EXHIBIT 13




                               [PFS BANCORP LOGO]















                                PFS BANCORP, INC.






                               2003 ANNUAL REPORT

                                 TO STOCKHOLDERS


<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS
===================================================================================================================

                                                                                                               Page
                                                                                                               ----
<S>                                                                                                            <C>
President's Letter to Stockholders..............................................................................1

Business of PFS Bancorp, Inc....................................................................................2

Market Price of PFS Bancorp Common Shares and Related Stockholder Matters.......................................3

Selected Consolidated Financial and Other Data..................................................................4

Management's Discussion and Analysis of Financial Condition and Results of Operations...........................6

Report of Independent Certified Public Accountants.............................................................14

Consolidated Statements of Financial Condition.................................................................15

Consolidated Statements of Earnings............................................................................16

Consolidated Statements of Comprehensive Income................................................................17

Consolidated Statements of Shareholders' Equity................................................................18

Consolidated Statements of Cash Flows..........................................................................19

Notes to Consolidated Financial Statements.....................................................................21

Directors and Executive Officers...............................................................................44

Banking Locations and Stockholder Information..................................................................45

</TABLE>


<PAGE>



                               PRESIDENT'S LETTER

Dear Shareholders,

We are pleased to present the third Annual Report of PFS Bancorp, Inc.

In connection with our conversion to a stock company, we changed our fiscal
reporting year from June 30th to December 31st. As a result, this is the first
year that our consolidated financial statements, as a stock company, reflect our
financial results for two calendar year periods. This allows for better and
easier reading of comparative numbers.

Net earnings for the year ended December 31, 2003, totaled $827,000, a decrease
of $26,000, or 3%, compared to the $853,000 of record net earnings recorded for
the year ended December 31, 2002. Diluted earnings per share amounted to $.60
for 2003, compared to $.59 in 2002. The slight drop in net earnings can be
attributed primarily to the prevailing low interest rate environment. The
resulting decline in net interest margin has affected our financial performance
as well as most of our financial institution peers.

Our assets at December 31, 2003 totaled $118.3 million, representing a decrease
of $763,000, or 0.6%, compared to December 31, 2002 levels. While total assets
dropped, the loan portfolio had experienced growth of $4.6 million or 4.8% to a
record high of $100.3 million. The totals of the loan portfolio are further
enhanced by the fact that it is made up of $84.4 million or 82.3% in adjustable
rate loans. While we believe these numbers look good we are looking for even
better growth in 2004. Shareholders' equity at December 31, 2003 totaled a solid
$26.9 million or 22.8%, representing the highest capital to assets ratio of any
financial institution headquartered in southeastern Indiana.

Apparently, the investment community appreciates our efforts to date. At
December 31, 2003, our share price had climbed to $19.65, representing a 26.4%
increase over the December 31, 2002 closing price. We have continued to enhance
stockholder value by paying a 7.5 cent per share dividend in each quarter of
2003 and through a 5% stock repurchase representing 77,565 shares of our common
stock in March 2003. This stock repurchase was announced and completed on the
same day at approximately $1.77 per share below book value.

As we continue to grow, we pledge to do our best to maintain your trust. This
pledge has been carried forward since the establishment of Peoples in 1887. We
have a long and proud legacy to live up to. Our goal has always been to maintain
a stable and secure financial institution that provides quality service to our
customers while offering competitive rates on our loans and deposits. The key to
meeting that goal is, as it always has been, the performance of our employees,
who have over 400 years of combined banking experience.

Since our conversion and the formation of PFS Bancorp, we have continued to take
actions to increase the value of your investment, which includes searching for
quality loans and investments to enhance profitability. We will continue to
explore other means to enhance shareholder value. We are encouraged by our
progress to date and look forward to building on our successes.

I wish to thank our directors, officers and employees for their support and
their continued service and dedication to PFS Bancorp and the Bank. We have made
many changes in the past three years and I feel we have just begun to see the
potential of PFS. I would also like to thank you as investors for your
overwhelming support and confidence in our stock.

Sincerely,

/s/ Mel E. Green
----------------
Mel E. Green

President and Chief Executive Officer

                                       1
<PAGE>


                                PFS BANCORP, INC.

                          BUSINESS OF PFS BANCORP, INC.

===============================================================================


         PFS Bancorp, Inc., an Indiana corporation ("PFS Bancorp" or the
"Corporation"), is a unitary savings and loan holding company which owns all of
the outstanding common shares of Peoples Federal Savings Bank ("Peoples" or the
"Bank"), a federally chartered savings bank.

         Founded in 1887, Peoples is a community and customer oriented stock
savings bank organized under the laws of the United States. Peoples conducts
business out of its main office located in Aurora, Indiana and two branch
offices in Rising Sun and Vevay, Indiana. Peoples' business consists principally
of attracting deposits from the general public and using those funds to
originate loans secured by one-to-four-family residential real estate,
multi-family real estate and non-residential real estate, as well as consumer
loans. Peoples' profitability depends primarily on its net interest income,
which is the difference between the income it receives on loans and other assets
and its cost of funds, which consists of the interest paid on deposits and
borrowings. At December 31, 2003, PFS Bancorp had total assets of $118.3
million, deposits of $88.3 million and total shareholders' equity of $26.9
million.

         PFS Bancorp is subject to regulation, supervision and examination by
the Office of Thrift Supervision of the U.S. Department of Treasury (the "OTS"),
as its primary federal regulator, and the Federal Deposit Insurance Corporation
(the "FDIC"), which administers the Savings Association Insurance Fund. The FDIC
insures deposits in Peoples up to applicable limits.

                                       2
<PAGE>


                                PFS BANCORP, INC.

                           MARKET PRICE OF PFS BANCORP
                  COMMON SHARES AND RELATED STOCKHOLDER MATTERS
===============================================================================

         PFS Bancorp's common shares have been listed on the Nasdaq National
Market ("Nasdaq") since October 11, 2001, under the symbol "PBNC." Presented
below are the high and low trading prices for PFS Bancorp's common shares as
well as related dividends for the two year period from January 1, 2002 to
December 31, 2003. Such prices do not include retail financial markups,
markdowns or commissions. Information relating to prices has been obtained from
Nasdaq.

   QUARTER ENDED:                       HIGH        LOW       DIVIDENDS

   2003
   December 31, 2003.............     $20.50       $17.75      $  .075
   September 30, 2003............      18.00        16.88         .075
   June 30, 2003.................      17.80        15.88         .075
   March 31, 2003................      16.46        15.18         .075

   2002
   December 31, 2002.............      16.06        14.43         .050
   September 30, 2002............      17.60        15.26         .050
   June 30, 2002.................      15.95        14.05         .050
   March 31, 2002................      14.36        13.25           --

         As of March 26, 2004, PFS Bancorp had 1,473,728 common shares
outstanding held of record by approximately 330 stockholders. The number of
stockholders does not reflect the number of persons or entities who may hold
stock in nominee or "street" name through brokerage firms or others.

                                       3
<PAGE>




                                PFS BANCORP, INC.

                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
===============================================================================

         The following selected consolidated financial and other data does not
purport to be complete and is qualified in its entirety by reference to the more
detailed financial information, including the Consolidated Financial Statements
and related notes, appearing elsewhere herein.
<TABLE>
<CAPTION>

                                                                                           AT DECEMBER 31,
                                                                                 ---------------------------------
                                                                                      2003                2002
                                                                                 -------------        ------------
                                                                                        (Dollars In Thousands)
<S>                                                                                <C>                <C>
         SELECTED BALANCE SHEET DATA:
         Total assets........................................................      $118,273           $119,036
         Cash and cash equivalents(1)........................................         5,187              5,225
         Investment securities available for sale............................        10,016             15,142
         Investment securities held to maturity..............................           152                161
         Loans receivable-net ...............................................       100,293             95,702
         Deposits............................................................        88,328             89,420
         Borrowings..........................................................         2,000              1,000
         Shareholders' equity................................................        26,922             27,597
         Full service offices................................................             3                  3
</TABLE>
<TABLE>
<CAPTION>
                                                                                              YEAR ENDED
                                                                                             DECEMBER 31,
                                                                                   -------------------------------
                                                                                      2003                2002
                                                                                   -----------        ------------
                                                                               (In thousands, except per share data)
<S>                                                                                  <C>                 <C>
         SELECTED OPERATING DATA:
         Total interest income..................................................     $5,747              $6,840
         Total interest expense.................................................      1,922               2,900
                                                                                      -----               -----
         Net interest income....................................................      3,825               3,940
         Provision for losses on loans..........................................         52                  92
                                                                                    -------             -------
         Net interest income after provision
           for losses on loans..................................................      3,773               3,848
         Total other income.....................................................        398                 336
         Total general, administrative and other
           expense..............................................................      2,780               2,707
                                                                                      -----               -----
         Earnings before income taxes...........................................      1,391               1,477
         Income taxes...........................................................        564                 624
                                                                                     ------             -------

         Net earnings...........................................................     $  827              $  853
                                                                                     ======             =======

         Earnings per share

           Basic................................................................     $  .60              $  .59
                                                                                     ======              ======
           Diluted..............................................................     $  .60              $  .59
                                                                                     ======              ======
</TABLE>

                                       4
<PAGE>



                                PFS BANCORP, INC.

                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
================================================================================

<TABLE>
<CAPTION>
                                                                                      AT OR FOR THE YEAR ENDED
                                                                                           DECEMBER 31,
                                                                                   -------------------------------
                                                                                       2003                2002
                                                                                   -----------         -----------
<S>                                                                                  <C>                    <C>
SELECTED OPERATING RATIOS(2):

PERFORMANCE RATIOS:
Return on average assets...............................................                 .70%                   .71%
Return on average equity...............................................                3.09                   3.08
Equity to assets at end of period......................................               22.76                  23.18
Interest rate spread(3)................................................                2.67                   2.50
Net interest margin(3).................................................                3.28                   3.33
Average interest-earning assets to average
  interest-bearing liabilities.........................................              136.92                 134.11
Net interest income after provision for
  losses on loans to total general,
  administrative and other expense.....................................              135.72                 142.15
Total general, administrative and other
  expense to average total assets......................................                2.34                   2.25
Dividend payout ratio..................................................               50.00                  25.42

ASSET QUALITY RATIOS:
Non-performing loans to total loans
  at end of period(4)..................................................                 .95%                   .93%
Non-performing assets to total assets
  at end of period(4)..................................................                 .96                    .95
Allowance for loan losses to total loans
  at end of period.....................................................                 .75                    .78
Allowance for loan losses to total
  non-performing loans at end of
  period(4)............................................................               79.48                  84.79

CAPITAL RATIOS:
Tangible capital ratio.................................................               18.2 %                 17.4 %
Core capital ratio.....................................................               18.2                   17.4
Risk-based capital ratio...............................................               31.2                   29.3

</TABLE>


----------------------
(1)      Consists of cash and short-term interest-bearing deposits in other
         financial institutions.

(2)      With the exception of end of period ratios, all ratios are based on
         average monthly balances during the periods and are annualized where
         appropriate.

(3)      Interest rate spread represents the difference between the
         weighted-average yield on interest-earning assets and the
         weighted-average rate on interest-bearing liabilities. Net interest
         margin represents net interest income as a percentage of average
         interest-earning assets.

(4)      Non-performing loans consist of non-accrual loans and non-performing
         assets consist of non-performing loans and real estate acquired by
         foreclosure or deed-in-lieu thereof.

                                       5
<PAGE>


                                PFS BANCORP, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================

GENERAL

         PFS Bancorp's profitability depends primarily on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans, investment securities and
interest-earning deposits in other financial institutions, and interest expense
on interest-bearing deposits and borrowings from the Federal Home Loan Bank of
Indianapolis. Net interest income is dependent upon the level of interest rates
and the extent to which such rates are changing. PFS Bancorp's profitability
also depends, to a lesser extent, on the level of other income, the provision
for losses on loans, general, administrative and other expenses and federal
income taxes.

         Historically, Peoples' business has consisted primarily of originating
single-family real estate loans secured by property in its market area. Peoples'
loans are primarily funded by deposits. Typically, single-family loans involve a
lower degree of risk and carry a lower yield than commercial real estate,
construction and consumer loans. To a significantly lesser extent, Peoples also
offers multi-family, non-residential, commercial and consumer and other loans.

