EXHIBIT 13




                               [PFS BANCORP LOGO]










                                PFS BANCORP, INC.

                               2002 ANNUAL REPORT

                                 TO STOCKHOLDERS





<PAGE>



                                TABLE OF CONTENTS

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

<TABLE>
<CAPTION>

                                                                                                               Page
                                                                                                               ----
<S>                                                                                                            <C>

President's Letter to Stockholders..............................................................................1

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

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

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

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

Report of Independent Certified Public Accountants.............................................................15

Consolidated Statements of Financial Condition.................................................................16

Consolidated Statements of Earnings............................................................................17

Consolidated Statements of Comprehensive Income................................................................18

Consolidated Statements of Shareholders' Equity................................................................19

Consolidated Statements of Cash Flows..........................................................................20

Notes to Consolidated Financial Statements.....................................................................22

Directors and Executive Officers...............................................................................42

Banking Locations and Stockholder Information..................................................................43

</TABLE>

                                       i


<PAGE>



                               PRESIDENT'S LETTER

Dear Shareholders,

We are pleased to present the second Annual Report of PFS Bancorp, Inc. Peoples
Federal Savings Bank converted from the mutual to stock form of ownership in
October 2001, culminating in the sale of 1,520,875 shares at an initial issuance
price of $10.00 per share.

In connection with our conversion to stock form, we changed our June 30th fiscal
reporting year to a calendar year. As a result, our consolidated financial
statements herein reflect this transition as we report on our financial
condition as of and for the year ended December 31, 2002 compared to the fiscal
year ended June 30, 2001.

Our entry into the world of publicly traded thrifts has been extremely
successful. Net earnings for the year ended December 31, 2002, totaled $853,000,
an increase of $105,000, or 14.0% over the $748,000 of net earnings recorded for
the fiscal year ended June 30, 2001.

The improvement in our core operations was primarily fueled by a $551,000, or
16.7% increase in net interest income after the provision for losses on loans.
Our assets at December 31, 2002 totaled $119 million, representing a modest
decrease of $209,000, or 0.2% compared to December 31, 2001 levels.
Shareholders' equity at December 31, 2002 totaled a solid $27.6 million, or
23.2% of total assets, representing the highest capital to assets ratio of any
financial institution headquartered in southeastern Indiana.

Apparently, the investment community appreciates our efforts to date. At
December 31, 2002, our share price had climbed to $15.55, representing a 14.3%
increase over the December 31, 2001 closing price. This same period saw the Dow
Jones Industrial Average drop nearly 16.8%. We have continued to enhance
shareholder value by paying a 5 cent dividend in the last three quarters of 2002
and increased the dividend by 50% to 7.5 cents per share for the first quarter
of 2003. Shareholders' equity was further enhanced through a stock repurchase of
5%, or 77,565 shares, of common stock in March 2003. This stock repurchase was
announced and completed on the same day at approximately $1.29 below book value
per share.

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

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

I wish to thank our directors, officers and employees for their support and
their continued service and dedication to PFS Bancorp and the Bank. 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 loans, multi-family
loans, non-residential real estate loans and 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, 2002, PFS Bancorp had total assets of $119.0 million, deposits of
$89.4 million and total shareholders' equity of $27.6 million.

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



                                       2

<PAGE>



                                PFS BANCORP, INC.

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



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




                                 HIGH              LOW       DIVIDENDS
       Quarter ended:
       December 31, 2001        $14.40           $12.15       $ --
       March 31, 2002            14.36            13.25         --
       June 30, 2002             15.95            14.05        .05
       September 30, 2002        17.60            15.26        .05
       December 31, 2002         16.06            14.43        .05

         As of March 21, 2003, PFS Bancorp had 1,473,728 common shares
outstanding held of record by approximately 348 stockholders. The number of
stockholders does not reflect the number of persons or entities who may hold
stock in nominee or "street" name through brokerage firms or others.




                                       3

<PAGE>



                                PFS BANCORP, INC.

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


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

<TABLE>
<CAPTION>

                                                                       At December 31,                       At June 30,
                                                              --------------------------------               -----------
                                                                2002                    2001                     2001
                                                              --------                --------               -----------
                                                                             (Dollars In Thousands)
<S>                                                           <C>                     <C>                      <C>
SELECTED BALANCE SHEET DATA:
Total assets.................................                 $119,036                $119,245                 $114,569
Cash and cash equivalents(1).................                    5,225                  13,854                   14,853
Investment securities available for sale.....                   15,142                   5,953                    1,450
Investment securities held to maturity.......                      161                     169                      169
Loans receivable-net ........................                   95,702                  96,772                   95,457
Deposits.....................................                   89,420                  90,429                   98,649
Borrowings...................................                    1,000                      --                    1,000
Shareholders' equity(2)......................                   27,597                  27,836                   13,865
Full service offices.........................                        3                       3                        3

</TABLE>


<TABLE>
<CAPTION>


                                                    Year Ended            Six Months Ended             Year Ended
                                                   December 31,             December 31,                June 30,
                                                       2002                     2001                      2001
                                                   ------------           ----------------             ----------
                                                               (In thousands, except per share data)
<S>                                                   <C>                      <C>                       <C>
SELECTED OPERATING DATA:
Total interest income........................         $6,840                   $3,785                    $8,406
Total interest expense.......................          2,900                    2,045                     4,953
                                                      ------                   ------                     -----
Net interest income..........................          3,940                    1,740                     3,453
Provision for losses on loans ...............             92                       48                       156
                                                      ------                   ------                    ------
Net interest income after
  provision for losses on loans .............          3,848                    1,692                     3,297
Total other income...........................            336                      180                       666
Total general, administrative and other
  expense....................................          2,707                    1,543                     2,677
                                                      ------                   ------                     -----
Earnings before income taxes.................          1,477                      329                     1,286
Income taxes.................................            624                      148                       538
                                                      ------                   ------                    ------
Net earnings.................................         $  853                   $  181                    $  748
                                                      ======                   ======                    ======
Earnings per share...........................         $  .59                      N/A                       N/A
                                                      ======

                                                                                   (Footnotes on following page)

</TABLE>

                                       4

<PAGE>



                                PFS BANCORP, INC.

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

<TABLE>
<CAPTION>


                                                                          Year Ended       Six Months Ended        Year Ended
                                                                          December 31,        December 31,          June 30,
                                                                             2002                 2001                2001
                                                                          ------------     ----------------        ----------
<S>                                                                         <C>                 <C>                   <C>

SELECTED OPERATING RATIOS(3):
PERFORMANCE RATIOS:
Return on average assets ............................................          .71%                 .31%                 .65%
Return on average equity ............................................         3.08                 1.89                 5.63
Equity to assets at end of period ...................................        23.18                23.34                12.10
Interest rate spread(4) .............................................         2.51                 2.37                 2.59
Net interest margin(4) ..............................................         3.33                 3.01                 3.10
Average interest-earning assets to
  average interest-bearing liabilities ..............................       133.39               118.00               112.02
Net interest income after provision
  for losses on loans to total general,
  administrative and other expense ..................................       142.15               109.66               123.16
Total general, administrative and other
  expense to average total assets ...................................         2.25                 2.60                 2.33
ASSET QUALITY RATIOS:
Non-performing loans to total
  loans at end of period(5) .........................................          .93%                1.87%                1.13%
Non-performing assets to
  total assets at end of period(5) ..................................          .95                 1.62                 1.03
Allowance for loan losses to total
  loans at end of period ............................................          .78                  .73                  .73
Allowance for loan losses to total
 non-performing loans at end of
 period(5) ..........................................................        84.79                39.18                63.71
CAPITAL RATIOS:
Tangible capital ratio ..............................................         17.4%                17.3%                11.4%
Core capital ratio ..................................................         17.4                 17.3                 11.4
Risk-based capital ratio ............................................         29.3                 29.4                 20.1

</TABLE>

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

(2)      Consists of retained earnings only at June 30, 2001.

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

(4)      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.

(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.


                                       5

<PAGE>


                                PFS BANCORP, INC.

