[PFS Bancorp Logo]

                                PFS BANCORP, INC.

                               2004 ANNUAL REPORT

                                 TO SHAREHOLDERS

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                            <C>
President's Letter to Shareholders..............................................................................1

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

Market Price of PFS Bancorp Common Shares and Related Shareholder Matters.......................................2

Selected Consolidated Financial and Other Data..................................................................3

Management's Discussion and Analysis of Financial Condition and Results of Operations...........................5

Report of Independent Registered Public Accounting Firm........................................................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...............................................................................43

Banking Locations and Shareholder Information..................................................................44
</TABLE>

<PAGE>

                               President's Letter

Dear Shareholders, Customers, and Employees:

As we look back on 2004 and PFS Bancorp's performance, we are sure it will be
viewed as a time of challenge and growth. The challenge came in the form of
historically low interest rates on loans and continued pressure on our interest
rate spread. Our deposits are made up of numerous products with different
durations which are used primarily to fund our loan portfolio of largely
adjustable rate loan products. Historically, this mix has worked well for PFS ,
however, with respect to 2004, we focused on loan growth to drive our increase
in net interest income. This growth came primarily in both the commercial and
residential mortgage areas and is reflected in the results of this report.

We were pleased to reward our shareholders for their faith in PFS Bancorp with
not only regular dividends of 7.5 cents per share for the first three quarters
of 2004 but a special dividend of $5.00 per share for the fourth quarter of
2004. Shareholders' equity at December 31, 2004 remained a solid $20.5 million
or 15.8% of total assets, a decrease of $6.4 million or 23.7% from the December
31, 2003 level. Apparently, the investment community appreciates our efforts to
date. At December 31, 2004, our share price was $17.67, representing a net gain
of 15.4% from the December 31, 2003 closing price, adjusted for the $5.00 per
share special dividend.

Our assets at December 31, 2004 totaled $129.8 million representing an increase
of $11.5 million, or 9.7% compared to the December 31, 2003 level. The loan
portfolio experienced total growth of $14.4 million or 14.3% to a record high of
$114.7 million. We are further encouraged by the composition of our loan
portfolio as $99.9 million, or 84.4% of the portfolio, consists of
adjustable-rate loans. We are looking forward to continuing this trend in 2005.

Net earnings for the year ended December 31, 2004 totaled $897,000, an increase
of $70,000, or 8.5%, compared to the $827,000 for the year ended December 31,
2003. In 2004, diluted earnings per share amounted to $.64, compared to $.60 in
2003. The slight increase in net earnings can be attributed to the increases in
net interest income and other income.

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 Federal
Savings Bank 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,
our employees, who have over 400 years of combined banking experience. 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 four 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,  2004,  PFS  Bancorp  had total  assets of $129.8
million,  deposits  of $86.9  million  and total  shareholders'  equity of $20.5
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.

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

      PFS Bancorp's common shares have been listed on the Nasdaq National Market
("Nasdaq") since October 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, 2003 to December  31,  2004.
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

      2004
      December 31, 2004...............     $24.26       $15.07      $  5.000
      September 30, 2004..............      22.80        20.50          .075
      June 30, 2004...................      20.50        19.06          .075
      March 31, 2004..................      20.79        19.50          .075

      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

      As of March 24, 2005, PFS Bancorp had 1,473,728 common shares  outstanding
held of record by  approximately  321  shareholders.  The number of shareholders
does not reflect the number of persons or entities who may hold stock in nominee
or "street" name through brokerage firms or others.


                                       2
<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 audited  Consolidated  Financial
Statements and related notes, appearing elsewhere herein.

<TABLE>
<CAPTION>
                                                             At December 31,
                                                            2004           2003
                                                         (Dollars In Thousands)
<S>                                                     <C>            <C>
      Selected Balance Sheet Data:
      Total assets ................................     $129,754       $118,273
      Cash and cash equivalents(1) ................        7,484          5,187
      Investment securities available for sale ....        5,014         10,016
      Investment securities held to maturity ......          143            152
      Loans receivable-net ........................      114,673        100,293
      Deposits ....................................       86,939         88,328
      FHLB advances and other borrowings ..........       21,000          2,000
      Shareholders' equity ........................       20,529         26,922
      Full service offices ........................            3              3

<CAPTION>
                                                              Year ended
                                                              December 31,
                                                            2004            2003
                                                 (In thousands, except per share data)
<S>                                                     <C>            <C>
      Selected Operating Data:
      Total interest income .......................     $  5,677       $  5,747
      Total interest expense ......................        1,704          1,922
                                                        --------       --------
      Net interest income .........................        3,973          3,825
      Provision for losses on loans ...............           96             52
                                                        --------       --------
      Net interest income after provision
        for losses on loans .......................        3,877          3,773
      Total other income ..........................          503            398
      Total general, administrative and other
        expense ...................................        2,882          2,780
                                                        --------       --------
      Earnings before income taxes ................        1,498          1,391
      Income taxes ................................          601            564
                                                        --------       --------

      Net earnings ................................     $    897       $    827
                                                        ========       ========

      Earnings per share
        Basic .....................................     $    .65       $    .60
                                                        ========       ========
        Diluted ...................................     $    .64       $    .60
                                                        ========       ========
</TABLE>

      ----------
      Footnotes on following page.


                                       3
<PAGE>

                                PFS Bancorp, Inc.

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

                                                        At or for the year ended
                                                              December 31,
Selected Operating Ratios(2):                              2004           2003

Performance Ratios:
Return on average assets ............................       .72%           .70%
Return on average equity ............................      3.60           3.09
Equity to assets at end of period ...................     15.82          22.76
Interest rate spread(3) .............................      2.78           2.67
Net interest margin(3) ..............................      3.24           3.28
Average interest-earning assets to average
  interest-bearing liabilities ......................    132.88         136.92
Net interest income after provision for
  losses on loans to total general,
  administrative and other expense ..................    134.52         135.72
Total general, administrative and other
  expense to average total assets ...................      2.31           2.34
Dividend payout ratio(4) ............................    803.85          50.00

Asset Quality Ratios:
Non-performing and impaired loans to total loans
  at end of period(5) ...............................       .71%          1.48%
Non-performing and impaired assets to total assets
  at end of period(5) ...............................       .63           1.40
Allowance for loan losses to total loans
  at end of period ..................................       .73            .77
Allowance for loan losses to total
  non-performing and impaired loans
  at end of period(5) ...............................    102.08          51.96

Capital Ratios(6):
Tangible capital ratio ..............................      16.9%          18.2%
Core capital ratio ..................................      16.9           18.2
Risk-based capital ratio ............................      28.7           31.2

----------
(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.

(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)   The Corporation paid a $5.00 per share special dividend in 2004.

(5)   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.

(6)   Consists of regulatory ratios for Peoples Federal Savings Bank


                                       4
<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,   primarily  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 and
funded by deposits.  Typically,  single-family  loans  involve a lower degree of
risk and  carry a lower  yield  than  commercial,  nonresidential  real  estate,
construction  and consumer  loans.  In recent  years,  Peoples has increased its
investment  in  commercial  and  nonresidential  real estate  loans,  as well as
utilizing Federal Home Loan Bank advances as a funding source for new 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.


                                       5
<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 daily  balances  for 2004 and monthly  balances for 2003.
Management does not believe that the monthly averages differ  significantly from
the daily average balances.

