Peoples Financial Corporation Annual Report 2006

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FY2006 Annual Report · Peoples Financial Corporation

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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 N U A L R E P O R T

2006

RECOVERY
AND
RENEWAL

C O N T E N T S
1 P R E S I D E N T ’ S L E T T E R

3 Y E A R I N R E V I E W

5 F I N A N C I A L S

36 C O R P O R A T E I N F O R M A T I O N

O N T H E C O V E R : Cruisin’ the Coast presented by The Peoples Bank returned in 2006 after its weather-caused hiatus in 2005. The 2006 event attracted some 80%
of the registered participants who attended in 2004. Each year, Cruisin’ holds its Wednesday Block Party in downtown Biloxi right in front of the Main Office. Hundreds
of vintage and custom cars line Lameuse Street, showing off their best attributes for a number of awards. One of those awards is The Peoples Cup, presented every year
by Chevis C. Swetman, president and CEO of Peoples Financial Corporation and the bank. Photo by Bruce W. Smith

T O O U R S H A R E H O L D E R S :

f 2005 is remembered as the year of destruction, then 2006 will
be considered the first year of our long reconstruction and
recovery process.

Perhaps the most important achievement in 2006 was the recognition
of the enormity of the job ahead. We took the first steps in reclaiming
our Gulf Coast. I think everyone would agree that much was accom-
plished in the first year after Katrina.

Of course, much more work lies ahead. Your company and your bank
spent 2006 repairing the immediate damage of Katrina. We were able
to repair and reoccupy every permanent branch except for Pass
Christian, which was completely destroyed. More importantly, we
moved beyond repair and reconstruction to renewal and revival by
resuming our original long-term growth plan.

This is why the next few pages of this year’s annual report are titled The
Year in Review & Preview. We enjoyed a good year in 2006, but we
are truly excited about 2007. We have not been able to say that for a
couple of years.

No one can argue that the pace of our rebuilding efforts stalled in the
second half of the year, primarily due to a combination of the slow-
down in the flow of funds and the uncertainty caused by a crisis in
the property insurance industry. Beginning in 2007, it seems we are
reaching a satisfactory conclusion to the issues, and the resurgence
and rebuilding of the Mississippi Gulf Coast will pick up the pace—
perhaps dramatically.

During 2006 our communities took the time and made the concerted
effort to define what we want to be in the future. During 2007 we will
take the first major steps in building the renaissance along the Gulf
Coast, moving from concepts on paper to realization in bricks and mortar.

Here on the Gulf Coast, we are fortunate in having the gaming indus-
try, our major economic driver, move back into operation so quickly.
With the help of our state legislature, casinos were allowed to operate
on land. This single step facilitated the rapid reopening of several busi-
nesses whose barges were washed up on shore and would have
required months to replace and refurbish to get back in operation.
Instead, some of our operators were able to convert their lobbies to
gaming facilities and begin operations in a matter of weeks, generat-
ing jobs, tax revenue and economic activity. By the end of 2006, a total
of ten casinos were in operation.

that will create the complete experience to bring vis-
itors back to the Mississippi Gulf Coast. In that regard,
it is gratifying to see many of our heritage restaurant
brands reopen and the number of available rooms
slowly but surely increase.

One shining example of our area’s revival was the
very successful renewal of Cruisin’ the Coast, presented
by The Peoples Bank. After the 2005 event was lost to
weather, the 2006 event drew some 80% of the
record-setting number of registrants who attended in
2004. Considering the reduced number of hotel rooms
and show venues available, that is a remarkable
accomplishment. Once again, the Wednesday Block
Party in downtown Biloxi was held to great
success right in front of our Main Office, and we are
proud to be the presenting sponsor of the Coast’s
largest single tourism event.

Despite these triumphs, the renewal effort continues
to be a lot of hard work. We are faced with rebuilding
our homes and our lives, as well as our economy. A
good many of our great team at The Peoples Bank
have yet to move back to their homes. In spite of their
personal challenges, our team members have never
wavered in their commitment to provide quality
financial products and outstanding service to our
many customers. I hope you join me in commending
their efforts, without which we would simply cease
to function.

I also want to thank our Board of Directors for provid-
ing the leadership and counsel that has taken our
company and bank through the most trying, most
challenging situation we are ever likely to experience
in our lifetimes. The fact that The Peoples Bank is back
on the road of its long-term strategic plan, building
new branches, renovating existing ones and expand-
ing our Main Office demonstrates the wisdom of our
Board’s vision. Together, our team will continue
working every day to earn your trust as we restore
our community.

Sincerely,

Our gaming industry drives our tourism industry. Our challenge ahead
is to rebuild the infrastructure of rooms, restaurants and attractions

Chevis C. Swetman
Chairman of the Board, President & CEO

N E T I N C O M E ( I N T H O U S A N D S )

E A R N I N G S P E R S H A R E

N E T I N T E R E S T I N C O M E ( I N T H O U S A N D S )

$12,768

$2.30

$30,109

$24,794

$19,475

$5,794

$5,882

$1.04

$1.06

2004 2005 2006

M A I N O F F I C E E X P A N S I O N

The Main Office extension includes

30,500 square feet of space on four

floors that will match our existing

historic building in finishes, color

and design. The second floor of the

new extension will also include

meeting and training rooms to

enhance employee development

and continuing education programs.

T H E Y E A R I N R E V I E W & P R E V I E W

Financially, the Company and the bank enjoyed a very

successful year with a large increase in earnings fueled by

substantial gains in loan volume and net interest income.

For the year, loan volume rose to $401 million, 15% higher than 2005. While that

figure represents a significant increase, earlier in the year we had projected a 25%

growth in loan volume. The slower pace is a result of the deceleration of money flow

N E W C O N S T R U C T I O N A N D R E N O VAT I O N S B E G I N

and the construction activity that the entire area experienced in the latter part of 2006.

Beyond the financial results, one of our most significant

achievements of 2006 was the completion of our branch repair

We believe the slowdown is only temporary, the product of an atmosphere of

and reconstruction efforts. By the end of the year, the bank

uncertainty caused by rising construction costs, the availability and affordability

had moved back into every branch except Pass Christian,

of insurance, building height requirements and construction codes. Once these

which was completely destroyed to the slab.

underlying questions are answered, the pace of rebuilding will inevitably rebound

and the recovery of our Gulf Coast will accelerate.

As we move into 2007, we once again start to look forward. We

have begun construction on a long-planned expansion to our

Our net interest income grew 21%, faster than loan volume, benefiting from our loan

Main Office that will significantly increase space for our back-

portfolio’s 60/40 ratio of floating to fixed rates and from higher earnings in our

office operations.

investment portfolio due to our larger deposit base.

S T O C K D I V I D E N D R A I S E D T W I C E

The Main Office extension includes 30,500 square feet of space

on four floors that will match our existing historic building in

finishes, color and design. The facade of the expansion will

add a complementary design to the streetscape of historic

Howard Avenue in downtown Biloxi.

As a result of the Company’s increased earnings and the confidence that these levels

will be maintained over the next several years of reconstruction of the Coast, the

The new building will connect to the present Main Office by

Board of Directors increased the common stock dividend twice during 2006.

means of a second-level bridge so that our existing drive-up

teller lanes will not be affected. The second floor of the

In June, the Board increased the semi-annual dividend to $.21 per share, followed in

new extension will also include meeting and training rooms

December by another increase to $.23 per share. The total 2006 dividend of $.41 per

to enhance employee development and continuing

share is 7.9% higher than the dividend paid in 2005.

education programs.

P A S S C H R I S T I A N B R A N C H

The new Pass Christian branch, located on the corner

of Davis and Second streets, is intended to support

the objectives of the post-Katrina charettes that

envision a new urbanism, pedestrian-friendly design

for downtown Pass Christian. The 6,000 square foot

building features architectural elements that recall

the Garden District of New Orleans and some of the

original buildings that formerly stood in downtown

Pass Christian. Existing live oaks on the property

will be preserved and incorporated into the overall

landscaping of the property.

B R A N C H E S B U I LT A N D R E N O VAT E D

L O A N V O L U M E ( I N T H O U S A N D S )

$401,194

Our branch system will also be significantly improved, with new buildings in Gautier

$334,193 $349,346

and Pass Christian and a major renovation at our Orange Grove location.

The new Pass Christian branch, located on the corner of Davis and Second streets, is

intended to support the objectives of the post-Katrina charettes that envision a new

urbanism, pedestrian-friendly design for downtown Pass Christian.

The 6,000 square foot building features architectural elements that recall the Garden

District of New Orleans and some of the original buildings that formerly stood in down-

town Pass Christian. The design elements include a stucco finish, double-hung windows

and shutters and wrought-iron porch elements, with metal roofs covering the drive-

through tellers and the front entrance.

Existing live oaks on the property will be preserved and incorporated into the overall

landscaping of the property, which will include approximately 22 parking spaces. The

new facility is expected to be completed in Fall 2007.

Our Gautier branch opened in early February, 2007 to replace the branch that we estab-

lished in an older building in 2002 to serve our growing customer base in Jackson

County. We were able to seize the opportunity to build a new branch with a design that

offers more convenience and a better banking experience for our customers in the

Gautier area.

The renovation of our Orange Grove branch was part of our long-term facility upgrade

program that was only delayed but never abandoned in the aftermath of Hurricane

Katrina. Once we completed the repairs to our Bay St. Louis branch—which itself had

been renovated only months before the storm—we moved the temporary branch facil-

ity to Orange Grove to begin the renovation project. We expect to move back into the

renovated branch by the end of 2007.

2004 2005 2006

D I V I D E N D S ( P E R S H A R E )

$0.41

$0.38

$0.32

2004 2005 2006

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
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 L Y 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 L T S O F O P E R A T I O N 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, 2006, 2005 and 2004. These comments highlight the signifi-
cant 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 contains
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 evalu-
ating 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
The year 2006 proved to be another eventful year for the Company on
several fronts. Net income for 2006 was $12,768,000, as compared with
$5,882,000 for 2005. Earnings for 2006 included primarily income from
operations, with net interest income increasing from $24,794,000 in 2005 to
$30,109,000 in 2006. Total assets reached $964,023,000 at December 31, 2006, as
deposits reached an all-time high of $613,170,000. 2005 earnings included a
loss of $281,000, net of taxes, on the sale of available for sale securities and
a gain of $538,000, net of taxes, from the Pulse EFT Association Exchange.
During 2006, the Company settled all of its outstanding claims relating to
damaged branch facilities, lost earnings and extra expenses resulting
from Hurricane Katrina. As a result, the Company realized a gain of
$2,674,000, net of taxes.

