SETTLEMENT AGREEMENT AND RELEASE

         THIS SETTLEMENT AGREEMENT AND RELEASE (the "Agreement") is made as of
December 30, 1996 by and among C. Edward Dunmire, an individual and resident of
the Commonwealth of Pennsylvania (the "Executive"), and Peoples Financial Corp.,
Inc. ("PFC"), a Pennsylvania corporation with its principal place of business in
Ford City, Pennsylvania, and Peoples Bank of Pa. ("Peoples"), a wholly-owned
subsidiary of PFC.

                                   WITNESSETH:
         WHEREAS, Executive and PFC entered into an employment
agreement on June 1, 1992 (the "PFC Employment Agreement");

         WHEREAS, Executive and New Bethlehem Bank ("NBB") entered into
an employment agreement on June 1, 1992 (the "NBB Employment Agreement");

         WHEREAS, Executive and Peoples entered into an employment agreement on
June 10, 1992 (the "Peoples Employment Agreement");

         WHEREAS, each of NBB and Peoples instituted a non-qualified pension
plan (the "NQPP") for the benefit of certain key employees including Executive;

         WHEREAS, in 1995, NBB was merged (the "Merger") with and into Peoples
with Peoples surviving the Merger;

         WHEREAS, as a result of the Merger, Peoples is liable to Executive
under the NBB Employment Agreement and the NBB sponsored NQPP;

         WHEREAS, PFC and Peoples terminated the employment of Executive with
the PFC and Peoples on or about April 17, 1996; and

         WHEREAS, Executive has filed a complaint with the Equal Employment
Opportunity Commission (the "EEOC") alleging discrimination based on age and the
existence of certain disabilities; and

         WHEREAS, Executive has made claims against PFC and Peoples for wrongful
discharge, breach of contract and personal injury resulting in damage to his
business reputation; and

         WHEREAS, PFC and Peoples deny the various allegations of the Executive;
and

         WHEREAS, PFC and Peoples have made claims against Executive with
respect to use of certain property and funds; and

<PAGE>

         WHEREAS, Executive denies the various allegations of PFC and Peoples;
and

         WHEREAS, the Executive, PFC and Peoples desire to put to rest and
settle all controversy between them related to and/or arising out of Executive's
employment with PFC and Peoples and provide for the termination of Executive's
employment with PFC and Peoples and the facts and circumstances underlying same,
and to settle and compromise any and all claims and differences between them, of
any sort, origin or description in order to put an end to the cost and
uncertainties inherent in litigation.


         NOW THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:


         1. Termination of Employment. The Executive shall cease to be an
employee of PFC and Peoples effective as of April 17, 1996 (the "Termination
Date").


         2. Effect of Termination. Except as expressly provided in this
Agreement, the Executive shall have no obligations to PFC and/or Peoples and PFC
and/or Peoples shall have no obligations to the Executive from and after the
Termination Date. Without limiting the generality of the foregoing, PFC and
Peoples shall have no obligation to the Executive with respect to salary,
bonuses and other incentive compensation, fringe benefits, severance pay or
other termination benefits, pension, profit-sharing or other retirement or
deferred compensation payments under plans qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code") (except as required in
accordance with the terms of such plans and applicable law), any other incentive
or deferred compensation payments under plans not so qualified, and any health,
life, disability, or other welfare benefit plans, programs or arrangements,
including but not limited to the following:

            (a) New Bethlehem Bank Non-Qualified Pension Plan; and

            (b) Peoples Bank of PA Non-Qualified Pension Plan.


                Except for the payments and benefits described in Section 3 of
this Agreement, the Executive waives any and all of the foregoing compensation
and benefits that may have accrued prior to the Effective Date and shall not be
entitled to receive any of the foregoing compensation or benefits after the
Termination Date.

<PAGE>

         3. Termination Benefits. The Executive shall receive the following
termination benefits, subject to Section 6 hereof:

            (a) PFC and Peoples shall provide to the Executive, those certain
miscellaneous benefits set forth on Annex I hereto.

            (b) Upon execution of this Agreement, PFC and Peoples shall deposit
the sum of $467,594.54 in immediately available funds with Kirkpatrick &
Lockhart LLP (the "Escrow Agent") in escrow for the benefit of the parties
hereto. Such sum shall represent the total of all amounts payable to Executive
pursuant to items 1, 4, 5 and 6 on Annex III hereto and shall hereinafter be
referred to as the "Escrowed Funds". Upon the eighth day first following the
execution of the Supplemental Release set forth on Annex II attached hereto and
incorporated herein by reference, the Escrow Agent shall pay the Executive the
Escrowed Funds. In the event the Executive shall fail to sign such Supplemental
Release within five (5) days of the date hereof, this Agreement shall terminate
and the Escrow Agent shall return the Escrowed Funds to PFC and Peoples.

