United States Securities and Exchange Commission
                             Washington, D.C. 20549
                                   Form 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the fiscal year ended December 31, 1996     

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934


                            COMMISSION FILE #0-9623
                                   UST CORP.
                                   ---------
             (Exact name of registrant as specified in its charter)

          MASSACHUSETTS                              04-2436093
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization) 

40 COURT STREET, BOSTON, MASSACHUSETTS             02108
(Address of principal executive offices)        (Zip Code)

(617) 726-7000
(Registrant's telephone number, including area code)

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 $0.625

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.      Yes [X]  No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by Reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The number of shares of common stock held by  nonaffiliates of the registrant as
of  February  20,  1997  was  25,237,309  for  an  aggregate   market  value  of
$525,251,494.

At February 20, 1997,  there were issued and  outstanding  28,288,446  shares of
common stock, par value $0.625 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  registrant's  proxy  statement for the 1997 Annual  Meeting are
incorporated by reference in Items 10, 11, 12 and 13 of Part III.




                          Form 10-K Table of Contents
                          ---------------------------

<TABLE>
<CAPTION>
                                     Part I
<S>                                                                                                      <C>
Item 1  Business                                                                                          1

Item 2  Properties                                                                                        9

Item 3  Legal Proceedings                                                                                10

Item 4  Submission of Matters to a Vote of Security Holders                                              10

                                    Part II

Item 5  Market for the Registrant's Common Stock and Related Security Holder Matters                     10

Item 6  Selected Financial Data                                                                          11

Item 7  Management's Discussion and Analysis of Financial Condition and Results of Operations            11

                Financial Condition at December 31, 1996                                                 12

                Results of Operations                                                                    22

Item 8  Financial Statements and Supplementary Material                                                  30

Item 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure             56

                                    Part III

Item 10 Directors and Executive Officers of the Registrant                                               56

Item 11 Executive Compensation                                                                           59

Item 12 Security Ownership of Certain Beneficial Owners and Management                                   59

Item 13 Certain Relationships and Related Transactions                                                   59

                                    Part IV

Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K                                  59

                Signatures                                                                               63
</TABLE>


                                       ii




                                     PART I

ITEM 1. Business

General Description of Business

UST Corp. (the "Company"),  a bank holding company  registered with the Board of
Governors of the Federal  Reserve  System (the  "Federal  Reserve  Board"),  was
organized as a Massachusetts  business  corporation in 1967. The Company is also
subject  to  examination   by,  and  is  required  to  file  reports  with,  the
Commissioner of Banks of the Commonwealth of Massachusetts  (the  "Massachusetts
Commissioner"). As of December 31, 1996, the Company's banking subsidiaries were
USTrust and United States Trust Company ("USTC"),  each headquartered in Boston.
Subsequently,  on January 3, 1997, the Company acquired Walden Bancorp,  Inc. of
Acton, Massachusetts ("Walden"), and its subsidiary banks, The Co-operative Bank
of Concord ("Concord"), headquartered in Concord, and The Braintree Savings Bank
("Braintree") headquartered in Braintree. The Company's acquisition of Walden is
discussed in further detail under the caption "Recent Developments - Acquisition
of Walden  Bancorp,  Inc." below.  Each of the  Company's  subsidiary  banks are
chartered under  Massachusetts  law.  USTrust,  USTC,  Braintree and Concord are
sometimes hereinafter collectively referred to as the "Subsidiary Banks". All of
the capital stock of the Subsidiary Banks is owned directly or indirectly by the
Company.  In  addition,   the  Company  owns,  indirectly  through  its  banking
subsidiaries,   all  of  the  outstanding   stock  of  three  active  nonbanking
subsidiaries,  all  Massachusetts  corporations:  UST Leasing  Corporation,  UST
Capital  Corp.  and  JSA  Financial  Corporation.  As a  result  of  the  Walden
acquisition,  the Company also acquired Concord's three nonbanking subsidiaries,
Walden Financial Corp., Walden Securities Corp. and Builders Collaborative, Inc.
and  Braintree's  three  nonbanking   subsidiaries,   Braintree  Savings  Corp.,
Braintree Securities Corp. and Bra-Prop Corp. The Company engages in one line of
business,   that  of  providing  financial  services  through  its  banking  and
nonbanking  subsidiaries.  A broad  range  of  financial  services  is  provided
principally to individuals and small- and medium-sized  companies in New England
including  those located in low- and  moderate-income  neighborhoods  within the
Company's  defined Community  Reinvestment Act assessment area. In addition,  an
important  component of the  Company's  financial  services is the  provision of
trust and money  management  services to  professionals,  corporate  executives,
nonprofit organizations,  labor unions, foundations,  mutual funds and owners of
closely-held  businesses most of whom are located in the New England region.  As
of the close of business on December 31, 1996,  the Company's  total assets were
approximately $2.71 billion and USTrust,  the lead bank, had over $2.69 billion,
or 99 percent of the Company's  consolidated assets. As of the close of business
on December 31,  1996,  Walden's  consolidated  assets were  approximately  $1.0
billion.

The Subsidiary Banks

The  Subsidiary  Banks are  engaged  in a general  banking  business  and accept
deposits  which  are  insured  by  the  Federal  Deposit  Insurance  Corporation
("FDIC").  In addition,  Braintree's deposits in excess of FDIC insurance limits
are insured by the Deposit  Insurance Fund of the Mutual  Savings  Central Fund,
Inc. of Massachusetts and Concord's  deposits in excess of FDIC insurance limits
are insured by the Share Insurance Fund of the Co-operative  Central Bank. USTC,
which has full  banking  powers and  accepts  deposits  which are insured by the
FDIC,  focuses its activity on trust and money  management,  venture capital and
other  fee-generating  businesses.   USTrust  and  USTC  are  commercial  banks,
Braintree is a savings bank and Concord is a  co-operative  bank. The Subsidiary
Banks are all located in Massachusetts.

Recent Developments

Acquisition of Twenty (20) Bank of Boston and BayBank Branches On June 18, 1996,
USTrust  entered into an  agreement  with The First  National  Bank of Boston to
purchase certain assets,  deposit liabilities and other liabilities  assigned to
twenty (20) branches in the greater  Boston,  Massachusetts  area. Four (4) were
former  branches  of The First  National  Bank of Boston and  sixteen  (16) were
former  branches of BayBank,  N.A.,  an affiliate of The First  National Bank of
Boston. In December, 1996, the transaction was completed.

                                        1


USTrust assumed approximately $744 million in deposit liabilities and repurchase
agreements and purchased  approximately  $517 million in (i)  commercial  loans;
(ii) residential mortgages;  (iii) home equity and other loans to businesses and
other customers  located within or in areas proximate to the communities  served
by the branches;  (iv) certain fixed  assets;  (v) real property  related to the
owned  branches  (vi)  certain  lease  obligations  with  respect  to the leased
branches and (vii) cash at the  branches.  Additionally,  USTrust paid a premium
equal to 7% of the  aggregate  average  daily  balance  of  deposit  liabilities
assumed  for the  period  commencing  twenty  business  days  prior to the third
business  day prior to the  closing  date and ending on the third  business  day
prior to the closing date. This premium was approximately  $49 million.  USTrust
did not  acquire or retain  any  management  personnel  in  connection  with the
purchase of the branches  nor any  personnel  responsible  for  originating  the
majority of the loans acquired upon consummation of the transaction.

The four (4) former  branches of The First  National  Bank of Boston  opened for
business as USTrust  branches on November  12, 1996 and the sixteen  (16) former
branches of BayBank, N.A. opened for business as USTrust branches on December 9,
1996.

Sale of UST Bank/Connecticut

On August 15,  1996,  the Company  executed a definitive  Agreement  and Plan of
Merger  under  the  terms of which  the  Company  sold its  Connecticut  banking
subsidiary, UST Bank/Connecticut to HUBCO, Inc., a New Jersey based bank holding
company. The transaction was consummated on November 29, 1996 and, at that time,
UST  Bank/Connecticut  was merged with and into  HUBCO's  subsidiary,  Lafayette
American Bank and Trust Company of Bridgeport, Connecticut. UST Bank/Connecticut
operated  four  offices in Fairfield  County with total assets of  approximately
$107 million.  Under the terms of the  Agreement,  the Company  received cash of
$13.4  million  representing  UST  Bank/Connecticut's  adjusted  capital  plus a
deposit premium of 7%.

Acquisition of Walden Bancorp, Inc.

On August  30,  1996,  the  Company  executed  an  agreement  (the  "Affiliation
Agreement")  with Walden pursuant to which the Company would acquire Walden.  On
January 3, 1997, the Company  consummated this acquisition.  Walden was the bank
holding  company  for Concord  and  Braintree,  which  operate an  aggregate  of
seventeen (17) branches in the Massachusetts counties of Middlesex,  Norfolk and
Plymouth with assets aggregating $1 billion. 

The  transaction  was  structured  as a tax-free  exchange  of 1.9 shares of the
Company's  common stock for each share of Walden  common stock and accounted for
as a pooling of  interests.  As of the  closing  date of  January  3, 1997,  the
transaction  was valued at  approximately  $207  million.  A total of 10,125,540
shares of the  Company's  common stock were issued in exchange for the 5,329,232
Walden shares outstanding at the closing date.

The assets  acquired by the Company  from Walden  included  the  physical
premises of (or the leases with  respect to) the  aggregate  of  seventeen  (17)
branches  of  Concord  and  Braintree.  The  Company  also  acquired  all of the
personalty  in  these  branches.   USTrust  has  applied  to  the  Massachusetts
Commissioner and the FDIC seeking permission to merge both Concord and Braintree
with and into USTrust.  The Company  anticipates  that the  transaction  will be
consummated  during the  second  quarter  of 1997.  Until that time,  the branch
locations will continue to operate as branches of Concord and Braintree.

In connection  with the  acquisition  of Walden and pursuant to the terms of the
Affiliation  Agreement,  the Company  also named three (3) former  Directors  of
Walden to the Boards of Directors of the Company and USTrust. The individuals so
elected are David E. Bradbury, G. Robert Tod and Chester G. Atkins. Mr. Bradbury
was formerly the Chairman of the Board,  President,  and Chief Executive Officer
of Walden and Chairman of the Board of Concord. Mr. Tod is the President,  Chief
Operating Officer and a director of the CML Group, Inc., a specialty retailer in
Acton, Massachusetts.  He is also a Director of SCI Systems Inc., of Huntsville,
Alabama, and EG&G, Inc., of Wellesley, Massachusetts. Mr. Atkins is a Partner in
ADS  Ventures,  Inc., of Concord,  Massachusetts.  Mr. Atkins is also the former
United States Congressman from the 5th Congressional District of Massachusetts.

Business Services

The  Subsidiary  Banks  provide  a broad  range of  banking  services  including
deposit, investment, cash management,  payroll, wire transfer, leasing, merchant
credit  card  and  lending  services  throughout  New  England.  Commercial  and
industrial  lending takes the form  primarily of direct loans and includes lines
of credit,  revolving  credits,  domestic  and foreign  letters of credit,  term
loans,  mortgage  loans,  receivable,  inventory and  equipment  loans and other
specialized lending services. Furthermore, the Company provides additional


                                        2


services to small business customers through utilization of government sponsored
and assisted loan programs and through the Company's  Minority  Enterprise  Loan
Program.  Since 1994, USTrust has been certified by the SBA as a "Small Business
Administration  Lender."  USTC  provides  deposit  services  and  other  banking
services,  but focuses its activities on money  management,  venture capital and
other fee-generating services. Through loan participations, each bank is able to
provide credit to businesses in its area up to the aggregate  limit available to
the Company's  subsidiary  banks.  At December 31, 1996,  the lending limit to a
single  borrower of USTrust was  approximately  $35.8  million,  and the lending
limits  for the other  subsidiary  banks,  USTC,  Braintree  and  Concord,  were
respectively $0.4 million, $9.7 million and $8.4 million.

Consumer Services

Consumer  services  are provided by the  Subsidiary  Banks to customers in their
geographic areas. These services include savings and checking accounts,  NOW and
money market  accounts,  consumer  loans,  credit cards (through a private label
arrangement),  ATM and debit cards,  safe deposit box  facilities and travelers'
checks. Consumer loans include home equity loans and lines of credit, automobile
loans, personal loans and loans to finance education costs as well as open-ended
credit. In 1996, the Company ceased providing  residential  mortgage origination
services.   Through  Concord,  the  Company  maintains  a  residential  mortgage
servicing  capacity.  As of February 28, 1997, the aggregate principal amount of
mortgages serviced by the Company was approximately $1.2 billion,  of which $575
million  is  serviced  for  other   institutions.   Automobile  loans  increased
substantially  in 1996 and reached a level of  approximately  $300 million as of
December 31, 1996. In addition,  in 1997 the Company  expects to begin  offering
automobile  leasing  services  to  customers.  The  Company's  Subsidiary  Banks
currently  have an aggregate of 65 offices  which  maintain an automated  teller
machine  system  which,  through  membership in various  networks,  provides the
Company's  customers with access to their  accounts at locations  throughout the
world.  Most of the Company's  proprietary ATM machines  provide  information to
customers in three languages,  English, Spanish and Portuguese, and also provide
information adapted for the visually impaired.

Investment Services

The  Investment  Group  located at USTrust  was formed in 1994.  The  Investment
Group, a service of Essex National  Securities,  Inc. and Essex Insurance Agency
of Massachusetts, Inc., an unaffiliated,  licensed broker-dealer,  offers mutual
funds (whose investments are managed by nonaffiliated  third parties),  Treasury
Bills,  Treasury Notes,  corporate bonds, state, federal and municipal bonds and
discount  brokerage  services to the customers of USTrust.  The Essex  Insurance
Agency of  Massachusetts,  Inc.  also offers  annuities to USTrust  customers at
branch locations.

Real Estate Services

The Subsidiary  Banks provide a broad range of industrial  and  commercial  real
estate lending services and other related financial  services.  In addition,  as
noted  above  under the  caption,  "Consumer  Services,"  Concord  is engaged in
residential mortgage servicing.

Asset and Money Management and Trust Services

Asset and money  management,  custodial and trust services are provided by USTC.
In addition,  USTC provides  services as executor,  administrator and trustee of
estates and acts, under the terms of agreements,  in various  capacities such as
escrow agent, bond trustee and trustee and agent of pension,  profit sharing and
other  employee  benefit  trusts.  At December 31, 1996,  the total assets under
management of USTC were approximately $2.8 billion.  Approximately  one-third of
total assets under management are those of clients who have requested that their
assets  be  managed  with  specified  social  as  well as  financial  investment
objectives in mind. USTC also serves as investment  adviser to a balanced mutual
fund, the Boston Managed Growth Fund.

Securities Portfolios Maintained by the Company

The  Subsidiary  Banks,  both  directly and through  wholly-owned  Massachusetts
securities corporations,  maintain securities portfolios consisting primarily of
U.S. Treasury,  U.S. Government Agency, and corporate and municipal  securities,
some of which are secured by assets.  The  Subsidiary  Banks own an aggregate of
four (4)  Massachusetts  securities  corporations,  namely UST Securities  Corp.
(owned by USTrust),

                                        3



Walden Securities Corporation,  Inc. (owned by Concord) and Bra-Prop Corporation
and  Braintree  Securities  Corp.  (owned by  Braintree).  In 1997,  the Company
organized  a  fifth  company,   USTrust  Securities  Corp.,  as  a  wholly-owned
subsidiary of UST Securities  Corp. As  Massachusetts  securities  corporations,
these subsidiaries make exclusively passive investments and serve the Company by
engaging  exclusively  in  the  buying,  selling,  dealing  in  and  holding  of
securities.

All of the Company's securities are deemed  "available-for-sale"  which enhances
the liquidity  position of the Company and allows for  flexibility in management
of interest rate risk.  The securities  portfolios of the Subsidiary  Banks also
include certain other equity  investments as allowed within limits prescribed by
Massachusetts and federal law. Such investments currently include, among others,
equity interests in the Massachusetts  Housing Investment  Corporation's Limited
Partnership  Equity Fund for Affordable  Housing.  The Treasury  Division of the
Company  provides  securities  portfolio  advisory  services  to  the  Company's
affiliated  banks.  USTrust  is also a member of the  Federal  Home Loan Bank of
Boston.  This membership provides USTrust with access to an additional source of
funds.

Principal Nonbanking Subsidiaries

UST Leasing  Corporation,  a subsidiary of USTrust organized in 1987, provides a
broad  range  of  equipment  leasing  services  to  corporations   headquartered
throughout the United States.  UST Leasing  Corporation offers a line of leasing
products  designed to meet the needs of the Company's  small business  customers
and other  business  entities with similar  needs.  As of December 31, 1996, UST
Leasing Corporation's total assets were approximately $50 million.

UST Capital  Corp.,  organized in 1961 and acquired by the Company in 1969, is a
subsidiary  of USTC and is a licensed  Small  Business  Investment  Company.  It
specializes  in  equity  and  long-term   debt  financing  for   growth-oriented
companies.

JSA  Financial  Corporation,  a  wholly-owned  subsidiary  of the  Company,  was
organized in 1959. In 1995 and 1996 this subsidiary acquired  approximately $1.1
million and $5.1 million,  respectively, of nonperforming and substandard assets
from the Company's former affiliate bank, UST Bank/Connecticut. Since that date,
it has been engaged in an active  program to liquidate  those assets.  As of the
date of this  Report,  the  value of the  assets  remaining  on the books of JSA
Financial Corporation is approximately $4 million (which includes  approximately
$2 million in cash).

Walden Financial Corporation,  organized in 1975, is a subsidiary of Concord. It
operates as a leasing company,  leasing  depreciable  equipment and buildings to
Concord and Braintree.

Competitive Conditions

The Company's banking and nonbanking  subsidiaries face substantial  competition
throughout  Massachusetts.  This  competition  is provided by commercial  banks,
savings banks, credit unions,  consumer finance companies,  insurance companies,
"nonbank  banks,"  mutual  funds,  government  agencies,  investment  management
companies, investment advisors, brokers and investment bankers. In addition, the
Company  anticipates  increased  competition from out-of-state and foreign banks
and bank holding  companies as those entities increase their usage of interstate
banking  powers  granted  since  1983 as well as by the  1994  enactment  of the
Riegle-Neal  Interstate  Banking and Branching Act (discussed under "Supervision
and Regulation of the Company and its Subsidiaries"  below). During the past six
years  several  factors have resulted in the  development  or  establishment  of
fewer, but financially  stronger  competitors in the local markets served by the
Company's banking subsidiaries. The most important of these factors include: (i)
the closing by  regulators  of a number of banks and bank  holding  companies in
Eastern  Massachusetts;  (ii) the acquisition  during the early 1990's of small-
and  medium-sized  banks and bank  holding  companies by the largest New England
bank  holding  companies;  (iii) the  improved  economic  conditions  during the
mid-1990's within the region;  and (iv) the mergers of Fleet Financial Group and
Shawmut  National  Corporation and the Bank of Boston  Corporation and BayBanks,
Inc., which resulted in the creation of two extremely large entities of what had
already been four of the five largest bank holding companies in New England.