         PFS Bancorp's operations and profitability are subject to changes in
interest rates, applicable statutes and regulations and general economic
conditions, as well as other factors beyond management's control.

FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CHANGE

         Certain statements are made in this document as to what management
expects may happen in the future. These statements usually contain the words
"believe," "estimate," "project," "expect," "anticipate," "intend" or similar
expressions. Because these statements look to the future, they are based on
management's current expectations and beliefs. Actual results or events may
differ materially from those reflected in the forward-looking statements.
Management's current expectations and beliefs as to future events are subject to
change at any time, and no assurances can be provided that the future events
will actually occur.

CRITICAL ACCOUNTING POLICIES

         Certain of the Corporation's accounting policies are important to the
portrayal of the Corporation's financial condition, since they require
management to make difficult, complex or subjective judgments, some of which may
relate to matters that are inherently uncertain. Estimates associated with these
policies are susceptible to material changes as a result of changes in facts and
circumstances. Facts and circumstances that could affect these judgments
include, but without limitation, changes in interest rates, changes in the
performance of the economy or changes in the financial condition of borrowers.
Management believes that its critical accounting policies include determining
the allowance for loan losses. If management were to underestimate the allowance
for loan losses, earnings could be reduced in the future as a result of greater
than expected net loan losses. Overestimations of the required allowance could
result in future increases in income, as loan loss recoveries increase or
provisions for losses on loans decrease.

                                       6
<PAGE>

                                PFS BANCORP, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================


The following tables present for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. All average
balances are based on monthly balances. Management does not believe that the
monthly averages differ significantly from the daily average balances.

<TABLE>
<CAPTION>

                                                                                          YEAR ENDED DECEMBER 31,
                                                                      -------------------------------------------------------------
                                                                                 2003                               2002
                                                                      ------------------------------  -----------------------------
                                                AT DECEMBER 31, 2003
                                                --------------------                      AVERAGE                        AVERAGE
                                                           YIELD/    AVERAGE               YIELD/    AVERAGE              YIELD/
                                                 BALANCE    RATE     BALANCE  INTEREST      RATE     BALANCE   INTEREST    RATE
                                                 -------  -------    -------  --------   ---------  --------   --------  --------
                                                                                 (Dollars In thousands)
<S>                                             <C>        <C>    <C>          <C>        <C>      <C>         <C>       <C>
INTEREST-EARNING ASSETS:
  Loans receivable, net(1)....................  $100,293   5.03%  $  97,021    $5,269      5.43%   $ 96,013    $6,246     6.51%
  Investment securities.......................    10,926   2.95      13,166       402      3.05      11,873       409      3.44
  Deposits in other financial institutions(2).     4,332   0.93       6,365        76      1.19      10,532       185      1.76
                                                --------   ----   ---------    ------      ----    --------    ------      ----
       Total interest-earning assets..........   115,551   4.68     116,552     5,747      4.93     118,418     6,840      5.78

  Non-interest-earning assets.................     2,722              2,143                           2,102
                                               ---------          ---------                       ---------
       Total assets...........................  $118,273           $118,695                        $120,520
                                               =========          =========                       =========

INTEREST-BEARING LIABILITIES:

  Deposits....................................  $ 83,150   1.74   $  84,950     1,919      2.26   $  88,178     2,898      3.29
  FHLB advances...............................     2,000   1.75         175         3      1.71         123         2      1.63
                                                --------   ----    --------     -----     -----   ---------     -----      ----
       Total interest-bearing liabilities.....    85,150   1.74      85,125     1,922      2.26      88,301     2,900      3.28
                                                           ----                 -----      ----                 -----      ----
  Non-interest-bearing liabilities............     6,201              6,790                           4,431
                                               ---------          ---------                       ---------
       Total liabilities......................    91,351             91,915                          92,732
  Total equity(3).............................    26,922             26,780                          27,788
                                                --------           --------                        --------
       Total liabilities and equity...........  $118,273           $118,695                        $120,520
                                                 =======            =======                         =======
  Net interest-earning assets.................  $ 30,401           $ 31,427                        $ 30,117
                                                ========           ========                        ========
  Net interest income.........................                                 $3,825                          $3,940
                                                                               ======                          ======
  Interest rate spread........................             2.94%                           2.67%                           2.50%
                                                           ====                            ====                            ====
  Net interest margin.........................                                             3.20%                           3.33%
                                                                                           ====                            ====
  Average interest-earning assets to average
   interest bearing liabilities...............                                           136.92%                         134.11%
                                                                                         ======                          ======
</TABLE>
----------------------

(1) Includes nonaccruing loans. Interest income on loans receivable includes
amortized loan fees.
(2) Includes interest-bearing demand deposits and other
interest-bearing deposits.
(3) Includes accumulated other comprehensive income.

                                       7
<PAGE>

                                PFS BANCORP, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================


RATE/VOLUME ANALYSIS

         The following table shows the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities affected PFS
Bancorp's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), and (ii) changes in rate (change in
rate multiplied by prior year volume). The combined effect of changes in both
rate and volume has been allocated proportionately to the change due to rate and
the change due to volume.
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31, 2003
                                                                        VS DECEMBER 31, 2002
                                                    -----------------------------------------------------
                                                       INCREASE (DECREASE) DUE TO
                                                    -------------------------------        TOTAL INCREASE
                                                     YIELD/RATE         VOLUME                (DECREASE)
                                                    ------------     --------------         -------------
                                                                     (In Thousands)
<S>                                                  <C>                 <C>                 <C>
  INTEREST-EARNING ASSETS:
  Loans receivable, net............................. $(1,043)            $  66               $  (977)
  Investment securities.............................     (49)               42                    (7)
  Deposits in other financial institutions..........     (49)              (60)                 (109)
                                                      ------              ----                ------
         Total......................................  (1,141)               48                (1,093)

INTEREST-BEARING LIABILITIES:

  Deposits..........................................    (877)             (102)                 (979)
  Borrowings........................................      -                  1                     1
                                                      ------              ----                ------
         Total......................................    (877)             (101)                 (978)
                                                      ------              ----                ------
  Increase (decrease) in net interest income........ $  (264)            $ 149               $  (115)
                                                      ======              ====                ======
</TABLE>
                                       8

<PAGE>

                                PFS BANCORP, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================


CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 2002 TO DECEMBER 31, 2003

         Total assets amounted to $118.3 million at December 31, 2003, a
decrease of $763,000, or .6%, compared to December 31, 2002. The decrease in
assets consisted primarily of a $5.1 million decrease in investment securities,
which was partially offset by a $4.6 million increase in loans receivable.

         Investment securities totaled $10.2 million at December 31, 2003, a
decrease of $5.1 million, or 33.6%, from December 31, 2002 levels. The decrease
resulted primarily from maturities and sales of $31.9 million and $3.0 million
respectively, which were partially offset by purchases totaling $30.0 million
during the year. The average yield on investment securities was 3.05% for 2003.

         Loans receivable increased by $4.6 million, or 4.8%, during the year
ended December 31, 2003, to a total of $100.3 million. Loan disbursements
amounted to $40.1 million and were partially offset by principal payments of
$35.5 million. During the year ended December 31, 2003, loan originations were
comprised of $25.0 million in loans secured by one- to four-family residential
real estate, $8.4 million in loans secured by commercial and nonresidential real
estate and $6.7 million in consumer and other loans.

         The allowance for loan losses totaled $771,000 and $764,000 at December
31, 2003 and 2002, respectively. Nonperforming and impaired loans totaled $1.5
million and $1.4 million at December 31, 2003 and 2002, respectively. The
allowance for loan losses represented 51.9% and 53.8% of nonperforming and
impaired loans as of December 31, 2003 and 2002, respectively. The allowance
represented approximately .75% and .78% of the total loan portfolio at December
31, 2003 and 2002, respectively. At December 31, 2003, nonperforming and
impaired loans were comprised of $923,000 in loans secured by one- to
four-family residential real estate, $514,000 in loans secured by nonresidential
real estate and $47,000 in commercial, consumer and other loans. Although
management believes that its allowance for loan losses at December 31, 2003, was
sufficient to cover known and inherent losses in the portfolio based upon the
available facts and circumstances, there can be no assurance that additions to
such allowance will not be necessary in future periods, which could adversely
affect the Corporation's results of operations.

         Deposits totaled $88.3 million at December 31, 2003, a decrease of $1.1
million, or 1.2% from December 31, 2002 levels. While management generally
strives to maintain a moderate level of growth in deposits through marketing and
pricing strategies, the current low interest rate environment contributed to the
reduction in deposits as depositors sought alternative investments. Such
decrease was offset by a $1.0 million increase in advances from the Federal Home
Loan Bank.

         Shareholders' equity amounted to $26.9 million at December 31, 2003, a
decrease of $675,000, or 2.4%, from December 31, 2002 levels. The decrease
resulted primarily from the Corporation's $1.3 million repurchase of its common
stock for treasury through a 5% stock repurchase program, which was initiated
and completed during the quarter ended March 31, 2003. The decrease was also
attributable to payment of dividends of $449,000, which was partially offset by
net earnings of $827,000 and an increase of $251,000 attributable to the
amortization effects of a distribution of shares in connection with the
Company's Recognition and Retention Plan and the Employee Stock Ownership Plan.

                                       9
<PAGE>


                                PFS BANCORP, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================


COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

         GENERAL. Net earnings amounted to $827,000 for the year ended December
31, 2003, compared to $853,000 for the year ended December 31, 2002. The
decrease in earnings of $26,000, or 3.0%, was due primarily to a $115,000
decrease in net interest income and a $73,000 increase in general,
administrative and other expense, which were partially offset by a $40,000
decrease in the provision for losses on loans, a $62,000 increase in other
income, and a $60,000 decrease in income taxes.

         NET INTEREST INCOME. Total interest income amounted to $5.7 million for
the year ended December 31, 2003, compared to $6.8 million for the year ended
December 31, 2002. The decrease of $1.1 million, or 16.0%, was primarily due to
a decrease of $977,000, or 15.6%, in interest income on loans, as a result of a
108 basis point decrease in the average yield on loans, which was partially
offset by a $1.0 million, or 1.0%, increase in the average balance of loans
outstanding year to year. The decrease in the average yield, from 6.51% in the
year ended December 31, 2002 to 5.43% in the year ended December 31, 2003
primarily reflects a decrease in market rates.

         Interest expense decreased by $978,000, or 33.7%, to $1.9 million for
the year ended December 31, 2003, compared to $2.9 million for the year ended
December 31, 2002. Such decrease reflects a decline in interest expense on
deposits. Interest expense on deposits decreased by $979,000, or 33.8%, due
primarily to a decrease in the average rate paid from 3.29% for the year ended
December 31, 2002 to 2.26% for the year ended December 31, 2003 and by a $3.2
million, or 3.7%, decrease in the average balance of deposits outstanding year
to year. The decrease in the rate paid reflects a decrease in market rates.
Interest expense on borrowings increased by $1,000, or 50.0%, due primarily to
an increase in the average balance outstanding as the Bank increased its level
of borrowings during 2003.

         As a result of the foregoing changes in interest income and interest
expense, net interest income decreased by $115,000, or 2.9%, to $3.8 million for
the year ended December 31, 2003, compared to $3.9 million for the year ended
December 31, 2002. The interest rate spread increased from 2.50% for the year
ended December 31, 2002 to 2.67% for the year ended December 31, 2003, while the
net interest margin decreased from 3.33% in 2002 to 3.28% in 2003. The average
interest-earning assets to average interest-bearing liabilities increased from
134.11% to 136.92% from year to year.

         PROVISION FOR LOSSES ON LOANS. As a result of an analysis of historical
experience, the volume and type of lending conducted by the Savings Bank, the
status of past due principal and interest payments, general market conditions,
particularly as such conditions relate to the Savings Bank's market area, and
other factors related to the collectibility of the Savings Bank's loan
portfolio, management elected to record a provision for losses on loans totaling
$52,000 for the year ended December 31, 2003 compared to the $92,000 provision
for the year ended December 31, 2002. The current provision was predicated
primarily upon the growth in the loan portfolio, including an increase in loans
secured by both residential and nonresidential real estate during the year, the
level of loan charge-offs during 2003, as well as an increase in nonperforming
loans. There can be no assurance that the loan loss allowance will be sufficient
to cover losses on nonperforming assets in the future.