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

GENERAL

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

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

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

FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CHANGE

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



                                       6

<PAGE>




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


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

<TABLE>
<CAPTION>

                                                                             Year Ended December 31,         Year Ended June 30,
                                                                           --------------------------   ---------------------------
                                                    At December 31, 2002               2002                         2001
                                                    ---------------------  --------------------------   ---------------------------
                                                                                              Average                       Average
                                                                            Average            Yield/    Average              Yield/
                                                     Balance   Yield/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)......................   $  95,702    5.77%     $ 95,104    $6,246   6.57%   $ 96,494   $  7,793    8.08%
  Investment and mortgage-backed securities......      16,033    3.31        12,304       409   3.32       2,261         74    3.27
  Deposits in other financial institutions (2)...       5,225    1.49        10,982       185   1.68      12,639        539    4.26
                                                     --------    ----      --------    ------ ------    --------   --------  ------
    Total interest-earning assets................     116,960    5.24       118,390     6,840   5.78     111,394      8,406    7.55
  Non-interest-earning assets....................       2,076                 2,005                        3,711
                                                     --------              --------                     --------
    Total assets.................................    $119,036              $120,395                     $115,105
                                                     ========              ========                     ========

INTEREST-BEARING LIABILITIES:
  Deposits.......................................    $ 86,749    2.65      $ 88,600     2,898   3.27    $ 97,339      4,775    4.91
  FHLB advances..................................       1,000    1.62           154         2   1.30       2,601        178    6.84
                                                     --------    ----      --------    ------ ------    --------   --------  ------
    Total interest-bearing liabilities...........      87,749    2.64        88,754     2,900   3.27      99,940      4,953    4.96
                                                                                       ------ ------               --------  ------
  Non-interest-bearing liabilities...............       3,690                 3,943                        1,876
                                                     --------              --------                     --------
    Total liabilities............................      91,439                92,697                      101,816
  Total equity(3)................................      27,597                27,698                       13,289
                                                     --------              --------                     --------
    Total liabilities and equity.................    $119,036              $120,395                     $115,105
                                                     ========              ========                     ========
  Net interest-earning assets....................                          $ 29,636                     $ 11,454
                                                                           ========                     ========
  Net interest income............................                                      $3,940                      $  3,453
                                                                                       ======                      ========

  Interest rate spread...........................                2.60%                          2.51%                          2.59%
                                                                 ====                         ======                         ======
  Net interest margin............................                                               3.33%                          3.10%
                                                                                              ======                         ======
  Average interest-earning assets to average
   interest-bearing liabilities..................                                             133.39%                        111.46%
                                                                                              ======                         ======

</TABLE>

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

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

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

   (3) Includes retained earnings and accumulated other comprehensive income.



                                  7

<PAGE>





                                PFS BANCORP, INC.

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



RATE/VOLUME ANALYSIS

         The following table shows the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities affected PFS
Bancorp's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), and (ii) changes in rate (change in
rate multiplied by prior year volume). The combined effect of changes in both
rate and volume has been allocated proportionately to the change due to rate and
the change due to volume.

<TABLE>
<CAPTION>


                                                              Year Ended December 31,
                                                         2002 vs Year Ended June 30, 2001
                                                      --------------------------------------
                                                             Increase
                                                            (Decrease)
                                                              Due To                Total
                                                      -----------------------      Increase
                                                      Yield/Rate       Volume     (Decrease)
                                                      ----------       ------     ----------
                                                                   (In Thousands)
<S>                                                    <C>             <C>          <C>
INTEREST-EARNING ASSETS:
  Loans receivable, net.........................       $(1,436)        $ (111)      $(1,547)
  Investment securities.........................             1            334           335
  Deposits in other financial institutions......          (272)           (82)         (354)
                                                       -------         ------       -------
    Total.......................................        (1,707)           141        (1,566)

INTEREST-BEARING LIABILITIES:
  Deposits......................................        (1,395)          (482)       (1,877)
  Borrowings....................................           (81)           (91)         (176)
                                                       -------         ------       -------
      Total.....................................        (1,476)          (577)       (2,053)
                                                       -------         ------       -------
  Increase (decrease) in net interest income....       $  (231)        $  718       $   487
                                                       =======         ======       =======

</TABLE>



                                       8

<PAGE>


                                PFS BANCORP, INC.

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

CHANGES IN FINANCIAL CONDITION FROM DECEMBER 31, 2001 TO DECEMBER 31, 2002

         Total assets amounted to $119.0 million at December 31, 2002, a
decrease of $209,000, or .2%, compared to December 31, 2001.

         Cash and cash equivalents decreased by $8.6 million, or 62.3%, as these
funds were re-deployed into higher yielding investment securities and mortgage
loans. Investment securities totaled $15.3 million at December 31, 2002, an
increase of $9.2 million, or 150.0%, due primarily to purchases of $26.6 million
of short term corporate debt securities, which were partially offset by
maturities of $17.4 million. The aggregate yield on investment securities was
3.32% for 2002 while the aggregate yield on interest-bearing deposits in other
financial institutions was 1.68% for 2002.

         Loans receivable totaled $95.7 million at December 31, 2002, a decrease
of $1.1 million, or 1.1%, from December 31, 2001. The decrease in loans reflects
principal repayments during the 2002 period of $29.6 million, which were
substantially offset by loan disbursements totaling $28.8 million. At December
31, 2002, the allowance for loan losses of Peoples totaled $764,000, an increase
of $45,000, or 6.3%, over the level maintained at December 31, 2001. At December
31, 2002, the allowance represented approximately .80% of the total loan
portfolio and 84.8% of total non-performing loans. As of December 31, 2002, the
ratio of non-performing loans to total loans amounted to .93% compared to 1.87%
at December 31, 2001. Nonperforming loans amounted to $901,000 and $1.8 million
at December 31, 2002 and 2001, respectively. At December 31, 2002, nonperforming
loans were comprised primarily of $816,000 of loans secured by one- to
four-family residential real estate and $85,000 of consumer loans. It is the
opinion of management that nonperforming loans are adequately collateralized and
no unreserved losses are anticipated on nonperforming loans. Although management
believes that its allowance for loan losses at December 31, 2002, was adequate
based on 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 decreased by $1.0 million, or 1.1%, year to year while
advances from the Federal Home Loan Bank increased by $1.0 million compared to
the prior year. Shareholders' equity totaled $27.6 million at December 31, 2002,
a decrease of $239,000 or .9%, from December 31, 2001. The decrease in
stockholders' equity was the result of a $1.0 million purchase of PFS Bancorp,
Inc. stock for the Recognition and Retention Plan and dividends paid of
$232,000, which were partially offset by net earnings of $853,000 and $162,000
of amortization for the allocation of shares in connection with the
Corporation's Employee Stock Ownership Plan.

COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE
YEAR ENDED JUNE 30, 2001

         GENERAL. During 2001, the Corporation elected to change its annual
reporting period from a June 30th fiscal period to a December 31st calendar
period. As a result, the following discussion and analysis compares the
Corporation's results of operations for the year ended December 31, 2002 to the
fiscal year ended June 30, 2001. Net earnings amounted to $853,000 for the year
ended December 31, 2002, compared

                                       9

<PAGE>


                                PFS BANCORP, INC.

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


to $748,000 for the fiscal year ended June 30, 2001. The increase in earnings of
$105,000, or 14.0%, was due primarily to a $487,000 increase in net interest
income and a $64,000 decrease in the provision for losses on loans, which were
partially offset by a $330,000 decrease in other income, a $30,000 increase in
general, administrative and other expense, and an $86,000 increase in income
taxes.

         NET INTEREST INCOME. Total interest income amounted to $6.8 million for
the year ended December 31, 2002, compared to $8.4 million for the fiscal year
ended June 30, 2001. The decrease of $1.6 million, or 18.6%, was due primarily
to a decrease of $1.5 million, or 18.7%, in interest income on loans, as a
result of a 151 basis point decrease in the average yield on loans and a $1.4
million, or 1.4%, decrease in the average balance of loans outstanding period to
period. The decrease in the average yield, from 8.08% for the year ended June
30, 2001, to 6.57% for the year ended December 31, 2002 primarily reflects a
decrease in market rates.