During 2006, considerable resources were dedicated to the restoration of our
branch facilities. The Company completed the renovation of our branch loca-
tions in Waveland, Bay St. Louis, D’Iberville and Downtown Gulfport.
Construction is well underway for a new Money Center building in downtown
Biloxi with an expected completion date in the third quarter of 2007. On
February 15, 2007, the groundbreaking for the construction of a new Pass
Christian branch facility in the city’s downtown business district took place.
Long-awaited renovations to our thriving Orange Grove branch have begun.

Management has continued its efforts in evaluating its loan portfolio,
especially with respect to potential losses on loans as a result of Hurricane
Katrina. Earnings for 2005 were impacted by the net provision of
$3,614,000, or $2,385,000, net of taxes. This net provision included a

negative provision for the first six months of $999,000,net of tax, and a
provision of $3,368,000, net of tax in the third quarter of that year. In
2006, a provision for losses of only $93,000, net of taxes, was recorded for
potential losses on overdraft accounts. The initial effort to evaluate losses
after the hurricane has proven to be accurate, with no additional losses
having been identified since September 2005. The Company continues to
evaluate the area’s recovery and rebuilding efforts. While much has been
accomplished in the last eighteen months, the vast scale of these efforts is
sobering. The pace of the recovery is being impacted by the availability
and affordability of insurance, housing for residents and construction
workers, availability of workforce and the increasing cost of materials.

F I N A N C I A L C O N D I T I O N
Available for Sale Securities
Available for sale securities increased $218,814,000 at December 31, 2006 as
compared with December 31, 2005. The increase in these securities is the result
of the management of the liquidity position of the bank subsidiary. The
growth in funds from deposits and non-deposit products has significantly
outpaced the growth in loans during the last eighteen months. These excess
funds have been invested in U.S. Treasury and U.S. Government securities.
Proceeds from maturities of these investments are funding the purchase of
U.S. Agency securities with longer maturities and which are being classified
as available for sale. The Company continues to monitor its investment in
bonds issued by local municipalities which have been affected by Hurricane
Katrina. At December 31, 2006, Management has determined that no provi-
sion for loss for these investments is required.

Gross unrealized gains were $694,000, $132,000 and $347,000 and gross unre-
alized losses were $3,109,000, $4,328,000 and $1,754,000 for available for sale
securities at December 31, 2006, 2005 and 2004, respectively. Losses of
$426,000 and $237,000 were realized on the liquidation or sale of available for
sale securities in 2005 and 2004, respectively.

Held to Maturity Securities
Held to maturity securities decreased $48,473,000 at December 31, 2006,
compared with December 31, 2005. As discussed above, the Company
invests primarily in U.S. Treasury and U.S. Government Agency securities.
During 2005, purchases were primarily classified as Held to Maturity and
in 2006 purchases were primarily classified as Available for Sale. The
Company continues to monitor its investment in bonds issued by local
municipalities which have been affected by Hurricane Katrina. At
December 31, 2006, Management has determined that no provision for loss
for these investments is required.

Gross unrealized gains were $62,000, $93,000 and $113,000, at December 31,
2006, 2005 and 2004 respectively, while gross unrealized losses were $117,000,
$132,000 and $2,000 at December 31, 2006, 2005 and 2004, respectively. There
were no significant realized gains or losses from calls of these investments for
the years ended December 31, 2006, 2005 and 2004.

Loans
The Company’s loan portfolio increased $51,848,000 at December 31, 2006,
as compared with December 31, 2005. The initial phase of rebuilding after
Hurricane Katrina is well underway, yet Management believes that more
than a decade will be needed to complete the recovery of the Mississippi
Gulf Coast. As the pace of funds available to businesses and individuals
from insurance, grants, and other sources has slowed, rebuilding has been
negatively impacted. The anticipated loan growth of 25% for 2006 stalled

at 15% due to the uncertainty that exists in the market place. Resources
available to fund development, rising construction costs and the avail-
ability and affordability of insurance are among the concerns creating this
uncertainty. These factors, and others, are impacting rebuilding efforts,
and will directly impact loan demand and growth during the coming
years. See Provision for Loan Losses for further discussion of these and
other issues relating to the evaluation of the quality of the loan portfolio
and the allowance for loan losses.

Fluctuations in the various categories of loans and information relating to
concentrations are presented in Note C.

Bank Premises and Equipment, net:
Bank premises and equipment increased $1,771,000 at December 31, 2006
as compared with December 31, 2005. During 2006, the Company settled
its outstanding claims relating to damage to bank premises and equip-
ment as a result of Hurricane Katrina. A gain of $3,793,000 was realized
from this settlement and bank premises and equipment with a book value
of $1,290,000 were retired. The Company will utilize its insurance proceeds
to fund the renovation and construction of new facilities.

Accrued Interest Receivable
Accrued interest receivable increased $3,827,000 at December 31, 2006 as
compared with December 31, 2005 due to an increase in interest earning
assets and the rate earned on these assets.

Other Assets
Other assets decreased $779,000 at December 31, 2006, as compared with
December 31, 2005, due to deferred taxes on deferred gains on the sale and
retirement of bank premises.

Deposits
Total deposits increased $20,952,000 at December 31, 2006, as compared
with December 31, 2005. 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 and jumbo certificates
of deposit as municipal customers receive federal and state funding
and commercial and personal customers receive insurance proceeds,
SBA loans, block grants and other forms of assistance. Based on previous
post-hurricane experience and expectations with respect to the time
frame for reconstruction, the Company anticipates that deposits will
continue at or near their present level, and may even increase, during 2007.

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 to manage the potential
volatility of its deposits.

Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase
Federal funds purchased and securities sold under agreements to repurchase
increased $76,765,000 at December 31, 2006, as compared with December 31,
2005. This fluctuation is directly related to customers’ periodic reallocation of
their funds between deposit and non-deposit products.

Other Liabilities
Other liabilities increased $10,336,000 at December 31, 2006, as compared
with December 31, 2005, primarily due to the increase in the liability for the
Company’s retiree health plan of $1,158,000 due to the adoption of SFAS 158
during 2006 and the liability for investments not yet settled.

Shareholders' Equity
During 2006, 2005 and 2004, there were significant events that impacted
the components of shareholders’ equity. These events are detailed in
Note J to the Consolidated Financial Statements included in this report.

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 risk-based capital ratios. The Five-Year Comparative
Summary of Selected Financial Information on page 33 presents these
ratios for those periods.

One measure of capital adequacy is the primary capital ratio. As presented
in the Five-Year Summary, the Company’s ratios are well above the regu-
latory minimum of 6.00%, but have declined in 2006 and 2005. This
decrease has been the result of the significant increase in assets since
September 30, 2005, rather than an indication of a weakening of the
Company’s capital position. Management continues to emphasize the
importance of maintaining the appropriate capital levels of the Company
and has established a goal of maintaining its primary capital ratio
at 8.00%, which is the minimum requirement for classification as being
“well capitalized” by the banking regulatory authorities.

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, 2006,
approximately $25,021,000 of undistributed earnings of the bank sub-
sidiary included in consolidated surplus and retained earnings was avail-
able for future distribution to the Company as dividends, subject to
approval by the Board of Directors. The Company cannot predict what div-
idends, if any, will be paid in the future, however the Board of Directors
has established a goal of achieving a 35% dividend payout ratio.

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. The
following schedule summarizes net interest earnings and net yield on inter-
est earning assets (in thousands):

For the years ended December 31,
Total interest income (1)
Total interest expense
Net interest earnings
Net yield on interest earning assets (2)

2006
$ 49,335
18,785
$ 30,550
3.73%

2005
$32,759
7,550
$25,209
4.15%

2004
$24,841
5,091
$19,750
3.70%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2006,

2005 and 2004.

(2) Interest income in 2005 included $900,000 received in nonaccrual loan income from prior

years not previously recognized. Net yield would have been 4.00% without this interest.

Total interest income increased $16,551,000 for the year ended December 31,
2006, as compared with the year ended December 31, 2005, and had
increased $7,777,000 for the year ended December 31, 2005, as compared
with the year ended December 31, 2004. Coinciding with the Federal Reserve’s
increases in the discount rates during this time frame, the Company’s yield
on loans has improved, given that the loan portfolio includes a 40%/60% mix
of fixed/floating rate term. Interest income has also increased significantly as
a result of the increase in volume of the investment portfolio.

Total interest expense increased $11,235,000 for the year ended December 31,
2006, as compared with the year ended December 31, 2005, and increased
$2,459,000 for the year ended December 31, 2005, as compared with the year
ended December 31, 2004. During the last five months of 2005, the Company’s
deposit and non-deposit funds increased significantly, as discussed previ-
ously. During 2005, the increase in interest expense was primarily due to the
increase in volume of these funds after Hurricane Katrina. Although deposits
continued to increase during 2006, the increase in interest expense is largely
attributable to the increase in rates paid on these funds as competition to
maintain funds in the Company’s trade area became more robust during
the year.

Provision for Loan Losses
Management continuously monitors the Company’s relationships with its
loan customers, especially those in concentrated industries such as gam-
ing and hotel/motel, as well as the exposure for out of area loans, and
their direct and indirect impact on its operations. A thorough analysis of
current economic conditions and the quality of the loan portfolio is con-
ducted on a quarterly basis. Management utilized these analyses, with
special emphasis on the impact of Hurricane Katrina on the loan portfolio
and underlying collateral, in determining the adequacy of its allowance
for loan losses at December 31, 2006.

