<PAGE>
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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                ---------------

                                   FORM 10-KSB

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 [Fee Required]
     For  the fiscal year ended March 31, 1999

                                       OR

[  ] TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
     EXCHANGE  ACT OF 1934 [No Fee  Required]

     For  the transition period from __________________ to __________________

                         COMMISSION FILE NUMBER 0-27170

                            CLASSIC BANCSHARES, INC.
        (Exact Name of Small Business Issuer as Specified in its Charter)

          Delaware                                        61-1289391
 (State or other jurisdiction               (I.R.S. Employer Identification No.)
of incorporation or organization)

344 Seventeenth Street, Ashland, Kentucky                   41101
(Address of principal executive offices)                  (Zip Code)



         Issuer's telephone number, including area code: (606) 325-4789

           Securities Registered Pursuant to Section 12(b) of the Act:

                                      None

           Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                                (Title of Class)

     Check  whether  the Issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past twelve  months (or for
such shorter period that the Issuer was required to file such reports),  and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

     The Issuer had $10.5  million in gross  income for the year ended March 31,
1999.

     As of June 14, 1999, there were issued and outstanding  1,227,500 shares of
the Issuer's Common Stock.  The aggregate  market value of the voting stock held
by  non-affiliates  of the Issuer,  computed by  reference to the average of the
closing  bid and asked price of such stock on the Nasdaq  SmallCap  Market as of
June 14, 1999 was approximately  $15.4 million.  (The exclusion from such amount
of the  market  value of the shares  owned by any person  shall not be deemed an
admission by the Issuer that such person is an affiliate of the Issuer.)

                       DOCUMENTS INCORPORATED BY REFERENCE

PART II of Form 10-KSB--Portions of Annual Report to Stockholders for the fiscal
year ended March 31, 1999. PART III of Form 10-KSB--Proxy Statement for the 1999
Annual Meeting of Stockholders.


--------------------------------------------------------------------------------
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<PAGE>

                                     PART I

Item 1.  Business

General

     Classic  Bancshares,   Inc.  ("Classic"  or  the  "Company"),   a  Delaware
corporation,  is a bank holding  company  which has as its primary  wholly-owned
subsidiaries  Classic Bank (formerly  known as Ashland  Federal Savings Bank), a
federal  savings bank, and The First National Bank of Paintsville  ("Paintsville
Bank").  The Company was  organized  in 1995 by Classic  Bank for the purpose of
becoming the savings and loan holding company of Classic Bank in connection with
Classic  Bank's  conversion  from  mutual  to stock  form of  organization  (the
"Conversion") on December 28, 1995.  Paintsville Bank became a subsidiary of the
Company upon  consummation  of the Company's  acquisition  of First  Paintsville
Bancshares,   Inc.  ("First   Paintsville"),   the  former  holding  company  of
Paintsville  Bank,  on September  30,  1996.  See  "--Acquisitions."  Unless the
context otherwise requires,  all references herein to Classic Bank,  Paintsville
Bank or the Company include the Company,  Classic Bank and Paintsville Bank on a
consolidated basis.  References to the Company prior to September 30, 1996 refer
only to the  Company  and  Classic  Bank.  References  to the  Company  prior to
December 28, 1995 refer only to Classic Bank.

     At March 31,  1999,  the  Company had total  consolidated  assets of $142.7
million,  deposits of $117.7 million and stockholders'  equity of $20.3 million.
On such date, the Company's assets  consisted of all of the outstanding  capital
stock of Classic Bank and Paintsville  Bank and cash and cash  equivalents.  The
executive office of the Company is located at 344 Seventeenth  Street,  Ashland,
Kentucky 41101 and its telephone number is (606) 325-4789.

     As community-oriented financial institutions,  Classic Bank and Paintsville
Bank seek to serve the financial needs of communities in their respective market
areas. Their businesses involve attracting  deposits from the general public and
using such deposits,  together with other funds, to originate  primarily  one-to
four-family  residential  mortgage  loans and,  to a lesser  extent,  commercial
business, consumer,  commercial real estate, multi-family and construction loans
in their respective market areas.  Classic Bank and Paintsville Bank also invest
in mortgage-backed  and related  securities and investment  securities and other
permissible investments. See "Investment Activities."

     The Company follows a "community  bank" oriented  strategy that is designed
to provide  planned and  profitable  growth and  sustained  profitability  while
maintaining the safety and soundness of Classic Bank and  Paintsville  Bank. The
principal  elements of this strategy  include (i) continued growth in lower cost
deposits through the offering of transaction and other non-certificate accounts,
(ii) the  offering of  different  types of  consumer  loan  products,  (iii) the
expansion of commercial  business and commercial real estate lending operations,
(iv) increasing non-interest income through new product offerings and aggressive
pricing  structures,  (v) enhancing delivery channels through traditional branch
offices and  non-traditional  channels through ATM networks and on-line banking,
(vi) the acquisition of other financial institutions to the extent opportunities
arise,  (vii)  continuous  review  of loan  underwriting  standards  in order to
maintain asset quality and (viii) maintenance of a capital position that exceeds
regulatory guidelines.

     The Company, Classic Bank and Paintsville Bank are subject to comprehensive
regulation. See "Regulation."

Forward-Looking Statements

     When used in this Form 10-KSB and in future filings by the Company with the
Securities and Exchange  Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications,  and in oral statements made with


                                        2

<PAGE>


the approval of an  authorized  executive  officer,  the words or phrases  "will
likely   result,"  "are  expected  to,"  "will   continue,"  "is   anticipated,"
"estimate,"   "project"  or  similar   expressions   are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995. Such statements are subject to certain risks and
uncertainties,  including changes in economic conditions in the Company's market
area,  changes in  policies by  regulatory  agencies,  fluctuations  in interest
rates, demand for loans in the Company's market area and competition, that could
cause actual results to differ  materially  from  historical  earnings and those
presently anticipated or projected. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made.  The Company  wishes to advise readers that the factors listed
above  could  affect the  Company's  financial  performance  and could cause the
Company's  actual  results  for  future  periods to differ  materially  from any
opinions or statements  expressed  with respect to future periods in any current
statements.

     The   Company   does   not   undertake--and   specifically   declines   any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or  unanticipated
events.

Acquisitions

     On September 30, 1996, the Company acquired First  Paintsville,  the former
holding company of Paintsville  Bank, for $9.3 million in cash. At September 30,
1996,  First  Paintsville  had total assets of $66.6 million,  deposits of $52.8
million and stockholders'  equity of $10.2 million.  Paintsville Bank engages in
retail and  commercial  banking,  including  one-to  four-family,  consumer  and
commercial business lending, and provides trust services.  Paintsville Bank also
offers a variety of certificate, savings, money market and checking accounts and
credit cards.

     On May 14, 1999,  the Company  completed its  acquisition of Citizens Bank,
Grayson (Grayson,  Kentucky). In the transaction,  Citizens Bank was merged with
and  into  Classic  Bank,  with  Classic  Bank  as  the  surviving  institution.
Shareholders of Citizens Bank received $75.00 in cash for each share of Citizens
Bank stock held, for an aggregate consideration of $4.5 million. Citizens Bank's
office is now operated as a branch office of Classic Bank.

Market Area

     Classic Bank serves primarily Boyd and Greenup  Counties,  Kentucky through
its main  office  located at 344  Seventeenth  Street in Ashland  and two branch
offices  located in Greenup and Boyd  counties.  Classic Bank's market area also
includes  portions of Lawrence and Carter Counties,  Kentucky,  Lawrence County,
Ohio and Wayne and Cabell  Counties,  West  Virginia.  Upon the  acquisition  of
Citizens  Bank,  the  Company  added a third  branch  office,  located in Carter
County, which had served as Citizens Bank's main office before the acquisition.

     Paintsville  Bank  conducts  its  business  through its main office and one
branch office located in Paintsville, Kentucky. Paintsville Bank's customer base
includes  individuals and small to medium sized businesses located in its market
area.  First  Paintsville's  market area includes  Johnson County,  Kentucky and
portions of Martin, Floyd, Magoffin and Lawrence Counties, Kentucky.

     Historically,  the regional economy in and around the Company's market area
has been based on the coal,  oil and railroad  industries  and dependent  upon a
small number of large employers. While the coal industry and some heavy industry
remain,  the market  area has  experienced  industrial  decline  during the past
several  years due to layoffs and  transfers of some of the  operations of these
companies  to other  locations.  The  Company's  primary  market area also has a
significant medical community.


                                        3

<PAGE>


     The economy of the Company's  market area is in a period of transition from
a primarily industrial- based economy to a service- and retail-based economy. In
the past two years, the Company's  market area has experienced  increases in the
retail and service  sectors which have somewhat  offset the impact of job losses
and  consolidations  from  heavy  industry.   Notwithstanding   recent  economic
diversification, the unemployment rate in the Company's market area continues to
exceed the rates for the Commonwealth of Kentucky and the United States.

Lending Activities

     General.  The principal  lending activity of the Company is originating for
its portfolio  mortgage loans secured by one- to four-family  residences located
primarily in the  Company's  market area. To a lesser  extent,  the Company also
originates consumer,  commercial business,  commercial real estate, construction
and multi-family  loans in its market area. At March 31, 1999, loans receivable,
net, totaled $97.5 million. See "Originations, Purchases and Sales of Loans."

                                        4

<PAGE>



     Loan Portfolio Composition. The following table presents the composition of
the  Company's  loan  portfolio  in dollar  amounts and in  percentages  (before
deductions for loans in process,  deferred fees and discounts and allowances for
losses) as of the dates indicated.

<TABLE>
<CAPTION>
                                                                          March 31,
                             -------------------------------------------------------------------------------------------------------
                                       1999                1998                 1997              1996                  1995
                               -------------------  -----------------    ------------------ -------------------  ------------------
                                Amount    Percent    Amount    Percent   Amount    Percent    Amount   Percent    Amount   Percent
                               ---------  --------  --------  --------  --------  --------  ---------  --------  ------- ----------
                                                                    (Dollars in Thousands)
<S>                           <C>       <C>       <C>       <C>        <C>       <C>       <C>        <C>      <C>       <C>

Real Estate Loans
 One- to four-family ........   $ 61,992    63.0%   $66,078     72.6%   $62,413     75.3%   $38,944     87.5%    $35,005    96.9%
 Commercial .................     10,136    10.3      8,970      9.9      6,877      8.3      2,509      5.7         630     1.7
 Multi-family ...............      1,179     1.2      1,497      1.6      1,104      1.3        215      0.5         118     0.3
 Construction ...............      2,513     2.6        426      0.5        832      1.0      1,132      2.5          --      --
                                --------    ----     ------    -----     ------    -----    -------     ----      ------    ----
     Total real estate loans      75,820    77.1     76,971     84.6     71,226     85.9     42,800     96.2      35,753    98.9
                                --------    ----     ------    -----     ------    -----    -------    -----      ------    ----

Other Loans
 Consumer Loans:
  Deposit account ...........        383     0.4        526      0.6        433      0.5       389      0.9          383     1.1
  Credit Card ...............          3      --        218      0.2        256      0.3        --       --           --      --
  Installment ...............      7,347(1)  7.5      5,380      5.9      5,452      6.6        --       --           --      --
  Other .....................         68     0.1        991      1.1        697      0.8       229      0.5           --      --
                                --------    ----     ------    -----     ------    -----    ------    -----       ------   -----
     Total consumer loans ...      7,801     8.0      7,115      7.8      6,838      8.2       618      1.4          383     1.1
                                                                                            ------    -----       ------   -----
 Commercial business loans ..     14,747    14.9      6,942      7.6      4,794      5.9     1,063      2.4           --      --
 Commercial agriculture loans         17      --         --       --         --       --        --       --           --      --
                                --------    ----     ------    -----     ------    -----    ------    -----       ------   -----
     Total other loans ......     22,565    22.9     14,057     15.4     11,632     14.1     1,681      3.8          383     1.1
                                --------    ----     ------    -----     ------    -----    ------    -----       ------   -----
     Total loans ............     98,385   100.0%    91,028    100.0%    82,858    100.0%   44,481    100.0%      36,136   100.0%
                                ========   =====     ======    =====     ======    =====    ======    =====       ======   =====

Less
 Loans in process ...........        (23)               (29)                 (6)               504                    97
 Deferred fees and discounts          26                (68)               (323)               (31)                   (4)
 Allowance for loan losses ..       (861)              (831)               (801)               286                   312
                                  ------             ------              ------             ------                ------
 Total loans receivable, net     $97,527            $90,100             $81,728            $43,722               $35,731
                                 =======            =======             =======            =======              ========
</TABLE>

-------------------
1    Includes $3.0 million of automobile loans.

                                        5

<PAGE>



The  following  table shows the  composition  of the Company's loan portfolio by
     fixed and adjustable rates at the dates indicated.

<TABLE>
<CAPTION>

                                                                                        March 31,
                                   -------------------------------------------------------------------------------------------------
                                          1999                1998                 1997            1996               1995
                                   -----------------  ------------------- ------------------ -----------------  -------------------
                                    Amount    Percent   Amount   Percent   Amount   Percent   Amount   Percent   Amount    Percent
                                   --------  --------  --------  -------  -------- --------  --------  -------  --------  ---------
                                                                            (Dollars in Thousands)
<S>                                <C>        <C>      <C>      <C>      <C>      <C>        <C>      <C>      <C>       <C>

Fixed-Rate Loans:
 Real estate:
  One- to four-family ............   $33,944   34.5%  $33,253     36.5%   $29,730    35.9%   $15,013    33.8%   $11,811     32.7%
  Commercial .....................     5,329    5.4     3,348      3.7      2,627     3.2        721     1.6        424      1.2
  Multi-family ...................       850    0.9     1,278      1.4        781     0.9        138     0.3         34      0.1
 Construction ....................     1,815    1.9       426      0.5        814     1.0      1,132     2.5         --       --
                                     -------  -----    ------    -----     ------   -----    -------   -----    -------    -----
     Total real estate loans .....    41,938   42.7    38,305     42.1     33,952    41.0     17,004    38.2     12,269     34.0
 Consumer ........................     7,053    7.2     6,161      6.8      6,154     7.4        567     1.3        383      1.1
                                     -------  -----    ------    -----     ------   -----    -------   -----    -------    -----
 Commercial business .............     8,137    8.2     2,649      2.9      1,395     1.7         51     0.1        383      1.1
 Commercial agriculture ..........        17     --        --       --         --      --         --      --         --       --
                                     -------  -----    ------    -----     ------   -----    -------   -----    -------    -----
     Total fixed-rate loans ......    57,145   58.1    47,115     51.8     41,501    50.1     17,622    39.6     12,652     35.1

Adjustable-Rate Loans:
 Real estate:
  One- to four-family ............    28,048   28.5    32,825     36.1     32,683    39.4     23,931    53.8     23,194     64.2
  Commercial .....................     4,807    4.9     5,622      6.2      4,250     5.1      1,788     4.0        206      0.5
  Multi-family ...................       329    0.3       219      0.2        323     0.4         77     0.2         84      0.2
  Construction ...................       698    0.7        --       --         18      --         --      --         --       --
                                     -------  -----    ------    -----    -------   -----    -------   -----    -------    -----
     Total real estate loans .....    33,882   34.4    38,666     42.5     37,274    44.9     25,796    58.0     23,484     64.9
                                     -------  -----    ------    -----    -------   -----    -------   -----    -------    -----
 Consumer ........................       748    0.8       954      1.0        684     0.8         51     0.1         --       --
 Commercial business .............     6,610    6.7     4,293      4.7      3,399     4.2      1,012     2.3         --       --
                                     -------  -----    ------    -----    -------   -----    -------   -----    -------    -----
     Total adjustable-rate loans .    41,240   41.9    43,913     48.2     41,357    49.9     26,859    60.4     23,484     64.9
                                     -------  -----    ------    -----    -------   -----    -------   -----    -------    -----
     Total loans .................    98,385  100.0%   91,028    100.0%    82,858   100.0%    44,481   100.0%    36,136    100.0%
                                                                                    =====    =======   =====    =======    =====