         Interest expense decreased by $2.1 million, or 41.4%, to $2.9 million
for the year ended December 31, 2002, compared to $5.0 million for the fiscal
year ended June 30, 2001. Such decrease was due to a decline in interest expense
on both deposits and borrowings. Interest expense on deposits decreased by $1.9
million, or 39.3%, due primarily to a decrease in the average rate paid from
4.91% for the fiscal year ended June 30, 2001 to 3.27% for the year ended
December 31, 2002 and an $8.7 million, or 9.0%, decrease in the average balance
of deposits outstanding period to period. The decrease in the rate paid reflects
a decrease in market rates. Interest expense on borrowings decreased by
$176,000, or 98.9%, due primarily to a decrease in the average balance
outstanding as the Corporation used excess funds to reduce borrowings.

         As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $487,000, or 14.1%, to $3.9 million
for the year ended December 31, 2002, compared to the fiscal year ended June 30,
2001. The interest rate spread decreased from 2.59% for the fiscal year ended
June 30, 2001 to 2.51% for the year ended December 31, 2002, while the net
interest margin increased from 3.10% to 3.33% from period to period. The ratio
of average interest-earning assets to average interest- bearing liabilities
increased from 111.46% to 133.39% from period to period, respectively.

         PROVISION FOR LOSSES ON LOANS. Peoples charges a provision for losses
on loans to earnings to bring the total allowance for loan losses to a level
considered appropriate by management based on historical experience, the volume
and type of lending conducted by Peoples, the status of past due principal and
interest payments, general market conditions, particularly as such conditions
relate to Peoples' market area, and other factors related to the collectibility
of Peoples' loan portfolio. Specifically, Peoples' methodology for assessing the
appropriateness of the allowance consists of a formula allowance, a specific
allowance, and an unallocated allowance. The formula allowance is based on loss
factors applied to the categories of Peoples' loan portfolio based on historical
experience. The specific allowance relates to specific categories of loans based
on recent loss experience, charge-offs, and current economic conditions related
to specific borrowers. The unallocated allowance is based upon management's
evaluation of various conditions, including general economic and business
conditions and credit quality trends, the effects of which are not directly
measured in the determination of the formula and specific allowance. The
evaluation of the inherent loss with respect



                                       10

<PAGE>


                                PFS BANCORP, INC.

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


to these conditions is subject to a higher degree of uncertainty because they
are not identified with specific credits.

         As a result of such analysis, management recorded a provision of
$92,000 for the year ended December 31, 2002 and $156,000 for the fiscal year
ended June 30, 2001. The provision for 2002 was predicated primarily on the
level of nonperforming loans and the $47,000 of net charge-offs during the year.

         While management believes that, based on information currently
available, the allowance for loan losses is sufficient to cover losses inherent
in Peoples' loan portfolio at this time, no assurance can be given that the
level of the allowance will be sufficient to cover future loan losses or that
future adjustments to the allowance will not be necessary if economic and/or
other conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of the
allowance.

         OTHER INCOME. Other income amounted to $336,000 for the year ended
December 31, 2002, a decrease of $330,000, or 49.5%, compared to the fiscal year
ended June 30, 2001. The decrease was due primarily to a $344,000 gain on sale
of investment securities recorded in the year ended June 30, 2001. Other
operating income increased by $19,000, or 6.0%, due primarily to an increase in
service fees on NOW and demand deposit accounts.

         GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $2.7 million for the year ended December 31, 2002, an
increase of $30,000, or 1.1%, over the fiscal year ended June 30, 2001. Employee
compensation and benefits decreased by $241,000, or 14.3%, due to the expense of
$622,000 related to the establishment of a deferred compensation plan in the
fiscal year ended June 30, 2001, which provides retirement benefits to directors
and certain officers of Peoples. This decline was partially offset by an
increase in compensation for additional staffing, normal merit increases and a
$212,000 increase in costs related to the stock benefit plans. Data processing
expense increased by $145,000, or 66.5%, due primarily to costs incurred in
connection with a conversion in data processing systems during 2002. This
conversion to the new data processing platform is expected to facilitate the
Savings Bank's expansion of its product offerings and accommodate future growth.
A $125,000 payment to terminate the contract of the former data processor was
expensed in 2002. Other operating expense increased by $63,000, or 13.7%, to
$523,000 for the year ended December 31, 2002 compared to the fiscal year ended
June 30, 2001. The increase was primarily due to increased professional fees
associated with PFS Bancorp operating as a public company for the full year
ended December 31, 2002.

         INCOME TAX. The provision for income tax totaled $624,000 for the year
ended December 31, 2002, an increase of $86,000, or 16.0%, over the fiscal year
ended June 30, 2001. The increase was due primarily to the rise in pre-tax
earnings of $191,000, or 14.9%, over comparable earnings for the fiscal year
ended June 30, 2001. The effective tax rates for the years ended December 31,
2002 and June 30, 2001 were 42.2% and 41.8%, respectively.



                                       11

<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, 2002, $16.1 million,
or 16.5%, 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, 2002,
$81.3 million, or 83.5% 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.


                                       12

<PAGE>


                                PFS Bancorp, Inc.

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

         The following table presents Peoples' net portfolio value as of
December 31, 2002.

<TABLE>
<CAPTION>

                                                Net Portfolio Value
---------------------------------------------------------------------------------------------------------------
                                                    Estimated
      Change in                                     NPV as a                                    Change as a
    Interest Rates           Estimated             Percentage              Amount               Percentage
    (basis points)              NPV                 of Assets             of Change              of Assets
-------------------    -------------------    -------------------   -------------------    -------------------
                                          (Dollars In Thousands)
<S>                         <C>                     <C>                   <C>                     <C>

         +300               $21,360                  18.80%               $(545)                  (13)bp
         +200                22,001                  19.17                   96                    24 bp
         +100                22,066                  19.13                  161                    20 bp
            0                21,905                  18.93                   --                    --
         -100                21,821                  18.78                  (84)                  (15)bp

</TABLE>

         The following table presents Peoples' net portfolio values as of
December 31, 2001.

<TABLE>
<CAPTION>

                                                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               $22,667                  19.65%               $(2,001)                (112)bp
         +200                23,651                  20.25                 (1,017)                 (52)bp
         +100                24,250                  20.57                   (418)                 (20)bp
            0                24,668                  20.77                     --                   --
         -100                24,823                  20.78                    155                    1 bp

</TABLE>


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




                                       13

<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.

         At December 31, 2002, Peoples had outstanding commitments to originate
loans (including lines of credit) totaling $5.5 million. In addition, as of
December 31, 2002, the amount of certificates of deposit which were scheduled to
mature in the following 12 months totaled $40.8 million. Peoples believes that
it has adequate resources to fund all of its commitments and that it can adjust
the rate on certificates of deposit to retain deposits in changed interest rate
environments. If Peoples requires funds beyond its internal funding
capabilities, advances from the Federal Home Loan Bank of Indianapolis are
available as an additional source of funds.

         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, 2002, Peoples exceeded each of its capital
requirements, with tangible, core and risk-based capital ratios of 17.4%, 17.4%
and 29.3%, 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.




                                       14

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
PFS Bancorp, Inc.

We have audited the accompanying consolidated statements of financial condition
of PFS Bancorp, Inc. as of December 31, 2002 and 2001, and the related
consolidated statements of earnings, comprehensive income, shareholders' equity
and cash flows for the year ended December 31, 2002, for the six month period
ended December 31, 2001 and for the fiscal year ended June 30, 2001. These
consolidated financial statements are the responsibility of the Savings Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PFS Bancorp, Inc.
as of December 31, 2002 and 2001, and the results of its operations and its cash
flows for the year ended December 31, 2002, for the six month period ended
December 31, 2001 and for the fiscal year ended June 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.


