Peoples Financial Corporation Annual Report 2005

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FY2005 Annual Report · Peoples Financial Corporation

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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

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 :

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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 %

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

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

5,017,845

$ .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 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)

(111,636)

48,144

94,899

(1,195,267)

5,017,845

(1,195,267)

5,017,845

(1,195,267)

(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)

(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)

(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)

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)

(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

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 :

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

132

000

(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

000

244

285

347

113

(165)

(766)

(115)

(1,046)

(708)

64,652

91,813

13,383

169,848

3,183

(1,754)

173,031

(2)

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

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

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

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.

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.

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 :

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

347

2,876

(1,402)

(20)

(4,854)

(2,254)

(1,422)

2005

3,653

(1,049)

2,604

2005

(103)

(1,221)

(149)

(948)

390

2004

2,660

(629)

2,031

2004

(208)

(168)

(161)

(826)

(92)

2003

2,322

(287)

2,035

2003

(88)

101

(183)

(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)

(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)

(43)

(50)

(312)

2,031

(0.5)

(0.6)

(4.2)

25.9

(184)

(54)

(133)

2,035

34.0

(2.6)

0.1

(0.8)

(1.8)

28.9

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)

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

$88,983

84,405

$85,583

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%

8.00%

4.00%

8.00%

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

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 :

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 :

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

285

842

88,868

87,083

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

5,959

5,863

(19)

5,882

85,991

268

823

87,083

1,282

85,801

87,083

2004

1,575

4,246

5,867

5,780

(14)

5,794

82,957

546

1,462

84,966

1,367

1,462

83,504

84,966

2003

2,280

2,739

5,103

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)

2,300

2,316

(118)

(2,109)

(2,227)

268

285

(22)

(5,821)

(14)

(63)

1,575

1,597

(34)

(1,778)

(1,812)

(278)

546

268

(57)

(5,019)

(58)

2,280

2,337

(368)

(1,449)

(1,817)

462

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

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

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

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

$ 32,573

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

206,467

4,353

295,757

80,599

296,190

376,789

95,039

17,180

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 :

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

.32

15.44

5,838

19,227

447

18,780

9,737

(21,464)

7,053

2,035

5,018

.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

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

1,943

1,425

0.25

5,252

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

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

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

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.

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

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