Less:
 Loans in process.................       (23)             (29)                 (6)               504                 97
 Deferred fees and discounts......        26              (68)               (323)               (31)                (4)
 Allowance for loan losses........      (861)            (831)               (801)               286                312
                                      ------          -------            --------           --------            -------
    Total loans receivable, net...   $97,527          $90,100             $81,728            $43,722            $35,731
                                     =======          =======             =======            =======            =======
</TABLE>




                                        6

<PAGE>



     The following  schedule  illustrates  the interest rate  sensitivity of the
Company's loan portfolio at March 31, 1999.  Mortgages  which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract  is due.  The  schedule  does  not  reflect  the  effects  of  possible
prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>

                                                            Real Estate
                     --------------------------------------------------------------------------------------
                          One- to                  Multi-family and
                         Four-Family                  Commercial            Construction        Consumer
                      ---------------------    ---------------------- -----------------------   ----------

                                   Weighted                 Weighted                Weighted
                       Amount        Rate        Amount       Rate        Amount      Rate        Amount
                       -------     --------      -------    ---------    -------     ------      -------
<S>                   <C>          <C>          <C>         <C>          <C>         <C>        <C>
                                                       (Dollars in Thousands)
       Due
---------------------

Within one year(1)      $ 1,231         8.2%     $   429         9.0%      $1,039       8.8%       $2,683
One to two years ..         210        10.2          442         8.7           --        --           988
Two to three years          733         8.9          194         8.3           --        --         1,898
Three to five years       1,480         8.4        2,077         7.9           --        --         2,013
Five to ten years .      11,055         7.9        3,197         8.5           --        --           151
Ten to 15 years ...      18,363         7.8        4,133         8.4        1,071       9.1            --
Over 15 years .....      28,920         7.6          843         8.4          403       8.6            --
                        -------                  -------                   ------                  ------
  Totals ..........     $61,992                  $11,315                   $2,513                  $7,733
                        =======                  =======                   ======                  ======
</TABLE>

<TABLE>
<CAPTION>

                                                                         Commercial
                                                 -----------------------------------------------------------------------
                                Consumer               Business                  Other                     Total
                          --------------------   ---------------------     --------------------    ---------------------
                                Weighted                     Weighted                 Weighted                 Weighted
                                Average                       Average                  Average                  Average
                                 Rate             Amount        Rate         Amount      Rate       Amount        Rate
                               --------          -------     --------      ---------   --------    ---------     -------
                                                                (Dollars in Thousands)
<S>                          <C>                <C>           <C>          <C>          <C>         <C>          <C>

       Due
---------------------

Within one year(1)               8.5%            $ 2,969        8.9%              1       16.6%        8,352       8.7%
One to two years ..             11.5               1,855        7.6              16       10.0         3,511       9.0
Two to three years               9.6               2,215        8.1              --         --         5,040       8.8
Three to five years              9.8               5,392        8.2              51        8.3        11,013       8.5
Five to ten years .             12.9               1,769        8.6              --         --        16,172       8.1
Ten to 15 years ...               --                 564        7.9              --         --        24,131       8.0
Over 15 years .....               --                  --         --              --         --        30,166       7.7
                                                 -------                       ----                 --------
  Totals ..........                              $14,764                       $ 68                  $98,385
                                                 =======                       ====                  =======


</TABLE>

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

(1)  Includes demand loans, loans having no stated maturity and overdraft loans.

     The total amount of loans due after March 31, 2000 which have predetermined
interest rates is $51.2 million,  while the total amount of loans due after such
date which have floating or adjustable interest rates is $38.8 million.



                                        7

<PAGE>



     Under  federal  law,  the  aggregate  amount of loans that Classic Bank and
Paintsville Bank are permitted to make to any one borrower is generally  limited
to 15% of unimpaired  capital and surplus (25% if the security for such loan has
a readily  marketable  value).  At March 31, 1999,  based on the above,  Classic
Bank's and  Paintsville  Bank's  regulatory  loans-to-one  borrower  limits were
approximately  $1.3 million and $1.2  million,  respectively.  On the same date,
neither  institution had borrowers with  outstanding  balances in excess of this
amount.  Classic Bank's  largest  dollar amount  outstanding to one borrower or,
group of related  borrowers,  was $1.0 million.  This loan represents  permanent
financing of a medical  office  building and equipment  located in the Company's
market  area.  Paintsville  Bank's  largest  dollar  amount  outstanding  to one
borrower  or group of related  borrowers,  was $1.2  million,  which  represents
permanent  financing  for a convenience  store and operating  capital for a coal
company.

     Both  Classic  Bank's and  Paintsville  Bank's  President  and Senior  Vice
Presidents  have the  authority to approve  loans up to $250,000  and  $200,000,
respectively.  Loans  of  $250,000  or  more  up to 10% of  Classic  Bank's  and
Paintsville  Bank's respective capital require approval of the Loan Committee of
the Board of Directors of the respective  institutions.  Loans in excess of such
amount require approval of the Board of Directors of the institution.

     All of the  Company's  lending  is  subject  to  its  written  underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed  applications and property valuations  (consistent
with the Board-established appraisal policy). The loan applications are designed
primarily to determine the borrower's  ability to repay and the more significant
items on the application are verified  through use of credit reports,  financial
statements, tax returns or confirmations.

     The  Company  requires a title  opinion or other  evidence  of title on its
mortgage  loans,  as well as fire and extended  coverage  casualty  insurance in
amounts  at least  equal to the  principal  amount  of the loan or the  value of
improvements  on the property,  depending on the type of loan.  The Company also
requires flood insurance to protect the property  securing its interest when the
property is located in a flood plain.

     One- to Four-Family  Residential Real Estate Lending. A significant portion
of the  Company's  lending  program  is the  origination  of  loans  secured  by
mortgages on owner-occupied one- to four-family residences. Substantially all of
the Company's one- to four-family  residential mortgage originations are secured
by  properties  located in its  market  area.  In  addition,  substantially  all
mortgage  loans  originated  by the Company are  retained and serviced by it. At
March  31,  1999,  $62.0  million,  or 63.0% of the  Company's  loan  portfolio,
consisted  of  mortgage  loans on one- to  four-family  residences,  including a
number of loans secured by non-owner occupied properties.

     Since the early 1980s,  Classic Bank has offered  adjustable-rate  mortgage
("ARM") loans at rates and on terms  determined  in  accordance  with market and
competitive factors. Prior to April 1995, Classic Bank utilized a variety of ARM
loan products.  Most of these loans provided for a 1.0% maximum annual cap and a
life-time cap of 5.0% over the initial rate and adjusted to a stated margin over
either the National  Monthly Median Cost of Funds Index or the National  Average
Interest  Contract  Rate on the Purchase of  Previously  Occupied  Homes for All
Major  Types of Lenders  (collectively,  the "Cost of Funds  Indices").  Because
these  indices  generally  react more  slowly to changes  in  interest  rates as
compared to other indices commonly used for ARMs (including those based on rates
paid on U.S. Treasury securities), during a period of rising interest rates, the
use of these lagging  indices  results in Classic Bank's  adjustable-rate  loans
repricing  upward a slower  rate which could  result in a reduction  in interest
rate  spread.  At March 31,  1999,  Classic  Bank had $9.0  million of ARM loans
representing  14.5% of the one- to  four-family  loan  portfolio,  which reprice
based upon one of the Cost of Funds Indices. On the same date, these loans had a
weighted  average  yield  of 6.5% and a  weighted  average  contractual  term to
maturity of 181 months.

     Prior to April 1995,  when  competing  lenders  offered ARMs with  interest
rates during the initial  adjustment  period (i.e.,  typically the first year of
the  loan  term)  below  that  which  would be  indicated  by  reference  to the


                                        8

<PAGE>


applicable  index plus the stated margin (i.e.,  "teaser"  rates),  Classic Bank
would  often  respond  not by  matching  the  discounted  rate  for the  initial
adjustment  period but rather by  discounting  the interest  rate for the entire
life of the loan.  Effective  April 1,  1995,  Classic  Bank  discontinued  this
practice of offering teaser rates for the entire loan term, although it may from
time to time offer ARMs with initial rates below the fully indexed rates.

     In order to increase the interest rate sensitivity of its ARMs, the Company
currently  requires that ARM loans adjust in  accordance  with the one-year U.S.
Treasury  Constant  Maturity  Index.  At March 31,  1999,  the Company had $18.1
million of ARM loans which reprice based upon this index.  However,  since these
loans  generally  provide for a 1.0 - 2.0% maximum annual cap and a lifetime cap
of 5.0 - 6.0% over the initial rate,  the interest  rates on these loans may not
be as rate sensitive as is the Company's cost of funds.  Currently,  none of the
ARM loans  originated  provide for a minimum interest rate or are convertible to
fixed-rate loans.

     ARM loans  decrease  the risk to the  Company  associated  with  changes in
interest rates but may involve other risks,  primarily because as interest rates
rise, the payment by the borrower may rise to the extent  permitted by the terms
of the loan, thereby increasing the potential for default. At the same time, the
market value of the  underlying  property  may be  adversely  affected by higher
interest rates.

     The Company currently offers fixed-rate mortgage loans with maturities from
10 to 30 years.  Interest rates and fees charged on these  fixed-rate  loans are
established   on  a  regular   basis   according  to  market   conditions.   See
"Originations, Purchases and Sales of Loans."

     In  underwriting  one- to four-family  residential  real estate loans,  the
Company  currently  evaluates  both the  borrower's  ability to make  principal,
interest and escrow  payments,  the value of the  property  that will secure the
loan and debt to income  ratios.  In earlier years,  the Company's  underwriting
standards  placed more emphasis on the collateral  securing the loan than on the
borrower's  ability to make principal and interest  payments.  As a result,  the
Company may experience a higher delinquency rate on loans originated during such
periods.

     Currently, the Company will lend up to 90% (or up to 100% on a case-by-case
basis) of the  lesser  of the sales  price or  appraised  value of the  security
property on owner occupied one- to four-family loans. The loan-to-value ratio on
non-owner occupied,  one- to four-family loans is generally 85% of the lesser of
the sales price or appraised value of the security property.

     Residential loans do not include  prepayment  penalties,  are non-assumable
and  do  not  produce  negative   amortization.   Properties  securing  one-  to
four-family  residential  real estate loans made by the Company are appraised by
independent appraisers.

     The  Company's  current  underwriting  policy is based on Federal Home Loan
Mortgage  Corporation  ("FHLMC")  guidelines.  Under current policy, the Company
originates all mortgage loans for its portfolio.

     The Company's  residential  mortgage loans customarily  include due-on-sale
clauses  giving the Company the right to declare  the loan  immediately  due and
payable in the event that,  among other things,  the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.

     Commercial and Multi-Family Real Estate Lending.  The Company has increased
its commercial and multi-family real estate lending in recent years as a part of
its strategy to increase the yield and reduce the term of its lending portfolio.
The Company  generally  focuses its commercial  real estate  lending  efforts on
borrowers  (such  as  professionals)  who  occupy  some  or all of the  property
securing the loan. The Company's  commercial and  multi-family  real estate loan
portfolio includes loans secured by apartment buildings, office and professional


                                        9

<PAGE>



buildings,  medical facilities,  churches and other non-residential  properties,
almost all of which are located in the Company's market area. At March 31, 1999,
the Company had $10.1 million in commercial real estate loans representing 10.3%
of the Company's total loan portfolio,  and $1.2 million in multi-family  loans,
or 1.2% of the Company's  total loan  portfolio.  At March 31, 1999, the Company
had five  commercial  real  estate or  multi-family  loans  with a book value in
excess of $500,000.  Three of these loans were secured by restaurants and had an
aggregate  book  value of $2.7  million,  one of these  loans was  secured  by a
convenience store and had a total book value of $580,000, and the remaining loan
was secured by a medical office and had a total book value of $841,000.

     The Company's  permanent  commercial and multi-family real estate loans are
generally  originated for maximum terms of 10 years and 15 years,  respectively,
and have fixed or  adjustable  rates  which are  generally  based on a specified
index plus a margin.  Commercial and multi-family  real estate loans are written
in amounts of up to 75% and 80%,  respectively,  of the  appraised  value of the
property.

     Appraisals on properties  securing  multi-family and commercial real estate
loans  originated  by the  Company are  generally  performed  by an  independent
appraiser  prior to the time the loan is made.  All appraisals on commercial and
multi-family real estate are reviewed by the Company's management. The Company's
underwriting  procedures require  verification of the borrower's credit history,
income and financial  statements,  banking  relationships  and  references.  The
Company generally requires personal  guarantees on loans secured by multi-family
and commercial real estate.

     Multi-family  and commercial real estate loans  generally  present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several  factors,  including the  concentration of principal in a
limited  number  of  loans  and  borrowers,  the  effects  of  general  economic
conditions  on income  producing  properties  and the  increased  difficulty  of
evaluating and monitoring  these types of loans.  Furthermore,  the repayment of
loans secured by multi-family and commercial real estate is typically  dependent
upon the successful  operation of the related real estate  project.  If the cash
flow from the project is reduced  (for  example,  if leases are not  obtained or
renewed), the borrower's ability to repay the loan may be impaired. At March 31,
1999, the Company had no multi-family  loans and no commercial real estate loans
which were 90 days or more delinquent.

     Construction  Lending.  The Company  originates  construction loans for the
construction of residential  and commercial real estate.  At March 31, 1999, the
Company's construction loan portfolio totaled $2.5 million, or 2.6% of its total
loan portfolio.

     Construction  loans to individuals for the construction of their residences
are  structured  to convert to  permanent  loans at the end of the  construction
phase, which typically run up to six months. These construction loans have rates
and terms comparable to one- to four-family loans offered by the Company, except
that  during the  construction  phase,  the  borrower  pays  interest  only at a
specified  margin  over the  prime  rate.  The  maximum  loan-to-value  ratio of
owner-occupied,   single-family   construction   loans   is   80%.   Residential
construction  loans are  underwritten  pursuant to the same  guidelines used for
originating  permanent  residential  loans.  At March 31, 1999,  there were $1.5
million gross residential construction loans outstanding.

     From time to time,  subject to market  conditions,  the Company  originates
construction  loans to builders of one- to  four-family  residences.  Such loans
generally  have terms of up to six months and  require  the  payment of interest
only for the loan term. The maximum loan to value ratio on builder loans is 80%.
The Company generally limits loans to builders for the construction of homes for
sale to one home per  builder.  At March 31,  1999,  the Company had $332,000 in
construction loans to builders of one- to four-family residences.

     The Company also originates a limited number of loans for the  construction
of commercial real estate on which the owner is the primary  tenant.  Such loans


                                       10

<PAGE>



typically  carry  adjustable  rates and  convert to  permanent  loans  following
completion of the construction period. Commercial real estate construction loans
are  generally  underwritten  pursuant  to  the  same  guidelines  utilized  for
commercial  real  estate  loans.  At  March  31,  1999,  the  Company's  largest
construction  loan was an $800,000  loan for the  construction  of a hotel for a
national franchise.

     The  Company's   construction   loan  agreements   generally   provide  for
disbursement  of loan  proceeds in increments as  construction  progresses.  The
Company  reviews  the  progress  of  the  construction  of  the  project  before
disbursements are made.

     Construction  loans are obtained  principally  through  referrals  from the
Company's  and  management's  contacts  in the  business  community  as  well as
existing and walk-in customers. The application process includes a submission to
the Company of  accurate  plans,  specifications  and costs of the project to be
constructed/developed.  These  items  are  used  as a  basis  to  determine  the
appraised  value of the  subject  property.  Loans  are  based on the  lesser of
current appraised value and/or the cost of construction (land plus building).

     Construction  lending is generally  considered to involve a higher level of
credit risk than one- to four-family  residential lending since the risk of loss
on  construction  loans is  dependent  largely  upon the accuracy of the initial
estimate of the individual  property's  value upon completion of the project and
the estimated  cost  (including  interest) of the project.  If the cost estimate
proves to be inaccurate, the Company may be required to advance funds beyond the
amount originally  committed to permit completion of the project.  To the extent
the  Company's  construction  lending  increases in the future,  there can be no
assurance that the Company will not experience an increase in  delinquencies  on
its construction loans.