/s/ Grant Thornton LLP

Cincinnati, Ohio
February 28, 2003 (except for Note M, as to which the date is March 10, 2003)


                                       15

<PAGE>



                                PFS BANCORP, INC.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                           December 31, 2002 and 2001
                        (In thousands, except share data)

<TABLE>
<CAPTION>


         ASSETS                                                                          2002               2001
<S>                                                                                   <C>                <C>

Cash and due from banks                                                               $     819          $   1,034
Interest-bearing deposits in other financial institutions                                 4,406             12,820
                                                                                      ---------          ---------
         Cash and cash equivalents                                                        5,225             13,854
Investment securities designated as available for sale -
  at market                                                                              15,142              5,953
Investment securities held to maturity - at amortized cost, which
  approximates market                                                                       161                169
Loans receivable - net                                                                   95,702             96,772
Office premises and equipment - at depreciated cost                                       1,170              1,069
Real estate acquired through foreclosure                                                    228                101
Federal Home Loan Bank stock - at cost                                                      730                699
Accrued interest receivable                                                                 446                397
Prepaid expenses and other assets                                                           176                 32
Prepaid federal income taxes                                                                 --                199
Deferred federal income taxes                                                                56                 --
                                                                                      ---------          ---------
         Total assets                                                                 $ 119,036          $ 119,245
                                                                                      =========          =========


         LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits                                                                              $  89,420          $  90,429
Advances from the Federal Home Loan Bank                                                  1,000                 --
Advances by borrowers for taxes and insurance                                                80                 75
Accrued interest payable                                                                     26                 35
Other liabilities                                                                           883                752
Deferred federal income taxes                                                                --                118
Accrued federal income taxes                                                                 30                 --
                                                                                      ---------          ---------
         Total liabilities                                                               91,439             91,409

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 and outstanding                                                  16                 16
  Additional paid-in capital                                                             14,971             14,931
  Retained earnings - substantially restricted                                           13,723             13,102
  Shares acquired by stock benefit plans                                                 (1,994)            (1,095)
  Accumulated other comprehensive income - unrealized gains on
    securities designated as available for sale, net of related tax effects                 881                882
                                                                                      ---------          ---------
         Total shareholders' equity                                                      27,597             27,836
                                                                                      ---------          ---------

         Total liabilities and shareholders' equity                                   $ 119,036          $ 119,245
                                                                                      =========          =========

</TABLE>

The accompanying notes are an integral part of these statements.

                                       16

<PAGE>


                                PFS BANCORP, INC.

                       CONSOLIDATED STATEMENTS OF EARNINGS

                        (In thousands, except share data)

<TABLE>
<CAPTION>



                                                                        YEAR ENDED      SIX MONTHS ENDED    YEAR ENDED
                                                                        DECEMBER 31,      DECEMBER 31,       JUNE 30,
                                                                           2002              2001              2001
<S>                                                                       <C>               <C>               <C>

Interest income
  Loans                                                                   $ 6,246           $ 3,518           $ 7,793
  Investment and mortgage-backed securities                                   409                26                17
  Interest-bearing deposits and other                                         185               241               596
                                                                          -------           -------           -------
         Total interest income                                              6,840             3,785             8,406

Interest expense
  Deposits                                                                  2,898             2,026             4,775
  Borrowings                                                                    2                19               178
                                                                          -------           -------           -------
         Total interest expense                                             2,900             2,045             4,953
                                                                          -------           -------           -------

         Net interest income                                                3,940             1,740             3,453

Provision for losses on loans                                                  92                48               156
                                                                          -------           -------           -------

         Net interest income after provision for
           losses on loans                                                  3,848             1,692             3,297

Other income
  Gain on sale of real estate acquired through foreclosure                     --                --                 5
  Gain on sale of investment securities                                        --                --               344
  Other operating                                                             336               180               317
                                                                          -------           -------           -------
         Total other income                                                   336               180               666

General, administrative and other expense
  Employee compensation and benefits                                        1,446               749             1,687
  Occupancy and equipment                                                     299               129               262
  Data processing                                                             363               115               218
  Federal deposit insurance premiums                                           56                26                50
  Contribution to charitable foundation                                        --               304                --
  Provision for losses on real estate acquired through
    foreclosure                                                                20                --                --
  Other operating                                                             523               220               460
                                                                          -------           -------           -------
         Total general, administrative and other expense                    2,707             1,543             2,677
                                                                          -------           -------           -------

         Earnings before income taxes                                       1,477               329             1,286

Income taxes
  Current                                                                     798               175               785
  Deferred                                                                   (174)              (27)             (247)
                                                                          -------           -------           -------
         Total income taxes                                                   624               148               538
                                                                          -------           -------           -------

         NET EARNINGS                                                     $   853           $   181           $   748
                                                                          =======           =======           =======

         EARNINGS PER SHARE                                               $   .59               N/A               N/A
                                                                          =======           =======           =======

</TABLE>

The accompanying notes are an integral part of these statements.

                                       17

<PAGE>


                                PFS BANCORP, INC.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                 (In thousands)

<TABLE>
<CAPTION>


                                                                    YEAR ENDED      SIX MONTHS ENDED    YEAR ENDED
                                                                   DECEMBER 31,       DECEMBER 31,       JUNE 30,
                                                                       2002               2001             2001
<S>                                                                  <C>               <C>               <C>

Net earnings                                                         $   853           $   181           $   748

Other comprehensive income (loss), net of tax:
  Unrealized holding gains (losses) on securities during
    the period, net of taxes (benefits) of $(32) during the
    six months ended December 31, 2001, and $253
    for the fiscal year ended June 30, 2001                               (1)              (62)              492

  Reclassification adjustment for realized gains included
    in earnings, net of tax of $117                                       --                --              (227)
                                                                     -------           -------           -------

Comprehensive income                                                 $   852           $   119           $ 1,013
                                                                     =======           =======           =======

Accumulated comprehensive income                                     $   881           $   882           $   944
                                                                     =======           =======           =======

</TABLE>

The accompanying notes are an integral part of these statements.

                                       18

<PAGE>


                                PFS BANCORP, INC.

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                  For the year ended December 31, 2002, the six
                     months ended December 31, 2001 and the
                         fiscal year ended June 30, 2001
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                         UNREALIZED GAINS
                                                                                               SHARES      (LOSSES) ON
                                                                      ADDITIONAL              ACQUIRED      SECURITIES
                                                             COMMON    PAID-IN    RETAINED    BY STOCK     DESIGNATED AS
                                                             STOCK     CAPITAL    EARNINGS  BENEFIT PLAN AVAILABLE FOR SALE   TOTAL
<S>                                                         <C>        <C>        <C>         <C>         <C>              <C>

Balance at July 1, 2000                                     $     --   $     --   $ 12,173    $     --    $    679         $ 12,852

Net earnings for the year ended June 30, 2001                     --         --        748          --          --              748
Unrealized gains on securities designated as
  available for sale, net of related tax effects                  --         --         --          --         265              265
                                                            --------   --------   --------    --------    --------         --------

Balance at June 30, 2001                                          --         --     12,921          --         944           13,865

Net proceeds from issuance of common stock                        15     14,605         --      (1,217)         --           13,403
Issuance of shares to charitable foundation                        1        303         --          --          --              304
Amortization of expense related to stock benefit plan             --         23         --         122          --              145
Net earnings for the six months ended December 31, 2001           --         --        181          --          --              181
Unrealized losses on securities designated as
  available for sale, net of related tax effects                  --         --         --          --         (62)             (62)
                                                            --------   --------   --------    --------    --------         --------

Balance at December 31, 2001                                      16     14,931     13,102      (1,095)        882           27,836

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

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


</TABLE>

The accompanying notes are an integral part of these statements.

