Peoples Financial Corp.
Annual Report 2005

Plain-text annual report

W E W I L L R EB U I L D O U R C O A S T. W E W I L L R E S T O RE O U R L I F E S T Y L E . W E W I L L R E CL A I M T O M O R R O W. W E W I L L R EI N V E S T T O D AY. W E W I L L R E VE R E Y E S T E R D AY. W E W I L L R E I NV E N T O U R F U T U R E . W E W I L L R E J O I CE O N C E A G A I N . P E O P L E S F I N A N C I A L C O R P O R AT I O N A N N U A L R E P O R T 2 0 0 5 W E W I L L R E B U I L D O U R C O A S T O N E B R I C K A T A T I M E . C O N T E N T S P R E S I D E N T ’ S L E T T E R 1 Y E A R I N R E V I E W F I N A N C I A L S 3 5 C O R P O R A T E I N F O R M A T I O N 3 5 W E W I L L R E S T O R E O U R L I F E S T Y L E A N D O U R L I V E S . T O O U R S H A R E H O L D E R S : T To paraphrase Charles Dickens, 2005 was the best of years and it was the worst of years. Thankfully, 2005 is behind us, and we can now turn our collective attention to the reconstruction and recovery of our Mississippi Gulf Coast. The first eight months of 2005 were quite successful for your company and bank. The Mississippi Gulf Coast was moving into a strong economic resurgence. The gaming industry started a new phase of growth with new casinos opening, under construction and applying for permits. Even better, this new phase in the gaming industry was accompanied by a corresponding wave of new high-rise condominium development along the beach from Waveland to Ocean Springs. The Mississippi Gulf Coast was rapidly becoming the new frontier of resort and condominium activity. Of course, just about all of that disappeared in one day, along with buildings and institutions that had withstood the worst Hurricane Camille could serve up a generation ago. Our history will no longer be recorded in terms of pre and post-Camille but in pre and post-Katrina. We have a new name for destruction and tragedy. In the aftermath of all this sorrow, however, we can see the future take form, and it is beginning to resemble its earlier incarnation—and likely annual report 2005 / 1 W E W I L L R E C L A I M T O M O R R O W F O R G E N E R A T I O N S T O C O M E . better. New casinos have been announced and already opened on the Once again, I have to call attention to the heroic efforts of our great safety of shore to replace the ones destroyed at the water’s edge. Permits team of bankers who put us back in business just days after Hurricane have been applied for nearly three times the number of condominium Katrina left the area. I could not be more proud of their accomplish- units as we had seen before August, 2005. The world has taken notice ments, and I have no doubt that they will accomplish even more in the of the Mississippi Gulf Coast, and thanks to the efforts of our influential difficult months and years ahead. If everyone on the Gulf Coast shows congressional delegation, federal financial resources are beginning to the same resolve and resourcefulness as our team has, then the future pour in to rebuild our region. of our region is bright indeed. Tragedy is a terrible price to pay for opportunity, and certainly no one Before closing, I want to mark the death of Richard Creel, a former wanted this chapter in our history to be written this way. But this is the director of The Peoples Bank who served honorably and faithfully for hand we have been dealt, and the only reasonable response is to make 21 years before his retirement from our board in 1994. His death repre- the best of the situation. sents an irreplaceable loss to our community and to The Peoples Bank institutional history. Richard Creel, his counsel and his friendship will The history of hurricanes along our American shores tells us that with be missed. proper planning, unshakable resolve and a healthy dose of outside assistance, communities laid waste by nature can not merely rebuild, Finally, I must recognize the guidance of our Board of Directors. They they can resurge. Mobile after Frederick, Charleston after Hugo and have remained calm under the most stressful of circumstances, resolute Homestead after Andrew are recent examples of triumph in the wake in the face of grave uncertainty and faithful to the trust our stockholders of tragedy. have placed in their wisdom. They too are heroes. They too believe in the In these and other cases, local banks rose to the occasion and led the way in providing capital and other financial resources to support the Sincerely, vision of the future of our institution and our region. rebuilding and recovery efforts. The Peoples Bank has already started down this road. As I mentioned in my third quarterly report shortly after the storm had passed, The Peoples Bank is a Gulf Coast bank. When our region suffers, we suffer. When our region does well we do well. So far, we have suffered together, but now we are seeing the beginnings of a Chevis C, Swetman new, more prosperous future. Chairman of the Board, President & CEO 2 / annual report 2005 W E W I L L R E I N V E S T T O D A Y F O R O U R S E L V E S . T H E Y E A R I N R E V I E W EARNINGS WEATHER THE STORM Despite the ravages of Hurricane Katrina, the company’s 2005 net income showed an increase over 2004. Earnings reached $5,882,000 for the year, 2% more than the year before. H However, prior to August 29, 2005, earnings had been moving upward strongly, due primarily to consistent increases in loan volume, a negative provision for loan losses, an extraordinary gain and the repayment of a large loan that had previously been impaired. To recall what now seems a distant memory, by mid-year, earnings had totaled $5,119,000, a 67% increase over the same period the year before. commercial and residential loans, the Board of Directors and management recorded a provision for loan losses totaling $5,055,000. Exclusive of all adjustments for loan loss provisions during the year, the company would have earned more than $9,000,000, a significant increase over 2004 and an all-time record. The primary drag on 2005 earnings came in the third quarter with a The infusion of cash from hurricane relief efforts, disaster aid funding large addition to loan loss reserves in the immediate wake of the storm. and insurance proceeds resulted in a 52% increase in deposits, finishing Following a careful, systematic evaluation of potential losses in both the year at $592 million. While a surge this large presents challenges to $5,794 $5,882 $5,018 $0.38 $0.32 $0.29 $349,346 $334,193 $302,155 2003 2004 2005 N E T I N C O M E ( I N T H O U S A N D S ) 2003 2004 2005 D I V I D E N D S ( P E R S H A R E ) 2003 2004 2005 L O A N S ( I N T H O U S A N D S ) annual report 2005 / 3 W E W I L L R E I N V E N T O U R F U T U R E B E C A U S E T H I S I S O U R H O M E . liquidity, as customers eventually call upon those funds, it also presents As of early 2006, all but two branches have returned to their original the opportunity for additional earnings through intelligent investment buildings. Bay St. Louis is expected to return operations to its permanent and timing of maturities. structure in May, and plans are already underway to build a new branch in Pass Christian to post-Katrina standards in a new location. DIVIDEND IS MAINTAINED, SHARE REPURCHASES EXTENDED Supporting the prevailing optimism about the future of the Mississippi COMMUNITY SUPPORT CONTINUES Gulf Coast, the Board of Directors maintained the level of the semi- For more than a century, The Peoples Bank and its employees have annual dividend at $.20 a share. The dividend increased 11.1% in June, supported the Gulf Coast through contributions to community charities. 2005, which at the time was the fifth consecutive increase dating Hurricane Katrina did not stop that effort. back to the first half of 2003. In addition, the Board approved a three-year extension of the stock corporate donation at the organization’s annual Heart Walk — two days In fact, bank officials presented the American Heart Association a $5,000 repurchase plan, which authorizes the repurchase of up to 129,000 shares before Katrina struck. of common stock. The ability to maintain the dividend and the stock repurchase plan reflects the Board’s confidence in the earning potential The Salvation Army also received a $5,000 corporate donation as the and the capital strength of the company. bank’s second designated charity recipient for the year. THE BANK REBUILDS ITS INFRASTRUCTURE In December, Gulf Coast charities St. Vincent de Paul Pharmacy and The Peoples Bank did not escape the physical damage Hurricane Katrina inflicted on the wider Gulf Coast area. Five of the bank’s 16 branches were heavily damaged, and one branch was completely destroyed. However, the heroic efforts of the bank’s staff and an effective emergency response plan returned the computer system to operation only 48 hours after the storm’s passage. Within a week, seven branches had reopened, and by early December all 16 branches were operating, some from temporary buildings. Quality Hospice received checks for $9,700 each. The funds were raised and donated by bank employees during the year through a variety of special events and other fund-raising activities. The City of Biloxi honored The Peoples Bank’s long history of community support with the city’s 2005 Volunteer Recognition Award. Biloxi Mayor A. J. Holloway presented the award to a group of senior executives at the city’s annual dinner honoring contributions from members of the local corporate community. 4 / annual report 2005 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries (the Company) for the years ended December 31, 2005, 2004 and 2003. W E W I L L R E J O I C E O N C E A G A I N B E C A U S E W E B E L I E V E . These comments highlight the significant events for these years and should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this annual report. 4 F O R W A R D - L O O K I N G I N F O R M A T I O N Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s antici- pated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report con- tains forward-looking statements and reflects industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. 4 C R I T I C A L A C C O U N T I N G P O L I C I E S Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements. The Company’s single most critical accounting policy relates to its allowance for loan losses, which reflects the estimated losses result- ing from the inability of its borrowers to make loan payments. If there was a deterioration of any of the factors considered by Management in evaluating the allowance for loan losses, as discussed in Note A, the estimates of loss would be updated and additional provisions for loan losses may be required. 4 O V E R V I E W Prior to August 29, 2005, the Company was having a very good year. One large credit, that had previously been impaired, paid off. This resulted in the realization of interest income of $900,000 and a negative provision for loan losses of $1,600,000. An extraordinary gain of $815,000 was realized as a result of the Pulse EFT Association Exchange. Loan demand was strong and the local economy was thriving. When Hurricane Katrina hit the Mississippi Gulf Coast on August 29, 2005, it impacted the Company’s operations and its entire trade area. What has been called the largest natural disaster to affect the United States destroyed tens of thousands of homes and businesses. Local infrastructure was in shambles. The gaming and tourism industries, which play a major role in the Gulf Coast economy and employ thousands, have been crippled. Six of our bank subsidiary’s sixteen branches were either destroyed or severely damaged. Fortunately, however, our operations and computer center sustained only minimal damage and, coupled with our excellent disaster recovery preparations and the dedicated efforts of our staff, enabled us to continue to serve our customers without interruption. The Company’s success is completely tied to the success of south Mississippi and, therefore, Katrina has impacted the Company’s earnings in 2005. The primary effect was from potential loan losses, and within weeks of the storm the Company initiated a thorough evaluation of its portfolio, as discussed later in detail under “Provision for Loan Losses”. Based on this evaluation, during the third quarter of 2005, the Company recorded a provision for potential loan losses of $5,055,000. The Company has continued to evaluate its loan portfolio and has not identified any additional potential losses. Net income for 2005 was $5,882,000 as compared with $5,794,000 for 2004. In addition to the factors discussed previously, the Company has seen an increase in its deposits of more than 50% since Katrina. Much of these funds are currently invested in short-term Treasury securities. Managing the net interest margin in our trade area’s extremely competi- tive environment continues to be a challenge. Excluding the $900,000 in loan interest income from the previously impaired loan mentioned previ- ously, the Company’s net interest margin has increased from 3.55% at December 31, 2004 to 3.68% at December 31, 2005. The Company continues working with its public adjuster and insurance carriers in settling all property and extra expense claims. Earnings for 2005 include $450,000 in gains from insurance claims