Supervision and Regulation of the Company and its Subsidiaries

General

As a bank holding company registered under the Bank Holding Company Act of 1956,
as amended (the "BHC Act"), the Company is subject to substantial regulation and
supervision  by  the  Federal  Reserve  Board.  As  state-chartered  banks,  the
Subsidiary Banks are subject to substantial regulation and supervision

                                        4


by the FDIC and the applicable state bank regulatory  agencies.  Such activities
are often  intended  primarily for the  protection of depositors or are aimed at
carrying out broad public  policy goals that may not be directly  related to the
financial  services  provided by the Company and its  subsidiaries.  Federal and
state banking and other laws impose a number of requirements and restrictions on
the  business  operations,   investments  and  other  activities  of  depository
institutions and their affiliates.

General Supervision and Regulation

The Company, as a bank holding company under the BHC Act, is registered with the
Federal  Reserve  Board and is regulated  under the  provisions  of the BHC Act.
Under the BHC Act the  Company is  prohibited,  with  certain  exceptions,  from
acquiring direct or indirect  ownership or control of more than 5 percent of the
voting  shares  of any  company  which is not a bank and  from  engaging  in any
business other than that of banking, managing or controlling banks or furnishing
services to, or acquiring  premises for, its affiliated  banks,  except that the
Company  may engage in and own voting  shares of  companies  engaging in certain
activities  determined by the Federal  Reserve Board, by order or by regulation,
to be so closely  related to banking or to managing or controlling  banks "as to
be a proper incident thereto."

The Company is required by the BHC Act to file with the Federal Reserve Board an
annual  report and such  additional  reports as the  Federal  Reserve  Board may
require.  The  Federal  Reserve  Board also makes  periodic  inspections  of the
Company and its subsidiaries. The BHC Act requires every bank holding company to
obtain the prior  approval of the Federal  Reserve  Board  before it may acquire
substantially  all of the  assets of any bank,  or  ownership  or control of any
voting shares of any bank, if, after such acquisition,  it would own or control,
directly or indirectly, more than 5 percent of the voting shares of such bank.

Because  the  Company is also a bank  holding  company  under the  Massachusetts
General Laws, the  Massachusetts  Commissioner  has authority to require certain
reports  from the Company  from time to time and to examine the Company and each
of its subsidiaries.  The Massachusetts Commissioner also has enforcement powers
designed to prevent  banks from  engaging in unfair  methods of  competition  or
unfair or deceptive acts or practices involving consumer transactions.  In 1996,
Massachusetts  adopted  legislation  which allows  well-capitalized  banks to be
inspected by  Massachusetts  regulators  once every 18 months in contrast to the
current yearly  examination.  Prior approval of the Massachusetts  Board of Bank
Incorporation  is also  required  before the Company may acquire any  additional
commercial  banks  located in  Massachusetts  or in those  states  which  permit
acquisitions of banking  institutions  located in their states by  Massachusetts
bank holding companies.

The  location  of  nonbank   subsidiaries  of  the  Company  is  not  restricted
geographically  under the BHC Act. In 1989,  after the passage of the  Financial
Institutions  Reform,  Recovery  and  Enforcement  Act of 1989  ("FIRREA"),  the
Federal Reserve Board amended its  regulations  under the BHC Act to permit bank
holding  companies,  as a  nonbanking  activity,  to  own  and  operate  savings
associations  without  geographical  restrictions.  Furthermore,  in  1994,  the
Riegle-Neal  Interstate  Banking  and  Branching  Act of 1994  (the  "Interstate
Banking Act") was enacted. The Interstate Banking Act's provisions,  among other
things:  (i) permit bank holding  companies,  under  certain  circumstances,  to
acquire control of banks in any state, subject to (a) specified maximum national
and state deposit  concentration limits; (b) any applicable state law provisions
requiring  that the acquired  bank has to have been in existence for a specified
period of up to 5 years; (c) any applicable  nondiscriminatory  state provisions
that make an  acquisition  of a bank  contingent  upon a  requirement  to hold a
portion of such bank's assets  available for call by a  state-sponsored  housing
entity; and (d) applicable anti-trust laws; (ii) authorize interstate mergers by
banks in different states,  including branching through bank mergers,  beginning
June 1, 1997,  subject to the provisions noted in (i) and to any state laws that
"opt-in" as of an earlier  date or "opt-out" of the  provision  entirely;  (iii)
authorize states to enact legislation  permitting  interstate de novo branching;
and (iv) provide for parity of treatment for foreign bank branch activities.

In 1996,  Massachusetts  enacted legislation  implementing the provisions of the
Interstate  Banking  Act.  In  the  new  legislation,  Massachusetts  authorized
immediate  "opt  in"  to  interstate   banking.   Thus,  the  1996   legislation
substantially  facilitates the geographic  expansion of banking by Massachusetts
and out-of-state  banks.  Unlike the Subsidiary Banks,  national banks have used
the power  available  under a federal  charter to move a bank's  headquarters 30
miles  or  less  and by that  means  have  accelerated  the  pace of  interstate
branching.

The 1996  legislation also allows  out-of-state  banks to establish and maintain
branches  through a merger or  consolidation  with or the  purchase of assets or
stock of any  Massachusetts  bank or through  de novo  branch  establishment  or
purchase of a branch  without  purchase  of the bank which owns the  branch,  in
Massachusetts,  provided that such out-of-state bank is expressly  authorized to
do so by the laws of the state under which it is organized. The 1996 legislation
also allows Massachusetts banks to establish and


                                        5


 
maintain  branches through a merger or consolidation  with or by the purchase of
the whole or any part of the assets or stock of any out-of-state bank of through
de novo  branch  establishment  in any other  state  other  than  Massachusetts.
Finally,  the 1996  legislation  prohibits  the  establishment  of bank  holding
companies and acquisition of banks and bank holding  companies by  Massachusetts
and out-of-state bank holding companies if the Massachusetts bank to be acquired
has been in existence less than 3 years or if, after such acquisition,  the bank
holding company would control 28% of the deposits in Massachusetts  (until 1998,
when the deposit limitation is increased to 30%).

The  Subsidiary  Banks,  whose  deposits  are  insured  by  the  FDIC,  and  the
subsidiaries  of such banks are subject to a number of regulatory  restrictions,
including certain restrictions upon: (i) extensions of credit to the Company and
the  Company's  nonbanking  affiliates   (collectively  with  the  Company,  the
"Affiliates");  (ii) the purchase of assets from Affiliates;  (iii) the issuance
of a guarantee or acceptance of a letter of credit on behalf of Affiliates;  and
(iv) investments in stock or other securities issued by Affiliates or acceptance
thereof as collateral for an extension of credit. In addition,  all transactions
among the Company and its direct and  indirect  subsidiaries  must be made on an
arm's length basis and valued on fair market  terms.  The  Subsidiary  Banks pay
deposit insurance premiums to the FDIC.

Federal  Reserve  Board policy  requires  bank  holding  companies to serve as a
source of strength to their  subsidiary banks by standing ready to use available
resources to provide  adequate  capital funds to subsidiary banks during periods
of financial  stress or  adversity.  A bank  holding  company also can be liable
under  certain   provisions  of  the  Federal  Deposit   Insurance   Corporation
Improvement  Act  of  1991  ("FDICIA")  for  the  capital   deficiencies  of  an
undercapitalized  bank  subsidiary.  In the  event of a bank  holding  company's
bankruptcy  under Chapter 11 of the U.S.  Bankruptcy  Code,  the trustee will be
deemed to have assumed and is required to cure immediately any deficit under any
commitment by the debtor to any of the federal banking  agencies to maintain the
capital of an insured depository  institution,  and any claim for breach of such
obligation will generally have priority over most other unsecured claims.  Under
the  cross-guarantee  provisions of the Federal Deposit Insurance Act, if any or
all of the Subsidiary Banks were placed in conservatorship or receivership,  the
Company, as sole stockholder, would likely lose its investment in the applicable
Subsidiary  Bank or Subsidiary  Banks,  and, in addition,  its investment in its
other Subsidiary Bank or Subsidiary Banks would be at risk.

The Company and all its  subsidiaries  are also subject to certain  restrictions
with respect to engaging in the issue, flotation,  underwriting,  public sale or
distribution of certain types of securities. In addition, under both Section 106
of the 1970 Amendments to the BHC Act and regulations  which have been issued by
the Federal Reserve Board,  the Company and its subsidiaries are prohibited from
engaging in certain  tie-in  arrangements  in  connection  with any extension of
credit, lease or sale of any property or the furnishing of any service.  Various
consumer  laws and  regulations  also affect the  operations  of the  Subsidiary
Banks.

The Subsidiary Banks,  which are chartered under  Massachusetts law, are subject
to federal requirements to maintain cash reserves against deposits, and to state
mandated  restrictions  upon the nature and amount of loans which may be made by
the banks  (including  restrictions  upon loans to "insiders" of the Company and
its  Subsidiary  Banks)  as  well  as to  restrictions  relating  to  dividends,
investments, branching and other bank activities.

FDICIA  prescribes the  supervisory  and  regulatory  actions that will be taken
against  undercapitalized  insured  depository  institutions for the purposes of
promptly resolving problems at such institutions at the least possible long-term
loss  to  the  FDIC.  Five  categories  of  depository  institutions  have  been
established  by  FDICIA  in  accordance   with  their  capital   levels:   "well
capitalized,"  "adequately  capitalized,"   "undercapitalized,"   "significantly
undercapitalized,"  and  "critically   undercapitalized."  The  federal  banking
agencies have adopted  uniform  regulations  to implement the prompt  regulatory
action provisions of FDICIA.

Under the uniform regulations, a well capitalized institution has a minimum Tier
1 capital-to-total risk-based assets ratio of 6 percent, a minimum Total capital
to total risk-based assets ratio of 10 percent and a minimum leverage ratio of 5
percent and is not subject to any written agreement, order or capital directive.
An  adequately  capitalized   institution  meets  all  of  its  minimum  capital
requirements under the existing capital adequacy guidelines. An undercapitalized
institution  is one  that  fails to meet any one of the  three  minimum  capital
requirements. A significantly  undercapitalized institution has a Tier 1 capital
to total  risk-based  assets  ratio of less than 3  percent,  a Tier 1  leverage
capital  ratio of less than 3 percent  or a Total  capital  to total  risk-based
assets ratio of less than 6 percent. A critically  undercapitalized  institution
has a Tier 1 leverage ratio of 2 percent or less. An  institution  whose capital
ratios meet the criteria for a well capitalized institution may be classified as
an adequately  capitalized  institution due to qualitative  and/or  quantitative
factors other than capital adequacy.  An adequately  capitalized  institution or
undercapitalized  institution may, under certain  circumstances,  be required to
comply with supervisory  action as if it were in the next lower category.  As of
December 31, 1996, all of the Subsidiary  Banks were well  capitalized  with the
exception of USTrust. As of March 5, 1997, all of the Subsidiary Banks were well
capitalized, with the exception of USTrust

                                        6


which was adequately  capitalized.  During a period from the consummation of the
twenty (20) branch  purchase in December 1996 (described in further detail under
the caption entitled,  "Recent Developments - Acquisition of Twenty (20) Bank of
Boston and BayBank Branches"),  until March 5, 1997,  USTrust's total capital to
total  risk-based  assets ratio  temporarily  fell below the  requirements of an
adequately capitalized bank. The Company made a capital contribution on March 5,
1997 to address this requirement.  For further discussion of this matter,  refer
to Note 13 of the Notes to Consolidated Financial Statements.

An undercapitalized institution is required to submit a capital restoration plan
for acceptance by the appropriate  federal banking agency and will be subject to
close  monitoring of both its condition and  compliance  with, and progress made
pursuant to, its capital  restoration plan. The capital restoration plan will be
accepted  only if:  (i) it  specifies  the  steps  that  will be taken to become
adequately  capitalized and the activities in which the institution will engage;
(ii) it is based  upon  realistic  assumptions  and it is likely to  succeed  in
restoring the institution's  capital; (iii) it does not appreciably increase the
institution's  risk  exposure;  and (iv) each holding  company that controls the
institution provides  appropriate  assurances of performance and guaranties that
the  institution  will comply with the plan until the  institution is adequately
capitalized on an average basis for each of four consecutive quarters. Liability
under the guaranty is the lesser of (i) five percent of the institution's  total
assets at the time it became  undercapitalized  and (ii) the amount necessary to
bring the institution into compliance with all applicable  capital  standards as
of the time the institution  fails to comply with the plan. An institution  that
fails to  submit  an  acceptable  plan may be  placed  into  conservatorship  or
receivership   unless   its   capital   restoration   plan   is   accepted.   An
undercapitalized  institution  will also be  subject  to  restrictions  on asset
growth, acquisitions,  branching, new activities,  capital distributions and the
payment of management fees.

FDICIA requires the appropriate regulatory agencies to take one or more specific
actions against significantly undercapitalized institutions and undercapitalized
institutions that fail to submit acceptable  capital  restoration  plans,  which
actions  include but are not limited to: (i) requiring the  institution  to sell
shares or other  obligations to raise capital;  (ii) limiting  deposit  interest
rates;  (iii)  requiring  the  election  of a  new  board  of  directors  and/or
dismissing  senior executive  officers and directors who held such positions for
more  than  180  days  before  the  institution  became  undercapitalized;  (iv)
prohibiting  receipt  of  deposits  from  correspondent   banks,  (v)  requiring
divestiture or liquidation of one or more  subsidiaries;  and (vi) requiring the
parent company to divest the  institution if such  divestiture  will improve the
institution's  financial condition and future prospects. In addition, an insured
institution  that receives a  less-than-satisfactory  rating for asset  quality,
management,  earnings  or  liquidity  may be deemed by its  appropriate  federal
banking  regulator to be engaging in an unsafe or unsound  practice for purposes
of issuing an order to cease and desist or to take certain affirmative  actions.
If the unsafe or unsound  practice  is likely to weaken the  institution,  cause
insolvency  or  substantial  dissipation  of assets  or  earnings  or  otherwise
seriously  prejudice  the  interest  of  depositors  or the FDIC,  a receiver or
conservator could be appointed.  Finally,  subject to certain  exceptions FDICIA
requires critically undercapitalized institutions to be placed into receivership
or conservatorship within 90 days after becoming critically undercapitalized.

The Federal  Reserve Board has indicated  that it will consult with each federal
banking agency  regulating the bank subsidiaries of a holding company to monitor
required   supervisory   actions,   and  based  upon  an   assessment  of  these
developments, will take appropriate action at the holding company level.

Under FDICIA,  federal bank regulators are also required to see that changes are
made in the operations  and/or  management of a bank or bank holding  company if
the financial  institution is deemed to be  "undercapitalized."  Under FDICIA, a
depository   institution   that  is  "adequately   capitalized"  but  not  "well
capitalized"  is  generally  prohibited  from  accepting  brokered  deposits and
offering  interest  rates on deposits  higher than the  prevailing  rates in its
market. In addition,  "pass through" insurance coverage may not be available for
certain employee benefit accounts.

Additional  regulations  adopted  pursuant  to FDICIA  include:  (i) real estate
lending  standards  for  depository   institutions,   which  provide  guidelines
concerning  loan-to-value  ratios for various types of real estate  loans;  (ii)
rules  requiring  depository  institutions  to develop  and  implement  internal
procedures  to evaluate  and  control  credit and  settlement  exposure to their
correspondent banks; (iii) rules implementing the FDICIA provisions prohibiting,
with certain  exceptions,  insured state banks from making equity investments or
engaging in  activities  of the types and amounts not  permissible  for national
banks; and (iv) rules and guidelines for enhanced financial  reporting and audit
requirements.  Rules adopted  pursuant to FDICIA  include:  (i) revisions to the
risk-based  capital guidelines  regarding interest rate risk,  concentrations of
credit risk and the risks posed by  "nontraditional  activities;" and (ii) rules
addressing various "safety and soundness" standards.

In 1995, the Federal Reserve Board provided all bank holding  companies with new
guidelines which direct examiners to provide  separate  supervisory  ratings for
the risk  management  process of all bank  holding  companies.  Pursuant  to the
guidelines, examiners will evaluate the entire spectrum of risks facing


                                        7



the  Company  including,   but  not  limited  to,  credit,  market,   liquidity,
operational,  legal and reputational  risk. Under the guidelines,  examiners are
directed to place primary  consideration  on findings  relating to the following
elements:  (i)  active  board and senior  management  oversight;  (ii)  adequate
policies,  procedures and limits;  (iii) adequate risk measurement,  monitoring,
and management information systems; and (iv) comprehensive internal controls. In
1995,  the Company  established a Risk  Management  Committee to coordinate  the
Company's management of applicable risks which reports to the Audit Committee of
the Board of Directors of the Company.

The status of the Company as a registered  bank holding  company does not exempt
it  from  certain  federal  and  state  laws  and   regulations   applicable  to
corporations generally, including, without limitation, certain provisions of the
federal  securities laws and the Massachusetts  corporate laws. With the passage
of FIRREA in 1989,  the Crime  Control  Act in 1990 and FDICIA in 1991,  federal
bank regulatory agencies, including the Federal Reserve Board and the FDIC, were
granted  substantially  broader enforcement powers to restrict the activities of
financial  institutions  and to impose or seek the imposition of increased civil
and/or  criminal  penalties upon financial  institutions,  the  individuals  who
manage or control such institutions and "institution affiliated parties" of such
entities.

In 1996,  legislation was enacted by Congress providing for the recapitalization
of the Savings  Association  Insurance Fund ("SAIF").  Savings  associations and
commercial banks holding  SAIF-insured  deposits were assessed a one-time charge
in connection with the servicing of the debt incurred with respect to the thrift
bailout  through  the  issuance  of FICO bonds.  USTrust  acquired  SAIF-insured
deposits, indirectly, through an affiliate on September 7, 1990, when it assumed
certain  deposits and  liabilities  of the failed Home Owners Federal Loan Bank,
FSB, from the  Resolution  Trust Company.  USTrust paid a one-time  charge of $3
million in 1996. As a result of the  foregoing,  the deposit  premiums which the
Subsidiary Banks pay to the FDIC have been reduced.

Pursuant  to  the  federal  Community   Reinvestment  Act  ("CRA")  and  similar
provisions of Massachusetts law,  regulatory  authorities review the performance
of the  Company  and its  subsidiary  banks in meeting  the credit  needs of the
communities   served  by  the  subsidiary   banks.  The  applicable   regulatory
authorities  consider  compliance with this law in connection with  applications
for,  among  other  things,   approval  of  branches,   branch  relocations  and
acquisitions  of  banks  and  bank  holding  companies.   USTrust  has  received
"outstanding"  ratings  from  the  FDIC.  The  Massachusetts   Commissioner  has
continued  to  examine  USTC  for  CRA  compliance,  and  currently  rates  USTC
"satisfactory."

In 1994, the federal Riegle Community Development and Regulatory Improvement Act
of 1994 (the "Community Development Act") was enacted. The Community Development
Act established  financial and other assistance for entities involved  primarily
in community development activities.  The Community Development Act's provisions
also,  among  other  items,  (i)  increased  restrictions  on some types of high
interest loans;  (ii) improved small business access to capital;  (iii) required
federal banking  agencies to, among other things,  coordinate  examinations  and
establish uniform regulations and guidelines where appropriate; and (iv) amended
certain  requirements  on insider loans.  The Community  Development Act had the
effect  of  reducing   slightly   certain   regulatory   burdens  on   financial
institutions, including the Company's subsidiaries.