                                       19

<PAGE>



                                PFS BANCORP, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)

<TABLE>
<CAPTION>

                                                                                YEAR ENDED   SIX MONTHS ENDED     YEAR ENDED
                                                                               DECEMBER 31,    DECEMBER 31,        JUNE 30,
                                                                                   2002           2001               2001
<S>                                                                              <C>            <C>                <C>
Cash flows from operating activities:
  Net earnings for the period                                                    $    853       $    181           $    748
  Adjustments to reconcile net earnings to net cash
  provided by (used in) operating activities:
    Amortization of premium on investment securities                                   70              1                 --
    Amortization of deferred loan origination fees                                    (74)           (47)               (61)
    Amortization expense of stock benefit plan                                        162            145                 --
    Gain on sale of real estate acquired through foreclosure                           --             --                 (5)
    Gain on sale of investment securities                                              --             --               (344)
    Depreciation                                                                      137             47                121
    Provision for losses on loans                                                      92             48                156
    Provision for losses on real estate acquired through foreclosure                   20             --                 --
    Issuance of shares to PFS Charitable Foundation                                    --            304                 --
    Deferred compensation liability                                                    48             23                 --
    Increase (decrease) in cash due to changes in:
      Accrued interest receivable                                                     (49)            70                 15
      Prepaid expenses and other assets                                              (144)           145               (130)
      Other liabilities                                                                83            (36)               634
      Accrued interest payable                                                         (9)           (13)                 9
      Income taxes
        Current                                                                       229           (112)              (113)
        Deferred                                                                     (174)           (27)              (247)
                                                                                 --------       --------           --------
         Net cash provided by operating activities                                  1,244            729                783

Cash flows provided by (used in) investing activities:
  Proceeds from maturities of investment securities                                17,350             --                 10
  Proceeds from sale of investment securities                                          --             --                349
  Principal repayments on investment securities                                         8             --                 --
  Purchase of investment securities designated as available for sale              (26,610)        (4,584)                --
  Loan principal repayments                                                        29,639         23,160             38,345
  Loan disbursements                                                              (28,816)       (24,475)           (38,653)
  Purchase of office premises and equipment                                          (238)           (22)               (35)
  Proceeds from sale of real estate acquired through foreclosure                       82             --                183
  Purchase of Federal Home Loan Bank stock                                            (31)            --                 (5)
                                                                                 --------       --------           --------
         Net cash provided by (used in) investing activities                       (8,616)        (5,921)               194

Cash flows provided by (used in) financing activities:
  Net increase (decrease) in deposits                                              (1,009)        (8,220)             7,827
  Proceeds from Federal Home Loan Bank advances                                     1,000             --              1,000
  Repayment of Federal Home Loan Bank advances                                         --         (1,000)            (3,750)
  Advances by borrowers for taxes and insurance                                         5             10                 (2)
  Proceeds from issuance of common stock                                               --         14,620                 --
  Dividends paid on common stock                                                     (232)            --                 --
  Shares acquired by stock benefit plans                                           (1,021)        (1,217)                --
                                                                                 --------       --------           --------
         Net cash provided by (used in) financing activities                       (1,257)         4,193              5,075
                                                                                 --------       --------           --------

Net increase (decrease) in cash and cash equivalents                               (8,629)          (999)             6,052

Cash and cash equivalents at beginning of period                                   13,854         14,853              8,801
                                                                                 --------       --------           --------

Cash and cash equivalents at end of period                                       $  5,225       $ 13,854           $ 14,853
                                                                                 ========       ========           ========

</TABLE>

The accompanying notes are an integral part of these statements.

                                       20

<PAGE>




                                PFS BANCORP, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                                 (In thousands)

<TABLE>
<CAPTION>


                                                                        YEAR ENDED    SIX MONTHS ENDED     YEAR ENDED
                                                                        DECEMBER 31,    DECEMBER 31,        JUNE 30,
                                                                           2002             2001              2001
<S>                                                                       <C>              <C>              <C>

Supplemental disclosure of cash flow information:
  Cash paid during the period for:
    Income taxes                                                          $   553          $   276          $   793
                                                                          =======          =======          =======
    Interest on deposits and borrowings                                   $ 2,909          $ 2,058          $ 4,944
                                                                          =======          =======          =======
Supplemental disclosure of noncash investing activities:
  Unrealized gains (losses) on securities designated as available
    for sale, net of related tax effects                                  $    (1)         $   (62)         $   265
                                                                          =======          =======          =======
  Transfers from loans to real estate acquired through
    foreclosure                                                           $   259          $    --          $    40
                                                                          =======          =======          =======
  Issuance of loans upon sale of real estate
    acquired through foreclosure                                          $    --          $     5          $   271
                                                                          =======          =======          =======


</TABLE>

The accompanying notes are an integral part of these statements.

                                       21

<PAGE>


                                PFS BANCORP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE A - SUMMARY OF ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

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




                                       22

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


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.



                                       23

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


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.

    At December 31, 2002 and 2001 and June 30, 2001, the Savings Bank had no
    loans that were defined as impaired under SFAS No. 114.

    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.





                                       24

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


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, general loan loss allowances and the percentage of earnings
    bad debt deduction. Additionally, a temporary difference is recognized for
    depreciation utilizing accelerated methods for federal income tax purposes.

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

    In conjunction with the Conversion, the Corporation implemented an Employee
    Stock Ownership Plan ("ESOP"). The ESOP 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
    $182,000 for the year ended December 31, 2002 and $157,000 for the six
    months ended December 31, 2001.

    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 its common stock in the open market. Common stock
    awarded under the RRP vests ratably over a five year period, commencing with
    the date of the award. A provision of $30,000 related to the RRP was charged
    to operations in 2002.

    The Savings Bank funds its defined benefit pension plan through
    participation in the Pentegra Defined Benefit Plan (the "Plan"). The Savings
    Bank is required to fund pension costs accrued. Contributions to the Plan
    were not required during any periods in 2002 or 2001 due to the Plan's
    overfunded status. The provision for pension expense is computed by the
    Plan's actuaries utilizing the projected unit credit cost method and
    assuming a 7.5% return on Plan assets. The Savings Bank is not required to
    disclose separate actuarial information due to the Plan's classification as
    a multi-employer pension plan.



                                       25

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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

    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 $9,000 for the year ended December 31, 2002,
    $4,000 for the six month period ended December 31, 2001 and $9,000 for the
    fiscal year ended June 30, 2001.

    Peoples has a profit sharing plan which provides for additional compensation
    to employees if the Savings Bank meets certain performance goals. The
    Savings Bank recorded expense totaling $13,000 for the profit sharing plan
    for the fiscal year ended June 30, 2001. No expense was recognized in
    connection with the profit sharing plan in any other period presented.

    The Savings Bank implemented a nonqualified Executive Officers and Directors
    Deferred Compensation Plan (the "Compensation Plan") during fiscal 2001,
    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 5.5% and the relative time to
    retirement for each participant. The Savings Bank recorded expense totaling
    $48,000 for the Compensation Plan during the year ended December 31, 2002,
    $23,000 during the six months ended December 31, 2001 and $622,000 during
    the fiscal year ended June 30, 2001.

    Also, in April 2002, the Board of Directors adopted the PFS Bancorp, Inc.
    2002 Stock Option Plan that provides for the issuance of 152,088 shares of
    authorized, but unissued shares of common stock at fair value at the date of
    grant. No options were granted in 2002.

    10.  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.

    11.  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



                                       26

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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

    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, 2002 and 2001. The fair values
                  for fixed-rate certificates of deposit are based on the
                  discounted value of contractual cash flows. The discount rate
                  is estimated using the rates currently offered for deposits of
                  similar remaining maturities.

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

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

                  Commitments to extend credit: For fixed-rate and
                  adjustable-rate loan commitments, the fair value estimate
                  considers the difference between current levels of interest
                  rates and committed rates. The difference between the fair
                  value and notional amount of outstanding loan commitments at
                  December 31, 2002 and 2001, was not material.

                                       27

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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

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

<TABLE>
<CAPTION>


                                                                        2002                         2001
                                                             CARRYING         FAIR         CARRYING         FAIR
                                                                VALUE        VALUE            VALUE        VALUE
                                                                                (In thousands)
    <S>                                                      <C>          <C>              <C>          <C>
    Financial assets
      Cash and cash equivalents                              $  5,225     $  5,225         $ 13,854     $ 13,854
      Investment securities designated as available for sale   15,142       15,142            5,953        5,953
      Investment securities held to maturity                      161          161              169          169
      Loans receivable - net                                   95,702       96,239           96,772      100,886
      Federal Home Loan Bank stock                                730          730              699          699
                                                             --------     --------         --------     --------
                                                             $116,960     $117,497         $117,447     $121,561
                                                              =======     ========         ========     ========

    Financial liabilities
      Deposits                                               $ 89,420     $ 90,457         $ 90,429     $ 92,229
      Advances from the Federal Home Loan Bank                  1,000        1,000               --           --
      Advances by borrowers for taxes and insurance                80           80               75           75
                                                             --------     --------         --------     --------

                                                             $ 90,500     $ 91,537         $ 90,504     $ 92,304
                                                             ========     ========         ========     ========

</TABLE>


    12.  Advertising
         -----------

    Advertising costs are expensed when incurred. The Corporation's advertising
    expense totaled $35,000 for the year ended December 31, 2002, $32,000 for
    the six months ended December 31, 2001 and $63,000 for the fiscal year ended
    June 30, 2001.