During the first six months of 2005, the Company 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 account-
ing principles. In determining potential loan losses as a result of Hurricane
Katrina in August 2005, the Company evaluated its commercial and residen-
tial loan portfolios separately. 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 repayment. Based on this evaluation, a provision for loan
losses on commercial loans of $3,455,000 was recorded. The Company eval-
uated the residential portfolio as a pool of loans. This portfolio was analyzed
based on the census 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
residential loans of $1,600,000 for the residential portfolio was recorded. This
on-going analysis has been enhanced by the completion of the evaluation of
the impact of Katrina on every credit in the residential loan portfolio during
the second quarter of 2006.

Management continues its evaluation in recognition of the extraordinary
impact of Katrina on its entire trade area, attempting to quantify poten-
tial losses in accordance with the Company’s established methodology.
Loan delinquencies and deposit overdrafts are closely monitored in order
to identify developing problems as early as possible. Additionally,
Management has considered the historical data available from the impact
of other natural disasters on the Mississippi Gulf Coast and other coastal
communities, including the length of time between the storm’s landfall
and identification of all losses. Past bank experience with hurricanes and
FDIC research have shown that the actual loss position may not be known
until 24 months after the event.

Although more than one year has passed, much uncertainty remains
regarding the impact of federal and state assistance, settlement of insur-
ance claims, the availability and affordability of windstorm insurance and
the rate and pace of recovery in the Company’s trade area. Commercial
and personal customers are still assessing their resources and making

decisions about their future plans. Meanwhile, construction costs continue
to escalate, further impacting recovery efforts. The ability of customers to
service their debt must be carefully considered. The slow release of
Community Development Block Grants (CDBG), which should have started
in July 2006, has added to our uncertainty.

We are just starting to realize the full impact of Hurricane Katrina on insur-
ance coverage going forward. Several carriers have announced their inten-
tion to restrict coverage in our trade area. For those carriers continuing to
write policies on the Gulf Coast, premiums are increasing significantly.
Commercial development has already been negatively impacted by the abil-
ity to obtain insurance coverage. Ultimately, the effect of the insurance ques-
tion may pose a potential risk to a large portion of our loan portfolio.

The Company has identified no additional significant potential losses as a
result of Hurricane Katrina since its initial evaluation in September 2005.
In fact, some loans which were thought to pose a potential loss during the
initial evaluation have shown positive developments. It is also very possi-
ble that potential losses, despite the best efforts of the Company, have not
yet been identified. Management believes that it is reasonably possible
that the actual amount of potential losses as a result of Hurricane Katrina
may be less than what was estimated in September 2005, but as a result of
the factors discussed above, this amount cannot be reasonably estimated
at this time and no provision or negative provision for losses on loans was
recorded for the year ended December 31, 2006.

The Company recorded a provision of $141,000 during 2006 relating to
potential losses on overdrawn deposit accounts.

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
quarters which may require an adjustment to the allowance for loan
losses. Management will continue to closely monitor its portfolio, work
with individual customers and take such action as it deems appropriate to
accurately report its financial condition and results of operations.

Trust Income and Fees
Trust income and fees increased $193,000 for the year ended December 31,
2006 as compared with the year ended December 31, 2005, as a result of
an increase in cash management accounts funded with insurance and
other proceeds.

Service Charges on Deposit Accounts
Service charges on deposit accounts increased $901,000 for the year ended
December 31, 2006 as compared with the year ended December 31, 2005. In
2005, ATM and NSF fees decreased $660,000 as a result of Hurricane Katrina
in August of that year.

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. There were no sales of securities in 2006.

Gain from Settlement of Insurance Proceeds
The Company realized gains in 2006 and 2005 of $3,793,000 and $449,000,
respectively, from the settlement of its insurance claims arising from the
significant damage to six of the bank subsidiary’s sixteen branch loca-
tions and the impact on the operations of the bank subsidiary. Proceeds
from insurance settlement will be used to fund the construction and ren-
ovation of bank premises during 2007.

Other Income
Other income increased $148,000 for the year ended December 31, 2006, as
compared with the year ended December 31, 2005, primarily due to a gain
of $250,000 from the sale of “The Mint” trademark in 2006. See Note K for
further information.

Salaries and Employee Benefits
Salaries and employee benefits increased $1,635,000 for the year ended
December 31, 2006 as compared with the year ended December 31, 2005.
The Company increased salaries and incentives to its employees in order
to reward performance and retain personnel within the local, post-Katrina
competitive employment conditions.

Net Occupancy
Net occupancy increased $351,000 for the year ended December 31, 2006 as
compared with the year ended December 31, 2005 as a result of the
increase in costs associated with insurance coverage.

Equipment Rentals, Depreciation and Maintenance
Equipment rentals, depreciation and maintenance increased $316,000 for
the year ended December 31, 2006 as compared with the year ended
December 31, 2005. This increase is attributable to an increase in repairs
expenditures in 2006 as any post-Katrina repairs in 2005 were covered
under insurance.

Other Expense
Other expense increased $279,000 for the year ended December 31, 2006, as
compared with the year ended December 31, 2005, primarily as a result of
consulting fees of $350,000 associated with the settlement of the Company’s
insurance claims. See Note K 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 is 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
deposits is presented in Note E. The Company has not currently engaged, nor
does it have any plans to engage, in any transactions outside of the ordinary
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. Note M discloses information relating to financial instruments with
off-balance-sheet risk, including letters of credit and outstanding unused
loan commitments. The Company closely monitors the potential effects
of funding these commitments on its liquidity position. Management
monitors these funds requirements in such a manner as to satisfy these
demands and provide the maximum earnings on its earning assets.

The Company monitors its liquidity position closely through a number of
methods, including 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 mon-
itors its liquidity needs, particularly relating to potentially volatile deposits.
It has continued to implement these procedures since Hurricane Katrina, and
the Company has encountered no problems with meeting its liquidity needs.

Deposits, payments of principal and interest on loans, proceeds from
maturities of investment securities and earnings on investment securities
are the principal sources of funds for the Company. The Company also uses
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 2007.

Since Hurricane Katrina, the Company’s deposits and non-deposit
accounts have increased significantly. Management carefully monitors its
liquidity needs, particularly relating to these potentially volatile funds,
which are currently invested in U.S. Treasury and U.S. Agency securities. It
is anticipated that expanding loan demand in future quarters will be
funded from the maturity of these investments. Federal funds sold and
federal funds purchased are utilized by the Company to manage its daily
liquidity position. At December 31, 2006, the Company was able to
purchase federal funds up to $88,000,000.

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 provides for, among other things, the accel-
eration of filing deadlines for quarterly and annual reports for companies
that meet certain criteria. The Company became an accelerated filer at
December 31, 2005. As a result of the impact of Hurricane Katrina, the
Company was not able to be compliant with the reporting requirements
relating to internal controls over financial reporting in a timely manner. The
Company requested relief relating to this reporting from the Securities and
Exchange Commission. On March 31, 2006, the Securities and Exchange
Commission issued an order providing that the Company will first comply
with the disclosure specified in paragraphs (a) and (b) of Item 308 of
Regulation S-K and Exchange Act Rule 13a-15(c) for the fiscal year ended
December 31, 2006.

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 $149,457,000 at December 31, 2006, and irrevocable letters of
credit, which amounted to $3,038,096 at December 31, 2006. 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 does 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 L.

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.

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
software to assist with interest rate risk management and balance sheet
management. 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
investments has been extended up to seven years with call provisions. The

loan portfolio consists of a 40%/60% blend of fixed/floating rate loans. It
is the general loan policy to offer fixed rate loans with maturities of
five years or less. The market is now dictating floating rate loans with
maturities up to fifteen years. On the liability side, more than 68% 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 2007 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 the 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
significant impact on expected maturity.

Interest rate sensitivity at December 31, 2006 was as follows (in thousands):

Loans, net
Average rate
Securities
Average rate
Total Financial Assets
Average rate
Interest Bearing Deposits
Average rate
Funds Management
Average rate
Long-term funds
Average rate
Total Financial Liabilities
Average Rate

2 0 0 7
245,810
8.40%
165,435
4.80%
411,245
7.42%
430,645
3.40%
226,032
3.87%
196
6.09%
656,873
3.58%

2 0 0 8
22,747
6.36%
105,856
4.40%
128,603
4.87%
18,536
4.46%

2 0 0 9
61,099
6.34%
37,625
4.64%
98,724
5.82%
10,375
3.91%

2 0 1 0
24,129
6.79%
60,596
5.11%
84,725
5.70%
3,094
4.05%

184
6.09%
18,720
4.48%

178
6.09%
10,553
3.96%

5,177
6.09%
8,271
4.21%

2 0 1 1
31,524
7.45%
44,184
5.42%
75,708
6.44%
2,064
4.05%

177
6.09%
2,241
4.28%

Interest rate sensitivity at December 31, 2005 was as follows (in thousands):

2 0 0 6
221,074
7.57%
151,017
3.97%
372,091
6.64%
387,861
1.91%
149,268
1.48%
298
5.68%
537,427
1.81%

2 0 0 7
5,168
$
6.75%
51,532
3.93%
56,700
4.36%
8,745
2.98%

211
5.68%
8,956
3.09%

2 0 0 8
28,746
6.26%
46,743
3.71%
75,489
5.03%
2,562
3.24%

2 0 0 9

54,525 $
6.91%
14,883
3.88%
69,408
5.61%
9,853
3.79%

2 0 1 0
23,438
6.29%
20,104
4.20%
43,542
5.54%
6,569
3.79%

198
5.68%
2,760
3.53%

198
5.68%
10,051
3.84%

198
5.68%
6,767
3.87%

B E Y O N D
5,044
6.97%
70,214
5.48%
75,258
5.61%

1,355
6.42%
1,355
6.42%

B E Y O N D
5,429
6.62%
29,238
4.53%
34,667
4.99%

6,249
6.24%
6,249
6.24%

T O T A L
390,353
7.86%
483,910
4.93%
874,263
6.60%
464,714
3.48%
226,032
3.87%
7,267
6.38%
698,013
3.67%

T O T A L
338,380
7.14%
313,517
4.01%
651,897
6.10%
415,590
2.10%
149,268
1.48%
7,352
6.16%
572,210
2.04%

1 2 / 3 1 / 0 6
F A I R
V A L U E
389,072
$

483,855

464,873

226,032

8,002

698,907

1 2 / 3 1 / 0 5
F A I R
V A L U E
341,016
$

313,478

654,494

415,582

149,268

7,728

572,578

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

$85,519,000 - 2006; $134,008,000 - 2005;

$6,698,000 - 2004

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, 5,548,199, 5,549,128 and

5,555,419 shares issued and outstanding at

December 31, 2006, 2005 and 2004, respectively

Surplus

Undivided profits

Accumulated other comprehensive income, net of tax

Total shareholders' equity

2 0 0 6

2 0 0 5

2 0 0 4

37,793,493

52,277,524

32,573,125

6,400,000

397,207,489

100,340,000

178,393,652

151,500

173,030,808

85,574,260

1,128,500

401,194,010

10,841,367

390,352,643

19,658,585

44,538

8,142,230

17,721,330

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

964,023,068

$ 845,325,032

$ 577,441,149

148,455,754

176,627,048

$ 89,529,270

271,331,272

132,846,509

60,536,259

613,169,794

226,032,370

7,267,349

19,320,860

865,790,373

5,548,199

65,780,254

29,253,825

(2,349,583)

98,232,695

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

Total liabilities and shareholders' equity

964,023,068

$ 845,325,032

$ 577,441,149

See Notes to Consolidated Financial Statements.