From time to time various  proposals are made in the United States Congress,  as
well as  state  legislatures,  which  would  alter  the  powers  of,  and  place
restrictions  on,  different  types  of bank  organizations  as well as bank and
nonbank  activities.  Such legislative  proposals  include  proposals related to
expansion  of  bank  powers  and  increased   consumer   compliance   disclosure
requirements. In early 1997, federal legislation was proposed which, if adopted,
would grant bank holding  companies broader powers with respect to insurance and
securities   activities.   Under  the  proposed  federal  legislation,   broader
cross-ownership  would be authorized  among  banking,  insurance and  securities
companies.  In addition,  in 1997 legislation which would provide  Massachusetts
chartered  banks  with  broader  insurance  powers  is being  considered  by the
Massachusetts  legislature.  At  this  time it is  unclear  whether  either  the
proposed   federal  or  state   legislation  (in  any  form)  will  be  adopted.
Accordingly,  it is not  possible  to  evaluate  the effect of  adoption of such
proposed legislation on the business of the Company or its subsidiaries.

Supervision,  regulation and  examination  of the  Subsidiary  Banks by the bank
regulatory  agencies  are not  intended  for  the  protection  of the  Company's
security holders.

Governmental Policies, Economic Conditions and Credit Risk Concentration

The earnings and business of the Company's subsidiaries are and will be affected
by a number of external influences, including general economic conditions in the
United  States and  particularly  in New  England  and the  policies  of various
regulatory  authorities  of the United  States,  including  the Federal  Reserve
Board.  The  Federal  Reserve  Board  regulates  the supply of money and of bank
credit to influence  general  economic  conditions  within the United States and
throughout the world. From time to time, the Federal Reserve Board


                                       8



takes specific steps to dampen  domestic  inflation and to control the country's
money supply. The instruments of monetary policy employed by the Federal Reserve
Board for these purposes (including the level of cash reserves banks,  including
nonmember  banks such as all four of the  Company's  banking  subsidiaries,  are
required to maintain  against  deposits)  influence in various ways the interest
rates paid on interest-bearing  liabilities and the interest received on earning
assets,  and the overall  level of bank loans,  investments  and  deposits.  The
impact upon the future  business  and  earnings  of the  Company of  prospective
domestic economic  conditions,  and of the policies of the Federal Reserve Board
as well as other U.S. regulatory authorities, cannot be predicted accurately.

During the period from 1990 through 1993, the Company's primary loan market, the
New England  region,  suffered  from a weak economic  environment.  The economic
climate  contributed  to a decline in real estate values and adversely  affected
the net worth of certain borrowing  customers of the Company's  subsidiary banks
and the Company's  collateral  position with respect to certain  loans.  The New
England regional  economy improved in the mid-1990's,  which aided the Company's
loan workout efforts over the past several years. In 1996,  economic  conditions
in the  Company's  principal  markets  improved at the same moderate pace as the
entire United States economy.  Most of the Company's loans  outstanding are from
borrowers  located in  Community  Reinvestment  Act  delineated  communities  in
Massachusetts and a substantial portion of these loans are various types of real
estate  loans;  still  others  have real  estate as  additional  collateral.  At
year-end 1996, the Company's exposure to credit risk from borrowers who had real
estate as their primary  collateral  support included $729 million of loans. The
Base Lending Rate used by the Company's Subsidiary Banks and the costs they paid
for major sources of funds were  essentially  unchanged.  In late 1996 and early
1997, a number of  commentators  and the Chairman of the Federal  Reserve  Board
suggested that interest rates might increase during 1997. Any renewed  increases
in the Base  Lending  Rate used by the  Company's  Subsidiary  Banks may have an
adverse effect upon the ability of some borrowers to repay their loans. In early
1997,  the prices of marketable  equity  securities  were at  historically  high
levels.  A substantial  diminution in the values of such  marketable  securities
could have an adverse effect upon the ability of some of the Company's borrowers
to repay loans  outstanding to the Company's  Subsidiary  Banks and could reduce
gross fee income generated by the Asset Management Division of the United States
Trust Company.

General

No significant  portion of the loans or deposits of any of the Company's banking
subsidiaries  results  from one or  several  accounts,  the loss of which  would
materially  affect its  business.  The Company does not  experience  significant
seasonal fluctuations in its business.

Employees

As of December  31, 1996,  the Company and its  subsidiaries  had  approximately
1,141 full-time and part-time employees.  After the acquisition of Walden, as of
February 28, 1997,  the Company and its  subsidiaries  had  approximately  1,450
full-time and part-time employees.

ITEM 2. Properties

USTrust owns and occupies a  twelve-story,  112,360  square foot brick and steel
building  constructed  in 1915 and  located at  Government  Center,  30-40 Court
Street, Boston, Massachusetts which houses the banking premises of USTrust, USTC
and the offices of the Company and all of its nonbanking subsidiaries.

The  Company   currently   leases  a  three-story   brick  office   building  of
approximately 37,900 square feet at 196 Broadway, Cambridge,  Massachusetts, all
of which is used by USTrust, as well as 30,487 square feet in an adjacent office
tower at 141  Portland  Street,  Cambridge,  Massachusetts.  USTrust also leases
approximately  26,080  square  feet of  space  at 25-55  Court  Street,  Boston,
Massachusetts, which is used primarily to house staff support services.

USTrust  owns  twenty  branch  offices in  Boston,  Cambridge,  Canton,  Dedham,
Gloucester,  Milton, Milton Village,  Natick, Needham,  Newton, Norwood, Quincy,
Randolph,  Somerville,   Stoughton,  Swampscott,  Waltham,  Watertown  and  West
Roxbury,  Massachusetts.  The  remaining  branch  offices of the USTrust  occupy
leased premises.

Braintree and Concord own 12 branch  offices in Arlington,  Braintree,  Concord,
Hanover,  Lexington,  Norwell, Quincy and Randolph. The remaining branch offices
of Braintree and Concord occupy leased premises.


                                       9



The 1997 annual  leasehold  commitment for all premises  leased by the Company's
subsidiaries,  including  Walden and its  subsidiaries,  totals  $5,449,364  not
including expenses related to tax or maintenance escalation provisions. Refer to
Note 16 to the Notes to Consolidated Financial Statements of this Form 10-K.

ITEM 3. Legal Proceedings

In the ordinary course of operations,  the Company and its  subsidiaries  become
defendants  in a variety of judiciary  and  administrative  proceedings.  In the
opinion  of  management,  however,  there is no  proceeding  pending,  or to the
knowledge  of  management  threatened,  which is likely to result in a  material
adverse  change in the  financial  condition  or  results of  operations  of the
Company and its subsidiaries.

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

At a Special Meeting of Stockholders held on December 17, 1996, the Stockholders
were asked to  consider  and vote upon  proposals  (i) to  approve  and adopt an
Affiliation  Agreement and Plan of  Reorganization  dated as of August 30, 1996,
between  the  Company  and Walden and the  corresponding  Agreement  and Plan of
Merger,  dated  as of  August  30,  1996,  among  the  Company,  an  acquisition
subsidiary  wholly-owned by the Company,  and Walden as well as the transactions
contemplated thereby,  including specifically the issuance of approximately 10.1
million shares of the Company's common stock to persons who were stockholders of
Walden immediately prior to the merger; and (ii) to amend the Company's Restated
Articles of  Organization  to increase  the number of  authorized  shares of the
Company's  common stock from 30,000,000 to 45,000,000.  The following votes were
cast with respect to the two proposals:

                         In Favor       Against   Abstain   Delivered, Not Voted
                         --------       -------   -------   --------------------

Walden Affiliation      10,036,402       34,282    90,617          1,475,432
Common Stock Increase   11,344,981      185,131   104,410              2,210

PART II

ITEM 5. Market for the  Registrant's  Common Stock and Related  Security  Holder
Matters

The common  stock of the  Company is traded  over the  counter  and its price is
quoted on the Nasdaq National  Market System.  During the period January 1, 1995
to December 31, 1996,  the range of high and low sales prices for the  Company's
common stock was as follows:

                                  1996                1995
                                  ----                ----
                             Low       High       Low       High
                             ---       ----       ---       ----
1st Quarter                13         15 1/8     9 3/4     11 3/8
2nd Quarter                12 3/4     15 1/8    10 1/2     13 1/2
3rd Quarter                14 1/4     17 1/8    13 1/4     15
4th Quarter                16 3/4     20 5/8    12 3/4     15 1/2

Such  over-the-counter  market quotations reflect  interdealer  prices,  without
retail markup, markdown or commission and may not represent actual transactions.

The  number of  holders of record of common  stock of the  Company  was 2,894 at
January 31, 1997.

The Company did not pay cash dividends from mid-1991 until the fourth quarter of
1995,  at which time the Company  declared and paid a cash dividend of $0.05 per
share to each holder of its common  stock.  During 1996,  the Company  gradually
increased the cash dividends  declared to $0.08 per share in the fourth quarter.
The Company  declared cash dividends  totaling $0.29 per share to each holder of
its common stock in 1996.

Future  dividends  will depend upon the financial  condition and earnings of the
Company and its subsidiaries,  their need for funds and other factors, including
applicable government regulations and the absence of regulatory objection.

                                       10



ITEM 6. Selected Financial Data

<TABLE>
<CAPTION>
Consolidated Summary of Selected Financial Data (1)

                                                                              Year Ended December 31,

(Dollars in thousands, except share amounts)            1996            1995            1994            1993            1992
                                                        ----            ----            ----            ----            ----
<S>                                                <C>             <C>             <C>             <C>             <C>
Earnings Data:
        Interest income                            $   157,654     $   147,969     $   132,312     $   140,628     $   157,024   
        Interest expense                                61,528          52,535          40,213          47,944          68,970   
                                                   -----------     -----------     -----------     -----------     -----------
        Net interest income                             96,126          95,434          92,099          92,684          88,054   
        Provision (credit) for possible loan losses    (18,600)         13,090          24,281          68,427          42,245   
                                                   -----------     -----------     -----------     -----------     -----------
        Net interest income after    
                provision for possible loan losses     114,726          82,344          67,818          24,257          45,809   
        Noninterest income                              37,288          29,970          30,334          36,723          42,359   
        Noninterest expense                             98,338          88,187          91,355          93,341          95,820   
                                                   -----------     -----------     -----------     -----------     -----------
        Income (loss) before income
                taxes                                   53,676          24,127           6,797         (32,361)         (7,652)   
        Income tax provision (benefit)                  21,014           9,169           2,051         (12,261)         (2,931)   
                                                   -----------     -----------     -----------     -----------     -----------
        Net income (loss)                          $    32,662     $    14,958     $     4,746     $   (20,100)    $    (4,721)
                                                   ===========     ===========     ===========     ===========     ===========
Per share data:   
        Net income (loss)                          $      1.79     $       .83     $       .27     $     (1.31)    $      (.34)   
        Cash dividends declared                    $       .29     $       .05
Weighted average common shares outstanding          18,227,036      18,068,203      17,780,032      15,362,251      13,984,190
Consolidated Average Balances(2):   
        Total assets                               $ 2,066,904     $ 1,836,229     $ 1,881,429     $ 2,042,567     $ 2,270,874   
        Loans                                        1,359,326       1,265,098       1,283,464       1,435,665       1,584,390   
        Deposits                                     1,532,086       1,474,636       1,527,113       1,635,178       1,826,738   
        Funds borrowed(3)                              328,779         185,666         192,115         244,775         268,519   
        Stockholders' investment                       184,967         163,651         152,256         143,149         147,440
Consolidated Ratios:   
        Net income (loss) to average total assets         1.58%            .81%            .25%           (.98)%          (.21)%   
        Net income (loss) to average   
                stockholders' investment                 17.66%           9.14%           3.12%         (14.04)%         (3.20)%   
Average stockholders' investment to 
        average total assets                               8.9%            8.9%            8.1%            7.0%            6.5%   
Net (recoveries) chargeoffs to average loans             (0.3)%            1.7%            1.9%            3.8%            2.6%   
Reserve for possible loan losses to period end loans       2.1%            4.4%            5.0%            4.8%            3.4%   
Average earning assets to average total assets            94.7%           94.8%           93.9%           93.0%           91.2%   
Dividend Payout Ratio                                     16.2%            6.0%
</TABLE>

(1)    This  information   should  be  read  in  connection  with   Management's
       Discussion and Analysis of Financial  Condition and Results of Operations
       of this Form 10-K.

(2)    Average  balances  do not  include  the effect of fair value  adjustments
       under SFAS No.  115,  "Accounting  for  Certain  Investments  in Debt and
       Equity Securities."

(3)    Includes federal funds purchased,  repurchase agreements,  short-term and
       other borrowings.

ITEM 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

The  following  discussion  should  be read in  conjunction  with the  financial
statements,  notes,  and  tables  included  elsewhere  in this Form 10-K for the
fiscal year ended December 31, 1996.  Certain amounts reported for prior periods
have been  reclassified  to conform  to the 1996  presentation.  The  discussion
contains certain forward-looking  statements regarding the future performance of
the Company. All forward-looking  information is inherently uncertain and actual
results may differ materially from the assumptions,  estimates,  or expectations
reflected  or  contained  in the  forward-looking  information.  Please refer to
"Cautionary Statement Regarding  Forward-looking  Information" of this Form 10-K
for a further discussion.


                                       11



Highlights

Operating  results for the year ended  December 31, 1996,  reflect the Company's
emphasis on new business development and acquisition activities.  Net income for
the year,  which  included a number of one-time  charges and credits,  was $32.7
million,  or $1.79 per share, a 118 percent increase over the $15.0 million,  or
$0.83 per  share,  earned in 1995.  Through  business  development  efforts  and
acquisition  activities the Company grew from a resource base of $2.0 billion in
1995 to over $2.7 billion in resources at year-end  1996. In the fourth  quarter
of 1996, the Company's  principal  banking  subsidiary,  USTrust,  completed the
purchase of twenty  banking  branches and  assumption of $744 million in deposit
liabilities  and repurchase  agreements and $508 million in loans from two local
banking subsidiaries of Bank of Boston Corporation ("the Branch Purchase"). Also
during the fourth  quarter the  Company  completed  the sale of its  Connecticut
banking  subsidiary,  UST  Bank/Connecticut   ("UST/Conn").   Other  acquisition
activities  included the  execution of an agreement to acquire  Walden  Bancorp,
Inc.  ("Walden"),  a $1.0 billion  multi-bank  holding company  headquartered in
Acton,  Massachusetts.  The Walden acquisition was completed on January 3, 1997.
Refer to Note 2 to the Notes to the  Consolidated  Financial  Statements of this
Form 10-K for a further discussion of acquisitions and divestitures.

The  one-time  charges and credits that  influenced  1996  earnings  included an
earnings  credit of $18.6  million  recorded  through the provision for possible
loan losses, which reflects the established quality of the loan portfolio. Refer
to  "Credit  Quality  and  Reserve  for  Possible  Loan  Losses"  for a  further
discussion of provisions  and the reserve.  Other one-time items included a $6.8
million  gain from the sale of  UST/Conn,  $5.9  million in  acquisition-related
charges,  and a $3.0  million  assessment  on  certain  deposits  insured by the
Savings Association Insurance Fund ("SAIF").

The continued reduction in foreclosed asset and workout expense and reduced FDIC
insurance  assessments  were also major factors  supporting  the 1996  operating
results.

                    Financial Condition at December 31, 1996

Assets

Total  assets at  December  31,  1996 were  $2.707  billion,  an  increase of 37
percent,  or $738  million  from $1.969  billion a year ago.  The  increase  was
largely  attributed  to the  loans  and  other  assets  acquired  in the  Branch
Purchase,  partially  offset  by the  reduction  in  assets  due to the  sale of
UST/Conn.  Total loans increased $576 million to $1.848 billion  reflecting $508
million in loans  acquired  through the Branch  Purchase  and  internal  growth,
reduced by $70 million in connection  with the UST/Conn sale.  Internal net loan
growth was approximately 11 percent, or $138 million, compared with a slight net
reduction in loans of $5 million,  in 1995.  Federal funds sold  increased  $127
million  primarily  supported by a similar  increase in  short-term  borrowings.
Intangible  assets  increased  $49  million  to $54  million  at  year-end  1996
reflecting a deposit  premium paid in connection with the Branch  Purchase.  The
increase in Premises,  Furniture and Equipment  reflects the fixed assets of the
twenty additional branches acquired in the Branch Purchase. Partially offsetting
these asset  increases  was a  reduction  in  securities  of $47 million to $528
million.

                                       12




Loans

The following table presents the composition of the loan portfolio:

<TABLE>
<CAPTION>
                                                                              December 31,

(Dollars in thousands)                           1996            1995            1994            1993            1992
                                                 ----            ----            ----            ----            ----
<S>                                          <C>             <C>             <C>             <C>             <C>
Commercial and financial                     $   746,762     $   642,940     $   705,075     $   760,446     $   862,590
Commercial real estate: 
        Construction                              27,256          16,937          13,109          35,295          50,427 
        Developer, investor and land             172,390         207,710         265,624         321,965         368,871
Consumer: 
        Residential mortgage                     443,071          85,806          90,643          85,889          57,896 
        Home equity                               86,046          70,066          64,068          63,188          67,010 
        Indirect automobile installment(1)       301,072         197,148          90,255          31,848          42,786 
        Other consumer(1)                         31,026          23,015          21,964          23,944          26,914
Lease financing                                   40,519          28,455          25,945          26,348          28,312     
                                             -----------     -----------     -----------     -----------     -----------
                        Total loans(2)         1,848,142       1,272,077       1,276,683       1,348,923       1,504,806

Reserve for possible loan losses                 (38,789)        (56,029)        (64,088)        (64,465)        (50,478)
                                             -----------     -----------     -----------     -----------     -----------
                                             $ 1,809,353     $ 1,216,048     $ 1,212,595     $ 1,284,458     $ 1,454,328
                                             ===========     ===========     ===========     ===========     ===========
</TABLE>

(1)    Indirect  automobile  installment loans represent loans purchased without
       recourse  from   automobile   dealers  which  conform  to  the  Company's
       underwriting  standards.  The  Company  and its  subsidiary  banks do not
       engage in subprime automobile lending.  Automobile loans made directly to
       consumers are not significant and are included with other consumer loans.

(2)    Excluded  from the loan  balances at December  31, 1996 and 1995 were $.1
       million and $13.1 million, respectively, in loans held-for-sale, recorded
       at net realizable value and classified as other assets.

The loan portfolio mix changed significantly during the year. As of December 31,
1996,  total consumer loans represent 47 percent of the Company's loan portfolio
while  commercial  and  commercial  real estate  loans and leases  represent  53
percent.  This  compares  with a consumer  loan  percentage  of 30  percent  and
commercial  loans and  leases of 70 percent in 1995.  The 1996  increase  in the
consumer loan percentage  reflects portfolio growth and portfolio additions from
the Branch Purchase.

The Company's  commercial loan  portfolios  listed above totaled $946 million at
December 31, 1996, an increase of $79 million from a year ago.  Commercial loans
acquired in the Branch Purchase totaled $111 million while commercial loans sold
in the UST/Conn sale were  approximately $19 million.  Excluding the acquisition
and divestiture activities, commercial loans decreased approximately $13 million
as normal  amortization  slightly outpaced new commercial loan volume during the
year. Prior to 1996 the commercial loan portfolio had been  experiencing a sharp
decline  due to the  combination  of  normal  amortization  and  the  aggressive
reduction  of  problem  loans   through   collection,   chargeoff,   third-party
refinancing, or sale.