which have been settled. Although the amount is currently unknown, it is anticipated that the Company will realize additional gains as a result of the future settle- ment of its remaining claims. Management is very optimistic about the recovery of the Mississippi Gulf Coast. Every day brings progress in the recovery as more businesses open, infrastructure is restored and life slowly returns to normal. By December 31, 2005,The Peoples Bank had reopened all of its branch facilities, three casinos had reopened in Biloxi and more local highways and bridges were repaired. The Company is doing what it does best, working closely with our customers and in our community. The Company will play a vital role as the Mississippi Gulf Coast first recovers, and then rebuilds in the com- ing years. With history from other challenging times as a guide, we expect that the short-term difficulties we now face will ultimately result in longer term prosperity. annual report 2005 / 5 annual report 2005 / 5 4 F I N A N C I A L C O N D I T I O N Federal Funds Sold Federal funds sold were $100,340,000 at December 31, 2005. Funds avail- able from the increase in deposits and non-deposit products have been invested in these short-term investments in the management of the Company’s liquidity position. Available for Sale Securities Available for sale securities increased $5,363,000 at December 31, 2005 as compared with December 31, 2004 primarily as a result of the management of the bank subsidiary’s liquidity position. Included in this portfolio are bonds issued by local municipalities which have been affected by Hurricane Katrina. These investments were approximately $1,775,000 at December 31, 2005. Developments, particularly the ability of the issuer to continue to service the bonds, are being closely monitored. At December 31, 2005, Management has determined that no provision for loss for these investments is required. Gross unrealized gains were $132,000, $347,000 and $2,113,000 and gross unrealized losses were $4,328,000, $1,754,000 and $1,094,000 for available for sale securities at December 31, 2005, 2004 and 2003, respectively. Gains (losses) of $(426,000), $(237,000) and $57,000 were realized on the liquidation or sale of available for sale securities in 2005, 2004 and 2003, respectively. Held to Maturity Securities Held to maturity securities increased $127,460,000 at December 31, 2005, compared with December 31, 2004. The increase in these securities is the result of the management of the Company’s liquidity position as funds available from the increase in deposits and non-deposit products have been invested in U. S. Treasury Bills and classified as held to maturity. Most of these securities are three month and six month Treasury Bills pur- chased by non-competitive tender at the weekly Treasury auction. Included in this portfolio are bonds issued by local municipalities which have been affected by Hurricane Katrina. These investments were approx- imately $3,615,000 at December 31, 2005. Developments, particularly the ability of the issuer to continue to service the bonds, are being closely monitored. At December 31, 2005, Management has determined that no provision for loss for these investments is required. Gross unrealized gains were $93,000, $113,000 and $176,000, at December 31, 2005, 2004 and 2003, respectively, while gross unrealized losses were $132,000, $2,000 and $2,000 at December 31, 2005, 2004 and 2003, respec- tively. There were no significant realized gains or losses from calls of these investments for the years ended December 31, 2005, 2004 and 2003. Federal Home Loan Bank Stock The Company’s investment in Federal Home Loan Bank (“FHLB”) stock decreased $325,000 at December 31, 2005 as compared with December 31, 2004, due to the redemption of the stock by the FHLB. Loans The Company’s loan portfolio increased $15,153,000 at December 31, 2005, as compared with December 31, 2004. During 2004 and continuing to August 2005, the local economy had stabilized which had resulted in increased loan demand. While the Company has experienced higher than normal loan payoffs since Katrina as customers receive insurance proceeds, it is anticipated that loan demand will be robust as the local economy recovers. Fluctuations in the various categories of loans are illustrated in Note C. 6 / annual report 2005 Bank Premises and Equipment, Net Six of the Bank subsidiary’s sixteen branches were damaged in Hurricane Katrina. The Company was able to begin or complete renovations at three disabled locations, utilize modular bank facilities at two disabled loca- tions and transfer its Money Center operations to the Main Office in order to return to normal bank operations as soon as possible. During 2006, the Company expects to begin construction of a new Pass Christian branch, which was completely destroyed. Current operating cash flows and pro- ceeds from the settlement of insurance claims are generally expected to be the source of funding for these renovation and construction expenditures. Accrued Interest Receivable Accrued interest receivable increased $1,570,000 at December 31, 2005 as compared with December 31, 2004 due to an increase in interest earning assets and the rate earned on these assets. Other Assets Other assets increased $3,360,000 at December 31, 2005, as compared with December 31, 2004, due to an increase in the cash surrender value of Bank Owned Life Insurance (BOLI) of $480,000 and an increase in deferred taxes of $2,787,000. The increase in deferred taxes is primarily due to the increase in unrealized losses on available for sale securities, which are recorded net of deferred taxes, and the provision for loan losses. Deposits Total deposits increased $203,026,000 at December 31, 2005, as compared with December 31, 2004. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits are anticipated by Management as customers in the casino industry and county and municipal areas reallocate their resources peri- odically. Since Hurricane Katrina, the Company has realized a significant increase in demand and savings deposits as municipal customers receive federal and state funding and commercial and personal customers begin receiving insurance proceeds. While some customers have closed their accounts upon relocating out of the area, the Company has experienced a net increase in the number of accounts from customers of other local banks and from individual and commercial interests associated with recovery efforts coming into the area. Based on previous post-hurricane experience and expectations with respect to the timeframe for reconstruc- tion, the Company anticipates that deposits will continue at or near their present level for another twelve months. The Company has managed its funds including planning the timing of investment maturities and the classification of investments and using other funding sources and their maturity so as to achieve appropriate liquidity. Federal Funds Purchased and Securities Sold Under Agreements to Repurchase Federal funds purchased and securities sold under agreements to repur- chase increased $61,991,000 at December 31, 2005, as compared with December 31, 2004. This fluctuation is directly related to customers’ periodic reallocation of their funds between deposit and non-deposit products. Other Liabilities Other liabilities increased $1,018,000 at December 31, 2005, as compared with December 31, 2004, primarily due to an increase of $430,000 for deferred compensation liabilities and an increase of $500,000 for expenses relating to bonuses and incentives for 2005 and casualty and liability insurance premiums expensed but unpaid in 2005. Shareholders' Equity During 2005, 2004 and 2003, there were significant events that impacted the components of shareholders’ equity. These events are detailed in Note I to the Consolidated Financial Statements included in this report. than other more traditional deposit funds, and had a negative impact on the Company’s net margin. As these funds have been repriced more favorably, the Company has realized a positive improvement in its interest margin. Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing pros- perity of the Company and the security of its customers and shareholders. There are numerous indicators of capital adequacy including primary capital ratios and capital formation rates. The Five-Year Comparative Summary of Selected Financial Information presents these ratios for those periods. This summary is included in the annual report to shareholders. The Company’s total risk-based capital ratio at December 31, 2005, 2004 and 2003 was 21.51%, 24.29% and 24.81% as compared with the required standard of 8.00%. The Five-Year Comparative Summary of Selected Financial Information presents these figures. The decrease in 2005 ratios is directly related to the increase in total assets during the year and does not indicate a weakening of the Company’s capital position. Bank regulations limit the amount of dividends that may be paid by the bank subsidiary without prior approval of the Commissioner of Banking and Consumer Finance of the State of Mississippi. At December 31, 2005, approx- imately $15,007,000 of undistributed earnings of the bank subsidiary included in consolidated surplus and retained earnings was available for future distri- bution to the Company as dividends, subject to approval by the Board of Directors. The Company cannot predict what dividends, if any, will be paid in the future, however the Board of Directors has established a goal of achiev- ing a 35% dividend payout ratio before extraordinary items. 4 R E S U L T S O F O P E R A T I O N S Net Interest Income Net interest income, the amount by which interest income on loans, invest- ments and other interest earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the Company’s income. Management’s objective is to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risk. Total interest income increased $7,777,000 for the year ended December 31, 2005, as compared with the year ended December 31, 2004, and had decreased $499,000 for the year ended December 31, 2004, as compared with the year ended December 31, 2003. Coinciding with the Federal Reserve’s increases in the discount rates during 2004 and 2005, the Company’s yield on loans has improved, given that the loan portfolio includes a 60%-40% mix of variable and fixed rates. The funding of this loan growth came from the maturity and sale of available for sale securi- ties, primarily U. S. Government Agencies. The Company had experienced a decline in interest income as a result of the decrease in the volume of loans and the decrease in interest rates earned on loans in prior years. Total interest expense increased $2,459,000 for the year ended December 31, 2005, as compared with the year ended December 31, 2004, and had decreased $748,000 for the year ended December 31, 2004, as compared with the year ended December 31, 2003. During the last five months of 2005, the Company’s deposit and non-deposit funds have increased significantly, as discussed previously. While the rates paid on these funds have increased dur- ing the same time frame, the increase in interest expense in primarily due to the increase in volume of these funds. The Company has used brokered time deposits and borrowings from the Federal Home Loan Bank to address its liq- uidity position in prior years. The cost of these funding sources was higher Provision for Loan Losses The Company continuously monitors its relationships with its loan customers, especially those in concentrated industries such as seafood, gam- ing and hotel/motel, and their direct and indirect impact on its operations. A thorough analysis of current economic conditions and the quality of the loan portfolio is conducted on a quarterly basis using the latest available information. These analyses are utilized in the computation of the adequacy of the allowance for loan losses. A provision is charged to income on a peri- odic basis to absorb potential losses based on these analyses. Further infor- mation related to the computation of the provision is presented in Note A. During the first six months of 2005, the Company had recorded a negative provision of $1,513,000 as a result of positive events relating to the quality of the loan portfolio. As a result of Hurricane Katrina, however, Management recorded a provision for loan losses of $5,055,000 during the third quarter of 2005. This provision was determined based on established Company methodology in compliance with generally accepted accounting principles. During the weeks after August 29, 2005, the loan portfolio was considered based on two specific criteria: commercial loans and residential loans. For commercial loans, Management evaluated potential losses for individual credits based on criteria including post-Katrina value of the collateral, existence and adequacy of insurance, and available sources of repay- ment. Based on this evaluation, a provision for loan losses on commercial loans of $3,455,000 was recorded. The Company evaluated the residential portfolio as a pool of loans. This portfolio was analyzed based on the cen- sus tract in which the collateral is located. Assumptions based on this information as well as the post-Katrina value