     Consumer Lending.  At March 31, 1999,  consumer loans totaled $7.8 million,
or 8.0% of the Company's  total loan  portfolio.  In order to increase the yield
and interest rate sensitivity of its loan portfolio and as part of its community
bank-oriented  strategy,  the Company has sought to increase the type and volume
of its consumer  loans to include  unsecured and secured  consumer  loans,  with
emphasis on direct automobile  financing and home equity lending.  Consumer loan
terms vary according to the type and value of collateral, length of contract and
creditworthiness  of the borrower.  During fiscal 1999, consumer loans increased
by $686,000 as a result of the implementation of this strategy.

     The  underwriting  standards  employed by the Company  for  consumer  loans
include a determination  of the  applicant's  payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration,  the underwriting
process also  includes a  comparison  of the value of the  security,  if any, in
relation to the proposed loan amount.

     Consumer loans,  other than loans secured by deposit  accounts,  may entail
greater credit risk than residential mortgage loans, particularly in the case of
consumer loans which are unsecured or are secured by rapidly depreciable assets,
such as automobiles.  In such cases, any repossessed  collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan  balance  as a  result  of  the  greater  likelihood  of  damage,  loss  or
depreciation.  In  addition,  consumer  loan  collections  are  dependent on the
borrower's  continuing  financial  stability,  and thus are  more  likely  to be
affected by adverse  personal  circumstances.  Furthermore,  the  application of
various federal and state laws,  including  bankruptcy and insolvency  laws, may
limit the amount which can be recovered  on such loans.  At March 31, 1999,  the
Company  had $5,000 of  non-performing  consumer  loans and  $17,000 of consumer
assets acquired by foreclosure.  In view of the projected increase in the amount
and  scope  of  the  Company's  consumer  lending  activities,  there  can be no
assurance that delinquencies in the consumer loan portfolio will not increase in
the future.


                                       11

<PAGE>



     Commercial  Business  Lending.  The Company  makes  secured  and  unsecured
commercial  business  loans to local  businesses.  These loans  generally  carry
higher  interest  rates and have shorter  terms to maturity  than the  Company's
residential  loans.  Such  loans  also  strengthen  community  ties and  present
attractive  opportunities  for  cross  selling  the  Company's  other  financial
products.  The Company  generally seeks to make  commercial  business loans on a
"relationship"  rather  than a  "transaction"  basis.  At March  31,  1999,  the
Company's  commercial  business loans totaled $14.8  million,  or 14.9% of total
loans.  In addition,  as of such date,  the Company had $3.4 million of unfunded
commercial business loan commitments.

     The Company's  commercial  business loans generally have terms of up to ten
years and generally carry  adjustable  rates of interest over the prime rate. If
secured,  such loans generally carry security  interests on inventory,  accounts
receivable and fixed assets located in the Company's  market area. The Company's
commercial business loans are generally personally  guaranteed by one or more of
the  principals of the  borrowers but do not include a lien on such  principal's
personal  residences.  Regardless of whether a commercial business loan includes
collateral,  the Company seeks to require that the borrower meet certain  income
and financial designed to measure its ability to repay the debt.

     Unlike residential mortgage loans, which generally are made on the basis of
the  borrower's  ability to make  repayment from his or her employment and other
income,  and which are secured by real property,  the value of which tends to be
more  easily  ascertainable,  commercial  business  loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself.  Further,  the collateral,  if any, securing
the loans may  depreciate  over  time,  may be  difficult  to  appraise  and may
fluctuate in value based on the success of the business.  Accordingly, there can
be no assurance that the Company's non-performing commercial business loans will
not increase in the future.

     The   Company's   commercial   business   lending   volume  has   increased
significantly  in the last several years as a result of  management's  continued
focus on the Company's  commercial  relationships  as well as a reduction in the
number of locally owned  business  lenders.  The Company  intends to continue to
increase its commercial business lending activities in the future.

Originations, Purchases and Sales of Loans

     Loans are  originated  by the  Company's  staff of salaried  loan  officers
through marketing  activities and referrals.  The Company's ability to originate
loans is dependent  upon  customer  demand for loans in its market area and to a
limited extent, various marketing efforts.  Demand is affected by both the local
economy and the interest  rate  environment.  See "Market  Area." Under  current
policy,  all loans  originated  by the  Company are  retained  in the  Company's
portfolio.

     The  Company  also  takes  residential  loan  applications  for a  national
mortgage  banker.  Although  the Company  does not make the subject  loans,  the
Company  receives an origination fee on any loan actually funded by the mortgage
banker.  These  loans are  offered to  customers  seeking to receive  "secondary
market rates" on their residential loans.

     From time to time, in order to supplement  loan  originations,  the Company
has acquired mortgage-backed and related securities which are held, depending on
the investment intent, in the "available-for-sale"  portfolios.  See "Investment
Activities - Mortgage-Backed  and Related Securities" and Note 4 to the Notes to
Consolidated Financial Statements contained in Exhibit 13.


                                       12

<PAGE>

     The  following  table  shows  the  loan  origination,  purchase,  sale  and
repayment activities for the periods indicated.

<TABLE>
<CAPTION>

                                                                                       Year Ended March 31,
                                                                           ---------------------------------------------
                                                                             1999               1998               1997
                                                                             ----               ----               ----
                                                                                           (In Thousands)
<S>                                                                      <C>              <C>                 <C>

Originations by type:
 Adjustable rate:
  Real estate - one- to four-family...........................            $ 3,950           $  5,362            $ 7,916
                 - multi-family...............................                ---                ---                ---
                 - commercial.................................              2,174              2,667                240
                 - construction...............................              1,119                156                 31
  Non-real estate - consumer..................................                496                690                205
                 - commercial business........................              4,060             11,159              1,144
                                                                          -------            -------            -------
                 - other......................................                ---                ---                 89
                                                                          -------            -------            -------
         Total adjustable-rate loans..........................             11,799             20,034              9,625
                                                                          -------            -------            -------
 Fixed rate:
  Real estate - one- to four-family...........................             12,275             10,414              8,560
                 - multi-family...............................                ---                572                655
                 - commercial.................................              2,476              1,465                832
                 - construction...............................              1,374              1,462              1,147
  Non-real estate - consumer..................................              7,720              5,376              2,683
                 - commercial business........................              8,831              5,852              1,012
                 - other......................................                ---                ---                  6
                 - commercial agriculture.....................                 17                ---                ---
                                                                          -------            -------            -------
         Total fixed-rate loans...............................             32,693             25,141             14,895
                                                                          -------            -------            -------
         Total loans originated...............................             44,492             45,175             24,520
                                                                          -------            -------            -------

Purchases:
 Real estate - commercial.....................................              1,240                ---                ---
 Non-real estate - commercial.................................                 48                ---                ---
                                                                          -------            -------            -------
         Total purchases......................................              1,288                ---                ---

Participations sold:
 Real estate - commercial.....................................                525                ---                ---
 Non-real estate - commercial business........................              1,533                ---                ---
                 - other......................................                ---                ---                ---
                                                                          -------            -------            -------
         Total participations sold............................              2,058                ---                ---

Repayments:
  Real estate - one- to four-family...........................             20,400             12,338              7,807
                 - multi-family...............................                318                179                 23
                 - commercial.................................              4,199              2,039              1,685
                 - construction...............................                406              2,024              1,655
  Non-real estate - consumer..................................              6,607              5,789              2,799
                 - commercial business........................              3,601             14,863                531
                 - other......................................                923                ---                 12
                                                                          -------            -------            -------
   Total principal repayments.................................             36,454             37,232             14,512
                                                                          -------            -------            -------
Increase (decrease) in other items, net.......................                 89                227               (108)
  Acquisition of Paintsville Bank.............................                ---                ---             28,477
                                                                          -------            -------            -------
         Net increase (decrease)..............................            $ 7,357            $ 8,170            $38,377
                                                                          =======            =======            =======
</TABLE>

                                       13

<PAGE>

Delinquencies and Non-Performing Assets

     Delinquency Procedures. When a borrower fails to make a required payment on
a loan, the Company attempts to cure the delinquency by contacting the borrower.
The Company  sends late notices on all loans past due (10 to 15 days,  depending
on the type of loan) and imposes  late fees past the grace  periods.  Additional
written and verbal contacts may be made with the borrower between 30 and 90 days
after the due date. If the loan is contractually delinquent 90 days, the Company
initiates  appropriate  legal action for collection.  The decision as to whether
and when to initiate  legal  action is based upon such  factors as the amount of
the outstanding loan in relation to the original indebtedness,  current value of
collateral  (if  secured),  the  extent and  frequency  of  delinquency  and the
borrower's  ability  and  willingness  to  cooperate  in  curing  delinquencies.
Generally,  when a loan  becomes  delinquent  90 days or more,  the Company will
place the loan on a  non-accrual  status  and, as a result,  previously  accrued
interest  income on the loan is taken out of  current  income.  Future  interest
income is  recognized on a cash basis  although many times any payment  received
during the non-accrual  period may be applied directly to the principal balance.
Loans  placed on  non-accrual  are not placed back on an accruing  basis until a
satisfactory payment history has been established  (normally six payments).  All
commercial  loans made since  January 1, 1997 carry a default  rate clause which
increases the interest rate two percent upon the loan after the grace period (10
days).

     Real estate  acquired by the Company as a result of  foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until it is sold. When
property  is  acquired  by  foreclosure  or deed in lieu of  foreclosure,  it is
recorded  at the  lower  of cost or  estimated  fair  value  (as  determined  by
appraisal) less estimated selling costs. After  acquisition,  all costs incurred
in maintaining the property are expensed.  Costs relating to the development and
improvement of the property are capitalized.

     The following table sets forth loan delinquencies by type, by amount and by
percentage of type at March 31, 1999.

<TABLE>
<CAPTION>

                                             Loans Delinquent For:
                       --------------------------------------------------------------
                                 60 - 90 Days                  90 Days and Over             Total Delinquent Loans
                       --------------------------------------------------------------  ----------------------------------
                                              Percent                         Percent                          Percent
                                              of Loan                         of Loan                          of Loan
                         Number     Amount   Category    Number     Amount   Category    Number     Amount    Category
                       ----------  --------  --------  ---------  ---------- --------- ----------  --------   ----------
                                                            (Dollars in Thousands)
<S>                   <C>          <C>       <C>      <C>        <C>        <C>        <C>        <C>         <C>

Real Estate:
  One- to four-family.    ---       $  ---      ---        3        $86          0.1         3      $  86          0.1
  Commercial..........    ---          ---      ---      ---        ---          ---       ---        ---          ---
Consumer..............      3           15      0.2        2          5          0.1         5         20          0.3
Commercial............      3           88      0.6      ---        ---          ---         3         88          0.6
                          ---        -----    -----      ---      -----        -----      ----      -----         ----

                            6         $103      0.1        5        $91          0.1        11       $194          0.2
                          ===         ====               ===        ===                     ==       ====
</TABLE>


     Classification  of Assets.  Federal  regulations  require that each savings
institution  and national  bank classify its own assets on a regular  basis.  In
addition,  in connection with examinations of savings  institutions and national
banks,  examiners of the Office of Thrift  Supervision  (the "OTS") (for savings
institutions),  the Office of the  Comptroller  of the Currency (the "OCC") (for
national  banks) and the Federal  Deposit  Insurance  Corporation  ("FDIC") (for
savings  institutions  and national  banks) have  authority to identify  problem
assets and,  if  appropriate,  require  them to be  classified.  There are three
classifications for problem assets: Substandard,  Doubtful and Loss. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility  that the institution will sustain some loss if the deficiencies are
not corrected.  Doubtful assets have the weaknesses of Substandard  assets, with
the  additional   characteristics   that  the  weaknesses   make  collection  or
liquidation  in full on the basis of currently  existing  facts,  conditions and
values  questionable,  and  there  is a  high  possibility  of  loss.  An  asset
classified  Loss is  considered  uncollectible  and of such  little  value  that
continuance  as an  asset  on  the  balance  sheet  of  the  institution  is not
warranted.  Assets classified as Substandard or Doubtful require the institution


                                       14

<PAGE>



to establish prudent general  allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss allowance.  Assets which do not currently expose an institution to
sufficient risk to warrant classification of the aforementioned  categories, but
possess  weaknesses  are  required  to be  designated  "Special  Mention" by the
institution's management.

     On the basis of management's  review of its assets,  at March 31, 1999, the
Company had the following classified assets:

<TABLE>
<CAPTION>

                                                                    March 31, 1999
                                                                   ---------------
                                                                    (In Thousands)
<S>                                                               <C>

Substandard...................................................          $1,069
Doubtful......................................................               9
Loss..........................................................             ---
Special Mention...............................................             193
                                                                        ------
     Total....................................................          $1,271
                                                                        ======
</TABLE>


     The  Company's  classified  assets  consist  of  non-performing  loans  and
foreclosed  assets. As of the date of this report,  these asset  classifications
are materially  consistent  with those of the OTS, OCC and FDIC.  When loans are
classified as a "loss," they are charged off against the loan loss allowance.


                                       15

<PAGE>



     Non-Performing  Assets.  The  following  table sets forth the  amounts  and
categories of non-performing  assets in the loan portfolio.  Loans are placed on
non-accrual  status when the  collection  of principal  and/or  interest  become
doubtful.  For  all  years  presented,  the  Company  has had no  troubled  debt
restructurings  (which  involve  forgiving a portion of interest or principal on
any loans or making loans at a rate  materially less than that of market rates).
Foreclosed assets include assets acquired in settlement of loans.

<TABLE>
<CAPTION>


                                                                                 March 31,
                                                     ------------------------------------------------------------
                                                         1999        1998        1997        1996        1995
                                                      ---------    ---------  ----------  ----------  -----------
                                                                          (Dollars in Thousands)
<S>                                                   <C>          <C>        <C>         <C>         <C>

Non-accruing loans:
  One- to four-family............................      $  97          $296       $  465      $552        $447
  Multi-Family...................................        ---           ---           32       ---         ---
  Commercial real estate.........................        ---           ---           62        43         301
  Consumer.......................................        ---            12          ---       ---         ---
  Commercial business............................        218           ---          ---       ---         ---
                                                         ---          ----       ------      ----        ----
     Total.......................................        315           308          559       595         748

Accruing loans delinquent 90 days or more:
  One- to four-family............................         86            13           57       ---          60
  Commercial real estate.........................        ---             7           90       ---         ---
  Consumer.......................................          5             5            3       ---         ---
  Credit Card....................................        ---           ---            7       ---         ---

Foreclosed assets:
  One- to four-family............................         32            35           92         5          49
  Commercial real estate.........................        194           194          244       ---         ---
  Consumer.......................................        ---           ---           24       ---         ---
                                                        ----          ----       ------      ----        ----

Total non-performing assets.....................        $632          $562       $1,076      $600        $857
                                                        ====          ====       ======      ====        ====
Total as a percentage of total assets...........         0.4%          0.4%         0.8%      0.9%        1.4%
                                                         ===           ===          ===       ===         ===
</TABLE>


     For the year ended March 31, 1999,  gross interest  income which would have
been recorded had the  non-accruing  loans been current in accordance with their
original  terms  amounted to $23,000.  The amount that was  included in interest
income on such loans was $10,000 for the year ended March 31, 1999.  The average
balance of non-accrual loans for the year ended March 31, 1999 was $163,000. The
allowance for loan losses on non-accrual  loans amounted to $33,000 at March 31,
1999.

     At March 31, 1999,  the Company's  non-accruing  loans  included four loans
secured by  single-family  real estate totaling  $97,000,  and three  commercial
business  loans,  one for  $28,000  secured  by a tractor  and  trailer  and two
unsecured  totaling  $190,000.  At March 31, 1999,  real estate owned included a
vacant lot valued at $194,000 and two single family homes valued at $32,000.

                                       16

<PAGE>



     Other Assets of Concern. In addition to the non-performing assets set forth
in the table above,  as of March 31,  1999,  there were no loans or other assets
with respect to which known  information  about the possible  credit problems of
the  borrowers  or  the  cash  flows  of the  security  properties  have  caused
management  to have  concerns as to the ability of the  borrowers to comply with
present  loan  repayment  terms and which may result in the future  inclusion of
such items in the non-performing asset categories.