Residential  loans  increased $357 million during the year to $443 million.  The
increase  reflects  $380  million of  residential  loans  acquired in the Branch
Purchase  as  reduced  by normal  amortization  during the year and a $9 million
reduction in connection  with the UST/Conn sale.  Internal growth in residential
mortgage  loans in 1996 was minimal as the Company  elected to  discontinue  the
origination  of these  loans.  The  residential  mortgage  industry  has  become
increasingly  the purview of large scale  providers which prompted the Company's
subsidiary banks,  after careful  consideration,  to take such action.  With the
exception of residential  loans obtained through  acquisition,  future growth in
this portfolio is not expected.

The strong  growth in the indirect  automobile  portfolio of the prior two years
continued in 1996. This portfolio totaled $301 million at December 31, 1996, and
reflects net growth of 53 percent,  or $104  million,  this year  compared  with
growth of $107 million last year. The Company's  "Prime Always" home equity loan
product  and  promotional  campaign  produced  a 23  percent  net growth in that
portfolio,  or $16  million.  Such growth is net of a $10 million  reduction  in
connection with the UST/Conn sale. The other consumer loan category increased $8
million  mostly due to acquired  cash reserve  advance  accounts from the Branch
Purchase.  The lease financing  portfolio reflects growth of 42 percent,  or $12
million  during the year.  A portion of this  growth,  $5 million,  was directly
related to the Branch Purchase.


                                       13



Loan Maturity Distribution

The following table reflects the maturity and interest sensitivity of commercial
and financial, and commercial real estate loans, at December 31, 1996:

<TABLE>
<CAPTION>
                                                                     After 1 Year
(Dollars in thousands)                         1 Year or Less       through 5 Years     After 5 Years      Total   
                                               --------------       ---------------     -------------      -----   
<S>                                            <C>                  <C>                 <C>              <C>
Commercial and financial                       $      473,372       $       218,935     $      54,455    $   746,762
Commercial real estate:
        Construction                                    7,790                10,044             9,422         27,256  
        Developer, investor and land                   64,951                78,226            29,213        172,390
                                               --------------       ---------------     -------------    -----------
                                               $      546,113       $       307,205     $      93,090    $   946,408
                                               ==============       ===============     =============    ===========
Interest sensitivity of above loans:
        With predetermined interest rates      $      142,569       $       111,193     $      52,974    $   306,736
        With floating interest rates                  403,544               196,012            40,116        639,672
                                               --------------       ---------------     -------------    -----------
                                               $      546,113       $       307,205     $      93,090    $   946,408
                                               ==============       ===============     =============    ===========
</TABLE>


The Company does not have an automatic  rollover  (renewal)  policy for maturing
loans.  Renewal  requests are reviewed  and approved in  substantially  the same
manner as applications by new customers for extensions of credit.  Additionally,
any renewal of a loan rated  Substandard  or lower in the Company's  credit risk
rating profile  requires the Controlled Loan  Department head approval,  and for
certain  size  loans  and  circumstances,  the  approval  of the  Senior  Credit
Committee and Board of Directors.

Securities

The 1996 decrease of $47 million in securities was due to normal amortization, a
$22 million  reduction in connection  with the UST/Conn  sale,  sales of certain
below  market-yielding  securities,  and net  sales  to  accommodate  cash  flow
requirements.  Adding to the  decrease was a change from an  unrealized  gain on
securities  available-for-sale  of  $1.7  million  at  December  31,  1995 to an
unrealized  loss of $4.3 million at December 31, 1996, a $6 million  decrease in
fair value. The decline in market value of the portfolio was directly related to
the downward movement in bond prices  experienced  earlier in the year. Refer to
Note  1 to  the  Notes  to  Consolidated  Financial  Statements  for  a  further
discussion of the unrealized  valuation adjustment to market value of securities
available-for-sale as required under Statement of Financial Accounting Standards
No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity
Securities."

The change in the market  value of  securities  available-for-sale  also had the
effect of decreasing  stockholders'  investment  by $3.5 million since  year-end
1995. The unrealized gain reported as part of  stockholders'  investment of $1.0
million,  net of tax at December 31, 1995, changed to an unrealized loss of $2.5
million, net of tax at December 31, 1996.

Partially  offsetting  the  above-mentioned  decreases  to  securities  was  the
purchase of $38.9 million in Federal Home Loan Bank of Boston ("FHLBB") stock by
a banking subsidiary,  USTrust. The bank became a member of the FHLBB during the
year and is required to invest in the FHLBB in an amount equal to the greater of
1 percent of  residential  mortgage  loans,  including  certain  mortgage-backed
securities,  or three  tenths  of 1  percent  of  total  assets  or a  specified
percentage of outstanding advances.

The Company has a policy of purchasing securities primarily rated A or better by
Moody's  Investors  Services and U.S.  Government  securities to minimize credit
risk. As of December 31, 1996, all of the Company's  mortgage-backed  securities
were issued by agencies or sponsored  agencies of the U.S.  Government.  Also at
December 31, 1996,  none of the Company's  mortgage-backed  securities  would be
classified  as "high  risk" under  Federal  Financial  Institutions  Examination
Council  guidelines.  All  securities,  however,  carry interest rate risk which
affects their market value such that as market yields increase, the value of the
Company's  securities  declines  and vice versa.  Additionally,  mortgage-backed
securities  carry  prepayment risk where expected yields may not be achieved due
to an inability to re-invest the proceeds from prepayment at comparable  yields.
Moreover,   such   mortgage-backed   securities   may  not  benefit  from  price
appreciation  in periods of declining  rates to the same extent as the remainder
of the  portfolio.  Refer  to  Note 1 to the  Notes  to  Consolidated  Financial
Statements, "Summary of Significant Accounting Policies" of this Form 10-K for a
further  discussion of prepayment  risk. The following table sets forth the book
value of the securities owned by the Company:


                                       14



<TABLE>
<CAPTION>
                                                                                          December 31,
(Dollars in thousands)                                                                1996            1995    
<S>                                                                               <C>              <C>
Available-for-sale:
        Mortgage-backed securities                                                $    216,978     $   246,521
        U.S. Treasury and other U.S. Government agencies and corporations              170,061         196,967
        Obligations of states and political subdivisions*                                2,275           3,254
        Other securities                                                               138,860         128,931
                                                                                  ------------     -----------
                        Total                                                     $    528,174     $   575,673
                                                                                  ============     ===========
*       Non-taxable
</TABLE>

The following table presents maturities for the Company's securities at December
31, 1996, and the approximate  weighted tax equivalent  yields (at the statutory
federal  tax rate of 35  percent).  Mortgage-backed  securities  are shown at or
based on their final  maturity but are expected to have shorter  average  lives.
Considering this, the Company estimates the average life of the entire portfolio
to be 2.2 years.  Yields  presented in this table have been  computed  using the
amortized cost of the securities.

<TABLE>
<CAPTION>
                                                                                Securities Maturing In
                                               1 Year or Less       After 1-Yr. through 5    5-Yrs. through 10    10 Yrs. or more 
(Dollars in thousands)                         Balance  Yield       Balance         Yield    Balance     Yield    Balance   Yield   
                                               -------  -----       -------         -----    -------     -----    -------   -----   
<S>                                            <C>                  <C>                      <C>                  <C>
Available-for-sale: 
  Mortgage-backed securities                                        $    591         8.14%   $ 63,040     6.51%   $153,347   6.16% 
  U.S. Treasury and other U.S. Government 
    agencies and corporations                  $ 3,550   5.62%       142,481         5.50%     24,030     5.48% 
  Obligations of states and political 
    subdivisions                                   201   8.10%           763         8.29%        819     9.18%        492   8.67% 
  Other securities                              30,134   6.21%        54,952         6.03%      7,100     5.36%           
                                               -------              --------                 --------             --------
    Total                                      $33,885   6.16%      $198,787         5.67%   $ 94,989     6.19%   $153,839   6.17%
                                               =======              ========                 ========             ========
</TABLE>

At December 31, 1996,  the Company owned the following  corporate  notes,  whose
aggregate fair value was in excess of 10 percent of stockholders' investment.

(Dollars in thousands)                                    Aggregate Market Value

General Motors Acceptance Corporation Medium Term Notes          $20,102      

The corporate  notes are  unsecured  and are of  investment  grade and carry the
normal credit risk associated with such instruments.

Liquidity and Funding

Liquidity  involves  the  Company's  ability to raise or gain access to funds in
order to fulfill its existing and anticipated financial  obligations.  It may be
provided  through  amortization,  maturity  or sale of assets  such as loans and
securities  available-for-sale,  liability  sources such as increased  deposits,
utilization of the FHLBB credit facility, purchased or other borrowed funds, and
access to the capital markets.  The Company's securities portfolio is classified
entirely as  available-for-sale,  which provides the flexibility to sell certain
securities  based upon changes in economic or market  conditions,  interest rate
risk and the Company's financial position and liquidity.

At December 31, 1996, liquidity,  which includes excess cash, federal funds sold
and unpledged  securities,  totaled approximately $283 million, or 10 percent of
total assets, a $34 million decrease from 1995.

The funds needed to support the Company's  loan and  securities  portfolios  are
provided  through a combination of commercial and retail deposits and short-term
borrowings.  Total  deposits  increased $593 million,  or 39 percent,  to $2.106
billion since  December 31, 1995.  The large increase in deposits was due to the
assumption of $667 million in deposits as part of the Branch Purchase  partially
offset by a reduction  of $95 million in  connection  with the sale of UST/Conn.
These  significant  events had the effect of  increasing  NOW,  money market and
regular  savings  deposits by $339  million.  In  addition,  noninterest-bearing
deposits increased $167 million and time deposits increased $87 million.

                                       15



As shown in the Consolidated Statements of Cash Flows, cash and cash equivalents
increased  $21.7  million  during 1996.  Cash  provided by  operations  resulted
largely  from net  interest  income  from  loans  and  securities,  less the net
difference of  noninterest  expense over  noninterest  income.  Cash provided by
financing activities was due principally to the net increases in deposits and in
short-term and other  borrowings,  offset in part by dividends paid and treasury
stock  acquisitions.  Net  cash  used  by  investing  activities  was due to net
increases in federal  funds sold and loans  offset in part by net cash  acquired
from the Branch Purchase,  net proceeds from the sale of a bank subsidiary,  and
an excess of proceeds from the sales and maturities of securities over purchases
of securities.

At December  31,  1996,  the parent  company had $1 million in cash and due from
banks and $14 million in short-term  securities  purchased  under  agreements to
resell,  compared  with $1  million  cash and due from  banks and $5  million in
short-term securities purchased under agreements to resell at December 31, 1995.

For the year ended December 31, 1996, the Company received a total of $6 million
in dividends from its asset management and trust subsidiary, United States Trust
Company  ("USTC"),  $5.7 million  from  USTrust,  $1 million from JSA  Financial
Corporation ("JSA"), a nonbanking  subsidiary of the Company specializing in the
liquidation of problem  assets,  and $3 million from  UST/Conn.  During the same
period $13 million was  contributed  to USTrust.  This capital  contribution  to
USTrust  facilitated  the  purchase  of 20  former  Bank of Boston  and  BayBank
branches.

Deposits

The following  table sets forth the  remaining  maturities  of  certificates  of
deposit in the amount of $100 thousand or more at December 31, 1996:

(Dollars in thousands)
Less than three months                                       $       80,210
Three to six months                                                  14,779
Six to twelve months                                                  9,707
Over twelve months                                                   14,166
                                                             --------------
        Total                                                $      118,862
                                                             ==============

Short-term Borrowings

The  Company's   short-term   borrowings  consist  primarily  of  federal  funds
purchased,  securities sold under agreements to repurchase and FHLBB borrowings.
These instruments are generally overnight funds.

<TABLE>
<CAPTION>
                                    December 31,                        For the Year Ended December 31, 
                             -------------------------       -------------------------------------------------------
                                      Weighted Average         Maximum Amount     Average Amount    Weighted Average
(Dollars in thousands)       Balance     Interest Rate       at Any Month End        Outstanding       Interest Rate
                             -------     -------------       ----------------        -----------       -------------
<S>                         <C>              <C>                  <C>                <C>                   <C>
Federal funds purchased:
        1996                $ 96,677         5.73%                $   96,677         $  68,551             5.35%   
        1995                  57,406         5.63%                    58,013            40,020             5.86%   
        1994                  19,296         6.00%                    35,061            29,090             4.14%

Securities sold under agreements to repurchase:   
        1996                $236,552         4.73%                $  286,109         $ 227,265             4.70%   
        1995                 172,689         4.73%                   172,689           127,752             4.85%   
        1994                 126,597         4.48%                   155,709           137,139             3.22%

FHLBB borrowings:   
        1996                                                      $  272,500         $  24,795             5.48%
</TABLE>

Interest Rate Risk

Volatility in interest rates  requires the Company to manage  interest rate risk
which  arises  from  differences  in the  timing  of  repricing  of  assets  and
liabilities.   Management   monitors   and   adjusts  the   difference   between
interest-sensitive  assets and  interest-sensitive  liabilities ("GAP" position)
within  various time frames.  An  institution  with more assets  repricing  than
liabilities  within a given time frame is considered asset sensitive  ("positive
GAP") and in time  frames  with more  liabilities  repricing  than  assets it is
liability sensitive

                                       16


 
("negative GAP").  Within GAP limits established by the Board of Directors,  the
Company  seeks to balance the objective of  insulating  the net interest  margin
from rate exposure with that of taking advantage of anticipated changes in rates
in order to  enhance  income.  The  Company's  policy is to limit  its  one-year
cumulative GAP position to 2.5 times equity, presently equal to approximately 18
percent of total assets. The Company has historically  managed its interest rate
GAP  primarily  by  lengthening  or  shortening  the  maturity  structure of its
securities portfolio.

The   Company's  GAP   presentation   may  not  reflect  the  degrees  to  which
interest-earning  assets  and core  deposit  costs  respond to changes in market
interest rates. The Company's  rate-sensitive  assets consist primarily of loans
tied to the prime rate and to a lesser extent the London Interbank  Offered Rate
("LIBOR").  A small  decline  in the prime  rate was  realized  during the first
quarter of 1996, which,  along with a general external pressure on loan pricing,
had the effect of a reduction in the Company's yield on earning assets.

The following table  summarizes the Company's GAP position at December 31, 1996.
The majority of commercial  loans, as well as home equity loans, are included in
0-30  days  as  they  reprice  in  response  to  changes  in the  interest  rate
environment.   Interest-bearing  deposits  are  classified  according  to  their
expected  interest rate  sensitivity.  Actual  sensitivity  of these deposits is
reviewed  periodically and adjustments are made in the Company's GAP analysis as
management deems appropriate. Securities and noninterest-bearing demand deposits
are  categorized  according to their expected lives based on published  industry
prepayment  estimates in the case of securities and current management estimates
for demand deposits.  Securities are evaluated in conjunction with the Company's
asset/liability  management strategy and may be purchased or sold in response to
expected or actual changes in interest rates, credit risk, prepayment risk, loan
growth and similar factors.  The reserve for possible loan losses is included in
the  "Over 1 Year"  category  of loans.  At  December  31,  1996,  the  one-year
cumulative GAP position was positive at $61 million,  or approximately 2 percent
of total assets.

<TABLE>
<CAPTION>
                                                                         Interest Sensitivity Periods
(Dollars in millions)                             0-30 Days       31-90 Days      91-365 Days     Over 1 Year     Total
                                                  ---------       ----------      -----------     -----------     -----
<S>                                               <C>              <C>             <C>             <C>           <C>
Loans, net of reserve                             $   787          $    40         $   162         $    820      $  1,809
Federal funds sold                                    127                                                             127
Securities                                             25               50              68              385           528
Other assets                                           26                                               217           243     
                                                  -------          -------         -------         --------      --------
                Total assets                      $   965          $    90         $   230         $  1,422      $  2,707
                                                  -------          -------         -------         --------      ========
Interest-bearing deposits                         $   412          $    96         $   249         $    809      $  1,566
Borrowed funds                                        348                                                             348
Noninterest-bearing deposits                          119                                               421           540
Other liabilities and stockholders' equity                                                              253           253     
                                                  -------          -------         -------         --------      --------
                Total liabilities and equity      $   879          $    96         $   249         $  1,483      $  2,707
                                                  -------          -------         -------         --------      ========
GAP for period                                    $    86          $    (6)        $   (19)        $    (61)
                                                  =======          -------         -------         --------
Cumulative GAP                                                     $    80         $    61         $      0
                                                                   =======         =======         ========
As a percent of total assets                         3.18%            2.96%           2.25%

</TABLE>

Capital

There are three capital requirements which banks and bank holding companies must
meet. Two requirements take into consideration risks inherent in assets for both
on- and off-balance sheet items on a risk-weighted basis ("risk-based  assets").
Risk  weightings  are as determined by banking  regulators for the industry as a
whole. Under these requirements,  the Company must meet minimum Tier 1 and Total
risk-based  capital ratios (capital,  as defined in the regulations,  divided by
risk-based assets) of 4 percent and 8 percent,  respectively.  Tier 1 capital is
essentially  shareholders'  investment,  net of  intangible  assets  and  Tier 2
capital is the  allowable  portion of the loan loss  reserve  (as  defined)  and
discounted  subordinated  debt.  Total capital is the  combination of Tier 1 and
Tier 2. The third  requirement is a leverage  capital  ratio,  defined as Tier 1
capital  divided by total average assets,  net of intangibles.  All but the most
highly-rated banks are required to maintain a minimum of 4 percent.  The Company
has not been  notified of a specific  requirement  above the minimum.  All three
capital  ratios  are  calculated  excluding  the  effect  of  SFAS  No.  115 and
unrealized gain/loss on securities available-for-sale.


                                       17



As a condition to FDIC approval of the acquisition of sixteen BayBank  branches,
USTrust was  required to have a Tier 1 leverage  capital  ratio of not less than
(i) 4.8 percent, no later than ten days after consummation of the acquisition of
the  BayBank  branches;  and (ii) 5 percent,  no later than three  months  after
acquisition of the BayBank  branches and for a period of six months  thereafter.
The Company  currently  anticipates that USTrust will maintain a Tier 1 leverage
ratio  equal to or in excess  of the  foregoing  conditions.  In  addition,  the
Company expects that the foregoing  conditions will not have a material  adverse
impact on the future operations of USTrust.

As of December 31, 1996, all of the subsidiary banks were well capitalized, with
the exception of USTrust.  As of March 5, 1997, all of the subsidiary banks were
well capitalized with the exception of USTrust which was adequately capitalized.
During a period from the  consummation of the Branch Purchase in December,  1996
(described in further detail under the caption entitled,  "Recent Developments -
Acquisition  of Twenty (20) Bank of Boston and BayBank  Branches,"  in Part I of
this  Form  10-K)  until  March  5,  1997,  USTrust's  Total  capital  to  total
risked-based   assets  ratio  temporarily  fell  below  the  requirement  of  an
adequately  capitalized bank. The Company made a capital contribution to USTrust
on March 5, 1997 in order to meet this  requirement.  For further  discussion of
capital  requirements,  refer to Note 13 of the Notes to Consolidated  Financial
Statements.

In 1996, the Company declared quarterly cash dividends totaling $5.2 million, or
$0.29 per share, to  stockholders.  Also,  during the year the Company  received
dividends from  subsidiaries of $6 million from USTC, $5.7 million from USTrust,
$1 million from JSA Financial Corporation and $3 million from UST/Conn, a former
banking subsidiary sold during the year. The Company  contributed capital of $13
million to USTrust in 1996 to facilitate the Branch Purchase.