<TABLE>
<CAPTION>
                                                                                           Year ended December 31,
                                                                                   2004                             2003
                                                      At December 31, 2004                   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) ..................      $114,673   5.00%    $108,861     $5,325      4.89%   $ 97,021    $5,269     5.43%
  Investment securities (2) .................         6,132   3.43        9,494        293      3.09      13,166       402     3.05
  Deposits in other financial institutions(3)         6,489   2.05        4,398         59      1.34       6,365        76     1.19
                                                   --------  -----     --------     ------    ------    --------    ------   -------
     Total interest-earning assets ..........       127,294   4.77      122,753      5,677      4.62     116,552     5,747     4.93
  Non-interest-earning assets ...............         2,460               1,774                            2,143
                                                   --------            --------                         --------
     Total assets ...........................      $129,754            $124,527                         $118,695
                                                   ========            ========                         ========

Interest-bearing liabilities:
  Deposits ..................................      $ 82,881   1.95     $ 80,830      1,422      1.76%   $ 84,950    $1,919     2.26%
  FHLB advances .............................        17,500   2.89       10,899        249      2.28         175         3     1.71
  Note payable ..............................         3,500   5.28          650         33      5.08          --        --       --
                                                   --------  -----     --------     ------    ------    --------    ------   -------
     Total interest-bearing liabilities .....       103,881   2.22       92,379      1,704      1.84      85,125     1,922     2.26
                                                             -----                  ------    ------                ------   -------
  Non-interest-bearing liabilities ..........         5,344               7,264                            6,790
                                                   --------            --------                         --------
     Total liabilities ......................       109,225              99,643                           91,915
  Total equity(4) ...........................        20,529              24,884                           26,780
                                                   --------            --------                         --------
     Total liabilities and equity ...........      $129,754            $124,527                         $118,695
                                                   ========            ========                         ========
  Net interest-earning assets ...............      $ 23,413            $ 30,374                         $ 31,427
                                                   ========            ========                         ========
  Net interest income .......................                                       $3,973                          $3,825
                                                                                    ======                          ======
  Interest rate spread ......................                 2.55%                             2.78%                          2.67%
                                                             =====                            ======                         ======
  Net interest margin .......................                                                   3.24%                          3.28%
                                                                                              ======                         ======
  Average interest-earning assets to average
    interest bearing liabilities ............                                                 132.88%                        136.92%
                                                                                              ======                         ======
</TABLE>

----------
(1)   Includes nonaccruing loans. Interest income on loans receivable includes
      amortized loan fees.

(2)   Includes Federal Home Loan Bank stock.

(3)   Includes interest-bearing demand deposits and other interest-bearing
      deposits.

(4)   Includes accumulated other comprehensive income.


                                       6
<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, 2004
                                                                             vs December 31, 2003
                                                                  Increase (Decrease) Due to       Total Increase
                                                                Yield/Rate             Volume        (Decrease)
                                                                                   (In Thousands)
<S>                                                                <C>                  <C>            <C>
Interest-earning assets:
  Loans receivable, net ............................               $(552)               $ 608          $  56
  Investment securities ............................                   5                 (114)          (109)
  Deposits in other financial institutions .........                   9                  (26)           (17)
                                                                   -----                -----          -----
         Total .....................................                (538)                 468            (70)

Interest-bearing liabilities:
  Deposits .........................................                (408)                 (89)          (497)
  Borrowings .......................................                   1                  278            279
                                                                   -----                -----          -----
         Total .....................................                (407)                 189           (218)
                                                                   -----                -----          -----
  Increase (decrease) in net interest income .......               $(131)               $ 279          $ 148
                                                                   =====                =====          =====
</TABLE>


                                       7
<PAGE>

                                PFS Bancorp, Inc.

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

Changes in Financial Condition From December 31, 2004 to December 31, 2003

      Total assets  amounted to $129.8 million at December 31, 2004, an increase
of $11.5 million, or 9.7%, compared to December 31, 2003. The increase in assets
consisted primarily of a $14.4 million, or 14.3%,  increase in loans receivable,
which was principally  funded by additional  advances from the Federal Home Loan
Bank, which increased by $15.5 million. A special dividend of $5.00 per share or
$7.4  million  was paid to  shareholders  of record at the close of  business on
October 18, 2004. The Corporation  borrowed $3.5 million to finance the dividend
payment.

      Investment  securities  totaled  $5.2  million at  December  31,  2004,  a
decrease of $5.0 million,  or 49.3%, from December 31, 2003 levels. The decrease
resulted  primarily  from  maturities  and sales of $23.1  million and $713,000,
respectively,  which were partially  offset by purchases  totaling $18.7 million
during the year. The average yield on investment securities was 3.09% for 2004.

      Loans  receivable  increased by $14.4 million,  or 14.3%,  during the year
ended  December  31,  2004,  to a total of $114.7  million.  Loan  disbursements
amounted to $46.3  million and were  partially  offset by principal  payments of
$31.8 million.  During the year ended December 31, 2004, loan  originations were
comprised of $26.2 million in loans secured by one- to  four-family  residential
real  estate,  $1.1 million in loans  secured by  multifamily  residential  real
estate,  $11.6 million in loans secured by commercial  and  nonresidential  real
estate and $7.4 million in consumer and other loans.

      The  allowance for loan losses  totaled  $833,000 and $771,000 at December
31,  2004 and 2003,  respectively.  Nonperforming  and  impaired  loans  totaled
$816,000  and $1.5  million at  December  31, 2004 and 2003,  respectively.  The
allowance  for loan losses  represented  102.1% and 52.0% of  nonperforming  and
impaired  loans as of December 31, 2004 and 2003,  respectively.  The  allowance
represented  approximately .73% and .77% of the total loan portfolio at December
31,  2004 and 2003,  respectively.  At  December  31,  2004,  nonperforming  and
impaired  loans  were  comprised  of  $280,000  in  loans  secured  by  one-  to
four-family residential real estate, $514,000 in loans secured by nonresidential
real  estate and  $22,000 in  commercial,  consumer  and other  loans.  Although
management believes that its allowance for loan losses at December 31, 2004, 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  $86.9  million at December 31, 2004, a decrease of $1.4
million, or 1.6% from December 31, 2003 levels. The decline was due primarily to
planned withdrawals from one municipality's savings account.  Excluding this one
account,  deposits would have increased $4.0 million,  or 4.6%. While management
generally  strives to maintain a moderate  level of growth in  deposits  through
marketing  and pricing  strategies,  the current low interest  rate  environment
presented  an   impediment  to   increasing   deposits  as   depositors   sought
higher-yielding alternative investments.

      Shareholders'  equity  amounted to $20.5  million at December  31, 2004, a
decrease of $6.4 million,  or 23.7%, from December 31, 2003 levels. The decrease
resulted  primarily from the payment of dividends of $7.7 million which included
a special  dividend of $5.00 per share,  or $7.4 million,  in October 2004.  The
decrease was partially offset by net earnings of $897,000,  a $140,000  increase
in  unrealized  gains on securities  designated  as available  for sale,  and an
increase of $270,000  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.


                                       8
<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, 2004 and 2003

      General. Net earnings amounted to $897,000 for the year ended December 31,
2004, compared to $827,000 for the year ended December 31, 2003. The increase in
earnings of $70,000, or 8.5%, was due primarily to a $148,000, or 3.9%, increase
in net interest income and a $105,000, or 26.4%, increase in other income, which
were  partially  offset by a $44,000,  or 84.6%,  increase in the  provision for
losses on loans, a $102,000,  or 3.7%,  increase in general,  administrative and
other expense, and a $37,000, or 6.6%, increase in income taxes.

