FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FIRST FINANCIAL CORPORATION June 30, 1999 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 1999 Commission File Number 0-16759 FIRST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1546989 (State or other jurisdiction (I.R.S. Employer Incorporation or organization) Identification No.) One First Financial Plaza, Terre Haute, IN 47807 (Address of principal executive office) (Zip Code) (812) -238-6000 (Registrant s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 _____. As of June 30, 1999 were outstanding 6,975,219 shares without par value, of the registrant. 1 FIRST FINANCIAL CORPORATION FORM 10-Q INDEX PART I. Financial Information Page No. Item 1. Financial Statements: Consolidated Statements of Condition.........................3 Consolidated Statements of Income............................4 Consolidated Statements of Shareholders Equity and Comprehensive Income.......................................5 Consolidated Statements of Cash Flows........................7 Notes to Consolidated Financial Statements...................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........9 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders.....................................15 Signatures............................ ..........................16 2 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION June, 30 December, 31 1999 1998 (Unaudited) ASSETS (Amounts in thousands) Cash and due from bank $63,981 $54,877 Federal funds sold and securities purchased under agreement to resell 350 450 Investments, available-for-sale 582,854 633,365 Loans: Commercial, financial and agricultural 239,147 233,080 Real estate - construction 38,436 32,880 Real estate - mortgage 658,235 636,615 Installment 213,707 205,251 Lease financing 5,516 5,825 1,155,041 1,113,651 Less: Unearned income 1,891 1,886 Allowance for loan losses 17,786 16,429 1,135,364 1,095,336 Accrued interest receivable 14,207 14,704 Premises and equipment, net 24,162 24,426 Other assets 25,163 26,594 TOTAL ASSETS $1,846,081 $1,849,752 LIABILITIES AND SHAREHOLDERS EQUITY Deposits: Noninterest-bearing $143,829 $148,747 Interest-bearing: Certificates of deposit of $100,000 or more 227,641 196,773 Other interest-bearing deposits 895,478 914,845 1,266,948 1,260,365 Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 66,206 100,571 Treasury tax and loan open-end note 6,147 3,061 Advances from Federal Home Loan Bank 207,086 185,930 279,439 289,562 Other liabilities 15,789 21,504 Long-term debt 6,612 6,619 Long-term advances from Federal Home Loan Bank 105,225 89,519 TOTAL LIABILITIES 1,674,013 1,667,569 Shareholders equity: Common stock, $.125 stated value per share; authorized 10,000,000 shares; issued and outstanding 903 903 7,225,483 shares for 1998 and 1999 including treasury shares of 91,093 in 1998 and 250,264 in 1999 Additional capital 66,680 66,680 Retained earnings 117,875 110,566 Accumulated other comprehensive income (loss): Unrealized gains (losses) on investments, net of tax -1,541 8,123 Less: Treasury shares at cost -11,849 -4,089 TOTAL SHAREHOLDERS EQUITY 172,068 182,183 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $1,846,081 $1,849,752 The accompanying notes are an integral part of the consolidated financial statements. 3 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 Unaudited Unaudited Unaudited Unaudited (Amounts in thousands, except per share amounts) INTEREST INCOME: Loans $23,681 $23,151 $47,115 $45,755 Investment securities: Taxable 7,226 6,659 14,225 13,272 Tax-exempt 2,030 2,072 4,029 4,036 9,256 8,731 18,254 17,308 Other interest income 148 224 482 522 TOTAL INTEREST INCOME 33,085 32,106 65,851 63,585 INTEREST EXPENSE: Deposits 11,225 12,885 22,656 25,076 Other 5,103 3,700 9,955 7,583 TOTAL INTEREST EXPENSE 16,328 16,585 32,611 32,659 NET INTEREST INCOME 16,757 15,521 33,240 30,926 Provision for loan losses 1,078 1,549 2,560 2,956 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,679 13,972 30,680 27,970 OTHER INCOME Trust income 589 503 1,326 1,085 Service Charges on deposit accounts 319 325 620 645 Other service charges and fees 1,371 1,184 2,487 2,264 Investment securities gains 133 39 157 391 Other 512 274 1,181 556 2,924 2,325 5,771 4,941 OTHER EXPENSES Salaries and employee benefits 6,195 5,983 12,259 11,977 Occupancy expense 731 684 1,466 1,388 Equipment expense 865 830 1,748 1,648 Other 3,203 3,200 6,406 6,190 10,994 10,697 21,879 21,203 INCOME BEFORE INCOME TAXES 7,609 5,600 14,572 11,708 Income Tax Expense 2,223 1,430 4,194 3,038 NET INCOME $5,386 $4,170 $10,378 $8,670 PRIMARY EARNINGS PER SHARE $0.77 $0.58 $1.48 $1.20 Weighted average number of shares outstanding 6,975 7,217 7,010 7,221 The accompanying notes are an integral part of the consolidated financial statements. 