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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, 1998

                                       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 of                           (I.R.S. Employer
    incorporation or organization)                           Identification No.)

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. [X]

     The Issuer had $10.4  million in gross  income for the year ended March 31,
1998.

     As of June 15, 1998, there were issued and outstanding  1,299,590 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 15, 1998 was approximately  $15.1 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, 1998. PART III of Form 10-KSB--Proxy Statement for the 1998
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 "--Recent  Acquisition." 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,  1998,  the  Company had total  consolidated  assets of $131.1
million,  deposits of $104.9 million and stockholders'  equity of $20.4 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 involves 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,  consumer,
commercial real estate, commercial business, 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 - Investment Securities" and
"Mortgage-Backed and Related Securities."

     The Board of Directors  has adopted a "community  bank"  oriented  strategy
designed to provide planned and profitable growth,  sustained  profitability and
maintain safety and soundness.  The principal  elements of this strategy include
(i) attracting lower cost deposits through an increased  emphasis on transaction
accounts, (ii) increasing the amount and type of consumer loan products offered,
(iii)  expanding   commercial  real  estate  and  commercial   business  lending
operations,  (iv) increasing  non-interest  income through new product offerings
and aggressive pricing structures (v) enhancing  traditional and non-traditional
branch locations,  including the acquisition of other financial  institutions to
the extent  opportunities  arise, (vi) improving operating  efficiencies through
the utilization of technology and low cost delivery systems,  (vii) reviewing on
an  ongoing  basis  loan  underwriting  standards,   asset  quality  and  (viii)
maintaining a capital position that exceeds regulatory guidelines.

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


                                        2

<PAGE>


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
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.

Acquisition

     On September 30, 1996, the Company acquired First  Paintsville,  the former
holding  company of  Paintsville  Bank,  for $9.3 million in cash. In connection
with the acquisition of First  Paintsville,  the Company  assumed  approximately
$722,000 of long-term debt of First  Paintsville.  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.

Market Area

     Classic Bank serves primarily Boyd and Greenup  Counties,  Kentucky through
its main  offices  located at 344  Seventeenth  Street in Ashland and two branch
offices located in Greenup and Boyd counties.

     In connection with the adoption of its community  bank-oriented strategy in
fiscal  1996,  Classic  Bank  expanded  its market  area to include  portions of
Lawrence and Carter  Counties,  Kentucky,  Lawrence  County,  Ohio and Wayne and
Cabell Counties, West Virginia.

     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

                                        3

<PAGE>



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.

     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 has 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, 1998, loans receivable,
net, totaled $90.1 million. See "Originations,  Purchases and Sales of Loans and
Mortgage-Backed and Related Securities."

                                        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,
                                           1998                            1997                            1996              
                                  ------------------------        ------------------------        -----------------------
                                   Amount         Percent          Amount         Percent          Amount        Percent     
                                  --------       ---------        --------       ---------        --------      ---------
                                                                   (Dollars in Thousands)
<S>                               <C>                <C>          <C>                <C>          <C>               <C>  
Real Estate Loans
 One- to four-family ...........  $ 66,078            72.6%       $ 62,413            75.3%       $ 38,944           87.5%
 Commercial ....................     8,970             9.9           6,877             8.3           2,509            5.7
 Multi-family ..................     1,497             1.6           1,104             1.3             215            0.5
 Construction ..................       426             0.5             832             1.0           1,132            2.5
                                  --------       ---------        --------       ---------        --------      ---------
     Total real estate loans ...    76,971            84.6          71,226            85.9          42,800           96.2
                                  --------       ---------        --------       ---------        --------      ---------

Other Loans
 Consumer Loans:
  Deposit account ..............       526             0.6             433             0.5             389            0.9
  Credit Card ..................       218             0.2             256             0.3              --             -- 
  Installment ..................     5,380             5.9           5,452             6.6              --             -- 
  Other ........................       991             1.1             697             0.8             229            0.5
                                  --------       ---------        --------       ---------        --------      ---------
     Total consumer loans ......     7,115             7.8           6,838             8.2             618            1.4
                                                                                                  --------      ---------
 Commercial business loans .....     6,942             7.6           4,794             5.9           1,063            2.4
                                  --------       ---------        --------       ---------        --------      ---------
     Total other loans .........    14,057            15.4          11,632            14.1           1,681            3.8
                                  --------       ---------        --------       ---------        --------      ---------
     Total loans ...............    91,028           100.0%         82,858           100.0%         44,481          100.0%
                                  ========       =========        ========       =========        ========      =========

Less
 Loans in process ..............       (29)                             (6)                            504 
 Deferred fees and discounts ...       (68)                           (323)                            (31)
 Allowance for loan losses .....      (831)                           (801)                            286 
                                  ---------                       --------                        -------- 
 Total loans receivable, net ...  $ 90,100                        $ 81,728                        $ 43,722 
                                  =========                       ========                        ======== 
                                                                                 
<CAPTION>
                                                        March 31,
                                           1995                            1994                 
                                  ------------------------       ------------------------      
                                   Amount         Percent         Amount         Percent       
                                  --------       ---------       --------       ---------      
                                                   (Dollars in Thousands)
<S>                               <C>                 <C>        <C>                 <C>  
Real Estate Loans
 One- to four-family ...........  $ 35,005            96.9%      $ 32,239            95.8%
 Commercial ....................       630             1.7            805             2.4
 Multi-family ..................       118             0.3            161             0.5
 Construction ..................        --              --             --              --
                                  --------       ---------       --------       ---------
     Total real estate loans ...    35,753            98.9         33,205            98.7
                                  --------       ---------       --------       ---------

Other Loans
 Consumer Loans:
  Deposit account ..............       383             1.1            429             1.3
  Credit Card ..................        --              --             --              --
  Installment ..................        --              --             --              --
  Other ........................        --              --             --              --
                                  --------       ---------       --------       ---------
     Total consumer loans ......       383             1.1            429             1.3
                                  --------       ---------       --------       ---------
 Commercial business loans .....        --              --             --              --
                                  --------       ---------       --------       ---------
     Total other loans .........       383             1.1            429             1.3
                                  --------       ---------       --------       ---------
     Total loans ...............    36,136           100.0%        33,634           100.0%
                                  ========       =========       ========       =========

Less
 Loans in process ..............        97                            167
 Deferred fees and discounts ...        (4)                            42
 Allowance for loan losses .....       312                            318
                                  --------                       --------
 Total loans receivable, net ...  $ 35,731                       $ 33,107
                                  ========                       ========
</TABLE>