     Management considers non-performing and "of concern" assets in establishing
its allowance for loan losses.

     Allowance for Loan Losses.  The  following  table sets forth an analysis of
the allowance for loan losses.

<TABLE>
<CAPTION>

                                                                                     Year Ended March 31,
                                                                    ---------------------------------------------------
                                                                      1999        1998       1997      1996     1995
                                                                    --------   ---------  ---------  --------  -------
                                                                                    (Dollars in Thousands)
<S>                                                                 <C>        <C>        <C>        <C>       <C>


Balance at beginning of period................................       $831       $801       $286      $311       $318
                                                                     ----       ----       ----      ----       ----
Acquisition of Paintsville Bank...............................        ---        ---        526       ---        ---
Charge-offs:
  One- to four-family.........................................         23         49         17        44        130
  Multi-family................................................        ---        ---        ---       149        ---
  Commercial real estate......................................        ---        ---        ---        21         19
  Commercial business.........................................          8          1         45       ---        ---
  Consumer....................................................         84        102         76       ---        ---
  Credit cards................................................          2         21         15       ---        ---
                                                                     ----      -----       ----     -----      -----
      Total charge-offs.......................................        117        173        153       214        149
                                                                     ----       ----       ----      ----       ----

Recoveries:
  One- to four-family.........................................         15        ---          3        12          9
  Multi-family................................................        ---        ---        ---         9        ---
  Commercial business.........................................        ---         26         17       ---        ---
  Consumer....................................................         32         16         16       ---        ---
  Credit cards................................................        ---          3          1       ---        ---
                                                                     ----      -----      -----     -----      -----
      Total recoveries........................................         47         45         37        21          9
Net charge-offs...............................................         70        128        116       193        140
                                                                     ----       ----       ----      ----       ----
Additions charged to operations...............................        100        158        105       168        133
                                                                     ----       ----       ----      ----       ----
Balance at end of period......................................       $861      $ 831       $801      $286       $311
                                                                     ====      =====       ====      ====       ====

Ratio of net charge-offs during the period to average loans
    outstanding during the period.............................       0.1%       0.1%       0.2%      0.5%       0.4%
                                                                    ====      =====        ===       ===        ===

Ratio of net charge-offs during the period to average non-
    performing assets.........................................       9.3%      15.4%       9.6%     25.4%      17.5%
                                                                    ====       ====        ===      ====       ====


</TABLE>


                                       17

<PAGE>



     The distribution of the allowance for loan losses at the dates indicated is
summarized as follows:

<TABLE>
<CAPTION>

                                                                March 31,
                     ------------------------------------------------------------------------------------------------
                                     1999                                       1998                        1997
                      --------------------------------------   -------------------------------------    -------------
                                                    Percent                                 Percent
                                                   of Loans                                of Loans
                                        Loan       in Each                      Loan       in Each
                         Amount of     Amounts     Category     Amount of      Amounts     Category       Amount of
                         Loan Loss       by        to Total     Loan Loss        by        to Total       Loan Loss
                         Allowance    Category      Loans       Allowance     Category      Loans         Allowance
                        ----------   ---------     --------     ---------     ---------    --------      ----------
<S>                     <C>          <C>           <C>          <C>           <C>         <C>            <C>

One- to four-family ..   $   180      $61,992        63.0%       $   221        $66,078      72.6%           $  88
Multi-family .........        --        1,179         1.2              2          1,497       1.6                3
Commercial real estate        34       10,136        10.3             45          8,970       9.9               67
Construction .........        --        2,513         2.6             --            426       0.5               --
Consumer .............        60        7,801         8.0             35          7,115       7.8               14
Commercial business ..        80       14,747        14.9             52          6,942       7.6               22
Commercial agriculture        --           17          --             --             --        --               --
Unallocated ..........       507           --          --            476             --        --              607
                         -------      -------       -----        -------        -------     -----            -----
     Total ...........   $   861      $98,385       100.0%       $   831        $91,028     100.0%           $ 801
                         -------      =======       =====        =======        =======     =====            =====
</TABLE>


<TABLE>
<CAPTION>


                                                               March 31,
                        -----------------------------------------------------------------------------------------------------------
                               1997                              1996                                          1995
                        --------------------    -----------------------------------------      ------------------------------------
                                    Percent                                    Percent                                Percent
                                   of Loans                                    of Loans                               of Loans
                          Loan      in Each                        Loan        in Each                     Loan       in Each
                         Amounts    Category     Amount of        Amounts     Category      Amount of     Amounts    Category
                           by       to Total     Loan Loss          by        to Total      Loan Loss       by       to Total
                        Category     Loans       Allowance       Category       Loans       Allowance    Category      Loans
                        ----------  ---------    ---------       ---------    ---------    -----------   --------   -----------
<S>                    <C>         <C>          <C>            <C>           <C>          <C>            <C>         <C>


One- to four-family ..   $62,413      75.3%        $ 59           $38,944       87.5%        $  47         $35,005      96.9%
Multi-family .........     1,104       1.3           --               215        0.5            --             118       0.3
Commercial real estate     6,877       8.3            4             2,509        5.7            75             630       1.7
Construction .........       832       1.0           --             1,132        2.5            --              --        --
Consumer .............     6,838       8.3           --               618        1.4            --             383       1.1
Commercial business ..     4,794       5.8           --             1,063        2.4            --              --        --
Commercial agriculture        --        --           --                --         --            --              --        --
Unallocated ..........        --        --          223                --         --           190              --        --
                         -------     -----         ----           -------      -----          ----          ------     -----
     Total ...........   $82,858     100.0%        $286           $44,481      100.0%         $ 312        $36,136     100.0%
                         =======     =====         ====           =======      =====          =====        =======     =====

</TABLE>



                                       18

<PAGE>



     The allowance for loan losses is  established  through a provision for loan
losses charged to earnings based on management's evaluation of the risk inherent
in its entire  loan  portfolio  and changes in the nature and volume of its loan
activity.  Such  evaluation,  which includes a review of all loans of which full
collectibility may not be reasonably assured,  considers the market value of the
underlying  collateral,  growth  and  composition  of the  loan  portfolio,  the
relationship of the allowance to outstanding loans,  historical loss experience,
delinquency  trends,  prevailing  and projected  economic  conditions  and other
factors that warrant recognition in providing for an adequate allowance for loan
losses.  In determining the general  reserves under these  policies,  historical
charge-offs and  recoveries,  changes in the mix and levels of the various types
of loans, net realizable values, the current loan portfolio and current economic
conditions are considered.

     While management  believes that it uses the best  information  available to
determine  the  allowance  for  loan  losses,  unforeseen  economic  and  market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly  affected, if circumstances differ substantially
from the assumptions used in making the final determination.

Investment Activities

     General. Generally, the investment policy of the Company is to invest funds
among  categories of investments and maturities  based upon the  asset/liability
management  policies,  investment  quality,  loan and deposit volume,  liquidity
needs and performance  objectives.  The Company's securities are classified into
three categories:  trading, held to maturity and available-for-sale.  Securities
that are bought and held principally for the purpose of selling them in the near
term are  classified as trading  securities  and are reported at fair value with
unrealized  gains and losses  included  in  trading  account  activities  in the
statement of operations. Securities that the Company has the positive intent and
ability to hold to maturity are classified as  held-to-maturity  and reported at
amortized   cost.   All  other   securities   not   classified   as  trading  or
held-to-maturity  are classified as  available-for-sale.  At March 31, 1999, the
Company had no securities  which were classified as trading.  Available-for-sale
securities are reported at fair value with unrealized gains and losses included,
on an after-tax basis, in a separate  component of retained  earnings.  At March
31, 1999, $29.6 million of investment  securities or mortgage-backed and related
securities were classified as available-for-sale.

     The Company must maintain  minimum levels of  investments  and other assets
that qualify as liquid assets. Liquidity may increase or decrease depending upon
the  availability of funds and comparative  yields on investments in relation to
the return on loans. Historically,  Classic Bank has maintained liquid assets at
levels  significantly above the minimum  requirements imposed by the regulations
and  above  levels  believed   adequate  to  meet  the  requirements  of  normal
operations,  including  potential  deposit  outflows.  At March  31,  1999,  the
liquidity ratio (defined as cash and other financial  assets maturing within one
year)  was  4.12%.  See  "Management's  Discussion  and  Analysis  of  Financial
Condition  and  Results  of  Operations  -  Asset/Liability  Management"  and "-
Liquidity and Capital Resources" contained in Exhibit 13.

     Securities.  National banks and federally  chartered  savings  institutions
have the authority to invest in various types of liquid assets, including United
States Treasury  obligations,  securities of various federal  agencies,  certain
certificates  of deposit  of insured  banks and  savings  institutions,  certain
bankers'  acceptances,  repurchase  agreements  and  federal  funds.  Subject to
various   restrictions,   national   banks  and  federally   chartered   savings
institutions may also invest their assets in commercial paper,  investment grade
corporate  debt  securities  and  mutual  funds  whose  assets  conform  to  the
investments  that  a  federally   chartered  savings  institution  is  otherwise
authorized to make directly.


     The  Company   invests  in  liquidity   investments   and  in  high-quality
investments,  such  as  U.S.  Treasury  and  agency  obligations,  in  order  to
supplement  lending volume and provide  collateral for FHLB borrowing and public
funds  deposited  with the Company.  Investment  securities  may also be used to
adjust the term to

                                       19

<PAGE>



repricing of the Company's assets.  At March 31, 1999, the Company's  investment
securities  portfolio totaled $26.5 million.  At March 31, 1999, the Company did
not own any  investment  securities of a single issuer which exceeded 10% of the
Company's  stockholders'  equity,  other  than U.S.  government  securities  and
federal  agency  obligations.  See  Note 3 of  the  Notes  to  the  Consolidated
Financial  Statements  in Exhibit 13 for  additional  information  regarding the
Company's investment securities portfolio.

     The following table sets forth the composition of the Company's  securities
at the dates  indicated.  All  investment  securities  held by the Company  were
classified as available for sale.

<TABLE>
<CAPTION>

                                                                                    March 31,
                                                 -----------------------------------------------------------------------------
                                                          1999                       1998                     1997
                                                 ------------------------    ---------------------     -----------------------
                                                   Carrying       % of        Carrying      % of         Carrying     % of
                                                     Value        Total         Value       Total          Value      Total
                                                  -----------    --------     ----------  --------       ---------  ---------
                                                                              (Dollars in Thousands)
<S>                                                <C>           <C>          <C>         <C>           <C>        <C>

Investment securities:
  U.S. government securities.....................     $ 1,017         3.8        $1,275        6.5        $1,503         6.2
  Federal agency obligations.....................       3,032        11.5         7,826       40.2        14,815        60.7
  Municipal bonds................................      15,872        59.8         8,804       45.2         7,057        28.9
  Other debt securities..........................       4,449        16.8           272        1.4           ---         ---
  Other equity securities........................         771         2.9           ---        ---           ---         ---
FHLB and FRB stock...............................       1,385         5.2         1,297        6.7         1,015         4.2
                                                      -------       -----       -------      -----       -------       -----
     Total securities and FHLB and FRB stock.....     $26,526       100.0%      $19,474      100.0%      $24,390       100.0%
                                                      =======       =====       =======      =====       =======       =====

Average remaining life of investment securities..      12 yrs                    10 yrs.                   7 yrs.

Other interest-earning assets:
  Interest-bearing deposits with banks...........     $   133         8.7% $        410       26.6%      $   495         8.2%
  Federal Funds Sold and securities purchased
   under agreement to resell.....................       1,398        91.3         1,131       73.4         5,525        91.8

</TABLE>


     The composition and maturities of the securities portfolio,  excluding FHLB
and FRB stock, are indicated in the following table.

<TABLE>
<CAPTION>

                                                                     March 31, 1999
                                     -----------------------------------------------------------------------------
                                      Less Than      1 to 5       5 to 10        Over
                                       1 Year         Years        Years       10 Years        Total Securities
                                     -----------    ---------    ---------    ----------    ----------------------
                                      Carrying      Carrying     Carrying      Carrying     Carrying       Market
                                        Value         Value        Value         Value        Value         Value
                                     -----------    ---------    ----------   ----------    ---------     ---------
                                                                        (Dollars in Thousands)
<S>                                  <C>             <C>           <C>         <C>           <C>           <C>


U.S. government securities..........     $---         $1,017       $  ---       $   ---      $ 1,017       $1, 017
Federal agency obligations..........      ---            ---          ---         3,032        3,032         3,032
Municipal bonds.....................        5          1,184        2,273        12,410       15,872        15,872
Corporate debt securities...........      ---            ---          ---         4,449        4,449         4,449
Corporate equity securities.........      ---            ---          ---           771          771           771
                                         ----         ------       ------       -------      -------       -------
Total securities....................     $  5         $2,201       $2,273       $20,662      $25,141       $25,141
                                         ====         ======       ======       =======      =======       =======

Weighted average yield(1)...........      5.3%           5.4%         5.6%          5.9%         5.9%          5.9%

</TABLE>


(1)  Yields have not been computed on a tax-equivalent basis.


                                       20

<PAGE>



     See Note 3 of the Notes to the Consolidated  Financial Statements contained
in Exhibit 13 for a discussion of the Company's securities portfolio.

     Mortgage-Backed  and Related  Securities.  In order to supplement  loan and
investment  activities,  the Company has invested in mortgage-backed and related
securities.

     Consistent with its asset/liability  management strategy at March 31, 1999,
$1.8 million, or 40.3% of the Company's  mortgage-backed and related securities,
have adjustable  interest rates. For information  regarding the  mortgage-backed
and related  securities  portfolio,  see Note 3 of the Notes to the Consolidated
Financial Statements contained in Exhibit 13.

     As of March 31, 1999,  all of the  mortgage-backed  and related  securities
owned by the Company  were  issued,  insured or  guaranteed  either  directly or
indirectly  by a federal  agency.  As a  result,  the  Company  did not have any
mortgage-backed or related  securities in excess of 10% of stockholders'  equity
except for federal agency obligations.

     In addition to its conventional  mortgage-backed  securities,  from time to
time, the Company invests in collateralized  mortgage  obligations  ("CMOs") and
real  estate  mortgage  investment  conduits  ("REMICs").  CMOs and  REMICs  are
securities   derived  by  reallocating  the  cash  flows  from   mortgage-backed
securities or pools of mortgage loans in order to create  multiple  classes,  or
tranches, of securities with coupon rates and average lives that differ from the
underlying  collateral  as a whole.  The  terms to  maturity  of any  particular
tranche is dependent upon the prepayment  speed of the underlying  collateral as
well as the structure of the particular CMO or REMIC. As a result, the cash flow
and hence the value of CMOs and REMICs are  subject to  substantial  change.  At
March 31, 1999, the Company had $426,000 of CMOs.

     To assess price volatility,  the Federal Financial Institutions Examination
Council  ("FFIEC")  adopted a policy in 1992 which  requires an annual  "stress"
test of mortgage  derivative  securities.  This policy requires Classic Bank and
Paintsville  Bank  to  annually  test  their  CMOs  and  other  mortgage-related
securities to determine  whether they are high-risk or nonhigh-risk  securities.
Mortgage  derivative products with an average life or price volatility in excess
of a benchmark 30-year,  mortgage-backed,  pass-through  security are considered
high-risk  mortgage  securities.  Under the  policy,  savings  institutions  may
generally  only  invest  in  high-risk  mortgage  securities  in order to reduce
interest rate risk.  In addition,  all high-risk  mortgage  securities  acquired
after February 9, 1992 which are classified as high risk at the time of purchase
must be carried in the institution's trading account or as assets held for sale.
At  March  31,  1999,  none of the  Company's  mortgage-backed  securities  were
classified as "high-risk."

     The following table sets forth the contractual  maturities of the Company's
mortgage-backed securities at March 31, 1999.