4 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME Six Months Ended June 30, 1999 and 1998 Accumulated Other (Dollar amounts in thousands, Common Additional Retained Comprehensive Treasury except per share data) Stock Capital Earnings Income Stock Total Balance, January 1, 1999 $903 $66,680 $110,566 $8,123 $- 4,089 $182,183 Comprehensive income: Net income 10,378 10,378 Other comprehensive income, net of tax: Change in unrealized gains on securities, net of tax of $-5,090 -9,453 -9,453 Less: reclassification adjustment for gains included in net income, net of tax of $-113 - 211 - 211 Total comprehensive income 714 Cash Dividends, $.44 per share -3,069 -3,069 Treasury stock purchase - 7,760 -7,760 __________________________________________________________________________________ Balance, June 30, 1999 $903 $66,680 $117,875 $-1,541 $-11,849 $172,068 Balance, January 1, 1998 $877 $59,787 $ 98,046 $6,770 - $165,480 Comprehensive income: Net income 8,670 8,670 Other comprehensive income, net of tax: Change in unrealized gains on securities, net of tax of $ 276 512 512 Less: reclassification adjustment for gains included in net income, net of tax of $-137 - 254 -254 Total comprehensive income 8,928 Issuance shares for Morris Plan acquisition 26 6,893 6,919 Cash Dividends, $.40 per share -2,884 -2,884 Treasury stock purchase -780 - 780 __________________________________________________________________________________ Balance, June 30, 1998 $903 $66,680 $103,832 $7,028 $ -780 $177,663 The accompanying notes are an integral part of the consolidated financial statements. 5 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME Three Months Ended June 30, 1999 and 1998 Accumulated Other (Dollar amounts in thousands, Common Additional Retained Comprehensive Treasury except per share data) Stock Capital Earnings Income Stock Total Balance, April 1, 1999 $903 $66,680 $115,558 $5,988 $- 11,849 $177,280 Comprehensive income: Net income 5,386 5,386 Other comprehensive income, net of tax: Change in unrealized gains on securities, net of tax of $-3,949 -7,334 -7,334 Less: reclassification adjustment for gains included in net income, net of tax of $-104 - 195 - 195 Total comprehensive income -2,143 Cash Dividends, $.44 per share -3,069 -3,069 ______________________________________________________________________________ Balance, June 30, 1999 $903 $66,680 $117,875 $-1,541 $-11,849 $172,068 Balance, April 1, 1998 $903 $66,680 $102,546 $6,019 - $176,148 Comprehensive income: Net income 4,170 4,170 Other comprehensive income, net of tax: Change in unrealized gains on securities, net of tax of $ 557 1,034 1,034 Less: reclassification adjustment for gains included in net income, net of tax of $-13 - 25 -25 Total comprehensive income 5,179 Cash Dividends, $.40 per share -2,884 -2,884 Treasury stock purchase -780 - 780 _______________________________________________________________________________ Balance, June 30, 1998 $903 $66,680 $103,832 $7,028 $ -780 177,663 The accompanying notes are an integral part of the consolidated financial statements. 6 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 1999 1998 (Unaudited) (Amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $10,378 $8,670 Adjustment to reconcile net income to net cash provided by operating activities: Net amortization of discounts on investments -133 -706 Provision for loan losses 2,560 2,956 Investment gains -157 -391 Provision for depreciation and amortization 1,358 1,228 Provision for deferred income taxes -919 273 Net decrease (increase) in accrued interest receivable 497 -481 Other, net 3,861 -847 NET CASH PROVIDED BY OPERATING ACTIVITIES 17,445 10,702 CASH FLOWS FROM INVESTING ACTIVITIES: Sales and maturities of available-for-sale securities 156,101 146,026 Purchases of available-for-sale securities -121,925 -178,689 Loans made to customers, net of repayments -42,602 -23,463 Net decrease in federal funds sold 100 680 Additions to premises and equipment -1,260 -929 NET CASH USED BY INVESTING ACTIVITIES -9,586 -56,375 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase from sales and redemptions of certificates of deposit 12,624 80,492 Net decrease in other deposits -6,041 -36,818 Net (decrease) increase in short-term borrowings -10,114 6,053 Cash dividends -3,154 -2,740 Purchase of treasury stock -7,760 -780 Net increase in long-term debt and advances 15,690 4,145 NET CASH PROVIDED BY FINANCING ACTIVITIES 1,245 50,352 NET INCREASE IN CASH AND CASH EQUIVALENTS 9,104 4,679 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 54,877 54,285 CASH AND CASH EQUIVALENTS, END OF PERIOD $63,981 $58,964 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $33,140 $32,190 Income taxes paid $5,267 $3,689 The accompanying notes are an integral part of the consolidated financial statements. 