                                        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,
                                                 1998                             1997                            1996             
                                        ------------------------        ------------------------        -----------------------
                                         Amount         Percent          Amount         Percent          Amount        Percent     
                                        --------       ---------        --------       ---------        --------      ---------
                                                                         (Dollars in Thousands)
<S>                                     <C>                <C>          <C>                <C>          <C>               <C>  
Fixed-Rate Loans:
 Real estate:
  One- to four-family ............      $ 33,253            36.5%       $ 29,730            35.9%       $ 15,013           33.8%
  Commercial .....................         3,348             3.7           2,627             3.2             721            1.6
  Multi-family ...................         1,278             1.4             781             0.9             138             .3
 Construction ....................           426             0.5             814             1.0           1,132            2.5
                                        --------       ---------        --------       ---------        --------      ---------
     Total real estate loans .....        38,305            42.1          33,952            41.0          17,004           38.2
 Consumer ........................         6,161             6.8           6,154             7.4             567            1.3
                                        --------       ---------        --------       ---------        --------      ---------
 Commercial business .............         2,649             2.9           1,395             1.7              51             .1
                                        --------       ---------        --------       ---------        --------      ---------
     Total fixed-rate loans ......        47,115            51.8          41,501            50.1          17,622           39.6

Adjustable-Rate Loans:
 Real estate:
  One- to four-family ............        32,825            36.1          32,683            39.4          23,931           53.8
  Commercial .....................         5,622             6.2           4,250             5.1           1,788            4.0
  Multi-family ...................           219             0.2             323             0.4              77             .2
  Construction ...................            --              --              18              --              --             -- 
                                        --------       ---------        --------       ---------        --------      ---------
     Total real estate loans .....        38,666            42.5          37,274            44.9          25,796           58.0
                                        --------       ---------        --------       ---------        --------      ---------
 Consumer ........................           954             1.0             684             0.8              51             .1
 Commercial business .............         4,293             4.7           3,399             4.2           1,012            2.3
                                        --------       ---------        --------       ---------        --------      ---------
     Total adjustable-rate loans .        43,913            48.2          41,357            49.9          26,859           60.4
                                        --------       ---------        --------       ---------        --------      ---------
     Total loans .................        91,028           100.0%         82,858           100.0%         44,481          100.0%
                                                       =========                       =========                      =========

Less:
 Loans in process ................           (29)                             (6)                            504  
 Deferred fees and discounts .....           (68)                           (323)                            (31) 
 Allowance for loan losses .......          (831)                           (801)                            286  
                                        --------                        --------                       ---------  
    Total loans receivable, net ..        90,100                          81,728                       $  43,722  
                                        ========                        ========                       =========  
                                                                                             
<CAPTION>
                                                                March 31,
                                                 1995                             1994                 
                                        ------------------------        ------------------------       
                                         Amount         Percent          Amount         Percent        
                                        --------       ---------       --------       ---------
                                                         (Dollars in Thousands)
<S>                                     <C>                <C>         <C>                <C>  
Fixed-Rate Loans:
 Real estate:
  One- to four-family ............      $ 11,811            32.7%      $ 13,275            39.5%
  Commercial .....................           424             1.2            525             1.5
  Multi-family ...................            34              .1             35              .1
 Construction ....................            --              --             --              --
                                        --------       ---------       --------       ---------
     Total real estate loans .....        12,269            34.0         13,835            41.1
 Consumer ........................           383             1.1            429             1.3
                                        --------       ---------       --------       ---------
 Commercial business .............           383             1.1            429             1.3
                                        --------       ---------       --------       ---------
     Total fixed-rate loans ......        12,652            35.1         14,264            42.4

Adjustable-Rate Loans:
 Real estate:
  One- to four-family ............        23,194            64.2         18,964            56.4
  Commercial .....................           206              .5            280              .8
  Multi-family ...................            84              .2            126              .4
  Construction ...................            --              --             --              --
                                        --------       ---------       --------       ---------
     Total real estate loans .....        23,484            64.9         19,370            57.6
                                        --------       ---------       --------       ---------
 Consumer ........................            --              --             --              --
 Commercial business .............            --              --             --              --
                                        --------       ---------       --------       ---------
     Total adjustable-rate loans .        23,484            64.9         19,370            57.6
                                        --------       ---------       --------       ---------
     Total loans .................        36,136           100.0%        33,634           100.0%
                                                       =========                     =========

Less:
 Loans in process ................            97                            167
 Deferred fees and discounts .....            (4)                            42
 Allowance for loan losses .......           312                            318
                                        --------                      ---------
    Total loans receivable, net ..      $ 35,731                      $  33,107
                                        ========                      =========
</TABLE>


                                        6

<PAGE>



     The following  schedule  illustrates  the interest rate  sensitivity of the
Company's loan portfolio at March 31, 1998.  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                                                              
                         ------------------------------------------------------------------------------       -------      --------

                                                       Multi-family and
                          One- to Four-Family              Commercial               Construction                     Consumer       
                         ---------------------       -----------------------    -----------------------       ---------------------
                                      Weighted                     Weighted                   Weighted                     Weighted 
                                      Average                       Average                    Average                      Average 
                          Amount       Rate           Amount          Rate       Amount          Rate          Amount        Rate   
                         -------      --------       ---------      --------    ---------      --------       -------      --------
                                                                   (Dollars in Thousands)
<S>                      <C>              <C>       <C>                 <C>     <C>                 <C>       <C>             <C> 
       Due
-------------------
Within one year(1)         4,706           8.0%            456           9.6%   $     183           9.3%      $ 2,339           9.6%
One to two years ..          563           9.3              47          10.5           --            --         1,129          11.4
Two to three years           503          10.4             372           9.7           --            --         1,481          10.8
Three to five years        1,916           8.5           1,405           8.0           --            --         1,912           9.2
Five to ten years .        9,933           8.1           3,926           9.0           --            --           254          10.8
Ten to 15 years ...       18,110           7.9           3,566           9.0          243           9.3            --            -- 
Over 15 years .....       30,347           7.5             695           9.0           --            --            --            -- 
                         -------      --------       ---------      --------    ---------      --------       -------      --------
  Totals ..........      $66,078                     $  10,467                  $     426                     $ 7,115
                         =======                     =========                  =========                     =======

<CAPTION>
                                                           Commercial                                               
                         ------------------------------------------------------------------------------     
                              Business                        Other                     Total              
                         ---------------------       -----------------------    -----------------------     
                                      Weighted                     Weighted                   Weighted      
                                      Average                       Average                    Average      
                          Amount       Rate           Amount          Rate       Amount          Rate       
                         -------      --------       ---------      --------    ---------      --------     
                                                      (Dollars in Thousands)
<S>                      <C>               <C>              <C>           <C>   <C>                <C> 
       Due
-------------------
Within one year(1)         3,495           8.9%             --            --       11,179           8.7%
One to two years ..          215           9.3              --            --        1,954          10.5
Two to three years         1,373           8.9              --            --        3,729           9.9
Three to five years        1,229           9.3              --            --        6,462           8.8
Five to ten years .          429           9.4              --            --       14,542           8.4
Ten to 15 years ...          201           9.0              --            --       22,120           8.1
Over 15 years .....           --            --              --            --       31,042           7.5
                         -------      --------       ---------      --------    ---------      --------
  Totals ..........      $ 6,942                            --                  $ 91,028
                         =======                     =========                  ========      
</TABLE>

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

     The total amount of loans due after March 31, 1998 which have predetermined
interest rates is $47.1 million,  while the total amount of loans due after such
date which have floating or adjustable interest rates is $43.9 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,  1998,  based on the above,  Classic
Bank's and  Paintsville  Bank's  regulatory  loans-to-one  borrower  limits were
approximately  $1.2 million and $1.3  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 $1.1 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 $769,000 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
President  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,  1998,  $66.1  million,  or 72.6% 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, 1998,  Classic  Bank had $11.5  million of ARM loans
representing 17.4% of the one- to four-family loan

                                        8

<PAGE>



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 186 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
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,  1998,  the Company had $20.1
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 and Mortgage-Backed Securities."