            (c) The execution of this Agreement by the Executive shall
constitute a qualifying event, as described in Section 4980B(f)(3) of the Code,
with respect to the Executive's health care continuation rights under the
Consolidated Omnibus Budget Reconciliation Act, as amended, and an election of
continuation coverage by the Executive, as described in Section 4980B(f)(1) of
the Code, beginning on the Effective Date, for the period described in Section
4980B(f)(2)(B). As a result of this election, the Executive shall receive health
care continuation coverage from PFC and Peoples for the period May 1, 1996
through July 31, 2002, subject to the terms and conditions of PFC's and Peoples'
existing health care programs and arrangements and Section 4980B(f) of the Code.
The premiums for such health care continuation coverage shall be paid by PFC and
Peoples. Since May 1, 1996 Executive has paid $2,469.52 to PFC or Peoples for
premiums for such health care continuation coverage. As indicated on item 5 on
Annex III, the Escrowed Funds include reimbursement to Executive of such
premiums paid to date by Executive. The health care continuation coverage
provided to the Executive hereunder shall be in complete satisfaction of his
rights to health care continuation coverage under the Consolidated Omnibus
Budget Reconciliation Act, as amended, and Section 4980B(f) of the Code and
shall discharge the PFC's and Peoples' obligations thereunder with respect to
the Executive.

            (d) PFC and Peoples shall provide the benefits listed as items 2 and
3 on Annex III.

         PFC and Peoples do not plan to withhold federal, state or local income
or other taxes for any amounts, payable to Executives hereunder however,
notwithstanding the foregoing, to the extent that any of the foregoing benefits

<PAGE>

are subject to federal, state or local income or other taxes and believes, in
good faith, that it is required by applicable law to withhold any such taxes in
respect of any payment or benefit, PFC and Peoples shall make withholding in the
amounts as it determines, in good faith, appropriate and shall remit those
amounts to the appropriate taxing agencies. Notwithstanding any withholding for
such taxes, PFC' and Peoples' obligations shall be limited to those imposed on
employers for withholding for income and, if applicable, payroll taxes under
applicable law and the Executive shall be responsible for the timely reporting
of income and payment of income taxes thereon.

         4. Confidential and Proprietary Information; Press Releases.

            (a) The Executive shall make available to PFC within five (5) days
after the date of this Agreement, all written materials, documents and other
information in his possession relating to PFC, Peoples and NBB and its
management and business. The Executive shall make available to PFC within five
(5) days after the date of this Agreement, all other property of PFC, Peoples
and NBB in his possession. The Executive acknowledges that, by virtue of his
position with PFC and Peoples, he has had access to certain confidential and
proprietary information of PFC, Peoples and NBB and its business affairs. The
Executive represents that he has held all such information confidential and that
he shall keep secret all confidential and/or proprietary matters relating to
PFC, Peoples and NBB, whether or not specifically designated as such, and shall
not disclose them for any purpose whatsoever to any outside party without the
prior written consent of PFC and Peoples.

            (b) No party hereto will issue or make any reports, statements
or releases to the public with respect to this Agreement or the transactions
contemplated hereby without the consent of the other parties hereto, which
consent shall not be unreasonably withheld. If any party hereto is unable to
obtain, after reasonable effort, the approval of its public report, statement or
release from the other parties hereto and such report, statement or release is,
in the opinion of legal counsel to such party, required by law in order to
discharge such party's disclosure obligations, then such party may make or issue
the legally required report, statement or release and promptly furnish the other
parties with a copy thereof. Except as provided in this Section 4(b), the
parties agree not to disclose any information whatsoever regarding the existence
or substance of this Agreement to any person other than to their attorneys,
financial advisors and those needed to perform tasks to effectuate this
Agreement, or as is otherwise required by law. Executive may make oral
statements to the public to the effect that his employment with PFC, NBB and
Peoples has been terminated and that the parties have reached an agreement

<PAGE>

settling all claims each may have against the other. In addition PFC and Peoples
will take all actions necessary to assure that employees of PFC and Peoples who
are acquaintances of Executive or his family feel free to speak with Executive
and his family about any and all matters except for the termination of
Executive's employment and the content of this Agreement.