      Net Interest  Income.  Total interest  income amounted to $5.7 million for
the year ended  December 31, 2004, a decrease of $70,000,  or 1.2%, for the year
ended  December 31, 2003.  Interest  income on loans totaled $5.3 million during
the 2004 period,  an increase of $56,000,  or 1.1%,  from the 2003  period.  The
increase was primarily due to a $11.8 million, or 12.2%, increase in the average
balance of loans  outstanding  year to year,  which was partially offset by a 54
basis point  decrease in the  weighted-average  yield year to year, to 4.89% for
the year ended  December 31, 2004.  The decrease in the average yield was due to
the downward  repricing of our adjustable rate mortgage  loans.  The increase in
the average balance was due primarily to increased origination activity.

      Interest income on investment  securities decreased by $109,000, or 27.1%,
for the year ended  December 31, 2004,  compared to the year ended  December 31,
2003.  This decline was due primarily to a $3.7 million,  or 27.9%,  decrease in
the average balance  outstanding,  which was partially offset by a 4 basis point
increase in the weighted-average  yield to 3.09% for the year ended December 31,
2004. Interest income on other  interest-bearing  deposits decreased by $17,000,
or 22.4%,  during  the year ended  December  31,  2004,  compared  to 2003,  due
primarily  to a  $2.0  million,  or  30.9%,  decrease  in  the  average  balance
outstanding  for the year.  The  decline in the  average  balance of  investment
securities  and  interest-bearing  deposits was primarily due to the use of such
funds to fund loan growth.

      Interest expense decreased by $218,000,  or 11.3%, to $1.7 million for the
year ended  December  31,  2004,  compared  to $1.9  million  for the year ended
December 31, 2003. Interest expense on deposits decreased by $497,000, or 25.9%,
due  primarily  to a decrease in the  average  rate paid from 2.26% for the year
ended December 31, 2003 to 1.76% for the year ended  December 31, 2004,  coupled
with  a  $4.1   million,   or  4.8%,   decrease  in  the   average   balance  of
interest-bearing  deposits  outstanding  year to year.  The decrease in the rate
paid  generally  reflects  a decline  in market  rates in the  overall  economy.
Interest  expense on  borrowings  increased by $279,000 to $282,000 for the year
ended December 31, 2004 compared to the $3,000  borrowing cost recorded in 2003.
This increase in interest  expense on  borrowings  was due to an increase in the
average  balance of borrowings  during 2004,  which, as stated  previously,  was
utilized to fund loan growth.

      As a result of the  foregoing  changes in  interest  income  and  interest
expense, net interest income increased by $148,000, or 3.9%, to $4.0 million for
the year ended  December 31,  2004,  compared to $3.8 million for the year ended
December 31, 2003.  The interest rate spread  increased  from 2.67% for the year
ended December 31, 2003 to 2.78% for the year ended December 31, 2004, while the
net interest margin  decreased from 3.28% in 2003 to 3.24% in 2004. The ratio of
average   interest-earning  assets  to  average   interest-bearing   liabilities
decreased from 136.92% to 132.88% year to year.


                                       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, 2004 and 2003
(continued)

      Provision  for Losses on Loans.  As a result of an analysis of  historical
experience,  the volume and type of lending conducted by the Bank, the status of
past  due  principal  and  interest   payments,   general   market   conditions,
particularly  as such  conditions  relate to the Bank's  market area,  and other
factors related to the  collectibility of the Bank's loan portfolio,  management
elected to record a provision for losses on loans totaling  $96,000 for the year
ended  December 31, 2004  compared to the $52,000  provision  for the year ended
December 31, 2003. The current year provision was predicated  primarily upon the
growth in the loan  portfolio,  including  an increase in loans  secured by both
residential  and  nonresidential  real  estate  correlated  to the level of loan
charge-offs  during 2004. There can be no assurance that the loan loss allowance
will be sufficient to cover losses on nonperforming assets in the future.

      Other  Income.  Other  income  amounted  to  $503,000  for the year  ended
December 31, 2004, an increase of $105,000,  or 26.4%,  compared to $398,000 for
the year ended  December 31, 2003.  The increase was primarily due to a $66,000,
or 24.6%, increase in service charge fees which includes returned check fees and
ATM fees.  In  addition,  there was a $28,000  loss  resulting  from the sale of
investment securities in 2003, as compared to a $6,000 gain in 2004.

      General,  Administrative  and Other Expense.  General,  administrative and
other expense increased by $102,000, or 3.7%, to $2.9 million for the year ended
December 31, 2004. Employee  compensation and benefits increased by $157,000, or
10.1%,  due  primarily  to normal  merit  increases  coupled with an increase in
benefit expenses.  The increase in benefit costs was due to the increased market
value of the Corporation's common stock, coupled with increased costs related to
the defined  benefit  retirement  plan.  Data  processing  expense  increased by
$16,000, or 7.0%, and other operating expense increased by $44,000, or 8.8%, due
primarily  to check  processing  costs  related to Check 21 and loan  processing
expenses,  which were  partially  offset by a  $55,000,  or 14.5%,  decrease  in
occupancy  and  equipment  expense and a $59,000  decrease in the  provision for
losses on real estate acquired through foreclosure. The decline in occupancy and
equipment  expense  reflects a reduction  in real estate taxes and a decrease in
depreciation expense.

      Income Tax. The provision  for income taxes totaled  $601,000 for the year
ended  December 31,  2004,  an increase of $37,000,  or 6.6%,  from the $564,000
recorded for the year ended  December 31, 2003. The increase in income taxes was
due  primarily  to an  $107,000,  or 7.7%,  increase  in pre-tax  earnings.  The
Company's  effective tax rates were 40.1% and 40.5% for the years ended December
31, 2004 and 2003, respectively.


                                       10
<PAGE>

                                PFS Bancorp, Inc.

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

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.

      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, 2004,  $18.4 million,  or
16.6%,  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, 2004,
$96.3   million,   or  84.0%  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.


                                       11
<PAGE>

                                PFS Bancorp, Inc.

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

      The following  tables present  Peoples' net portfolio value as of December
31, 2004 and 2003.

<TABLE>
<CAPTION>
                                                  December 31, 2004
                                                 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               $21,729            17.14%             $(4,661)         (262)bp
                  +200                23,748            18.34               (2,642)         (142)bp
                  +100                25,440            19.30                 (950)          (47)bp
                     0                26,390            19.77                   --            --
                  -100                26,357            19.63                  (33)          (13)bp

<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>

      Net  portfolio  values are not  provided for a decline of 200 or 300 basis
points as the cost of funds would approximate zero at those levels.


                                       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, 2004.