<TABLE>
<CAPTION>

                                                                                       March 31, 1999
                                                                                       --------------
                                    Over 1 to 5   Over 5 to   Over 10 to     Over 20       Balance
                                       Years      10 Years     20 Years       Years      Outstanding
                                   ------------ ------------ ------------ ------------ -------------
<S>                                <C>          <C>          <C>         <C>           <C>


Freddie Mac.................       $  ---          $ 904       $   ---          ---        $    904
Fannie Mae..................          ---            ---         1,298        1,138           2,436
GNMA........................          ---            ---           ---          ---             ---
Other.......................          ---            ---           ---          713             713
CMOs and REMICs.............          ---            426           ---          ---             426
                                  -------         ------         -----       ------          ------

     Total.................       $  ---          $1,330        $1,298       $1,851         $ 4,479
                                  =======         ======        ======       ======         =======

</TABLE>


                                       21

<PAGE>



     At March 31, 1999,  the dollar  amount of all  mortgage-backed  and related
securities due after March 31, 2000, which had fixed interest rates and floating
or adjustable rates totaled $2.7 million and $1.8 million, respectively.

     The market values of a portion of the Company's mortgage-backed and related
securities  held-to-  maturity  have  been from time to time  lower  than  their
carrying values.  However,  for financial reporting  purposes,  such declines in
value are  considered  to be  temporary  in nature  since  they have been due to
changes in interest rates rather than credit  concerns.  See Note 3 of the Notes
to the Consolidated Financial Statements contained in Exhibit 13.

     The  following  table sets  forth the  composition  of the  mortgage-backed
securities at the dates indicated.

<TABLE>
<CAPTION>

                                                                               March 31,
                                                 ---------------------------------------------------------------------
                                                          1999                   1998                     1997
                                                 ---------------------- ----------------------    --------------------
                                                  Amortized   Market     Amortized   Market       Amortized    Market
                                                    Cost       Value       Cost       Value         Cost        Value
                                                  -----------  ------   -----------  ---------    -----------  -------
                                                                        (Dollars in Thousands)
<S>                                               <C>          <C>       <C>          <C>         <C>           <C>


Mortgage-backed securities available for sale:
 Freddie Mac.....................................     $  891      $  904      $2,989     $3,031     $2,561      $2,521
 Fannie Mae......................................      2,473       2,436       2,546      2,546      2,945       2,966
  Other..........................................        712         713         828        826        417         411
  CMOs/REMICs....................................        439         426       1,442      1,428      2,017       1,987
                                                      ------      ------      ------     ------     ------      ------
       Total mortgage-backed securities..........     $4,515      $4,479      $7,805     $7,831     $7,940      $7,885
                                                      ======      ======      ======     ======     ======      ======


</TABLE>


     The following table shows  mortgage-backed and related securities purchase,
sale and repayment activities for the periods indicated.

<TABLE>
<CAPTION>

                                                                                    Year Ended March 31,
                                                                 -----------------------------------------------------
                                                                       1999              1998               1997
                                                                 ---------------     ------------    -----------------
                                                                                       (In Thousands)
<S>                                                                <C>                <C>               <C>

Purchases:
  Adjustable-rate(1)...................................              $   ---           $  ---             $3,035
  Fixed-rate(1)........................................                3,840            1,744              2,299
  CMOs and REMICs......................................                  ---              438                ---
                                                                     -------            -----             ------
         Total purchases...............................                3,840            2,182              5,334
                                                                     -------            -----             ------

Sales:
  Adjustable-rate(1)...................................                  685              ---              2,255
  Fixed-rate(1)........................................                3,387              ---                976
  CMOs and REMICs......................................                1,003            1,012                ---
                                                                     -------            -----             ------
         Total sales...................................                5,075            1,012              3,231
                                                                     -------            -----             ------

Principal repayments...................................               (1,982)          (1,285)              (532)
Other increases (decreases), net.......................                  (73)             (20)               (46)
                                                                     -------           ------             ------
     Net increase (decrease)...........................              $(3,290)          $ (135)            $1,525
                                                                     =======           ======             ======

</TABLE>

-------------
(1)  Consists of pass-through securities.

                                       22

<PAGE>



Sources of Funds

     General.  The Company's  primary  sources of funds are  deposits,  payments
(including  prepayments)  of  loan  principal,  interest  earned  on  loans  and
securities,  repayments  of  securities,  borrowings  and  funds  provided  from
operations.  Borrowings  may be used on a  short-term  basis to  compensate  for
seasonal reductions in deposits or deposit inflows at less than projected levels
and may be used on a longer-term basis to support expanded lending activities.

     Deposits.  The  Company  offers  deposit  accounts  having a wide  range of
interest  rates and terms.  The Company's  deposits  consist of passbook,  money
market,  various  certificate and interest- and  noninterest-  bearing  checking
accounts.  The Company  also cross  markets to current  customers  and  utilizes
newspaper and radio  advertisements.  The Company  currently relies primarily on
competitive  pricing  policies  and  customer  service  to  attract  and  retain
deposits.  The Company added two offices and eight new ATM locations  during the
year in order to increase fees and attract customers.

     The  Company   serves  as  a  depository   for  public  funds  for  various
municipalities  and related  entities.  At March 31, 1999,  the amount of public
funds on deposit with the Company was $1.2 million.  These  accounts are subject
to volatility  depending on government funding needs and the Company's desire to
attract such funds.

     From time to time,  the Company offers "step up"  certificates  of deposits
which permit upward adjustments of interest rates depending on market conditions
but do not permit downward adjustments below the initial rate. At March 31, 1999
the  Company  had $1.6  million of "step up"  certificates  of  deposit  with an
average cost of 5.2%.

     The Company  currently  manages the pricing of its deposits in keeping with
its  asset/liability  management,   profitability  and  growth  objectives.  For
additional  information regarding the Company's deposit accounts,  see Note 6 of
the Notes to the Consolidated Financial Statements contained in Exhibit 13.

     The following  table sets forth the savings flows at the Company during the
periods indicated.

<TABLE>
<CAPTION>

                                                                   Year Ended March 31,
                                                    ------------------------------------------------
                                                       1999                1998              1997
                                                    ------------        -----------      -----------
                                                                 (Dollars in Thousands)
<S>                                                <C>                <C>               <C>

Opening balance..............................          $104,927          $100,519         $  46,200
Acquisition of Paintsville Bank..............               ---               ---            52,851
Deposits.....................................           741,087           507,555           217,612
Withdrawals..................................          (731,714)         (506,091)         (218,707)
Interest credited............................             3,432             2,944             2,563
                                                    -----------        ----------        ----------

Ending balance...............................          $117,732          $104,927          $100,519
                                                       ========          ========          ========

Net increase (decrease)......................         $  12,805        $    4,408          $ 54,319
                                                      =========        ==========          ========

Percent increase (decrease)..................              12.2%              4.4%            117.8%
                                                           ====               ===             =====
</TABLE>


                                       23

<PAGE>



     The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered as of the dates indicated.

<TABLE>
<CAPTION>
                                                                                 As of March 31,
                                              ----------------------------------------------------------------------------------
                                                        1999                          1998                         1997
                                              ------------------------        -----------------------     ---------------------
                                                              Percent                       Percent                    Percent
                                                 Amount       of Total          Amount     of Total         Amount     of Total
                                               -----------    --------        ---------   -----------      --------   ---------
                                                                           (Dollars in Thousands)
<S>                                            <C>            <C>             <C>         <C>             <C>         <C>


Deposits:

Non-interest bearing demand deposits..........     $ 9,600        8.2%           $10,152         9.7       $  9,496         9.4%
Interest bearing demand deposits - 2.6%(1)....      15,919       13.5             10,281         9.8          9,134         9.1
Savings Accounts - 2.7%(1)....................      12,156       10.3             10,722        10.2         11,552        11.5
Money Market Accounts - 3.2%(1)...............       7,599        6.5              9,331         8.9          9,599         9.5
                                                   -------       ----             ------        ----        -------     -------
     Total Deposits...........................     $45,274       38.5%           $40,486        38.6%      $ 39,781        39.5%
                                                   =======       ====           ========        ====       ========      ======

Certificates:

0.00 -  4.00%.................................     $ 1,389        1.2$             1,128         1.1 $        1,611         1.7
4.01 -  6.00%.................................      68,356       58.0             50,657        48.2         48,363        48.1
6.01 -  8.00%.................................       2,713        2.3             12,556        12.0         10,640        10.6
8.01 - 10.00%.................................         ---        ---                100         0.1            124         0.1
                                                   -------    -------           --------      -------     ---------     -------
Total Certificates............................      72,458       61.5             64,441        61.4         60,738        60.5
                                                   -------      -----           --------       -----       --------      ------
     Total Deposits...........................    $117,732      100.0%          $104,927       100.0%      $100,519       100.0%
                                                  ========      =====           ========       =====       ========       =====
</TABLE>
---------------
(1) Interest rate offered at March 31, 1999.

     The following  table shows rate and maturity  information for the Company's
certificates of deposit as of March 31, 1999.

<TABLE>
<CAPTION>


                                          0.00-         4.01-         6.01-         8.01-                        Percent
                                          4.00%         6.00%         8.00%      or greater      Total           of Total
                                        -----------   ----------   ----------   ------------   ---------   --------------------
                                                                 (Dollars in Thousands)
<S>                                     <C>           <C>          <C>          <C>            <C>         <C>


Certificate accounts maturing in quarter ending:

June 30, 1999........................      $1,379      $20,677       $   944          ---        $23,000           31.7
September 30, 1999...................         ---       16,324           312          ---         16,636           23.0
December 31, 1999....................         ---       12,190           455          ---         12,645           17.5
March 31, 2000.......................         ---        8,258           462          ---          8,720           12.0
June 30, 2000........................         ---        4,123           441          ---          4,564            6.3
September 30, 2000...................          10        3,340           ---          ---          3,350            4.6
December 31, 2000....................         ---          551            25          ---            576            0.8
March 31, 2001.......................         ---          518             8          ---            526            0.7
June 30, 2001........................         ---          401           ---          ---            401            0.6
September 30, 2001...................         ---          546           ---          ---            546            0.8
December 31, 2001....................         ---           66            35          ---            101            0.1
March 31, 2002.......................         ---          163           ---          ---            163            0.2
Thereafter...........................         ---        1,199            31          ---          1,230            1.7
                                           ------      -------        ------         ----       --------          -----

   Total.............................      $1,389      $68,356        $2,713          ---        $72,458          100.0
                                           ======      =======        ======         ====        =======          =====

   Percent of total..................        1.9%        94.4%          3.7%         ---%         100.0%

</TABLE>


                                       24

<PAGE>



     The following table indicates the amount of the certificates of deposit and
other deposits by time remaining until maturity as of March 31, 1999.

<TABLE>
<CAPTION>

                                                                                   Maturity
                                                       ---------------------------------------------------------------
                                                                       Over         Over
                                                        3 Months      3 to 6       6 to 12       Over
                                                         or Less      Months       Months      12 months      Total
                                                        ----------  ----------  -----------  ------------  -----------
                                                                                   (In Thousands)
<S>                                                      <C>          <C>         <C>         <C>            <C>

Certificates of deposit less than $100,000...........      $15,786      $11,221      $14,743      $ 8,466      $50,216
Certificates of deposit of $100,000 or more..........        6,872        4,710        6,515        2,991       21,088
Public funds.........................................          342          705          107          ---        1,154
                                                           -------      -------      -------      -------      -------
Total certificates of deposit........................      $23,000      $16,636      $21,365      $11,457      $72,458
                                                           =======      =======      =======      =======      =======
</TABLE>



     For  additional  information  regarding  the  composition  of the Company's
deposits,  see Note 6 of the  Notes  to the  Consolidated  Financial  Statements
contained in Exhibit 13.

     Borrowings. Other available sources of funds include advances from the FHLB
of  Cincinnati  and other  borrowings.  As  members  of the FHLB of  Cincinnati,
Classic Bank and Paintsville  Bank are required to own capital stock in the FHLB
of  Cincinnati  and are  authorized  to  apply  for  advances  from  the FHLB of
Cincinnati.  Each FHLB credit  program has its own interest  rate,  which may be
fixed or variable, and range of maturities. The FHLB of Cincinnati may prescribe
the acceptable  uses for these  advances,  as well as limitations on the size of
the advances and repayment provisions.

     FHLB  borrowings  are also used to fund loan  demand  and other  investment
opportunities and to offset deposit outflows. At March 31, 1999, the Company had
$388,000  of  FHLB  advances  outstanding.  See  Note  8 of  the  Notes  to  the
Consolidated Financial Statements contained in Exhibit 13.

     In  connection  with its  acquisition  of First  Paintsville,  the  Company
assumed and refinanced  $722,000 of 8 1/4% notes due in December 2004 payable by
First  Paintsville to a local  community bank. The Company prepaid the remaining
outstanding amount of the notes during fiscal 1999.


                                       25

<PAGE>



     The following  table sets forth the maximum  month-end  balance and average
balance of the Company's borrowings for the periods indicated.

<TABLE>
<CAPTION>

                                                                                    Year Ended March 31,
                                                                         ----------------------------------------
                                                                            1999            1998          1997
                                                                         ----------       ---------      --------
                                                                                         (In Thousands)
<S>                                                                       <C>             <C>            <C>

Maximum Balance:
  Repurchase agreements.........................................           $3,516           $3,681         $ 5,285
  Federal funds purchased.......................................            1,333              ---             ---
  Other borrowings..............................................
     Treasury tax and loan note.................................              428              704             544
     Notes payable..............................................              550              650             700
     FHLB advances..............................................           $5,520           $8,378         $10,200

Average Balance:
  Repurchase agreements.........................................            2,409            3,589           2,517
  Federal funds purchased.......................................              559              ---             ---
  Other borrowings..............................................
     Treasury tax and loan note.................................              143              317             204
     Notes payable..............................................              348              613             340
     FHLB advances..............................................            1,797            5,813           4,079

Weighted average interest rate..................................             5.3%             6.0%            5.4%

</TABLE>



                                       26

<PAGE>


     The  following  table sets forth  certain  information  as to the Company's
borrowings at the dates indicated.

<TABLE>
<CAPTION>


                                                                               March 31,
                                                               ----------------------------------------
                                                                   1999          1998           1997
                                                               -----------  -------------   -----------
                                                                            (Dollars in Thousands)
<S>                                                               <C>           <C>          <C>

Repurchase agreements....................................          $2,099        $3,522       $  4,956
Federal funds purchased..................................             718           ---            ---
Other Borrowings
  Treasury tax and loan note.............................              85           274            429
  Notes payable..........................................             ---           550            650
  FHLB advances..........................................         $   388           ---       $  4,750
                                                                  -------     ---------       --------
Total Borrowings.........................................          $3,290        $4,346        $10,785
                                                                   ======        ======        =======

Weighted average interest rate of repurchase
agreements and federal funds purchased...................            4.7%           5.4%           5.1%
Weighted average interest rate of
other borrowings.........................................            6.1%           7.5%           6.3%

</TABLE>



Trust Services

     In order to  generate  fee income and  provide a broad range of services to
its  customers,  Paintsville  Bank  provides a variety of trust  services to its
customers. Such services include managing and investing trust assets, disbursing
funds as required by trust agreements and arranging for maintenance at two local
cemeteries. For fiscal 1999, gross trust fees were less than $1,000.

Subsidiary Activities

     Federal  Savings  Associations.  As a  federally  chartered  savings  bank,
Classic Bank is permitted by OTS regulations to invest up to 2% of its assets in
the stock of, or loans to, service corporation  subsidiaries,  and may invest an
additional 1% of its assets in service  corporations where such additional funds
are used for  inner-city  or  community  development  purposes.  In  addition to
investments  in service  corporations,  federal  institutions  are  permitted to
invest  an  unlimited  amount  in  operating   subsidiaries  engaged  solely  in
activities which a federal savings association may engage in directly.  At March
31, 1999, Classic Bank had no subsidiaries.

     National  Banks.  A national bank may establish an operating  subsidiary to
engage  in  activities  incidental  to the  business  of  banking.  There are no
investment or geographic  limitations  on the  establishment  of a national bank
operating subsidiary. At March 31, 1999, Paintsville Bank had no subsidiaries.