In 1995, the Company's Board of Directors  approved a stock  repurchase  program
and the Company adopted a shareholder  rights plan. The stock repurchase program
was terminated in 1996 and all shares acquired  thereunder were reissued.  Refer
to Note 13 to the Notes to Consolidated  Financial  Statements of this Form 10-K
for a discussion.

Credit Quality and Reserve for Possible Loan Losses

At year-end  1995,  the Company  had reduced the level of  substandard  loans to
levels which were comparable to industry peer group averages.  While improvement
in credit  quality is no longer a major  strategic  focus,  the Company  remains
committed to the maintenance of its current credit standards and in ensuring the
continued  quality of the loan and lease  portfolios.  This year the Company was
successful  in further  reducing the level of  substandards  from $44 million at
year-end 1995 to $30 million at December 31, 1996, a 32 percent reduction. Loans
reported as substandard include loans classified as Substandard or Doubtful,  as
determined by the Company in its internal credit risk rating profile.  Under the
Company's definition,  Substandard loans, which include loans on nonaccrual, are
characterized  by the distinct  possibility  that some loss will be sustained if
the credit  deficiencies  are not  corrected.  The  Substandard  classification,
however,  does not  necessarily  imply ultimate loss for each individual loan so
classified.  Loans  classified as Doubtful have all the  weaknesses  inherent in
Substandard  loans  with  the  added  characteristic  that the  weaknesses  make
collection of 100 percent of the assets questionable and improbable.

At December 31, 1996,  Substandard and Doubtful loans were $29.1 million and $.5
million,  respectively.  Substandard  loans  include  $5.6  million of  accruing
commercial  and commercial  real estate loans,  of which 99 percent were current
with respect to contractual  principal and interest payments,  and $23.5 million
in loans that were on nonaccrual and included in  nonperforming  assets.  All of
the loans rated  Doubtful  were on  nonaccrual  and  included  in  nonperforming
assets. Also, at December 31, 1996, loans rated Special Mention in the Company's
internal  risk  rating  profile  amounted  to $4.2  million,  all of which  were
current.  Special  Mention  loans,  as defined by the  Company,  have  potential
weaknesses that deserve management's close attention. If left uncorrected, these
potential  weaknesses may result in deterioration of the repayment prospects for
the assets.

As of year-end 1996, approximately 35 percent of loans classified as Substandard
or  Doubtful  were  collateralized  by  real  estate,  and  the  remainder  were
collateralized by accounts receivable,  inventory,  equipment and other business
assets.  Of the loans  secured by real  estate,  approximately  60 percent  were
collateralized by owner-occupied commercial properties, approximately 30 percent
were collateralized by commercial real estate  development,  and approximately 5
percent by residential real estate.  The remaining loans were  collateralized by
real estate under construction and raw land.


                                       18




Nonperforming Assets

The following  table sets forth the  Company's  total  nonperforming  assets and
performance measures regarding key indicators of asset quality:

<TABLE>
<CAPTION>
                                                                               December 31,
(Dollars in thousands)                                      1996      1995        1994       1993        1992    
                                                            ----      ----        ----       ----        ----
<S>                                                      <C>         <C>         <C>        <C>         <C>
Nonperforming assets: 
  Nonaccruals:   
          Commercial and financial                       $ 22,680    $ 14,531    $ 36,754   $ 28,511    $ 55,893 
          Commercial real estate:  
                  Construction                                 16          44         551      1,025      16,558  
                  Developer, investor and land              1,495       3,114      18,447     25,475      24,461 
          Consumer:  
                  Residential mortgage                        887         956       3,373      3,601       2,518  
                  Home equity                                 522         741         656        190       1,240  
                  Indirect automobile installment             778         446         134         40         271  
                  Other consumer                               46          98          29        540         550 
                                                         --------    --------    --------   --------    --------
  Total nonaccrual                                         26,424      19,930      59,944     59,382     101,491 
  Accruing loans 90 days or more past due                     363         257       1,409        557       1,091 
  Other real estate owned (OREO), net(1)                      688       3,015       9,958     11,270      28,644 
  Restructured loans(2)                                        45       5,783      15,757     41,477      44,899
                                                         --------    --------    --------   --------    --------
Total nonperforming assets                               $ 27,520    $ 28,985    $ 87,068   $112,686    $176,125
                                                         ========    ========    ========   ========    ========
Reserve for possible loan losses                         $ 38,789    $ 56,029    $ 64,088   $ 64,465    $ 50,478
Net (recoveries) chargeoffs                              $ (3,464)   $ 21,149    $ 24,658   $ 54,440    $ 41,867
OREO reserve                                             $    320    $    568    $  1,044   $  4,635    $    389

Ratios:
Reserve to nonaccrual loans                                 146.8%      281.1%      106.9%     108.6%       49.7%
Reserve to total of nonaccrual loans, accruing loans 
  90 days or more past due and restructured loans           144.6%      215.7%       83.1%      63.6%       34.2%
Reserve to period-end loans                                   2.1%        4.4%        5.0%       4.8%        3.4%
Nonaccrual loans to period-end loans                          1.4%        1.6%        4.7%       4.4%        6.7%
Nonaccrual loans and accruing loans over 90 days past
 due to period-end loans                                      1.4%        1.6%        4.8%       4.4%        6.8%
Nonperforming assets to period-end loans and OREO             1.5%        2.3%        6.8%       8.3%       11.5%
Nonperforming assets to total assets                          1.0%        1.5%        4.8%       5.5%        8.1%
Net (recoveries) chargeoffs to average loans                 (0.3%)       1.7%        1.9%       3.8%        2.6%
OREO reserve to OREO                                         31.7%       15.9%        9.5%      29.1%        1.3%
</TABLE>

(1)    Other real estate owned ("OREO")  represents assets to which title to the
       collateral has been taken through  foreclosure or in settlement of loans.
       Other  real  estate  owned  is  recorded  at the  lower  of the  recorded
       investment in the loan or fair value minus  estimated costs to sell ("net
       realizable  value").  Included  in OREO are  automobiles  owned which are
       vehicles  repossessed for reason of nonpayment.  The balance is stated at
       the lower of the recorded investment in the loan or net realizable value.

(2)    Restructured  loans are  those  where  interest  rates  and/or  principal
       repayments have been  restructured to defer or reduce payment as a result
       of financial difficulties of the borrower.

As exhibited in the preceding table,  the steep decline in nonperforming  assets
in the earlier years leveled off in 1996.  Nonperforming  assets at December 31,
1996 of $28 million were within  industry  norms  relative to the Company's size
and total volume of loans.  Nonaccrual  loans  increased from $19.9 million last
year to $26.4 million at year-end 1996. The December 31, 1996 balance includes a
$8  million  loan to a single  commercial  borrower  which paid off in the first
quarter of 1997 with a minor  chargeoff of loan  principal.  Restructured  loans
decreased  from $5.8  million  last  year to a nominal  amount  this  year.  The
improvement in asset quality and reduction in  nonperforming  loans has directly
contributed to the decreasing amount of net chargeoffs  recorded by the Company.
In 1996, the Company  recorded net recoveries of $3.4 million.  Nonaccrual loans
were 1.4 percent of total loans at December 31, 1996 compared with 1.6 percent a
year ago.  Nonperforming  assets were 1.0 percent of total assets  compared with
1.5 percent last year.

                                       19



At December 31, 1996, total impaired loans were $24.2 million,  comprised of $.5
million  that  required a reserve  for  possible  loan losses of $.3 million and
$23.7 million that did not require a related reserve. Impaired loans, as defined
in  Statement  of  Financial  Accounting  Standards  No. 114  ("SFAS No.  114"),
"Accounting  by  Creditors  for  Impairment  of  a  Loan,"  are  commercial  and
commercial  real  estate  loans  recognized  by the  Company as  nonaccrual  and
restructured.  Refer to Note 1 to the Notes to Consolidated Financial Statements
of this  Form 10-K for a  further  discussion  on SFAS No.  114.  The  amount of
interest on December 31, 1996  impaired  loans that would have been recorded had
the loans been paying in accordance  with their  original  terms during 1996 was
approximately  $2.6  million.  The  amount of  interest  income  on these  loans
included in net income in 1996 was approximately $.5 million.

Credit Quality Monitoring

Credit quality within the commercial and commercial  real estate loan portfolios
of each  subsidiary  is  quantified  by an internal  credit  risk rating  system
designed to parallel  regulatory  criteria and categories of loan risk.  Lenders
monitor  their  loans to ensure  appropriate  rating  assignments  are made on a
timely  basis.  Risk  ratings and overall  loan  quality are also  assessed on a
regular  basis by an  independent  Loan Review  Department  which reports to the
Company's  Board of  Directors  and its Asset  Quality  Committee.  Loan  Review
personnel conduct ongoing portfolio trend analyses and individual credit reviews
to evaluate loan risk and compliance with corporate  lending  policies.  Results
and recommendations from this process provide senior management and the Board of
Directors and its Asset Quality  Committee with independent  information on loan
portfolio condition.  The Asset Quality Committee monitors asset quality monthly
and actively reviews the large credit exposures.

The Company's commercial lending, credit and loan administration departments are
charged  with  ensuring   compliance  with  lending  policies,   procedures  and
administrative   guidelines  for  the  commercial  portfolio.  In  addition,  an
Appraisal Department reviews third-party real estate loan collateral  appraisals
to ensure adherence to federal  requirements and the Company's lending policies.
There is a Controlled  Loan Department  with  specialized  expertise in handling
most of the Company's  nonaccrual and other troubled  loans.  In order to ensure
the effectiveness of credit quality monitoring systems,  monitoring controls are
periodically reviewed and tested by the Company's Internal Audit Department.

The credit quality of the lease financing  receivables  portfolio is measured by
the same  credit  rating  system  described  above.  Consumer  loan  quality  is
evaluated on the basis of delinquent  data due to the large number of such loans
and  relatively  small size of individual  credits.  Historical  trend  analysis
reports  are  reviewed on a monthly  basis by senior  lending  officers  and the
Company's Board of Directors.

Past due nonconsumer loans,  nonaccrual loans, and troubled debt  restructurings
are reviewed at least quarterly by a Special Assets  Committee whose  membership
includes  the Chief  Executive  Officer of the Company,  Loan Review  Department
management  and the most  senior  lending  officers  in the  major  lending  and
credit-related divisions.  Loans are placed on nonaccrual when there is doubt as
to the collectibility of interest or principal,  or if loans are 90 days or more
past due unless they are both well secured and in the process of collection.  In
every case, a loan reaching 180 days past due is placed on nonaccrual.

Reserve for Possible Loan Losses

The  Company  maintains  a reserve for  possible  loan  losses to absorb  future
chargeoffs  of loans and  leases  in the  existing  portfolio.  The  reserve  is
increased when a loan loss provision is recorded in the income statement. When a
loan, or portion thereof, is considered uncollectible, it is charged against the
reserve.  Recoveries on amounts previously  charged-off are added to the reserve
when  collected.  Adequacy of the reserve for possible loan losses is determined
using a consistent,  systematic  methodology which analyzes the size and risk of
the loan and  lease  portfolio  on a monthly  basis.  Factors  in this  analysis
include   historical  loss  experience  and  asset  quality,   as  reflected  by
delinquency  trends,  nonaccrual and restructured loans and the Company's credit
risk rating  profile.  Consideration  is also given to the current and  expected
economic conditions and, in particular,  how such conditions affect the types of
credits in the  portfolio  and the market  area in  general.  This  analysis  is
documented  using a  combination  of  numerical  and  qualitative  analysis  and
includes sensitivity testing and a written conclusion.

No portion of the reserve is restricted  to any loan or group of loans,  and the
entire reserve is available to absorb realized losses.  The amount and timing of
realized losses and future reserve  allocations may vary from current estimates.
An allocation of the reserve for possible loan losses and ratio of loans in each
category to total loans at December 31, 1992 through 1996 is presented below:


                                       20



<TABLE>
<CAPTION>
                                                                   December 31,
                                           1996                       1995                        1994          
                                   ----------------------     ----------------------    ------------------------
                                               Loans as a                 Loans as a                  Loans as a
                                   Allocation  Percent of     Allocation  Percent of    Allocation    Percent of
(Dollars in thousands)                 Amount Total Loans     Amount     Total Loans        Amount   Total Loans
<S>                                <C>                        <C>                       <C>                     
Amount of loan loss reserve:
Commercial and financial           $   15,263     40.3%       $   20,055    50.6%       $   30,962      55.3%   
Commercial real estate:  
        Construction                      524      1.5%              495     1.3%              538       1.0%   
        Developer, investor 
           and land                     2,404      9.3%            4,802    16.3%            8,885      20.8%   
Consumer*                              11,022     46.7%            8,515    29.6%            6,028      20.9%   
Lease financing                           541      2.2%              356     2.2%              130       2.0%   
Unallocated                             9,035                     21,806                    17,545              
                                   ----------    -----        ----------   -----        ----------     -----    
                Total              $   38,789    100.0%       $   56,029   100.0%       $   64,088     100.0%   
                                   ==========    =====        ==========   =====        ==========     =====    



                                                 December 31,
                                           1993                       1992
                                   ----------------------     ----------------------
                                               Loans as a                 Loans as a
                                   Allocation  Percent of     Allocation  Percent of
(Dollars in thousands)                 Amount Total Loans         Amount Total Loans
Amount of loan loss reserve:
Commercial and financial           $   38,123    56.3%        $   25,702     57.3%
Commercial real estate:  
        Construction                    1,648     2.6%             1,399      3.4%  
        Developer, investor 
           and land                    12,426    23.9%             8,453     24.5%
Consumer*                               5,470    15.2%             4,762     12.9%
Lease financing                           132     2.0%               142      1.9%
Unallocated                             6,666                     10,020           
                                   ----------   -----         ----------    -----
                Total              $   64,465   100.0%        $   50,478    100.0%
                                   ==========   =====         ==========    =====

</TABLE>

* Consumer loans include  indirect  automobile  installment  loans,  residential
mortgages and home equity lines of credit, credit cards, and check credit loans.

The reserve for possible  loan losses was $38.8  million at December 31, 1996, a
decrease of $17.2 million from the $56.0  million a year ago. Net  chargeoffs of
$1.7 million in the first quarter of this year were offset with a similar amount
of  provision  for  possible  loan  losses.  In the second  quarter  the Company
realized $5.1 million in net recoveries on loans  previously  charged off. This,
along  with the  Company's  risk  rating and  reserve  adequacy  indicators  and
continued  improvement  in asset  quality,  provided  a basis  to  record a $5.5
million credit provision in that quarter. In the third quarter,  upon receipt of
final results from the federal and state regulatory  agencies annual examination
and following its internal analysis of reserve adequacy,  the Company recorded a
$14.6 million credit provision. Also during the third quarter, net recoveries of
$584 thousand were  recorded.  In the fourth  quarter of 1996, net chargeoffs of
$518  thousand  and the  elimination  of the $2.1  million  reserve  of the sold
banking  subsidiary,  UST/Conn,  decreased  the reserve to $38.8 million at year
end.

The $18.6  million  credit  provision  recorded to the reserve for possible loan
losses  during the year  decreased the  unallocated  portion of the reserve from
$21.8 million,  or 39 percent of the reserve, a year ago to $9.0 million,  or 23
percent of the reserve at December 31,  1996.  The reserve  requirement  for the
commercial  loan  portfolios was reduced $7.2 million due to the  combination of
the favorable  examination  results which confirmed the Company's  internal risk
rating  indicators  and reserve  adequacy  analysis,  and the trend and level of
recoveries.  The consumer loan reserve requirement increased $2.5 million due to
the acquisition of residential loans containing no delinquencies from the Branch
Purchase and internal growth in indirect automobile loans and home equity loans.

As of December 31, 1996, the Company's  reserve ratios were more closely aligned
with  those of  comparable  institutions,  as the  reserve  was 147  percent  of
nonaccruals,  141 percent of total nonperforming assets and 2.1 percent of total
loans.



                                       21




A summary of loan loss  experience for the years ended December 31, 1992 through
1996 is presented below:

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
(Dollars in thousands)                                         1996        1995        1994        1993        1992
                                                               ----        ----        ----        ----        ----
<S>                                                        <C>         <C>         <C>         <C>         <C>
Reserve for loan losses at beginning of period             $   56,029  $   64,088  $   64,465  $   50,478  $   50,100
Chargeoffs: 
  Commercial and financial                                      3,388       8,823      15,320      29,789      24,012 
  Commercial real estate:  
          Construction                                                        511         197       1,705         924  
          Developer, investor and land                            256      16,531      13,483      23,387      10,788 
  Consumer:  
          Residential mortgage                                    256       1,845         897         686       1,250
          Home equity                                              51         403         119         370         673  
          Indirect automobile installment                       1,736         844         806       1,981       2,181  
          Other consumer                                          172         117         237         280       3,386 
                                                           ----------  ----------  ----------  ----------  ----------
          Total chargeoffs                                      5,859      29,074      31,059      58,198      43,214
                                                           ----------  ----------  ----------  ----------  ----------
Recoveries: 
 Commercial and financial                                       4,875       4,236       4,319       1,628         688 
 Commercial real estate:  
         Construction                                              35         181          32          24           9  
         Developer, investor and land                           3,104       1,799       1,034         928 
 Consumer:
         Residential mortgage                                     554         982          62          11          36  
         Home equity                                               17          46          48         101          66  
         Indirect automobile installment                          707         642         820       1,046         219  
         Other consumer                                            31          39          86          20         329 
                                                           ----------  ----------  ----------  ----------  ----------
                 Total recoveries                               9,323       7,925       6,401       3,758       1,347
                                                           ----------  ----------  ----------  ----------  ----------
Net (recoveries) chargeoffs                                    (3,464)     21,149      24,658      54,440      41,867
Provision (credit) for possible loan losses                   (18,600)     13,090      24,281      68,427      42,245
Reserve of sold bank                                           (2,104)
                                                           ----------  ----------  ----------  ----------  ----------
Reserve for loan losses at end of period                   $   38,789  $   56,029  $   64,088  $   64,465  $   50,478
                                                           ==========  ==========  ==========  ==========  ==========
Average loans                                              $1,359,326  $1,265,098  $1,283,464  $1,435,665  $1,584,390
                                                           ==========  ==========  ==========  ==========  ==========
Ratio of net (recoveries) chargeoffs to average loans          (0.3%)        1.7%        1.9%        3.8%        2.6%
</TABLE>

                             Results of Operations

Comparison of 1996 with 1995

For the year ended December 31, 1996, net income was $32.7 million, or $1.79 per
share,  substantially  higher than the $15.0 million, or $0.83 per share, earned
in 1995.  The 1996  improvement  in earnings was largely  attributed  to a $18.6
million  earnings credit recorded through the provision for possible loan losses
compared with a provision of $13.1 million last year, a $6.8 million gain on the
sale of UST/Conn,  an increase in lease  residual  income on maturing  equipment
leases,  reduced  foreclosed  asset  and  workout  expense  and  FDIC  insurance
assessment,   and  a  modest  improvement  in  net  interest  margin.  Partially
offsetting  these favorable  increases were $5.9 million in  acquisition-related
charges, a $3.0 million one-time SAIF deposit  assessment,  and increased salary
and employee benefits expense.  This year's earning results produced a return on
average  stockholders'  investment of 17.66  percent  compared with 9.14 percent
last  year,  and an  improvement  in return on  average  assets of 1.58  percent
compared with .81 percent in 1995. A comparative  analysis for return on average
assets and return on average stockholders' investment is presented below:


                                       22



Return on Average Assets


Year Ended December 31,                                           1996    1995

Net interest income                                              4.65%   5.20%
Provision (credit) for possible loan losses                      (.90)    .72
                                                                 ----    ----
Net interest income after provision for possible loan losses     5.55    4.48
Noninterest income                                               1.80    1.63
Noninterest expense                                              4.75    4.80
                                                                 ----    ----
Income before income tax                                         2.60    1.31
Income tax provision                                             1.02     .50
                                                                 ----    ----
        Net income                                               1.58%    .81%
                                                                 ====    ====
Return on Average Stockholders' Investment

Year Ended December 31,                                          1996    1995

Net interest income                                             51.97%  58.32%
Provision (credit) for possible loan losses                    (10.06)   8.00
                                                                -----   -----
Net interest income after provision for possible loan losses    62.03   50.32
Noninterest income                                              20.16   18.31
Noninterest expense                                             53.17   53.89
                                                                -----   -----
Income before income tax                                        29.02   14.74
Income tax provision                                            11.36    5.60
                                                                -----   -----
        Net income                                              17.66%   9.14%
                                                                =====   =====
Net Interest Income Analysis

The Company's net interest income on a fully taxable  equivalent basis was $96.8
million in 1996,  slightly  above  1995 of $96.4  million.  Actual net  interest
income, excluding taxable equivalent basis adjustments, increased $692 thousand,
which  exceeded  the fully  taxable  increase  due to lower  tax-exempt  and tax
preference  interest  income in 1996.  This  year's  modest  improvement  in net
interest  margin  reflects the positive  effect of earning asset growth slightly
exceeding  the  negative  effect of lower  market  interest  rates in 1996.  The
decline in market  rates was for the most part  limited to the first  quarter of
1996 as rates remained relatively level throughout the rest of the year.