     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 loans are currently  underwritten  comparable to Federal Home
Loan  Mortgage  Corporation  ("FHLMC")  guidelines.  Under current  policy,  the
Company originates all mortgage loans for its portfolio.


                                        9

<PAGE>



     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  generally
focuses  its  commercial  real  estate  lending  efforts on  borrowers  (such as
professionals) who occupy some or all of the collateral  property.  At March 31,
1998, the Company had $9.0 million in commercial real estate loans  representing
9.9% of the Company's  total loan  portfolio,  and $1.5 million in  multi-family
loans, or 1.6%, of the Company's  total loan  portfolio.  At March 31, 1998, the
Company had one commercial real estate or multi-family loan with a book value in
excess of $500,000;  such loan had a book value of $850,000 and was secured by a
medical office building.

     The  Company's  commercial  and  multi-family  real estate  loan  portfolio
includes or is  anticipated  to include  loans  secured by apartment  buildings,
office  and  professional  buildings,  medical  facilities,  churches  and other
non-residential  building properties.  The Company's commercial and multi-family
real estate  loans are secured by  properties  located in the  Company's  market
area.

     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  serving  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,
1998, the Company had no multi-family  loans and no commercial real estate loans
which were 90 days or more delinquent.

     The acquisition of Paintsville  Bank has impacted the Company's  commercial
real estate  lending by increasing  the volume of  commercial  real estate loans
originated.

     Construction   Lending.   The  Company   originates  a  modest   amount  of
construction  loans for the  construction  of residential  and  commercial  real
estate.  At March 31, 1998, the Company's  construction  loan portfolio  totaled
$426,000, or 0.5% 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,

                                       10

<PAGE>



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, 1998, there were $54,000
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,  1998,  the  Company  had  $144,000
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
typically  carry  adjustable  rates and convert to a 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,  1998,  the  Company's  largest
construction  loan  was a $1.0  million  outstanding  loan  commitment  for  the
construction  of a hotel for a national  franchise,  of which  $304,000 had been
funded.

     The Company's  construction  loan  agreements  generally  provide that loan
proceeds are  disbursed 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, 1998,  consumer loans totaled $7.1 million,
or 7.8% 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 intends 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  will  vary  according  to the type and  value of  collateral,  length  of
contract and  creditworthiness  of the borrower.  During  fiscal 1998,  consumer
loans increased $277,000 as a result of the implementation of this strategy.

     The Company offers MasterCard credit card accounts.  At March 31, 1998, 234
credit card accounts had been issued,  with an aggregate  outstanding balance of
$218,000 and unused credit available

                                       11

<PAGE>



of $351,000.  The Company  presently charges an annual membership fee of $20 for
its credit  cards.  The annual  rate of  interest  on the credit  cards  adjusts
monthly based upon the prime rate.

     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, 1998,  the
Company  had $17,000 of  non-performing  consumer  loans and no 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.

     Commercial  Business  Lending.  The Company  makes  secured  and  unsecured
commercial business loans to local businesses.  At March 31, 1998, the Company's
commercial  business  loans  totaled $6.9  million,  or 7.6% of total loans.  In
addition,  on such date, the Company had $5.3 million of outstanding  commercial
business loan commitments, of which $2.7 million were not yet funded.

     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. Such
loans are generally secured by inventory, accounts receivable and fixed assets.

     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.

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 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.


                                       12

<PAGE>



     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.


                                       13

<PAGE>



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

<TABLE>
<CAPTION>
                                                     Year Ended March 31,
                                             -------------------------------------
                                               1998          1997           1996
                                             --------      --------       --------
                                                        (In Thousands)
<S>                                          <C>           <C>            <C>     
Originations by type:
 Adjustable rate:
  Real estate - one- to four-family ...      $  5,362      $  7,916       $  5,145
                 - multi-family .......            --            --             --
                 - commercial .........         2,667           240          1,997
                 - construction .......           156            31             --
  Non-real estate - consumer ..........           690           205             75
                 - commercial business         11,159         1,144          1,855
                                             --------      --------       --------
                 - other ..............            --            89             --
                                             --------      --------       --------
         Total adjustable-rate loans ..        20,034         9,625          9,072
                                             --------      --------       --------
 Fixed rate:
  Real estate - one- to four-family ...        10,414         8,560          5,447
                 - multi-family .......           572           655            106
                 - commercial .........         1,465           832            591
                 - construction .......         1,462         1,147          2,142
  Non-real estate - consumer ..........         5,376         2,683            552
                 - commercial business          5,852         1,012             54
                 - other ..............            --             6             --
                                             --------      --------       --------
         Total fixed-rate loans .......        25,141        14,895          8,892
                                             --------      --------       --------
         Total loans originated .......        45,175        24,520         17,964
                                             --------      --------       --------

Purchases:
 Real estate - commercial .............            --            --             25
  Non-real estate - commercial ........            --            --            250
                                             --------      --------       --------
         Total purchases ..............            --            --            275

Participations sold:
 Real estate - commercial .............            --            --            250
  Non-real estate - commercial business            --            --            538
                 - other ..............            --            --             --
                                             --------      --------       --------
         Total participations sold ....            --            --            788

Repayments:
  Real estate - one- to four-family ...        12,338         7,807          6,558
                 - multi-family .......           179            23              8
                 - commercial .........         2,039         1,685            317
                 - construction .......         2,024         1,655          1,010
  Non-real estate - consumer ..........         5,789         2,799            392
                 - commercial business         14,863           531            559
                 - other ..............            --            12             --
                                             --------      --------       --------
   Total principal repayments .........        37,232        14,512          8,844
                                             --------      --------       --------
Increase (decrease) in other items, net           227          (108)          (262)
  Acquisition of Paintsville Bank .....            --        28,477             --
                                             --------      --------       --------
         Net increase (decrease) ......      $  8,170      $ 38,377       $  8,345
                                             ========      ========       ========
</TABLE>


                                       14
<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, 1998.


