase in loan delinquencies
or a decrease in collateral values; (ii) changes in market interest rates or
changes in the speed at which market interest rates change; (iii) changes in
laws and regulations affecting the financial service industry; (iv) changes in
competition and (v) changes in consumer preferences.

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, 2001, 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.

CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 2001 TO JUNE 30, 2002

During the six months ended June 30, 2002, total assets declined $36.1
million or 1.3%. The Company's security portfolio declined $32.4 million or
5.18% as a result of normal paydowns and maturities as well as sales during the
period. The Company's loans receivable, net of allowance, remained relatively
stable at $1.98 billion at June 30, 2002 compared with $1.97 billion at December
31, 2001. The Company continues to experience growth in its commercial loan
portfolio where balances rose $15.7 million during the period. However, total
loan growth has slowed in recent periods with residential balances declining
$8.9 million during the period due to normal amortization.

Total deposits rose $74.3 million or 4.1% during the six months ended
June 30, 2002 with the majority of this growth occurring in demand and time
deposits. Advances from the FLHB of Topeka declined $125.2 million or 17.2%
during the period as the Company utilized the increase in deposits as well as
cash generated from paydowns, maturities and sales in the securities portfolio
to meet its funding needs.

Total stockholders' equity increased $11.6 million during the six
months ended June 30, 2002. The increase in stockholders' equity came primarily
as a result of earnings during the period offset by an increase in treasury
shares and a decline in accumulated other comprehensive income. During the
period, the Company repurchased 150,000 shares at market value for $2.3 million
as part of a stock repurchase program which began last year. The increase in
additional paid-in capital of $1.2 million was the result of an exercise of
106,667 warrants, which were part of the original 591,000 warrants issued in
conjunction with the Company's 1997 private placement, as well as the exercise
of 23,000 incentive stock options issued under the Company's 1998 Stock Option
Plan. See Note 5 of the Notes to Consolidated Financial

8

Statements. At June 30, 2002, the Company and the Bank exceeded all regulatory
requirements to be considered well capitalized. See "--Liquidity and Capital
Resources".

On July 17, 2002, the Company announced its intent to acquire U.S.
National Bank, a privately-held institution located in Midwest City, Oklahoma,
with total assets of $34.2 million, deposits of $28.4 million, liabilities of
$30.4 million and stockholders' equity of $3.8 million. The acquisition will not
have a material impact on the consolidated financial condition of the Company.
The acquisition will bring total deposits in the Midwest City market to $113.6
million, a significant presence in that area.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 AND THE
THREE MONTHS ENDED JUNE 30, 2002 AND 2001

Net Income. Net income for the six and three months ended June 30, 2002
was $14.5 million and $7.5 million, respectively, up from $13.8 million and $7.1
million for the same respective period last year. Diluted earnings per share for
the six months ended June 30, 2002 were $.73, up 12.3% from the same period last
year. Diluted earnings per share for the quarter were $.37, up 12.1% from the
same quarter in the prior year. Earnings per share data in both periods gives
effect to the Company's purchase of 1.5 million of its outstanding shares in
2001 and 2002 and elimination of amortization of goodwill in 2002. The Company
discontinued its amortization of goodwill following its January 1, 2002 adoption
of Statement No. 142, Goodwill and Other Intangible Assets. See Note 9 of the
Notes to Consolidated Financial Statements. There was no amortization expense
for the six and three months ended June 30, 2002, whereas this expense amounted
to $670,000 and $335,000 for the six and three months ended June 30, 2001,
respectively. The Company's reported net income for the six months ended June
30, 2001, excluding the effects of goodwill amortization, would have been $14.5
million compared with $13.8 million as reported. Accordingly, net income for the
three months ended June 30, 2001, excluding the effects of goodwill
amortization, would have been $7.4 million compared to $7.1 million as reported.

Net Interest Income. Net interest income totaled $46.1 million in the
six months ended June 30, 2002 as compared to $42.0 million during the same
period in the prior year. Net interest income in the three-month comparative
periods ended June 30, 2002 and 2001 totaled $22.9 million and $21.3 million,
respectively. In both comparative periods, the increase was primarily
attributable to increasing spreads. Net interest margin was 3.47% year-to-date
compared to 3.45% last year at this time. On a sequential quarter basis, spreads
continue to decline as rates on interest-earning assets decline more rapidly
than rates on interest-bearing liabilities. Low interest rates, over a prolonged
period of time, as well as soft loan demand, will impact profitability
adversely.