                                       10
<PAGE>


                                PFS BANCORP, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================

         OTHER INCOME. Other income amounted to $398,000 for the year ended
December 31, 2003, an increase of $62,000, or 18.5%, compared to $336,000 for
the year ended December 31, 2002. The increase was primarily due to an $80,000
increase in other operating income, consisting primarily of service charges on
checking accounts and a $10,000 gain on sale of real estate acquired through
foreclosure, which were offset by a $28,000 loss on sale of investment
securities.

         GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased by $73,000, or 2.7%, to $2.8 million for the year ended
December 31, 2003. Employee compensation and benefits increased by $113,000, or
7.8%, due primarily to a $36,000, or 3.6%, increase in compensation expense and
a $69,000, or 32.5%, increase in expenses of the stock benefit plans.
Specifically, the expense associated with the Employee Stock Ownership Plan
increased by $28,000, due primarily to the increase in the fair value of the
common shares. The expense related to the Recognition and Retention Plan
increased by $41,000, as the 2002 expense reflected only a partial year, from
the date shares under this plan were awarded, while 2003 reflects expense for a
full year. Occupancy and equipment expense increased by $81,000, or 27.1%, due
primarily to an increase in real estate taxes and an increase in depreciation
resulting from the purchase of computer equipment in the second half of 2002.
The provision for losses on real estate acquired through foreclosure increased
by $39,000, or 195.0%, reflecting a decrease in the appraised value of such
property. These increases were partially offset by a decrease in data processing
expense of $134,000, or 36.9%, due to a realization of lower data processing
costs following the data conversion in 2002, and a decrease in other operating
expense of $21,000, or 4.0%, to $502,000 for the year ended December 31, 2003
compared to $523,000 for the year ended December 31, 2002.

         INCOME TAX. The provision for income taxes totaled $564,000 for the
year ended December 31, 2003, a decrease of $60,000, or 9.6%, from the $624,000
recorded for the year ended December 31, 2002. The decrease in income taxes was
due primarily to an $86,000, or 5.8%, decrease in pre-tax earnings. The
Company's effective tax rates were 40.5% and 42.2% for the years ended December
31, 2003 and 2002, respectively.

EXPOSURE TO CHANGES IN INTEREST RATES

         Our ability to maintain net interest income depends upon our ability to
earn a higher yield on assets than the rates we pay on our deposits and
borrowings. Our interest-earning assets consist primarily of long-term
residential mortgage loans which have adjustable rates of interest. Our ability
to maintain a positive spread between the interest earned on assets and the
interest paid on deposits and borrowings can be adversely affected when market
rates of interest rise since our adjustable-rate loans typically do not adjust
as rapidly as our liabilities.

         QUANTITATIVE ANALYSIS. The OTS provides a quarterly report on the
potential impact of interest rate changes upon the market value of portfolio
equity. Management reviews the quarterly reports from the OTS which show the
impact of changing interest rates on net portfolio value. The report is based on
financial data provided by management of Peoples. Net portfolio value is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts.

                                       11
<PAGE>


                                PFS BANCORP, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================


         QUALITATIVE ANALYSIS. Our ability to maintain a positive "spread"
between the interest earned on assets and the interest paid on deposits and
borrowings is affected by changes in interest rates. Our fixed-rate loans help
our profitability if interest rates are stable or declining since these loans
have yields that exceed the cost of funds. At December 31, 2003, $18.2 million,
or 17.7%, of the total loan portfolio consisted of fixed-rate loans. If interest
rates increase, however, we would have to pay more on our deposits and new
borrowings, which would adversely affect our interest rate spread. In order to
counter the potential effects of dramatic increases in market rates of interest,
we have focused primarily on marketing adjustable-rate mortgage loans as well as
shorter term commercial real estate and consumer loans. At December 31, 2003,
$84.3 million, or 82.3% of the total loan portfolio, consisted of
adjustable-rate loans.

         Although the interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, management also regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income and net
portfolio value, which is defined as the net present value of a savings
institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential changes in net
interest income and net portfolio value.

         The following tables present Peoples' net portfolio value as of
December 31, 2003 and 2002.
<TABLE>
<CAPTION>
                                DECEMBER 31, 2003
                               NET PORTFOLIO VALUE
------------------------------------------------------------------------------------------------------
                                                    ESTIMATED
                CHANGE IN                            NPV AS A                         CHANGE AS A
             INTEREST RATES        ESTIMATED        PERCENTAGE          AMOUNT         PERCENTAGE
             (BASIS POINTS)           NPV           OF ASSETS          OF CHANGE        OF ASSETS
             --------------       ----------     ----------------     -----------   ------------------
                             (Dollars in thousands)

                  <S>               <C>                <C>             <C>              <C>
                  +300              $21,223            18.69%          $(3,196)         (203)bp
                  +200               22,864            19.79            (1,555)          (93)bp
                  +100               24,006            20.51              (413)          (21)bp
                     0               24,419            20.72                --               --
                  -100               24,407            20.63               (12)           (9)bp

</TABLE>

<TABLE>
<CAPTION>

                                DECEMBER 31, 2002
                               NET PORTFOLIO VALUE
-------------------------------------------------------------------------------------------------------
                                                     ESTIMATED
                CHANGE IN                             NPV AS A                          CHANGE AS A
             INTEREST RATES        ESTIMATED         PERCENTAGE           AMOUNT         PERCENTAGE
             (BASIS POINTS)          NPV             OF ASSETS          OF CHANGE        OF ASSETS
             --------------       -----------     ----------------    ------------- -------------------
                             (Dollars in thousands)
                  <S>                <C>                <C>             <C>              <C>
                  +300               $21,360            18.80%          $(545)          (13)bp
                  +200                22,001            19.17              96             24bp
                  +100                22,066            19.13             161             20bp
                     0                21,905            18.93              --              --
                  -100                21,821            18.78             (84)          (15)bp


</TABLE>

         Net portfolio values are not provided by the OTS for a decrease of 200
or 300 basis points.

                                       12
<PAGE>


                                PFS BANCORP, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================


LIQUIDITY AND CAPITAL RESOURCES

         Peoples maintains cash and liquid investments in corporate debt
securities, municipal obligations and other securities to meet loan commitments
and other funding needs.

         The following table sets forth information regarding Peoples'
obligations and commitments to make future payments under contract as of
December 31, 2003.
<TABLE>
<CAPTION>

                                                                 PAYMENTS DUE BY PERIOD
                                                  ----------------------------------------------------------------
                                                    LESS                                   MORE
                                                    THAN          1-3          3-5         THAN
                                                   1 YEAR        YEARS        YEARS       5 YEARS      TOTAL
                                                   ------        -----        -----       -------    ---------
                                                                           (In thousands)

<S>                                               <C>          <C>          <C>               <C>    <C>
Contractual obligations:
 Advances from the Federal Home Loan Bank         $  2,000     $     -      $     -           $-     $  2,000
 Certificates of deposit                            37,706       13,414        1,013           -       52,133

Amount of commitments expiration per period
 Commitments to originate loans:
    One- to four-family residential loans              877           -            -            -          877
    Non-residential real estate loans                2,352           -            -            -        2,352
    Undisbursed loans in process                     1,361           -            -            -        1,361
    Home equity/commercial lines of credit           5,431           -            -            -        5,431
    Letters of credit                                   12           -            -            -           12
                                                   -------      -------      -------           --     -------
         Total contractual obligations            $ 49,739     $ 13,414     $  1,013          $-     $ 64,166
                                                    ======       ======        =====           ==      ======
</TABLE>

         Peoples anticipates that it will have sufficient funds available to
meet its current loan commitments. Based upon historical deposit flow data,
Peoples' competitive pricing in its market and management's experience,
management believes that a significant portion of maturing certificates of
deposit will remain with Peoples.

         Liquidity management is both a daily and long-term function of Peoples'
management strategy. In the event that Peoples should require funds beyond its
ability to generate them internally, additional funds are available through the
use of FHLB advances, and also may be available through sales of securities,
although no sales of securities are planned.

         Peoples is required to maintain regulatory capital sufficient to meet
tangible, core and risk-based capital ratios of at least 1.5%, 4.0% and 8.0%,
respectively. At December 31, 2003, Peoples exceeded each of its capital
requirements, with tangible, core and risk-based capital ratios of 18.2%, 18.2%
and 31.2%, respectively.

IMPACT OF INFLATION AND CHANGING PRICES

         The consolidated financial statements and related financial data
presented herein regarding PFS Bancorp have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
generally require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in relative purchasing
power over time due to inflation. Unlike most industrial companies, virtually
all of PFS Bancorp's assets and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact on PFS Bancorp's
performance than does the effect of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services, since such prices are affected by inflation to a larger extent than
interest rates.

                                       13
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
PFS Bancorp, Inc.

We have audited the accompanying consolidated statements of financial condition
of PFS Bancorp, Inc. as of December 31, 2003 and 2002, and the related
consolidated statements of earnings, comprehensive income, shareholders' equity
and cash flows for each of the years ended December 31, 2003 and 2002. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PFS Bancorp, Inc.
as of December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the years ended December 31, 2003 and 2002, in conformity with
accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP
----------------------
Cincinnati, Ohio
March 3, 2004

                                       14
<PAGE>





                                PFS BANCORP, INC.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                           December 31, 2003 and 2002
                        (In thousands, except share data)
<TABLE>
<CAPTION>

         ASSETS                                                                        2003               2002
                                                                                     --------           --------
<S>                                                                                  <C>                <C>
Cash and due from banks                                                              $    855           $    819
Interest-bearing deposits in other financial institutions                               4,332              4,406
                                                                                     --------           --------
         Cash and cash equivalents                                                      5,187              5,225

Investment securities designated as available for sale -
  at market                                                                            10,016             15,142
Investment securities held to maturity - at amortized cost, which
  approximates market                                                                     152                161
Loans receivable - net                                                                100,293             95,702
Office premises and equipment - at depreciated cost                                     1,065              1,170
Real estate acquired through foreclosure                                                  169                228
Federal Home Loan Bank stock - at cost                                                    758                730
Accrued interest receivable                                                               395                446
Prepaid expenses and other assets                                                         126                176
Prepaid income taxes                                                                       20                 -
Deferred income taxes                                                                      92                 56
                                                                                     --------           --------
         Total assets                                                                $118,273           $119,036
                                                                                     ========           ========


         LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits                                                                             $ 88,328           $ 89,420
Advances from the Federal Home Loan Bank                                                2,000              1,000
Advances by borrowers for taxes and insurance                                              63                 80
Accrued interest payable                                                                   12                 26
Other liabilities                                                                         948                883
Accrued income taxes                                                                       -                  30
                                                                                     --------           --------
         Total liabilities                                                             91,351             91,439

Commitments                                                                                -                  -

Shareholders' equity
  Preferred stock, 5,000,000 shares authorized, $.01 par value;
    no shares issued                                                                       -                  -
  Common stock - 10,000,000 shares authorized, $.01 par value;
    1,551,293 shares issued                                                                16                 16
  Additional paid-in capital                                                           15,029             14,971
  Retained earnings - restricted                                                       14,101             13,723
  Less 77,565 shares of treasury stock - at cost                                       (1,282)                -
  Shares acquired by stock benefit plans                                               (1,801)            (1,994)
  Accumulated other comprehensive income - unrealized gains on
    securities designated as available for sale, net of related tax effects               859                881
                                                                                     --------           --------
         Total shareholders' equity                                                    26,922             27,597
                                                                                     --------           --------

         Total liabilities and shareholders' equity                                  $118,273           $119,036
                                                                                     ========           ========
</TABLE>

The accompanying notes are an integral part of these statements.

                                       15

<PAGE>


                                PFS BANCORP, INC.