<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.        ---        ---        ---        12        309         0.5       12        309         0.5
  Commercial..........          1          5        ---       ---        ---        ---         1          5        ---
Consumer..............          6         11         0.2        3         17         0.2        9         28         0.4
Commercial............          2         62         0.9       --         --        ---         2         62         0.9
                              ---        ---        ----     ----       ----     ------       ---       ----       -----
                                9         78         0.1       15        326         0.4       24        404         0.4
</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


                                       15
<PAGE>


of the  institution  is not  warranted.  Assets  classified  as  Substandard  or
Doubtful  require the institution 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, 1998, the
Company had the following classified assets:


                                                                 March 31, 1998
                                                                 (In Thousands)

Substandard...................................................          963
Doubtful......................................................            8
Loss..........................................................          ---
Special Mention...............................................          627
                                                                     ------
     Total....................................................       $1,608
                                                                     ======
                                                                 
     The  Company's  classified  assets  consist  of  non-performing  loans  and
foreclosed  assets.  As of the date  hereof,  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.



                                       16
<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,
                                                ----------------------------------------------------------
                                                 1998         1997         1996         1995         1994
                                                ------       ------       ------       ------       ------
                                                                    (Dollars in Thousands)
<S>                                             <C>          <C>          <C>          <C>          <C>   
Non-accruing loans:
  One- to four-family ....................      $  296       $  465       $  552       $  447       $1,051
  Multi-Family ...........................          --           32
  Commercial real estate .................          --           62           43          301           --
  Consumer ...............................          12           --           --           --           --
                                                ------       ------       ------       ------       ------
     Total ...............................         308          559          595          748         1051

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

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

Total non-performing assets ..............      $  562       $1,076       $  600       $  857       $1,051
                                                ======       ======       ======       ======       ======
Total as a percentage of total assets ....         0.4%         0.8%         0.9%         1.4%         1.8%
                                                ======       ======       ======       ======       ======
</TABLE>

     For the year ended March 31, 1998,  gross interest  income which would have
been recorded had the  non-accruing  loans been current in accordance with their
original  terms  amounted to $11,000.  The amount that was  included in interest
income on such loans was $12,000 for the year ended March 31, 1998.  The average
balance of non-accrual loans for the year ended March 31, 1998 was $294,000. The
allowance for loan losses on non-accrual  loans amounted to $23,000 at March 31,
1998.

     At March 31,  1998,  the  Company's  non-accruing  loans  included 11 loans
secured by  single-family  real estate  totaling  $296,000,  two consumer  loans
secured by autos totaling $12,000. At March 31, 1998, real estate owned included
a vacant lot totaling  $194,000 and three loans  secured by  single-family  real
estate totaling $35,000.

     Management   has  revised  the  Company's   underwriting   guidelines   and
implemented  increased collection efforts in an attempt to minimize the level of
non-performing  assets. No prediction can be made as to whether this effort will
be successful.

     Other Assets of Concern. In addition to the non-performing assets set forth
in the table above,  as of March 31,  1998,  there were no loans or other assets
with respect to which known information about the


                                       17
<PAGE>

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,
                                                                 ------------------------------------------------
                                                                 1998       1997       1996       1995       1994
                                                                 ----       ----       ----       ----       ----
                                                                              (Dollars in Thousands)
<S>                                                              <C>        <C>        <C>        <C>        <C> 
Balance at beginning of period ............................      $801       $286       $311       $318       $349
                                                                 ----       ----       ----       ----       ----
Acquisition of Paintsville Bank ...........................        --        526         --         --         --
Charge-offs:
  One- to four-family .....................................        49         17         44        130        184
  Multi-family ............................................        --         --        149         --         --
  Commercial real estate ..................................        --         --         21         19         --
  Commercial business .....................................         1         45         --         --         --
  Consumer ................................................       102         76         --         --         --
  Credit cards ............................................        21         15         --         --         --
                                                                 ----       ----       ----       ----       ----
      Total charge-offs ...................................       173        153        214        149        184
                                                                 ----       ----       ----       ----       ----

Recoveries:
  One- to four-family .....................................        --          3         12          9         70
  Multi-family ............................................        --         --          9         --         --
  Commercial Business .....................................        26         17         --         --         --
  Consumer ................................................        16         16         --         --         --
  Credit cards ............................................         3          1         --         --         --
                                                                 ----       ----       ----       ----       ----
      Total recoveries ....................................        45         37         21          9         70
Net charge-offs ...........................................       128        116        193        140        114
                                                                 ----       ----       ----       ----       ----
Additions charged to operations ...........................       158        105        168        133         83
                                                                 ----       ----       ----       ----       ----
Balance at end of period ..................................       831       $801       $286       $311       $318
                                                                 ====       ====       ====       ====       ====

Ratio of net charge-offs during the period to average loans
    outstanding during the period .........................       0.1%       0.2%       0.5%       0.4%       0.3%
                                                                 ====       ====       ====       ====       ====

Ratio of net charge-offs during the period to average non-
    performing assets .....................................      15.4%       9.6%      25.4%      17.5%      11.5%
                                                                 ====       ====       ====       ====       ====
</TABLE>



                                       18
<PAGE>


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


<TABLE>
<CAPTION>
                                                                           March 31,
                            --------------------------------------------------------------------------------------------------------
                                          1998                                1997                                1996              
                            -------------------------------    ---------------------------------    --------------------------------
                                                   Percent                              Percent                             Percent 
                                                   of Loans                             of Loans                            of Loans
                                          Loan     in Each                   Loan       in Each                   Loan      in Each 
                            Amount of   Amounts    Category    Amount of    Amounts     Category    Amount of    Amounts    Category
                            Loan Loss      by      to Total    Loan Loss       by       to Total    Loan Loss      by       to Total
                            Allowance   Category     Loans     Allowance    Category      Loans     Allowance   Category      Loans 
                            ---------   --------   --------    ---------    ---------    -------    ---------   ---------    -------
                                                                          (In thousands)
<S>                         <C>          <C>         <C>        <C>          <C>          <C>        <C>         <C>          <C>   
One- to four-family ..          221      66,078       72.6%          88       62,413       75.3%     $    59     $38,944       87.5%
Multi-family .........            2       1,497        1.6            3        1,104        1.3           --         215        0.5
Commercial real estate           45       8,970        9.9           67        6,877        8.3            4       2,509        5.7
Construction .........           --         426        0.5           --          832        1.0           --       1,132        2.5
Consumer .............           35       7,115        7.8           14        6,838        8.3           --         618        1.4
Commercial business ..           52       6,942        7.6           22        4,794        5.8           --       1,063        2.4
Unallocated ..........          476          --         --          607           --         --          223          --         -- 
                            -------     -------      -----      -------      -------      -----      -------     -------      -----
     Total ...........      $   831      91,028      100.0%     $   801      $82,858      100.0%     $   286     $44,481      100.0%
                            =======                  =====      =======      =======      =====      =======     =======      =====

<CAPTION>
                                                         March 31,
                            --------------------------------------------------------------------   
                                          1995                                1994                 
                            -------------------------------    ---------------------------------   
                                                   Percent                              Percent    
                                                   of Loans                             of Loans   
                                          Loan     in Each                   Loan       in Each    
                            Amount of   Amounts    Category    Amount of    Amounts     Category   
                            Loan Loss      by      to Total    Loan Loss       by       to Total   
                            Allowance   Category     Loans     Allowance    Category      Loans    
                            ---------   --------   --------    ---------    ---------    -------   
                                                     (In thousands)
<S>                         <C>         <C>          <C>        <C>          <C>          <C>   
One- to four-family ..      $    47     $35,005       96.9%        $---      $32,239       95.8%
Multi-family .........           --         118        0.3           --          161        0.5
Commercial real estate           75         630        1.7           --          805        2.4
Construction .........           --          --         --           --           --         --
Consumer .............           --         383        1.1           --          429        1.3
Commercial business ..           --          --         --           --           --         --
Unallocated ..........          190          --         --          318           --         --
                            -------     -------      -----      -------      -------      -----
     Total ...........      $   312     $36,136      100.0%     $   318      $33,634      100.0%
                            =======     =======      =====      =======      =======      =====
</TABLE>



                                       19
<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, 1998, 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, 1998, $26.0 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,  1998,  the
liquidity ratio (defined as cash and other financial  assets maturing within one
year) was 4.4%. 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.