Competition

     The Company  faces  strong  competition  both in  originating  loans and in
attracting  deposits.  Competition  in  originating  loans comes  primarily from
commercial banks, savings institutions, credit unions and mortgage bankers which
also make loans to borrowers  located in the Company's  primary  market area. At
March 31, 1999,  there were seven savings  institutions,  eight commercial banks
and five credit unions located in Boyd,  Johnson,  Greenup and Carter  Counties,
Kentucky.  On that date,  the  Company's  market  share of total  loans in these
counties was  approximately  8.1%. The Company competes for loans principally on
the basis of the interest rates and loan fees it charges,  the types of loans it
originates and the quality of services it provides to borrowers.

                                       27

<PAGE>



     Competition for deposits comes principally from commercial  banks,  savings
institutions,  credit unions,  mutual funds and securities  firms located in the
same  communities.  The ability of the  Company to attract  and retain  deposits
depends on its ability to provide an investment  opportunity  that satisfies the
requirements  of investors  as to rate of return,  liquidity,  risk,  convenient
locations and other factors. The Company competes for these deposits by offering
competitive rates,  convenient  business hours and a customer oriented staff. At
March 31,  1999,  the  Company's  share of deposits in the above market area was
approximately 7.4%.

Employees

     At March 31,  1999,  the  Company  and its  subsidiaries  had a total of 57
full-time  employees.  None of the Company's  employees are  represented  by any
collective bargaining agreement.  Management considers its employee relations to
be good.

                                   REGULATION

General

     Classic Bank is a federally chartered savings association,  the deposits of
which are  federally  insured  and  backed by the full  faith and  credit of the
United States Government.  Accordingly, Classic Bank is subject to broad federal
regulation  and  oversight  extending to all its  operations.  Classic Bank is a
member of the FHLB of Cincinnati and is subject to certain limited regulation by
the Federal Reserve Board.  Classic Bank is a member of the Savings  Association
Insurance  Fund  ("SAIF")  and the  deposits of Classic  Bank are insured by the
FDIC. As a result,  the FDIC has certain  regulatory and  examination  authority
over Classic Bank.

     Paintsville Bank is a national bank and its deposit accounts are insured by
the Bank  Insurance  Fund ("BIF") of the FDIC. As a national  bank,  Paintsville
Bank is required to file  reports with the OCC  concerning  its  activities  and
financial  condition  and is required to obtain  regulatory  approvals  prior to
entering into certain transactions,  including mergers with, or acquisitions of,
other depository institutions.  As a national bank, Paintsville Bank is required
to be a member of the Federal  Reserve  System.  As the bank holding  company of
Paintsville  Bank,  the  Company  is  subject to  supervision,  examination  and
regulation by the Federal Reserve Board.

     Certain of these  regulatory  requirements  and  restrictions are discussed
below or elsewhere in this document.

Federal Regulation of Savings Associations and National Banks

     The  OTS  has   extensive   authority   over  the   operations  of  savings
associations.  As part of  this  authority,  Classic  Bank is  required  to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC examinations of Classic Bank were as
of August 17, 1998 and April 13, 1993,  respectively.  Under  agency  scheduling
guidelines,  it is likely that another examination will be initiated in the near
future.  When these  examinations  are  conducted  by the OTS and the FDIC,  the
examiners  may require  Classic  Bank to provide for higher  general or specific
loan loss  reserves.  All  savings  associations  are  subject to a  semi-annual
assessment,  based upon the  savings  association's  total  assets,  to fund the
operations of the OTS.  Classic  Bank's OTS assessment for the fiscal year ended
March 31, 1999 was $24,000.

     The  OTS  also  has  extensive   enforcement  authority  over  all  savings
institutions, including Classic Bank. This enforcement authority includes, among
other  things,   the  ability  to  assess  civil  money   penalties,   to  issue
cease-and-desist  or  removal  orders and to  initiate  injunctive  actions.  In


                                       28

<PAGE>



general,  these enforcement  actions may be initiated for violations of laws and
regulations  and unsafe or unsound  practices.  Other  actions or inactions  may
provide  the basis for  enforcement  action,  including  misleading  or untimely
reports  filed  with  the  OTS.  Except  under  certain  circumstances,   public
disclosure of final enforcement actions by the OTS is required.

     In addition,  the  investment,  lending and branching  authority of Classic
Bank is  prescribed  by federal laws and it is  prohibited  from engaging in any
activities not permitted by such laws. For instance,  no savings institution may
invest in  non-investment  grade  corporate debt  securities.  In addition,  the
permissible  level of  investment  by federal  associations  in loans secured by
non-residential real property may not exceed 400% of total capital,  except with
approval of the OTS. Federal savings  associations are also generally authorized
to branch nationwide. Classic Bank is in compliance with the noted restrictions.
Within the  Commonwealth  of Kentucky,  Paintsville  Bank is permitted to branch
only  within  the  county  in  which  its  principal  office  is  located.   See
"--Interstate  Banking and Branching" for restrictions  applicable to interstate
branching by Paintsville Bank.

     The OCC has extensive  authority over the operations of national  banks. As
part of this authority,  Paintsville  Bank is required to file periodic  reports
with the OCC and is  subject  to  periodic  examinations  by the  OCC.  The last
regular  examination of  Paintsville  Bank was as of June 30, 1997. All national
banks are  subject to a  semi-annual  assessment,  based  upon the bank's  total
assets, to fund the operations of the OCC. Paintsville Bank's assessment for the
fiscal year ended March 31, 1999 was $29,000.

     The OCC also has extensive  enforcement  authority over all national banks,
including  Paintsville Bank. This enforcement  authority  includes,  among other
things, the ability to assess civil money penalties,  to issue  cease-and-desist
or  removal  orders  and to  initiate  injunctive  actions.  In  general,  these
enforcement  actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis of
enforcement action, including misleading or untimely reports filed with the OCC.
Except under  certain  circumstances,  public  disclosure  of final  enforcement
actions by the OCC is required.

     Classic Bank's and Paintsville  Bank's general  permissible  lending limits
for  loans to one  borrower  are  equal to the  greater  of  $500,000  or 15% of
unimpaired  capital  and  surplus  (except  for loans  fully  secured by certain
readily marketable  collateral,  in which case each limit is increased to 25% of
unimpaired capital and surplus). At March 31, 1999, Classic Bank's lending limit
was  $1.3  million.  On such  date,  Classic  Bank  was in  compliance  with the
loans-to-one-borrower  limitation. At March 31, 1999, Paintsville Bank's lending
limit was $1.2 million.  On such date,  Paintsville  Bank was in compliance with
this limit.

     The OTS, as well as other federal banking agencies,  has adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and  documentation,  internal  controls and audit  systems,  interest  rate risk
exposure and compensation  and other employee  benefits.  Any institution  which
fails to comply with these standards must submit a compliance plan. A failure to
submit a plan or to comply with an approved plan will subject the institution to
further  enforcement action. The OTS and the other federal banking agencies have
also proposed additional guidelines on asset quality and earnings standards.  No
assurance  can be given as to whether or in what form the  proposed  regulations
will be adopted. Paintsville Bank is subject to substantially similar guidelines
adopted by the OCC.


                                       29

<PAGE>



Insurance of Accounts and Regulation by the FDIC

     Classic Bank is a member of the SAIF, and  Paintsville  Bank is a member of
the BIF, both of which are administered by the FDIC.  Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States  Government.  As insurer,  the FDIC imposes  deposit
insurance  premiums and is authorized to conduct  examinations of and to require
reporting by FDIC-insured  institutions.  It also may prohibit any  FDIC-insured
institution  from engaging in any activity the FDIC  determines by regulation or
order  to pose a  serious  risk to the SAIF or the  BIF.  The FDIC  also has the
authority to initiate  enforcement  actions  against  savings  associations  and
national  banks,  after  giving  the OTS or the  OCC,  as the  case  may be,  an
opportunity  to take such action,  and may  terminate an  institution's  deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.

     The FDIC's  deposit  insurance  premiums are assessed  through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to  risk-weighted  assets  ("Tier 1  risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.

     In order to equalize the deposit  insurance  premium  schedules for BIF and
SAIF insured institutions, the FDIC imposed a one-time special assessment on all
SAIF-assessable  deposits pursuant to federal  legislation  enacted on September
30, 1996.  Classic Bank's special  assessment,  which was $316,000,  was paid in
November 1996, and included in federal deposit  insurance expense for the fiscal
year ended March 31, 1997.  Effective  January 1, 1997, the premium schedule for
BIF and SAIF insured  institutions  ranged from 0 to 27 basis  points.  However,
SAIF-insured  institutions  are required to pay a Financing  Corporation  (FICO)
assessment,  in order to fund the  interest  on bonds  issued to resolve  thrift
failures  in the  1980s,  equal to 6.48 basis  points for each $100 in  domestic
deposits,  while BIF-insured  institutions pay an assessment equal to 1.52 basis
points for each $100 in  domestic  deposits.  The  assessment  is expected to be
reduced to 2.43 no later than  January 1, 2000,  when BIF  insured  institutions
fully  participate in the assessment.  These  assessments,  which may be revised
based upon the level of BIF and SAIF  deposits,  will  continue  until the bonds
mature in the year 2017.

Regulatory Capital Requirements of Federal Savings Associations

     Federally insured savings associations,  such as Classic Bank, are required
to  maintain a minimum  level of  regulatory  capital.  The OTS has  established
capital standards,  including a tangible capital  requirement,  a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such  savings  associations.  These  capital  requirements  must be generally as
stringent as the comparable capital  requirements for national banks. The OTS is
also  authorized to impose capital  requirements in excess of these standards on
individual associations on a case-by-case basis.

     The  capital  regulations  require  tangible  capital  of at least  1.5% of
adjusted total assets (as defined by  regulation).  Tangible  capital  generally
includes  common   stockholders'   equity  and  retained  income,   and  certain
noncumulative  perpetual  preferred stock and related income.  In addition,  all
intangible  assets,  other than a limited amount of purchased mortgage servicing
rights,  must be deducted from tangible capital for calculating  compliance with
the  requirement.  At March 31, 1999,  Classic Bank did not have any  intangible
assets.


                                       30

<PAGE>



     The OTS  regulations  establish  special  capitalization  requirements  for
savings associations that own subsidiaries.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes  in  proportion  to  Classic's  level  of  ownership.   For  excludable
subsidiaries the debt and equity  investments in such  subsidiaries are deducted
from assets and capital.

     At March 31, 1999,  Classic Bank had tangible  capital of $8.3 million,  or
11.8% of adjusted total assets,  which is  approximately  $7.2 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

     The capital  standards  also require  core capital  equal to at least 3% of
adjusted total assets.  Core capital generally consists of tangible capital plus
certain intangible  assets,  including a limited amount of purchased credit card
relationships.  As a result of the prompt corrective action provisions discussed
below,  however, a savings  association must maintain a core capital ratio of at
least  4%  to  be  considered  adequately  capitalized  unless  its  supervisory
condition is such to allow it to maintain a 3% ratio. At March 31, 1999, Classic
Bank had no intangibles which were subject to these tests.

     At March 31, 1999, Classic Bank had core capital equal to $8.3 million,  or
11.8% of adjusted total assets, which is $5.5 million above the minimum leverage
ratio requirement of 3% as in effect on that dates.

     The OTS risk-based  requirement requires savings associations to have total
capital of at least 8% of risk-weighted  assets.  Total capital consists of core
capital,  as defined above, and  supplementary  capital.  Supplementary  capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-  weighted  assets.  Supplementary  capital may be
used to satisfy the risk-based  requirement  only to the extent of core capital.
The OTS is also  authorized  to require a savings  association  to  maintain  an
additional  amount of total capital to account for  concentration of credit risk
and the risk of non-traditional  activities. At March 31, 1999, Classic Bank had
no capital  instruments  that qualify as  supplementary  capital and $360,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.

     Certain  exclusions from capital and assets are required to be made for the
purpose  of  calculating  total  capital.  Such  exclusions  consist  of  equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
nonresidential  construction  loans in excess of an 80% loan-to-value  ratio and
reciprocal holdings of qualifying capital instruments.

     In determining the amount of risk-weighted  assets,  all assets,  including
certain  off-balance sheet items,  will be multiplied by a risk weight,  ranging
from 0% to 100%,  based on the risk inherent in the type of asset.  For example,
the OTS has assigned a risk weight of 50% for prudently  underwritten  permanent
one- to four-family  first lien mortgage loans not more than 90 days  delinquent
and  having a loan to value  ratio of not more  than 80% at  origination  unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.

     On  March  31,  1999,  Classic  Bank  had  total  capital  of $8.7  million
(including $8.3 million in core capital and $360,000 in qualifying supplementary
capital) and risk-weighted  assets of $41.3 million or total capital of 21.1% of
risk-weighted assets. This amount was $5.4 million above the 8.0% requirement in
effect on that date.


                                       31

<PAGE>



Regulatory Capital Requirements of National Banks

     Paintsville  Bank is subject to the  capital  regulations  of the OCC.  The
OCC's regulations establish two capital standards for national banks: a leverage
requirement and a risk-based capital requirement. In addition, the OCC may, on a
case-by-case  basis,  establish  individual  minimum capital  requirements for a
national bank that vary from the requirements  which would otherwise apply under
OCC regulations.  A national bank that fails to satisfy the capital requirements
established under the OCC's  regulations will be subject to such  administrative
action or sanctions as the OCC deems appropriate.

     The leverage  ratio  adopted by the OCC requires a minimum ratio of "Tier 1
capital" to adjusted  total  assets of 3% for national  banks rated  composite 1
under the CAMEL rating system for banks.  National  banks not rated  composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their  operations.  For  purposes  of the OCC's  leverage
requirement,  Tier 1 capital  generally  consists of the same components as core
capital under the OTS's capital regulations, except that no intangibless,  other
than certain  purchased  mortgage  servicing  rights,  and purchased credit card
receivables may be included in capital.

     The risk-based  capital  requirements  established by the OCC's regulations
require national banks to maintain "total capital" equal to at least 8% of total
risk-weighted assets. For purposes of the risk-based capital requirement, "total
capital"  means Tier 1 capital (as  described  above) plus "Tier 2 capital"  (as
described below),  provided that the amount of Tier 2 capital may not exceed the
amount of Tier 1 capital,  less certain assets. The components of Tier 2 capital
under  the  OCC's  regulations   generally   correspond  to  the  components  of
supplementary   capital  under  OTS  regulations.   Total  risk-weighted  assets
generally are determined under the OCC's regulations in the same manner as under
the OTS's  regulations.  At March 31, 1999,  Paintsville  Bank was in compliance
with its capital  requirements.  See  "Management's  Discussion  and Analysis of
Financial   Condition   and  Results  of  Operations  -  Liquidity  and  Capital
Resources", contained in Exhibit 13 to this Report and incorporated by reference
herein, for additional  information regarding Paintsville Bank's compliance with
its capital requirements.

Prompt Corrective Action

     The OTS and the  FDIC  are  authorized  and,  under  certain  circumstances
required, to take certain actions against savings associations that fail to meet
their  capital  requirements.  The OTS is  generally  required to take action to
restrict the activities of an "undercapitalized  association" (generally defined
to be  one  with  less  than  either  a 4%  core  capital  ratio,  a 4%  Tier  1
risked-based  capital  ratio  or an  8%  risk-based  capital  ratio).  Any  such
association  must  submit a  capital  restoration  plan and  until  such plan is
approved by the OTS may not increase its assets,  acquire  another  institution,
establish a branch or engage in any new  activities,  and generally may not make
capital   distributions.   The  OTS  is  authorized  to  impose  the  additional
restrictions that are applicable to significantly undercapitalized associations.

     As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited  capital  maintenance   guarantee  with  respect  to  the  institution's
achievement of its capital requirements.