The table below  presents the  following  information:  average  earning  assets
(including nonaccrual loans) and average interest-bearing liabilities supporting
earning  assets;  and  interest  income  and  interest  expense  expressed  as a
percentage of the related asset or liability. The average balances and the rates
presented  do not  include the effect of fair value  adjustments  under SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."


                                       23



<TABLE>
<CAPTION>
                                                                          December 31,
                                            1996                             1995                                   1994
                                            ----                             ----                                   ----
                                Average             Average     Average              Average        Average               Average
(Dollars in thousands)          Balance    Interest    Rate     Balance    Interest     Rate        Balance    Interest      Rate
                                -------    --------    ----     -------    --------     ----        -------    --------      ----
<S>                           <C>          <C>         <C>    <C>          <C>          <C>       <C>          <C>          <C>
Assets
Cash and due from banks       $   83,331                      $   89,490                          $   95,717
Federal funds sold and other      19,388   $  1,058    5.46%      51,908   $  3,047     5.87%         24,095   $  1,197      4.97%
Securities: 
        Taxable                  574,737     34,007    5.92      418,484     25,746     6.15         452,700     27,206      6.01 
        Non-taxable(1)             4,684        461    9.84        5,097        750    14.71           5,559        557     10.02 
                              ----------   --------           ----------   --------               ----------   --------
        Total securities         579,421     34,468    5.95      423,581     26,496     6.26         458,259     27,763      6.06
Loans(1)                       1,359,326    122,754    9.03    1,265,098    119,375     9.44       1,283,464    104,322      8.13
Reserve for possible loan
   losses                        (53,233)                        (63,039)                            (64,063) 
                              ----------                      ----------                          ----------
        Net loans              1,306,093                       1,202,059                           1,219,401
Other assets                      78,671                          69,191                              83,957 
                              ----------   --------           ----------   --------               ----------   --------
 Total assets/interest income $2,066,904   $158,280           $1,836,229   $148,918               $1,881,429   $133,282
                              ==========   ========           ==========   ========               ==========   ========

Liabilities and Stockholders' Investment

Deposits:

Noninterest-bearing           $  355,172                      $  336,931                          $  350,405

NOW                              142,565   $  1,691    1.19%     158,636   $  2,176     1.37%        163,841  $   2,343      1.43%
Money market                     230,391      7,271    3.16      237,580      6,580     2.77         288,489      6,372      2.21
Regular savings                  268,992      6,637    2.47      254,496      7,104     2.79         311,139      7,745      2.49
Time                             534,966     29,657    5.54      486,993     26,823     5.51         413,239     16,447      3.98  
                              ----------   --------           ----------   --------               ----------   --------
 Total interest-bearing
   deposits                    1,176,914     45,256    3.85    1,137,705     42,683     3.75       1,176,708     32,907      2.80  
                              ----------                      ----------                          ----------
 Total deposits                1,532,086                       1,474,636                           1,527,113
Short-term borrowings            328,779     16,272    4.95      179,260      9,281     5.18         180,325      6,240      3.46
Other borrowings                                                   6,406        571     8.91          11,790      1,066      9.04
Other liabilities                 21,072                          12,276                               9,945
Stockholders' investment         184,967                         163,651                             152,256   
                              ----------   --------           ----------   --------               ----------   --------
 Total liabilities and stockholders'  
  investment/interest expense $2,066,904   $ 61,528           $1,836,229   $ 52,535               $1,881,429  $  40,213
                              ==========   ========           ==========   ========               ==========  =========
Earning assets - interest
  income                      $1,958,135   $158,280    8.08%  $1,740,587   $148,918     8.56%     $1,765,818  $ 133,282      7.55%
Interest-bearing 
        liabilities - interest 
  expense                     $1,505,693     61,528    4.09%  $1,323,371     52,535     3.97%     $1,368,823     40,213      2.94%
                                           --------                        --------                           ---------
Net interest spread(2)                                 3.99%                            4.59%                                4.61%
Net interest margin(3)                     $ 96,752    4.94%               $ 96,383     5.54%                 $  93,069      5.27%
                                           ========                        ========                           =========
</TABLE>

(1)    Interest on loans to and obligations of states and political subdivisions
       is not subject to federal  income  tax.  In order to make  pretax  yields
       comparable to taxable loans and investments,  a tax equivalent adjustment
       is utilized.  The adjustment is based on a 35 percent  federal income tax
       rate in 1996 and 1995,  and 34  percent in 1994 and  includes  applicable
       state taxes, net of federal tax benefit.

(2)    Net interest spread is the excess of the interest rate on average earning
       assets over the interest rate on average interest-bearing liabilities.

(3)    Net interest  margin is the excess of the interest  earned over  interest
       expense divided by average earning assets.

As  reflected in the  foregoing  table,  the yield on loans,  which was directly
affected by the market rate decline and to a lesser extent by external  pressure
on loan  pricing,  decreased  41 basis  points from 9.44 percent in 1995 to 9.03
percent for the year ended  December 31, 1996.  The yield on securities was also
affected  by market  interest  rates and  decreased  31 basis  points  from 6.26
percent to 5.95 percent this year.  The  combination  of yield declines in loans
and  securities  and,  to a lesser  degree,  lower  federal  funds sold  yields,
resulted in a decline in yield on total  earning  assets of 48 basis points from
8.56 percent to 8.08  percent.  As exhibited in the following  table,  the total
effect of lower yields on interest income due to lower earning asset rates was a
$6.7 million decline from 1995.

The cost of  interest-bearing  liabilities  increased  12 basis points from last
year to 4.09  percent  in  1996.  Deposit  costs,  the  principal  component  of
interest-bearing  liabilities,  have remained  relatively stable since the third
quarter of 1995.  This  year's  increase of 10 basis  points to 3.85  percent in
deposit  costs  reflects the  carryover  effect in 1996 of rising  deposit rates
during the first three quarters of 1995.  Cost of  borrowings,  which are almost
entirely short term,  decreased  during the year consistent with interest rates.
The effect on total interest expense from changes in interest-bearing  liability
rates from a year ago was a $298 thousand


                                       24


decrease.  The net  effect  on net  interest  income  from  changes  in rates on
interest-earning assets and interest- bearing liabilities was a decrease of $6.4
million.

Reflecting the decline in earning asset yield and a modest increase in liability
costs,  the  interest  margin and spread  decreased  from 5.54  percent and 4.59
percent,  respectively,  last year to 4.94  percent and 3.99  percent this year.
Since reaching a historical peak in the first quarter of 1995, both net interest
margin and rate  spread have been on a decline in concert  with market  interest
rates and some  pressure on loan  pricing.  Excluding  the  possible  effects of
future  market  interest rate changes,  some  continued  narrowing of margin and
spread  is  expected  as the full  impact  of the  Branch  Purchase  and  Walden
acquisition are included in operating  results.  Net interest  income,  however,
will benefit favorably from both transactions.

Average  earning  assets for the year were $1.958  billion,  $218 million higher
than 1995. Average securities volume was up $156 million to $579 million for the
year while average loans  outstanding  increased $94 million to $1.359  billion.
When combined  with reduced  federal funds sold volume,  total  interest  income
increased  $16.1  million  from 1995 due to  changes in  earning  asset  volume.
Funding  for the  higher  loan and  securities  volume was  provided  through an
increase  in average  borrowings  of $143  million to $329  million  and deposit
growth of $57 million which was principally higher cost certificates of deposit.
In the aggregate, interest-bearing liabilities increased $182 million in 1996 to
$1.506  billion.  Such increase  added $9.3 million in  volume-related  interest
expense over 1995. The net effect on net interest  income from changes in volume
of interest-earning  assets and interest-bearing  liabilities was an increase of
$6.8 million.

The following table  attributes  changes in interest income and interest expense
to  changes in  interest  rates and  changes  in the volume of  interest-earning
assets and  interest-bearing  liabilities  for the year ended  December 31, 1996
when compared with the year ended  December 31, 1995.  Changes  attributable  to
both rate and volume are allocated on a weighted basis.

<TABLE>
<CAPTION>
                                                                               Increase (Decrease) From Year Ended December 31, 1995
                                                                   Year Ended                       Amount Due to Changes in
(Dollars in thousands)                                      December 31, 1996       Total Change    Volume              Rate
                                                            -----------------       ------------    ------              ----
<S>                                                              <C>                 <C>             <C>               <C>
Interest income:
 Interest and fees on loans*                                     $    122,754        $     3,379     $      8,649      $   (5,270)
 Interest on securities:   
  Taxable                                                              34,007              8,261            9,280          (1,019)
  Non-taxable*                                                            461               (289)             (57)           (232)
Interest on federal funds sold and other                                1,058             (1,989)          (1,788)           (201)
                                                                 ------------        -----------     ------------      ----------
   Total interest income*                                             158,280              9,362           16,084          (6,722)
                                                                 ------------        -----------     ------------      ----------
Interest expense:  
 Interest on NOW, money market and regular savings deposits            15,599               (261)            (213)            (48)
 Interest on time deposits                                             29,657              2,834            2,658             176
 Interest on short-term borrowings                                     16,272              6,991            7,417            (426)
 Interest on other borrowings                                                               (571)            (571)
                                                                 ------------        -----------     ------------      ----------
   Total interest expense                                              61,528              8,993            9,291            (298)
                                                                 ------------        -----------     ------------      ----------
Net interest income                                              $     96,752        $       369     $      6,793      $   (6,424)
                                                                 ============        ===========     ============      ==========
</TABLE>


* Fully  taxable  equivalent  at the  federal  income tax rate of 35 percent and
includes  applicable  state  taxes net of federal  benefit.  The tax  equivalent
adjustment  on  loans  was  approximately   $500  thousand  and  on  non-taxable
securities was approximately $100 thousand.

Noninterest Income

Total  noninterest  income was $37.3  million,  $7.3  million  higher than 1995.
Included in this year's non- interest income was a $6.8 million gain on the sale
of UST/Conn.  Refer to Note 2 to the Notes to Consolidated  Financial Statements
for a further  discussion.  Corporate  services income,  which includes merchant
credit card  income,  increased  15 percent,  or $1.3  million to $9.8  million.
Income  recorded on maturing  equipment  leases  increased $700 thousand to $1.4
million.  Asset  management fees decreased $707 thousand due to a lower level of
assets under  management  and net realized  securities  gains were $689 thousand
lower than 1995.

Noninterest Expense

Total noninterest  expense was $98.3 million,  an increase of $10.2 million over
last year.  The largest  component of the increase was a $5.1 million  provision
for  acquisition  expenses  related to the Branch  Purchase and a $793  thousand
charge for expense  related to the 1997 Walden  acquisition  for a total of $5.9
million  in  acquisition  charge  expense.  Refer  to  Note 11 to the  Notes  to
Consolidated  Financial  Statements  for a  further  discussion  of  acquisition
charges.   Salary  and  employee  benefits  increased  $3.7  million  reflecting
additional  staffing in retail  banking,  computer  operations and processing to
support the addition


                                       25


of 20 banking branches  acquired in the Branch  Purchase.  Also included in 1996
benefit  expense  was a  one-time  $830  thousand  provision  for the  remaining
obligation  to  fund a  UST/Conn  Directors'  pension  plan  stemming  from  the
contractual  provisions of the sale of this  subsidiary.  Credit card processing
expense increased $948 thousand  consistent with the increase in merchant credit
card income described above. The deposit  insurance  assessment was $4.0 million
in 1996 and includes a one-time $3.0 million Savings Association  Insurance Fund
assessment  on former  savings and loan  association  deposits held by a Company
subsidiary  bank,  USTrust.  Refer  to  Note  11 to the  Notes  to  Consolidated
Financial  Statements of this Form 10-K for a further  discussion of the deposit
insurance assessment. Other noninterest expense, described below, increased $3.0
million to $25.9 million.  Partially offsetting the aforementioned  increases in
expense was a sharp decrease from 1995 in foreclosed  asset and workout  expense
of $4.2 million to $1.6 million  this year,  a direct  benefit of the  Company's
successful effort in the reduction of problem assets over the past few years.

Other  noninterest  expense  increased  from  $23.0  million  last year to $25.9
million this year.  Furniture and equipment  expense increased $592 thousand due
to increased maintenance and depreciation expense on the Company's investment in
new  computer-related   equipment  and  software.  The  increase  in  legal  and
consulting of $638 thousand was largely  driven by the growth in home equity and
indirect  automobile  loans and associated legal costs for new loan closings and
collection  activities.  In addition,  a $243 thousand  nonrecurring  charge for
severance-related consulting services of a former Company executive was recorded
during the year.  Advertising and promotion  increased $744 thousand as a result
of  several  successful  promotional  campaigns  during  the  year  for new loan
products and deposit  services as well as to increase the presence and awareness
of the Company's  subsidiary bank,  USTrust among the constituents of its market
area. This year's amortization of intangible expense includes one month, or $534
thousand  of  amortization  of core  deposit  intangibles  related to the Branch
Purchase. All other noninterest expense increased $2.5 million to $12.5 million.
Included  this year was $870  thousand in  litigation  provisions  recorded  for
certain litigation matters that required  accounting  recognition,  higher costs
associated with the increased volume of consumer loans, and other  miscellaneous
operating  costs.  Slightly  offsetting  the  aforementioned  increases in other
noninterest  expense  was  the  absence  this  year  of  $1.9  million  facility
consolidation   provisions   recorded  last  year  in   connection   with  space
consolidation,  including the write-off of leases and leasehold  improvements on
abandoned facilities.

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
(Dollars in thousands)                                                        1996            1995    

<S>                                                                         <C>             <C>     
Furniture and equipment depreciation and maintenance                        $  4,164        $  3,572
Legal and consulting                                                           2,994           2,356
Advertising and promotion                                                      2,867           2,123
Amortization of intangibles                                                    1,703           1,798
Service bureau and other data processing                                       1,657           1,274
Facility consolidation provisions                                                 84           1,895
All other                                                                     12,463           9,951
                                                                            --------        --------
        Total other noninterest expense                                     $ 25,932        $ 22,969
                                                                            ========        ========
</TABLE>

It is expected that noninterest expense, excluding one-time items, will increase
substantially  next  year as the  full  year's  effect  of the  Branch  Purchase
overhead  expenses are included.  In addition,  the Company  expects to record a
one-time, pre-tax restructuring charge in 1997 of approximately $13.5 million in
connection with the Walden acquisition.

Income Taxes

The Company  recorded  income taxes of $21.0  million in 1996 compared with $9.2
million in 1995. The increase is the direct result of the  significantly  higher
level of pre-tax  income  recorded  this year.  Refer to Note 12 to the Notes to
Consolidated  Financial Statements of this Form 10-K for a further discussion of
income taxes.

As of December  31,  1996,  included in other assets was a deferred tax asset of
approximately  $5.0  million,  which is expected to be realized  against  future
taxable  income.  Management  believes  that it is more likely than not that the
Company will realize the benefit of these deferred assets.

Fair Value of Financial Instruments

The methods and  assumptions  used by the Company to estimate  the fair value of
each  class of  financial  instruments  as of  December  31,  1996 and 1995,  in
accordance  with  SFAS No.  107,  "Disclosures  about  Fair  Value of  Financial
Instruments,"  are discussed in Note 18 to the Notes to  Consolidated  Financial
Statements


                                       26



of this Form 10-K.  Financial  instruments  do not include all of the assets and
liabilities recorded on a company's balance sheet. Therefore, the aggregate fair
value amounts of the financial instruments do not represent the underlying value
of a company.

As a result of those assumptions and valuation methodologies, the estimated fair
value of  Financial  Instrument  assets  and  liabilities  of the  Company as of
December  31, 1996 was $2.56  billion and $2.45  billion,  or $27 million and $1
million in excess of carrying value,  respectively.  The estimated fair value of
Financial  Instrument  assets and  liabilities as of December 31, 1995 was $1.91
billion and $1.76  billion,  or $43 million and $4 million in excess of carrying
value,  respectively.  The  decrease  in excess of fair value over the  carrying
value of  Financial  Instrument  assets of $16  million  is  attributed,  in the
opinion of management,  to the $17 million decrease in reserve for possible loan
losses  partially  offset by the improvement in credit quality of the commercial
loan  portfolios  and resulting  reduction in credit risk. The small decrease in
excess of fair value over carrying value of Financial Instrument liabilities, is
attributed,  in the opinion of management, to the rollover of older certificates
of deposit at the current higher rates.

Comparison of 1995 with 1994

Net Interest Income Analysis

The Company's 1995 net interest income on a fully taxable  equivalent  basis was
$96.4 million,  $3.3 million higher than the $93.1 million in 1994. The increase
reflects  the  positive  effect  on net  interest  income  of a higher  level of
interest rates in 1995 compared with 1994. The average  interest rate spread was
relatively  level with 1994 while the average  interest  rate margin was higher.
Partially offsetting the effect of a stronger interest rate margin was a decline
in the  volume of earning  assets,  particularly  loans,  and a shift by deposit
customers from savings  products to higher cost  certificates  of deposit during
1995.

Interest  rates moved  downward in the second half of 1995 following a period of
rapid  interest rate rise from early 1994 through the first quarter of 1995. The
result of 1995's higher level of interest  rates was an  improvement in yield on
earning  assets of 101 basis points from 7.55 percent in 1994 to 8.56 percent in
1995. The cost of interest-bearing liabilities,  principally deposits, increased
by 103 basis points from 2.94 percent in 1994 to 3.97 percent in 1995. Yields on
prime-based  loans and federal funds sold,  which reprice  daily,  reached their
peak in the  first  quarter  of  1995  and  decreased  steadily  throughout  the
remainder of the year consistent with the movement of interest rates.