                       CONSOLIDATED STATEMENTS OF EARNINGS

                 For the years ended December 31, 2003 and 2002
                        (In thousands, except share data)
<TABLE>
<CAPTION>

                                                                                       2003               2002
                                                                                     --------           --------
<S>                                                                                  <C>                <C>
Interest income

  Loans                                                                              $  5,269           $  6,246
  Investment securities                                                                   402                409
  Interest-bearing deposits and other                                                      76                185
                                                                                      -------             ------
         Total interest income                                                          5,747              6,840

Interest expense

  Deposits                                                                              1,919              2,898
  Borrowings                                                                                3                  2
                                                                                     --------           --------
         Total interest expense                                                         1,922              2,900
                                                                                        -----           --------

         Net interest income                                                            3,825              3,940

Provision for losses on loans                                                              52                 92
                                                                                     --------           --------

         Net interest income after provision for losses on loans                        3,773              3,848

Other income

  Gain on sale of real estate acquired through foreclosure                                 10                  -
  Loss on sale of investment securities                                                   (28)                 -
  Other operating                                                                         416                336
                                                                                     --------           --------
         Total other income                                                               398                336

General, administrative and other expense
  Employee compensation and benefits                                                    1,559              1,446
  Occupancy and equipment                                                                 380                299
  Data processing                                                                         229                363
  Federal deposit insurance premiums                                                       51                 56
  Provision for losses on real estate acquired through
    foreclosure                                                                            59                 20
  Other operating                                                                         502                523
                                                                                     --------           --------
         Total general, administrative and other expense                                2,780              2,707
                                                                                     --------           -------
         Earnings before income taxes                                                   1,391              1,477

Income taxes
  Current                                                                                 528                798
  Deferred                                                                                 36               (174)
                                                                                     --------           --------
         Total income taxes                                                               564                624
                                                                                     --------           --------
         NET EARNINGS                                                                $    827           $    853
                                                                                     ========           ========
         EARNINGS PER SHARE
           Basic                                                                     $    .60           $    .59
                                                                                          ===                ===
           Diluted                                                                   $    .60           $    .59
                                                                                          ===                ===
</TABLE>
The accompanying notes are an integral part of these statements.

                                       16
<PAGE>


                                PFS BANCORP, INC.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                 For the years ended December 31, 2003 and 2002
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                       2003               2002
                                                                                     --------           --------

<S>                                                                                      <C>                <C>
Net earnings                                                                             $827               $853

Other comprehensive income (loss), net of tax:
  Unrealized holding losses on securities during
    the year, net of tax benefits of $21 for the year
    ended December 31, 2003                                                               (40)                (1)

  Reclassification adjustment for realized losses included
    in earnings, net of tax benefits of $10 in 2003                                        18                  -
                                                                                         ----                 --
Comprehensive income                                                                     $805               $852
                                                                                          ===                ===

Accumulated comprehensive income                                                         $859               $881
                                                                                          ===                ===
</TABLE>

The accompanying notes are an integral part of these statements.

                                       17


<PAGE>


                                PFS BANCORP, INC.

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                 For the years ended December 31, 2003 and 2002
                        (In thousands, except share data)
<TABLE>
<CAPTION>
                                                                                               SHARES    UNREALIZED
                                                                                              ACQUIRED  GAINS (LOSSES)
                                                                                                BY     ON SECURITIES
                                                               ADDITIONAL                      STOCK    DESIGNATED AS
                                                        COMMON  PAID-IN   RETAINED  TREASURY  BENEFIT  SHARES AVAILABLE
                                                        STOCK   CAPITAL   EARNINGS   SHARES    PLANS      FOR SALE         TOTAL
                                                       -------- --------  --------  -------- -------- -----------------   -------

<S>                <C>                                   <C>   <C>        <C>         <C>       <C>            <C>         <C>
Balance at January 1, 2002                               $16   $14,931    $13,102     $    -    $(1,095)       $882        $27,836

Amortization of expense related to stock benefit plan      -        40          -          -        122           -            162
Purchase of shares for stock benefit plan                  -         -          -          -     (1,021)          -         (1,021)
Net earnings for the year ended December 31, 2002          -         -        853          -          -           -            853
Cash dividends of $.15 per share                           -         -       (232)         -          -           -           (232)
Unrealized losses on securities designated as available
  for sale, net of related tax effects                     -         -          -          -          -          (1)            (1)
                                                          --   -------    -------      ------    -------       -----        -------

Balance at December 31, 2002                              16    14,971     13,723           -     (1,994)       881         27,597

Amortization of expense related to stock benefit plan      -        58          -           -        193          -            251
Purchase of treasury shares                                -         -          -      (1,282)         -          -         (1,282)
Net earnings for the year ended December 31, 2003          -         -        827           -          -          -            827
Cash dividends of $.30 per share                           -         -       (449)          -          -          -           (449)
Unrealized losses on securities designated as available
  for sale, net of related tax effects                     -         -          -           -          -        (22)           (22)
                                                          --   -------    -------      ------     ------        ----        -------

Balance at December 31, 2003                             $16   $15,029    $14,101     $(1,282)   $(1,801)       $859       $26,922
                                                          ==    ======     ======      ======     ======         ===        ======

</TABLE>
The accompanying notes are an integral part of these statements.

                                       18
<PAGE>



                                PFS BANCORP, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 For the years ended December 31, 2003 and 2002
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                       2003               2002
                                                                                     --------           --------
<S>                                                                                  <C>                <C>
Cash flows from operating activities:
  Net earnings for the year                                                          $    827           $    853
  Adjustments to reconcile net earnings to net cash
  provided by (used in) operating activities:
    Amortization of premium on investment securities                                       80                 70
    Amortization of deferred loan origination fees                                        (61)               (74)
    Amortization expense of stock benefit plan                                            251                162
    Gain on sale of real estate acquired through foreclosure                              (10)                 -
    Dividends on Federal Home Loan Bank stock                                             (28)                 -
    Loss on sale of investment securities                                                  28                  -
    Depreciation                                                                          189                137
    Provision for losses on loans                                                          52                 92
    Provision for losses on real estate acquired through foreclosure                       59                 20
    Deferred compensation liability                                                        52                 48
    Increase (decrease) in cash due to changes in:
      Accrued interest receivable                                                          51                (49)
      Prepaid expenses and other assets                                                    50               (144)
      Other liabilities                                                                    13                 83
      Accrued interest payable                                                            (14)                (9)
      Income taxes
        Current                                                                           (50)               229
        Deferred                                                                          (25)              (174)
                                                                                     --------           --------
         Net cash provided by operating activities                                      1,464              1,244

Cash flows provided by (used in) investing activities:

  Proceeds from maturities of investment securities                                    31,937             17,350
  Proceeds from sale of investment securities                                           3,001                  -
  Principal repayments on investment securities                                             9                  8
  Purchase of investment securities designated as available for sale                  (29,953)           (26,610)
  Loan principal repayments                                                            35,516             29,639
  Loan disbursements                                                                  (40,145)           (28,816)
  Purchase of office premises and equipment                                               (84)              (238)
  Proceeds from sale of real estate acquired through foreclosure                           57                 82
  Purchase of Federal Home Loan Bank stock                                                 -                 (31)
                                                                                     --------           --------
         Net cash provided by (used in) investing activities                              338             (8,616)

Cash flows provided by (used in) financing activities:

  Net decrease in deposits                                                             (1,092)            (1,009)
  Proceeds from Federal Home Loan Bank advances                                         4,500              1,000
  Repayment of Federal Home Loan Bank advances                                         (3,500)                 -
  Advances by borrowers for taxes and insurance                                           (17)                 5
  Dividends paid on common stock                                                         (449)              (232)
  Purchase of treasury shares                                                          (1,282)                 -
  Shares acquired by stock benefit plans                                                    -             (1,021)
                                                                                     --------           --------
         Net cash used in financing activities                                         (1,840)            (1,257)
                                                                                     --------           --------

Net decrease in cash and cash equivalents                                                 (38)            (8,629)

Cash and cash equivalents at beginning of year                                          5,225             13,854
                                                                                     ---------          --------

Cash and cash equivalents at end of year                                             $  5,187           $  5,225
                                                                                     ========           ========

</TABLE>



                                       19
<PAGE>

                                PFS BANCORP, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                 For the years ended December 31, 2003 and 2002
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                         2003                  2002
                                                                       --------              --------

<S>                                                                    <C>                   <C>

Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Income taxes                                                       $   697               $   553
                                                                       =======               =======

    Interest on deposits and borrowings                                $ 1,936               $ 2,909
                                                                       -------               -------

Supplemental disclosure of noncash investing activities:
  Unrealized losses on securities designated as available
    for sale, net of related tax effects                               $   (40)              $    (1)
                                                                       -------               -------

  Transfers from loans to real estate acquired through
    foreclosure                                                        $    47               $   259
                                                                       =======               =======

</TABLE>


The accompanying notes are an integral part of these statements.

                                       20
<PAGE>


                                PFS BANCORP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES

    In May 2001, the Board of Directors of Peoples Federal Savings Bank
    ("Peoples" or the "Savings Bank") adopted an overall plan of conversion and
    reorganization (the "Plan") whereby the Savings Bank would convert to the
    stock form of ownership, followed by the issuance of all the Savings Bank's
    outstanding stock to a newly formed holding company, PFS Bancorp, Inc. (the
    "Corporation"). The conversion to the stock form of ownership was completed
    in October 2001, culminating in the Corporation's issuance of 1,551,293
    common shares.

    The Savings Bank conducts a general banking business in southeastern Indiana
    which primarily consists of attracting deposits from the general public and
    applying those funds to the origination of loans for residential, consumer,
    and nonresidential purposes. Peoples' profitability is significantly
    dependent on its net interest income, which is the difference between
    interest income generated from interest-earning assets (i.e. loans and
    investments) and the interest expense paid on interest-bearing liabilities
    (i.e. deposits and borrowed funds). Net interest income is affected by the
    relative amount of interest-earning assets and interest-bearing liabilities
    and the interest received or paid on these balances. The level of interest
    rates paid or received by Peoples can be significantly influenced by a
    number of environmental factors, such as governmental monetary policy, that
    are outside of management's control.

    The financial information presented herein has been prepared in accordance
    with accounting principles generally accepted in the United States of
    America ("U.S. GAAP") and general accounting practices within the financial
    services industry. In preparing financial statements in accordance with U.S.
    GAAP, management is required to make estimates and assumptions that affect
    the reported amounts of assets and liabilities and the disclosure of
    contingent assets and liabilities at the date of the financial statements
    and revenues and expenses during the reporting period. Actual results could
    differ from such estimates.

    The following is a summary of significant accounting policies which have
    been consistently applied in the preparation of the accompanying
    consolidated financial statements.

    1.  Principles of Consolidation
        ---------------------------

    The consolidated financial statements include the accounts of the
    Corporation and its subsidiary, Peoples. All significant intercompany
    balances and transactions have been eliminated.

    2.  Investment Securities
        ---------------------

    The Corporation accounts for investment securities in accordance with
    Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
    Certain Investments in Debt and Equity Securities." SFAS No. 115 requires
    that investments in debt and equity securities be categorized as
    held-to-maturity, trading, or available for sale. Securities classified as
    held-to-maturity are to be carried at cost only if the Corporation has the
    positive intent and ability to hold these securities to maturity. Securities
    designated as available for sale are carried at fair value with resulting
    unrealized gains or losses recorded to shareholders' equity.

    Realized gains and losses on sales of securities are recognized using the
    specific identification method.


                                       21

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    3.  Loans Receivable
        ----------------

    Loans receivable are stated at the principal amount outstanding, adjusted
    for deferred loan origination fees and the allowance for loan losses.
    Interest is accrued as earned unless the collectibility of the loan is in
    doubt. Interest on loans that are contractually past due is charged off, or
    an allowance is established based on management's periodic evaluation. The
    allowance is established by a charge to interest income equal to all
    interest previously accrued, and income is subsequently recognized only to
    the extent that cash payments are received until, in management's judgment,
    the borrower's ability to make periodic interest and principal payments has
    returned to normal, in which case the loan is returned to accrual status.
    If the ultimate collectibility of the loan is in doubt, in whole or in
    part, all payments received on nonaccrual loans are applied to reduce
    principal until such doubt is eliminated.

    4.  Loan Origination Fees
        ---------------------

    The Savings Bank accounts for loan origination fees in accordance with SFAS
    No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
    Originating or Acquiring Loans and Initial Direct Costs of Leases." Pursuant
    to the provisions of SFAS No. 91, origination fees received from loans, net
    of direct origination costs, are deferred and amortized to interest income
    using the level-yield method, giving effect to actual loan prepayments.
    Additionally, SFAS No. 91 generally limits the definition of loan
    origination costs to the direct costs attributable to originating a loan,
    i.e., principally actual personnel costs. Fees received for loan commitments
    that are expected to be drawn upon, based on the Savings Bank's experience
    with similar commitments, are deferred and amortized over the life of the
    related loan using the interest method.