of collateral and existence and adequacy of insurance for the loans within each census tract were developed. Based on this evaluation, a provision of loan losses on residen- tial loans of $1,600,000 for the residential portfolio was recorded. The Company continued to evaluate its entire loan portfolio during the fourth quarter of 2005 and determined that no further provisions were required. The allowance for loan losses is an estimate, and as such, events may occur in the future which affect its accuracy. The Company anticipates that it is probable that additional information will be gathered in the coming quar- ters which may require an adjustment to the allowance for loan losses. Management will continue to closely monitor its portfolio, work with indi- vidual customers and take such action as it deems appropriate to accu- rately report its financial condition and results of operations. Service Charges on Deposit Accounts Service charges on deposit accounts decreased $1,252,000 for the year ended December 31, 2005 as compared with the year ended December 31, 2004. The decrease is due to reduced fee income from off-site ATMs no longer under contract with the Company as well as a decrease in fees of $660,000 as a result of Hurricane Katrina. Gain (Loss) on Liquidation, Sale and Calls of Securities The Company realized a loss of $426,000 and $237,000 for the years ended December 31, 2005 and 2004, respectively, as a direct result of the sale of investment securities. The sales were executed in order to provide funding for increased loan demand. annual report 2005 / 7 T H E S A R B A N E S - O X L E Y A C T O F 2 0 0 2 The Sarbanes - Oxley Act of 2002 (the “Act”) requires the implementation of provisions designed to enhance public company governance, responsibility and disclosure. The issues addressed by the Act include the composition and responsibilities of a public company’s board of directors and its committees, especially the Audit and Nominating Committees, the certification of financial statements by the chief executive officer and chief financial officer, timely reporting of trading by insiders and independence of external auditors. The Sarbanes Oxley Act of 2002 also provides for the acceleration of filing deadlines for quarterly and annual reports for companies that meet certain criteria. Based on its June 30, 2005 market capitalization, the Company has determined that it became an accelerated filer at December 31, 2005. 4 N E W A C C O U N T I N G P R O N O U N C E M E N T S The Financial Accounting Standards Board (FASB) issued Statement 154, “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” The Statement is effective for accounting changes and corrections of errors made in fiscal years begin- ning after December 15, 2005. 4 O F F - B A L A N C E S H E E T A R R A N G E M E N T S The Company is a party to off-balance-sheet arrangements in the normal course of business to meet the financing needs of its customers. These arrangements include unused commitments to extend credit, which amounted to $121,369,000 at December 31, 2005, and irrevocable letters of credit, which amounted to $4,491,773 at December 31, 2005. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet arrangements. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amount do not necessarily represent future cash requirements. As discussed previously, the Company carefully mon- itors its liquidity needs and considers the cash requirements, especially for loan commitments, in making decisions on investments and obtaining funds from its other sources. Further information relating to off-balance- sheet instruments can be found in Note K. 4 Q U A N T I T A T I V E A N D Q U A L I T A T I V E D I S C L O S U R E S A B O U T M A R K E T R I S K Market risk is the risk of loss arising from adverse changes in market prices and rates. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities. Also, the Company does not currently, and has no plans to, engage in trading activities or use derivative or off-bal- ance sheet instruments to manage interest rate risk. Other Income Other income decreased $970,000 for the year ended December 31, 2005, as compared with the year ended December 31, 2004, primarily as a result of the sale of bank premises during 2004. See Note J for further information. 4 Other Expense Other expense decreased $520,000 for the year ended December 31, 2005, as compared with the year ended December 31, 2004, as a result of a decrease in expense for off-site ATMs out of service since Katrina and gains on Other Real Estate (ORE) sold of $367,000 in 2005. See Note J for further information. 4 R E L A T E D P A R T I E S The Company extends loans to certain officers and directors and their personal business interests, at terms and rates comparable to other loans of similar credit risks. Further disclosure of these transactions are presented in Note C. The Company may also hold deposits for these related parties and/or provide other banking services in the ordinary course of business. Further disclosure of these transactions are presented in Note E. None of these transactions are material to the Company’s financial statements. The Company has not currently engaged, nor does it have any plans to engage, in any transactions outside of the ordi- nary course of banking business with any related persons or entities. 4 L I Q U I D I T Y Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Management monitors these funds requirements in such a manner as to satisfy these demands and provide the maximum earnings on its earning assets. Note K discloses information relating to financial instru- ments with off-balance-sheet risk, including letters of credit and out- standing unused loan commitments. The Company closely monitors the potential effects of funding these commitments on its liquidity position. The Company monitors its liquidity position closely through a number of methods, including through the computation of liquidity and dependency ratios on a monthly basis. The formula for these ratios are those used for the Uniform Bank Performance Report, such that the Company may monitor and evaluate its own risk, but also compare itself to its peers. Management carefully monitors its liquidity needs, particularly relating to potentially volatile deposits. It has continued to implement these procedures since August 29, 2005, and the Company has encountered no problems with meeting its liquidity needs. Deposits, payment of principal and interest on loans, proceeds from sales and maturities of investment securities, earnings on investment securities, and purchases of federal funds and securities sold under agreements to repurchase are the principal sources of funds for the Company. On a more limited basis, the Company began using other, non-traditional sources of funds, including borrowings from the Federal Home Loan Bank. The Company generally anticipates relying on traditional sources of funds, especially deposits and purchases of federal funds, for its liquidity needs in 2006. At December 31, 2005, the Company was able to purchase federal funds up to $85,000,000. The Bank subsidiary has also been approved for inducement into the Mississippi Industrial Development Revenue Bond Program to fund the renovation of its disabled branches and acquisition of furniture, fixtures and equipment lost or damaged as a result of Hurricane Katrina. The Company has not determined if it will pursue this funding option. 8 / annual report 2005 The Company has risk management policies in place to monitor and limit exposure to market risk. The Asset/Liability Committee (ALCO), whose members include the chief executive officer and senior and middle man- agement from the financial, lending, investing, and deposit areas, is responsible for the day-to-day operating guidelines, approval of strate- gies affecting net interest income and coordination of activities within policy limits established by the Board of Directors based on the Company’s tolerance for risk. Specifically, the key objectives of the Company’s asset/liability management program are to manage the exposure of planned net interest margins to unexpected changes due to interest rate fluctuations. These efforts will also affect loan pricing policies, deposit interest rate policies, asset mix and volume guidelines and liquidity. The ALCO Committee utilizes a number of tools in its activities, including soft- ware to assist with interest rate risk management, asset modeling, balance sheet management and budget forecasting. The ALCO committee reports to the Board of Directors on a quarterly basis. The Company has implemented a conservative approach to its asset/liabil- ity management. The net interest margin is managed on a daily basis largely as a result of the management of the liquidity needs of the bank subsidiary. The Company generally follows a policy of investing in short term U. S. Treasury Bills and U. S. Agency securities with maturities of two years or less. Due to the low interest rate environment, the duration of Interest rate sensitivity at December 31, 2005 was as follows (in thousands): investments has been extended to seven years or less with call provisions. The loan portfolio consists of a 40% - 60% blend of fixed and floating rate loans. It is the general loan policy to offer loans with maturities of five years or less; however the market is now dictating floating rate terms to be extended to fifteen years. On the liability side, more than 81% of the deposits are demand and savings transaction accounts. Additionally, more than 75% of the certificates of deposit mature within eighteen months. Since the Company’s deposits are generally not rate-sensitive, they are considered to be core deposits. The short term nature of the financial assets and liabilities allows the Company to meet the dual requirements of liquidity and interest rate risk management. The interest rate sensitivity tables below provide additional information about the Company’s financial instruments that are sensitive to changes in interest rates. The negative gap in 2006 is mitigated by the nature of the Company’s deposits, whose characteristics have been previously described. The tabular disclosure reflects contractual interest rate repric- ing dates and contractual maturity dates. Loan maturities have been adjusted for reserve for loan losses. There have been no adjustments for such factors as prepayment risk, early calls of investments, the effect of the maturity of balloon notes or the early withdrawal of deposits. The Company does not believe that the aforementioned factors have a signif- icant impact on expected maturity. Loans, net Average rate Securities Average rate Total Financial Assets Average rate Deposits Average rate Long-term funds Average rate Total Financial Liabilities Average rate 1 2 / 3 1 / 0 5 F A I R V A L U E 341,016 $ T O T A L 338,380 2 0 0 6 221,074 $ 2 0 0 7 5,168 $ 2 0 0 8 28,746 $ 2 0 0 9 $ 54,525 $ 2 0 1 0 23,438 B E Y O N D 5,429 $ $ 7.57% 151,017 3.97% 372,091 6.64% 387,861 1.91% 298 5.68% 388,159 1.91% 6.75% 51,532 3.93% 56,700 4.36% 8,745 2.98% 211 5.68% 8,956 3.09% 6.26% 46,743 3.71% 75,489 5.03% 2,562 3.24% 198 5.68% 2,760 3.53% 6.91% 14,883 3.88% 69,408 5.61% 9,853 3.79% 198 5.68% 10,051 3.84% 6.29% 20,104 4.20% 43,542 5.54% 6,569 3.79% 198 5.68% 6,767 3.87% 6.62% 29,238 4.53% 34,667 4.99% 6,249 6.24% 6,249 6.24% 7.14% 313,517 4.01% 651,897 6.10% 415,590 2.10% 7,352 6.16% 442,942 2.32% 313,478 654,494 415,582 7,728 423,310 Interest rate sensitivity at December 31, 2004 was as follows (in thousands): Loans, net Average rate Securities Average rate Total Financial Assets Average rate Deposits Average rate Long-term funds Average rate Total Financial Liabilities Average rate 2 0 0 5 228,658 $ 2 0 0 6 7,337 $ 2 0 0 7 7,248 $ 2 0 0 8 $ 20,443 $ 2 0 0 9 58,895 B E Y O N D 5,043 $ $ 1 2 / 3 1 / 0 4 F A I R V A L U E 331,044 $ T O T A L 327,624 6.11 % 50,329 2.02 % 278,987 6.10% 275,935 1.61% 222 4.89% 276,157 1.61% 7.50 % 15,317 2.64 % 22,654 5.44% 9,782 2.46 % 235 4.89 % 10,017 2.57% 6.69% 10,076 3.20 % 17,324 5.30% 3,787 3.02 % 165 4.89% 3,952 3.14% 6.69% 29,617 3.50 % 50,060 5.31% 6,093 3.58% 156 6.12% 15,274 3.89% 74,169 5.80% 4,062 3.58 % 147 4.89 % 4.89 % 6,249 3.62% 4,209 3.64% 5.60% 60,407 4.39 % 65,450 4.51% 6.49% 181,020 3.55 % 508,644 5.81% 181,132 512,176 3 299,662 300,188 3.59% 6,278 6.24% 6,281 6.24% 1.82% 7,203 5.36% 306,865 2.05% 7,906 308,094 annual report 2005 / 9 P E O P L E S F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C O N D I T I O N D E C E M B E R 3 1 , Assets Cash and due from banks Federal funds sold Available for sale securities Held to maturity securities, fair value of $134,008,000 - 2005; $6,698,000 - 2004; $4,527,000 - 2003 Federal Home Loan Bank Stock, at cost Loans Less: Allowance for loan losses Loans, net Bank premises and equipment, net Other real estate Accrued interest receivable Other assets Total assets Liabilities & Shareholders' Equity Liabilities: Deposits: Demand, non-interest bearing Savings and demand, interest bearing Time, $100,000 or more Other time deposits Total deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from Federal Home Loan Bank Notes payable Other liabilities Total liabilities Shareholders' Equity: Common Stock, $1 par value, 15,000,000 shares authorized, 5,549,128, 5,555,419 and 5,557,379 shares issued and outstanding at December 31, 2005, 2004 and 2003, respectively Surplus Undivided profits Unearned compensation Accumulated other comprehensive income, net of tax Total shareholders' equity 2 0 0 5 2 0 0 4 2 0 0 3 $ 52,277,524 $ 32,573,125 $ 33,830,329 100,340,000 178,393,652 151,500 173,030,808 30,700 207,486,172 134,046,959 1,076,600 349,346,340 10,966,022 338,380,318 17,887,907 106,046 4,315,358 18,500,668 6,587,375 1,401,900 334,193,124 6,569,614 327,623,510 18,018,504 168,091 2,745,235 15,141,101 4,352,854 1,974,200 302,155,275 6,398,694 295,756,581 17,952,504 1,383,451 3,096,002 13,804,039 $ 845,325,032 $ 577,441,149 $ 579,666,832 $ 176,627,048 $ 89,529,270 $ 80,598,685 301,052,887 51,292,708 63,244,699 592,217,342 149,267,750 7,352,005 8,984,804 757,821,901 5,549,128 65,780,254 18,942,855 (2,769,106) 87,503,131 180,464,256 51,948,077 67,249,927 389,191,530 87,277,125 7,202,970 1,239 7,966,852 491,639,716 5,555,419 65,780,254 15,391,524 (925,764) 85,801,433 173,970,603 58,182,870 64,036,836 376,788,994 95,039,261 17,069,848 110,235 7,154,545 496,162,883 5,557,379 65,780,254 11,574,074 (94,899) 687,141 83,503,949 Total liabilities and shareholders' equity $ 845,325,032 $ 577,441,149 $ 579,666,832 See Notes to Consolidated Financial Statements. 