While the Company  initially  refrained  from  increasing  deposit  rates in the
rising  interest rate  environment  of 1994, to satisfy  liquidity  needs and in
response to competition  for deposits,  a more  aggressive  deposit  pricing was
adopted in late 1994 and the first  quarter of 1995.  Beginning  with the second
quarter and  continuing  through the rest of 1995,  the Company  moved to a less
competitive  pricing  policy.  The result was a rising cost of deposits in early
1995 which subsided during the latter half of the year.

The interest  rate spread in 1995 of 4.59 percent was  approximately  equal with
the 1994 spread of 4.61 percent as the rise in yield on earning  assets  equaled
the increase in cost of  interest-bearing  liabilities.  The net  interest  rate
margin  improved 27 basis points to 5.54 percent  reflecting the positive impact
of an equal rise in rates on the larger balance of average  earning assets which
totaled $1.74 billion compared with  interest-bearing  liabilities which totaled
$1.32 billion. Also contributing to the increased net interest rate margin was a
reduction  in  interest-bearing  liabilities  of $45  million  which  exceeded a
decrease  in  interest-earning  assets  by $20  million.  The net  effect on net
interest income from changes in rates in 1995 compared with 1994 was an increase
of $5.5 million.

Average earning assets decreased $25 million from $1.77 billion in 1994 to $1.74
billion in 1995. The decrease  reflects declines in average loans of $18 million
and securities of $35 million which was partially offset by an increase in lower
yielding federal funds sold of $28 million. Average interest-bearing liabilities
decreased  $45  million  from  1994 to  $1.32  billion  in  1995.  In  addition,
interest-bearing  liabilities experienced a shift in the mix of average deposits
from savings and money market  deposits to higher cost  certificates of deposit.
Regular savings, NOW and money market deposits decreased $113 million while time
deposits  increased  $74  million.  The net effect on net  interest  income from
changes in volume of loans, deposits and other interest-bearing balances in 1995
compared with 1994 was a decrease of $2.2 million.

The following table  attributes  changes in interest income and interest expense
to  changes in  interest  rates and  changes  in the volume of  interest-earning
assets and  interest-bearing  liabilities  for the year ended  December 31, 1995
when compared with the year ended  December 31, 1994.  Changes  attributable  to
both rate and volume are allocated on a weighted basis.


                                       27



<TABLE>
<CAPTION>
                                                      Increase (Decrease) From Year Ended December 31, 1994
                                         Year Ended                   Amount Due to Changes in
(Dollars in thousands)            December 31, 1995   Total Change    Volume       Rate
<S>                                       <C>          <C>          <C>           <C>      
Interest income:
 Interest and fees on loans*              $ 119,375    $  15,053    $  (1,512)    $  16,565
 Interest on securities:
         Taxable                             25,746       (1,460)      (2,093)          633
         Non-taxable*                           750          193          (50)          243
 Interest on federal funds sold and other     3,047        1,850        1,599           251
                                          ---------    ---------    ---------     ---------
                 Total interest income*     148,918       15,636       (2,056)       17,692
                                          ---------    ---------    ---------     ---------
Interest expense:
 Interest on NOW,  money market and 
   regular savings deposits                  15,860         (600)      (2,599)        1,999
 Interest on time deposits                   26,823       10,376        3,293         7,083
 Interest on short-term borrowings            9,281        3,041          (37)        3,078
 Interest on other borrowings                   571         (495)        (480)          (15)
                                          ---------    ---------    ---------     ---------
                 Total interest expense      52,535       12,322          177        12,145
                                          ---------    ---------    ---------     ---------
Net interest income                       $  96,383    $   3,314    $  (2,233)    $   5,547
                                          =========    =========    =========     =========
</TABLE>

* Fully  taxable  equivalent  at the  federal  income tax rate of 35 percent and
includes  applicable  state  taxes net of federal  benefit.  The tax  equivalent
adjustment  on  loans  was  approximately   $700  thousand  and  on  non-taxable
securities was approximately $200 thousand.

Noninterest Income

Total  noninterest  income was $30.0  million in 1995, a slight  decrease of $.3
million from 1994.  Asset  management  fees decreased $1.1 million due to timing
differences in the  recognition  of fee income in 1994 and a slight  decrease in
the level of assets under  management in 1995 compared to 1994.  Offsetting  the
lower  asset  management  fees were  increases  in  corporate  services  income,
residual income on maturing  equipment leases and higher realized gains from the
sale of primarily equity securities held by a investment company subsidiary.

Noninterest Expense

Total  noninterest  expense was reduced  $3.2  million in 1995 to $88.2  million
compared  to 1994 due  largely to  decreases  in  foreclosed  asset and  workout
expense and deposit insurance assessments.  The lower level of problem assets in
1995  resulted  in a $3.0  million  decrease  in  foreclosed  asset and  workout
expense. Deposit insurance assessments decreased $1.5 million in 1995 due to the
reduction in insurance premium rates by the FDIC.

Salary and employee  benefits  increased  $1.6 million in 1995 to $44.3 million.
The increase was largely due to a full-year of asset management  revenue-sharing
provisions in 1995 compared  with only a half-year  provision in 1994.  Refer to
the paragraph below for a further discussion of the revenue-sharing  provisions.
Included in salary and  employee  benefits  was $.7 million and $1.0  million in
expenses related to severance agreements for 1995 and 1994, respectively.

In late 1994 and early 1995,  the Company and senior  executives of USTC's Asset
Management Division  negotiated and entered into employment  agreements designed
to maximize the  profitability and grow the assets under management of the asset
management  business.  The  agreements  are designed to increase  the  foregoing
executives'  participation in the value created in the asset management business
and,  in  a  change-in-control   situation,   increase  the  likelihood  that  a
prospective  purchaser  will  retain the  services  of the  executives.  Certain
provisions  of the  agreements  became  effective  July  1,  1994,  and  contain
revenue-sharing  provisions which permit the Asset Management  Division to use a
specified  percentage  of its base  revenues  for the payment of expenses of the
operation, including incentive compensation.

Other  noninterest  expense was  reduced  $.6 million in 1995 to $23.0  million.
Included in other  noninterest  expense were  provisions  recorded in connection
with space  consolidation,  including  the  writedown to market value of Company
facilities offered for sale and the writeoff of leases on abandoned  facilities,
lease  subsidies  and  leasehold   improvements.   The  facility   consolidation
provisions  were $1.9  million in 1995  compared  with $.5  million in 1994.  In
addition,  the Company in 1995  accelerated  the  amortization  of certain  core
deposit  intangible  assets after  conducting  a review of the  expected  future
economic  benefits  derived from these assets and their current carrying amount.
The amount of accelerated amortization expense recorded in 1995 was $.6 million.
This resulted in an increase in amortization of intangible  asset expense of $.4
million  compared with 1994.  Excluding  such special items,  other  noninterest
expense  was reduced  over 10 percent,  or $2.6  million,  in 1995.  The largest
reductions were in legal and consulting $1.2 million and


                                       28



all  other  noninterest  expense  of $1.2  million.  The  decrease  in all other
noninterest  expense was due to reductions  across numerous expense  categories,
the largest were declines in appraisal fees,  litigation expense and audit fees.
The major components of other noninterest expense were:

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
(Dollars in thousands)                                                 1995                   1994    
<S>                                                                 <C>                    <C>     
Furniture and equipment depreciation and maintenance                $  3,572               $  3,476
Legal and consulting                                                   2,356                  3,553
Advertising and promotion                                              2,123                  2,307
Facility consolidation provisions                                      1,895                    480
Amortization of intangibles                                            1,798                  1,367
Service bureau and other data processing                               1,274                  1,173
All other                                                              9,951                 11,171
                                                                    --------               --------
        Total other noninterest expense                             $ 22,969               $ 23,527
                                                                    ========               ========
</TABLE>

Cautionary Statement Regarding Forward-looking Information

The preceding discussion and Notes to Consolidated  Financial Statements of this
Form  10-K  contain  certain  forward-looking   statements,   including  without
limitation the statements  regarding (i) the Walden  acquisition  and associated
amounts  and  timing  of  certain  restructuring  charges  and  effect on future
operating  results;  and (ii) the full-year effect on operating results from the
Branch Purchase;  and (iii) the Company's  expectations regarding the ability of
its  principal  banking  subsidiary  USTrust  in meeting  the bank's  regulatory
capital  conditions  and  requirements.  Moreover,  the Company may from time to
time, in both written reports and oral statements by Company management, express
its expectations  regarding  future  performance of the Company and estimates of
the effects of its acquisition activities.  These forward-looking statements are
inherently  uncertain,  and actual results may differ from Company expectations.
Risk factors that could impact  current and future  performance  include but are
not  limited  to:  (i)  changes  in  asset  quality  and  the  resulting  credit
risk-related losses and expense;  (ii) adverse changes in the economy of the New
England region,  the Company's  primary market,  which could further  accentuate
credit-related losses and expenses;  (iii) since most of the Company's loans are
concentrated in Eastern  Massachusetts and a substantial  portion of these loans
have real estate as primary and  secondary  collateral,  adverse  changes in the
local real  estate  market can also  negatively  affect  credit  risk;  (iv) the
Company operates in an increasingly  competitive New England financial  services
marketplace,  where a large number of bank acquisitions and mergers has resulted
in fewer but much larger and financially  stronger competitors which could alter
Company expectations; (v) fluctuations in market rates and prices can negatively
affect net interest margin, asset valuations and expense expectations;  and (vi)
as a bank-holding  company,  the Company and its subsidiary banks are subject to
changing  regulatory  requirements  of  federal  and state  agencies  that could
materially impact future operations of the Company.


                                       29



ITEM 8. Financial Statements and Supplementary Material.

Index to Financial Statements
<TABLE>
<CAPTION>

Financial Statements                                                                                                   Page
<S>                                                                                                                    <C>
Report of Independent Public Accountants                                                                                31
Consolidated Balance Sheets - December 31, 1996 and 1995                                                                32
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994                                  33
Consolidated Statements of Changes in Stockholders' Investment for the years ended December 31, 1996, 1995 and 1994     34
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994                              35
Notes to Consolidated Financial Statements                                                                              36
</TABLE>

                                       30




                    Report of Independent Public Accountants

To the Stockholders and Board of Directors of UST Corp.:

We have audited the  accompanying  consolidated  balance  sheets of UST Corp. (a
Massachusetts  corporation)  and  Subsidiaries as of December 31, 1996 and 1995,
and the related  consolidated  statements  of income,  changes in  stockholders'
investment  and cash  flows  for each of the  three  years in the  period  ended
December  31,   1996.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of UST Corp.  and
Subsidiaries  as of  December  31,  1996  and  1995,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Boston, Massachusetts
January 31, 1997


                                       31



<TABLE>
<CAPTION>
Consolidated Balance Sheets 
                                                                                                  December 31,
(Dollars in thousands, except share amounts)                                                  1996            1995    
<S>                                                                                       <C>             <C>       
Assets
Cash, due from banks and interest-bearing deposits (Note 3)                               $  111,532      $   89,799
Federal funds sold                                                                           127,469
Securities available-for-sale (Notes 1 and 4): 
        Mortgage-backed securities                                                           216,978         246,521 
        U.S. Treasury and federal agencies and other securities                              311,196         329,152    
                                                                                          ----------      ----------
                Total securities available-for-sale                                          528,174         575,673
Loans (Notes 5, 14, and 16): 
        Loans - net of unearned discount of $18,444 in 1996 and $33,419 in 1995            1,848,142       1,272,077 
        Reserve for possible loan losses                                                     (38,789)        (56,029)    
                                                                                          ----------      ----------
                Total loans, net                                                           1,809,353       1,216,048
Premises, furniture and equipment, net (Note 6)                                               41,512          31,840
Other real estate owned, net (Notes 1 and 7)                                                     688           3,015
Loans held-for-sale (Note 1)                                                                     102          13,098
Intangible assets, net (Note 1)                                                               53,878           4,650
Other assets (Notes 9 and 12)                                                                 33,906          34,965    
                                                                                          ----------      ----------
                Total Assets                                                              $2,706,614      $1,969,088
                                                                                          ==========      ==========
Liabilities and Stockholders' Investment
Deposits: 
        Noninterest-bearing                                                               $  540,014 $       372,917 
        Interest-bearing:   
                NOW                                                                          259,265         166,011   
                Money market                                                                 243,749         210,924   
                Regular savings                                                              457,769         244,680   
                Time:    
                        Certificates of deposit over $100 thousand                           118,862         112,426    
                        Other time                                                           486,207         405,779    
                                                                                          ----------      ----------
                                Total deposits                                             2,105,866       1,512,737
Short-term and other borrowings (Note 8)                                                     348,066         243,105
Other liabilities (Note 9)                                                                    54,722          39,578    
                                                                                          ----------      ----------
                        Total liabilities                                                  2,508,654       1,795,420
Commitments and contingencies (Notes 15 and 16)
Stockholders' investment (Notes 1, 10, and 13): 
        Preferred stock $1 par value; Authorized - 4,000,000 shares;   
                Outstanding - None 
        Common stock $.625 par value; Authorized - 45,000,000 shares;   
                Outstanding - 18,018,623 and 17,843,582 shares in 1996 and
                    1995, respectively                                                       11,262           11,152 
        Additional paid-in capital                                                           75,710           74,158 
        Retained earnings                                                                   112,975           87,253 
        Unrealized (loss) gain on securities available-for-sale, net of tax                  (2,453)             961 
        Deferred compensation and other                                                         466              144   
                                                                                          ----------      ----------
                Total stockholders' investment                                              197,960          173,668    
                                                                                          ----------      ----------
                        Total Liabilities and Stockholders' Investment                    $2,706,614      $1,969,088
                                                                                          ==========      ==========
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       32



<TABLE>
<CAPTION>
Consolidated Statements of Income 

                                                                                         Year Ended December 31,
(Dollars in thousands, except share amounts)                                        1996          1995         1994
<S>                                                                            <C>           <C>           <C>         
Interest income: 
        Interest and fees on loans                                             $   122,279   $   118,666   $   103,526 
        Interest and dividends on securities: 
                Taxable                                                             34,007        25,746        27,206  
                Non-taxable                                                            310           510           383 
        Interest on federal funds sold and other                                     1,058         3,047         1,197   
                                                                               -----------   -----------   -----------
                        Total interest income                                      157,654       147,969       132,312
                                                                               -----------   -----------   -----------
Interest expense: 
        Interest on deposits                                                        45,256        42,683        32,907 
        Interest on borrowings                                                      16,272         9,852         7,306   
                                                                               -----------   -----------   -----------
                        Total interest expense                                      61,528        52,535        40,213 
                                                                               -----------   -----------   -----------
        Net interest income                                                         96,126        95,434        92,099
Provision (credit) for possible loan losses (Note 5)                               (18,600)       13,090        24,281 
                                                                               -----------   -----------   -----------
        Net interest income after provision for possible loan losses               114,726        82,344        67,818
                                                                               -----------   -----------   -----------
Noninterest income: 
        Asset management fees                                                       12,569        13,276        14,419 
        Corporate services income                                                    9,827         8,529         8,198 
        Gain on sale of bank subsidiary (Note 2)                                     6,806 
        Service charges on deposit accounts                                          4,422         4,637         4,893 
        Lease residual income                                                        1,382           682           362 
        Securities gains, net (Note 4)                                               1,113         1,802         1,105 
        Other                                                                        1,169         1,044         1,357   
                                                                               -----------   -----------   -----------
                        Total noninterest income                                    37,288        29,970        30,334
                                                                               -----------   -----------   -----------
Noninterest expense: 
        Salary and employee benefits (Note 9)                                       48,009        44,287        42,650 
        Net occupancy expense                                                        7,571         7,672         7,837 
        Acquisition charges (Note 11)                                                5,933 
        Credit card processing expense                                               5,356         4,408         3,955 
        Deposit insurance assessment (Note 11)                                       3,954         3,067         4,566 
        Foreclosed asset and workout expense (Note 7)                                1,583         5,784         8,820 
        Other (Note 11)                                                             25,932        22,969        23,527  
                                                                               -----------   -----------   -----------
                        Total noninterest expense                                   98,338        88,187        91,355
                                                                               -----------   -----------   -----------
Income before income taxes                                                          53,676        24,127         6,797 
        Income tax provision (Note 12)                                              21,014         9,169         2,051   
                                                                               -----------   -----------   -----------
                        Net income                                             $    32,662   $    14,958   $     4,746
                                                                               ===========   ===========   ===========
Per share data: 
        Net income                                                             $      1.79   $       .83   $       .27 
        Cash dividends declared                                                $       .29   $       .05
Weighted average number of common shares (Note 10)                              18,227,036    18,068,203    17,780,032
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                       33



<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Investment

                                                               Additional                Unrealized               Deferred
                                                        Common    Paid-in   Retained    Gain/(Loss)  Treasury Compensation
(Dollars in thousands)                                   Stock    Capital   Earnings  on Securities     Stock    and Other    Total

<S>                                                    <C>        <C>        <C>          <C>        <C>       <C>         <C>     
Balance December 31, 1993                              $10,815    $69,694    $68,437      $ 3,335              $   538     $152,819
Net income                                                                     4,746                                          4,746
Stock option exercises and 
        stock issued under restricted stock 
        plan (Notes 9 and 10)                              162      2,108                                         (664)       1,606
Change from net unrealized gain 
        to loss on securities available-for-sale, 
        net of tax (Note 1)                                                               (26,936)                          (26,936)
Reduction in ESOP loan guarantee                                                                                   322          322
Activity in Directors Deferred 
        Compensation Program and other, net (Note 10)       32        327                                         (282)          77
                                                       -------    -------   --------      -------   --------   -------     --------
Balance December 31, 1994                               11,009     72,129     73,183      (23,601)                 (86)     132,634

Net income                                                                    14,958                                         14,958
Cash dividends declared                                                         (888)                                          (888)
Stock option exercises and 
        stock issued under restricted stock 
        plan (Notes 9 and 10)                              139      1,987                                         (171)       1,955
Change from net unrealized loss 
        to gain on securities available-for-sale, 
        net of tax (Note 1)                                                                24,562                            24,562
Reduction in ESOP loan guarantee                                                                                   321          321
Activity in Directors Deferred 
        Compensation Program and other, net (Note 10)        4         42                                           80          126
                                                       -------    -------   --------      -------   --------   -------     --------
Balance December 31, 1995                               11,152     74,158     87,253          961                  144      173,668

Net income                                                                    32,662                                         32,662
Cash dividends declared                                                       (5,202)                                        (5,202)
Treasury stock acquired (Note 13)                                                                    $(3,363)                (3,363)
Stock option exercises and 
        stock issued under restricted stock 
        plan (Notes 9, 10 and 13)                           94      1,367     (1,738)                  3,221                  2,944
    Change from net unrealized gain 
        to loss on securities available-for-sale, 
        net of tax (Note 1)                                                                (3,414)                           (3,414)
Reduction in ESOP loan guarantee                                                                                   143          143
Activity in Directors Deferred 
        Compensation Program and other, net (Note 10)       16        185                                142       179          522
                                                       -------    -------   --------      -------   --------   -------     --------
Balance December 31, 1996                              $11,262    $75,710   $112,975      $(2,453)  $      -   $   466     $197,960
                                                       =======    =======   ========      =======   ========   =======     ========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                       34