    5.  Allowance for Loan Losses
        -------------------------

    It is the Savings Bank's policy to provide valuation allowances for
    estimated losses on loans based on past loss experience, trends in the level
    of delinquent and problem loans, adverse situations that may affect the
    borrower's ability to repay, the estimated value of any underlying
    collateral and current and anticipated economic conditions in the primary
    lending area. When the collection of a loan becomes doubtful, or otherwise
    troubled, the Savings Bank records a charge-off equal to the difference
    between the fair value of the property securing the loan and the loan's
    carrying value. Major loans and major lending areas are reviewed
    periodically to determine potential problems at an early date. The allowance
    for loan losses is increased by charges to earnings and decreased by
    charge-offs (net of recoveries).

    The Savings Bank accounts for impaired loans in accordance with SFAS No.
    114, "Accounting by Creditors for Impairment of a Loan," which requires that
    impaired loans be measured based upon the present value of expected future
    cash flows discounted at the loan's effective interest rate or, as an
    alternative, at the loan's observable market price or fair value of the
    collateral. The Savings Bank's current procedures for evaluating impaired
    loans result in carrying such loans at the lower of cost or fair value.


                                       22

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    5. Allowance for Loan Losses (continued)
       -------------------------

    A loan is defined under SFAS No. 114 as impaired when, based on current
    information and events, it is probable that a creditor will be unable to
    collect all amounts due according to the contractual terms of the loan
    agreement. In applying the provisions of SFAS No. 114, the Savings Bank
    considers its investment in one- to four-family residential loans and
    consumer installment loans to be homogeneous and therefore excluded from
    separate identification for evaluation of impairment. With respect to the
    Savings Bank's investment in multi-family and nonresidential loans, and its
    evaluation of impairment thereof, such loans are collateral dependent, and
    as a result, are carried as a practical expedient at the lower of cost or
    fair value.

    It is the Savings Bank's policy to charge off unsecured credits that are
    more than ninety days delinquent. Similarly, collateral dependent loans
    which are more than ninety days delinquent are considered to constitute more
    than a minimum delay in repayment and are evaluated for impairment under
    SFAS No. 114 at that time.

    The Savings Bank's impaired loan information was as follows at December 31:

                                                          2003           2002
                                                          ----           ----
                                                             (In thousands)

    Impaired loans with related allowance                 $ --           $ --
    Impaired loans with no related allowance               514            519
                                                          ----           ----

          Total impaired loans                            $514           $519
                                                          ====           ====

    Average balance of impaired loans                     $517           $521
    Interest income recognized on impaired loans          $ 25           $ 27

    6.  Office Premises and Equipment
        -----------------------------

    Office premises and equipment are carried at cost and include expenditures
    which extend the useful lives of existing assets. Maintenance, repairs and
    minor renewals are expensed as incurred. For financial reporting,
    depreciation and amortization are provided primarily using the straight-line
    and declining balance methods over the useful lives of the assets, generally
    estimated to be thirty years for the building and building improvements and
    five to seven years for furniture and equipment. An accelerated depreciation
    method is used for tax reporting purposes.


                                       23

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    7.  Real Estate Acquired through Foreclosure
        ----------------------------------------

    Real estate acquired through foreclosure is carried at the lower of the
    loan's unpaid principal balance (cost) or fair value less estimated selling
    expenses at the date of acquisition. Real estate loss provisions are
    recorded if the properties' fair value subsequently declines below the value
    determined at the recording date. In determining the lower of cost or fair
    value at acquisition, costs relating to development and improvement of
    property are capitalized. Costs relating to holding real estate acquired
    through foreclosure, net of rental income, are charged against earnings as
    incurred.

    8.  Income Taxes
        ------------

    The Corporation accounts for income taxes in accordance with the provisions
    of SFAS No. 109, "Accounting for Income Taxes." Pursuant to the provisions
    of SFAS No. 109, a deferred tax liability or deferred tax asset is computed
    by applying the current statutory tax rates to net taxable or deductible
    differences between the tax basis of an asset or liability and its reported
    amount in the financial statements that will result in taxable or deductible
    amounts in future periods. Deferred tax assets are recorded only to the
    extent that the amount of net deductible temporary differences or
    carryforward attributes may be utilized against current period earnings,
    carried back against prior years earnings, offset against taxable temporary
    differences reversing in future periods, or utilized to the extent of
    management's estimate of future taxable income. A valuation allowance is
    provided for deferred tax assets to the extent that the value of net
    deductible temporary differences and carryforward attributes exceeds
    management's estimates of taxes payable on future taxable income. Deferred
    tax liabilities are provided on the total amount of net temporary
    differences taxable in the future.

    The Corporation's principal temporary differences between pretax financial
    income and taxable income result primarily from the different methods of
    accounting for deferred loan origination fees and costs, deferred
    compensation, charitable contributions carryforwards and the general loan
    loss allowance. Additionally, a temporary difference is recognized for
    depreciation utilizing accelerated methods for federal income tax purposes.

    9.  Benefit Plans
        -------------

    The Corporation has an Employee Stock Ownership Plan ("ESOP") that provides
    retirement benefits for substantially all employees who have completed one
    year of service and have attained the age of 21. The Corporation accounts
    for the ESOP in accordance with Statement of Position ("SOP") 93-6,
    "Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6
    requires that compensation expense recorded by employers equal the fair
    value of ESOP shares allocated to participants during a given year. Expense
    related to the ESOP totaled approximately $210,000 and $182,000 for the
    years ended December 31, 2003 and 2002, respectively.

                                       24

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    9. Benefit Plans (continued)
       -------------

    The Corporation also has a Recognition and Retention Plan ("RRP").
    Subsequent to the offering of common shares by the Corporation, the RRP
    purchased 60,835 shares of the Corporation's common stock in the open
    market. During 2002, 21,294 shares were awarded to members of the Board of
    Directors and certain members of management. Common stock awarded under the
    RRP vests ratably over a five year period, commencing with the date of the
    award. A provision of $71,000 and $30,000 related to the RRP was charged to
    operations for the years ended December 31, 2003 and 2002, respectively.

    The Savings Bank funds its defined benefit pension plan through
    participation in the Pentegra Defined Benefit Plan (the "Plan"). The Savings
    Bank is required to fund pension costs accrued. Contributions to the Plan
    were not required during the year ended December 31, 2002, due to the Plan's
    overfunded status. The Savings Bank made a $6,000 contribution in 2003 due
    to the Plan's funding requirements. The provision for pension expense is
    computed by the Plan's actuaries utilizing the projected unit credit cost
    method and assuming a 7.5% return on Plan assets. The Savings Bank is not
    required to disclose separate actuarial information due to the Plan's
    classification as a multi-employer pension plan.

    The Savings Bank has a 401(k) savings plan for its employees. All employees
    are eligible and receive matching contributions from the Savings Bank at a
    predetermined rate. Expense recognized in connection with the 401(k) savings
    plan totaled approximately $11,000 and $9,000 for the years ended December
    31, 2003 and 2002, respectively.

    The Savings Bank has a nonqualified Executive Officers and Directors
    Deferred Compensation Plan (the "Compensation Plan"), which provides for the
    payment of benefits to its directors and certain officers upon termination
    of service with the Savings Bank, with full vesting in the Compensation Plan
    after ten years of service. The deferred compensation unfunded liability
    reflects the current value of the plan obligation based on a present value
    of providing a sum certain of $17,800 per year to each participant for ten
    years after retirement. The present value was determined using an interest
    rate of 7.5% and the relative time to retirement for each participant. The
    Savings Bank recorded expense totaling $52,000 and $48,000 for the
    Compensation Plan during the years ended December 31, 2003 and 2002,
    respectively.

    10.  Stock Option Plan
         -----------------

    In April 2002, the Board of Directors adopted the PFS Bancorp, Inc. 2002
    Stock Option Plan (the "Plan") that provides for the issuance of 152,088
    shares of authorized, but unissued shares of common stock at fair value at
    the date of grant. No options were granted in 2002. Stock options were
    granted in June 2003 for 62,228 shares at an exercise price equal to fair
    value of $16.85. The Plan provides that one-fifth of the options granted
    become exercisable on each of the first five anniversaries of the date of
    grant and each option has an exercise period of ten years from the
    exercisable date.


                                       25

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    10. Stock Option Plan (continued)
        -----------------

    The Corporation accounts for the Plan in accordance with SFAS No. 123,
    "Accounting for Stock-Based Compensation," which contains a fair value-based
    method for valuing stock-based compensation that entities may use, which
    measures compensation cost at the grant date based on the fair value of the
    award. Compensation is then recognized over the service period, which is
    usually the vesting period. Alternatively, SFAS No. 123 permits entities to
    continue to account for stock options and similar equity instruments under
    Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
    Issued to Employees." Entities that continue to account for stock options
    using APB Opinion No. 25 are required to make pro forma disclosures of net
    earnings and earnings per share, as if the fair value-based method of
    accounting defined in SFAS No. 123 had been applied.

    The Corporation applies APB Opinion No. 25 and related Interpretations in
    accounting for the Plan. Accordingly, no compensation cost had been
    recognized for the Plan. Had compensation cost for the Plan been determined
    based on the fair value at the grant date for awards under the Plan
    consistent with the accounting method utilized in SFAS No. 123, the
    Corporation's net earnings and earnings per share would have been reported
    as the pro forma amounts indicated below:

<TABLE>
<CAPTION>


                                                                                                    YEAR ENDED
                                                                                                 DECEMBER 31, 2003
                                                                                                 -----------------
<S>                                                                                                    <C>

         Net earnings (In thousands)                        As reported                                $ 827
                                   Stock-based compensation, net of tax                                  (14)
                                                                                                       -----

                                                              Pro-forma                                $ 813
                                                                                                       =====

         Earnings per share
         Basic                                              As reported                                $ .60
                                   Stock-based compensation, net of tax                                 (.02)
                                                                                                       -----

                                                              Pro-forma                                $ .58
                                                                                                       =====

           Diluted                                          As reported                                $ .60
                                   Stock-based compensation, net of tax                                 (.02)
                                                                                                       -----

                                                              Pro-forma                                $ .58
                                                                                                       =====

</TABLE>


The fair value of each option grant is estimated on the date of grant using the
modified Black-Scholes options-pricing model with the following assumptions used
for grants during 2003: dividend yield of 1.7%; expected volatility of 15.8%; a
risk-free interest rate of 3.4%; and an expected life of ten years for all
grants.


                                       26

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    10. Stock Option Plan (continued)
        -----------------

    A summary of the status of the Plan as of and for the year ended December
    31, 2003 is presented below:

                                                                    WEIGHTED-
                                                                     AVERAGE
                                                                    EXERCISE
                                                        SHARES       PRICE
                                                        ------      --------

    Outstanding at beginning of year                        --      $    --
    Granted                                             62,228        16.85
    Exercised                                               --           --
    Forfeited                                               --           --
                                                        ------      -------
    Outstanding at end of year                          62,228      $ 16.85
                                                        ======      =======

    Options exercisable at year-end                         --      $    --
                                                        ======      =======

    Weighted-average fair value of options granted
      during the year                                               $  3.82
                                                                    =======

    The following information applies to options outstanding at December 31,
    2003:

    Number outstanding                                               62,228
    Range of exercise prices                                        $ 16.85
    Weighted-average exercise price                                 $ 16.85
    Weighted-average remaining contractual life                   9.5 years

    11.  Cash and Cash Equivalents
         -------------------------

    For purposes of reporting cash flows, cash and cash equivalents include cash
    and due from banks and interest-bearing deposits in other financial
    institutions with original terms to maturity of less than ninety days.

    12.  Fair Value of Financial Instruments
         -----------------------------------

    SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
    requires disclosure of the fair value of financial instruments, both assets
    and liabilities, whether or not recognized in the statements of financial
    condition, for which it is practicable to estimate that value. In cases
    where quoted market prices are not available, fair values are based on
    estimates using present value or other valuation techniques. Those
    techniques are significantly affected by the assumptions used, including the
    discount rate and estimates of future cash flows. In that regard, the
    derived fair value estimates cannot be substantiated by comparison to
    independent markets and, in many cases, could not be realized in immediate
    settlement of the instrument. SFAS No. 107 excludes certain financial
    instruments and all non-financial instruments from the disclosure
    requirements. Accordingly, the aggregate fair value amounts presented do not
    represent the underlying value of the Corporation.