10 / annual report 2005 P E O P L E S F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 0 5 2 0 0 4 2 0 0 3 Interest income: Interest and fees on loans Interest and dividends on securities: U. S. Treasury U. S. Government agencies and corporations States and political subdivisions Other investments Interest on federal funds sold Total interest income Interest expense: Deposits Long-term borrowings Federal funds purchased and securities sold under agreements to repurchase Total interest expense Net interest income Provision for allowance for losses on loans Net interest income after provision for allowance for losses on loans Other operating income: Trust department income and fees Service charges on deposit accounts Gain (loss) on liquidation, sale and calls of securities Other income Total other operating income Other operating expense: Salaries and employee benefits Net occupancy Equipment rentals, depreciation and maintenance Other expense Total other operating expense Income before income taxes and extraordinary gain Income taxes Income before extraordinary gain Extraordinary gain, net of taxes Net income Basic and diluted earnings per share Basic and diluted earnings per share before extraordinary gain See Notes to Consolidated Financial Statements. $ 22,690,169 $ 17,526,210 $ 17,181,975 2,675,827 4,568,700 804,664 193,709 1,410,226 32,343,295 5,296,667 437,712 1,815,131 7,549,510 24,793,785 3,614,000 21,179,785 1,477,401 4,506,634 (426,094) 1,679,435 7,237,376 11,398,469 1,518,620 2,520,339 5,031,513 20,468,941 7,948,220 2,604,000 5,344,220 538,000 5,882,220 1.06 .96 $ $ $ 1,366,831 4,833,893 532,688 229,550 76,780 24,565,952 3,600,386 447,401 1,043,112 5,090,899 19,475,053 448,000 19,027,053 1,391,314 5,758,727 (236,618) 2,649,434 9,562,857 11,334,384 1,461,492 2,416,749 5,551,947 20,764,572 7,825,338 2,031,300 5,794,038 1,320,545 5,882,469 368,934 249,185 62,109 25,065,217 4,383,806 456,694 998,139 5,838,639 19,226,578 447,000 18,779,578 1,458,037 6,709,852 57,356 1,512,169 9,737,414 10,989,269 1,466,797 2,760,125 6,247,956 21,464,147 7,052,845 2,035,000 5,017,845 $ $ $ 5,794,038 1.04 1.04 $ 5,017,845 $ .90 $ .90 annual report 2005 / 11 P E O P L E S F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y N u m b e r o f C o m m o n S h a r e s 5,583,472 Balance, January 1, 2003 Comprehensive Income: Net income C o m m o n S t o c k $ 5,583,472 S u r p l u s $ 65,780,254 U n e a r n e d C o m p r e h e n s i v e C o m p r e h e n s i v e C o m p e n s a t i o n $ (143,043) I n c o m e $ 2,000,582 I n c o m e T o t a l $ 81,731,606 A c c u m u l a t e d O t h e r Net unrealized loss on available for sale securities, net of tax Reclassification adjustment for available for sale securities called or sold in current year, net of tax Total comprehensive income Cash dividends ($ .14 per share) Dividend declared ($ .15 per share) Allocation of ESOP shares Retirement of stock Balance, December 31, 2003 Comprehensive Income: Net income Net unrealized loss on available for sale securities, net of tax Reclassification adjustment for available for sale securities called or sold in current year, net of tax Total comprehensive income Cash dividends ($ .17 per share) Dividend declared ($ .18 per share) Allocation of ESOP shares Retirement of stock Balance, December 31, 2004 Comprehensive Income: Net income Net unrealized loss on available for sale securities, net of tax Reclassification adjustment for available for sale securities called or sold in current year, net of tax Total comprehensive income Effect of retirement of stock on accrued dividends Cash dividends ($ .20 per share) Dividend declared ($ .20 per share) Retirement of stock Balance, December 31, 2005 See Notes to Consolidated Financial Statements. 12 / annual report 2005 (26,093) 5,557,379 (26,093) 5,557,379 65,780,254 (94,899) 687,141 (1,960) 5,555,419 (1,960) 5,555,419 65,780,254 (143,043) (925,764) (6,291) 5,549,128 (6,291) $ 5,549,128 $ 65,780,254 $ 18,942,855 $ (143,043) $ (2,769,106) $ 87,503,131 U n d i v i d e d P r o f i t s $ 8,510,341 5,017,845 (778,570) (833,607) (341,935) 11,574,074 5,794,038 (944,591) (999,975) (32,022) 15,391,524 5,882,220 399 (1,109,826) (1,109,826) (111,636) 48,144 94,899 (1,195,267) $ 5,017,845 (1,195,267) 5,017,845 (1,195,267) (118,174) (118,174) (118,174) $ 3,704,404 (1,720,706) 107,801 $ 5,794,038 (1,720,706) 107,801 $ 4,181,133 (2,077,657) 234,315 $ 5,882,220 (2,077,657) 234,315 $ 4,038,878 (778,570) (833,607) 48,144 (368,028) 83,503,949 5,794,038 (1,720,706) 107,801 (944,591) (999,975) 94,899 (33,982) 85,801,433 5,882,220 (2,077,657) 234,315 399 (1,109,826) (1,109,826) (117,927) U n d i v i d e d P r o f i t s $ 8,510,341 5,017,845 (778,570) (833,607) (341,935) 11,574,074 5,794,038 (944,591) (999,975) (32,022) 15,391,524 5,882,220 399 (1,109,826) (1,109,826) (111,636) U n e a r n e d C o m p e n s a t i o n A c c u m u l a t e d O t h e r C o m p r e h e n s i v e I n c o m e C o m p r e h e n s i v e I n c o m e $ (143,043) $ 2,000,582 T o t a l $ 81,731,606 (1,195,267) $ 5,017,845 (1,195,267) 5,017,845 (1,195,267) (118,174) (118,174) (118,174) $ 3,704,404 48,144 (94,899) 687,141 (1,720,706) 107,801 $ 5,794,038 (1,720,706) 107,801 $ 4,181,133 94,899 (143,043) (925,764) (2,077,657) 234,315 $ 5,882,220 (2,077,657) 234,315 $ 4,038,878 (778,570) (833,607) 48,144 (368,028) 83,503,949 5,794,038 (1,720,706) 107,801 (944,591) (999,975) 94,899 (33,982) 85,801,433 5,882,220 (2,077,657) 234,315 399 (1,109,826) (1,109,826) (117,927) $ 18,942,855 $ (143,043) $ (2,769,106) $ 87,503,131 annual report 2005 / 13 P E O P L E S F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Y E A R S E N D E D D E C E M B E R 3 1 , Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Gain on sales of other real estate (Gain) loss on sales, calls and liquidation of securities Gain on sale and retirement of bank premises Depreciation Provision for allowance for loan losses Provision for losses on other real estate Changes in assets and liabilities: Accrued interest receivable Other assets Other liabilities Net cash provided by operating activities Cash flows from investing activities: Proceeds from maturities, sales and calls of available for sale securities Investment in available for sale securities Proceeds from maturities and calls of held to maturity securities Investment in held to maturity securities Investment in Federal Home Loan Bank stock Redemption of Federal Home Loan Bank stock Proceeds from sales of other real estate Loans, net (increase) decrease Proceeds from sale and retirement of bank premises Acquisition of premises and equipment Federal funds sold Other assets Net cash used in investing activities Cash flows from financing activities: Demand and savings deposits, net increase Time deposits made, net decrease Principal payments on notes Cash dividends Retirement of common stock Borrowings from Federal Home Loan Bank Repayments to Federal Home Loan Bank Federal funds purchased and securities sold under agreements to repurchase, net increase (decrease) Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See Notes to Consolidated Financial Statements. 2 0 0 5 2 0 0 4 2 0 0 3 $ 5,882,220 $ 5,794,038 $ 5,017,845 (366,865) 426,093 (549,412) 1,473,539 3,614,000 21,910 (1,570,123) (93,683) (933,186) 7,904,493 144,782,701 (153,360,763) 23,435,000 (150,894,584) 325,300 495,000 (14,458,808) 769,807 (1,563,337) (100,188,500) (478,814) (251,136,998) 207,686,409 (4,660,597) (1,239) (2,109,402) (117,927) 402,819 (253,784) 61,990,625 262,936,904 19,704,399 32,573,125 (100,750) 258,888 (1,270,697) 1,447,000 448,000 354,360 350,767 (238,021) 778,939 7,822,524 174,457,599 (142,688,628) 1,405,000 (3,639,521) (28,700) 601,000 1,074,000 (32,427,179) 2,837,500 (3,079,803) (120,800) (417,441) (2,026,973) 15,424,238 (3,021,702) (14,097) (1,778,198) (33,982) 30,292,102 (248,170) (57,356) (130,503) 1,676,000 447,000 210,358 (237,812) (323,618) 304,832 6,658,576 130,443,200 (188,388,210) 13,234,836 (47,200) 827,665 11,949,514 445,068 (2,883,669) (30,700) 325,425 (34,124,071) 10,384,713 (25,300,858) (175,992) (1,448,587) (368,028) 95,855,031 (40,158,980) (85,098,260) (7,762,136) (7,052,755) (1,257,204) 33,830,329 27,793,558 21,641,577 (5,823,918) 39,654,247 $ 52,277,524 $ 32,573,125 $ 33,830,329 14 / annual report 2005 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S 4 N O T E A - B U S I N E S S A N D S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S : Securities not classified as held to maturity are classified as available for sale and are stated at fair value. Unrealized gains and losses, net of tax, on these securities are recorded in shareholders’ equity as accumulated Business of The Company other comprehensive income. Peoples Financial Corporation is a one-bank holding company headquar- tered in Biloxi, Mississippi. Its two operating subsidiaries are The Peoples The amortized cost of available for sale securities and held to maturity Bank, Biloxi, Mississippi, and PFC Service Corp. Its principal subsidiary is securities is adjusted for amortization of premiums and accretion of dis- The Peoples Bank, Biloxi, Mississippi, which provides a full range of bank- counts to maturity, determined using the interest method. Such amortiza- ing, financial and trust services to individuals and small and commercial tion and accretion is included in interest income on securities. Declines in businesses operating in Harrison, Hancock, Stone and Jackson counties. the fair value of securities below their cost that are deemed to be other Principles of Consolidation The consolidated financial statements include the accounts of Peoples Financial Corporation and its wholly-owned subsidiaries, The Peoples Bank, Biloxi, Mississippi, and PFC Service Corp. All significant intercompany transactions and balances have been eliminated in consolidation. Basis of Accounting Peoples Financial Corporation and Subsidiaries recognize assets and lia- bilities, and income and expense, on the accrual basis of accounting. The preparation of financial statements in conformity with generally accepted than temporary would be reflected in earnings as realized losses. In esti- mating other-than-temporary losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and nature of the issuer, the cause of the decline, espe- cially if related to a change in interest rates, and the intent and ability of the Company to retain the investment in the issuer for a period of time suf- ficient to allow for any anticipated recovery in fair value. The specific identification method is used to determine realized gains and losses on sales of securities, which are reported as gain or loss on sale and calls of securities in other operating income. accounting principles requires Management to make estimates and Loans assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash and Due from Banks The Company is required to maintain average reserve balances in its vault or on deposit with the Federal Reserve Bank. The average amount of these reserve requirements was approximately $15,133,000, $11,623,000 and $10,220,000 for the years ending December 31, 2005, 2004 and 2003, respectively. The Company’s bank subsidiary maintained account balances in excess of amounts insured by the Federal Deposit Insurance Corporation. At December 31, 2005, the bank subsidiary had excess deposits of $11,631,000. These amounts were uninsured and uncollateralized. Securities The classification of securities is determined by Management at the time of purchase. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the security until maturity. Securities held to maturity are stated at amortized cost. The loan portfolio consists of commercial and industrial and real estate loans within the Company’s trade area in South Mississippi. The loan policy establishes guidelines relating to pricing, repayment terms, collateral standards including loan to value (LTV) limits, appraisal and environmen- tal standards, lending authority, lending limits and documentation requirements. Loans are stated at the amount of unpaid principal, reduced by unearned income and the allowance for loan losses. Interest on loans is recognized over the terms of each loan based on the unpaid principal balance. Loan origination fees are recognized as income when received. Revenue from these fees is not material to the financial statements. The Company places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of interest or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. Accrued interest on loans classi- fied as nonaccrual is reversed at the time the loans are placed on nonac- crual. Interest received on nonaccrual loans is applied against principal. Loans are restored to accrual status when the obligation is brought current annual report 2005 / 15 or has performed in accordance with the contractual terms for a reason- Trust Department Income and Fees able period of time and the ultimate collectibility of the total contractual Corporate trust fees are accounted for on an accrual basis and personal principal and interest is no longer in doubt. Loans classified as nonaccrual trust fees are recorded when received. are generally identified as impaired loans. The policy for recognizing income on impaired loans is consistent with the nonaccrual policy. Income Taxes Allowance for Loan Losses The Company files a consolidated tax return with its wholly-owned subsidiaries. The tax liability of each entity is allocated based on the The allowance for loan losses is established through provisions for loan entity’s contribution to consolidated taxable income. The provision losses charged against earnings. Loans deemed to be uncollectible are for applicable income taxes is based upon reported income and expenses charged against the allowance for loan losses, and subsequent recoveries, as adjusted for differences between reported income and taxable if any, are credited to the allowance. income. The primary differences are exempt income on state, county and The allowance for loan losses is based on Management’s evaluation of the pared to the amount allowable for income tax purposes; directors’ and loan portfolio under current economic conditions and is an amount that officers’ insurance; depreciation for income tax purposes over (under) Management believes will be adequate to absorb probable losses on loans that reported for financial statements; gains reported under the existing at the reporting date. The evaluation includes Management’s installment sales method for tax purposes and gains on the sale of bank assessment of several factors: review and evaluations of specific loans, premises which were structured under the provisions of Section 1031 of the municipal securities; differences in provisions for losses on loans as com- changes in the nature and volume of the loan portfolio, current and antic- Internal Revenue Code. ipated economic conditions and the related impact on specific borrowers and industry groups, a study of loss experience, a review of classified, Advertising nonperforming and delinquent loans, the estimated value of any under- Advertising costs are expensed as incurred. lying collateral, an estimate of the possibility of loss based on the risk characteristics of the portfolio, adverse situations that may affect the bor- Leases rower’s ability to repay and the results of regulatory examinations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful or sub- standard. For such loans, a specific allowance is established when the col- lateral value or observable market price of the loan is lower than the carry- ing value of the loan. The general component of the allowance relates to loans that are not classified and is based on historical loss experience. Bank Premises and Equipment Bank premises and equipment are stated at cost, less accumulated depre- ciation. Depreciation is computed primarily by the straight-line method based on the estimated useful lives of the related assets. Other Real Estate Other real estate acquired through foreclosure is carried at the lower of cost (primarily outstanding loan balance) or estimated market value, less estimated costs to sell. If, at foreclosure, the carrying value of the loan is greater than the estimated market value of the property acquired, the excess is charged against the allowance for loan losses and any subse- quent adjustments are charged to expense. Costs of operating and main- taining the properties, net of related income and gains (losses) on their disposition, are charged to expense as incurred. All leases are accounted for as operating leases in accordance with the terms of the leases. Earnings Per Share Basic and diluted earnings per share are computed on the basis of the weighted average number of common shares outstanding, 5,550,477, 5,556,251 and 5,563,015 in 2005, 2004 and 2003, respectively. Statements of Cash Flows The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $7,389,847, $5,044,207 and $5,937,967 in 2005, 2004 and 2003, respectively, for interest on deposits and borrowings. Income tax payments totaled $4,856,000, $2,062,000 and $2,537,223 in 2005, 2004 and 2003, respectively. Loans transferred to other real estate amounted to $88,000, $112,250 and $977,584 in 2005, 2004 and 2003, respectively. The income tax effect on the accumulated other com- prehensive income was $(949,600), $(830,890) and $(676,621), at December 31, 2005, 2004 and 2003, respectively. Reclassifications Certain reclassifications have been made to the prior year statements to conform to current year presentation. The reclassifications had no effect on prior year net income. 16 / annual report 2005 N O T E B - S E C U R I T I E S : 4 The amortized cost and estimated fair value of securities at December 31, 2005, 2004, and 2003, respectively, are as follows (in thousands): December 31, 2005 Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value Available for sale securities: Debt securities: U. S. Treasury $ 37,953 $ 000 2 $ (525) $ 37,430 U. S. Government agencies and corp. States and political subdivisions Total debt securities Equity securities 126,444 14,364 178,761 3,829 Total available for sale securities $ 182,590 Held to maturity securities: U.S. Treasury U.S. Government agencies and corp. States and political subdivisions $ 106,897 21,000 6,150 Total held to maturity securities $ 134,047 68 70 62 132 000 93 93 $ $ $ (2,573) (282) (3,380) (948) 123,871 14,150 175,451 2,943 $ (4,328) $ 178,394 $ $ (66) (19) (47) (132) $ 106,831 20,981 6,196 $ 134,008 December 31, 2004 Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value Available for sale securities: Debt securities: U. S. Treasury U. S. Government agencies and corp. States and political subdivisions Total debt securities Equity securities $ 64,817 92,538 13,254 170,609 3,829 Total available for sale securities $ 174,438 Held to maturity securities: States and political subdivisions Total held to maturity securities $ $ 6,587 6,587 $ $ $ $ 000 41 244 285 62 347 113 113 $ (165) (766) (115) (1,046) (708) $ 64,652 91,813 13,383 169,848 3,183 $ (1,754) $ 173,031 $ $ (2) (2) $ $ 6,698 6,698 annual report 2005 / 17 December 31, 2003 Available for sale securities: Debt securities: U. S. Treasury U. S. Government agencies and corp. States and political subdivisions Total debt securities Equity securities Total available for sale securities Held to maturity securities: U. S. Treasury States and political subdivisions Total held to maturity securities Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value $ $ $ $ 49,977 145,507 7,154 202,638 3,829 206,467 1,000 3,353 4,353 $ $ $ $ 465 778 161 1,404 709 2,113 17 159 176 $ $ $ $ (38) (801) (48) (887) (207) (1,094) 0 (2) (2) $ $ $ $ 50,404 145,484 7,267 203,155 4,331 207,486 1,017 3,510 4,527 The amortized cost and estimated fair value of debt securities at December 31, 2005, (in thousands) by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized cost Estimated fair value Available for sale securities: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Totals Held to maturity securities: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Totals $ $ $ $ 31,861 125,211 19,239 2,450 178,761 119,430 10,602 3,146 869 134,047 $ $ $ $ 31,587 122,658 18,815 2,391 175,451 119,361 10,588 3,176 883 134,008 Information pertaining to securities with gross unrealized losses at December 31, 2005, aggregated by investment category and length of time that individual securities have been in a continuous loss position is as follows (in thousands): Less Than Twelve Months Over Twelve Months Total U. S. Treasury U. S. Government Agencies States and political subdivisions FHLMC preferred stock Total Fair Value $ 100,001 81,411 9,106 $ 190,518 Gross Unrealized Loss 259 1,054 150 $ $ 1,463 Fair Value 17,656 $ 50,441 3,485 2,127 $ 73,709 $ Gross Unrealized Loss 332 1,538 179 948 2,997 $ $ $ Fair Value Gross Unrealized Loss 591 2,592 329 948 4,460 117,657 131,852 12,591 2,127 $ 264,227 $ Management evaluates securities for other-than-temporary impairment Company realized gains of $16,441, $22,270 and $57,000 from the liquidation on a monthly basis. As a result of the evaluation of the impairment of of equity securities in 2005, 2004 and 2003, respectively. these securities, the Company has determined that the declines summa- rized in the table above are not deemed to be other-than-temporary. Securities with an amortized cost of approximately $217,009,000, $166,311,000 and $154,105,000 at December 31, 2005, 2004 and 2003, Proceeds from maturities and calls of held to maturity debt securities dur- respectively, were pledged to secure public deposits, federal funds pur- ing 2005, 2004 and 2003 were $23,435,000, $1,405,000 and $13,234,836, chased and other balances required by law. respectively. There were no sales of held to maturity debt securities during 2005, 2004 and 2003. Proceeds from maturities, sales and calls of available Federal Home Loan Bank (FHLB) common stock was purchased during 1999 in for sale debt securities were $144,782,701, $174,457,599 and $130,443,200 order for the Company to participate in certain FHLB programs. The amount to during 2005, 2004 and 2003, respectively. Available for sale debt securities be invested in FHLB stock was calculated according to FHLB guidelines as a per- were sold in 2005 and 2004 for a realized loss of $443,000 and $259,000. centage of certain mortgage loans. Based on this calculation, the FHLB may There were no sales of available for sale debt securities during 2003. The periodically automatically redeem its common stock. The investment is carried at cost. Dividends received are reinvested in FHLB stock. 18 / annual report 2005 4 N O T E C - L O A N S : The composition of the loan portfolio was as follows (in thousands): December 31, Real estate, construction Real estate, mortgage Loans to finance agricultural production and other loans to farmers Commercial and industrial loans Loans to individuals for household, family and other consumer expenditures Obligations of states and political subdivisions (primarily industrial revenue bonds and local government tax anticipation notes) All other loans Totals Transactions in the allowance for loan losses are as follows (in thousands): Balance, January 1 Recoveries Loans charged off Provision for allowance for loan losses Balance, December 31 2005 2004 $ 20,663 $ 20,926 $ 258,573 2,795 53,473 11,812 1,423 607 250,676 4,251 44,983 11,387 1,654 316 2003 14,896 223,246 3,980 41,832 15,252 2,560 389 $ 349,346 $ 334,193 $ 302,155 $ 2005 6,570 1,344 (562) 3,614 $ 10,966 2004 6,399 494 (771) 448 6,570 $ $ 2003 6,697 600 (1,345) 447 6,399 $ $ In the ordinary course of business, the Company extends loans to certain officers and directors and their personal business interests at, in the opinion of Management, terms and rates comparable to other loans of similar credit risks. These loans do not involve more than normal risk of collectibility and do not include other unfavorable features. An analysis of the activity with respect to such loans to related parties is as follows (in thousands): Balance, January 1 New loans and advances Repayments Balance, December 31 2005 8,836 20,300 (20,466) 8,670 $ $ 2004 7,637 14,381 (13,182) 8,836 $ $ 2003 9,183 13,517 (15,063) 7,637 $ $ Industrial revenue bonds with a carrying value of $502,187 at December 31, December 31, 2005, 2004 and 2003, the average recorded investment in 2003, were pledged to secure public deposits. impaired loans was $265,000, $6,355,000 and $7,400,000, respectively. The amount of interest not accrued on these loans was approximately Nonaccrual loans amounted to approximately $267,000, $6,164,000 and $9,000, $15,000 and $261,000 in 2005, 2004 and 2003, respectively. $7,415,000 at December 31, 2005, 2004 and 2003, respectively. In compliance with a bankruptcy court order, interest in the amount of $255,000 was received and recorded as interest income relating to one The total recorded investment in impaired loans amounted to $267,000, impaired loan, with an average balance of $5,725,000 for the year ended $6,164,000 and $7,415,000 at December 31, 2005, 2004 and 2003, respec- December 31, 2004. tively. The amount of that recorded investment in impaired loans for which there is a related allowance for loan losses was $267,000, $6,164,000 and $7,415,000 at December 31, 2005, 2004 and 2003, respectively. At Demand deposits with debit balances amounting to approximately $2,205,000, $1,490,000 and $4,232,000 at December 31, 2005, 2004 and 2003, respectively, have been reclassified as loans. annual report 2005 / 19 4 N O T E D - B A N K P R E M I S E S A N D E Q U I P M E N T : Bank premises and equipment are shown as follows (in thousands): December 31, Land Buildings Furniture, fixtures and equipment Totals, at cost Less: Accumulated depreciation Totals Estimated useful lives 5-40 years 3-10 years $ $ 2005 4,926 17,476 13,511 35,913 18,025 $ 17,888 $ 2004 5,033 17,463 12,697 35,193 17,174 18,019 $ 2003 4,522 17,533 12,173 34,228 16,275 $ 17,953 4 N O T E E - D E P O S I T S At December 31, 2005, the scheduled maturities of time deposits (in thousands) are as follows: 2006 2007 2008 2009 2010 Total $ 86,807 8,745 2,562 9,854 6,569 $ 114,537 Deposits held for related parties amounted to $12,130,015 at December 31, 2005. 