         5. Acknowledgment and Mutual Release.

            (a) The Executive acknowledges that the payments and benefits he is
to receive pursuant to this Agreement shall be in full satisfaction of all
claims, if any, against PFC and Peoples, its subsidiaries and other affiliates,
and their respective shareholders, directors, officers, employees and agents,
past and present. PFC and Peoples, on behalf of themselves and their respective
subsidiaries, affiliates, shareholders, directors, employees and agents,
acknowledge that this Agreement shall be in full satisfaction of all claims, if
any, against Executive and his heirs and assigns. Except for the obligations of
the respective parties under this Agreement, and except as set forth in Section
5(c) hereof, each of the Executive on the one hand, and PFC and Peoples on the
other hand, does, for himself or itself, and his or its heirs, personal
representatives, successors and assigns, hereby irrevocably release, promise,
quitclaim and discharge, in the case of the Executive, PFC and Peoples, its
subsidiaries and other affiliates, their respective stockholders, directors,
officers, employees and agents, past and present, and PFC's and Peoples
predecessors, successors and attorneys, and in the case of PFC and Peoples, the
Executive and his heirs and personal representatives, of and from any and all
manner of actions, causes of action, claims, suits, debts, dues, sums of money,
controversies, agreements, promises and demands whatsoever, both at law and in
equity, known or unknown, arising under any federal, state or local law, rule,
ordinance or regulation (including any common law), which he or it now have or
ever had or may in the future have, for, upon, or by reason of any matter, cause
or thing whatsoever from the beginning of the world to the date of this
Agreement for, on account of or arising out of any transactions or events that
have occurred prior to the execution and delivery of this Agreement. This
release is unqualified and for any relief, no matter how called, including,
without limitation, wages, back pay, front pay, compensatory damages, liquidated
damages, punitive damages, damages for pain or suffering, costs, attorneys' fees
and expenses and claims to be reinstated to employment with PFC and Peoples.

            (b) Executive shall cause to be discharged with prejudice that
certain complaint pending before the Equal Employment Opportunity Commission, C.
Edward Dunmire v. Peoples Bank of PA (Division of PFC Bank), New Bethlehem Bank
(Division of PFC Bank), PFC Bank and Peoples Financial Corp., Inc., No.
172-960859.

<PAGE>

            (c) Notwithstanding anything to the contrary in this Agreement, the
following shall not be included in the releases given by the parties:

                (i) any claim by Executive for workers compensation or other
                benefits arising from the automobile accident involving
                Executive which occurred on November 19, 1993;

                (ii) any amounts due by Executive to Peoples pursuant to that
                certain mortgage loan, dated November 15, 1990, in the original
                principal amount of $94,400.00;

                (iii) any and all amounts due to Executive with respect to
                deposit accounts held by Executive at Peoples; and

                (iv) any amounts due by Executive to James Hetrick, son of Darl
                Hetrick, a director of Peoples and PFC pursuant to that certain
                note dated September 7, 1994, in the original principal amount
                of $50,000 and that certain note dated January 11, 1996, in the
                original principal amount of $15,000.

         6. Breach of Agreement.

            (a) Except as hereinafter provided, in the event that it is
determined the Executive breaches any provision of this Agreement, PFC and
Peoples shall be relieved of any and all obligations to make further payments or
provide further benefits to the Executive hereunder (except to the extent
provided by law). Except as hereinafter provided, in the event that it is
determined that PFC or Peoples has breached any provision of this Agreement,
Executive shall be relieved of any and all obligations to abide further with the
terms of this Agreement. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be determined settled in accordance
with the provisions of subsection (b) below.

            (b) If any dispute arises under this Agreement, any party may from
time to time deliver written notice to the other party that he or it intends to
submit such dispute to arbitration. Such arbitration shall be held in
Pittsburgh, Pennsylvania, in accordance with the rules and regulations of the
American Arbitration Association by a panel of three arbitrators. The
determination of the arbitrators shall be conclusive and binding upon the
parties to such arbitration proceeding and judgment upon the award may be
entered in any court having jurisdiction. The expenses of each party, including

<PAGE>

legal and accounting fees, if any, with respect to the arbitration, shall be
borne by such party, except to the extent otherwise directed by the arbitrators,
who shall endeavor to allocate such expenses among the disputing parties based
upon the relative merits of their cases. The arbitrators shall designate the
party to bear the expenses of the arbitrators or the respective amounts of such
expenses to be borne by each party. Any provision in this Agreement to the
contrary notwithstanding, each party shall be free to seek provisional equitable
relief from a court of competent jurisdiction (whether or not an arbitration
proceeding shall then be pending). No arbitration pursuant to this Agreement
shall be stayed or delayed pending the outcome of any judicial or other
proceeding.