Interest Income. Total interest income decreased by $7.7 million or
7.9% during the six months ended June 30, 2002 as compared to the same period in
the prior year, and fell by $3.8 million or 7.9% during the three months ended
June 30, 2002 compared to the same period in the prior year. Prepayment
penalties are included in interest income and had the effect of mitigating these
declines somewhat. However, notwithstanding the effects of prepayment penalties,
the decline in interest income during the six and three-month comparative
periods was due primarily to declines in the average yield on the Company's loan
portfolio, which dropped from 8.28% to 6.99% in the six-month comparative
periods and from 8.05% to 7.05% in the three-month comparative periods. These
rate declines were offset to a certain extent by increases in the average
balance of loans receivable which rose $115.2 million or 6.12% and $96.8 million
or 5.12% in both the six and three-month comparative periods.

Interest Expense. Total interest expense decreased $11.8 million or
21.5% in the six months ended June 30, 2002 as compared to the same period in
the prior year. Total interest expense decreased $5.4 million or 20.2% during
the three months ended June 30, 2002 as compared to the same period in the prior
year. The decreases in both comparative periods were primarily the result of the
declining cost of

9

deposits. The Company's average cost of deposits in the six-month period ended
June 30, 2002 was 3.20% as compared with 5.01% during the same period in the
prior year. Likewise, the Company's average cost of deposits in the three-month
period ended June 30, 2002 was 3.08% as compared with 4.76% during the same
period in the prior year. Declines in the average cost of deposits in both
periods offset modest increases in the average balance of total deposits in
those periods. Interest expense on FHLB advances increased in the comparative
three and six-month periods primarily due to increases in the average balance of
borrowings during those periods, which offset the decline in rates paid on those
borrowings. During the periods presented, interest expense on Senior Notes
consisted of interest accrued with respect to the Senior Notes issued in
connection with the 1997 purchase and recapitalization of the Company. During
the past three years, the Company has successfully purchased and retired $58.5
million of the original $80.0 million 11% Senior Notes, resulting in the
continued decrease in interest expense. Additionally, during the three and
six-month periods ended June 30, 2002, the Company paid $921,000 and $1.8
million, respectively, in interest expense on its 9% cumulative trust preferred
securities (the "Trust Preferred Securities"), which were issued in September
and October 2001.

Provision for Loan Losses. The Company increased its provision for loan
losses to $1.8 million during the second quarter from $1.2 million during the
same quarter last year, bringing the year-to-date provision to $3.6 million
versus $1.9 million at this date last year. Charge-offs (net of recoveries) in
the six and three-month periods ended June 30, 2002 were $2.9 million and $1.1
million, respectively. The Company's basis for provisions was a function of
management's 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, change in collateral values,
and detailed review of specific large loan relationships.

Noninterest Income. The components of noninterest income consist of
deposit-related income, loan fees and loan service charges, net gains on sale of
assets and other income. Total noninterest income increased $2.7 million or
26.7% during the six months ended June 30, 2002 and $1.4 million or 26.2% during
the three months ended June 30, 2002. Contributing to this increase was
deposit-related income growth in both comparative periods, primarily
attributable to the success of our High Performance Checking campaign as well as
increased account analysis fees from commercial cash management services. Net
gains on sales of assets during the quarter ended June 30, 2002 included gains
on sale of securities, which was offset by a loss on the sale of a classified
loan (for a net nonrecurring gain of $417,000), combined with $187,000 in gains
from on-going sales of single-family residential and student loans.

Noninterest Expense. Total noninterest expense increased $4.0 million
or 13.4% during the six months ended June 30, 2002 and $1.7 million or 11.4%
during the three months ended June 30, 2002. The increases in noninterest
expense were primarily attributable to compensation and advertising increases
considered necessary to support long-term strategic and marketing initiatives.

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 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

10

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
June 30, 2002, based on the information and assumptions set forth in the notes
below (dollars in thousands):

(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, 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.

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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):

- ----------

(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.
(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.

12

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 June 30, 2002, the Company had $451.0 million in
available borrowing capacity with the FHLB.