4 N O T E F - B O R R O W I N G S F R O M F E D E R A L H O M E L O A N B A N K : At December 31, 2005, the Company had $7,352,005 in advances under a $76,000,000 line of credit with the Federal Home Loan Bank of Dallas (“FHLB”). One advance in the amount of $5,000,000 bears interest at 6.50% and matures in 2010. The remaining balance consists of a number of smaller advances bearing interest from 2.24%–7.00% with maturity dates from 2006–2030. The advances are collateralized by a blanket floating lien on the Company’s 2005 2004 2003 $00000001 $ 1,239 $ 15,336 $00000001 $ 1,239 94,899 $ 110,235 residential first mortgage loans. 4 N O T E G - N O T E S P A Y A B L E : December 31, Notes payable on automobiles. The notes are non interest-bearing and payable in monthly installments through January 2005. RiverHills Bank, $750,000 line of credit for Peoples Financial Corporation Employee Stock Ownership Plan, secured by the guarantee of the Company; Interest at New York Prime (4.00% at December 31, 2003) due quarterly, principal due at maturity in June 2004. Totals 20 / annual report 2005 N O T E H - I N C O M E T A X E S : 4 Federal income taxes payable (or refundable) and deferred taxes (or deferred charges) as of December 31, 2005, 2004 and 2003, included in other assets or other liabilities, were as follows (in thousands): December 31, Deferred tax assets: Allowance for loan losses Employee benefit plans' liabilities Unrealized loss on available for sale securities, charged from equity Other Deferred tax assets Deferred tax liabilities: Accumulated depreciation Deferred gain on sale of bank premises Installment sales Unrealized gains on available for sale securities, charged to equity Deferred tax liabilities Net deferred taxes Current payable (refundable) Totals Income taxes consist of the following components (in thousands): Years Ended December 31, Current Deferred Totals Deferred income taxes (benefits) resulted from the following (in thousands): Years Ended December 31, Depreciation Provision for loan losses Officers' and directors' life insurance Deferred gain on sale of bank premises Unrealized gain on available for sale securities, charged to equity Other Totals 2005 2004 $ 3,503 $ 1,638 1,427 525 (7,093) 421 1,818 2,239 (4,854) 2,282 1,489 479 915 (5,165) 524 1,784 2,308 (2,857) 603 $ 2003 2,114 1,328 836 (4,278) 732 1,784 13 347 2,876 (1,402) (20) $ (4,854) $ (2,254) $ (1,422) $ $ $ 2005 3,653 (1,049) 2,604 2005 (103) (1,221) (149) 34 (948) 390 $ $ $ 2004 2,660 (629) 2,031 2004 (208) (168) (161) (826) (92) $ 2003 2,322 (287) $ 2,035 $ 2003 (88) 101 (183) 34 (679) (151) $ (1,997) $ (1,455) $ (966) annual report 2005 / 21 Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 34.0% for 2005, 2004 and 2003, to earnings before income taxes. The reason for these differences is shown below (in thousands): Years Ended December 31, Taxes computed at statutory rate Increase (decrease) resulting from: Tax-exempt interest income Non-deductible interest Non-taxable life insurance proceeds Dividend exclusion Other, net Total income taxes 2005 Amount $ 2,702 (272) 6 (41) 209 $ 2,604 % 34.0 (3.4) 0.1 (0.5) 2.6 32.8 2004 Amount % 2003 Amount $ 2,660 34.0 $ 2,398 (230) (2.9) 6 (43) (50) (312) $ 2,031 .1 (0.5) (0.6) (4.2) 25.9 (184) 8 (54) (133) $ 2,035 % 34.0 (2.6) 0.1 (0.8) (1.8) 28.9 4 N O T E I - S H A R E H O L D E R S ' E Q U I T Y : The bank subsidiary is subject to various regulatory capital requirements Banking regulations limit the amount of dividends that may be paid by administered by the federal banking agencies. Failure to meet minimum the bank subsidiary without prior approval of the Commissioner of capital requirements can initiate certain mandatory, and possibly addi- Banking and Consumer Finance of the State of Mississippi. At December 31, tional discretionary, actions by the regulators that, if undertaken, could 2005, approximately $15,007,000 of undistributed earnings of the bank have a direct material effect on the bank subsidiary’s financial statements. subsidiary included in consolidated surplus and retained earnings was Under capital adequacy guidelines and the regulatory framework for available for future distribution to the Company as dividends, subject to prompt corrective action, the bank subsidiary must meet specific capital the approval by Board of Directors. guidelines that involve quantitative measures of the bank subsidiary’s assets, liabilities and certain off-balance sheet items as calculated under On May 24, 2000, the Company’s Board of Directors approved the repur- regulatory accounting practices. The bank subsidiary’s capital amounts chase of up to 2.50% of the outstanding shares of the Company’s common and classification are also subject to qualitative judgments by the regula- stock. As of December 31, 2003, 147,633 shares available under this plan tors about components, risk weightings and other factors. had been repurchased and retired. On November 26, 2002, the Company’s Board of Directors approved the repurchase of up to 2.50% of the out- Quantitative measures established by regulation to ensure capital ade- standing shares of the Company’s common stock. At November 26, 2005, quacy require the bank subsidiary to maintain minimum amounts and the date this repurchase was set to expire, the Company had the authori- ratios of Total and Tier 1 capital to risk-weighted assets, and Tier 1 capital zation to repurchase and retire another 109,610 shares. On November 22, to average assets. 2005, the Board of Directors approved a three year extension of the repur- chase plan originally approved on November 26, 2002. As of December 31, As of December 31, 2005, the most recent notification from the Federal 2005, 29,864 shares had been repurchased and retired under the plan Deposit Insurance Corporation categorized the bank subsidiary as well approved November 26, 2002 and extended on November 22, 2005. capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the bank subsidiary must have a On December 9, 2005, the Company’s Board of Directors approved a semi- Total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based cap- annual dividend of $ .20 per share. This dividend has a record date of ital ratio of 6.00% or greater and a Leverage capital ratio of 5.00% or January 9, 2006 and a distribution date of January 17, 2006. greater. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category. 22 / annual report 2005 The bank subsidiary’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2005, 2004 and 2003, are as follows (in thousands): December 31, 2005: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2004: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2003: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) 4 N O T E J - O T H E R I N C O M E A N D E X P E N S E S : Other income consisted of the following: Years Ended December 31, Other service charges, commissions and fees Gain on sale of bank premises Rentals Income from proceeds of insurance policies Other income Totals Other expenses consisted of the following: Years Ended December 31, Advertising Data processing FDIC and state banking assessments Legal and accounting Postage and freight Stationery, printing and supplies Other real estate ATM expense Federal Reserve and other bank service charges Conferences and classes Taxes and licenses Consulting fees Trust expense Loss from insurance deductibles Other Totals Actual For Capital Adequacy Purposes Amount Ratio Amount $ 90,418 85,163 85,163 $88,983 84,405 84,405 $85,583 81,270 81,270 21.51% 20.26% 12.57% 24.29% 23.04% 14.66% 24.81% 23.56% 14.44% $33,630 16,815 27,104 $29,302 14,651 23,028 $27,600 13,800 22,511 2005 207,809 100,449 376,176 448,963 546,038 $ 2004 220,443 1,270,698 480,267 128,117 549,909 $ 1,679,435 $ 2,649,434 $ $ $ 2005 534,509 281,263 93,302 485,805 199,719 239,492 (271,011) 954,168 138,305 80,125 296,057 242,110 387,351 365,000 1,005,318 5,031,513 $ $ $ $ 2004 553,104 232,473 55,923 443,152 189,082 263,241 359,344 1,256,013 145,991 164,546 259,361 119,182 397,610 1,112,925 Ratio 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 2003 226,946 130,503 473,292 681,428 1,512,169 2003 515,538 282,420 117,271 382,161 167,517 250,976 59,887 2,223,479 154,701 120,293 267,319 363,282 381,233 961,879 $ 5,551,947 $ 6,247,956 annual report 2005 / 23 4 N O T E K - F I N A N C I A L I N S T R U M E N T S W I T H O F F - B A L A N C E - S H E E T R I S K : In December 2000, the case was transferred from the judge to whom it was originally assigned to a second judge (the “Judge”). The Judge had The Company is a party to financial instruments with off-balance-sheet previously handled some discovery matters in the case. risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend The Bank had made a routine loan to the Judge in November 1998, which credit and irrevocable letters of credit. These instruments involve, to vary- was guaranteed by the Attorney. The loan was repaid in February 2000 by ing degrees, elements of credit and interest rate risk in excess of the someone other than the Judge, apparently at the request of the Attorney. amount recognized in the balance sheet. The contract amounts of those Neither the Attorney nor the Judge disclosed the loan or the repayment to instruments reflect the extent of involvement the bank subsidiary has in USF&G or its counsel. particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the finan- During the course of the case, the Bank and USF&G filed competing motions cial instrument for commitments to extend credit and irrevocable letters for summary judgment. The Judge granted summary judgment in the Bank’s of credit is represented by the contractual amount of those instruments. favor on the issue of liability and subsequently presided over a settlement The Company uses the same credit policies in making commitments and conference in which he expressed his opinion about the value of the case in conditional obligations as it does for on-balance-sheet instruments. monetary terms. The case was settled on December 24, 2001, for $1.5 million. Commitments to extend credit are agreements to lend to a customer as In 2003, the Attorney, the Judge and other parties were indicted for long as there is no violation of any conditions established in the agree- alleged fraud, bribery, etc. involving various events, including allega- ment. Irrevocable letters of credit written are conditional commitments tions concerning the Bank v. USF&G lawsuit. Neither the Bank nor any Bank issued by the Company to guarantee the performance of a customer to a employee was indicted. Following the indictments, USF&G filed a civil third party. Commitments and irrevocable letters of credit generally have action against the Attorney, the Judge and the Bank alleging fraud in con- fixed expiration dates or other termination clauses and may require pay- nection with the outcome of the Bank v. USF&G lawsuit. The complaint ment of a fee. Since some of the commitments and irrevocable letters of demands $2.5 million in compensatory damages and $10 million in puni- credit may expire without being drawn upon, the total amounts do not tive damages, prejudgment interest and attorneys’ fees, etc. The USF&G v. necessarily represent future cash requirements. The Company evaluated Bank suit was stayed until 30 days following the completion of the crimi- each customer’s creditworthiness on a case-by-case basis. The amount of nal case. There has been no discovery. collateral obtained upon extension of credit is based on Management’s credit evaluation of the customer. Collateral obtained varies but may The criminal case against the Attorney, the Judge and other parties con- include equipment, real property and inventory. cluded on August 12, 2005. No guilty verdicts were returned. The defen- dants received not guilty verdicts on several counts and there was no ver- The Company generally grants loans to customers in its primary trade area dict (mistrial) on a number of other counts, including the Bank v. USF&G of Harrison, Hancock, Jackson and Stone counties. matter. On September 16, 2005, the U. S. Attorney’s office announced that it will retry the