<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          $ 8,000     $ 6,500      $ 3,000    $    --     $17,500
  Note payable                                           --       3,500           --         --       3,500
  Certificates of deposit                            41,349      12,622        1,183        177      55,331

Amount of commitments expiration per period
  Commitments to originate loans:
    One- to four-family residential loans             1,219          --           --         --       1,219
    Nonresidential real estate loans                     36          --           --         --          36
    Undisbursed loans in process                      2,746          --           --         --       2,746
    Commercial lines of credit                        4,543          --           --         --       4,543
    Home equity                                       2,122          --           --         --       2,122
    Letters of credit                                    45         252           --         --         297
                                                    -------     -------      -------    -------     -------

         Total contractual obligations              $60,060     $22,874      $ 4,183    $   177     $87,294
                                                    =======     =======      =======    =======     =======
</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,  2004,  Peoples  more than  exceeded  each of its
capital  requirements,  with  tangible,  core and  risk-based  capital ratios of
16.9%, 16.9% and 28.7%, 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 REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
PFS Bancorp, Inc.

We have audited the accompanying  consolidated statements of financial condition
of PFS  Bancorp,  Inc.  as of  December  31,  2004  and  2003,  and the  related
consolidated statements of earnings,  comprehensive income, shareholders' equity
and cash flows for each of the years ended  December  31,  2004 and 2003.  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 the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Corporation is not required to
have,  nor were we  engaged to perform  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion  on  the  effectiveness  of  the  Corporation's  internal  control  over
financial  reporting.  Accordingly,  we express no such  opinion.  An audit also
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  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, 2004 and 2003, and the results of its operations and its cash
flows for each of the years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of America.


/s/ GRANT THORNTON LLP

Cincinnati, Ohio
March 11, 2005


                                       14
<PAGE>

                                       17
                                PFS BANCORP, INC.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                           December 31, 2004 and 2003
                        (In thousands, except share data)

<TABLE>
<CAPTION>
         ASSETS                                                                       2004                 2003
<S>                                                                              <C>                  <C>
Cash and due from banks                                                          $     995            $     855
Interest-bearing deposits in other financial institutions                            6,489                4,332
                                                                                 ---------            ---------
         Cash and cash equivalents                                                   7,484                5,187

Investment securities designated as available for sale -
  at market                                                                          5,014               10,016
Investment securities held to maturity - at amortized cost, which
  approximates market                                                                  143                  152
Loans receivable - net                                                             114,673              100,293
Office premises and equipment - at depreciated cost                                    940                1,065
Real estate acquired through foreclosure                                                --                  169
Federal Home Loan Bank stock - at cost                                                 975                  758
Accrued interest receivable                                                            441                  395
Prepaid expenses and other assets                                                       64                  126
Prepaid income taxes                                                                    20                   20
Deferred income taxes                                                                   --                   92
                                                                                 ---------            ---------

         Total assets                                                            $ 129,754            $ 118,273
                                                                                 =========            =========

         LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits $                                                                          86,939            $  88,328
Advances from the Federal Home Loan Bank                                            17,500                2,000
Note payable                                                                         3,500                   --
Advances by borrowers for taxes and insurance                                          201                   63
Accrued interest payable                                                                11                   12
Other liabilities                                                                    1,061                  948
Deferred income taxes                                                                   13                   --
                                                                                 ---------            ---------
         Total liabilities                                                         109,225               91,351

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                                                        15,106               15,029
  Retained earnings - restricted                                                     7,298               14,101
  Less 77,565 shares of treasury stock - at cost                                    (1,282)              (1,282)
  Shares acquired by stock benefit plans                                            (1,608)              (1,801)
  Accumulated other comprehensive income - unrealized gains on
    securities designated as available for sale, net of related tax effects            999                  859
                                                                                 ---------            ---------
         Total shareholders' equity                                                 20,529               26,922
                                                                                 ---------            ---------

         Total liabilities and shareholders' equity                              $ 129,754            $ 118,273
                                                                                 =========            =========
</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, 2004 and 2003
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                            2004           2003
<S>                                                                      <C>            <C>
Interest income
  Loans                                                                  $ 5,325        $ 5,269
  Investment securities                                                      293            402
  Interest-bearing deposits and other                                         59             76
                                                                         -------        -------
         Total interest income                                             5,677          5,747

Interest expense
  Deposits                                                                 1,422          1,919
  Borrowings                                                                 282              3
                                                                         -------        -------
         Total interest expense                                            1,704          1,922
                                                                         -------        -------

         Net interest income                                               3,973          3,825

Provision for losses on loans                                                 96             52
                                                                         -------        -------

         Net interest income after provision for
           losses on loans                                                 3,877          3,773

Other income (loss)
  Gain (loss) on sale of real estate acquired through foreclosure             (1)            10
  Gain (loss) on sale of investment securities                                 6            (28)
  Service charges                                                            334            268
  Other operating                                                            164            148
                                                                         -------        -------
         Total other income                                                  503            398

General, administrative and other expense
  Employee compensation and benefits                                       1,716          1,559
  Occupancy and equipment                                                    325            380
  Data processing                                                            245            229
  Federal deposit insurance premiums                                          50             51
  Provision for losses on real estate acquired through foreclosure            --             59
  Other operating                                                            546            502
                                                                         -------        -------
         Total general, administrative and other expense                   2,882          2,780
                                                                         -------        -------

         Earnings before income taxes                                      1,498          1,391

Income taxes
  Current                                                                    568            528
  Deferred                                                                    33             36
                                                                         -------        -------
         Total income taxes                                                  601            564
                                                                         -------        -------

         NET EARNINGS                                                    $   897        $   827
                                                                         =======        =======

         EARNINGS PER SHARE
           Basic                                                         $   .65        $   .60
                                                                         =======        =======

           Diluted                                                       $   .64        $   .60
                                                                         =======        =======
</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, 2004 and 2003
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                 2004                 2003
<S>                                                                           <C>                  <C>
Net earnings                                                                  $   897              $   827

Other comprehensive income (loss), net of tax:
  Unrealized holding gains (losses) on securities during the year,
    net of taxes (benefits) of $72 and ($21) for the years ended
    December 31, 2004 and 2003, respectively                                      144                  (40)

  Reclassification adjustment for realized (gains) losses included
    in earnings, net of taxes (benefits) of $2 and $(10) for the years
    ended December 31, 2004 and 2003, respectively                                 (4)                  18
                                                                              -------              -------

Comprehensive income                                                          $ 1,037              $   805
                                                                              =======              =======

Accumulated comprehensive income                                              $   999              $   859
                                                                              =======              =======
</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, 2004 and 2003
                        (In thousands, except share data)

<TABLE>
<CAPTION>


                                                                     Additional
                                                            Common     paid-in     Retained     Treasury
                                                            stock      capital     earnings      shares
<S>                                                        <C>         <C>         <C>          <C>
Balance at January 1, 2003                                 $     16    $ 14,971    $ 13,723     $     --

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

Balance at December 31, 2003                                     16      15,029      14,101       (1,282)

Amortization of expense related to stock benefit plan            --          77          --           --
Net earnings for the year ended December 31, 2004                --          --         897           --
Cash dividends of $5.225 per share                               --          --      (7,700)          --
Unrealized gains on securities designated as available
  for sale, net of related tax effects                           --          --          --           --
                                                           --------    --------    --------     --------

Balance at December 31, 2004                               $     16    $ 15,106    $  7,298     $ (1,282)
                                                           ========    ========    ========     ========

<CAPTION>
                                                                               Unrealized gains
                                                                  Shares        (losses) on
                                                                 acquired        securities
                                                                 by stock       designated as
                                                              benefit plans   available for sale     Total
<S>                                                              <C>               <C>             <C>
Balance at January 1, 2003                                       $ (1,994)         $    881        $ 27,597