                                       20
<PAGE>


     Prior to April 1995, the Company used  investment  securities to supplement
loan volume and to improve the yield on its  interest-earning  assets. Since the
Company's shift in business  strategy in 1996 resulted in an increase in lending
activities (in part because loans  generally carry higher yields than investment
securities),  the Company has  experienced a decline in the volume of investment
securities.  However,  the Company continues to invest 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 repricing of the Company's assets. At March 31, 1998,
the Company's  investment  securities  portfolio totaled $19.5 million. At March
31, 1998, 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 4 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.

<TABLE>
<CAPTION>
                                                                                              March 31,
                                                               --------------------------------------------------------------------
                                                                      1998(1)                  1997(1)                  1996(1)
                                                               ------------------       ------------------       ------------------
                                                               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 ............................        1,275        6.5       $ 1,503        6.2       $ 1,266       11.5
  Federal agency obligations ............................        7,826       40.2        14,815       60.7         4,415       39.9
  Municipal bonds .......................................        8,804       45.2         7,057       28.9         4,757       43.0
  Other debt securities .................................          272        1.4            --         --            --         --
FHLB and FRB stock ......................................        1,297        6.7         1,015        4.2           621        5.6
                                                               -------      -----       -------      -----       -------      -----
     Total securities and FHLB stock ....................       19,474      100.0%      $24,390      100.0%       11,059      100.0%
                                                               =======      =====       =======      =====       =======      =====

Average remaining life of investment securities .........      10 yrs.                   7 yrs.                  13 yrs.

Other interest-earning assets:
  Interest-bearing deposits with banks ..................      $   410       26.6%      $   495        8.2%      $ 6,649      100.0%
  Federal Funds Sold and securities purchased
   under agreement to resell ............................        1,131       73.4         5,525       91.8            --         --
</TABLE>

----------
(1)  At March 31, 1998,  1997 and 1996,  all investment  securities  held by the
     Company were classified as available for sale.


 
                                       21
<PAGE>


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

<TABLE>
<CAPTION>
                                                                               March 31, 1998
                                           ----------------------------------------------------------------------------------------
                                           Less Than        1 to 5          5 to 10          Over             Total Securities
                                             1 Year          Years           Years          10 Years        -----------------------
                                            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 .........        $   250         $ 1,025              --              --         $ 1,275         $ 1,275
Federal agency obligations .........             --              --             997           6,829           7,826           7,826
Municipal bonds ....................             43             564           1,616           6,581           8,804           8,804
Corporate equity securities ........             --              --              --             272             272             272
                                            -------         -------         -------         -------         -------         -------
Total securities ...................        $   293         $ 1,589         $ 2,613         $13,682         $18,177         $18,177
                                            =======         =======         =======         =======         =======         =======

Weighted average yield(1) ..........            5.3%            6.2%            5.4%            6.5%            6.3%            6.3%
</TABLE>

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

     See Note 4 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, 1998,
$3.3 million,  or 42.3% 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 4 of the Notes to the Consolidated
Financial Statements contained in Exhibit 13.

     As of March 31, 1998,  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, 1998, the Company had $1.4 million 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 its 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


                                       22
<PAGE>


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,  1998,  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, 1998.

<TABLE>
<CAPTION>

                                                                                     March 31, 1998
                                                                                     --------------
                                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>   
Federal Home Loan Mortgage                                                           
Corporation ..............        $  757        $  263        $1,059           952        $3,031
FNMA .....................            --            --            --         2,546         2,546
GNMA .....................            --            --            --            --            --
Other ....................            --            --            --           826           826
CMOs and REMICs ..........            --         1,010           418            --         1,428
                                  ------        ------        ------        ------        ------
                                                                                     
     Total ...............        $  757        $1,273        $1,477        $4,324        $7,831
                                  ======        ======        ======        ======        ======
</TABLE>


     At March 31, 1998,  the dollar  amount of all  mortgage-backed  and related
securities due after March 31, 1998, which had fixed interest rates and floating
or adjustable rates totaled $4.5 million and $3.3 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 4 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,
                                          -------------------------------------------------------------------
                                                   1998                    1997                   1996
                                          -------------------     -------------------    --------------------
                                          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:
FHLMC ...............................      $2,989      $3,031      $2,561      $2,521      $  371      $  365
FNMA ................................       2,546       2,546       2,945       2,966          --          --
Other ...............................         828         826         417         411         484         480
CMOs/REMICs .........................       1,442       1,428       2,017       1,987       2,021       1,995
                                           ------      ------      ------      ------      ------      ------
     Total mortgage-backed securities      $7,805      $7,831      $7,940      $7,885      $2,876      $2,840
                                           ======      ======      ======      ======      ======      ======
</TABLE>



                                       23
<PAGE>


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


                                                    Year Ended March 31,
                                            -----------------------------------
                                              1998          1997          1996
                                            -------       -------       -------
                                                       (In Thousands)
Purchases:
  Adjustable-rate(1) .................      $    --       $ 3,035       $   488
  Fixed-rate(1) ......................        1,744         2,299            --
  CMOs and REMICs ....................          438            --         2,022
                                            -------       -------       -------
         Total purchases .............        2,182         5,334         2,510
                                            -------       -------       -------

Sales:
  Adjustable-rate(1) .................           --         2,255           156
  Fixed-rate(1) ......................           --           976           451
  CMOs and REMICs ....................        1,012            --         6,542
                                            -------       -------       -------
         Total sales .................        1,012         3,231         7,149
                                                          -------       -------

Principal repayments .................       (1,285)         (532)          659
Other increases (decreases), net .....          (20)          (46)           (3)
                                            -------       -------       -------
     Net increase (decrease) .........      $  (135)      $ 1,525       $(5,301)
                                            =======       =======       =======

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


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.  In order to  increase  the volume of checking  accounts,  the Company
employed a new  accounts  specialist  in fiscal  1996.  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 has a contract with
a nationally  recognized ATM network and added five new ATM locations during the
year in order to obtain  access to  automated  teller  machines  and 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, 1998,  the amount of public
funds on deposit with the Company was $1.1 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



                                       24
<PAGE>


below the initial  rate. At March 31, 1998 the Company had $1.9 million of "step
up" certificates of deposit with an average cost of 5.4%.