Attorney, the Judge and other parties on fraud and bribery At December 31, 2005, 2004 and 2003, the Company had outstanding charges related to the Bank v. USF&G matter. A tentative date of March 6, irrevocable letters of credit aggregating $4,491,773, $3,113,033 and 2006 has been set for the new trial. The USF&G v. Bank suit will remain sub- $3,388,997, respectively. At December 31, 2005, 2004 and 2003, the ject to the stay order until the criminal matters are concluded. Company had outstanding unused loan commitments aggregating $121,369,000, $113,500,000 and $95,165,000, respectively. Approximately The Company understands that this litigation, as with any litigation, is $65,721,000, $24,637,000 and $46,688,000 of outstanding commitments inherently uncertain and it is reasonably possible that the Company may were at fixed rates and the remainder were at variable rates at December incur a loss in this matter. The Company has no reason to conclude, how- 31, 2005, 2004 and 2003, respectively. ever, that the loss is probable and cannot reasonably estimate the amount N O T E L - C O N T I N G E N C I E S : 4 The Company’s bank subsidiary (the “Bank”) filed suit against USF&G in 1998 to recover damages for USF&G’s bad faith failure to defend and indemnify the Bank in connection with a lawsuit filed against the Bank in 1996. The Bank obtained legal representation from a local plaintiff’s attor- ney and customer (“Attorney”) on a contingent basis. of any possible loss. No liability for the USF&G lawsuit has been accrued. This conclusion is based on relevant legal advice, the fact that this lawsuit is in its very earliest stages with no discovery having been undertaken and the Company’s resolve to vigorously contest the case. The bank is involved in various other legal matters and claims which are being defended and handled in the ordinary course of business. None of these mat- ters is expected, in the opinion of Management, to have a material adverse effect upon the financial position or results of operations of the Company. 24 / annual report 2005 N O T E M - C O N D E N S E D P A R E N T C O M P A N Y O N L Y F I N A N C I A L I N F O R M A T I O N : 4 Peoples Financial Corporation began its operations September 30, 1985, when it acquired all the outstanding stock of The Peoples Bank, Biloxi, Mississippi. A condensed summary of its financial information is shown below. C O N D E N S E D B A L A N C E S H E E T S ( I N T H O U S A N D S ) 2005 2004 2003 December 31, Assets Investments in subsidiaries, at underlying equity: Bank subsidiary Nonbank subsidiary Cash in bank subsidiary Other assets Total assets Liabilities and Shareholders' Equity Notes payable Other liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity $ $ $ $ 87,740 1 285 842 88,868 87,083 1,365 1,365 87,503 88,868 C O N D E N S E D S T A T E M E N T S O F I N C O M E ( I N T H O U S A N D S ) Years Ended December 31, Income Earnings of unconsolidated bank subsidiary: Distributed earnings Undistributed earnings Interest income Other income Total income Expenses Other expense Total expenses Income before income taxes Income tax (benefit) Net income 2005 2,300 3,618 4 37 5,959 96 96 5,863 (19) 5,882 $ $ $ $ $ $ $ $ 85,991 1 268 823 87,083 87,083 1,282 1,282 85,801 87,083 2004 1,575 4,246 3 43 5,867 87 87 5,780 (14) 5,794 $ 82,957 1 546 1,462 84,966 95 1,367 1,462 83,504 84,966 2003 2,280 2,739 5 79 5,103 86 86 5,017 (1) 5,018 $ $ $ $ $ annual report 2005 / 25 C O N D E N S E D S T A T E M E N T S O F C A S H F L O W S ( I N T H O U S A N D S ) Years Ended December 31, Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Gain on liquidation of investment Net income of unconsolidated subsidiaries Changes in assets and liabilities: Other assets Net cash used in operating activities Cash flows from investing activities: Proceeds from liquidation of investment Dividends from unconsolidated subsidiary Net cash provided by investing activities Cash flows from financing activities: Retirement of stock Dividends paid Net cash used in financing activities Net increase (decrease) in cash Cash, beginning of year Cash, end of year 2005 2004 2003 $ 5,882 $ 5,794 $ 5,018 (16) (5,918) (20) (72) 16 2,300 2,316 (118) (2,109) (2,227) 17 268 285 $ (22) (5,821) (14) (63) 22 1,575 1,597 (34) (1,778) (1,812) (278) 546 268 $ (57) (5,019) (58) 57 2,280 2,337 (368) (1,449) (1,817) 462 84 546 $ Peoples Financial Corporation paid income taxes of $4,856,000, $2,042,000 and $2,537,223 in 2005, 2004 and 2003, respectively. No interest was paid during the three years ended December 31, 2005. N O T E N - E M P L O Y E E B E N E F I T P L A N S : ESOP debt for acquisition of Company shares has been guaranteed by the 4 The Company sponsors the Peoples Financial Corporation Employee Stock Company and is reported as a debt of the Company. Shares pledged as Ownership Plan (ESOP). Employees who work more than 1,000 hours are eli- collateral are reported as unearned compensation in equity. ESOP debt for gible to participate in the ESOP. The Plan included 401(k) provisions and acquisition from The Peoples Bank, Biloxi, Mississippi, is eliminated in the former Gulf National Bank Profit Sharing Plan. Effective January 1, 2001, consolidation. As shares are committed to be released, the Company the ESOP was amended to separate the 401(k) funds into the Peoples reports compensation expense equal to the current market price of the Financial Corporation 401(k) Plan. The separation had no impact on the shares, and the shares become outstanding for net income per share com- eligibility or benefits provided to participants of either plan. The 401(k) putations. Dividends on allocated ESOP shares are recorded as a reduction provides for a matching contribution of 75% of the amounts contributed of retained earnings; dividends on unallocated ESOP shares are recorded by the employee (up to 6% of compensation). Contributions are deter- as a reduction of debt and accrued interest. mined by the Board of Directors and may be paid either in cash or Peoples Financial Corporation capital stock. Total contributions to the plan Compensation expense of $7,277,422, $7,323,267 and $7,021,816 relating to the charged to operating expense were $300,000, $459,000 and $360,000 in ESOP was recorded during 2005, 2004 and 2003, respectively. The ESOP held 2005, 2004 and 2003, respectively. 468,084, 472,744 and 467,499 allocated shares at December 31, 2005, 2004 and 2003, respectively. 26 / annual report 2005 The Company established an Executive Supplemental Income Plan and a guaranteed death benefit to the participants’ beneficiaries. These contracts Directors’ Deferred Income Plan, which provide for pre-retirement and are carried at their cash surrender value, which amounted to $1,070,459, post-retirement benefits to certain key executives and directors. The $1,021,710 and $989,004 at December 31, 2005, 2004 and 2003, respectively. Company has acquired insurance policies, with the bank subsidiary as The present value of accumulated benefits under these plans using an owner and beneficiary, that it may use as a source to pay potential interest rate of 7.50% in 2005, 2004 and 2003 and the projected unit cost benefits to the plan participants. These contracts are carried at their cash method has been accrued. The accrual amounted to $628,515, $597,096 surrender value, which amounted to $11,418,134, $10,980,737 and and $530,372 at December 31, 2005, 2004 and 2003, respectively. $10,588,084 at December 31, 2005, 2004 and 2003, respectively. The pres- ent value of accumulated benefits under these plans, using an interest The Company provides post-retirement health insurance to certain of its rate of 7.50% and the interest ramp-up method for 2005, 2004 and 2003, retired employees. Employees are eligible to participate in the retiree has been accrued. The accrual amounted to $4,189,779, $3,783,850 and health plan if they retire from active service no earlier than their Social $3,375,938 at December 31, 2005, 2004 and 2003, respectively. Security normal retirement age, which varies from 65 to 67 based on the year of birth. In addition, the employee must have at least 25 continuous The Company also has additional plans for non-vested post-retirement years of service with the Company immediately preceding retirement. benefits for certain key executives and directors. The Company has However, any active employee who was at least age 65 as of January 1, 1995, acquired insurance policies, with the bank subsidiary as owner and ben- does not have to meet the 25 years of service requirement. The accumulated eficiary, that it may use as a source to pay potential benefits to the plan post-retirement benefit obligation at January 1, 1995, was $517,599, which participants. Additionally, there are two endorsement split dollar policies, the Company elected to amortize over 20 years. The Company reserves the with the bank subsidiary as owner and beneficiary, which provide a right to modify, reduce or eliminate these health benefits. The following is a summary of the components of the net periodic post-retirement benefit cost: Years Ended December 31, Service cost Interest cost Amortization of net transition obligation 2005 2004 $ 237,731 $ 212,933 139,449 20,600 133,262 20,600 2003 $ 157,515 104,409 20,600 Net periodic post-retirement benefit cost $ 397,780 $ 366,795 $ 282,524 The discount rate used in determining the accumulated post-retirement Medicare Part D. The Act becomes effective in 2006. The Company believes benefit obligation was 5.50% in 2005, 5.75% in 2004, and 6.25% in 2003. that the coverage it provides under its retiree health plan is actuarially The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 10.00% in 2005. The rate was assumed to decrease gradually to 5.00% for 2016 and remain at that level thereafter. If the health care cost trend rate assumptions were increased 1.00%, the accumulated post-retirement benefit obligation as of December 31, 2005, would be increased by 24.77%, and the aggregate of the service and interest cost components of the net periodic post-retirement benefit cost for the year then ended would have increased by 28.71%. If the health equivalent to Medicare Part D and that it will be entitled to the subsidy. The Company elected to recognize the effect of this subsidy as of December 31, 2004, in accordance with FASB Staff Position 106-2. The recognition of this subsidy had no effect on the 2004 net periodic post- retirement benefit cost but did reduce the accumulated benefit obligation as of December 31, 2004 by $650,109. The following table presents the estimated benefit payments and effect of the Medicare Part D subsidy for each of the next five years and in the care cost trend rate assumptions were decreased 1.00%, the accumulated aggregate for the next five years: post-retirement benefit obligation as of December 31, 2005, would be decreased by 18.90%, and the aggregate of the service and interest cost components of the net periodic post-retirement benefit cost for the year then ended would have decreased by 21.38%. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) introduces a prescription drug benefit under Medicare Year 2006 2007 2008 2009 2010 Part D as well as a federal subsidy to sponsors of retiree health care bene- 2011-2015 fit plans that provide a benefit that is at least actuarially equivalent to With Subsidy Without Subsidy $ 45,000 50,000 55,000 60,000 66,000 488,000 $ 52,000 58,000 64,000 70,000 76,000 584,000 Subsidy $ 7,000 8,000 9,000 10,000 10,000 96,000 annual report 2005 / 27 The following is a reconciliation of the accumulated post-retirement benefit obligation: Accumulated post-retirement benefit obligation as of December 31, 2004 $ 2,234,569 Service cost Interest cost Actuarial loss Benefits paid 197,169 139,449 719,676 (68,860) Accumulated post-retirement benefit obligation as of December 31, 2005 $ 3,222,003 December 31, 2005 2004 2003 Accumulated post-retirement benefit obligation: Retirees Not eligible to retire Total Plan assets at fair value Accumulated post-retirement benefit obligation in excess of plan assets Unrecognized transition obligation Unrecognized cumulative net gain from past experience different from that assumed and from changes in assumptions $ 830,354 $ 717,323 $ 659,859 2,391,649 3,222,003 -0- 3,222,003 (185,397) 1,517,246 2,234,569 -0- 2,234,569 (205,997) 1,493,123 2,152,982 -0- 2,152,982 (226,597) (1,363,523) (684,409) (887,947) Accrued post-retirement benefit cost $ 1,673,083 $ 1,344,163 $ 1,038,438 4 N O T E O - F A I R V A L U E O F F I N A N C I A L I N S T R U M E N T S : Cash and Due from Banks The amount shown as cash and due from banks approximates fair value. SFAS 107, “Disclosures About Fair Value of Financial Instruments,” requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of condi- tion, for which it is practical to estimate its fair value. SFAS 107 excluded certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. In preparing these disclosures, Management made highly sensitive estimates and assumptions in developing the methodology to be utilized in the computation of fair value. These estimates and assumptions were formu- Federal Funds Sold The amount shown as federal funds sold approximates fair value. Available for Sale Securities The fair value of available for sale securities is based on quoted market prices. Held to Maturity Securities The fair value of held to maturity securities is based on quoted market prices. lated based on judgments regarding economic conditions and risk char- Loans acteristics of the financial instruments that were present at the time the The fair value of loans is estimated by discounting the future cash flows computations were made. Events may occur that alter these conditions using the current rates at which similar loans would be made to borrowers and thus perhaps change the assumptions as well. A change in the with similar credit ratings for the remaining maturities. The cash flows assumptions might affect the fair value of the financial instruments dis- considered in computing the fair value of such loans are segmented into closed in this footnote. In addition, the tax consequences related to the categories relating to the nature of the contract and collateral based on realization of the unrealized gains and losses have not been computed or contractual principal maturities. Appropriate adjustments are made to disclosed herein. These fair value estimates, methods and assumptions are reflect probable credit losses. Cash flows have not been adjusted for such set forth below. factors as prepayment risk or the effect of the maturity of balloon notes. 