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 6

2 0 0 5

2 0 0 4

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

Loss on liquidation, sale and calls of securities

Gain from sale of bank premises

Gain from settlement of insurance proceeds

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.

28,735,424

22,690,169

17,526,210

5,725,317

12,610,083

856,450

188,965

777,742

48,893,981

11,384,540

484,398

6,915,690

18,784,628

30,109,353

141,000

29,968,353

1,670,063

5,407,901

159,669

3,792,942

1,278,124

12,308,699

13,033,108

1,870,011

2,836,392

5,310,641

23,050,152

19,226,900

6,459,000

12,767,900

2.30

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)

100,449

448,963

1,130,023

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)

1,270,698

1,378,736

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

1.04

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

5,557,379

C o m m o n
S t o c k

5,557,379

S u r p l u s

65,780,254

Balance, January 1, 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

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

Cash dividends ($ .20 per share)

Dividend declared ($ .20 per share)

Effect of retirement of stock on accrued dividends

Retirement of stock

Balance, December 31, 2005

Comprehensive Income:

Net income

Net unrealized gain on available for sale securities, net of tax

Reclassification adjustment for available for sale securities

called or sold in current year, net of tax

Loss from unfunded post-retirement benefit obligation, net of tax

Total comprehensive income

Cash dividends ($ .21 per share)

Dividend declared ($ .23 per share)

Retirement of stock

Balance, December 31, 2006

See Notes to Consolidated Financial Statements.

(1,960)

5,555,419

(1,960)

5,555,419

65,780,254

(6,291)

5,549,128

(6,291)

5,549,128

65,780,254

(929)

5,548,199

(929)

5,548,199

65,780,254

U n d i v i d e d
P r o f i t s

11,574,074

5,794,038

(944,591)

(999,975)

(32,022)

15,391,524

5,882,220

(1,109,826)

399

(111,636)

18,942,855

12,767,900

(1,165,122)

(1,276,086)

(15,722)

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

(94,899)

687,141

C o m p r e h e n s i v e
I n c o m e

T o t a l

83,503,949

94,899

(1,720,706)

107,801

(925,764)

(2,077,657)

234,315

(2,769,106)

1,158,333

12,017

(750,827)

5,794,038

(1,720,706)

107,801

4,181,133

5,882,220

(2,077,657)

234,315

4,038,878

12,767,900

1,158,333

12,017

(750,827)

13,187,423

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

(1,109,826)

399

(117,927)

87,503,131

12,767,900

1,158,333

12,017

(750,827)

(1,165,122)

(1,276,086)

(16,651)

29,253,825

(2,349,583)

98,232,695

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:

Depreciation

Provision for allowance for loan losses

Provision for losses on other real estate

Gain on sales of other real estate

Loss on sales, calls and liquidation of securities

Gain on sale of bank premises

Gain on settlement of insurance

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

Proceeds from sale and retirement of bank premises

Acquisition of premises and equipment

Other assets

Net cash used in investing activities

Cash flows from financing activities:

Demand and savings deposits, net increase (decrease)

Time deposits made, net increase (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 6

2 0 0 5

2 0 0 4

12,767,900

5,882,220

5,794,038

1,606,000

141,000

14,908

(153,400)

(159,669)

(3,792,942)

(3,826,872)

330,657

9,750,102

16,677,684

55,190,291

(272,222,910)

265,074,303

(216,601,604)

(51,900)

344,000

(52,257,325)

5,400,045

(4,824,112)

(493,320)

1,473,539

3,614,000

21,910

(366,865)

426,094

(100,449)

(448,963)

(1,570,123)

(93,683)

(933,187)

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)

(478,814)

(220,442,532)

(150,948,498)

(57,892,909)

78,845,361

(2,274,948)

(16,651)

20,940,973

(21,025,629)

76,764,620

95,340,817

(108,424,031)

152,617,524

207,686,409

(4,660,597)

(1,239)

(2,109,402)

(117,927)

402,819

(253,784)

61,990,625

262,936,904

119,892,899

32,724,625

1,447,000

448,000

354,360

(100,750)

258,888

(1,270,698)

350,767

(238,021)

778,940

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)

(417,441)

(1,906,173)

15,424,238

(3,021,702)

(14,097)

(1,778,198)

(33,982)

30,292,102

(40,158,980)

(7,762,136)

(7,052,755)

(1,136,404)

33,861,029

44,193,493

152,617,524

32,724,625

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 :

after December 31, 2007. The Company does not expect the issue will have
a material impact on its results from operations or financial position.

Business of The Company
Peoples Financial Corporation is a one-bank holding company headquar-
tered in Biloxi, Mississippi. Its two operating subsidiaries are The Peoples
Bank, Biloxi, Mississippi, and PFC Service Corp. Its principal subsidiary is
The Peoples Bank, Biloxi, Mississippi, which provides a full range of bank-
ing, financial and trust services to individuals and small and commercial
businesses operating in Harrison, Hancock, Stone and Jackson counties.

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
liabilities, and income and expense, on the accrual basis of accounting.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
Management to make estimates and 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.

New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” (FIN 48), which clarifies the
accounting and disclosure for uncertainty in tax positions, as defined. FIN
48 seeks to reduce the diversity in practice associated with certain aspects
of the recognition and measurement related to accounting for income
taxes. This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company does not expect the interpretation will
have a material impact on its results from operations or financial position.

In September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements”, (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting prin-
ciples generally accepted in the United States, and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years begin-
ning after November 15, 2007, with earlier application encouraged. Any
amounts recognized upon adoption as a cumulative effect adjustment will
be recorded to the opening balance of retained earnings in the year of
adoption. The Company has not yet determined the impact of this
Statement on its financial position or results from operations.

In September 2006, the Emerging Issues Task Force (EITF) issued EITF Issue
No. 06-4, “Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,”
(EITF 06-4). EITF 06-4 requires the accrual of the post-retirement benefit
over the service period. EITF 06-4 is effective for fiscal years beginning

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 $24,539,000, $15,133,000
and $11,623,000 for the years ending December 31, 2006, 2005 and
2004, respectively. The Company’s bank subsidiary maintained account
balances in excess of amounts insured by the Federal Deposit Insurance
Corporation. At December 31, 2006, the bank subsidiary had excess deposits
of $8,781,000.

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.
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
other comprehensive income.

The amortized cost of available for sale securities and held to maturity
securities is adjusted for amortization of premiums and accretion of dis-
counts to maturity, determined using the interest method. Such amortiza-
tion and accretion is included in interest income on securities. Declines in
the fair value of securities below their cost that are deemed to be other
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.

Loans
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 limits, appraisal and
environmental 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 classified as nonaccrual is reversed at the time the loans are placed
on nonaccrual. Interest received on nonaccrual loans is applied against
principal. Loans are restored to accrual status when the obligation is
brought current or has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.

The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. The Company’s impaired loans include performing and
non-performing major loans for which full payment of principal or interest is
not expected. The Company calculates an allowance required for impaired
loans based on the present value of expected future cash flows discounted at
the loan’s effective interest rate, the loan’s observable market price or the fair
value of its collateral. If the recorded investment in the impaired loan
exceeds the measure of fair value, a valuation allowance is required as a
component of the allowance for loan losses. Changes to the valuation
allowance are recorded as a component of the provision for loan losses.

Generally, loans which become 90 days delinquent are reviewed relative to
collectibility. Unless such loans are in the process of terms revision to
bring to a current status or foreclosure or in the process of collection, those
loans deemed uncollectible are charged off against the allowance account.

Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan
losses charged against earnings. Loans deemed to be uncollectible are
charged against the allowance for loan losses, and subsequent recoveries,
if any, are credited to the allowance.

The allowance for loan losses is based on Management's evaluation of the
loan portfolio under current economic conditions and is an amount that
Management believes will be adequate to absorb probable losses on loans
existing at the reporting date. The evaluation includes Management’s
assessment of several factors: review and evaluations of specific loans,
changes in the nature and volume of the loan portfolio, current and antic-
ipated economic conditions and the related impact on specific borrowers
and industry groups, a study of loss experience, a review of classified,
nonperforming and delinquent loans, the estimated value of any under-
lying collateral, an estimate of the possibility of loss based on the risk
characteristics of the portfolio, adverse situations that may affect the bor-
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
substandard. For such loans, a specific allowance is established when
the collateral value is lower than the carrying value of the loan. The gen-
eral 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 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.

Trust Department Income and Fees
Corporate trust fees are accounted for on an accrual basis and personal
trust fees are recorded when received.

Income Taxes
The Company files a consolidated tax return with its wholly-owned sub-
sidiaries. The tax liability of each entity is allocated based on the entity’s
contribution to consolidated taxable income. The provision for applicable
income taxes is based upon reported income and expenses as adjusted
for differences between reported income and taxable income. The primary
differences are exempt income on state, county and municipal securities;
differences in provisions for losses on loans as compared to the amount
allowable for income tax purposes; directors' and officers' insurance;
depreciation for income tax purposes over (under) that reported for
financial statements; gains reported under the installment sales method
for tax purposes and gains on the sale of bank premises which were struc-
tured under the provisions of Section 1031 of the Internal Revenue Code.