     Any savings  association  that fails to comply with its capital  plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less  than 3% or a  risk-based  capital  ratio of less  than 6%) must be made
subject  to  one  or  more  of  additional   specified   actions  and  operating
restrictions  which may cover all aspects of its operations and include a forced
merger  or  acquisition  of  the   association.   An  association  that  becomes
"critically  undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly  undercapitalized associations. In addition, the OTS


                                       32

<PAGE>


must appoint a receiver (or conservator  with the concurrence of the FDIC) for a
savings  association,  with certain limited exceptions,  within 90 days after it
becomes critically  undercapitalized.  Any undercapitalized  association is also
subject to the general enforcement  authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.

     The OTS is also generally  authorized to reclassify an  association  into a
lower capital category and impose the  restrictions  applicable to such category
if the institution is engaged in unsafe or unsound  practices or is in an unsafe
or unsound condition.

     The  imposition by the OTS or the FDIC of any of these  measures on Classic
Bank may have a substantial  adverse  effect on Classic  Bank's  operations  and
profitability  and the  value  of the  Company's  common  stock.  The  Company's
shareholders do not have  preemptive  rights,  and therefore,  if the Company is
directed by the OTS or the FDIC to issue additional shares of Common Stock, such
issuance  may result in the dilution in the  percentage  of ownership of current
stockholders of the Company.

     The OCC has the authority to enforce such requirements  against Paintsville
Bank.

Limitations on Dividends and Other Capital Distributions

     OTS  regulations  impose various  restrictions  on the ability of a savings
association,  such as Classic Bank, to pay dividends or make other distributions
of capital.  OTS regulations  prohibit a savings  association  from declaring or
paying any dividends or from repurchasing any of its stock if, as a result,  the
regulatory capital of the association would be reduced below the amount required
to be maintained for the liquidation  account established in connection with its
mutual to stock conversion.

     Paintsville   Bank's  ability  to  pay  dividends  is  subject  to  various
restrictions imposed by the National Bank Act and OCC regulations.

Liquidity

     All savings associations,  including Classic Bank, are required to maintain
an average daily  balance of liquid assets equal to a certain  percentage of the
sum of its  average  daily  balance of net  withdrawable  deposit  accounts  and
borrowings  payable in one year or less. For a discussion of what is included in
liquid assets, see "Management's  Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources", contained in Exhibit
13 to this Report and incorporated by reference herein.  This liquid asset ratio
requirement  may vary from time to time depending  upon economic  conditions and
savings  flows of all savings  associations.  At the present  time,  the minimum
liquid asset ratio is 4%.

     National banks are not subject to any prescribed liquidity requirements.

Accounting

     An OTS policy statement  applicable to all savings  associations  clarifies
and re-emphasizes that the investment  activities of a savings  association must
be  in  compliance  with  approved  and  documented   investment   policies  and
strategies,  and must be accounted for in accordance with GAAP. Under the policy
statement,  management  must support its  classification  of and  accounting for
loans and securities (i.e.,  whether held for investment,  sale or trading) with
appropriate documentation.

     The OTS has adopted an amendment to its accounting  regulations,  which may
be made more  stringent  than GAAP by the OTS, to require that  transactions  be
reported in a manner that best reflects their underlying  economic substance and
inherent risk and that financial  reports must  incorporate any other accounting
regulations or orders  prescribed by the OTS. Classic Bank is in compliance with
these amended rules.

                                       33

<PAGE>



     Paintsville Bank, as a national bank, is subject to similar requirements.

Qualified Thrift Lender Test

     All savings  associations,  including  Classic Bank, are required to meet a
qualified  thrift  lender  ("QTL") test to avoid certain  restrictions  on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly  average  for nine out of every 12  months  on a  rolling  basis.  As an
alternative,  the savings  association  may  maintain 60% of its assets in those
assets  specified in Section  7701(a)(19)  of the Internal  Revenue Code.  Under
either test, such assets primarily consist of residential  housing related loans
and investments. At March 31, 1999, Classic Bank met the test and has always met
the test since its effectiveness.

     Any savings  association  that fails to meet the QTL test must convert to a
national bank charter,  unless it requalifies as a QTL and thereafter  remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible  for both a  savings  association  and a  national  bank,  and it is
limited to national bank branching  rights in its home state.  In addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "-- Holding Company Regulation."

     The QTL requirements do not apply to national banks.

Community Reinvestment Act

     Under  the  Community   Reinvestment   Act  ("CRA"),   every  FDIC  insured
institution,  including  Classic Bank and Paintsville Bank, has a continuing and
affirmative  obligation consistent with safe and sound banking practices to help
meet  the  credit   needs  of  its   entire   community,   including   low-  and
moderate-income  neighborhoods.  The CRA does  not  establish  specific  lending
requirements  or  programs  for  financial  institutions  nor  does it  limit an
institution's  discretion  to develop the types of products and services that it
believes are best suited to its particular  community,  consistent with the CRA.
The CRA requires the  appropriate  Federal  regulator,  in  connection  with the
examination of an insured  institution,  to assess the  institution's  record of
meeting the credit needs of its  community  and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by Classic Bank or Paintsville  Bank. An unsatisfactory  rating may
be used as the basis for the denial of an application by the OTS or the OCC.

     Classic  Bank was examined  for CRA  compliance  in May 1996 and received a
satisfactory rating.  Paintsville Bank was examined for CRA compliance in August
1996 and received a satisfactory rating.



                                       34

<PAGE>



Transactions with Affiliates

     Generally,  transactions  between a savings association or its subsidiaries
and its affiliates  are required to be on terms as favorable to the  association
as transactions with non-affiliates. In addition, certain of these transactions,
such  as  loans  to  an  affiliate,  are  restricted  to  a  percentage  of  the
association's   capital.   Affiliates  of  Classic  Bank  include  the  Company,
Paintsville  Bank and any  other  company  which is under  common  control  with
Classic Bank. In addition,  a savings  association may not lend to any affiliate
engaged in activities not  permissible for a bank holding company or acquire the
securities of most affiliates.  The OTS has the discretion to treat a subsidiary
of a savings associations as an affiliate on a case-by-case basis.

     Certain  transactions with directors,  officers or controlling  persons are
also  subject to  conflict of interest  regulations  enforced by the OTS.  These
conflict of interest  regulations and other statutes also impose restrictions on
loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

     Paintsville  Bank is subject to virtually  identical  rules on transactions
with affiliates and loans to insiders.

Holding Company Regulation

     General.  Upon  consummation of the acquisition of First  Paintsville,  the
Company,  as the sole  shareholder  of Paintsville  Bank,  became a bank holding
company and  registered  as such with the Federal  Reserve  Board.  Bank holding
companies are subject to  comprehensive  regulation by the Federal Reserve Board
under the Bank Holding  Company Act, and the  regulations of the Federal Reserve
Board. As a bank holding  company,  the Company is required to file reports with
the Federal Reserve Board and such additional information as the Federal Reserve
Board may require, and is subject to regular examinations by the Federal Reserve
Board. The Federal Reserve Board also has extensive  enforcement  authority over
bank holding  companies,  including,  among other things,  the ability to assess
civil  money  penalties,  to issue  cease and  desist or  removal  orders and to
require  that  a  holding  company  divest  subsidiaries   (including  its  bank
subsidiaries).  In general,  enforcement actions may be initiated for violations
of law and regulations and unsafe or unsound practices.

     Under Federal Reserve Board policy,  a bank holding company must serve as a
source of  strength  for its  subsidiary  banks.  Under this  policy the Federal
Reserve  Board may require,  and has required in the past, a holding  company to
contribute additional capital to an undercapitalized subsidiary bank.

     Under the Bank  Holding  Company  Act, a bank  holding  company must obtain
Federal Reserve Board approval  before:  (i) acquiring,  directly or indirectly,
ownership  or  control  of any voting  shares of  another  bank or bank  holding
company if, after such acquisition, it would own or control more than 5% of such
shares  (unless it already owns or controls the majority of such  shares);  (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.

     The Bank Holding  Company Act also prohibits a bank holding  company,  with
certain  exceptions,  from acquiring direct or indirect  ownership or control of
more than 5% of the  voting  shares of any  company  which is not a bank or bank
holding  company,  or from engaging  directly or indirectly in activities  other
than those of banking,  managing or controlling banks, or providing services for
its subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank  activities which, by statute or by Federal Reserve Board regulation or
order,  have been  identified as activities  closely  related to the business of
banking or managing or controlling  banks.  The list of activities  permitted by
the Federal  Reserve Board  includes,  among other  things,  operating a savings
institution, mortgage company, finance company, credit card company or factoring
company;  performing  certain  data  processing  operations;  providing  certain


                                       35

<PAGE>



investment and financial  advice;  underwriting and acting as an insurance agent
for  certain  types  of   credit-related   insurance;   leasing  property  on  a
full-payout,  non-operating basis;  selling money orders,  travelers' checks and
United  States  Savings  Bonds;  real estate and personal  property  appraising;
providing  tax  planning  and  preparation  services;  and,  subject  to certain
limitations,  providing securities brokerage services for customers. The Company
has no present plans to engage in any of these activities.

     Interstate  Banking and Branching.  On September 29, 1994, the  Riegle-Neal
Interstate  Banking  and  Branching  Act of 1994 (the "Act") was enacted to ease
restrictions on interstate banking. Effective September 29, 1995, the Act allows
the Federal Reserve Board to approve an application of an adequately capitalized
and adequately  managed bank holding  company to acquire  control of, or acquire
all or substantially  all of the assets of, a bank located in a state other than
such holding company's home state,  without regard to whether the transaction is
prohibited by the laws of any state.  The Federal  Reserve Board may not approve
the  acquisition  of a bank that has not been in existence  for the minimum time
period (not  exceeding  five years)  specified by the  statutory law of the host
state.  The Act also  prohibits  the Federal  Reserve  Board from  approving  an
application  if  the  applicant  (and  its  depository  institution  affiliates)
controls or would  control  more than 10% of the insured  deposits in the United
States or 30% or more of the deposits in the target  bank's home state or in any
state in which the target bank  maintains a branch.  The Act does not affect the
authority of states to limit the  percentage  of total  insured  deposits in the
state which may be held or controlled  by a bank or bank holding  company to the
extent such limitation does not discriminate  against out-of-state banks or bank
holding  companies.   Individual  states  may  also  waive  the  30%  state-wide
concentration limit contained in the Act. The Commonwealth of Kentucky currently
provides  for deposit  concentration  limits,  reciprocal  requirements  and age
protection for new banks.

     Effective June 1, 1997, the federal banking  agencies became  authorized to
approve   interstate  merger   transactions   without  regard  to  whether  such
transaction is prohibited by the law of any state,  unless the home state of one
of the  banks  has  opted  out of the Act by  adopting  a law  after the date of
enactment  of the Act and prior to June 1, 1997  which  applies  equally  to all
out-of-state  banks  and  expressly  prohibits  merger  transactions   involving
out-of-state  banks.  Interstate  acquisitions of branches are permitted only if
the law of the state in which the branch is located  permits such  acquisitions.
Interstate  mergers and branch  acquisitions  are also subject to the nationwide
and statewide insured deposit concentration amounts described above.

     The Act authorizes the OCC and FDIC to approve interstate branching de novo
by national and state  banks,  respectively,  only in states which  specifically
allow for such branching.

     Dividends.  The Federal Reserve Board has issued a policy  statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve  Board's view that a bank holding company should pay cash dividends only
to the extent that the  Company's  net income for the past year is sufficient to
cover both the cash dividends and a rate of earning retention that is consistent
with the Company's capital needs, asset quality and overall financial condition.
The Federal  Reserve Board also indicated that it would be  inappropriate  for a
company   experiencing  serious  financial  problems  to  borrow  funds  to  pay
dividends.  Furthermore,  under the prompt corrective action regulations adopted
by the Federal  Reserve  Board,  the Federal  Reserve  Board may prohibit a bank
holding  company  from  paying  any  dividends  if the  holding  company's  bank
subsidiary  is  classified  as  "undercapitalized".  See "--  Prompt  Corrective
Action."



                                       36

<PAGE>



     Bank holding companies are required to give the Federal Reserve Board prior
written  notice  of  any  purchase  or  redemption  of  its  outstanding  equity
securities  if the gross  consideration  for the  purchase or  redemption,  when
combined with the net  consideration  paid for all such purchases or redemptions
during the  preceding 12 months,  is equal to 10% or more of their  consolidated
net  worth.  The  Federal  Reserve  Board  may  disapprove  such a  purchase  or
redemption  if it  determines  that the proposal  would  constitute an unsafe or
unsound  practice or would violate any law,  regulation,  Federal  Reserve Board
order,  or any  condition  imposed by, or written  agreement  with,  the Federal
Reserve Board. This notification  requirement does not apply to any company that
meets the  well-capitalized  standard  for  commercial  banks,  has a safety and
soundness  examination  rating  of at  least  a "2"  and is not  subject  to any
unresolved supervisory issues.

     Capital  Requirements.  The Federal Reserve Board has  established  capital
requirements  for bank holding  companies  that  generally  parallel the capital
requirements  for national banks. For bank holding  companies with  consolidated
assets of less than $150 million,  compliance is measured on a bank-only  basis.
See "-- Regulatory Capital Requirements of National Banks."

Federal Securities Law

     The Company's  common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the  information,  proxy  solicitation,  insider trading  restrictions and other
requirements of the SEC's rules under the Exchange Act.

     Company  stock  held by persons  who are  affiliates  (generally  officers,
directors and principal  stockholders)  of the Company may not be resold without
registration or unless sold in accordance with certain resale  restrictions.  If
the Company  meets  specified  current  public  information  requirements,  each
affiliate  of the  Company  is  able  to  sell  in the  public  market,  without
registration, a limited number of shares in any three-month period.

Federal Reserve System

     The Federal Reserve Board requires all depository  institutions to maintain
noninterest-bearing  reserves at  specified  levels  against  their  transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At March 31,
1999,  Classic Bank and  Paintsville  Bank were in compliance with these reserve
requirements.  The balances maintained to meet the reserve  requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity  requirements that
may be imposed by the OTS. See "-- Liquidity."

     Savings  associations,  such as Classic Bank, are authorized to borrow from
the  Federal   Reserve  Bank  "discount   window,"  but  Federal  Reserve  Board
regulations require associations to exhaust other reasonable alternative sources
of funds,  including FHLB borrowings,  before borrowing from the Federal Reserve
Bank.

     As a national  bank,  Paintsville  Bank is a member of the Federal  Reserve
System and owns stock in the  Federal  Reserve  Bank of  Cleveland  in an amount
equal to 3% of Paintsville  Bank's paid in capital and surplus (an additional 3%
will be subject to call by the Federal Reserve Bank of Cleveland).  At March 31,
1999, Paintsville Bank was in compliance with this requirement.

Federal Home Loan Bank System

     Classic Bank and  Paintsville  Bank are members of the FHLB of  Cincinnati,
which is one of 12 regional  FHLBs that  administer  the home  financing  credit
function of savings associations.  Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated  obligations of the FHLB System.  It makes
loans to members (i.e.,  advances) in accordance  with policies and  procedures,


                                       37

<PAGE>



established  by the board of  directors  of the FHLB,  which are  subject to the
oversight of the Federal Housing  Finance Board.  All advances from the FHLB are
required to be fully secured by sufficient collateral as determined by the FHLB.
In  addition,   all  long-term  advances  are  required  to  provide  funds  for
residential home financing.

     As members,  Classic Bank and Paintsville Bank are required to purchase and
maintain  stock in the FHLB of Cincinnati.  At March 31, 1999,  Classic Bank had
$767,000 in FHLB stock,  which was in compliance with this  requirement.  On the
same  date,  Paintsville  Bank had  $312,000  in FHLB  stock,  which was also in
compliance  with the  requirement.  In past years,  Classic Bank and Paintsville
Bank have received substantial dividends on their FHLB stock. Over the past five
fiscal  years such  dividends  paid to Classic  Bank and  Paintsville  Bank have
averaged 6.8% and 6.9%, respectively,  and were 7.0% and 7.0%, respectively, for
fiscal 1999.

     Under  federal  law,  the  FHLBs  are  required  to  provide  funds for the
resolution  of  troubled  savings  associations  and to  contribute  to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects.  These  contributions  have  affected  adversely  the  level  of  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction  in value of Classic  Bank's FHLB stock may result in a  corresponding
reduction in Classic Bank's capital.