28 / annual report 2005 Deposits Federal Funds Purchased and Securities Sold under The fair value of non-interest bearing demand and interest bearing Agreements to Repurchase savings and demand deposits is the amount reported in the financial The amount shown as federal funds purchased and securities sold under statements. The fair value of time deposits is estimated by discounting the agreements to repurchase approximates fair value. cash flows using current rates of time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such Long Term Funds deposits are based on contractual maturities, since approximately 98% of The fair value of long term funds is computed by discounting the cash time deposits provide for automatic renewal at current interest rates. flows using current borrowing rates. The following table presents carrying amounts and estimated fair values for financial assets and financial liabilities at December 31, 2005, 2004 and 2003 (in thousands): 2005 2004 2003 Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Financial Assets: Cash and due from banks $ 52,278 $ 52,278 $ 32,573 $ 32,573 $ 33,830 $ 33,830 Federal funds sold Available for sale securities Held to maturity securities Loans, net Financial Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits 100,340 182,590 134,047 338,380 176,627 415,590 592,217 Federal funds purchased and securities sold under agreements to repurchase 149,268 Long term funds 7,352 100,340 178,394 134,008 341,016 176,627 415,582 592,209 149,268 7,728 152 174,438 6,587 327,624 89,529 299,662 389,191 87,277 7,203 152 173,031 6,698 331,044 89,529 300,188 389,717 87,277 7,906 31 206,467 4,353 295,757 80,599 296,190 376,789 95,039 17,180 31 207,486 4,527 298,918 80,599 297,065 377,664 95,039 18,076 N O T E P - E X T R A O R D I N A R Y G A I N : 4 An extraordinary gain of $538,000, net of taxes, was recorded as a result of the Pulse EFT Association Exchange. annual report 2005 / 29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S Board of Directors Peoples Financial Corporation and Subsidiaries Biloxi, Mississippi We have audited the accompanying consolidated statements of condition of Peoples Financial Corporation and Subsidiaries as of December 31, 2005, In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Financial Corporation and Subsidiaries at December 31, 2005, 2004 and 2003, and the results of its operations and its cash flows for the years then ended, in conformity with U. S. generally accepted accounting principles. 2004 and 2003, and the related consolidated statements of income, share- Certified Public Accountants holders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant esti- mates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PILTZ, WILLIAMS, LAROSA & CO. Biloxi, Mississippi January 25, 2006 30 / annual report 2005 F I V E - Y E A R C O M P A R A T I V E S U M M A R Y O F S E L E C T E D F I N A N C I A L I N F O R M A T I O N ( I N T H O U S A N D S E X C E P T P E R S H A R E D A T A ) Peoples Financial Corporation and Subsidiaries Balance Sheet Summary Total assets Available for sale securities Held to maturity securities Loans, net of unearned discount Deposits Borrowings from FHLB Long term notes payable Shareholders' equity Summary of Operations Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before taxes and extraordinary gain Applicable income taxes Extraordinary gain Net income Per Share Data Basic and diluted earnings per share Basic and diluted earnings per share before extraordinary gain Dividends per share Book value 2005 2004 2003 2002 2001 $ 845,325 $ 577,441 $ 579,669 $ 553,671 $ 587,012 178,394 134,047 349,346 592,217 7,352 173,030 6,588 334,193 389,192 7,203 87,503 85,801 207,486 4,353 302,155 376,789 17,070 110 83,504 151,484 17,588 315,827 391,705 6,313 334 81,732 $ 32,343 $ 24,566 $ 25,065 $ 27,424 $ 9,616 17,808 2,428 15,380 10,372 (21,874) 3,878 687 3,191 $ 7,550 24,793 3,614 21,179 7,237 (20,468) 7,948 2,604 538 5,882 1.06 .96 .38 15.77 $ $ 5,091 19,475 448 19,027 9,563 (20,765) 7,825 2,031 5,794 1.04 1.04 .32 15.44 $ $ 5,838 19,227 447 18,780 9,737 (21,464) 7,053 2,035 5,018 .90 .90 .29 15.03 $ $ $ $ .57 $ .71 .57 .24 14.64 .60 .24 14.25 142,902 38,279 347,169 412,543 5,549 336 80,069 37,285 18,354 18,931 2,503 16,428 9,256 (21,197) 4,487 1,082 594 3,999 Weighted average number of shares 5,550,477 5,556,251 5,563,015 5,603,834 5,629,872 Selected Ratios Return on average assets Return on average equity Capital formation rate Primary capital to average assets Risk-based capital ratios: Tier 1 Total .82% 6.79% 1.98% 13.67% 20.26% 21.51% 1.00% 6.84% 2.75% 15.87% 23.04% 24.29% .88% 6.07% 2.17% 15.79% 23.56% 24.81% .56% 3.94% 2.08% 15.39% 22.91% 24.16% .68% 5.04% 1.72% 14.47% 20.65% 21.90% annual report 2005 / 31 S U M M A R Y O F Q U A R T E R L Y R E S U L T S O F O P E R A T I O N S ( I N T H O U S A N D S E X C E P T P E R S H A R E D A T A ) Peoples Financial Corporation and Subsidiaries Quarter Ended, 2005 Interest income Net interest income Provision for loan losses Income before income taxes and extraordinary items Net income Basic and diluted earnings per share Quarter Ended, 2004 Interest income Net interest income Provision for loan losses Income before income taxes Net income Basic and diluted earnings per share Market Information March 31 $ 6,728 June 30 September 30 December 31 $ 8,220 $ 7,985 $ 9,410 5,252 (679) 2,705 2,392 .43 6,468 (834) 3,964 2,727 .49 5,902 5,103 (2,675) (1,767) (.32) 7,171 24 3,954 2,530 .46 March 31 $ 5,916 June 30 $ 5,811 September 30 December 31 $ 6,190 $ 6,649 4,738 180 1,529 1,072 .19 4,615 183 2,824 1,987 .36 4,870 61 1,943 1,425 0.25 5,252 24 1,529 1,310 .24 The Company's stock is traded under the symbol PFBX and is quoted in publications under "PplFnMS". The following table sets forth the high and low sale prices of the Company's common stock as reported on the NASDAQ Stock Market. Year 2005 2004 Quarter High 1st 2nd 3rd 4th 1st 2nd 3rd 4th $ 19.49 $ $ 19.00 19.00 18.50 19.50 19.47 18.00 19.95 $ Dividend per share $ 0.18 0.20 $ 0.15 .17 Low 17.50 17.30 17.39 16.51 16.15 17.10 16.70 17.00 There were 597 holders of record of common stock of the Company at paid to the Company by its bank subsidiary. Although Management January 31, 2006, and 5,549,128 shares issued and outstanding. The cannot predict what dividends, if any, will be paid in the future, principal source of funds to the Company for payment of dividends is the the Company has paid regular semiannual cash dividends since its earnings of the bank subsidiary. The Commissioner of Banking and founding in 1985. Consumer Finance of the State of Mississippi must approve all dividends 32 / annual report 2005 B O A R D O F D I R E C T O R S B O A R D O F D I R E C T O R S Peoples Financial Corporation B O A R D O F D I R E C T O R S The Peoples Bank, Biloxi, Mississippi Chevis C. Swetman, Chairman of the Board Chevis C. Swetman, Chairman of the Board Dan Magruder, Vice-Chairman; President, Rex Distributing Co., Inc. Tyrone J. Gollott, Vice-Chairman; President, G & W Enterprises, Inc. Drew Allen, President, Allen Beverages, Inc. Drew Allen, President, Allen Beverages, Inc. Rex E. Kelly, Business Executive (retired) Liz Corso Joachim, President, Frank P. Corso, Inc. Lyle M. Page, Partner, Page, Mannino, Peresich & McDermott, PLLC Rex E. Kelly, Business Executive (Retired) O F F I C E R S Peoples Financial Corporation Chevis C. Swetman, President and CEO A. Wes Fulmer, Executive Vice-President Thomas J. Sliman, First Vice-President Dan Magruder, President, Rex Distributing Co., Inc. Jeffrey H. O’Keefe, President, Bradford-O’Keefe Funeral Homes, Inc. Lyle M. Page, Partner, Page, Mannino, Peresich & McDermott, PLLC S E N I O R M A N A G E M E N T The Peoples Bank, Biloxi, Mississippi Jeannette E. Romero, Second Vice-President Chevis C. Swetman, President and CEO Robert M. Tucei, Vice-President Ann F. Guice, Vice-President and Secretary A. Wes Fulmer, Executive Vice-President Thomas J. Sliman, Senior Vice-President Lauri A. Wood, Chief Financial Officer and Controller Jeannette E. Romero, Senior Vice-President Robert M. Tucei, Senior Vice-President Lauri A. Wood, Senior Vice-President and Cashier Ann F. Guice, Senior Vice-President annual report 2005 / 33 B R A N C H L O C A T I O N S The Peoples Bank, Biloxi, Mississippi Handsboro 412 E. Pass Road, Gulfport, Mississippi 39507 Main Office 152 Lameuse Street, Biloxi, Mississippi 39530 (228) 897-8717 Long Beach (228) 435-5511 Asset Management & Trust Services 758 Vieux Marché, Biloxi, MS 39530 (228) 435-8208 Bay St. Louis 298 Jeff Davis Avenue, Long Beach, Mississippi 39560 (228) 897-8712 Ocean Springs 2015 Bienville Boulevard, Ocean Springs, Mississippi 39564 (228) 435-8204 408 Highway 90 East, Bay St. Louis, Mississippi 39520 Orange Grove (228) 897-8710 Cedar Lake 1740 Popps Ferry Road, Biloxi, Mississippi 39532 (228) 435-8688 Diamondhead 12020 Highway 49 North, Gulfport, Mississippi 39503 (228) 897-8718 Pass Christian 129 Fleitas Avenue, Pass Christian, Mississippi 39571 (228) 897-8719 4408 West Aloha Drive, Diamondhead, Mississippi 39525 Saucier (228) 897-8714 D’Iberville-St. Martin 17689 Second Street, Saucier, Mississippi 39574 (228) 897-8716 10491 Lemoyne Boulevard, D’Iberville, Mississippi 39540 Waveland (228) 435-8202 Downtown Gulfport 1105 30th Avenue, Gulfport, Mississippi 39501 (228) 897-8715 Gautier 470 Highway 90, Waveland, Mississippi 39576 (228) 467-7257 West Biloxi 2560 Pass Road, Biloxi, Mississippi 39531 (228) 435-8203 2601 Highway 90, Gautier, Mississippi 39553 Wiggins (228) 435-8694 1312 S. Magnolia Drive, Wiggins, Mississippi 39577 (601) 928-1761 or (228) 897-8722 34 / annual report 2005 C O R P O R A T E I N F O R M A T I O N Peoples Financial Corporation and Subsidiaries Independent Auditors Piltz, Williams, LaRosa & Company, Biloxi, Mississippi S.E.C. Form 10-K Requests A copy of the Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, may be obtained without charge by directing a written request to: Lauri A. Wood, Chief Financial Officer and Controller Peoples Financial Corporation P. O. Drawer 529, Biloxi, Mississippi 39533-0529 (228) 435-8412, e-mail: lwood@thepeoples.com Corporate Office Mailing Address P. O. Box 529 Biloxi, MS 39533-0529 Physical Address 152 Lameuse Street Biloxi, MS 39530 (228) 435-8205 Website www.thepeoples.com Corporate Stock The common stock of Peoples Financial Corporation is traded on the NASDAQ Small Cap Market under the symbol: PFBX. The current market makers are: FTN Midwest Research Secs. Knight Equity Markets, L.P. Morgan Keegan & Company, Inc. Sterne, Agee & Leach, Inc. Stifel Nicolaus & Co. Shareholder Information For complete information concerning the common stock of Peoples Financial Corporation, including dividend reinvestment, or general information about the Company, direct inquiries to transfer agent/investor relations: Asset Management & Trust Services Department The Peoples Bank, Biloxi, Mississippi P. O. Box 1416, Biloxi, Mississippi 39533-1416 (228) 435-8208, e-mail: investorrelations@thepeoples.com annual report 2005 / 35 B O A R D O F D I R E C T O R S PEOPLES FINANCIAL CORPORATION THE PEOPLES BANK, BILOXI, MISSISSIPPI BACK ROW FROM LEFT: Jeffrey H. O’Keefe, President, Bradford-O’Keefe Funeral Homes, Inc.; Tyrone J. Gollott, Vice-Chairman; President, G & W Enterprises, Inc.; Lyle M. Page*, Partner, Page, Mannino, Peresich & McDermott, PLLC. FRONT ROW FROM LEFT: Rex E. Kelly*, Business Executive (retired); Drew Allen*, President, Allen Beverages, Inc.; Chevis C. Swetman*, Chairman of the Board; Dan Magruder*, Vice-Chairman of Peoples Financial Corporation; President, Rex Distributing Co., Inc.; Liz Corso Joachim, President, Frank P. Corso, Inc. *Member of both boards 36 / annual report 2005 P E O P L E S F I N A N C I A L C O R P O R AT I O N A N N U A L R E P O R T 2 0 0 5 

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