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

Balance at December 31, 2003                                       (1,801)              859          26,922

Amortization of expense related to stock benefit plan                 193                --             270
Net earnings for the year ended December 31, 2004                      --                --             897
Cash dividends of $5.225 per share                                     --                --          (7,700)
Unrealized gains on securities designated as available
  for sale, net of related tax effects                                 --               140             140
                                                                 --------          --------        --------

Balance at December 31, 2004                                     $ (1,608)         $    999        $ 20,529
                                                                 ========          ========        ========
</TABLE>


                                       18
<PAGE>

                                PFS BANCORP, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 For the years ended December 31, 2004 and 2003
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                            2004         2003
<S>                                                                     <C>          <C>
Cash flows from operating activities:
  Net earnings for the year                                             $    897     $    827
  Adjustments to reconcile net earnings to net cash
  provided by (used in) operating activities:
    Amortization of premium on investment securities                          54           80
    Amortization of deferred loan origination fees                           (42)         (61)
    Amortization expense of stock benefit plans                              270          251
    (Gain) loss on sale of real estate acquired through foreclosure            1          (10)
    Dividends on Federal Home Loan Bank stock                                (35)         (28)
    (Gain) loss on sale of investment securities                              (6)          28
    Depreciation                                                             160          189
    Provision for losses on loans                                             96           52
    Provision for losses on real estate acquired through foreclosure          --           59
    Deferred compensation liability                                           42           52
    Increase (decrease) in cash due to changes in:
      Accrued interest receivable                                            (46)          51
      Prepaid expenses and other assets                                       62           50
      Other liabilities                                                      136           13
      Accrued interest payable                                                (1)         (14)
      Income taxes
        Current                                                              (65)         (50)
        Deferred                                                              33          (25)
                                                                        --------     --------
         Net cash provided by operating activities                         1,556        1,464

Cash flows provided by (used in) investing activities:
  Proceeds from maturities of investment securities                       23,103       31,937
  Proceeds from sale of investment securities                                713        3,001
  Principal repayments on investment securities                                9            9
  Purchase of investment securities designated as available for sale     (18,650)     (29,953)
  Loan principal repayments                                               31,779       35,516
  Loan disbursements                                                     (46,263)     (40,145)
  Purchase of office premises and equipment                                  (35)         (84)
  Proceeds from sale of real estate acquired through foreclosure             218           57
  Purchase of Federal Home Loan Bank stock                                  (182)          --
                                                                        --------     --------
         Net cash provided by (used in) investing activities              (9,308)         338

Cash flows provided by (used in) financing activities:
  Net decrease in deposits                                                (1,389)      (1,092)
  Proceeds from note payable                                               3,500           --
  Proceeds from Federal Home Loan Bank advances                           23,500        4,500
  Repayment of Federal Home Loan Bank advances                            (8,000)      (3,500)
  Advances by borrowers for taxes and insurance                              138          (17)
  Dividends paid on common stock                                          (7,700)        (449)
  Purchase of treasury shares                                                 --       (1,282)
                                                                        --------     --------
         Net cash provided by (used in) financing activities              10,049       (1,840)
                                                                        --------     --------

Net increase (decrease) in cash and cash equivalents                       2,297          (38)

Cash and cash equivalents at beginning of year                             5,187        5,225
                                                                        --------     --------

Cash and cash equivalents at end of year                                $  7,484     $  5,187
                                                                        ========     ========
</TABLE>


                                       19
<PAGE>

                                PFS BANCORP, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                 For the years ended December 31, 2004 and 2003
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                        2004       2003
<S>                                                                  <C>        <C>
Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Income taxes                                                     $   633    $   697
                                                                     =======    =======

    Interest on deposits and borrowings                              $ 1,705    $ 1,936
                                                                     =======    =======

Supplemental disclosure of noncash investing activities:
  Unrealized gains (losses) on securities designated as available
    for sale, net of related tax effects                             $   140    $   (22)
                                                                     =======    =======

Transfers from loans to real estate acquired through
    foreclosure                                                      $    50    $    47
                                                                     =======    =======
</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, 2004 and 2003

NOTE A - SUMMARY OF ACCOUNTING POLICIES

      In 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, 2004 and 2003

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, 2004 and 2003

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:

                                                              2004        2003
                                                                (In thousands)

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

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

      Average balance of impaired loans                       $514        $517
      Interest income recognized on impaired loans            $ 19        $ 25

      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.

      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.


                                       23
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

      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. 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 75,597 and 86,632  unallocated
      ESOP shares as of December 31, 2004 and 2003, respectively.

      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:

                                                         For the year ended
                                                            December 31,
                                                           2004           2003

         Weighted-average common shares
           outstanding (basic)                        1,387,129      1,390,238
         Dilutive effect of assumed exercise
           of stock options                              12,401             37
                                                      ---------      ---------
         Weighted-average common shares
           outstanding (diluted)                      1,399,530      1,390,275
                                                      =========      =========


                                       24
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

      10. 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  $239,000  and
      $210,000 for the years ended December 31, 2004 and 2003, respectively.

      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  related  to the RRP was  charged to
      operations for each of the years ended December 31, 2004 and 2003.

      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.  The Savings Bank
      made a $47,000 and $6,000 contribution in 2004 and 2003, respectively, 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 8.25% 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 for each of the years
      ended December 31, 2004 and 2003.

      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  considering  the time to
      retirement  for  each  participant.  The  Savings  Bank  recorded  expense
      totaling  $42,000 and $52,000 for the  Compensation  Plan during the years
      ended December 31, 2004 and 2003, respectively.


                                       25
<PAGE>

                                PFS Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

      11. Stock Option Plan
          -----------------

      In 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.  Stock  options  were  granted  in June  2003  for  79,316
      (adjusted)  shares  at an  exercise  price  equal to fair  value of $13.22
      (adjusted for the $5.00 special  dividend in 2004). 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 grant date.

      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,
                                                                            2004        2003
<S>                                                                        <C>         <C>
      Net earnings (In thousands)                        As reported       $ 897       $ 827
                                 Stock-based compensation, net of tax        (36)        (14)
                                                                           -----       -----

                                                            Pro-forma      $ 861       $ 813
                                                                           =====       =====

      Earnings per share
       Basic                                              As reported      $ .65       $ .60
                                 Stock-based compensation, net of tax       (.03)       (.02)
                                                                           -----       -----

                                                            Pro-forma      $ .62       $ .58
                                                                           =====       =====

      Diluted                                             As reported      $ .64       $ .60
                                 Stock-based compensation, net of tax       (.03)       (.02)
                                                                           -----       -----

                                                            Pro-forma      $ .61       $ .58
                                                                           =====       =====
</TABLE>


                                       26
<PAGE>

                                PFS Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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

      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.

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

<TABLE>
<CAPTION>
                                                                2004                    2003
                                                                    Weighted-                Weighted-
                                                                     average                  average
                                                                    exercise                 exercise
                                                          Shares      price       Shares       price
<S>                                                       <C>         <C>         <C>         <C>
      Outstanding at beginning of year                    79,316      $13.22          --      $   --
      Granted                                                 --          --      79,316       13.22
      Exercised                                               --          --          --          --
      Forfeited                                               --          --          --          --
                                                          ------      ------      ------      ------

      Outstanding at end of year                          79,316      $13.22      79,316      $13.22
                                                          ======      ======      ======      ======

      Options exercisable at year-end                     15,863      $13.22          --      $   --
                                                          ======      ======      ======      ======

      Weighted-average fair value of options granted                     N/A                  $ 3.82
       during the year                                                ======                  ======
</TABLE>

      The following  information  applies to options outstanding at December 31,
      2004:

      Number outstanding                                                  79,316
      Range of exercise prices                                            $13.22
      Weighted-average exercise price                                     $13.22
      Weighted-average remaining contractual life                     8.50 years

      12. 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.