    13.  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, which gives effect to 97,336 unallocated ESOP shares,
    totaled 1,453,957 for year ended December 31, 2002.

    Diluted earnings per share is computed by taking into consideration common
    shares outstanding and dilutive potential common share equivalents. The
    Corporation had no dilutive or potentially dilutive securities during the
    year ended December 31, 2002.

    The provisions of SFAS No. 128, "Earnings Per Share," are not applicable to
    the fiscal year ended June 30, 2001 and the six month period ended December
    31, 2001, as the Corporation completed its conversion from mutual to stock
    form in October 2001.

    14.  Reclassifications
         -----------------

    Certain prior year amounts have been reclassified to conform to the 2002
    financial statement presentation.



                                       28

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

    15.  Effects of Recent Accounting Pronouncements
         -------------------------------------------

    In August 2001, the Financial Accounting Standards Board (the "FASB") issued
    Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
    for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 carries
    over the recognition and measurement provisions in SFAS No. 121.
    Accordingly, an entity must recognize an impairment loss if the carrying
    value of a long-lived asset or asset group (a) is not recoverable and (b)
    exceeds its fair value. Similar to SFAS No. 121, SFAS No. 144 requires an
    entity to test an asset or asset group for impairment whenever events or
    changes in circumstances indicate that its carrying amount may not be
    recoverable. SFAS No. 144 differs from SFAS No. 121 in that it provides
    guidance on estimating future cash flows to test recoverability. An entity
    may use either a probability-weighted approach or best-estimate approach in
    developing estimates of cash flows to test recoverability. SFAS No. 144 is
    effective for financial statements issued for fiscal years beginning after
    December 15, 2001 and interim periods within those fiscal years. Management
    adopted SFAS No. 144 effective January 1, 2002, without material effect on
    the Corporation's financial condition or results of operations.

    In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
    with Exit or Disposal Activities." SFAS No. 146 provides financial
    accounting and reporting guidance for costs associated with exit or disposal
    activities, including one-time termination benefits, contract termination
    costs other than for a capital lease, and costs to consolidate facilities or
    relocate employees. SFAS No. 146 is effective for exit or disposal
    activities initiated after December 31, 2002. SFAS No. 146 is not expected
    to have a material effect on the Corporation's financial condition or
    results of operations.

    The FASB issued SFAS No. 147, "Acquisitions of Certain Financial
    Institutions: An amendment of FASB Statements No. 72 and 144 and FASB
    Interpretation No 9," which removes acquisitions of financial institutions
    from the scope of SFAS No. 72, "Accounting for Certain Acquisitions of
    Banking or Thrift Institutions," except for transactions between mutual
    enterprises. SFAS No. 147 also requires that the acquisition of a
    less-than-whole financial institution, such as a branch, be accounted for as
    a business combination if the transferred assets and activities constitute a
    business. The adoption of SFAS No. 147 did not have a material impact on the
    Corporation's financial position or results of operations.

    In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
    Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
    "Accounting for Stock-Based Compensation," to provide alternative methods of
    transition for a voluntary change to the fair value based method of
    accounting for stock-based employee compensation. In addition, SFAS No. 148
    amends the disclosure requirements of SFAS No. 123 to require prominent
    disclosures in both annual and interim financial statements about the method
    of accounting for stock-based employee compensation and the effect of the
    method used on reported results. SFAS No. 148 is effective for fiscal years
    beginning after December 15, 2002. The expanded annual disclosure
    requirements and the transition provisions are effective for fiscal years
    ending after December 15, 2002. The interim disclosure provisions are
    effective for financial reports containing financial statements for interim
    periods beginning after December 15, 2002. SFAS No. 148 is not expected to
    have a material effect on the Corporation's financial position or results of
    operations.



                                       29

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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

     In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
     "Consolidation of Variable Interest Entities." FIN 46 requires a variable
     interest entity to be consolidated by a company if that company is subject
     to a majority of the risk of loss from the variable interest entity's
     activities or entitled to receive a majority of the entity's residual
     returns, or both. FIN 46 also requires disclosures about variable interest
     entities that a company is not required to consolidate, but in which it has
     a significant variable interest. The consolidation requirements of FIN 46
     apply immediately to variable interest entities created after January 31,
     2003. The consolidation requirements apply to existing entities in the
     first fiscal year or interim period beginning after June 15, 2003. Certain
     of the disclosure requirements apply in all financial statements issued
     after January 31, 2003, regardless of when the variable interest entity was
     established. The Corporation is currently evaluating the impact of FIN 46
     and expects no material effect on its financial statements.


NOTE B - INVESTMENT SECURITIES

     Amortized cost and estimated fair values of investment securities at
     December 31 are summarized as follows:

                                          2002                   2001
                                              ESTIMATED              ESTIMATED
                                 AMORTIZED         FAIR  AMORTIZED        FAIR
                                      COST        VALUE       COST       VALUE
                                                  (In thousands)
     HELD TO MATURITY:
      Municipal obligations        $   161      $   161     $  169      $  169
                                   =======      =======     ======      ======
     AVAILABLE FOR SALE:
      FHLMC stock                  $    20      $ 1,226     $   20      $1,366
      Corporate debt securities     13,787       13,916      4,597       4,587
                                   -------      -------     ------      ------
         Total available for sale  $13,807      $15,142     $4,617      $5,953
                                   =======      =======     ======      ======

    At both December 31, 2002 and 2001, the market value appreciation of the
    Savings Bank's investment securities available for sale in excess of
    amortized cost was $1.3 million, consisting solely of gross unrealized gains
    at December 31, 2002, and consisting of $1.4 million in gross unrealized
    gains and $37,000 of gross unrealized losses at December 31, 2001.


                                       30


<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE B - INVESTMENT SECURITIES

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

                                                                     ESTIMATED
                                                 AMORTIZED                FAIR
                                                      COST               VALUE

    Due within one year                            $ 7,634             $ 7,613
    Due after one through three years                4,291               4,398
    Due after three through five years               1,862               1,905
                                                   -------             -------
                                                   $13,787             $13,916
                                                   =======             =======

    Municipal obligations are scheduled to mature ratably over the next 16
    years.

    Proceeds from sales of investments securities totaled $349,000 during fiscal
    year ended June 30, 2001, resulting in gross unrealized gains of $344,000.


NOTE C - LOANS RECEIVABLE

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

                                                    2002                2001
                                                         (In thousands)

    Residential real estate
      One-to-four family                           $72,964             $73,001
      Multi-family                                   3,659               3,090
    Nonresidential real estate                      13,051              13,837
    Consumer and other loans                         7,728               8,206
                                                   -------             -------
                                                    97,402              98,134
    Less:
      Undisbursed loans in process                     894                 563
      Deferred loan origination fees                    42                  80
      Allowance for loan losses                        764                 719
                                                   -------             -------

                                                   $95,702             $96,772
                                                   =======             =======

    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 $75.7 million, or 79%, of the total loan
    portfolio at December 31, 2002, and $75.5 million, or 78%, of the total loan
    portfolio at December 31, 2001. 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.


                                       31

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE C - LOANS RECEIVABLE (continued)

    In the ordinary course of business, the Savings Bank has granted loans to
    some of its 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 $399,000 and
    $536,000 at December 31, 2002 and 2001, respectively.


NOTE D - ALLOWANCE FOR LOAN LOSSES

    The activity in the allowance for loan losses is summarized as follows:

                                     YEAR ENDED    SIX MONTHS ENDED   YEAR ENDED
                                    DECEMBER 31,      DECEMBER 31,     JUNE 30,
                                        2002              2001           2001
                                                     (In thousands)

    Beginning balance                   $ 719            $ 691           $ 627
    Provision for losses on loans          92               48             156
    Charge-off of loans                   (59)             (20)           (130)
    Recoveries                             12               --              38
                                        -----            -----           -----
    Ending balance                      $ 764            $ 719           $ 691
                                        =====            =====           =====


    As of December 31, 2002, the Savings Bank's allowance for loan losses was
    solely general in nature, which is includible as a component of regulatory
    risk-based capital.