7 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying June 30, 1999 and 1998 consolidated financial statements are unaudited. The December 31, 1998 consolidated financial statements are as reported in the First Financial Corporation (the Corporation) 1998 annual report. The following notes should be read together with notes to the consolidated financial statements included in the 1998 annual report. 1. The significant accounting policies followed by the Corporation and its subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are, in the opinion of management, necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated financial statements and are of a normal recurring nature. 2. A loan is considered to be impaired when, based upon current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan. Impairment is primarily measured based on the fair value of the loan s collateral. The following table summarizes impaired loan information. (000's) June 30 1999 1998 Impaired loans with related allowance for loan losses calculated under SFAS No. 114.......... $2,902 $ 993 Interest payments on impaired loans are typically applied to principal unless collection of the principal amount is deemed to be fully assured, in which case interest is recognized on a cash basis. Interest income on commercial loans and residential real estate loans is no longer accrued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Commercial loans are charged off at the time the loan becomes 180 days delinquent unless the loan is well secured and in process of collection, or other circumstances support collection. Credit card loans and other unsecured personal credit lines are typically charged off no later than 180 days delinquent. Other consumer loans are typically charged off when they become 150 days delinquent. In all cases, loans must be placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are paid. 3. Investments The cost and fair value of the Corporation's investments at June 30, 1999 are shown below. All investments are classified as available-for-sale. (000's) June 30, 1999 Amortized Cost Fair Value Available-For-Sale: United States Government $193,185 $189,907 United States Government Agencies 196,153 192,920 State and Municipal 155,079 156,360 Other 44,290 43,667 $588,707 $582,854 8 4. Changes in Shareholders' Equity Under the Corporation's common stock repurchase program announced in September 1998, the Corporation has repurchased 250,264 shares as of June 30, 1999 compared to 91,903 shares as of December 31, 1998. In March 1998, the Corporation completed its acquisition of The Morris Plan Company of Terre Haute, Inc. (Morris Plan), whose assets total approximately $38 million. In exchange for all of the outstanding common stock of Morris Plan, the Corporation issued 210,000 shares of its common stock. The acquisition was accounted for using purchase accounting and resulted in goodwill of $2.4 million, which will be amortized over approximately 15 years. 9 FIRST FINANCIAL CORPORATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion is to point out key factors in the Corporation's recent performance compared with earlier periods. The discussion should be read in conjunction with the financial statements beginning on page three of this report. All amounts are for the consolidated entities. It is presumed the readers of these financial statements and the following narrative have previously read the Corporation's annual report for 1998. Forward-looking statements contained in the following discussion are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Corporation's control and are subject to change. These uncertainties can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements in this discussion. Summary of Operating Results The Corporation reported record earnings for the six month and three month periods ended June 30, 1999. Net income for the six months ended June 30, 1999 was $10.4 million, a 19.7% increase above the same period of 1998. Earnings per share of $1.48 for the six month period was 23.3% more than the $1.20 reported in 1998. For the three month period ended June 30,1999 net income of $5.4 million was 29.2% higher than the $4.2 million reported in 1998, while the $.77 earnings per share for the second quarter was 32.8% ahead of the previous years' second quarter. The major reason for the growth in income, for the six month period , was a 6.4% increase in assets, primarily loans, and a reduction in the efficiency ratio from 55.3% to 52.8%. Earnings per share growth was positively effected by a stock repurchase plan that began in the third quarter of 1998. Interest Income The Corporation's primary source of earnings is net interest income, which is the difference between the interest earned on loans and other investments and the interest incurred for deposits and other sources of funds. Although net interest income increased to $33.2 million in the first six months of 1999 from $30.9 million in the same period of 1998, the net interest margin decreased to 4.09% for 1999 from 4.16% in the same period of 1998. This decrease was the result of a lower yield on earning assets in 1999 than in the prior year. The 1999 second quarter net interest income also increased to $16.8 million from $15.5 million for the same quarter of 1998 while the net interest margin decreased to 4.11% for the second quarter of 1999 from 4.14% in the same quarter of 1998. Other Income Other income for the six months of 1999, as compared to the same period of 1998, increased $.8 million or 16.8%. Trust income and other income increased to $1.3 million and $1.2 million or 22.2% and 112.4% respectively, compared to the same period of 1998. The main reasons for the increase of other income are the result of realized gains from the sale of other real estate owned, sale of mortgage loans in the secondary market, and commissions received from the formation of a reinsurance company for $.2 million, $.1 million and $.2 million, respectively. These increases were partially offset by the reduction in realized gains from investment sales of $.2 million. 10 Second quarter other income increased to $2.9 million from $2.3 million compared to the same quarter of 1998. This increase is mainly from commissions received from the reinsurance company and gains realized from sales of investment securities for $.2 million, and $.1 million, respectively. Other Expenses Other expenses for the first six months of 1999, as compared to the same period of 1998, increased slightly to $21.9 million from $21.2 million or 3.2%. Most of the components of other expenses increased slightly and no one significant factor contributed to this increase. Second quarter other expenses also increased slightly to $11.0 million from $10.7 million or 2.8% for the same quarter of 1998. Allowance for Loan Losses The Corporation's provision for loan losses decreased to $2.6 million from $3.0 million for the first six months of 1999 compared to the same period a year earlier. At June 30, 1999, the allowance for loan losses was 1.54% of net loans. This compares with an allowance of 1.48% at December 31, 1998. Net chargeoffs for the first six months of 1999 were $1.2 million compared to $2.0 million for the same period of 1998. This decrease was due to the improvements of overall loan portfolio quality. The ratio of net chargeoffs to average loans outstanding for the last five years ended December 31, 1998, was .33%. With this experience and based on management's review of the portfolio, management believes the allowance of $17.8 million at June 30, 1999 is adequate. Under-performing Assets Under-performing assets consist primarily of (1) nonaccrual loans and leases on which the ultimate collectability of the full amount of interest is uncertain, (2) loans and leases which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, (3) loans and leases past due ninety days or more as to principal or interest and (4) land sold on contract and others. A summary of under-performing assets at June 30, 1999 and December 31, 1998 follows: (000's) (000's) June 30, 1999 December 31, 1998 Nonaccrual loans and leases $ 3,650 $ 4,103 Renegotiated loans and leases 1,397 70 Land sold on contract and others 2,210 1,914 Total non-performing assets $ 7,257 $ 6,087 Ninety days past due loans and leases 7,159 8,184 Total under-performing assets $14,416 $ 14,271 Ratio of the allowance for loan losses as a percentage of non-performing assets 245% 270% Ratio of the allowance for loan losses as a percentage of under-performing assets 123% 115% 11 The following loan categories comprise significant components of the under- performing loans at June 30, 1999 and December 31, 1998. Non-Accrual Loans: (000's) (000's) June 30, 1999 December 31, 1998 1-4 family residential $1,858 51% $1,927 47% Commercial loans 992 27 587 14 Installment loans 775 21 879 22 Other, various 25 1 710 17 $3,650 100% $4,103 100% Past due 90 days or more: 1-4 family residential $3,508 49% $3,456 42% Commercial loans 2,274 32 2,963 36 Installment loans 734 10 590 7 Other, various 643 9 1,175 15 $7,159 100% $8,184 100% There are no material industry concentrations within the under-performing loans. In addition to the above under-performing loans, certain loans are felt by management to be impaired for reasons other than the current repayment status. Such reasons may include but not be limited to previous payment history, bankruptcy proceedings, industry concerns, or information related to a specific borrower that may result in a negative future event to that borrower. At June 30, 1999 the Corporation had $2.1 million of these loans which are still in accrual status. Interest Rate Sensitivity and Liquidity The Corporation charges the nine subsidiary banks with monitoring and managing their individual