At June 30, 2002, the Company had approximately $349.5 million of
outstanding loan commitments (including unused lines of credit) for home equity,
commercial real estate and commercial business loans and an additional $7.6
million in performance standby letters of credit. Certificates of deposit which
are scheduled to mature or reprice within one year totaled $920.3 million at
June 30, 2002, and borrowings which are scheduled to mature or reprice within
the same period amounted to $36.7 million. The Company anticipates that
sufficient funds will be 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 the maturing
borrowings.

In September 1997, in connection with the Company's recapitalization,
the Company issued $80.0 million of Senior Notes. As of June 30, 2002, the
Company has purchased and retired $58.5 million of those outstanding Senior
Notes. These transactions reduced future interest costs associated with those
notes. The remaining $21.5 million of Senior Notes have an annual debt service
requirement of $2.4 million (or $1.2 million for each semi-annual period).

Capital Resources. In September 2001, the Company, through the Trust,
issued $35 million in Trust Preferred Securities with an additional issuance of
$5.3 million in October 2001. The Trust Preferred Securities increased the
Company's regulatory capital, which allows for the continued growth of its
banking franchise. The ability to treat these Trust Preferred Securities as
regulatory capital under Federal Reserve guidelines, coupled with the Federal
income tax deductibility of the related expense, provides the Company with a
cost-effective form of capital.

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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 June 30, 2002, the
Company exceeded all applicable capital requirements pursuant to the Risk-Based
Capital Guidelines and was considered "well capitalized" by having a total
risk-based capital ratio of 11.32%, a tier I risk-based capital ratio of 10.07%
and a leverage ratio of 7.12%.

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 COMMERCIAL COMMITMENTS

The following tables present contractual cash obligations and
commercial commitments of the Company as of June 30, 2002. See Note 3 of the
Notes to the Consolidated Financial Statements and "--Liquidity and Capital
Resources" (dollars in thousands):

In order to support strategic objectives, management initiated a
project to return its mainframe operations to an internally supported function.
The Company's mainframe processing had been operated in a data center operated
by a third-party servicer. During the first quarter of 2002, the Company brought
its mainframe processing in-house. The Company does not anticipate this action
will have a material impact on its consolidated financial condition and the
contractual obligations are reflected above.

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RECENT LEGISLATION

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002, or the SOA. The stated goals of the SOA are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.

The SOA is the most far-reaching U.S. securities legislation enacted in
some time. 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 Securities and
Exchange Commission, or the SEC, under the Securities Exchange Act of 1934, or
the Exchange Act. Given the extensive SEC role in implementing rules relating to
many of the SOA's new requirements, the final scope of these requirements
remains to be determined.

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.

This SOA addresses, among other matters: audit committees;
certification of financial statements by the chief executive officer 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 black out
periods; disclosure of off-balance sheet transactions; a prohibition on personal
loans to directors and officers, does not apply to loans made by ""insured
depository institutions'' that are subject to the insider lending restrictions
of the Federal Reserve Board; expedited filing requirements for Forms 4s;
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.

The SOA contains provisions which became effective upon enactment on
July 30, 2002 and provisions which will become effective from within 30 days to
one year from enactment. The SEC has been delegated the task of enacting rules
to implement various of the provisions with respect to, among other matters,
disclosure in periodic filings pursuant to the Exchange Act.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management" included in the
Company's Form 10-K for the year ended December 31, 2001 for Quantitative and
Qualitative Disclosures about Market Risk.

15

PART II OTHER INFORMATION

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

The Company held the Annual Meeting of Stockholders on May 22, 2002.
Management solicited proxies for the meeting, and there was no solicitation in
opposition to management's nominees as listed in the Proxy Statement. All
nominees were re-elected for a three-year term. Votes were cast as follows:

The stockholders ratified the appointment of KPMG LLP, independent
auditors, to audit the Company's financial statements for the year ending
December 31, 2002. Votes were cast as follows:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

99.1 Sarbanes-Oxley Act Certification

b. Reports on Form 8-K

The Company filed the following Form 8-K during the quarter ended June
30, 2002:

1. A Form 8-K dated April 16, 2002 was filed pursuant to the
release of earnings for the first quarter of 2002.

16

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 CORPORATION

Date: August 9, 2002 By/s/ Edward A. Townsend
------------------------
Edward A. Townsend
Chairman of the Board
Chief Executive Officer

LOCAL FINANCIAL CORPORATION

Date: August 9, 2002 By/s/ Richard L. Park
---------------------
Richard L. Park
Chief Financial Officer

17

FORM 10-Q

INDEX TO EXHIBITS