    At December 31, 2002 and 2001 and June 30, 2001, the Savings Bank's
    nonperforming loans totaled approximately $901,000, $1.8 million and $1.1
    million, respectively. Interest income which would have been recognized if
    such loans had performed pursuant to contractual terms totaled approximately
    $20,000 for the year ended December 31, 2002, $86,000 for the six months
    ended December 31, 2001, and $32,000 for the fiscal year ended June 30,
    2001.


NOTE E - OFFICE PREMISES AND EQUIPMENT

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

                                             2002                     2001
                                                     (In thousands)

    Land and improvements                   $  107                   $  107
    Buildings and improvements               1,326                    1,278
    Furniture and equipment                  1,064                      874
    Automobiles                                 26                       26
                                            ------                   ------
                                             2,523                    2,285
      Less accumulated depreciation
        and amortization                     1,353                    1,216
                                            ------                   ------
                                            $1,170                   $1,069
                                            ======                   ======


                                       32

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE F - DEPOSITS

    Deposits consist of the following major classifications at December 31:

<TABLE>
<CAPTION>


    DEPOSIT TYPE AND WEIGHTED-
    AVERAGE INTEREST RATE                                                           2002                  2001
                                                                                          (In thousands)
    <S>                                                                           <C>                   <C>

    Non-interest bearing accounts                                                 $  2,671              $    822
    NOW accounts
      2002 - 1.08%                                                                  14,834
      2001 - 1.31%                                                                                        15,982
    Savings Passbooks
      2002 - 1.49%                                                                   9,519
      2001 - 1.50%                                                                                         9,540
    Super Savers
      2002 - 1.73%                                                                   7,163
      2001 - 1.72%                                                                                         6,877
                                                                                  --------              --------
    Total demand, transaction and
      passbook deposits                                                             34,187                33,221

    Certificates of deposit
      Original maturities of:
        Less than 12 months
          2002 - 2.14%                                                               5,711
          2001 - 3.40%                                                                                     3,829
        12 months to 24 months
          2002 - 2.96%                                                              20,481
          2001 - 4.43%                                                                                    17,113
        24 months to 36 months
          2002 - 4.48%                                                              11,560
          2001 - 6.13%                                                                                     7,759
        More than 36 months
          2002 - 4.78%                                                               1,580
          2001 - 5.45%                                                                                     8,042
      Individual retirement
        2002 - 4.54%                                                                 9,117
        2001 - 5.44%                                                                                       9,155
      Jumbo
        2002 - 3.10%                                                                 6,784
        2001 - 5.04%                                                                                      11,310
                                                                                  --------              --------

    Total certificates of deposit                                                   55,233                57,208
                                                                                  --------              --------

    Total deposit accounts                                                        $ 89,420              $ 90,429
                                                                                  ========              ========

</TABLE>


    At December 31, 2002 and 2001, the Savings Bank had certificate of deposit
    accounts with balances in excess of $100,000 totaling approximately $13.7
    million and $26.4 million, respectively.


                                       33

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE F - DEPOSITS (continued)

    Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>


                                                               YEAR ENDED       SIX MONTHS ENDED       YEAR ENDED
                                                              DECEMBER 31,        DECEMBER 31,          JUNE 30,
                                                                  2002               2001                2001
                                                                                (In thousands)
    <S>                                                         <C>                <C>                 <C>
    Passbook, NOW and money market
      passbook                                                  $   494            $   356             $   722
    Certificates of deposit                                       2,404              1,670               4,053
                                                                -------            -------             -------
                                                                $ 2,898            $ 2,026             $ 4,775
                                                                =======            =======             =======

</TABLE>


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

                                        2002            2001
                                            (In thousands)

    Less than six months              $21,926         $12,803
    Six months to one year             18,867          29,672
    One year to three years            13,299          13,380
    Three years or more                 1,141           1,353
                                      -------         -------
                                      $55,233         $57,208
                                      =======         =======


NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

    Advances from the Federal Home Loan Bank, collateralized at December 31,
    2002 by pledges of certain residential mortgage loans totaling $1.5 million
    and the Savings Bank's investment in Federal Home Loan Bank stock, are
    summarized as follows:

                            MATURING
                            FISCAL YEAR
    INTEREST RATE           ENDING IN         2002          2001
                                                 (In thousands)

       1.62%                   2004          $1,000        $ --
                                             ======        ====



                                       34

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE H - INCOME TAXES

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

<TABLE>
<CAPTION>

                                                               YEAR ENDED    SIX MONTHS ENDED    YEAR ENDED
                                                              DECEMBER 31,     DECEMBER 31,       JUNE 30,
                                                                  2002             2001             2001
                                                                             (In thousands)
    <S>                                                          <C>              <C>              <C>

    Federal income taxes computed at 34% statutory rate          $ 502            $ 112            $ 437
    Increase (decrease) in taxes resulting from:
      Dividends received deduction                                  (4)              (2)              (4)
      Tax exempt interest                                           (3)              (2)              (3)
      State income taxes                                           160               53              110
      Other                                                        (31)             (13)              (2)
                                                                 -----            -----            -----
    Income tax provision per financial statements                $ 624            $ 148            $ 538
                                                                 =====            =====            =====
    Effective income tax rate                                     42.2%            45.0%            41.8%
                                                                 =====            =====            =====
</TABLE>


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

    TAXES (PAYABLE) REFUNDABLE ON TEMPORARY                  2002          2001
    DIFFERENCES AT STATUTORY RATE:                             (In thousands)

    DEFERRED TAX ASSETS:
      Stock benefit plans                                    $  10        $  --
      Deferred compensation                                    236          219
      General loan loss allowance                              267          245
      Charitable contribution carryforward                      98           --
                                                              ----         ----
         Total deferred tax assets                             611          464

    DEFERRED TAX LIABILITIES:
      Difference between book and tax depreciation             (61)         (77)
      Deferred loan origination costs                           (2)          --
      Percentage of earnings bad debt deduction                 --          (20)
      Unrealized gains on securities available for sale       (454)        (454)
      State income taxes                                       (38)         (31)
                                                              ----         ----
         Total deferred tax liabilities                       (555)        (582)
                                                              ----         ----
         Net deferred tax asset (liability)                  $  56        $(118)
                                                             =====        =====


    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, 2002, includes approximately $1.3 million
    for which federal income taxes have not been provided. The amount of the
    unrecognized deferred tax liability relating to the cumulative bad debt
    deduction is approximately $400,000.


                                       35

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE H - INCOME TAXES (continued)

    Pursuant to legislation enacted in 1996, the Savings Bank was required to
    recapture as taxable income approximately $670,000 of its tax bad debt
    reserve, which represented the post-1987 additions to the reserve, and will
    be unable to utilize the percentage of earnings method to compute its bad
    debt deduction in the future. The Savings Bank had provided deferred taxes
    for this amount and completed the six-year amortization of the recapture of
    the bad debt reserve into taxable income in 2001.


NOTE I - LOAN COMMITMENTS

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

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

    At December 31, 2002, the Savings Bank had outstanding commitments of
    approximately $1.3 million to originate loans. Additionally, the Savings
    Bank was obligated under unused lines of credit for home equity loans
    totaling $1.5 million and unused lines of credit under commercial loans
    totaling $2.7 million. In the opinion of management, all loan commitments
    equaled or exceeded prevalent market interest rates as of December 31, 2002,
    and will be funded from normal cash flow from operations and borrowings as
    necessary.


NOTE J - REGULATORY CAPITAL

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



                                       36

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE J - 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 2002, 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, 2002 and 2001, management believes that the Savings Bank
    met all capital adequacy requirements to which it was subject.

<TABLE>
<CAPTION>

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

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

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

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

</TABLE>


<TABLE>
<CAPTION>


                                                    AS OF DECEMBER 31, 2001
                                                                                     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        $19,476    17.3%        >/=$1,688   >/=1.5%         >/=$5,627    >/=  5.0%

    Core capital            $19,476    17.3%        >/=$4,502   >/=4.0%         >/=$6,752    >/=  6.0%

    Risk-based capital      $20,195    28.6%        >/=$5,663   >/=8.0%         >/=$7,078    >/= 10.0%

</TABLE>




                                       37

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


NOTE J - REGULATORY CAPITAL (continued)

    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.