                                       27
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

      13. 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.

      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,  2004 and 2003.  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 and Note Payable: The
                  fair value of these  borrowings  is estimated  using the rates
                  currently offered for similar  borrowings of similar remaining
                  maturities or, when available, quoted market prices.


                                       28
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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

                  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 fair value of outstanding loan
                  commitments at December 31, 2004 and 2003, was not material.

      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>
                                                                             2004                        2003
                                                                    Carrying       Fair         Carrying       Fair
                                                                      value        value          value        value
                                                                                     (In thousands)
<S>                                                                 <C>           <C>           <C>           <C>
      Financial assets
        Cash and cash equivalents                                   $  7,484      $  7,484      $  5,187      $  5,187
        Investment securities designated as available for sale         5,014         5,014        10,016        10,016
        Investment securities held to maturity                           143           143           152           152
        Loans receivable - net                                       114,673       113,531       100,293       101,441
        Federal Home Loan Bank stock                                     975           975           758           758
                                                                    --------      --------      --------      --------

                                                                    $128,289      $127,147      $116,406      $117,554
                                                                    ========      ========      ========      ========

      Financial liabilities
        Deposits                                                    $ 86,939      $ 86,945      $ 88,328      $ 88,876
        Advances from the Federal Home Loan Bank                      17,500        17,479         2,000         2,000
        Note payable                                                   3,500         3,500            --            --
        Advances by borrowers for taxes and insurance                    201           201            63            63
                                                                    --------      --------      --------      --------

                                                                    $108,140      $108,125      $ 90,391      $ 90,939
                                                                    ========      ========      ========      ========
</TABLE>

      14. Advertising
          -----------

      Advertising   costs  are  expensed  when   incurred.   The   Corporation's
      advertising  expense  totaled  $36,000  and  $31,000  for the years  ended
      December 31, 2004 and 2003, respectively.

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

      Certain prior year amounts have been  reclassified  to conform to the 2004
      consolidated financial statement presentation.


                                       29
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
      a revision to SFAS No. 123 which establishes  standards for the accounting
      for transactions in which an entity  exchanges its equity  instruments for
      goods or services,  primarily on accounting for  transactions  in which an
      entity  obtains  employee  services  in  share-based  transactions.   This
      Statement,  SFAS No.  123 (R)  "Share  Based  Payment",  requires a public
      entity to measure the cost of employee  services  received in exchange for
      an award of equity  instruments  based on the grant-date fair value of the
      award,  with limited  exceptions.  That cost will be  recognized  over the
      period  during  which an  employee  is  required  to provide  services  in
      exchange for the award - the requisite  service  period.  No  compensation
      cost is  recognized  for equity  instruments  for which  employees  do not
      render the  requisite  service.  Employee  share  purchase  plans will not
      result in recognition of compensation cost if certain conditions are met.

      Initially, the cost of employee services received in exchange for an award
      of liability instruments will be measured based on current fair value; the
      fair value of that award will be remeasured subsequently at each reporting
      date  through  the  settlement  date.  Changes  in fair  value  during the
      requisite service period will be recognized as compensation cost over that
      period.  The  grant-date  fair value of employee share options and similar
      instruments will be estimated using option-pricing models adjusted for the
      unique  characteristics  of those  instruments  (unless  observable market
      prices for the same or similar  instruments are  available).  If an equity
      award is modified after the grant date, incremental compensation cost will
      be  recognized  in an amount  equal to the excess of the fair value of the
      modified  award  over the fair  value of the  original  award  immediately
      before the modification.

      Excess tax  benefits,  as defined by SFAS No. 123(R) will be recognized as
      an addition to additional  paid-in  capital.  Cash retained as a result of
      those excess tax benefits will be presented in the consolidated  statement
      of cash flows as financing  cash  inflows.  The  write-off of deferred tax
      assets  relating to unrealized  tax benefits  associated  with  recognized
      compensation  cost will be recognized  as income tax expense  unless there
      are excess tax benefits from previous awards  remaining in additional paid
      in capital to which it can be offset.

      Compensation  cost is required to be  recognized  in the  beginning of the
      first  interim or annual  period that begins after  December 15, 2005,  or
      January 1, 2006 as to the  Corporation.  The  Corporation  anticipates the
      annual compensation expense under SFAS No. 123 will approximate the amount
      disclosed in Note A-11 above.


                                       30
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE B - INVESTMENT SECURITIES

      The amortized cost, gross unrealized  gains,  gross unrealized  losses and
      estimated  fair value of  investment  securities  at December 31, 2004 and
      2003, are as follows:

<TABLE>
<CAPTION>
                                                                                   2004
                                                                              Gross        Gross    Estimated
                                                             Amortized   unrealized   unrealized         fair
                                                                  cost        gains       losses        value
                                                                              (In thousands)
<S>                                                            <C>          <C>          <C>          <C>
      Held to maturity:
        Municipal obligations                                  $   143      $    --      $    --      $   143
                                                               =======      =======      =======      =======

      Available for sale:
        Corporate debt securities                              $ 2,980      $    27      $     8      $ 2,999
        U. S. Government agency securities                         500           --           12          488
        FHLMC stock                                                 20        1,507           --        1,527
                                                               -------      -------      -------      -------

           Total investment securities available for sale      $ 3,500      $ 1,534      $    20      $ 5,014
                                                               =======      =======      =======      =======

<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>


                                       31
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

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, 2004 and 2003.

<TABLE>
<CAPTION>
                                                        2004                           2003
                                                              Estimated                     Estimated
                                               Amortized           fair      Amortized           fair
                                                    cost          value           cost          value
<S>                                               <C>            <C>            <C>            <C>
      Due within one year                         $1,971         $1,981         $5,188         $5,219
      Due after one through three years              509            524          2,506          2,609
      Due after three through five years             500            494            500            497
      Due after five through ten years               250            245            250            240
      Due after ten through fifteen years            250            243            250            243
                                                  ------         ------         ------         ------

                                                  $3,480         $3,487         $8,694         $8,808
                                                  ======         ======         ======         ======
</TABLE>

      Municipal  obligations  are  scheduled to mature  ratably over the next 11
      years.

      Proceeds from sales of investment  securities  totaled $713,000 during the
      year ended December 31, 2004, resulting in gross realized gains of $6,000.

      Proceeds from sales of investment  securities  totaled $3.0 million during
      the 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, 2004:

<TABLE>
<CAPTION>
                                 Less than 12 months                    12 months or longer                      Total
         Description of     Number of    Fair     Unrealized    Number of     Fair    Unrealized    Number of    Fair     Unrealized
            securities     investments   value      losses    investments     value     losses     investments   value      losses
                                                                      (Dollars in thousands)
<S>                              <C>     <C>         <C>              <C>    <C>        <C>                 <C>  <C>        <C>
      Corporate debt and
        agency securities        3       $  705      $    5           3      $  736     $   15              6    $1,441     $   20
                            ======       ======      ======      ======      ======     ======         ======    ======     ======
</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.