                                       27

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    12. Fair Value of Financial Instruments (continued)
        -----------------------------------

    The following methods and assumptions were used by the Corporation in
    estimating its fair value disclosures for financial instruments. The use of
    different market assumptions and/or estimation methodologies may have a
    material effect on the estimated fair value amounts.

                  Cash and cash equivalents: The carrying amounts presented in
                  the consolidated statements of financial condition for cash
                  and cash equivalents are deemed to approximate fair value.

                  Investment securities: Fair values for investment securities
                  are based on quoted market prices and dealer quotes.

                  Loans receivable: The loan portfolio has been segregated into
                  categories with similar characteristics, such as one- to
                  four-family residential, multi-family residential and
                  nonresidential real estate. These categories were further
                  delineated into fixed-rate and adjustable-rate loans. The fair
                  values for the resultant categories were computed via
                  discounted cash flow analysis, using current interest rates
                  offered for loans with similar terms to borrowers of similar
                  credit quality. For loans on deposit accounts, and consumer
                  and other loans, fair values were deemed to equal the historic
                  carrying values.

                  Federal Home Loan Bank stock: The carrying amount presented in
                  the consolidated statements of financial condition is deemed
                  to approximate fair value.

                  Deposits: The fair values of deposits with no stated maturity,
                  such as NOW accounts, passbook accounts and money market
                  passbook accounts are deemed to approximate the amount payable
                  on demand as of December 31, 2003 and 2002. The fair values
                  for fixed-rate certificates of deposit are based on the
                  discounted value of contractual cash flows. The discount rate
                  is estimated using the rates currently offered for deposits of
                  similar remaining maturities.

                  Advances from the Federal Home Loan Bank: The fair value of
                  these advances is estimated using the rates currently offered
                  for similar advances of similar remaining maturities or, when
                  available, quoted market prices.

                  Advances by borrowers for taxes and insurance: The carrying
                  amount of advances by borrowers for taxes and insurance is
                  deemed to approximate fair value.

                  Commitments to extend credit: For fixed-rate and
                  adjustable-rate loan commitments, the fair value estimate
                  considers the difference between current levels of interest
                  rates and committed rates. The difference between the fair
                  value and notional amount of outstanding loan commitments at
                  December 31, 2003 and 2002, was not material.


                                       28

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    12. Fair Value of Financial Instruments (continued)
        -----------------------------------

    Based on the foregoing methods and assumptions, the carrying value and fair
    value of the Corporation's financial instruments are as follows at December
    31:

<TABLE>
<CAPTION>


                                                                                2003                         2002
                                                                       ----------------------      ----------------------
                                                                       CARRYING       FAIR         CARRYING        FAIR
                                                                        VALUE         VALUE         VALUE          VALUE
                                                                       --------      --------      --------      --------
                                                                                          (In thousands)
<S>                                                                    <C>           <C>           <C>           <C>

    Financial assets
      Cash and cash equivalents                                        $  5,187      $  5,187      $  5,225      $  5,225
      Investment securities designated as available for sale             10,016        10,016        15,142        15,142
      Investment securities held to maturity                                152           152           161           161
      Loans receivable - net                                            100,293       101,441        95,702        96,239
      Federal Home Loan Bank stock                                          758           758           730           730
                                                                       --------      --------      --------      --------

                                                                       $116,406      $117,554      $116,960      $117,497
                                                                       ========      ========      ========      ========

    Financial liabilities
           Deposits                                                    $ 88,328      $ 88,876      $ 89,420      $ 90,457
           Advances from the Federal Home Loan Bank                       2,000         2,000         1,000         1,000
           Advances by borrowers for taxes and insurance                     63            63            80            80
                                                                       --------      --------      --------      --------

                                                                       $ 90,391      $ 90,939      $ 90,500      $ 91,537
                                                                       ========      ========      ========      ========

</TABLE>

    13.  Advertising
         -----------

    Advertising costs are expensed when incurred. The Corporation's advertising
    expense totaled $31,000 and $35,000 for the years ended December 31, 2003
    and 2002, respectively.

    14.  Earnings Per Share
         ------------------

    Basic earnings per share is computed based upon the weighted-average common
    shares outstanding during the period, less shares in the ESOP that are
    unallocated and not committed to be released. Weighted-average common shares
    deemed outstanding gives effect to 86,632 and 97,336 unallocated ESOP shares
    as of December 31, 2003 and 2002, respectively.


                                       29

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    14. Earnings Per Share (continued)
        ------------------

    Diluted earnings per share is computed by taking into consideration common
    shares outstanding and the dilutive effect of additional potential common
    shares issuable under the Company's stock option plan. The computations are
    as follows:

<TABLE>
<CAPTION>

                                                                  FOR THE YEAR ENDED
                                                                     DECEMBER 31,
                                                          ---------------------------------
                                                            2003                     2002
                                                          ---------               ---------

<S>                                                       <C>                     <C>
         Weighted-average common shares
           outstanding (basic)                            1,390,238               1,453,957
         Dilutive effect of assumed exercise
           of stock options                                      37                      --
                                                          ---------               ---------
         Weighted-average common shares
           outstanding (diluted)                          1,390,275               1,453,957
                                                          =========               =========

</TABLE>


    The Corporation had no dilutive or potentially dilutive securities during
    the year ended December 31, 2002.

    15.  Reclassifications
         -----------------

    Certain prior year amounts have been reclassified to conform to the 2003
    financial statement presentation.

    16.  Effects of Recent Accounting Pronouncements
         -------------------------------------------

    In June 2002, the Financial Accounting Standards Board (the "FASB") issued
    Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting
    for Costs Associated with Exit or Disposal Activities." SFAS No. 146
    provides financial accounting and reporting guidance for costs associated
    with exit or disposal activities, including one-time termination benefits,
    contract termination costs other than for a capital lease, and costs to
    consolidate facilities or relocate employees. SFAS No. 146 is effective for
    exit or disposal activities initiated after December 31, 2002. Management
    adopted SFAS No. 146 effective January 1, 2003, as required, without
    material effect on the Corporation's financial condition or results of
    operations.

    In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
    Compensation -Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
    "Accounting for Stock-Based Compensation," to provide alternative methods of
    transition for a voluntary change to the fair value based method of
    accounting for stock-based employee compensation. In addition, SFAS No. 148
    amends the disclosure requirements of SFAS No. 123 to require prominent
    disclosures in both annual and interim financial statements about the method
    of accounting for stock-based employee compensation and the effect of the
    method used on reported results. SFAS No. 148 is effective for fiscal years
    beginning after December 15, 2002. Management adopted SFAS No. 148 effective
    January 1, 2003, as required, without material effect on the Corporation's
    financial position or results of operations.


                                       30

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    16. Effects of Recent Accounting Pronouncements (continued)
        -------------------------------------------

    In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
    "Consolidation of Variable Interest Entities." FIN 46 requires a variable
    interest entity to be consolidated by a company if that company is subject
    to a majority of the risk of loss from the variable interest entity's
    activities or entitled to receive a majority of the entity's residual
    returns, or both. FIN 46 also requires disclosures about variable interest
    entities that a company is not required to consolidate, but in which it has
    a significant variable interest. The consolidation requirements of FIN 46
    apply immediately to variable interest entities created after January 31,
    2003. The consolidation requirements apply to existing entities in the first
    fiscal year or interim period beginning after June 15, 2003. Certain of the
    disclosure requirements apply in all financial statements issued after
    January 31, 2003, regardless of when the variable interest entity was
    established. The Corporation has no variable interest entities. Management
    adopted FIN 46 effective July 1, 2003, without material effect on the
    Corporation's financial position or results of operations.

    In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
    Derivative Instruments and Hedging Activities," which clarifies certain
    implementation issues raised by constituents and amends SFAS No. 133,
    "Accounting for Derivative Instruments and Hedging Activities," to include
    the conclusions reached by the FASB on certain FASB Staff Implementation
    Issues that, while inconsistent with Statement 133's conclusions, were
    considered by the Board to be preferable; amends SFAS No. 133's discussion
    of financial guarantee contracts and the application of the shortcut method
    to an interest-rate swap agreement that includes an embedded option and
    amends other pronouncements.

    The guidance in SFAS No. 149 is effective for new contracts entered into or
    modified after June 30, 2003 and for hedging relationships designated after
    that date. Management adopted SFAS No. 149 effective July 1, 2003, as
    required, without material effect on the Corporation's financial position or
    results of operations.

    In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
    Instruments with Characteristics of both Liabilities and Equity," which
    changes the classification in the statement of financial position of certain
    common financial instruments from either equity or mezzanine presentation to
    liabilities and requires an issuer of those financial statements to
    recognize changes in fair value or redemption amount, as applicable, in
    earnings. SFAS No. 150 requires an issuer to classify certain financial
    instruments as liabilities, including mandatorily redeemable preferred and
    common stocks.

    SFAS No. 150 is effective for financial instruments entered into or modified
    after May 31, 2003 and, with one exception, is effective at the beginning of
    the first interim period beginning after June 15, 2003 (July 1, 2003 as to
    the Corporation). The effect of adopting SFAS No. 150 must be recognized as
    a cumulative effect of an accounting change as of the beginning of the
    period of adoption. Restatement of prior periods is not permitted.
    Management adopted SFAS No. 150 effective July 1, 2003, as required, without
    material effect on the Corporation's financial position or results of
    operations.


                                       31

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE B - INVESTMENT SECURITIES

    The amortized cost, gross unrealized gains, gross unrealized losses and
    estimated fair value of investment securities at December 31, 2003 and 2002,
    are as follows:

<TABLE>
<CAPTION>


                                                                                       2003
                                                               ---------------------------------------------------
                                                                               GROSS         GROSS       ESTIMATED
                                                               AMORTIZED     UNREALIZED    UNREALIZED      FAIR
                                                                 COST          GAINS         LOSSES        VALUE
                                                               ---------     ----------    ----------    ---------
                                                                                  (In thousands)
<S>                                                             <C>           <C>           <C>          <C>

    HELD TO MATURITY:
      Municipal obligations                                     $   152       $    --       $   --       $   152
                                                                =======       =======       ======       =======

    AVAILABLE FOR SALE:
      Corporate debt securities                                 $ 8,194       $   135       $    4       $ 8,325
      U. S. Government agency securities                            500            --           17           483
      FHLMC stock                                                    20         1,188           --         1,208
                                                                -------       -------       ------       -------

         Total investment securities available for sale         $ 8,714       $ 1,323       $   21       $10,016
                                                                =======       =======       ======       =======

</TABLE>


<TABLE>
<CAPTION>


                                                                                       2002
                                                               ---------------------------------------------------
                                                                               GROSS         GROSS       ESTIMATED
                                                               AMORTIZED     UNREALIZED    UNREALIZED      FAIR
                                                                 COST          GAINS         LOSSES        VALUE
                                                               ---------     ----------    ----------    ---------
                                                                                  (In thousands)
<S>                                                             <C>           <C>           <C>          <C>

    HELD TO MATURITY:
      Municipal obligations                                     $   161       $    --       $   --       $   161
                                                                =======       =======       ======       =======

    AVAILABLE FOR SALE:
      Corporate debt securities                                 $12,446       $   124       $   --       $12,570
      U. S. Government agency securities                          1,341             5           --         1,346
      FHLMC stock                                                    20         1,206           --         1,226
                                                                -------       -------       ------       -------

         Total investment securities available for sale         $13,807       $ 1,335       $   --       $15,142
                                                                =======       =======       ======       =======


</TABLE>



                                       32

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE B - INVESTMENT SECURITIES (continued)

    The amortized cost and estimated fair value of corporate debt and U. S.
    Government agency securities, by contractual terms to maturity, are shown
    below at December 31, 2003 and 2002.

<TABLE>
<CAPTION>

                                                                  2003                               2002
                                                       --------------------------        ---------------------------
                                                                        ESTIMATED                          ESTIMATED
                                                       AMORTIZED          FAIR           AMORTIZED           FAIR
                                                         COST             VALUE            COST              VALUE
                                                       ---------        ---------        ---------         ---------
<S>                                                     <C>              <C>              <C>              <C>

    Due within one year                                 $ 5,188          $ 5,219          $ 7,634          $ 7,613
    Due after one through three years                     2,506            2,609            4,291            4,398
    Due after three through five years                      500              497            1,862            1,905
    Due after five through ten years                        250              240               --               --
    Due after ten through fifteen years                     250              243               --               --
                                                        -------          -------          -------          -------
                                                        $ 8,694          $ 8,808          $13,787          $13,916
                                                        =======          =======          =======          =======

</TABLE>


    Municipal obligations are scheduled to mature ratably over the next 15
    years.