     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 7 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.


                                               Year Ended March 31,
                                   -------------------------------------------
                                      1998             1997             1996
                                   ---------        ---------        ---------
                                             (Dollars in Thousands)

Opening balance ...............    $ 100,519        $  46,200        $  48,510
Acquisition of Paintsville Bank           --           52,851               --
Deposits ......................      507,555          217,612           15,671
Withdrawals ...................     (506,091)        (218,707)         (19,587)
Interest credited .............        2,944            2,563            1,606
                                   ---------        ---------        ---------

Ending balance ................    $ 104,927        $ 100,519        $  46,200
                                   =========        =========        =========

Net increase (decrease) .......    $   4,408        $  54,319        $  (2,310)
                                   =========        =========        =========

Percent increase (decrease) ...          4.4%           117.8%            (4.8)%
                                   =========        =========        =========

     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,
                                                   ------------------------------------------------------------------
                                                        1998                     1997                      1996
                                                   ----------------       ------------------        -----------------
                                                             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..........     $10,152      9.7%     $  9,496        9.4%     $      --        --
Interest bearing demand deposits - 2.7%(1)....      10,281      9.8         9,134        9.1             15        --
Savings Accounts - 3.0%(1)....................      10,722     10.2        11,552       11.5          2,683       5.8
Money Market Accounts - 3.6%(1)...............       9,331      8.9         9,599        9.5          5,494      11.9
                                                   -------    -----       -------       ----        -------     -----
     Total Deposits...........................     $40,486     38.6%      $39,781       39.5%         8,192      17.7%
                                                   =======     ====       =======       ====          =====      ====
                                                                                                  
Certificates:                                                                                     
                                                                                                  
0.00 -  4.00%.................................       1,128      1.1         1,611        1.7          2,582       5.6
4.01 -  6.00%.................................      50,657     48.2        48,363       48.1         18,421      39.9
6.01 -  8.00%.................................      12,556     12.0        10,640       10.6         16,792      36.3
8.01 - 10.00%.................................         100      0.1           124        0.1            213       0.5
                                                   -------    -----       -------       ----        -------     -----
Total Certificates............................      64,441     61.4        60,738       60.5         38,008      82.3
                                                   -------    -----       -------       ----        -------     -----
     Total Deposits...........................     104,927    100.0%      100,519      100.0%        46,200     100.0%
                                                   =======    =====       =======      =====         ======     =====
</TABLE>

----------
(1)  Interest rate offered at March 31, 1998.
                                                                                


                                       25
<PAGE>


     The following  table shows rate and maturity  information for the Company's
certificates of deposit as of March 31, 1998.


<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)
Certificate accounts maturing in quarter ending:
<S>                                       <C>             <C>               <C>                              <C>               <C>  
June 30, 1998 .................           1,118           14,015            4,654               --           19,787            30.7%
September 30, 1998 ............              --           11,931            1,897               --           13,828            21.5
December 31, 1998 .............              --            5,772            2,016               --            7,788            12.1
March 31, 1999 ................              --            6,581            1,474              100            8,155            12.7
June 30, 1999 .................              --            4,160              909               --            5,069             7.9
September 30, 1999 ............              --            4,072              294               --            4,366             6.7
December 31, 1999 .............              --            1,249              445               --            1,694             2.6
March 31, 2000 ................              --              948              378               --            1,326             2.1
June 30, 2000 .................              --              472              429               --              901             1.4
September 30, 2000 ............              10              772               --               --              782             1.2
December 31, 2000 .............              --              225               25               --              250             0.4
March 31,2001 .................              --               80               --               --               80             0.1
Thereafter ....................              --              380               35               --              415             0.6
                                         ------           ------           ------           ------           ------           -----

   Total ......................           1,128           50,657           12,556              100           64,441           100.0%
                                         ======           ======           ======           ======           ======           =====

   Percent of total ...........             1.8%            78.5%            19.5%              .2%           100.0%
</TABLE>


     The following table indicates the amount of the certificates of deposit and
other deposits by time remaining until maturity as of March 31, 1998.


<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 ..............         11,741          9,887         11,483         12,302         45,413
Certificates of deposit of $100,000 or more .............          7,781          3,240          4,348          2,581         17,950
Public funds ............................................            265            701            112             --          1,078
                                                                  ------         ------         ------         ------         ------
Total certificates of deposit ...........................         19,787         13,828         15,943         14,883         64,441
                                                                  ======         ======         ======         ======         ======
</TABLE>


     For  additional  information  regarding  the  composition  of the Company's
deposits,  see Note 7 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.


                                       26
<PAGE>


     FHLB  borrowings  are also used to fund loan  demand  and other  investment
opportunities and to offset deposit outflows. At March 31, 1998, the Company had
no FHLB  advances  outstanding.  See  Note 9 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 payable by First Paintsville to
a local community bank. Such notes are due to mature in December 2004.

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


                                                   Year Ended March 31,
                                            -----------------------------------
                                             1998          1997          1996
                                            -------       -------       -------
                                                       (In Thousands)
Maximum Balance:
  Repurchase agreements ..............      $ 3,681       $ 5,285            --
  Other borrowings
     Treasury tax and loan note ......          704           544            --
     Notes payable ...................          650           700            --
     FHLB advances ...................      $ 8,378       $10,200       $ 7,975

Average Balance:
  Repurchase agreements ..............         3589         2,517            --
  Other borrowings
     Treasury tax and loan note ......          317           204            --
     Notes payable ...................          613           340            --
     FHLB advances ...................         5813         4,079         3,660

Weighted average interest rate .......          6.0%          5.4%          5.9%



                                       27
<PAGE>


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


<TABLE>
<CAPTION>
                                                               March 31,
                                                  ------------------------------------
                                                    1998          1997          1996
                                                  -------       -------       --------
                                                          (Dollars in Thousands)
<S>                                                 <C>         <C>           <C>     
Repurchase agreements ......................      $ 3,522       $ 4,956             --
Other Borrowings
  Treasury tax and loan note ...............          274           429             --
  Notes payable ............................          550           650             --
  FHLB advances ............................           --       $ 4,750       $     --
                                                  -------       -------       --------
Total Borrowings ...........................        $4346       $10,785       $     --
                                                  =======       =======       ========

Weighted average interest rate of repurchase
agreements .................................          5.4%          5.1%            --
Weighted average interest rate of
other borrowings ...........................          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 1998, 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.

     During fiscal 1998, Classic Bank had one wholly owned service  corporation,
AFS  Service  Corporation  (the  "Subsidiary").   The  Subsidiary,   a  Kentucky
corporation,  was incorporated in 1978 for the purpose of acquiring the stock of
Intrieve,  Inc.  ("Intrieve")  (formerly the Savings and Loan Data  Corporation,
Inc.).  During fiscal 1998,  the Subsidiary was dissolved and the Intrieve Stock
sold.