Leases
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, 5,548,300,
5,550,477 and 5,556,251 in 2006, 2005 and 2004, respectively.

Statements of Cash Flows
The Company has defined cash and cash equivalents to include cash and
due from banks and federal funds sold. The Company paid $18,444,672
$7,389,847 and $5,044,207 in 2006, 2005 and 2004, respectively, for inter-
est on deposits and borrowings. Income tax payments totaled $5,310,000,
$4,856,000 and $2,062,000 in 2006, 2005 and 2004, respectively. Loans
transferred to other real estate amounted to $144,000, $88,000 and $112,250
in 2006, 2005 and 2004, respectively. The income tax effect from the
unrealized gain (loss) on available for sale securities on accumulated
other comprehensive income was $602,907, $(949,600) and $(830,890), at
December 31, 2006, 2005 and 2004, respectively. The income tax effect
from the loss from unfunded post-retirement benefit obligation on accu-
mulated other comprehensive income was $407,201 at December 31, 2006.

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.

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, 2006, 2005 and 2004, respectively, are as follows (in thousands):

December 31, 2006

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

73,937

304,156

17,001

395,094

4,528

Total available for sale securities

399,622

Held to maturity securities:

U.S. Treasury

U.S. Government agencies and corp.

States and political subdivisions

53,517

26,970

5,087

Total held to maturity securities

85,574

304

247

632

694

(364)

73,654

(1,950)

(163)

(2,477)

(632)

302,510

17,085

393,249

3,958

(3,109)

397,207

(70)

(29)

(18)

(117)

53,447

26,941

5,131

85,519

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

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

(525)

37,430

(2,573)

(282)

(3,380)

(948)

(4,328)

(66)

(19)

(47)

(132)

123,871

14,150

175,451

2,943

178,394

106,831

20,981

6,196

134,008

December 31, 2004
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:

States and political subdivisions

Total held to maturity securities

Amortized cost

Gross
unrealized gains

Gross
unrealized losses

Estimated
fair value

$
$

64,817
92,538
13,254
170,609
3,829
174,438

6,587
6,587

$
$

347
41
244
285
62
347

113
113

$
$

(165)
(766)
(115)
(1,046)
(708)
(1,754)

(2)
(2)

$
$

64,652
91,813
13,383
169,848
3,183
173,031

6,698
6,698

The amortized cost and estimated fair value of debt securities at December 31, 2006, (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

84,823
247,640
56,409
6,222
395,094

80,948
2,032
2,364
230
85,574

84,487
246,229
56,253
6,280
393,249

80,849
2,048
2,388
234
85,519

Information pertaining to securities with gross unrealized losses at December 31, 2006, 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
$ 65,458
100,883
2,970

169,311

Gross Unrealized Loss
102
200
15

317

Fair Value
$ 29,647
105,697
7,016
2,443
$ 144,803

Gross Unrealized Loss
331
1,779
167
632
2,909

Fair Value Gross Unrealized Loss
433
$
1,979
182
632
3,226

95,105
206,580
9,986
2,443
$ 314,114

Information pertaining to securities with gross unrealized losses at December 31, 2005, aggregated by investment category and length of time that indi-
vidual securities have been in a continuous loss position is as follows (in thousands):

Less than twelve months

Over twelve months

Total

Gross Unrealized Loss
332
1,538
179
948
2,997

U.S. Treasury
U.S. Government Agencies
States and political subdivisions
FHLMC preferred stock
Total

Fair Value
$ 100,001
81,411
9,106

Gross Unrealized Loss
259
1,054
150

190,518

1,463

Fair Value
17,656
$
50,441
3,485
2,127
$ 73,709

Fair Value Gross Unrealized Loss
591
$ 117,657
2,592
131,852
329
12,591
948
2,127
4,460
$ 264,227

Management evaluates securities for other-than-temporary impairment
on a monthly basis. Consideration is given to the length of time and the
extent to which the fair value has been less than cost. The Company has
also considered that securities are primarily issued by U.S. Treasury and
U.S. Government Agencies, the cause of the decline in value, the intent
and ability of the Company to hold these securities until maturity and that
the Company has traditionally held virtually all of its securities, including
those classified as available for sale, until maturity. Any sales of available
for sale securities, which have been infrequent and immaterial, have been
for liquidity purposes. The Company has also carefully considered the
specific issues related to the valuation of the FHLMC preferred stock. As a
result of the evaluation of the impairment of these securities, the
Company has determined that the declines summarized in the table above
are not deemed to be other-than-temporary.

Proceeds from maturities and calls of held to maturity debt securities dur-
ing 2006, 2005 and 2004 were $265,074,303, $23,435,000 and $1,405,000,
respectively. There were no sales of held to maturity debt securities dur-
ing 2006, 2005 and 2004. Proceeds from maturities, sales and calls of

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

available for sale debt securities were $55,190,291, $144,782,701 and
$174,457,599 during 2006, 2005 and 2004, respectively. Available for sale
debt securities were sold in 2005 and 2004 for a realized loss of $443,000
and $259,000. There were no sales of available for sale debt securities
during 2006. The Company realized gains of $16,441 and $22,270 from the
liquidation of equity securities in 2005 and 2004, respectively.

Securities with an amortized cost of approximately $269,628,000,
$217,009,000 and $166,311,000 at December 31, 2006, 2005 and 2004,
respectively, were pledged to secure public deposits, federal funds
purchased and other balances required by law.

Federal Home Loan Bank (FHLB) common stock was purchased during 1999
in order for the Company to participate in certain FHLB programs. The
amount to be invested in FHLB stock was calculated according to FHLB
guidelines as a percentage of certain mortgage loans. Based on this
calculation, the FHLB may periodically automatically redeem its common
stock. The investment is carried at cost. Dividends received are reinvested
in FHLB stock.

2006

24,317

300,807

2,502

57,796

13,415

2,094

263

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

401,194

349,346

334,193

2006

10,966

463

(729)

141

2005

6,570

1,344

(562)

3,614

10,841

10,966

2004

6,399

494

(771)

448

6,570

As a part of its evaluation of the quality of the loan portfolio, Management continuously monitors the Company’s credit concentrations on a monthly

basis. Total outstanding concentrations were as follows (in thousands):

December 31,

Gaming

Hotel/motel

Out of area

Total

2006

60,105

24,907

19,357

104,369

2005

42,855

21,532

17,600

81,987

2004

26,600

24,602

14,062

65,264

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

2006
8,670
10,248
(10,364)
8,554

2005
8,836
20,300
(20,466)
8,670

2004
7,637
14,381
(13,182)
8,836

Loans past due ninety days or more and still accruing were $3,295,000,
$762,000 and $1,190,000 at December 31, 2006, 2005 and 2004, respectively.

Nonaccrual loans amounted to approximately $349,000, $267,000 and
$6,164,000 at December 31, 2006, 2005 and 2004, respectively.

The Company's other individually evaluated impaired loans include per-
forming loans and totaled $12,350,000, $17,162,000 and $10,957,000 at
December 31, 2006, 2005 and 2004, respectively. At December 31, 2006,
2005 and 2004, the average recorded investment in impaired loans was
$15,877,000, $17,827,000 and $14,962,000, respectively. The Company had

$4,389,000, $6,176,000 and $3,673,000 of specific allowance related to
impaired loans at December 31, 2006, 2005 and 2004, respectively. Interest
income recognized on impaired loans was $990,000, $1,132,000 and
$678,000 in 2006, 2005 and 2004, respectively. Interest income recognized
on impaired loans if the Company had used the cash-basis method of
accounting would have approximated $900,000, $1,056,000 and $680,000
in 2006, 2005 and 2004, respectively.

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):

Years Ended December 31,

Estimated useful lives

Land

Buildings

Furniture, fixtures and equipment

Totals, at cost

Less: Accumulated depreciation

Totals

5-40 years

3-10 years

N O T E E - D E P O S I T S
At December 31, 2006, the scheduled maturities of time deposits (in thousands) are as follows:

2006

5,720

14,731

13,806

34,257

14,598

2005

4,926

17,476

13,511

35,913

18,025

19,659

17,888

2004

5,033

17,463

12,697

35,193

17,174

18,019

2007

2008

2009

2010

2011

Total

159,315

18,536

10,375

3,094

2,063

193,383

Deposits held for related parties amounted to $15,399,924, $12,130,015 and $15,011,100 at December 31, 2006, 2005 and 2004, respectively.

N O T E F - F E D E R A L F U N D S P U R C H A S E D
A N D S E C U R I T I E S S O L D U N D E R
A G R E E M E N T S T O R E P U R C H A S E

N O T E G - 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, 2006, the Company had $7,267,349 outstanding in

At December 31, 2006, 2005 and 2004, federal funds purchased and

advances under a $96,259,000 line of credit with the Federal Home Loan

securities sold under agreements to repurchase consist only of funds

Bank of Dallas (“FHLB”). One advance in the amount of $5,000,000 bears

invested by customers in a non-deposit product of the bank subsidiary.

interest at 6.50% and matures in 2010. The remaining balance consists

These accounts are non-insured, non-deposit accounts which allow cus-

of a number of smaller advances at a fixed rate of interest from 2.24%

tomers to earn interest on their account with no restrictions as to the

to 7.00% with maturity dates from 2007 – 2030. The advances are collat-

number of transactions. They are set up as sweep accounts with no

eralized by a blanket floating lien on the Company’s residential first

check-writing capabilities, and require the customer to have at least one

mortgage loans.

operating deposit account.

At December 31, 2006, the Company had facilities in place to purchase

federal funds up to $88,000,000 under established credit arrangements.

N O T E H - N O T E S P A Y A B L E :
At December 31, 2004, the Company had a note payable on auto-

mobiles of $1,239 that was non-interest-bearing and which matured In

January 2005.