                                       32
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE C - LOANS RECEIVABLE

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

                                                              2004          2003
                                                              (In thousands)

      One- to four-family residential real estate         $ 84,432      $ 76,330
      Multi-family residential real estate                   2,158         2,168
      Construction                                           7,709         3,908
      Nonresidential real estate and land                   16,659        14,142
      Commercial                                             4,590         3,282
      Consumer and other loans                               2,802         2,676
                                                          --------      --------
                                                           118,350       102,506
      Less:
        Undisbursed loans in process                         2,746         1,361
        Deferred loan origination fees                          98            81
        Allowance for loan losses                              833           771
                                                          --------      --------

                                                          $114,673      $100,293
                                                          ========      ========

      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  $86.6 million,  or 76%, of the total
      loan  portfolio at December 31, 2004,  and $78.5  million,  or 78%, of the
      total loan  portfolio at December 31, 2003.  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  $102,000  and  $146,000  at  December  31,  2004 and  2003,
      respectively.


                                       33
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE D - ALLOWANCE FOR LOAN LOSSES

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

                                                           2004          2003
                                                              (In thousands)

      Beginning balance                                    $771          $764
      Provision for losses on loans                          96            52
      Charge-off of loans                                   (39)          (47)
      Recoveries                                              5             2
                                                           ----          ----

      Ending balance                                       $833          $771
                                                           ====          ====

      As of December 31, 2004, the Savings Bank's  allowance for loan losses was
      solely  general in nature,  and is includible as a component of regulatory
      risk-based capital.

      At  December  31,  2004 and 2003,  the Savings  Bank's  nonperforming  and
      impaired   loans   totaled   approximately   $816,000  and  $1.5  million,
      respectively.  Interest  income which would have been  recognized  if such
      loans had performed  pursuant to contractual  terms totaled  approximately
      $21,000  and  $30,000  for the years  ended  December  31,  2004 and 2003,
      respectively.

NOTE E - OFFICE PREMISES AND EQUIPMENT

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

                                                                2004        2003
                                                                (In thousands)

      Land and improvements                                   $  107      $  107
      Buildings and improvements                               1,303       1,299
      Furniture and equipment                                    953         974
      Automobiles                                                 19          19
                                                              ------      ------
                                                               2,382       2,399
        Less accumulated depreciation and amortization         1,442       1,334
                                                              ------      ------

                                                              $  940      $1,065
                                                              ======      ======


                                       34
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE F - DEPOSITS

      Deposits consist of the following major classifications at December 31:

      Deposit type and weighted-
      average interest rate                                 2004           2003
           (In thousands)
      Non-interest bearing accounts                      $ 4,058        $ 5,178
      NOW accounts
        2004 - 0.77%                                       7,993
        2003 - 0.46%                                                      7,525
      Savings accounts
        2004 - 0.50%                                       9,616
        2003 - 0.50%                                                      9,604
      Super Savers
        2004 - 0.75%                                       9,941
        2003 - 0.75%                                                     13,888
                                                         -------        -------
      Total demand, transaction and
        passbook deposits                                 31,608         36,195

      Certificates of deposit
        Original maturities of:
          Less than 12 months
            2004 - 1.54%                                   2,914
            2003 - 1.28%                                                  3,616
          12 months to 24 months
            2004 - 2.35%                                  27,628
            2003 - 2.15%                                                 23,653
          24 months to 36 months
            2004 - 3.24%                                   9,624
            2003 - 3.55%                                                  9,540
          More than 36 months
            2004 - 4.09%                                   2,565
            2003 - 4.16%                                                  1,716
        Individual retirement
          2004 - 2.62%                                     8,385
          2003 - 3.21%                                                    8,384
        Jumbo
          2004 - 2.38%                                     4,215
          2003 - 2.31%                                                    5,224
                                                         -------        -------

      Total certificates of deposit                       55,331         52,133
                                                         -------        -------

      Total deposits                                     $86,939        $88,328
                                                         =======        =======

      At December 31, 2004 and 2003, the Savings Bank had certificate of deposit
      accounts with balances in excess of $100,000 totaling  approximately $17.2
      million and $13.8 million, respectively.


                                       35
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE F - DEPOSITS (continued)

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

                                                               2004         2003
                                                               (In thousands)

      Savings, NOW and super savers                         $   180      $   271
      Certificates of deposit                                 1,242        1,648
                                                            -------      -------

                                                            $ 1,422      $ 1,919
                                                            =======      =======

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

                                                               2004         2003
         (In thousands)

      Less than six months                                  $18,215      $20,942
      Six months to one year                                 23,134       16,764
      One year to three years                                12,622       13,414
      Three years or more                                     1,360        1,013
                                                            -------      -------

                                                            $55,331      $52,133
                                                            =======      =======

NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

      Advances from the Federal Home Loan Bank,  collateralized  at December 31,
      2004 by pledges of  certain  residential  mortgage  loans  totaling  $25.4
      million and the Savings Bank's investment in Federal Home Loan Bank stock,
      are summarized as follows:

                                         Maturing
                                       year ending
      Interest rate                    December 31,          2004          2003
                                                               (In thousands)

          1.75%                             2004          $    --       $ 2,000
          1.57%                             2005            2,000            --
          2.51%                             2005            2,000            --
          2.40%                             2005            2,000            --
          2.66%                             2005            2,000            --
          2.69%                             2007            2,000            --
          3.34%                             2007            2,000            --
          3.71%                             2007            2,500            --
          3.73%                             2009            3,000            --
                                                          -------       -------

                                                          $17,500       $ 2,000
                                                          =======       =======

             Weighted-average interest rate                  2.89%         1.75%
                                                          =======       =======


                                       36
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE H - NOTES PAYABLE

      The  Corporation  has a revolving  line of credit with  another  financial
      institution  which allows the  Corporation to borrow up to $3.5 million at
      prime  rate  maturing  in  November   2006.  At  December  31,  2004,  the
      Corporation had $3.5 million outstanding under the line, which was paid in
      full in January 2005.

NOTE I - INCOME TAXES

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

                                                                2004       2003
                                                                (In thousands)

      Federal income taxes computed at 34% statutory rate      $ 509      $ 473
      Increase (decrease) in taxes resulting from:
        Dividends received deduction                              (6)        (5)
        Tax exempt interest                                       (3)        (3)
        State income taxes - net of federal tax benefits          90         90
        Other                                                     11          9
                                                               -----      -----

      Income tax provision per financial statements            $ 601      $ 564
                                                               =====      =====

      Effective income tax rate                                 40.1%      40.5%
                                                               =====      =====

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

      Taxes (payable) refundable on temporary                   2004       2003
      differences at statutory rate:                            (In thousands)

      Deferred tax assets:
        Stock benefit plans                                    $  10      $  10
        Deferred compensation                                    268        254
        General loan loss allowance                              283        289
        Deferred loan origination fees                            --         19
        Charitable contribution carryforward                      98         98
                                                               -----      -----
           Total deferred tax assets                             659        670

      Deferred tax liabilities:
        Federal Home Loan Bank stock dividends                   (21)       (10)
        Difference between book and tax depreciation             (71)       (85)
        Deferred loan origination costs                          (27)        --
        Unrealized gains on securities available for sale       (515)      (443)
        State income taxes                                       (38)       (40)
                                                               -----      -----
           Total deferred tax liabilities                       (672)      (578)
                                                               -----      -----

           Net deferred tax asset (liability)                  $ (13)     $  92
                                                               =====      =====


                                       37
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE I - INCOME TAXES (continued)

      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, 2004, includes  approximately $1.2
      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.