    Proceeds from sales of investment securities totaled $3.0 million during
    year ended December 31, 2003, resulting in gross realized losses of $28,000.

    The table below indicates the length of time individual securities have been
    in a continuous unrealized loss position at December 31, 2003:

<TABLE>
<CAPTION>

                                                      LESS THAN 12 MONTHS
        DESCRIPTION OF                NUMBER OF             FAIR             UNREALIZED
          SECURITIES                 INVESTMENTS            VALUE              LOSSES
    --------------------------       -----------      -------------------    ----------
                                                     (Dollars in thousands)
<S>                                       <C>              <C>                 <C>

    Corporate debt securities             6                $3,678              $  21
                                          =                ======              =====

</TABLE>


    Management has the intent and ability to hold these securities for the
    foreseeable future. The decline in the fair value is primarily due to an
    increase in market interest rates. The fair values are expected to recover
    as securities approach maturity dates. At December 31, 2003, the Corporation
    had no investment securities that had been in an unrealized loss position
    for a period of greater than twelve months.




                                       33
<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE C - LOANS RECEIVABLE

    The composition of the loan portfolio at December 31 was as follows:

                                                         2003            2002
                                                       --------       --------
                                                           (In thousands)

    One- to four-family residential real estate        $ 74,663       $ 70,092
    Multi-family residential real estate                  2,168          2,490
    Construction                                          3,908          4,397
    Nonresidential real estate                           14,142         12,695
    Commercial                                            3,282          2,856
    Consumer and other loans                              4,343          4,872
                                                       --------       --------
                                                        102,506         97,402
    Less:

      Undisbursed loans in process                        1,361            894
      Deferred loan origination fees                         81             42
      Allowance for loan losses                             771            764
                                                       --------       --------

                                                       $100,293       $ 95,702
                                                       ========       ========

    As depicted above, the Savings Bank's lending efforts have historically
    focused on one- to four-family and multi-family residential real estate
    loans, which comprise approximately $76.8 million, or 77%, of the total loan
    portfolio at December 31, 2003, and $72.6 million, or 76%, of the total loan
    portfolio at December 31, 2002. Customarily, such loans have been
    underwritten on the basis of no more than an 80% loan-to-value ratio, which
    has historically provided the Savings Bank with adequate collateral coverage
    in the event of default. Nevertheless, the Savings Bank, as with any lending
    institution, is subject to the risk that residential real estate values
    could deteriorate in its primary lending area of southeastern Indiana,
    thereby impairing collateral values. However, management is of the belief
    that real estate values in the Savings Bank's primary lending area are
    presently stable.

    In the ordinary course of business, the Savings Bank has granted loans to
    some of its executive officers, directors, and their related interests. In
    the opinion of management, such loans are within applicable regulatory
    lending limitations and do not involve more than the normal risk of
    collectibility. The aggregate dollar amount of these loans was approximately
    $146,000 and $128,000 at December 31, 2003 and 2002, respectively.



                                       34

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE D - ALLOWANCE FOR LOAN LOSSES

    The activity in the allowance for loan losses for the years ended December
    31 is summarized as follows:

                                                          2003          2002
                                                        -------       -------
                                                            (In thousands)

    Beginning balance                                   $   764       $   719
    Provision for losses on loans                            52            92
    Charge-off of loans                                     (47)          (59)
    Recoveries                                                2            12
                                                        -------       -------

    Ending balance                                      $   771       $   764
                                                        =======       =======

    As of December 31, 2003, the Savings Bank's allowance for loan losses was
    solely general in nature, which is includible as a component of regulatory
    risk-based capital.

    At December 31, 2003 and 2002, the Savings Bank's nonperforming loans
    totaled approximately $970,000 and $901,000, respectively. Interest income
    which would have been recognized if such loans had performed pursuant to
    contractual terms totaled approximately $30,000 and $20,000 for the years
    ended December 31, 2003 and 2002, respectively.

NOTE E - OFFICE PREMISES AND EQUIPMENT

    Office premises and equipment are comprised of the following at December 31:


                                                          2003          2002
                                                        -------       -------
                                                            (In thousands)


    Land and improvements                               $   107       $   107
    Buildings and improvements                            1,299         1,326
    Furniture and equipment                                 974         1,064
    Automobiles                                              19            26
                                                        -------       -------
                                                          2,399         2,523
      Less accumulated depreciation and amortization      1,334         1,353
                                                        -------       -------

                                                        $ 1,065       $ 1,170
                                                        =======       =======


                                       35

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE F - DEPOSITS

    Deposits consist of the following major classifications at December 31:

<TABLE>
<CAPTION>


    DEPOSIT TYPE AND WEIGHTED-
    AVERAGE INTEREST RATE                             2003                  2002
                                                   ---------             ---------
         (In thousands)
<S>                                                <C>                    <C>

    Non-interest bearing accounts                  $   5,178              $  2,671
    NOW accounts
      2003 - 0.46%                                     7,525
      2002 - 1.08%                                                          14,834
    Savings accounts
      2003 - 0.50%                                     9,604
      2002 - 1.49%                                                           9,519
    Super Savers
      2003 - 0.75%                                    13,888
      2002 - 1.73%                                                           7,163
                                                   ---------             ---------
    Total demand, transaction and
      passbook deposits                               36,195                34,187

    Certificates of deposit
      Original maturities of:
        Less than 12 months
          2003 - 1.28%                                 3,616
          2002 - 2.14%                                                       5,711
        12 months to 24 months
          2003 - 2.15%                                23,653
          2002 - 2.96%                                                      20,481
        24 months to 36 months
          2003 - 3.55%                                 9,540
          2002 - 4.48%                                                      11,560
        More than 36 months
          2003 - 4.16%                                 1,716
          2002 - 4.78%                                                       1,580
      Individual retirement
        2003 - 3.21%                                   8,384
        2002 - 4.54%                                                         9,117
      Jumbo
        2003 - 2.31%                                   5,224
        2002 - 3.10%                                                         6,784
                                                   ---------             ---------

    Total certificates of deposit                     52,133                55,233
                                                   ---------             ---------

    Total deposits                                 $  88,328             $  89,420
                                                   =========             =========

</TABLE>


    At December 31, 2003 and 2002, the Savings Bank had certificate of deposit
    accounts with balances in excess of $100,000 totaling approximately $13.8
    million and $13.7 million, respectively.


                                       36


<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE F - DEPOSITS (continued)

    Interest expense on deposits for the years ended December 31 is summarized
    as follows:

<TABLE>
<CAPTION>

                                                                               2003                 2002
                                                                             -------               -------
                                                                                     (In thousands)

<S>                                                                          <C>                   <C>
    Savings, NOW and super savers                                            $   271               $   494
    Certificates of deposit                                                    1,648                 2,404
                                                                             -------               -------

                                                                             $ 1,919               $ 2,898
                                                                             =======               =======

</TABLE>


    Maturities of outstanding certificates of deposit at December 31 are
    summarized as follows:

<TABLE>
<CAPTION>

                                                                               2003                 2002
                                                                             -------               -------
                                                                                     (In thousands)
<S>                                                                          <C>                   <C>
    Less than six months                                                     $20,942               $21,926
    Six months to one year                                                    16,764                18,867
    One year to three years                                                   13,414                13,299
    Three years or more                                                        1,013                 1,141
                                                                             -------               -------

                                                                             $52,133               $55,233
                                                                             =======               =======

</TABLE>


NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

    Advances from the Federal Home Loan Bank, collateralized at December 31,
    2003 by pledges of certain residential mortgage loans totaling $2.9 million
    and the Savings Bank's investment in Federal Home Loan Bank stock, are
    summarized as follows:

<TABLE>
<CAPTION>

                                     MATURING
                                    YEAR ENDING
INTEREST RATE                       DECEMBER 31,                              2003                    2002
-------------                       ------------                              ----                    ----
                                                                                    (In thousands)
<S>                                     <C>                                  <C>                   <C>
    1.62%                               2003                                 $    --               $ 1,000
    1.75%                               2004                                   2,000                    --
                                                                             -------               -------

                                                                             $ 2,000               $ 1,000
                                                                             =======               =======

</TABLE>


                                       37

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE H - INCOME TAXES

    The provision for income taxes differs from that computed at the statutory
    corporate tax rate at December 31 as follows:

<TABLE>
<CAPTION>


                                                                      2003                 2002
                                                                      -----                -----
                                                                             (In thousands)


<S>                                                                   <C>                  <C>
    Federal income taxes computed at 34% statutory rate               $ 473                $ 502
    Increase (decrease) in taxes resulting from:
      Dividends received deduction                                       (5)                  (4)
      Tax exempt interest                                                (3)                  (3)
      State income taxes - net of federal tax benefits                   90                  106
      Other                                                               9                   23
                                                                      -----                -----

    Income tax provision per financial statements                     $ 564                $ 624
                                                                      =====                =====

    Effective income tax rate                                          40.5%                42.2%
                                                                      =====                =====

</TABLE>


    The composition of the Corporation's net deferred tax asset at December 31
    is as follows:

<TABLE>
<CAPTION>


    TAXES (PAYABLE) REFUNDABLE ON TEMPORARY                           2003                 2002
    DIFFERENCES AT STATUTORY RATE:                                    -----                -----
<S>                                                                   <C>                  <C>
                                                                             (In thousands)

    DEFERRED TAX ASSETS:
      Stock benefit plans                                             $  10                $  10
      Deferred compensation                                             254                  236
      General loan loss allowance                                       289                  267
      Deferred loan origination fees                                     19                   --
      Charitable contribution carryforward                               98                   98
                                                                      -----                -----
         Total deferred tax assets                                      670                  611

    DEFERRED TAX LIABILITIES:
      Federal Home Loan Bank stock dividends                            (10)                  --
      Difference between book and tax depreciation                      (85)                 (61)
      Deferred loan origination costs                                    --                   (2)
      Unrealized gains on securities available for sale                (443)                (454)
      State income taxes                                                (40)                 (38)
                                                                      -----                -----
         Total deferred tax liabilities                                (578)                (555)
                                                                      -----                -----

         Net deferred tax asset                                       $  92                $  56
                                                                      =====                =====

</TABLE>


    Prior to 1997, the Savings Bank was allowed a special bad debt deduction,
    generally limited to 8% of otherwise taxable income and subject to certain
    limitations based on aggregate loans and deposit account balances at the end
    of the year. If the amounts that qualified as deductions for federal income
    tax purposes are later used for purposes other than for bad debt losses,
    including distributions in liquidation, such distributions will be subject
    to federal income taxes at the then current corporate income tax rate.
    Retained earnings at December 31, 2003, includes approximately $1.3 million
    for which federal income taxes have not been provided. The amount of the
    unrecognized deferred tax liability relating to the cumulative bad debt
    deduction is approximately $400,000.

                                       38


<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE I - LOAN COMMITMENTS

    The Savings Bank is a party to financial instruments with off-balance-sheet
    risk in the normal course of business to meet the financing needs of its
    customers, including commitments to extend credit. Such commitments involve,
    to varying degrees, elements of credit and interest-rate risk in excess of
    the amount recognized in the statement of financial condition. The contract
    or notional amounts of the commitments reflect the extent of the Savings
    Bank's involvement in such financial instruments.

    The Savings Bank's exposure to credit loss in the event of nonperformance by
    the other party to the financial instrument for commitments to extend credit
    is represented by the contractual notional amount of those instruments. The
    Savings Bank uses the same credit policies in making commitments and
    conditional obligations as those utilized for on-balance-sheet instruments.

    At December 31, 2003, the Savings Bank had outstanding commitments of
    approximately $3.2 million to originate loans. Additionally, the Savings
    Bank was obligated under unused lines of credit for home equity loans
    totaling $1.6 million and unused lines of credit under commercial loans
    totaling $3.9 million. In the opinion of management, all loan commitments
    equaled or exceeded prevalent market interest rates as of December 31, 2003,
    and will be funded from normal cash flow from operations and borrowings as
    necessary.