     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, 1998, Paintsville Bank had no subsidiaries.



                                       28
<PAGE>


Competition

     The Company faces strong  competition both in originating real estate loans
and in attracting  deposits.  Competition in originating  loans comes  primarily
from  commercial  banks,  credit  unions  mortgage  bankers  and  other  savings
institutions,  which  also make  loans  secured  by real  estate  located in the
Company's  primary  market  area.  At March 31, 1998,  there were seven  savings
institutions,  eight  commercial  banks and five credit unions  located in Boyd,
Johnson and Greenup Counties, Kentucky. On that date, the Company's market share
of total loans in these counties was  approximately  26.4%. 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.

     Competition for deposits comes  principally from commercial  banks,  credit
unions, mutual funds, securities firms and other savings institutions 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,  1998,  the  Company's  share of deposits in the above market area was
approximately 23.8%.

Employees

     At March 31,  1998,  the  Company  and its  subsidiaries  had a total of 54
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.


                                       29
<PAGE>


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 September 30, 1996 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, 1998 was $23,000.

     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
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.
Paintsville Bank is able 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, 1998 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, 1998, Classic Bank's lending limit
was $1.2 million. On such date,


                                       30
<PAGE>


Classic Bank was in compliance  with the  loans-to-one-borrower  limitation.  At
March 31, 1998, Paintsville Bank's lending limit was $1.3 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.

Insurance of Accounts and Regulation by the FDIC

     Classic Bank is a member of the SAIF, and  Paintsville  Bank is a member of
the Bank Insurance  Fund ("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  the  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.

     The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it  determines  that the  reserve  ratio of the  SAIF  will be less  than the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

     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,


                                       31
<PAGE>


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, 1998,  Classic Bank did not have any  intangible
assets.

     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.  The  subsidiary  of Classic  Bank is an  includable
subsidiary.

     At March 31, 1998,  Classic Bank had tangible  capital of $7.9 million,  or
11.5% of adjusted total assets,  which is  approximately  $6.9 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, 1998, Classic
Bank had no intangibles which were subject to these tests.

     At March 31, 1998, Classic Bank had core capital equal to $7.9 million,  or
11.5% of adjusted total assets, which is $5.9 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


                                       32
<PAGE>


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,  1998,
Classic Bank had no capital  instruments that qualify as  supplementary  capital
and  $319,000  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.

     The OTS has adopted a final rule that requires  every  savings  association
with more than  normal  interest  rate risk  exposure  to deduct  from its total
capital, for purposes of determining compliance with such requirement, an amount
equal to 50% of its interest-rate risk exposure  multiplied by the present value
of its assets.  This exposure is a measure of the  potential  decline in the net
portfolio value of a savings  association,  greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline).  Net portfolio value is
the  present  value  of  expected  cash  flows  from  assets,   liabilities  and
off-balance  sheet  contracts.  The rule  provides for a two quarter lag between
calculating  interest rate risk and recognizing any deduction from capital.  The
rule will not become  effective  until the OTS completes its evaluation of newly
adopted  procedures  by which savings  associations  may appeal an interest rate
risk  deduction  determination.  Any  savings  association  with  less than $300
million in assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines  otherwise.  See "Management's  Discussion
and Analysis of Financial  Condition and Results of Operations  -Asset/Liability
Management" contained in Exhibit 13 to this Report and incorporated by reference
herein.

     On  March  31,  1998,  Classic  Bank  had  total  capital  of $8.3  million
(including $7.9 million in core capital and $319,000 in qualifying supplementary
capital) and risk-weighted  assets of $36.8 million or total capital of 22.5% of
risk-weighted assets. This amount was $5.4 million above the 8.0% requirement in
effect on that date.

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


                                       33
<PAGE>


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, 1998,  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.

     The OCC has revised its risk-based  capital  requirements to permit the OCC
to require  higher levels of capital for an institution in light of its interest
rate risk. In addition,  the OCC has proposed  that a bank's  interest rate risk
exposure would be quantified  using either the  measurement  system set forth in
the proposal or the institution's internal model for measuring such exposure, if
such model is determined  to be adequate by the  institution's  examiner.  Small
institutions  that are highly  capitalized and have minimal  interest rate risk,
such as  Paintsville  Bank,  would be  exempt  from the  rule  unless  otherwise
determined by the OCC.  Management of Paintsville  Bank has not determined  what
effect,  if any, the OCC's proposed  interest rate risk component  would have on
Paintsville Bank's capital if adopted as proposed.

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
must appoint a receiver (or conservator


                                       34
<PAGE>


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 such  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 or requirements on associations
with respect to their  ability to pay dividends or make other  distributions  of
capital.  OTS regulations  prohibit an 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.

     Generally,  savings  associations,  such as Classic  Bank,  that before and
after the  proposed  distribution  meet  their  capital  requirements,  may make
capital  distributions  during any calendar year equal to the greater of 100% of
net  income for the  year-to-date  plus 50% of the amount by which the lesser of
the  association's  tangible,  core or  risk-based  capital  exceeds its capital
requirement  for such  capital  component,  as measured at the  beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However,  an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority  restricted by the OTS. Classic Bank may
pay dividends in accordance with this general authority.

     Savings  associations  proposing to make any capital distribution need only
submit  written  notice to the OTS 30 days prior to such  distribution.  Savings
associations  that do not,  or would not,  meet their  current  minimum  capital
requirements following a proposed capital distribution, however, must obtain OTS
approval  prior  to  making  such  distribution.  The  OTS  may  object  to  the
distribution  during that 30-day  period  notice  based on safety and  soundness
concerns.

     Paintsville  Bank's  ability to pay  dividends  is governed by the National
Bank Act and OCC regulations.  Under such statute and regulations, all dividends
by a national  bank must be paid out of current or retained net  profits,  after
deducting  reserves  for losses and bad debts.  The  National  Bank Act  further
restricts the payment of dividends out of net profits by  prohibiting a national
bank from  declaring a dividend on its shares of common  stock until the surplus
fund equals the amount of capital  stock or, if the surplus  fund does not equal
the amount of capital stock,  until one-tenth of Paintsville  Bank's net profits
for the preceding half year in the case of quarterly or  semi-annual  dividends,
or the  preceding  two half-year  periods in the case of annual  dividends,  are
transferred  to the surplus fund. In addition,  the prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared by
a national  bank in any calendar  year would exceed the total of its net profits
for the year combined with its net profits


                                       35
<PAGE>


for the two preceding  years,  less any required  transfers to surplus or a fund
for the retirement of any preferred stock.

     The OCC has the  authority  to  prohibit  the  payment  of  dividends  by a
national  bank when it  determines  such  payment  to be an unsafe  and  unsound
banking practice.  In addition,  Paintsville Bank would be prohibited by federal
statute  and the OCC's  prompt  corrective  action  regulations  from making any
capital  distribution if, after giving effect to the  distribution,  Paintsville
Bank would be classified as "undercapitalized" under the OCC's regulations.  See
"-- Prompt Corrective Action."