         7. Notices. Any notice or other communication required or permitted
under this Agreement shall be effective only if it is in writing and delivered
personally or sent by registered or certified mail, postage prepaid, addressed
as follows:

                  If to PFC or Peoples:
                           Peoples Financial Corp., Inc.
                           Ford Street and Fourth Avenue
                           Ford City, PA  16226
                           Attention:  President

                  If to the Executive:
                           C. Edward Dunmire
                           425 Pill Hill Road
                           Kittanning, PA  16201

or to such other address as either party may designate by notice to the other,
and shall be deemed to have been given upon delivery in person or upon deposit
in the mail.


         8. Miscellaneous.

            (a) The failure of a party to this Agreement to insist on any
occasion upon strict adherence to any term of this Agreement shall not be
considered to be a waiver or to deprive that party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement.
Any waiver must be in writing.

            (b) If any provision of this Agreement shall be invalid or
unenforceable, the balance of this Agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.

<PAGE>

            (c) This Agreement constitutes the entire understanding of the
parties with respect to its subject matter, supersedes all prior agreements and
understandings with respect to such subject matter, and may be terminated or
amended only by a writing signed by all of the parties to this Agreement.

            (d) The provisions of this Agreement shall be governed by and
construed in accordance with the law of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed in the Commonwealth of
Pennsylvania.

            (e) The headings in this Agreement are for convenience of reference
only and are not intended to be a part of or affect the meaning or
interpretation of this Agreement.

            (f) This Agreement is personal to the parties hereto and cannot be
assigned or transferred by either party without the express written consent of
the other party. This Agreement shall inure to the benefit of and be binding
upon the Executive, his heirs representatives and permitted assigns, and PFC and
Peoples and their respective successors and permitted assigns.

            (g) All payments and benefits to the Executive called for under this
Agreement shall be made from the general assets of PFC and Peoples and the
Executive shall have no rights in any such payments and benefits greater than
the rights of a general creditor of PFC and Peoples. Notwithstanding the
foregoing, those benefits to be paid to the Executive which are in the nature of
pension benefits shall be afforded the same protection and guarantees as similar
benefits payable to other retirees of PFC or Peoples.

         IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the day and year first above written.

                                                  EXECUTIVE:

/s/ Richard D. Rose                               /s/ C. Edward Dunmire
         Witness                                  C. Edward Dunmire
                                              
ATTEST:                                           PEOPLES FINANCIAL CORP., INC.
                                              
By: /s/ Brian Henry                               By:  /s/ R. B. Robertson
         Secretary                                Title:  CEO/Chairman
                                                  PEOPLES BANK OF PA.
                                              
By:_______________________                        By:_________________________
By: /s/ Brian Henry                               By: /s/ R. B. Robertson
         Secretary                                Title:  CEO/Chairman
                                              
<PAGE>

                                                                         ANNEX I
                                                                   MISCELLANEOUS
                                                                        BENEFITS

         PFC and Peoples will maintain at their cost for the benefit of
Executive during the period beginning on the date of the Agreement and ending on
May 31, 1998 (other than medical benefits which will be provided until Executive
attains age 65), the following benefits (as in effect on October 31, 1996):

                  o Term Life Insurance, Accidental Death and Dismemberment
                    Benefit*

                  o Dental/Vision Direct Reimbursement Plan**

                  o Medical Expense Direct Reimbursement Plan**

                  o Other employee benefits (other than qualified retirement
                    plan benefits) provided to full-time employees of PFC and
                    Peoples

-------------

* This benefit may be continued by Executive after May 31, 1998 at Executive's
expense. In addition, the benefits offered through AFLAC which have been
maintained at the election of Executive and at his cost may be continued at
Executive's sole cost after the date of the Agreement.

** Medical and dental benefits will be maintained at levels equal to or
exceeding the coverages provided at the time of termination of Executives
employment.

<PAGE>
                                                                        ANNEX II


                              
                              SUPPLEMENTAL RELEASE

         The undersigned, C. Edward Dunmire (the "Executive") acknowledges that
the payment he is to receive pursuant to Section 3(b) of the Settlement
Agreement and Release dated as of December 30, 1996, among the Executive,
Peoples Financial Corp., Inc., a Pennsylvania corporation ("PFC"), and Peoples
Bank of Pa. ("Peoples"), PFC and Peoples collectively referred to as the
"Company", shall be in full satisfaction of all claims, if any, against the
Company, its subsidiaries and other affiliates, and their respective
stockholders, directors, officers, employees and agents, past and present, and
in consideration of such payment the Executive hereby executes this release.

