UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

OR

Commission File Number:
001-13949

LOCAL FINANCIAL CORPORATION

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

LOCAL FINANCIAL CORPORATION
INDEX

PART I. 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.

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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.

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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.

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LOCAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1)		Pending Merger and Basis of Presentation
		On 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 Compensation
		The Company applies the intrinsic-value based method of accounting prescribed by APB Opinion No. 25 and related interpretations in accounting for its stock option plan. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Accordingly, no 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

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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):

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

(4)		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 $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):

(5)		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 March 31, 2004 and December 31, 2003 and are summarized as follows (dollars in thousands):

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(6)		Stockholders’ Equity
		The 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 Income
		Comprehensive income for the three months ended March 31, 2004 and 2003 consisted of (dollars in thousands):

(8)		Earnings Per Share
		Basic net income per share is based upon the weighted average number of shares outstanding during the period. Stock options and warrants to purchase common stock are considered in diluted income per share calculations, if dilutive, and are computed using the treasury stock method.
		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:

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		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)		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 (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.

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(10)		New Accounting Pronouncements
		In 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. 51 which 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.

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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.

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

     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”.

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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.

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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):

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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

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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):

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

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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):

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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.

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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.

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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 CORPORATION
Date: May 7, 2004	By /s/ Edward A. Townsend
	Edward A. Townsend
	Chairman of the Board Chief Executive Officer
	LOCAL FINANCIAL CORPORATION
Date: May 7, 2004	By/s/ Richard L. Park
	Richard L. Park
	Executive Vice President Chief Financial Officer

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Form 10-Q
Index to Exhibits

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