NOTE J - 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,  2004  and  2003,  the  Savings  Bank  had   outstanding
      commitments of approximately $1.3 million and $3.2 million,  respectively,
      to originate  loans.  The Savings Bank was obligated under unused lines of
      credit  for home  equity  loans in the  amount  of $2.1  million  and $1.6
      million at December 31, 2004 and 2003,  respectively,  and unused lines of
      credit under  commercial  loans  totaling  $4.5 million and $3.9  million,
      respectively  at those dates.  Additionally,  at December  31,  2004,  the
      Savings Bank was obligated under $297,000 of standby letters of credit. In
      the  opinion of  management,  all loan  commitments  equaled  or  exceeded
      prevalent  market  interest  rates as of December  31,  2004,  and will be
      funded from normal cash flow from operations and borrowings as necessary.

NOTE K- 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.


                                       38
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

NOTE K - REGULATORY CAPITAL (continued)

      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%.

      During  2004,  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, 2004 and 2003,  management  believes  that the Savings
      Bank met all capital adequacy requirements to which it was subject.

<TABLE>
<CAPTION>
                                                       As of December 31, 2004
                                                                                            To be "well-
                                                                                         capitalized" under
                                                             For capital                 prompt corrective
                                     Actual              adequacy purposes               action provisions
                                ---------------       ----------------------           ----------------------
                                Amount    Ratio           Amount    Ratio                Amount        Ratio
                                                      (Dollars in thousands)
<S>                             <C>        <C>           <C>          <C>              <C>           <C>
      Tangible capital          $21,738    16.9%         =/>$1,928    =/>1.5%          =/>$6,425     =/> 5.0%

      Core capital              $21,738    16.9%         =/>$5,140    =/>4.0%          =/>$7,710     =/> 6.0%

      Risk-based capital        $23,252    28.7%         =/>$6,480    =/>8.0%          =/>$8,100     =/>10.0%

<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
                                                        (Dollars in thousands)
<S>                             <C>        <C>           <C>          <C>              <C>           <C>
      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>

      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.


                                       39
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

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

      The  following  condensed  financial  statements  summarize  the financial
      position  of the  Corporation  as of December  31, 2004 and 2003,  and the
      results of its  operations and its cash flows for the years ended December
      31, 2004 and 2003.

                                PFS BANCORP, INC.
                        STATEMENTS OF FINANCIAL CONDITION
                           December 31, 2004 and 2003
                                 (In thousands)

<TABLE>
<CAPTION>
       ASSETS                                                                         2004           2003
<S>                                                                               <C>            <C>
      Interest-bearing deposits in Peoples Federal Savings Bank                   $    424       $    161
      Interest-bearing deposits in other financial institutions                         --             14
      Investment securities                                                             --          4,396
      Loan receivable from ESOP                                                        730            852
      Investment in Peoples Federal Savings Bank                                    22,771         21,391
      Prepaid expenses and other                                                        --             28
      Prepaid income taxes                                                              22             19
      Deferred income taxes                                                             98             87
                                                                                  --------       --------

            Total assets                                                          $ 24,045       $ 26,948
                                                                                  ========       ========

      LIABILITIES AND SHAREHOLDERS' EQUITY

      Note payable                                                                $  3,500       $     --
      Accrued expenses and other liabilities                                            16             26
                                                                                  --------       --------
            Total liabilities                                                        3,516             26

      Shareholders' equity
        Common stock and additional paid-in capital                                 15,122         15,045
        Retained earnings                                                            7,298         14,101
        Treasury stock                                                              (1,282)        (1,282)
        Shares acquired by stock benefit plans                                      (1,608)        (1,801)
        Unrealized gains on securities designated as available for sale, net           999            859
                                                                                  --------       --------
            Total shareholders' equity                                              20,529         26,922
                                                                                  --------       --------

            Total liabilities and shareholders' equity                            $ 24,045       $ 26,948
                                                                                  ========       ========
</TABLE>


                                       40
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

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

                                PFS BANCORP, INC.
                             STATEMENTS OF EARNINGS
                     Years ended December 31, 2004 and 2003
                                 (In thousands)

                                                             2004          2003

Revenue
  Interest income                                         $   140       $   192
  Gain on sale of investment securities                         6            --
  Equity in earnings of Peoples Federal Savings Bank          949           851
                                                          -------       -------
      Total revenue                                         1,095         1,043

Interest expense                                               32            --
General and administrative expenses                           199           232
                                                          -------       -------
      Total expense                                           231           232
Earnings before income tax credits                            864           811

Income tax credits                                            (33)          (16)
                                                          -------       -------

      NET EARNINGS                                        $   897       $   827
                                                          =======       =======


                                       41
<PAGE>

                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                     Years ended December 31, 2004 and 2003

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

                                PFS BANCORP, INC.
                            STATEMENTS OF CASH FLOWS
                     Years ended December 31, 2004 and 2003
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                   2004           2003
<S>                                                            <C>            <C>
Cash provided by (used in) operating activities:
  Net earnings for the year                                    $    897       $    827
  Adjustments to reconcile net earnings to net
  cash provided by (used in) operating activities
     Amortization of premiums and discounts on investment
       securities - net                                              10             20
    Gain on sale of investment securities                            (6)            --
    Equity in earnings of Peoples Federal Savings Bank             (949)          (851)
    Increase (decrease) in cash due to changes in:
      Accrued interest receivable                                    28             --
      Prepaid expenses and other assets                              --              3
      Prepaid income taxes                                            2            (51)
      Deferred income taxes                                          (4)            (1)
      Other liabilities                                             (11)             1
                                                               --------       --------
      Net cash used in operating activities                         (33)           (52)

Cash flows provided by (used in) investing activities:
  Purchase of investment securities                             (17,937)       (17,952)
  Proceeds from maturity of investment securities                21,584         18,350
  Proceeds from sale of investment securities                       713             --
  Proceeds from repayments on loan to ESOP                          122            121
                                                               --------       --------
      Net cash provided by investing activities                   4,482            519

Cash flows provided by (used in) financing activities:
  Proceeds from note payable                                      3,500             --
  Purchases of treasury stock                                        --         (1,282)
  Dividends paid on common stock                                 (7,700)          (449)
                                                               --------       --------
      Net cash used in financing activities                      (4,200)        (1,731)
                                                               --------       --------

Net increase (decrease) in cash and cash equivalents                249         (1,264)

Cash and cash equivalents at beginning of year                      175          1,439
                                                               --------       --------

Cash and cash equivalents at end of year                       $    424       $    175
                                                               ========       ========
</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 2004
and 2003, the Savings Bank did not distribute dividends to the Corporation.  The
Savings Bank applied for and received  approval to pay $6.5 million of dividends
to the Corporation in 2005.


                                       42
<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,
                                                    Chief Operating Officer and
                                                    Chief Financial Officer


                                       43
<PAGE>

                                PFS Bancorp, Inc.

                  BANKING LOCATIONS AND SHAREHOLDER 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  Shareholders  of PFS Bancorp will be held on May 5,
2005, 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

                              SHAREHOLDER REQUESTS

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

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


                                       44