NOTE K - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM

    In May 2001, the Savings Bank's Board of Directors 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. Pursuant to the Plan, as amended, PFS Bancorp, Inc. offered
    for sale up to 1.7 million common shares at $10.00 per share to its
    depositors, members of the community and a newly formed Employee Stock
    Ownership Plan ("ESOP"). The stock offering was completed on October 11,
    2001, culminating in the sale of 1,520,875 common shares and the receipt of
    $13.4 million of net equity capital. The Plan further provided for the PFS
    Bancorp, Inc. issuance of 30,418 shares to the PFS Charitable Foundation.
    Accordingly, the Corporation recorded a charge to operations totaling
    $304,000 for the six months ended December 31, 2001.

    At the completion of the conversion to stock form, a liquidation account was
    established in the amount of retained earnings contained in the final
    offering circular. The liquidation account will be maintained for the
    benefit of eligible savings account holders who maintain deposit accounts in
    the Savings Bank after conversion. In the event of a complete liquidation
    (and only in such event), each eligible member will be entitled to receive a
    liquidation distribution from the liquidation account in the amount of the
    then current adjusted balance of deposit accounts held, before any
    liquidation distribution may be made with respect to common stock. Except
    for the repurchase of stock and payment of dividends by the Savings Bank,
    the existence of the liquidation account will not restrict the use or
    application of such retained earnings.

    The Savings Bank may not declare, pay a cash dividend on, or repurchase any
    of its common stock, if the effect thereof would cause retained earnings to
    be reduced below either the amount required for the liquidation account or
    the regulatory capital requirements of SAIF insured institutions.


                                       38

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


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, 2002 and 2001, and the
    results of its operations and its cash flows for the year ended December 31,
    2002 and the period ended December 31, 2001.

                                PFS BANCORP, INC.
                        STATEMENTS OF FINANCIAL CONDITION
                           December 31, 2002 and 2001
                                 (In thousands)

<TABLE>
<CAPTION>


     ASSETS                                                                           2002               2001
    <S>                                                                             <C>               <C>

    Interest-bearing deposits in Peoples Federal Savings Bank                       $     191         $     93
    Interest-bearing deposits in other financial institutions                           1,248            1,424
    Investment securities                                                               4,818            4,587
    Loan receivable from ESOP                                                             973            1,095
    Investment in Peoples Federal Savings Bank                                         20,307           20,396
    Prepaid expenses and other                                                             31              159
    Prepaid income taxes                                                                   --               86
    Deferred income taxes                                                                  86                3
                                                                                    ---------         --------

          Total assets                                                              $  27,654         $ 27,843
                                                                                    =========         ========

    LIABILITIES AND SHAREHOLDERS' EQUITY

    Accrued expenses and other liabilities                                          $      25         $      7
    Accrued income taxes                                                                   32               --
                                                                                    ---------          -------
          Total liabilities                                                                57                7

    Shareholders' equity
      Common stock and additional paid-in capital                                      14,987           14,947
      Retained earnings                                                                13,723           13,102
      Shares acquired by stock benefit plans                                           (1,994)          (1,095)
      Unrealized gains on securities designated as available for sale, net                881              882
                                                                                    ---------         --------
          Total shareholders' equity                                                   27,597           27,836
                                                                                    ---------         --------

          Total liabilities and shareholders' equity                                $  27,654         $ 27,843
                                                                                    =========         ========

</TABLE>


                                       39

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


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

                                PFS BANCORP, INC.
                            STATEMENTS OF OPERATIONS
                                 (In thousands)

<TABLE>
<CAPTION>


                                                                             YEAR ENDED                PERIOD ENDED
                                                                            DECEMBER 31,               DECEMBER 31,
                                                                               2002                        2001

    <S>                                                                      <C>                         <C>
    Revenue
      Interest income                                                        $   254                     $  58
      Equity in earnings of Peoples Federal Savings Bank                         801                       124
                                                                             -------                     -----
          Total revenue                                                        1,055                       182

    General and administrative expenses                                          151                       312
                                                                             -------                     -----

    Earnings (loss) before income taxes (credits)                                904                      (130)

    Income taxes (credits)                                                        51                       (86)
                                                                             -------                     -----

          NET EARNINGS (LOSS)                                                $   853                     $ (44)
                                                                             =======                     =====

</TABLE>



                                       40

<PAGE>


                                PFS BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Year ended December 31, 2002, six months ended
              December 31, 2001 and fiscal year ended June 30, 2001


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

                                PFS BANCORP, INC.
                            STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>


                                                                                 YEAR ENDED            PERIOD ENDED
                                                                                DECEMBER 31,           DECEMBER 31,
                                                                                   2002                   2001

    <S>                                                                         <C>                   <C>
    Cash provided by (used in) operating activities:
      Net earnings (loss) for the period                                        $    853              $    (44)
      Adjustments to reconcile net earnings (loss) to net
      cash provided by (used in) operating activities
        Amortization of premiums and discounts on investment securities - net         18                   (13)
        Issuance of shares to PFS Charitable Foundation                               --                   304
        Equity in earnings of Peoples Federal Savings Bank                          (801)                 (124)
        Increase (decrease) in cash due to changes in:
          Prepaid expenses and other assets                                          128                  (159)
          Prepaid income taxes                                                       118                   (86)
          Deferred income taxes                                                      (98)                   (3)
          Other liabilities                                                           18                     7
                                                                                --------              --------
          Net cash provided by (used in) operating activities                        236                  (118)

    Cash flows provided by (used in) investing activities:
      Purchase of Peoples Federal Savings Bank common stock                           --                (7,306)
      Purchase of investment securities                                          (16,204)               (4,584)
      Proceeds from maturity of investment securities                             16,000                    --
      Loan disbursements to ESOP                                                      --                (1,217)
      Proceeds from repayments on loan to ESOP                                       122                   122
                                                                                --------              --------
          Net cash used in investing activities                                      (82)              (12,985)

    Cash flows provided by (used in) financing activities:
      Proceeds from issuance of common stock - net                                    --                14,620
      Dividends paid on common stock                                                (232)                   --
                                                                                --------              --------
          Net cash provided by (used in) financing activities                       (232)               14,620
                                                                                --------              --------

    Net increase (decrease) in cash and cash equivalents                             (78)                1,517

    Cash and cash equivalents at beginning of period                               1,517                    --
                                                                                --------              --------

    Cash and cash equivalents at end of period                                  $  1,439              $  1,517
                                                                                ========              ========

</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 2002 and 2001, the Savings Bank did not distribute
    dividends to the Corporation.


NOTE M - SUBSEQUENT EVENT

    In March 2003, the Corporation repurchased for treasury 77,565 shares of its
    common stock at an aggregate cost of $1.3 million.

                                       41






<PAGE>




                                PFS Bancorp, Inc.

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



               PFS BANCORP, INC. AND PEOPLES FEDERAL SAVINGS BANK

                                    DIRECTORS
                                    ---------


<TABLE>
<CAPTION>


         <S>                                                   <C>
         Robert L. Laker                                       Dale R. Moeller
         Chairman of the Board                                 Director

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

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


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



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

</TABLE>



                                       42

<PAGE>


                                PFS BANCORP, INC.

                  BANKING LOCATIONS AND STOCKHOLDER INFORMATION
================================================================================



                                BANKING LOCATIONS

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

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

                          Second and Bridgeway Streets
                              Aurora, Indiana 47001


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

   330 Industrial Access Road                              705 E. Main Street
   Rising Sun, Indiana 47040                               Vevay, Indiana 47043


                                 ANNUAL MEETING

         The Annual Meeting of Stockholders of PFS Bancorp will be held on May
1, 2003, at 3:00 p.m., Eastern Daylight Savings Time, at PFS Bancorp's main
office located at Second and Bridgeway Streets, Aurora, Indiana.

                            TRANSFER AGENT/REGISTRAR

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

                              STOCKHOLDER REQUESTS

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

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


                                       43