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.

     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, 1998, Classic Bank met the test and has always met
the test since its effectiveness.



                                       36
<PAGE>


     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.

     The  federal  banking  agencies,  including  the OTS and the OCC,  recently
revised the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened  attention being given to the CRA
in the past few years,  Classic  Bank and  Paintsville  Bank may be  required to
devote  additional  funds for  investment  and  lending in its local  community.
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.

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.  Classic  Bank's  subsidiary  is not  deemed an
affiliate,  however; the OTS has the discretion to treat a subsidiary of savings
associations as an affiliate on a case-by-case basis.



                                       37
<PAGE>


     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
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.



                                       38
<PAGE>


     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 the 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."

     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


                                       39
<PAGE>


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 stock of the Company 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,
1998,  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,
1998, 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  administers 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,
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.


                                       40
<PAGE>


     As members,  Classic Bank and Paintsville Bank are required to purchase and
maintain  stock in the FHLB of Cincinnati.  At March 31, 1998,  Classic Bank had
$715,000 in FHLB stock,  which was in compliance with this  requirement.  On the
same  date,  Paintsville  Bank had  $276,000  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 6.4% and 6.9%, respectively,  and were 7.1% and 7.1%, respectively, for
fiscal 1998.

     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,  1998,  dividends  paid by the FHLB of
Cincinnati  to Classic Bank and  Paintsville  Bank totaled  $49,000 and $19,000,
respectively,  compared  to  $44,000  and  $8,000,  respectively,  of  dividends
received in fiscal year 1997.

Change in Control Regulations

     The Change in Bank Control Act (the "CIBC"),  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.   Prior  to  the  enactment  of  recent  legislation
(discussed  below),  savings  associations such as Classic Bank that met certain
definitional  tests relating to the  composition of assets and other  conditions
prescribed by the Internal  Revenue Code of 1986,  as amended (the "Code"),  had
been permitted to establish  reserves for bad debts and to make annual additions
thereto which could, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes.  The amount of the bad
debt  reserve  deduction  for  "non-qualifying  loans"  was  computed  under the
experience  method. The amount of the bad debt reserve deduction for "qualifying
real property loans"  (generally loans secured by improved real estate) could be
computed under either the experience  method or the percentage of taxable income
method (based on an annual election).



                                       41
<PAGE>


     In August 1996,  legislation  was enacted that  repealed the  percentage of
taxable income method of accounting  used by many thrifts to calculate their bad
debt reserve for federal income tax purposes. As a result, small thrifts such as
Classic Bank must  recapture that portion of the reserve that exceeds the amount
that could have been taken under the experience  method for post-1987 tax years.
The  legislation  also  requires  thrifts to account  for bad debts for  federal
income  tax  purposes  on the  same  basis as  commercial  banks  for tax  years
beginning  after  December 31, 1995.  The  recapture  will occur over a six-year
period,  the  commencement  of which was delayed  until the first  taxable  year
beginning after December 31, 1997 for institutions which met certain residential
lending  requirements.  The management of Classic Bank does not believe that the
legislation will have a material impact on Classic Bank.

     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.

     To the extent  earnings  appropriated to a savings  association's  bad debt
reserves for  "qualifying  real property  loans" and deducted for federal income
tax purposes  exceed the allowable  amount of such reserves  computed  under the
experience method and to the extent of the association's  supplemental  reserves
for  loan  losses   ("Excess"),   such  Excess  may  not,  without  adverse  tax
consequences,   be  utilized  for  the  payment  of  cash   dividends  or  other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of March 31, 1998,  Classic Bank's Excess for tax purposes  totaled
approximately $1.9 million.

     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
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.

     Classic 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,  Classic)  would not result in a  deficiency  which  could have a material
adverse  effect on the  financial  condition or results of operations of Classic
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.



                                       42
<PAGE>


     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 48, 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 29, 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 two branch offices located in Greenup and Boyd
Counties.  Classic Bank's 6,000 square foot headquarters  office was acquired in
1963 and had a net book value of $363,000 at March 31, 1998.  At March 31, 1998,
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, 1998,  the
current book value of this building was  approximately  $88,000.  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, 1998 was approximately $369,000.


                                       43
<PAGE>


     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 $259,000 at March 31, 1998.  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.

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, 1998.

                                     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, 1998
included as Exhibit 13 to this Report, is herein incorporated by reference.

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,  1998  included as
Exhibit 13 to this Report, is herein incorporated 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,  1998  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.



                                       44
<PAGE>


                                    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 1998, a copy of which will be filed not later than
120 days after the close of the fiscal year.

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

     Section  16(a) of the Exchange Act requires  the  Company's  directors  and
executive  officers,  and persons who own more than 10% of a registered class of
the  Company's  equity  securities,  to file  with the SEC  initial  reports  of
ownership  and reports of changes in  ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than 10% stockholders
are  required  by SEC  regulations  to furnish  the  Company  with copies of all
Section 16(a) forms they file.

     To the Company's knowledge,  based solely on a review of the copies of such
reports  furnished  to the  Company and  written  representations  that no other
reports were required,  during the fiscal year ended March 31, 1998, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10 percent beneficial owners were met.

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 1998,  a copy of which  will be filed not later than
120 days after the close of the fiscal year.

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 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.



                                       45
<PAGE>


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 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.

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                         **
                    Employment Agreement with David B. Barbour                  **
      11         Statement regarding computation of per share                  None
                 earnings
      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.


                                       46
<PAGE>


(b)  Reports on Form 8-K

     During the quarter ended March 31, 1998, the Company filed a Current Report
on Form 8-K on  January  27,  1998,  to report  the  announcement  of  quarterly
earnings and the declaration of a cash dividend.


                                       47
<PAGE>


                                   SIGNATURES

     Pursuant to the  requirements  of Section 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  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)

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following  persons in the  capacities and on
the dates indicated.


/s/ David B. Barbour                        /s/ C. Cyrus Reynolds               
-----------------------------------         -----------------------------------
David B. Barbour,  President, Chief         C. Cyrus Reynolds,  Chairman of the 
Executive   Officer  and   Director         Board                               
(Principal  Executive and Operating                                             
Officer)                                    

Date: June 26, 1998                         Date:  June 26, 1998


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


Date: June 26, 1998                         Date:  June 26, 1998


/s/                                         /s/ John W. Clark         
-----------------------------------         -----------------------------------
Robert A. Moyer, Jr., Director              John W. Clark, Director   

Date: June 26, 1998                         Date:  June 26, 1998


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

Date: June 26, 1998                         Date:  June 26, 1998


/s/                                         /s/ Jeffrey P. Lopez       
-----------------------------------         -----------------------------------
Robert  L.  Bayes,  Executive  Vice         Jeffrey P. Lopez, Director 
President and Director                      

Date: June 26, 1998                         Date:  June 26, 1998


/s/ A. Bruce Addington           
-----------------------------------         
A. Bruce Addington, Director           

Date: June 26, 1998 


<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.......................................