N O T E I - I N C O M E T A X E S :

Deferred taxes (or deferred charges) as of December 31, 2006, 2005 and 2004, 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

Earned retiree health benefits plan liability

Unearned retiree health benefits plan liability

Other

Deferred tax assets

Deferred tax liabilities:

Bank premises and equipment

Other

Deferred tax liabilities

Net deferred taxes

Income taxes consist of the following components (in thousands):

Years Ended December 31,

Current

Deferred

Totals

2006

2005

2 0 0 4

4,089

3,503

2,030

911

798

435

356

8,619

3,989

4,028

1,638

1,427

525

7,093

2,239

4,591

4,854

2006

6,511

(52)

6,459

2005

3,653

(1,049)

2,604

2,282

1,489

479

915

5,165

2,308

2,857

2004

2,660

(629)

2,031

Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 35.0% for 2006 and 34% for 2005 and 2004,

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

Other, net

Total income taxes

2006 Amount

6,729

(292)

6,459

35.0

(1.5)

0.1

33.6

2005 Amount

2004 Amount

2,702

34.0

2,660

(272)

174

2,604

(3.4)

2.2

32.8

(230)

(399)

2,031

34.0

(2.9)

(5.2)

25.9

N O T E J - S H A R E H O L D E R S ' E Q U I T Y :

capital requirements can initiate certain mandatory, and possibly addi-

Banking regulations limit the amount of dividends that may be paid by

tional discretionary, actions by the regulators that, if undertaken, could

the bank subsidiary without prior approval of the Commissioner of

have a direct material effect on the bank subsidiary’s financial statements.

Banking and Consumer Finance of the State of Mississippi. At December 31,

Under capital adequacy guidelines and the regulatory framework for

2006, approximately $25,021,000 of undistributed earnings of the bank

prompt corrective action, the bank subsidiary must meet specific capital

subsidiary included in consolidated surplus and retained earnings was

guidelines that involve quantitative measures of the bank subsidiary’s

available for future distribution to the Company as dividends, subject to

assets, liabilities and certain off-balance sheet items as calculated under

the approval by the Board of Directors.

regulatory accounting practices. The bank subsidiary’s capital amounts

and classification are also subject to qualitative judgments by the regula-

On November 26, 2002, the Company’s Board of Directors approved the

tors about components, risk weightings and other factors.

repurchase of up to 2.50% of the outstanding shares of the Company’s

common stock. At November 26, 2005, the date this repurchase was set to

Quantitative measures established by regulation to ensure capital ade-

expire, the Company had the authorization to repurchase and retire

quacy require the bank subsidiary to maintain minimum amounts and

another 109,610 shares. On November 22, 2005, the Board of Directors

ratios of Total and Tier 1 capital to risk-weighted assets, and Tier 1 capital

approved a three year extension of the repurchase plan originally

to average assets.

approved on November 26, 2002. As of December 31, 2006, 30,793 shares

had been repurchased and retired under the plan approved November 26,

As of December 31, 2006, the most recent notification from the Federal

2002 and extended on November 22, 2005.

Deposit Insurance Corporation categorized the bank subsidiary as well

capitalized under the regulatory framework for prompt corrective action.

On December 8, 2006, the Company’s Board of Directors approved a semi-

To be categorized as well capitalized, the bank subsidiary must have a

annual dividend of $.23 per share. This dividend has a record date of

Total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based cap-

January 8, 2007 and a distribution date of January 16, 2007.

ital ratio of 6.00% or greater and a Leverage capital ratio of 5.00% or

greater. There are no conditions or events since that notification that

The bank subsidiary is subject to various regulatory capital requirements

Management believes have changed the bank subsidiary’s category.

administered by the federal banking agencies. Failure to meet minimum

The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2006, 2005 and 2004, are as follows

(in thousands):

December 31, 2006:

Total Capital (to Risk Weighted Assets)

Tier 1 Capital (to Risk Weighted Assets)

Tier 1 Capital (to Average Assets)

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)

Actual

For Capital Adequacy Purposes

Amount

Ratio

Amount

$ 102,480

96,415

$ 90,418

85,163

$ 88,983

84,405

21.12%

19.87%

10.60%

21.51%

20.26%

12.57%

24.29%

23.04%

14.66%

$38,818

19,409

36,374

$33,630

16,815

27,104

$29,302

14,651

23,028

Ratio

8.00%

4.00%

8.00%

4.00%

8.00%

4.00%

The bank subsidiary’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2006, 2005 and 2004, are as follows

(in thousands):

December 31, 2006:

Total Capital (to Risk Weighted Assets)

Tier 1 Capital (to Risk Weighted Assets)

Tier 1 Capital (to Average Assets)

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)

N O T E K - 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

Rentals

Other

Totals

Other expenses consisted of the following:

Years Ended December 31,

Advertising

Data processing

Legal and accounting

ATM expense

Consulting fees

Trust expense

Other

Totals

Actual

For Capital Adequacy Purposes

Amount

Ratio

Amount

102,111

95,991

$ 94,922

89,376

$ 90,616

85,998

21.06%

19.80%

9.98%

21.66%

20.39%

11.59%

24.66%

23.40%

14.31%

$38,791

19,396

38,482

$35,061

17,531

30,843

$29,397

14,698

24,040

2006

222,681

257,091

798,352

1,278,124

2006

586,646

314,570

492,296

1,066,411

429,336

426,156

1,995,226

5,310,641

2005

207,809

376,176

546,038

1,130,023

2005

534,509

281,263

485,805

954,168

242,110

387,351

2,146,307

5,031,513

Ratio

8.00%

4.00%

8.00%

4.00%

8.00%

4.00%

2004

220,443

480,267

678,026

1,378,736

2004

553,104

232,473

443,152

1,256,013

119,182

397,610

2,550,413

5,551,947

N O T E L - 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 :

The Bank had made a routine loan to the Judge in November 1998, which

was guaranteed by the Attorney. The loan was repaid in February 2000 by

The Company is a party to financial instruments with off-balance-sheet

someone other than the Judge, apparently at the request of the Attorney.

risk in the normal course of business to meet the financing needs of its

Neither the Attorney nor the Judge disclosed the loan or the repayment to

customers. These financial instruments include commitments to extend

USF&G or its counsel.

credit and irrevocable letters of credit. These instruments involve, to vary-

ing degrees, elements of credit and interest rate risk in excess of the

During the course of the case, the Bank and USF&G filed competing motions

amount recognized in the balance sheet. The contract amounts of those

for summary judgment. The Judge granted summary judgment in the Bank’s

instruments reflect the extent of involvement the bank subsidiary has in

favor on the issue of liability and subsequently presided over a settlement

particular classes of financial instruments. The Company's exposure to

conference in which he expressed his opinion about the value of the case in

credit loss in the event of nonperformance by the other party to the finan-

monetary terms. The case was settled on December 24, 2001, for $1.5 million.

cial instrument for commitments to extend credit and irrevocable letters

of credit is represented by the contractual amount of those instruments.

In 2003, the Attorney, the Judge and other parties were indicted for alleged

The Company uses the same credit policies in making commitments and

fraud, bribery, etc. involving various events, including allegations concerning

conditional obligations as it does for on-balance-sheet instruments.

the Bank v. USF&G lawsuit. Neither the Bank nor any Bank employee was indict-

ed. Following the indictments, USF&G filed a civil action against the Attorney,

Commitments to extend credit are agreements to lend to a customer as

the Judge and the Bank alleging fraud in connection with the outcome of the

long as there is no violation of any conditions established in the agree-

Bank v. USF&G lawsuit. The complaint demands $2.5 million in compensatory

ment. Irrevocable letters of credit written are conditional commitments

damages and $10 million in punitive damages, prejudgment interest and attor-

issued by the Company to guarantee the performance of a customer to a

neys’ fees, etc. The USF&G v. Bank suit was stayed until 30 days following the

third party. Commitments and irrevocable letters of credit generally have

completion of the criminal case. There has been no discovery.

fixed expiration dates or other termination clauses and may require pay-

ment of a fee. Since some of the commitments and irrevocable letters of

The criminal case against the Attorney, the Judge and other parties con-

credit may expire without being drawn upon, the total amounts do not

cluded on August 12, 2005. No guilty verdicts were returned. The defen-

necessarily represent future cash requirements. The Company evaluated

dants received not guilty verdicts on several counts and there was no ver-

each customer's creditworthiness on a case-by-case basis. The amount of

dict (mistrial) on a number of other counts, including the Bank v. USF&G

collateral obtained upon extension of credit is based on Management's

matter. On September 16, 2005, the U.S. Attorney’s office announced that

credit evaluation of the customer. Collateral obtained varies but may

it will retry the Attorney, the Judge and other parties on fraud and

include equipment, real property and inventory.

bribery charges related to the Bank v. USF&G matter. The new trial began

on February 7, 2007. The USF&G v. Bank suit will remain subject to the stay

The Company generally grants loans to customers in its primary trade area

order until the criminal matters are concluded.

of Harrison, Hancock, Jackson and Stone counties.

The Company understands that this litigation, as with any litigation, is

At December 31, 2006, 2005 and 2004, the Company had outstanding

inherently uncertain and it is reasonably possible that the Company may

irrevocable letters of credit aggregating $3,038,096, $4,491,773 and

incur a loss in this matter. The Company has no reason to conclude, how-

$3,113,033, respectively. At December 31, 2006, 2005 and 2004, the

ever, that the loss is probable and cannot reasonably estimate the amount

Company had outstanding unused loan commitments aggregating

of any possible loss. No liability for the USF&G lawsuit has been accrued.

$149,457,000, $121,369,000 and $113,500,000, respectively. Approximately

This conclusion is based on relevant legal advice, the fact that this lawsuit

$67,621,000, $65,721,000 and $24,637,000 of outstanding commitments

is in its very earliest stages with no discovery having been undertaken and

were at fixed rates and the remainder were at variable rates at December

the Company’s resolve to vigorously contest the case.

31, 2006, 2005 and 2004, respectively.

(cid:2)

N O T E M - C O M M I T M E N T S A N D 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.

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 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.

The Company has made commitments relating to the construction and

renovation of its bank premises. At December 31, 2006, such commitments

totaled $10,340,000, of which $614,000 was included in Bank Premises and

Equipment as construction in process. These expenditures are being fund-

ed through the proceeds of the settlement of insurance claims and current

previously handled some discovery matters in the case.

operating capital.