sensitivity to fluctuations in interest rates and assuring that they have adequate liquidity to meet loan demand or any potential unexpected deposit withdrawals. This function is facilitated by the Asset/Liability Committee. The primary goal of the committee is to maximize net interest income within the interest rate risk limits approved by the Board of Directors. This goal is accomplished through management of the subsidiary bank's balance sheet liquidity and interest rate risk exposures due to the changes in economic conditions and interest rate levels. Interest Rate Risk Management considers interest rate risk to be the Corporation s most significant market risk. Interest rate risk is the exposure to changes in net interest income as a result of changes in interest rates. Consistency in the Corporation's net income is largely dependent on the effective management of this risk. The Committee reviews a series of monthly reports to ensure that performance objectives are being met. The Committee monitors and controls interest rate risk through earnings simulation. Simulation modeling measures the effects of changes in interest rates, changes in the shape of the yield curve, and changes in prepayment speeds on net interest income. The primary measure of Interest Rate Risk is "Earnings at Risk." This measure projects the earnings effect of various rate movements over the next three years on net interest income. It is important to note that measures of interest rate risk have limitations and are dependent upon certain assumptions. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual results 12 will differ from simulated results due to timing, frequency and amount of interest rate changes as well as overall market conditions. The Committee has performed a thorough analysis and believes the assumptions to be valid and theoretically sound. The relationships are continuously monitored for behavioral changes. In its interest rate risk management, the Corporation currently does not utilize any derivative products and is not engaged in securities trading activity. The Corporation instead invests in assets whose value is derived from an underlying asset. These assets include government agency issued mortgage- backed securities. The performance of these assets in changing rate environments is included in the following table. The table below shows the Corporation's estimated earnings sensitivity profile as of June 30, 1999. Given a 100 basis point increase in rates, net interest income would decrease 1.07% over the next 12 months and decrease 4.44% over the next 24 months. A 100 basis point decrease would result in a 1.67% decrease in net interest income over the next 12 months and a 1.35% increase over the next 24 month periods. These estimates assume all rates changed overnight and management took no action as a result of this change. Basis Point Percentage Change in Net Interest Income Interest Rate Change 12 months 24 months 36 months Down 300 -6.80% -0.72% -7.82% Down 200 -3.85 1.34 -3.46 Down 100 -1.67 1.35 -1.12 Up 100 -1.07 -4.44 -2.00 Up 200 -2.11 -8.59 -3.52 Up 300 -2.58 -11.40 -3.27 The Corporation uses products which contain options, most notably callable agency securities and putable Federal Home Loan Bank advances. The securities pay a premium rate and the advances charge a discounted rate in exchange for the option. Therefore, there is a benefit to current income by using these products. Typical rate shock analysis does not reflect management s ability to react and thereby reduce the effects of rate changes, and represents a worst case scenario. The model assumes no actions are taken and prices change to the full extent of the rate shock. Liquidity Risk Liquidity is measured by each bank's ability to raise funds to meet the obligations from its customers, including deposit withdrawals and credit needs. This is accomplished primarily by maintaining sufficient liquid assets in the form of investment securities and core deposits. The Corporation has $11.5 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $71.1 million of principal payments from mortgage- backed securities. Given the current interest rate environment, the Corporation anticipates $5.1 million of securities to be called within the next 12 months. With these sources of funds, the Corporation currently anticipates adequate liquidity to meet the expected obligations of its customers. Capital Adequacy As of June 30, 1999 the Corporation's leverage ratio was 9.23% compared to 9.51% at December 31, 1998. At June 30, 1999 the Corporation's total capital, which includes Tier II capital, was 16.43% compared to 16.29% at December 31, 1998. These amounts exceed minimum regulatory capital requirements. 