         Each of the Executive on the one hand, and the Company on the other
hand, does, for himself or itself, and his or its heirs, personal
representatives, successors and assigns, hereby irrevocably release, promise,
quitclaim and discharge, in the case of the Executive, the Company, its
subsidiaries and other affiliates, their respective shareholders, directors,
officers, employees and agents, past and present, and the Company's
predecessors, successors and attorneys, and in the case of the Company, and the
Executive and his heirs and personal representatives, of and from any and all
manner of actions, causes of action, claims and suits whatsoever, both at law
and in equity, known or unknown, arising under the Civil Rights Act of 1974, as
amended, the Age Discrimination in Employment Act of 1967, as amended, and the
Americans With Disabilities Act which he or it now have or ever had or may in
the future have, for, upon, or by reason of any matter, cause or thing
whatsoever from the beginning of the world to the date hereof for, on account of
or arising out of his employment by the Company or the termination thereof that
have occurred prior to the execution and delivery of this Release.

         This Release is unqualified and for any relief, no matter how called,
including, without limitation, wages, back pay, front pay, compensatory damages,
liquidated damages, punitive damages, damages for pain or suffering, costs,
attorneys' fees and expenses and claims to be reinstated to employment with the
Company.

         The Executive represents that he has carefully read this Release, that
he has been given the opportunity to receive the advice of the attorney of his
choice with respect to this Release and to have an attorney explain to him the

<PAGE>

terms of this Release, that he accepts full responsibility and consequences of
his action or non-action in this regard, that he knows and understands the
content of this Release, that he executes this Release knowingly and voluntarily
as his own free act, that the terms of this Release are totally satisfactory and
thoroughly understood by him, and that this Release was freely negotiated and
entered into without fraud, duress or coercion. The Executive acknowledges that
he was given at least twenty-one (21) days in which to consider this Release and
that he may revoke this Release for a period of seven (7) days from the date set
forth below.

         This Release is executed in connection with the above-mentioned
Separation Agreement and shall be construed and interpreted in accordance with
the applicable terms thereof (including, but not limited to, the choice of law
specified in Section 8(e) thereof).

         WITNESS the due execution hereof as of this 30th day of December, 1996.

WITNESS:                                          EXECUTIVE
                                         
/s/ Richard D. Rose_____                          /s/ C. Edward Dunmire
                                                  C. Edward Dunmire
                                         
ATTEST:                                           PEOPLES FINANCIAL CORP., INC.
                                         
By:/s/ Brian Henry______                          By:  /s/ R. B. Robertson
                                         
                                         
ATTEST:                                           PEOPLES BANK OF PA.
                                         
By:/s/ Brian Henry______                          By:  /s/ R. B. Robertson
                                    
<PAGE>

                                                                       ANNEX III
                                                             SEPARATION PAYMENTS

         1. In settlement of Executive's various claims PFC and Peoples will pay
Executive FOUR HUNDRED FIFTY THOUSAND DOLLARS ($450,000) in immediately
available funds.

         2. A monthly pension benefit payable under qualified defined benefit
plans in effect for PFC, Peoples and NBB assuming a pension starting date of
June 1998 (the "Monthly Pension Benefit"). As derived from the attached Schedule
A the Monthly Pension Benefit assuring a starting date of June 1998 will be
$5,209.58. The Monthly Pension Benefit is subject to actuarial adjustment if the
pension starting date is extended beyond June 1998. Such actuarial adjustment
will be determined by PFC's then actuaries, provided, however, that the method
and assumptions used for such determination shall be consistent with those used
for Schedule A.

         3. Distribution of Executive's account balance under the Peoples 401(k)
plan (after inclusion of contributions for the 1996 plan year and after
inclusion of the "company match" with respect to sum payable or item 1.).

         4. PFC and Peoples shall reimburse Executive the reasonable legal fees
of Executive with respect to this Settlement Agreement and Release and the
employment issues contemplated hereby in an amount not to exceed $15,000.

         5. PFC and Peoples shall reimburse Executive the sum of $2,469.52
representing the health insurance continuation premium paid by Executive since
May 1996 (to be increased by $308.69 per month prior to the consummation of this
Agreement).

         6. PFC and Peoples shall reimburse Executive the sum of $125.02 for
costs associated with 1995 Christmas decorating and removal advanced by
Executive.

<PAGE>