     For the fiscal year ended  March 31,  1999,  dividends  paid by the FHLB of
Cincinnati  to Classic Bank and  Paintsville  Bank totaled  $52,000 and $21,000,
respectively,  compared  to $49,000  and  $19,000,  respectively,  of  dividends
received in fiscal year 1998.

Change in Control Regulations

     The  Change in Bank  Control  Act,  the Bank  Holding  Company  Act and the
regulations of the Federal Reserve Board promulgated  under those acts,  require
that the consent of the Federal Reserve Board be obtained prior to any person or
company acquiring  "control" of a bank holding company.  Control is conclusively
presumed  to exist if an  individual  or company  acquires  more than 25% of any
class of voting stock of a bank holding company.  Control is rebuttably presumed
to exist if the person  acquires  10% or more of any class of voting  stock of a
bank  holding  company if either (i) the bank  holding  company  has  registered
securities under Section 12 of the Exchange Act or (ii) no other person will own
a greater  percentage of that class of voting  securities  immediately after the
transaction. The regulations provide a procedure to rebut the rebuttable control
presumption.  Since the Company's Common Stock is registered under Section 12 of
the Exchange Act, any  acquisition of 10% or more of the Company's  Common Stock
will give rise to a  rebuttable  presumption  that the  acquiror  of such  stock
controls the Company,  requiring the acquiror, prior to acquiring such stock, to
rebut the  presumption  of control to the  satisfaction  of the Federal  Reserve
Board or obtain Federal Reserve Board approval for the acquisition of control.

Federal and State Taxation

     Federal  Taxation.  In addition to the  regular  income tax,  corporations,
including  savings  associations and national banks,  generally are subject to a
minimum tax. An alternative  minimum tax is imposed at a minimum tax rate of 20%
on  alternative  minimum  taxable  income,  which is the sum of a  corporation's
regular taxable income (with certain adjustments) and tax preference items, less
any available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income.

     The Company  and its  subsidiaries  file  consolidated  federal  income tax
returns on a fiscal year basis using the accrual method of  accounting.  Savings
associations, such as Classic Bank, that file federal income tax returns as part
of a  consolidated  group are required by  applicable  Treasury  regulations  to


                                       38

<PAGE>



reduce their taxable  income for purposes of computing the  percentage  bad debt
deduction for losses  attributable to activities of the non-savings  association
members  of  the  consolidated  group  that  are  functionally  related  to  the
activities of the savings association member.

     The Company and its consolidated  subsidiaries have been audited by the IRS
with respect to  consolidated  federal income tax returns  through  December 31,
1993.  With respect to years examined by the IRS, either all  deficiencies  have
been satisfied or sufficient  reserves have been established to satisfy asserted
deficiencies.  In the  opinion  of  management,  any  examination  of still open
returns (including returns of subsidiary and predecessors of, or entities merged
into the Company)  would not result in a deficiency  which could have a material
adverse  effect on the  financial  condition  or  results of  operations  of the
Company and its consolidated subsidiaries.

     Kentucky  Taxation.  The  Commonwealth  of  Kentucky  imposes  no income or
franchise  taxes on savings  institutions.  Classic Bank is subject to an annual
Kentucky ad valorem tax. This tax is .1% of the financial  institution's deposit
accounts,  common stock and retained income, with certain deductions for amounts
borrowed by  depositors  and  securities  guaranteed  by the U.S.  Government or
certain of its agencies.  Paintsville  Bank is subject to a state  franchise tax
equal to 1.1% of Paintsville Bank's average five year equity capital adjusted to
eliminate the effect of certain U.S. Government  obligations held by Paintsville
Bank. The Company is subject to Kentucky  income tax at a rate of 4% - 8.25% and
a Kentucky corporate licensing fee equal to .0021 times capital employed.

     Delaware  Taxation.  As a Delaware holding  company,  the Company is exempt
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of  Delaware.  The Company is also subject to
an annual franchise tax imposed by the State of Delaware.

Executive Officers Who Are Not Directors

     The  business  experience  of the  executive  officers  who  are  not  also
directors is set forth below.

     Robert S. Curtis,  age 49, is Executive  Vice  President and Senior Lending
Officer of Classic  Bank, a position he has held since May 1995.  Mr.  Curtis is
also  Senior  Vice  President  of the  Company,  a  position  he has held  since
September  1995.  Mr.  Curtis served as Vice  President and Real Estate  Lending
Division  Manager of First  American  Company,  a $225  million  bank located in
Ashland,  Kentucky from 1990 until May 1995.  As Vice  President and Real Estate
Lending Division Manager,  Mr. Curtis was responsible for the bank's residential
real estate loan portfolio in excess of $35.0  million.  Mr. Curtis was employed
by First American since 1973.

     Lisah M. Frazier,  age 30, is Vice President and Chief Financial Officer of
Classic Bank, a position she has held since August 1995. Ms. Frazier became Vice
President,  Treasurer  and Chief  Financial  Officer of the Company in September
1995.  Prior to joining  Classic  Bank in August  1995,  Ms.  Frazier  served as
Investment  Coordinator of Trust Company of Kentucky,  a subsidiary of Pikeville
National Company, a multi-bank holding company based in Pikeville, Kentucky from
June  1995 to August  1995.  Prior to such  time,  Ms.  Frazier  served as Audit
Specialist in the internal Audit  Department of Pikeville  National  Corporation
from 1993 to 1995.  Ms.  Frazier  also  served as Senior  Auditor  with  Kelley,
Galloway & Company, an accounting firm located in Ashland, Kentucky from 1990 to
1993. Ms. Frazier is a Certified Public Accountant.

Item 2.  Description of Properties

     Classic Bank conducts its business at its office located at 344 Seventeenth
Street, Ashland, Kentucky and at three branch offices located in Greenup, Carter
and Boyd  Counties.  Classic  Bank's 6,000 square foot  headquarters  office was


                                       39

<PAGE>



acquired  in 1963 and had a net book value of  $362,000  at March 31,  1999.  At
March 31, 1999, the total net book value of the Company's premises and equipment
(including land, building and leasehold  improvements,  and furniture,  fixtures
and equipment) was approximately $4.5 million.

     In June 1994,  Classic Bank acquired the 1,200 square foot office  building
and land located  adjacent to its current office  building at 1737 Carter Avenue
in Ashland,  Kentucky for a purchase  price of $90,000.  At March 31, 1999,  the
current book value of this building was  approximately  $86,000.  Classic Bank's
improvements to this building totaled approximately $8,000. This building, which
is currently rented, is intended to be used for Classic Bank's future expansion.

     In September  1996,  Classic Bank  purchased  land for $182,500 on which it
constructed a branch  facility  which was  completed in February  1998. In March
1997,  Classic  Bank  purchased   additional  land  for  $250,000  on  which  it
constructed a branch facility which was completed in April 1998.

     The Company's depositor and borrower customer files are maintained in-house
at Paintsville  In- house data processing and computer  equipment.  The net book
value of the data processing and computer  equipment  utilized by the Company at
March 31, 1999 was approximately $305,000.

     Paintsville Bank's main office is located at 240 Main Street,  Paintsville,
Kentucky.  This 8,400 square foot building was acquired by  Paintsville  Bank in
1933, and had a net book value of $244,000 at March 31, 1999.  Paintsville  Bank
has a branch  office  located at 602 South Mayo  Trail,  Paintsville,  Kentucky,
which is in a 2,200 square foot building  acquired by Paintsville  Bank in 1971.
Paintsville  Bank also operates an  administrative  office at 404 Euclid Avenue,
Paintsville,  Kentucky,  in a 6,700  square foot  building  that was acquired by
Paintsville  Bank in 1994.  Approximately  45% of this  building is leased to an
unaffiliated  party.  Rental income from this property is approximately  $20,000
per year. The lease for this building expires in June 1999.

     In May 1999 the  Company  completed  the  acquisition  of  Citizen's  Bank,
Grayson.  As a result,  the Company acquired a 3,500 square foot building.  This
location operates as a branch of Classic Bank.

Item 3.  Legal Proceedings

     The Company,  Classic Bank and Paintsville Bank are involved,  from time to
time, as plaintiff or defendant in various  legal actions  arising in the normal
course of their  businesses.  While the  ultimate  outcome of these  proceedings
cannot be  predicted  with  certainty,  it is the opinion of  management,  after
consultation with counsel representing the Company, Classic Bank and Paintsville
Bank in the  proceedings,  that the resolution of these  proceedings  should not
have a material effect on Company's financial condition or results of operations
on a consolidated basis.

Item 4.  Submission of Matters to a Vote of Security Holders

     No  matter  was  submitted  to a vote  of  security  holders,  through  the
solicitation of proxies or otherwise, during the quarter ended March 31, 1999.

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

     The information  under the caption "Market  Information" in the portions of
the Company's  Annual Report to  Stockholders  for the year ended March 31, 1999
included as Exhibit 13 to this Report, is incorporated herein by reference.

                                       40

<PAGE>


Item 6.  Management's Discussion and Analysis or Plan of Operation

     The information under the caption "Management's  Discussion and Analysis of
Financial  Condition and Results of Operations" in the portions of the Company's
Annual  Report to  Stockholders  for the year ended March 31,  1999  included as
Exhibit 13 to this Report, is incorporated herein by reference.

Item 7.  Financial Statements and Supplementary Data

     The consolidated  financial  statements and notes thereto  contained in the
portions of the Company's Annual Report to Stockholders for the year ended March
31,  1999  included as Exhibit 13 to this  Report,  are  incorporated  herein by
reference.


Item 8.  Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure

     There has been no changes in the Company's  independent  accountants during
the Company's two most recent fiscal years.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act

Directors

     Information  concerning  directors of the Company is incorporated herein by
reference from the Company's  definitive  Proxy Statement for the Annual Meeting
of Stockholders to be held in 1999, which has been filed with the SEC.

Executive Officers

     Information  concerning  the executive  officers of the Company who are not
directors is incorporated by reference from Part I of this Form 10-KSB under the
caption "Executive Officers of the Registrant Who Are Not Directors."

Section 16(a) Beneficial Ownership Reporting Compliance

     Information concerning compliance with Section 16(a) reporting requirements
by the  Company's  directors and executive  officers is  incorporated  herein by
reference from the Company's  definitive  Proxy Statement for the Annual Meeting
of Stockholders to be held in 1999, which has been filed with the SEC.


Item 10.    Executive Compensation

     Information  concerning  executive  compensation is incorporated  herein by
reference  from  the  definitive  Proxy  Statement  for the  Annual  Meeting  of
Stockholders to be held in 1999, which has been filed with the SEC.


                                       41

<PAGE>



Item 11.    Security Ownership of Certain Beneficial Owners and Management

     Information  concerning security ownership of certain beneficial owners and
management  is  incorporated  herein  by  reference  from the  definitive  Proxy
Statement for the Annual Meeting of Stockholders  to be held in 1999,  which has
been filed with the SEC.

Item 12.    Certain Relationships and Related Transactions

     Information  concerning certain  relationships and related  transactions is
incorporated  herein by reference  from the definitive  Proxy  Statement for the
Annual Meeting of Stockholders to be held in 1999, which has been filed with the
SEC.


                                       42

<PAGE>



Item 13.    Exhibits and Reports on Form 8-K

(a)      Exhibits

<TABLE>
<CAPTION>

                                                                              Reference to
                                                                             Prior Filing or
   Regulation S-B                                                            Exhibit Number
   Exhibit Number                          Document                          Attached Hereto
------------------   ------------------------------------------------      ------------------
<S>                 <C>                                                    <C>

         2          Plan of acquisition, reorganization, arrangement,             None
                    liquidation or succession
        3(a)        Articles of Incorporation                                       *
        3(b)        By-Laws                                                         *
         4          Instruments defining the rights of security holders,            *
                    including debentures
         9          Voting Trust Agreement                                        None
         10         Material contracts:

                       1996 Stock Option and Incentive Plan                        **
                       1996 Recognition and Retention Plan                         **
                       1998 Premium Price Stock Option Growth Plan                 ***
                       Employment Agreement with David B. Barbour                  **
         11         Statement regarding computation of per share earnings         None
         13         Annual Report to Security Holders                              13
         16         Letter regarding change in certifying accountants             None
         18         Letter regarding change in accounting principles              None
         21         Subsidiaries of Registrant                                     21
         22         Published report regarding matters submitted to vote          None
                    of security holders
         23         Consents of Experts and Counsel                                23
         24         Power of Attorney                                             None
         27         Financial Data Schedule                                        27
         99         Additional Exhibits                                           None

</TABLE>
---------------

*  Filed as exhibits to the Company's Form S-1  registration  statement filed on
   December 19, 1994 (File No. 33-87580) pursuant to Section 5 of the Securities
   Act of 1933. All of such previously  filed documents are hereby  incorporated
   herein by reference in accordance with Item 601 of Regulation S-B.

**Filed as exhibits to the Company's Annual Report on Form 10-KSB for the fiscal
   year ended March 31, 1996 (File No.  0-27170).  All of such previously  filed
   documents are hereby incorporated herein by reference in accordance with Item
   601 of Regulation S-B.

***Filed as Appendix A to the Company's definitive proxy solicitating  materials
     filed on June 26, 1998 (File No.  0-27170).  Such previously filed document
     is hereby  incorporated  herein by reference in accordance with Item 601 of
     Regulation S-B.

                                       43

<PAGE>



(b)     Reports on Form 8-K

     During the quarter ended March 31, 1999, the Company filed a Current Report
on Form 8-K  dated  January  19,  1999 to  report  under  Item 5 of Form 8-K the
issuance of a press release  announcing the execution of a definitive  agreement
to acquire Citizen Bank,  Grayson,  the Company's earnings for the quarter ended
December 31, 1998 and the declaration of a cash dividend.

                                       44

<PAGE>



                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                          CLASSIC BANCSHARES, INC.


                      By: /s/ David B. Barbour
                         ------------------------------------------------------
                          David B. Barbour, President, Chief Executive Officer
                            and Director (Duly Authorized Representative)

     In  accordance  with the Exchange Act, this report has been signed below by
the following persons in the capacities and on the dates indicated.

/s/ David B. Barbour
---------------------------------------------
David B. Barbour, President, Chief Executive
Officer and Director (Principal Executive and
Operating Officer)

Date:   June 28, 1999
     -------------------

/s/ C. Cyrus Reynolds
--------------------------------------------
C. Cyrus Reynolds, Chairman of the Board


Date:   June 28, 1999
     ------------------




--------------------------------------------
A. Bruce Addington, Director


Date:
     -------------------




------------------------------------------------------
Robert L. Bayes, Executive Vice President and Director


Date:
     -------------------

/s/ John W. Clark
-------------------------------------------
John W. Clark, Director


Date:   June 28, 1999
     --------------------


/s/ Lisah M. Frazier
--------------------------------------------
Lisah M. Frazier, Vice President, Treasurer
and Chief Financial Officer (Principal
Financial and Accounting Officer)

Date:   June 28, 1999
     -------------------


/s/ E. B. Gevedon, Jr.
--------------------------------------------
E. B. Gevedon, Jr., Director


Date:   June 28, 1999
     -------------------

/s/Robert B. Keifer, Jr.
--------------------------------------------
Robert B. Keifer, Jr., Director


Date:    June 28, 1999
     ---------------------




/s/ David A. Lang
--------------------------------------------
David A. Lang, Director


Date:   June 28, 1999
     -------------------

/s/ Jeffrey P. Lopez
--------------------------------------------
Jeffrey P. Lopez, Director


Date:   June 28, 1999
     ----------------------



/s/ Robert A. Moyer, Jr.
--------------------------------------------
Robert A. Moyer, Jr., Director


Date:   June 28, 1999
     -------------------

                                       45


<PAGE>



                                INDEX TO EXHIBITS



 Number

    13          Portions of Annual Report to Security Holders..........

    21          Subsidiaries of the Registrant.........................

    23          Consent of Independent Auditors..................

    27          Financial Data Schedule..............................


                                       46