N O T E N - 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 )

2006

2005

2004

98,147

87,740

85,991

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

Other liabilities

Total liabilities

Shareholders' equity

Total liabilities and shareholders' equity

1,535

99,738

1,505

98,233

99,738

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

2006

2,800

10,014

12,844

12,751

(17)

12,768

285

842

88,868

1,365

87,503

88,868

2005

2,300

3,618

5,959

5,863

(19)

5,882

268

823

87,083

1,282

85,801

87,083

2004

1,575

4,246

5,867

5,780

(14)

5,794

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:

Investment in equity securities

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

2006

2005

2004

12,768

5,882

5,794

(12,814)

(38)

(700)

2,800

2,100

(17)

(2,275)

(2,292)

(230)

285

(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

Peoples Financial Corporation paid income taxes of $5,310,000, $ 4,856,000 and $2,042,000 in 2006, 2005 and 2004, respectively. No interest was paid
during the three years ended December 31, 2006.

N O T E O - E X T R A O R D I N A R Y G A I N :

by the employee (up to 6% of compensation). Contributions are deter-

An extraordinary gain of $538,000, net of taxes, was recorded in 2005 as a

result of the Pulse EFT Association Exchange.

N O T E P - E M P L O Y E E B E N E F I T P L A N S :
The Company sponsors the Peoples Financial Corporation Employee Stock

Ownership Plan (ESOP). Employees who are in a position requiring at least

1,000 hours of service during a plan year and who are 21 years of age are

eligible to participate in the ESOP. The Plan included 401(k) provisions and

the former Gulf National Bank Profit Sharing Plan. Effective January 1, 2001,

the ESOP was amended to separate the 401(k) funds into the Peoples

Financial Corporation 401(k) Plan. The separation had no impact on the

eligibility or benefits provided to participants of either plan. The 401(k)

provides for a matching contribution of 75% of the amounts contributed

mined by the Board of Directors and may be paid either in cash or Peoples

Financial Corporation capital stock. Total contributions to the plan

charged to operating expense were $460,000, $300,000 and $459,000 in

2006, 2005 and 2004, respectively.

Compensation expense of $8,245,151, $7,277,442 and $7,323,267, was the

basis for determining the ESOP contribution allocation to participants for

2006, 2005 and 2004, respectively. The ESOP held 457,691, 468,084 and

472,744, allocated shares at December 31, 2006, 2005 and 2004, respectively.

The Company established an Executive Supplemental Income Plan and a

acquired insurance policies, with the bank subsidiary as owner and ben-

Directors' Deferred Income Plan, which provide for pre-retirement and

eficiary, that it may use as a source to pay potential benefits to the plan

post-retirement benefits to certain key executives and directors. Benefits

participants. Additionally, there are two endorsement split dollar policies,

under the Executive Supplemental Income Plan are based upon the posi-

with the bank subsidiary as owner and beneficiary, which provide a

tion and salary of the officer at retirement or death. Normal retirement

guaranteed death benefit to the participants’ beneficiaries. These con-

benefits under the plan are equal to 67% of salary for the president and

tracts are carried at their cash surrender value, which amounted to

chief executive officer, 58% of salary for the executive vice president and

$826,680, $816,025 and $780,898 at December 31, 2006, 2005 and 2004,

50% of salary for all other executive officers and are payable monthly over

respectively and are included in Other Assets. The present value of accu-

a period of fifteen (15) years. Under the Directors’ Deferred Income Plan,

mulated benefits under these plans using an interest rate of 7.50% in 2006,

the directors are given an opportunity to defer receipt of their annual

2005 and 2004 and the projected unit cost method has been accrued. The

directors’ fees until age sixty-five. For those who choose to participate,

accrual amounted to $613,510, $628,515 and $597,096 at December 31, 2006,

benefits are payable monthly for ten (10) years beginning the month after

2005 and 2004, respectively and is included in Other Liabilities.

the director attains age sixty-five. Interest on deferred fees accrues at an

annual rate of ten percent, compounded annually. The Company has

The Company provides post-retirement health insurance to certain of its

acquired insurance policies, with the bank subsidiary as owner and ben-

retired employees. Employees are eligible to participate in the retiree health

eficiary, that it may use as a source to pay potential benefits to the plan

plan if they retire from active service no earlier than age 65. In addition, the

participants. These contracts are carried at their cash surrender value,

employee must have at least 25 continuous years of service with the

which amounted to $12,157,922, $11,672,568 and $11,221,549 at December 31,

Company immediately preceding retirement. However, any active employ-

2006, 2005 and 2004, respectively, and are included in Other Assets. The

ee who was at least age 65 as of January 1, 1995, does not have to meet the

present value of accumulated benefits under these plans, using an inter-

25 years of service requirement. The accumulated post-retirement benefit

est rate of 7.00% in 2006 and 7.50% for 2005 and 2004 and the interest

obligation at January 1, 1995, was $517,599, which the Company elected to

ramp-up method for 2006, 2005 and 2004, has been accrued. The accrual

amortize over 20 years. The Company

reserves

the

right

amounted to $4,769,461, $4,189,779 and $3,783,850 at December 31, 2006,

modify, reduce or eliminate these health benefits. The Company has chosen

2005 and 2004, respectively, and is included in Other Liabilities.

to not offer this post-retirement benefit to individuals entering the employ

of the Company after December 31, 2006.

The Company also has additional plans for non-vested post-retirement

benefits for certain key executives and directors. The Company has

The following is a summary of the components of the net periodic post-retirement benefit cost:

Years Ended December 31,

Service cost, including amortization of loss

Interest cost

Amortization of net transition obligation

Net periodic post-retirement benefit cost

2006

315,561

175,982

20,600

512,143

2005

237,731

139,449

20,600

2004

212,933

133,262

20,600

397,780

366,795

The discount rate used in determining the accumulated post-retirement

Medicare Part D. The Act became effective in 2006. The Company believes

benefit obligation was 6.00% in 2006, 5.500% in 2005, and 5.75% in 2004.

that the coverage it provides under its plan is actuarially equivalent to

The assumed health care cost trend rate used in measuring the accumulated

Medicare Part D and that it will be entitled to the subsidy. The Company

post-retirement benefit obligation was 10.00% in 2003. The rate was

elected to recognize the effect of this subsidy as of December 31, 2004. The

assumed to decrease gradually to 5.00% for 2013 and remain at that level

recognition of this subsidy had no effect on the 2004 net periodic post-

thereafter. If the health care cost trend rate assumptions were increased

retirement benefit cost but did reduce the accumulated benefit obligation

1.00%, the accumulated post-retirement benefit obligation as of December

as of December 31, 2004 by $650,109.

31, 2006, would be increased by 24.07%, and the aggregate of the service

and interest cost components of the net periodic post-retirement benefit

The following table presents the estimated benefit payments and effect of

cost for the year then ended would have increased by 29.49%. If the health

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, 2006, would be

decreased by 18.46%, 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 21.89%.

The Medicare Prescription Drug, Improvement and Modernization Act of

Year

2007

2008

2009

2010

2011

2003, (the “Act”) provided a prescription drug benefit under Medicare

2012-2016

Part D as well as a federal subsidy to sponsors of retiree health care bene-

fit plans that provide a benefit that is at least actuarially equivalent to

With Subsidy

Without Subsidy

$ 58,000

64,000

70,000

76,000

86,000

744,000

$ 8,000

9,000

10,000

11,000

119,000

Subsidy

50,000

55,000

60,000

66,000

75,000

625,000

The following is a reconciliation of the accumulated post-retirement benefit obligation:
Accumulated post-retirement benefit obligation as of December 31, 2005
Service cost
Interest cost
Actuarial loss
Benefits paid
Accumulated post-retirement benefit obligation as of December 31, 2006

3,222,003
250,923
175,982
(305,654)
(73,202)
3,270,052

The following is a summary of the change in plan assets:

Fair Value of Plan Assets at Beginning of Year
Actual Return of Assets
Employer Contribution
Benefits Paid (net)
Fair Value of Plan Assets at End of Year

The following is a summary of the accrued post-retirement benefit cost at December 31, 2005 and 2004:
December 31,
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

Accrued post-retirement benefit cost

2006

2005

2004

73,202
(73,202)

68,860
(68,860)

61,070
(61,070)

2005

830,354
2,391,649
3,222,003

3,222,003
(185,397)

2004

717,323
1,517,246
2,234,569

2,234,569
(205,997)

(1,363,523)
1,673,083

(684,409)
1,344,163

The Company adopted FASB Statement No. 158, “Employers Accounting for
Defined Benefit Pensions and Other Postretirement Plans (an amendment
of FASB Statements No. 87, 88, 106 and 132R (SFAS 158). SFAS 158 requires
the recognition of the funded status of the Company’s postretirement
benefit plan and to provide additional disclosure. As a result of the adop-

tion of SFAS 158, accrued postretirement benefit cost of $3,270,052 is
included in Other Liabilities and the loss from unfunded post-retirement
benefit obligation of $750,827, net of taxes, is included in accumulated
other comprehensive income in 2006.

Other changes in plan assets and accumulated post-retirement benefit obligation recognized in accumulated other comprehensive income includes the
following, net of tax, at December 31, 2006.
Unrecognized Actuarial Loss
Unrecognized Transition Obligation
Unrecognized Prior Service Cost
Total recognized in other comprehensive income
Amortization of net loss
Amortization of prior service cost
Total recognized in net periodic benefit cost and other
comprehensive income
The estimated net loss and prior transition obligation for the other postretirement plan that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year is $41,355 and $20,600, respectively.

750,827
42,015
13,390
55,405

645,600
105,227

$
$

N O T E Q - 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 :
All entities are required to disclose the fair value of financial instruments,
both assets and liabilities, recognized and not recognized in the statement
of condition, for which it is practical to estimate its fair value. SFAS 107
excluded certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Significant assets and liabilities that are
not considered financial instruments include deferred income taxes and
bank premises and equipment.

Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Company. In preparing these disclosures,
Management made highly subjective estimates and assumptions in devel-
oping the methodology to be utilized in the computation of fair value.
These estimates and assumptions were formulated based on judgments
regarding economic conditions and risk characteristics of the financial
instruments that were present at the time the computations were made.
Events may occur that alter these conditions and thus perhaps change the
assumptions as well. A change in the assumptions might affect the fair
value of the financial instruments disclosed in this footnote. These esti-

mates do not reflect any premium or discount that could result from offer-
ing for sale at one time the Company's entire holdings of a particular
financial instrument. Fair value estimates are based on existing on and
off-balance sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and lia-
bilities that are not considered financial instruments. In addition, the tax
consequences related to the realization of the unrealized gains and losses
have not been computed or disclosed herein. These fair value estimates,
methods and assumptions are set forth below.

Cash and Due from Banks
The carrying amount shown as cash and due from banks approximates
fair value.

Federal Funds Sold
The carrying 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.

Federal Home Loan Bank Stock
The carrying amount shown as Federal Home Loan Bank Stock approximates
fair value.

Loans
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings for the remaining maturities. The cash
flows considered in computing the fair value of such loans are segmented
into categories relating to the nature of the contract and collateral based on

contractual principal maturities. Appropriate adjustments are made to
reflect probable credit losses. Cash flows have not been adjusted for such fac-
tors as prepayment risk or the effect of the maturity of balloon notes. The fair
value of floating rate loans is estimated to be its carrying value.

Cash Surrender Value
The carrying amount of cash surrender value of bank-owned life insurance,
which is included in Other Assets, approximates fair value.

Deposits
The fair value of non-interest bearing demand and interest bearing
savings and demand deposits is the amount reported in the financial
statements. The fair value of time deposits is estimated by discounting the
cash flows using current rates of time deposits with similar remaining
maturities. The cash flows considered in computing the fair value of such
deposits are based on contractual maturities, since approximately 98% of
time deposits provide for automatic renewal at current interest rates.

Federal Funds Purchased and Securities Sold under
Agreements to Repurchase
The carrying amount shown as federal funds purchased and securities sold
under agreements to repurchase approximates fair value.

Borrowings from FHLB
The fair value of FHLB fixed rate borrowings is estimated using discounted
cash flows based on current incremental borrowing rates for similar
types of borrowing arrangements. The Company has no FHLB variable
rate borrowings.

Commitments To Extend Credit and Standby Letters of Credit
Because commitments to extend credit and standby letters of credit
are generally short-term and at variable rates, the contract value and
estimated fair value associated with these instruments are immaterial.

The following table presents carrying amounts and estimated fair values for financial assets and financial liabilities at December 31, 2006, 2005 and 2004
(in thousands):

2006

2005

2004

Financial Assets:
Cash and due from banks
Federal funds sold
Available for sale securities
Held to maturity securities
Federal Home Loan Bank Stock
Loans, net
Cash surrender value
Financial Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Federal funds purchased and

securities sold under
agreements to repurchase

Borrowings from FHLB
Notes payable

Carrying
Amount

$ 37,793
6,400
397,207
85,574
1,129
390,353
12,985

148,456
464,714
613,170

226,032
7,267

Fair
Value

$ 37,793
6,400
397,207
85,519
1,129
389,072
12,985

148,456
464,873
613,329

226,032
8,002

Carrying
Amount

$ 52,278
100,340
178,394
134,047
1,077
338,380
12,489

176,627
415,590
592,217

149,268
7,352

Fair
Value

$ 52,278
100,340
178,394
134,008
1,077
341,016
12,489

176,627
415,582
592,209

149,268
7,728

Carrying
Amount

$ 32,573
152
173,031
6,587
1,402
327,624
12,003

89,529
299,662
389,191

87,277
7,203
1

Fair
Value

$ 32,573
152
173,031
6,698
1,402
331,044
12,003

89,529
300,188
389,717

87,277
7,906
1

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

To the Board of Directors
Peoples Financial Corporation
Biloxi, Mississippi

We have audited management's assessment, included in the accompany-
ing Management's Report on Internal Controls over Financial Reporting,
that Peoples Financial Corporation maintained effective internal control
over financial reporting as of December 31, 2006, based on criteria estab-
lished in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Peoples
Financial Corporation’s management is responsible for maintaining effec-
tive internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibil-
ity is to express an opinion on management's assessment and an opinion
on the effectiveness of the Company's internal control over financial
reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and oper-
ating effectiveness of internal control, and performing such other proce-
dures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for exter-
nal purposes in accordance with accounting principles generally accept-
ed in the United States of America. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions are record-
ed as necessary to permit preparation of financial statements in accor-
dance with accounting principles generally accepted in the United States

of America, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and direc-
tors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or dispo-
sition of the Company's assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over financial report-
ing may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteri-
orate.

In our opinion, management's assessment that Peoples Financial
Corporation maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material respects, based on
criteria established in Internal Control-Integrated Framework issued by
COSO. Also in our opinion, Peoples Financial Corporation maintained, in
all material respects, effective internal control over financial reporting as
of December 31, 2006, based on criteria established in Internal Control-
Integrated Framework issued by COSO.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
statement of condition of Peoples Financial Corporation and subsidiaries
as of December 31, 2006, and the related statements of income, sharehold-
ers’ equity and cash flows for the year then ended, and our report dated
February 14, 2007, expressed an unqualified opinion on those consolidat-
ed financial statements.

Atlanta, Georgia
February 14, 2007

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

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness
of Peoples Financial Corporation and subsidiaries’ internal control over
financial reporting as of December 31, 2006, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report
dated February 14, 2007, expressed an unqualified opinion on manage-
ment’s assessment of the effectiveness of Peoples Financial Corporation’s
internal control over financial reporting and an unqualified opinion on
the effectiveness of Peoples Financial Corporation’s internal control over
financial reporting.

Atlanta, Georgia
February 14, 2007

To the Board of Directors
Peoples Financial Corporation
Biloxi, Mississippi

We have audited the accompanying consolidated statements of condi-
tion of Peoples Financial Corporation and subsidiaries as of December 31,
2006, and the related statements of income, shareholders’ equity and
cash flows for the year 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 audit.
The consolidated financial statements of Peoples Financial Corporation
and subsidiaries as of December 31, 2005 and 2004 were audited by other
auditors whose report dated January 25, 2006, expressed an unqualified
opinion on those statements.

We conducted our audit 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 assur-
ance about whether the financial statements are free of material mis-
statement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and signifi-
cant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the 2006 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Peoples Financial Corporation and subsidiaries as of December 31, 2006,
and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in
the United States of America.

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 and 2004,

and the results of its operations and its cash flows for the years then

ended, in conformity with U. S. generally accepted accounting principles.

and 2004, and the related consolidated statements of income, sharehold-

Certified Public Accountants

ers’ equity and cash flows for the years then ended. These financial state-

ments are the responsibility of the Company’s Management. Our respon-

sibility 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

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

2006

2005

2004

2003

2002

964,023

845,325

577,441

579,669

553,671

397,207

85,574

401,194

613,170

7,267

178,394

134,047

349,346

592,217

7,352

173,030

6,588

334,193

389,192

7,203

98,233

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

48,894

32,343

24,566

25,065

27,424

18,785

30,109

141

29,968

12,309

(23,050)

19,227

6,459

12,768

2.30

.44

17.71

7,550

24,793

3,614

21,179

7,237

5,091

19,475

448

19,027

9,563

(20,468)

(20,765)

7,825

2,031

7,948

2,604

538

5,882

1.06

.96

.38

15.77

5,838

19,227

447

18,780

9,737

(21,464)

7,053

2,035

9,616

17,808

2,428

15,380

10,372

(21,874)

3,878

687

5,794

5,018

3,191

1.04

.90

.57

1.04

.32

15.44

.90

.29

15.03

.57

.24

14.64

Weighted average number of shares

5,548,300

5,550,477

5,556,251

5,563,015

5,603,834

Selected Ratios

Return on average assets

Return on average equity

Primary capital to average assets

Risk-based capital ratios:

Tier 1

Total

1.41%

13.75%

11.91%

19.87%

21.12%

.82%

6.79%

13.67%

20.26%

21.51%

1.00%

6.84%

15.87%

23.04%

24.29%

.88%

6.07%

15.79%

23.56%

24.81%

.56%

3.94%

15.39%

22.91%

24.16%

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, 2006

Interest income

Net interest income

Provision for loan losses

Income before income taxes

Net income

Basic and diluted earnings per share

Quarter Ended, 2005

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

10,505

June 30

September 30

December 31

11,489

13,151

13,749

7,507

3,823

2,533

.46

7,505

3,976

2,556

.46

7,607

4,115

2,685

.48

7,490

7,313

4,994

.90

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

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 Capital Market Exchange:

Year

2006

2005

Quarter

High

Low

Dividend per share

1st

2nd

3rd

4th

1st

2nd

3rd

4th

19.19

16.85

.20

22.27

26.35

27.94

19.49

19.00

18.50

18.75

23.00

25.50

17.50

17.30

17.39

16.51

.21

.18

.20

There were 593 holders of record of common stock of the Company at

paid to the Company by its bank subsidiary. Although Management

January 31, 2007, and 5,548,199 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

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

2609 Highway 90, Gautier, Mississippi 39553

Wiggins

(228) 435-8694

1312 S. Magnolia Drive, Wiggins, Mississippi 39577

(601) 928-1761 or (228) 897-8722

35
37

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

Shareholder Information

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

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

Independent Auditors

Porter Keadle Moore, LLP

Atlanta, Georgia

Corporate Stock

S.E.C. Form 10-K Requests

The common stock of Peoples Financial Corporation is traded

A copy of the Annual Report on Form 10-K, as filed with the

on the NASDAQ Capital Market under the symbol: PFBX.

Securities and Exchange Commission, may be obtained without

The current market makers are:

charge by directing a written request to:

FIG Partners

FTN Midwest Research Secs.

Knight Equity Markets, L.P.

Morgan Keegan & Company, Inc.

Sterne, Agee & Leach, Inc.

Stifel Nicolaus & Co.

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

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

A. Wes Fulmer, Executive Vice-President

Lauri A. Wood, Chief Financial Officer and Controller

Thomas J. Sliman, Senior Vice-President

Ann F. Guice, Vice-President and Secretary

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

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

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