NOTE J - REGULATORY CAPITAL

    The Savings Bank is subject to minimum regulatory capital standards
    promulgated by the Office of Thrift Supervision (the "OTS"). Failure to meet
    minimum capital requirements can initiate certain mandatory -- and possibly
    additional discretionary -- actions by regulators that, if undertaken, could
    have a direct material effect on the financial statements. Under capital
    adequacy guidelines and the regulatory framework for prompt corrective
    action, the Savings Bank must meet specific capital guidelines that involve
    quantitative measures of the Savings Bank's assets, liabilities, and certain
    off-balance-sheet items as calculated under regulatory accounting practices.
    The Savings Bank's capital amounts and classification are also subject to
    qualitative judgments by the regulators about components, risk weightings,
    and other factors.

    The minimum capital standards of the OTS generally require the maintenance
    of regulatory capital sufficient to meet each of three tests, hereinafter
    described as the tangible capital requirement, the core capital requirement
    and the risk-based capital requirement. The tangible capital requirement
    provides for minimum tangible capital (defined as shareholders' equity less
    all intangible assets) equal to 1.5% of adjusted total assets. The core
    capital requirement provides for minimum core capital (tangible capital plus
    certain forms of supervisory goodwill and other qualifying intangible
    assets) generally equal to 4.0% of adjusted total assets, except for those
    associations with the highest examination rating and acceptable levels of
    risk. The risk-based capital requirement provides for the maintenance of
    core capital plus general loss allowances equal to 8.0% of risk-weighted
    assets. In computing risk-weighted assets, the Savings Bank multiplies the
    value of each asset on its statement of financial condition by a defined
    risk-weighting factor, e.g., one- to four-family residential loans carry a
    risk-weighted factor of 50%.


                                       39

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE J - REGULATORY CAPITAL (continued)

    During 2003, the Savings Bank was notified by the OTS that it was
    categorized as "well-capitalized" under the regulatory framework for prompt
    corrective action. To be categorized as "well-capitalized" the Savings Bank
    must maintain minimum capital ratios as set forth in the following tables.

    As of December 31, 2003 and 2002, management believes that the Savings Bank
    met all capital adequacy requirements to which it was subject.

<TABLE>
<CAPTION>

                                                                 AS OF DECEMBER 31, 2003
                                        --------------------------------------------------------------------------
                                                                                                  TO BE "WELL-
                                                                                               CAPITALIZED" UNDER
                                                                        FOR CAPITAL            PROMPT CORRECTIVE
                                                ACTUAL               ADEQUACY PURPOSES         ACTION PROVISIONS
                                        --------------------       ---------------------      --------------------
                                         AMOUNT        RATIO        AMOUNT         RATIO       AMOUNT       RATIO
                                        --------       -----       --------       ------      --------     -------
<S>                                     <C>            <C>         <C>            <C>         <C>          <C>
                                                                  (Dollars in thousands)

    Tangible capital                    $20,479        18.2%       =>$1,686       =>1.5%      =>$5,620     => 5.0%

    Core capital                        $20,479        18.2%       =>$4,496       =>4.0%      =>$6,744     => 6.0%

    Risk-based capital                  $21,784        31.2%       =>$5,579       =>8.0%      =>$6,974     =>10.0%

</TABLE>

<TABLE>
<CAPTION>

                                                                 AS OF DECEMBER 31, 2002
                                        --------------------------------------------------------------------------
                                                                                                  TO BE "WELL-
                                                                                               CAPITALIZED" UNDER
                                                                        FOR CAPITAL            PROMPT CORRECTIVE
                                                ACTUAL               ADEQUACY PURPOSES         ACTION PROVISIONS
                                        --------------------       ---------------------      --------------------
                                         AMOUNT        RATIO        AMOUNT         RATIO       AMOUNT       RATIO
                                        -------        -----       --------       ------      --------     -------
<S>                                     <C>            <C>           <C>            <C>         <C>           <C>
                                                                  (Dollars in thousands)

    Tangible capital                    $19,450        17.4%       =>$1,674       =>1.5%      =>$5,580     => 5.0%

    Core capital                        $19,450        17.4%       =>$4,464       =>4.0%      =>$6,696     => 6.0%

    Risk-based capital                  $20,755        29.3%       =>$5,674       =>8.0%      =>$7,092     =>10.0%

</TABLE>


    The Savings Bank's management believes that, under the current regulatory
    capital regulations, the Savings Bank will continue to meet its minimum
    capital requirements in the foreseeable future. However, events beyond the
    control of the Savings Bank, such as increased interest rates or a downturn
    in the economy in the Savings Bank's market area, could adversely affect
    future earnings and, consequently, the ability to meet future minimum
    regulatory capital requirements.


                                       40

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE K - CONDENSED FINANCIAL STATEMENTS OF PFS BANCORP, INC.

    The following condensed financial statements summarize the financial
    position of the Corporation as of December 31, 2003 and 2002, and the
    results of its operations and its cash flows for the years ended December
    31, 2003 and 2002.

                                PFS BANCORP, INC.
                        STATEMENTS OF FINANCIAL CONDITION
                           December 31, 2003 and 2002
                                 (In thousands)

<TABLE>
<CAPTION>


    ASSETS                                                                              2003              2002
                                                                                      --------          --------
<S>                                                                                   <C>               <C>

    Interest-bearing deposits in Peoples Federal Savings Bank                         $    161          $    191
    Interest-bearing deposits in other financial institutions                               14             1,248
    Investment securities                                                                4,396             4,818
    Loan receivable from ESOP                                                              852               973
    Investment in Peoples Federal Savings Bank                                          21,391            20,307
    Prepaid expenses and other                                                              28                31
    Prepaid income taxes                                                                    19                --
    Deferred income taxes                                                                   87                86
                                                                                      --------          --------

          Total assets                                                                $ 26,948          $ 27,654
                                                                                      ========          ========

    LIABILITIES AND SHAREHOLDERS' EQUITY

    Accrued expenses and other liabilities                                            $     26          $     25
    Accrued income taxes                                                                    --                32
                                                                                      --------          --------
          Total liabilities                                                                 26                57

    Shareholders' equity
      Common stock and additional paid-in capital                                       15,045            14,987
      Retained earnings                                                                 14,101            13,723
      Treasury stock                                                                    (1,282)               --
      Shares acquired by stock benefit plans                                            (1,801)           (1,994)
      Unrealized gains on securities designated as available for sale, net                 859               881
                                                                                      --------          --------
          Total shareholders' equity                                                    26,922            27,597
                                                                                      --------          --------

          Total liabilities and shareholders' equity                                  $ 26,948          $ 27,654
                                                                                      ========          ========

</TABLE>

                                       41

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE K - CONDENSED FINANCIAL STATEMENTS OF PFS BANCORP, INC. (continued)

                                PFS BANCORP, INC.
                             STATEMENTS OF EARNINGS
                     Years ended December 31, 2003 and 2002
                                 (In thousands)

<TABLE>
<CAPTION>


                                                                       2003                  2002
                                                                     -------               -------
<S>                                                                  <C>                   <C>
    Revenue
      Interest income                                                $   192               $   254
      Equity in earnings of Peoples Federal Savings Bank                 851                   801
                                                                     -------               -------

          Total revenue                                                1,043                 1,055

    General and administrative expenses                                  232                   151
                                                                     -------               -------

    Earnings before income taxes (credits)                               811                   904

    Income taxes (credits)                                               (16)                   51
                                                                     -------               -------

          NET EARNINGS                                               $   827               $   853
                                                                     =======               =======

</TABLE>



                                       42

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2003 and 2002

NOTE K - CONDENSED FINANCIAL STATEMENTS OF PFS BANCORP, INC. (continued)

                                PFS BANCORP, INC.
                            STATEMENTS OF CASH FLOWS
                     Years ended December 31, 2003 and 2002
                                 (In thousands)

<TABLE>
<CAPTION>


                                                                             2003                 2002
                                                                           --------             --------
<S>                                                                        <C>                  <C>

    Cash provided by (used in) operating activities:
      Net earnings for the year                                            $    827             $    853
      Adjustments to reconcile net earnings to net
      cash provided by (used in) operating activities
        Amortization of premiums and discounts on investment
          securities - net                                                       20                   18
        Equity in earnings of Peoples Federal Savings Bank                     (851)                (801)
        Increase (decrease) in cash due to changes in:
          Prepaid expenses and other assets                                       3                  128
          Prepaid income taxes                                                  (51)                 118
          Deferred income taxes                                                  (1)                 (98)
          Other liabilities                                                       1                   18
                                                                           --------             --------
            Net cash provided by (used in) operating activities                 (52)                 236

    Cash flows provided by (used in) investing activities:
      Purchase of investment securities                                     (17,952)             (16,204)
      Proceeds from maturity of investment securities                        18,350               16,000
      Proceeds from repayments on loan to ESOP                                  121                  122
                                                                           --------             --------
            Net cash provided by (used in) investing activities                 519                  (82)

    Cash flows provided by (used in) financing activities:
      Purchases of treasury stock                                            (1,282)                  --
      Dividends paid on common stock                                           (449)                (232)
                                                                           --------             --------
            Net cash used in financing activities                            (1,731)                (232)
                                                                           --------             --------

    Net decrease in cash and cash equivalents                                (1,264)                 (78)

    Cash and cash equivalents at beginning of year                            1,439                1,517
                                                                           --------             --------

    Cash and cash equivalents at end of year                               $    175             $  1,439
                                                                           ========             ========

</TABLE>

         Regulations of the Office of Thrift Supervision (OTS) impose
limitations on the payment of dividends and other capital distributions by
savings associations. Generally, the Savings Bank's payment of dividends is
limited, without prior OTS approval, to net earnings for the current calendar
year plus the two preceding calendar years, less capital distributions paid over
the comparable time period. Insured institutions are required to file an
application with the OTS for capital distributions in excess of this limitation.
During 2003 and 2002, the Savings Bank did not distribute dividends to the
Corporation.


                                       43

<PAGE>



                                PFS BANCORP, INC.

                        DIRECTORS AND EXECUTIVE OFFICERS
================================================================================

               PFS BANCORP, INC. AND PEOPLES FEDERAL SAVINGS BANK

                                    DIRECTORS
                                    ---------

Robert L. Laker                                          Dale R. Moeller
Chairman of the Board                                    Director

Mel E. Green                                             Carl E. Petty
Director, President and Chief Executive Officer          Director

Gilbert L. Houze                                         Jack D. Tandy
Director and Vice Chairman of the Board                  Director and Secretary

                                 EXECUTIVE OFFICERS
                                 ------------------

Mel E. Green                                             Stuart M. Suggs
President and                                            Corporate Treasurer,
Chief Executive Officer                                  Vice President and
                                                         Chief Financial Officer


                                       44

<PAGE>



                                PFS BANCORP, INC.

                  BANKING LOCATIONS AND STOCKHOLDER INFORMATION

================================================================================


                                BANKING LOCATIONS

         PFS Bancorp, Inc. is an Indiana-incorporated thrift holding company
conducting business through its wholly-owned subsidiary, Peoples Federal Savings
Bank. Peoples Federal Savings Bank is a federally-chartered, SAIF-insured stock
savings bank operating through three offices in southeast Indiana.

                                   MAIN OFFICE
                                   -----------

                          Second and Bridgeway Streets
                              Aurora, Indiana 47001
                                 (812) 926-0631

                                 BRANCH OFFICES
                                 --------------

       330 Industrial Access Road                         705 E. Main Street
       Rising Sun, Indiana 47040                         Vevay, Indiana 47043
             (812) 438-2111                                 (812) 427-2629

                                 ANNUAL MEETING

         The Annual Meeting of Stockholders of PFS Bancorp will be held on May
6, 2004, at 3:00 p.m., Eastern Daylight Savings Time, at PFS Bancorp's main
office located at Second and Bridgeway Streets, Aurora, Indiana.

                            TRANSFER AGENT/REGISTRAR

                         Registrar and Transfer Company
                                10 Commerce Drive
                           Cranford, New Jersey 07016
                                 (908) 272-8511

                              STOCKHOLDER REQUESTS

         Requests for annual reports, quarterly reports and related stockholder
literature should be directed to Stuart M. Suggs, Corporate Treasurer, Vice
President and Chief Financial Officer, PFS Bancorp, Inc., Second and Bridgeway
Streets, Aurora, Indiana 47001.

         Stockholders needing assistance with stock records, transfers or lost
certificates, please contact PFS Bancorp's transfer agent, Registrar and
Transfer Company.





                                       45