13 Year 2000 The Year 2000 problem concerns the inability of information systems to properly recognize and process date sensitive information beginning on December 31, 1999. The Corporation has developed a Year 2000 team responsible for ensuring that its information technology (IT) systems and software, and non-IT systems are Year 2000 compliant in time to minimize any significant detrimental effects on operations and service to its customers. The Corporation is currently in the validation stage of a five step Year 2000 program. The awareness, assessment and renovation steps have been completed for all mission critical applications. The validation stage includes the necessary software and hardware testing that is required as well as ongoing discussions with vendors and customers on the success of their validation efforts. The Corporation utilizes Fiserv-CBS software for processing all of its core applications. The testing of this software began on September 1, 1998, and was substantially completed by the end of 1998. Currently the Corporation is focusing on maintaining the internal core processing system s readiness and will continue the effort until the Year 2000. In addition, the Corporation will continue to manage third party system relationships, update disaster recovery and contingency plans, and will also continue to test secondary computer systems. The remainder of Year 2000 mission critial testing was completed by June 30, 1999. The Corporation is in the process of corresponding with its major commercial loan customers and major suppliers and vendors to assess the credit risk related to the Year 2000 problem as well as the risk of business interruption. The majority of the Corporation s non-IT related systems have been assessed as Year 2000 compliant and the final testing phase was completed by June 30, 1999. The total estimated cost related to the Year 2000 issue, including the cost of replacing equipment is $622,000. Total incremental cost incurred through June 30, 1999 is approximately $419,000. The Corporation does not expect that the cost related to the Year 2000 project will have a material effect on the results of its operations or financial condition. The above expectations are subject to inherent uncertainties of the Year 2000 problem, including the readiness of third-party suppliers and regulatory agencies that the Corporation depends upon to meet customers needs. The failure to correct a material problem could result in an interruption or failure of normal business activities or operations. Such failures could materially affect the Corporation's ability to meet customers' needs and ultimately affect its results of operations and financial condition. The Corporation believes that with the successful completion of its Year 2000 program, the possibility of significant interruptions will be reduced. Concurrently with the Year 2000 program described above, the Corporation has developed contingency plans intended to mitigate the possible disruption in business operations that may result from the year 2000 problem and is estimating the costs for such plans. Contingency plans include increasing cash in vault, ordering extra forms/supplies, increasing allowance for loan loss allocation for year 2000 credit risk, establishing trigger dates for activating alternative solutions/vendors, identifying possible alternative vendors, preparing for some manual preparation of checks, forms, etc., and other appropriate measures. Contingency plans and related cost estimates are being continually refined as information becomes available. 14 FIRST FINANCIAL CORPORATION PART II OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders (a) The Annual meeting of the shareholders of the Corporation was held on April 21, 1999. (b) The following were elected Directors of the Corporation for a three year term: B. Guille Cox, Jr., Anton H. George, Gregory L Gibson and John W. Ragle. (c) The shareholders unanimously approved the annual report of the Corporation and unanimously approved the actions of the Directors and Officers of the Corporation for the fiscal year ended December 31, 1998. - ----------------------------------------------------------------------- No other information is required to be filed under Part II of this form. 15 FIRST FINANCIAL CORPORATION PART II OTHER INFORMATION FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST FINANCIAL CORPORATION (Registrant) Date: August 13, 1999 By (Signature) Donald E. Smith, President Date: August 13, 1999 By (Signature) John W. Perry, Secretary Date: August 13, 1999 By (Signature) Michael A. Carty, Treasurer 16 FIRST FINANCIAL CORPORATION PART II OTHER INFORMATION FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST FINANCIAL CORPORATION (Registrant) Date: August 13, 1999 By_________________________ Donald E. Smith, President Date: August 13, 1999 By_________________________ John W. Perry, Secretary Date: August 13, 1999 By_________________________ Michael A. Carty, Treasurer 17