<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows 

                                                                                                    Year Ended December 31,
(Dollars in thousands)                                                                           1996         1995        1994
<S>                                                                                           <C>          <C>         <C>       
Cash flows from operating activities: 
  Net income                                                                                  $  32,662    $  14,958   $   4,746 
  Adjustments to reconcile net income to net cash provided by  
        operating activities:  
        Provision (credit) for possible loan losses                                             (18,600)      13,090      24,281  
        Depreciation and amortization                                                             5,541        5,244       5,295  
        Amortization of gain on sale/leaseback                                                                  (372)       (384)  
        (Accretion) amortization of securities discount or premium, net                            (140)         481         732  
        Gain on sale of bank subsidiary                                                          (6,806)  
        Securities gains, net                                                                    (1,113)      (1,802)     (1,105)  
        Gain on sale of other real estate owned, net                                               (558)        (450)       (384)  
        Writedowns of other real estate owned                                                       496        2,035       2,360  
        Deferred income tax expense (benefit)                                                     3,312       (1,558)      7,134  
        (Increase) decrease in other assets                                                      (6,220)     (15,415)      8,717  
        Increase in other liabilities                                                            15,605       29,083       4,432   
                                                                                              ---------    ---------    --------
                Net cash provided by operating activities                                        24,179       45,294      55,824
Cash flows from investing activities: 
        Proceeds from sales of securities available-for-sale                                     30,394       56,019      61,669 
        Proceeds from maturities of securities available-for-sale                               140,986       25,599     196,943 
        Purchases of securities available-for-sale                                             (145,941)    (223,026)   (144,794) 
        Purchases of securities held-to-maturity                                                                            (100) 
        Net (increase) decrease in federal funds sold                                          (142,069)      10,000      11,000 
        Net (increase) decrease in loans                                                       (137,067)     (21,689)     37,735 
        Proceeds from other real estate owned                                                     5,619       10,503       8,753 
        Proceeds from loans held-for-sale                                                        12,996 
        Purchases of premises and equipment                                                      (5,885)      (2,884)     (3,670) 
        Net cash proceeds from sale of bank subsidiary (Note 2)                                  11,989
        Net cash acquired from Branch Purchase (Note 2)                                         176,862
                                                                                              ---------    ---------    --------
                Net cash (used) provided by investing activities                                (52,116)    (145,478)    167,536
Cash flows from financing activities: 
        Net increase (decrease) in nontime deposits                                              42,024     (102,866)    (91,940) 
        Net (decrease) increase in certificates of deposit                                      (20,325)     124,797     (58,052) 
        Net increase (decrease) in short-term and other borrowings                               32,299       74,473     (71,279) 
        Cash dividends paid                                                                      (3,760)        (888) 
        Treasury stock acquired                                                                  (3,363) 
        Issuance of common stock for cash, net                                                    2,795        1,388         792
                                                                                              ---------    ---------    --------
                Net cash provided (used) by financing activities                                 49,670       96,904    (220,479)
                                                                                              ---------    ---------    --------
        Increase (decrease) in cash and cash equivalents                                         21,733       (3,280)      2,881
        Cash and cash equivalents at beginning of year                                           89,799       93,079      90,198
                                                                                              ---------    ---------    --------
        Cash and cash equivalents at end of year                                              $ 111,532    $  89,799    $ 93,079
                                                                                              =========    =========    ========
Supplemental disclosure of cash flow information: 
        Cash paid during the year for:  
                Interest                                                                      $  61,057    $  51,730   $  39,853
                                                                                              =========    =========    ========
                Income taxes                                                                  $  17,606    $   7,768   $   2,204
                                                                                              =========    =========    ========
Noncash transactions (Note 2): 
        Transfers from securities held-to-maturity to securities available-for-sale                        $     100 
                                                                                                           =========
        Transfers from other assets to securities available-for-sale                          $   4,180    $     499   $     300
                                                                                              =========    =========    ========
        Transfers from loans to other real estate owned                                       $   5,200    $   6,175   $  24,872
                                                                                              =========    =========    ========
        Transfers from loans to loans held-for-sale, net                                                   $  13,098 
                                                                                                           =========
        Financed other real estate owned sales                                                $     550    $     565   $  14,732 
                                                                                              =========    =========    ========
        Common stock issuance                                                                 $     492    $     784   $   1,837
                                                                                              =========    =========    ========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                       35

         Notes to Consolidated Financial Statements, December 31, 1996

(1) Nature of Operations and Summary of Significant Accounting Policies

UST Corp. is a bank holding company with two banking  subsidiaries:  USTrust and
United   States  Trust  Company   ("USTC"),   each   headquartered   in  Boston,
Massachusetts.  UST Corp.  and its  banking  and  nonbanking  subsidiaries  (the
"Company")  is engaged in a single line of  business,  that of providing a broad
range  of  financial   services   principally  to  individuals  and  small-  and
medium-sized companies in the New England region. Included in these services are
commercial banking, consumer services, trust and money management, and equipment
leasing.  The  Company  through  its  banking  subsidiaries  operates 48 banking
branches in the greater Boston area.

The  accounting  and reporting  policies of the Company  conform with  generally
accepted accounting principles and general practice in the banking industry. The
preparation  of financial  statements  in  conformity  with  generally  accepted
accounting  principles  requires the Company to make  estimates and  assumptions
that affect the reporting and  disclosure of assets and  liabilities,  including
those that are of a contingent  nature, at the date of the financial  statements
and the reported  amounts of revenues and expenses during the reporting  period.
Actual results could differ from those estimates. The significant accounting and
reporting policies of the Company are summarized below.

Principles of Consolidation

The consolidated  financial statements include the accounts of UST Corp. and its
wholly-owned  subsidiaries.  All material intercompany balances and transactions
have been eliminated.  The parent company only financial statements contained in
Note  17  reflect  investments  in  subsidiaries  using  the  equity  method  of
accounting.

Certain  reclassifications have been made to prior year balances to conform with
the current year presentation. Assets owned by others and held in a fiduciary or
agency capacity are not included in the consolidated balance sheets.

Securities

The Company  classifies  investments in debt and equity securities in accordance
with  Statement  of Financial  Accounting  Standards  No. 115 ("SFAS No.  115"),
"Accounting  for  Certain  Investments  in Debt  and  Equity  Securities."  This
Statement  addresses the  accounting  and reporting  for  investments  in equity
securities that have readily determinable fair values and for all investments in
debt  securities.  Under  this  statement  such  securities  are  classified  as
held-to-maturity, trading, or available-for-sale.

Securities  Held-to-Maturity - Debt securities which management has the positive
intent and ability to hold to maturity are classified as  held-to-maturity,  and
are carried at cost adjusted for the amortization of premium or the accretion of
discount.  At December 31, 1996 and 1995, there were no securities classified by
the Company as held-to-maturity.

Trading Securities - Debt and equity securities with readily determinable market
values that are bought and held  principally  for the purpose of selling them in
the near term are  classified  as  trading  securities  and are  carried at fair
value,  with  unrealized  gains and  losses  included  in current  earnings.  At
December 31, 1996 and 1995,  there were no securities  classified by the Company
as trading.

Securities  Available-for-Sale  - Debt and equity  securities  not classified as
either  held-to-maturity  or trading are  classified as  available-for-sale  and
carried at fair value, with unrealized  after-tax gains and losses reported as a
separate   component  of  stockholders'   investment.   At  December  31,  1996,
stockholders' investment was decreased by an unrealized loss related to SFAS No.
115 of $2.5 million net of a deferred tax benefit of $1.8 million.

For mortgage-backed  securities, the Company recalculates the effective yield on
the  investment to reflect the actual  prepayment  results and estimated  future
prepayments.  The net  investment in these  securities is adjusted to the amount
that would have existed had the new estimated  average life and effective  yield
been applied since the  acquisition  of the  securities.  Such  adjustments  are
charged or credited to interest income in the current period.

The  Company  determines  the  securities  sold by the  specific  identification
method.  The amount of taxes paid on gains is dependent upon the overall results
of operations of the subsidiary realizing the gain.


                                       36




Premises, Furniture and Equipment

Premises,   furniture  and  equipment  are  stated  at  cost,  less  accumulated
depreciation and amortization.  The Company provides for depreciation  using the
straight-line  method by charges to expense in amounts estimated to amortize the
cost over the estimated useful lives of the respective assets as follows:

Buildings and building improvements                                  10-40 years
Computer equipment                                                       5 years
All other furniture and equipment                                     3-10 years

Leasehold  improvements are amortized over the life of the lease agreements plus
one renewal period.

Loans and Leases

Loans are stated at their  principal  amount net of unearned  discount,  if any.
Certain loans are made on a discounted basis. The unearned  discount  applicable
to such loans is  recorded  as income  monthly by use of the  actuarial  method.
Interest income on nondiscounted  loans is accrued based on the principal amount
of loans outstanding.

Loans and leases are placed on nonaccrual,  with the reversal of all uncollected
accrued  interest,  when there is doubt as to the  collectibility of interest or
principal  or if loans or leases  are 90 days or more past due  unless  they are
both well  secured and in the process of  collection.  In every case,  a loan or
lease reaching 180 days past due is placed on nonaccrual.  Interest  received on
nonaccrual  loans and leases is applied to principal if  collection of principal
is doubtful; otherwise, it is reflected in interest income on a cash basis.

Restructured  loans are those on which concessions in terms have been granted as
a result of deterioration of a borrower's financial condition. Interest on these
loans is accrued at the new terms.

The Company adopted on January 1, 1995,  SFAS No. 114,  "Accounting by Creditors
for  Impairment  of a Loan," as amended by SFAS No. 118.  Under this  Statement,
commercial and  commercial  real estate loans that are recognized by the Company
as  nonaccrual  and  restructured  are  classified  as  "impaired  loans" by the
Company.  Consumer  loans and leases  recognized as nonaccrual are excluded from
impaired  loans in  accordance  with SFAS No. 114.  Loan  impairment is measured
based on the present  value of expected  future  cash flows,  discounted  at the
loan's  effective  interest  rate or, as a  practical  expedient,  at the loan's
observable  market  price or the fair  value  of the  collateral  if the loan is
collateral dependent.

Reserve for Possible Loan Losses

The  reserve  for  possible  loan  losses is  maintained  at a level  considered
adequate by  management  to provide for  possible  losses from loans and leases.
Adequacy  of the  reserve  is  determined  by  management  using  a  consistent,
systematic  methodology  which  analyzes the size and risk of the loan and lease
portfolio on a monthly basis.  Factors in this analysis include  historical loss
experience and asset quality, as reflected by delinquency trends, nonaccrual and
restructured  loans and the Company's credit risk rating profile.  Consideration
is  also  given  to  the  current  and  expected  economic  conditions  and,  in
particular, how such conditions affect the types of credits in the portfolio and
the market area in general.  This analysis is documented  using a combination of
numerical  and  qualitative  analysis  and  includes  sensitivity  testing and a
written conclusion.  The reserve is based on estimates,  and ultimate losses may
vary from current estimates.  These estimates are reviewed  periodically and, as
adjustments  become  necessary,  they are  reported  in  earnings in the current
period.

When a loan,  classified  as  impaired  or  otherwise,  or a lease,  or  portion
thereof,  is  considered  uncollectible,  it is  charged  against  the  reserve.
Recoveries  on amounts  previously  charged  off are added to the  reserve  when
collected.  Amounts  are  charged  off  once  the  probability  of loss has been
established  given  consideration  to such  factors as level of  collateral  and
guarantees,  prospective  economic  conditions  and  financial  strength  of the
customer.

Loans Held-For-Sale

In 1995, the Company  transferred  certain loans to an  accelerated  disposition
portfolio, "Loans held-for-sale." Such loans were transferred at their estimated
disposition  values less estimated cost of disposal.  The excess, if any, of the
loan balance over the  determined  value was charged to the reserve for possible
loan losses upon transfer.



                                       37


         Notes to consolidated Financial Statements, December 31, 1996

Other Real Estate Owned

Other real estate owned ("OREO") includes  properties which the Company acquired
through  foreclosure  or in settlement  of loans.  All OREO is held for sale and
carried at the lower of the loan value or fair value of the  property  acquired,
less  estimated  costs  to  sell  ("net  realizable  value").  At  the  time  of
foreclosure,  the  excess,  if any,  of the loan value  over the net  realizable
value, is charged to the reserve for possible loan losses. The carrying value of
OREO is  reviewed  periodically.  Subsequent  declines  in the fair value of the
property and net  operating  results of the property are charged to  "Foreclosed
asset and workout expense."

Income Taxes

Deferred tax assets and  liabilities  are reflected at currently  enacted income
tax  rates  applicable  to the  period  in which  the  deferred  tax  assets  or
liabilities  are  expected to be realized or settled.  As changes in tax laws or
rates are enacted,  deferred tax assets and liabilities are adjusted through the
income tax provision.

Earnings Per Share

Earnings per share is computed  using the weighted  average  number of shares of
common stock and common stock equivalents outstanding.  Common stock equivalents
consist  primarily of dilutive  outstanding  stock  options  computed  under the
treasury stock method.  Average dilutive common stock  equivalents were 343,314,
382,206 and 379,059 for 1996, 1995 and 1994, respectively.

Intangible Assets

Intangible assets include goodwill and core deposit intangibles which are stated
at cost less accumulated amortization. Cost of purchased businesses in excess of
net assets acquired  ("goodwill")  includes amounts being amortized over twenty-
and  forty-year  periods.  Values  assigned to deposits of purchased  businesses
("core deposit  intangibles")  are being amortized over seven- and  fifteen-year
periods using an accelerated method.

On a  periodic  basis,  the  Company  reviews  its  goodwill  and  core  deposit
intangible assets for events or changes in circumstances  that may indicate that
the carrying amount of the assets may not be  recoverable,  and, if appropriate,
reduces  the  carrying  amount  through a charge  to  income.  Goodwill,  net of
accumulated amortization,  totaled $2.4 million and $2.0 million at December 31,
1996 and  1995,  respectively.  Core  deposit  intangibles,  net of  accumulated
amortization,  totaled  $51.4  million and $2.7 million at December 31, 1996 and
1995, respectively. The increase in both intangible asset categories during 1996
was related to the purchase of twenty  banking  branches.  The allocation of the
purchase  price to intangible  assets from the branch  acquisition is subject to
the completion of certain appraisals of the assets acquired. Refer to Note 2 for
a further discussion.

Statements of Cash Flows

For the purpose of reporting cash flows, cash and cash equivalents  include cash
on hand, amounts due from banks and interest-bearing deposits.

Recent Accounting Developments

As of January 1, 1996,  the Company  adopted SFAS No. 121,  "Accounting  for the
Impairment of Long-lived  Assets and for  Long-lived  Assets to be Disposed of."
This Statement requires a review for impairment of long-lived assets and certain
identifiable  intangibles  to be held and used by an entity  whenever  events or
changes in circumstances  indicate that the carrying amount of the asset may not
be  recoverable.  An  impairment  would be  estimated if the sum of the expected
future cash flows to result from the use and eventual  disposition  of the asset
is less than the carrying amount of the asset.  This Statement does not apply to
financial  instruments,  core deposit intangibles,  mortgage and other servicing
rights, or deferred tax assets.  The adoption of this Statement did not have any
impact on the Company's financial position or results of operations.

Also on January 1, 1996,  the  Company  adopted  SFAS No. 122,  "Accounting  for
Mortgage Servicing Rights." This Statement amends certain provisions of SFAS No.
65, "Accounting for Mortgage Banking Activities," prohibiting the capitalization
of mortgage loan servicing rights acquired through loan origination  activities,
by requiring that both originated and purchased  mortgage loan servicing  rights
be capitalized. In addition, SFAS No. 122 requires all capitalized mortgage loan
servicing  rights be evaluated for  impairment  based on their fair values.  The
adoption of this  Statement did not have any impact on the  Company's  financial
position or results of operations.

In October  1995,  the FASB  issued SFAS No. 123,  "Accounting  for  Stock-Based
Compensation,"  which  establishes a fair  value-based  method of accounting for
stock options and similar equity instruments of


                                       38


employee stock compensation  plans. This Statement allows the option of adopting
the new fair value  method or to continue to measure  compensation  cost for the
those plans using the current  intrinsic  value-based  method as  prescribed  by
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees,"  ("APB Opinion No. 25"). Under this Statement,  the continued use of
the intrinsic  value-based  method,  requires pro forma disclosure of net income
and earnings per share as if the fair value-based  method had been applied.  The
Statement was adopted by the Company on January 1, 1996.  The Company,  however,
continues to use the intrinsic  value-based  method under the  provisions of APB
Opinion No. 25 and has disclosed the pro forma information in Note 10.

In June  1996,  the  FASB  issued  SFAS No.  125 as  amended  by SFAS  No.  127,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of Liabilities." This Statement provides  accounting and reporting standards for
transfers and servicing of financial assets and  extinguishments of liabilities.
The  standards  are based on consistent  application  of a financial  components
approach  that  focuses on control.  After a transfer of  financial  assets,  an
entity  recognizes  the  financial  and  servicing  assets it  controls  and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered,  and  derecognizes  liabilities when  extinguished.  This Statement
provides consistent  standards for distinguishing  transfers of financial assets
that are sales from  transfers  that are secured  borrowings.  This Statement is
effective  for  transactions  occurring  after  December 31, 1996,  and is to be
applied prospectively.  This Statement is not expected to have a material impact
on the Company's financial condition or results of operations.

On March 3, 1997,  the FASB  issued  SFAS No. 128,  "Earnings  Per Share."  This
Statement  supersedes APB Opinion No. 15 regarding the  presentation of earnings
per share ("EPS") on the face of the income statement. SFAS No. 128 replaces the
presentation  of Primary  EPS with a Basic EPS  calculation  that  excludes  the
dilutive  effect of common  stock  equivalents.  The  Statement  requires a dual
presentation  of Basic and Diluted  EPS,  which is computed  similarly  to Fully
Diluted  EPS  pursuant  to APB Opinion  No. 15, for all  entities  with  complex
capital  structures.  This  Statement is effective for fiscal years ending after
December  15,  1997  and  requires  restatement  of all  prior-period  EPS  data
presented.  The  Statement  is not  expected  to have a  material  impact on the
Company's earnings per share presentation.

(2) Acquisitions and Divestitures

Branch Purchase 

In June 1996, the Company's principal banking subsidiary,  USTrust, entered into
a definitive  agreement with the First National Bank of Boston  ("FNBB") and its
parent company,  Bank of Boston Corporation,  under which USTrust would purchase
twenty  banking  branches  ("the Branch  Purchase")  of FNBB and  BayBank,  N.A.
("BayBank").  The  transaction  included the  assumption of  approximately  $149
million in noninterest-bearing  deposits, $378 million in savings deposits, $140
million of certificates  of deposit,  $77 million of repurchase  agreements,  $8
million in premises and equipment,  and $508 million in commercial,  residential
real  estate,  and other loans with  businesses  and  consumers.  USTrust paid a
premium  equal  to  7  percent  of  average  deposit   liabilities   assumed  or
approximately  $49 million.  The  allocation of purchase price is subject to the
completion of certain  appraisals of assets acquired.  The transaction  received
bank regulatory approval under the condition that USTrust have a Tier 1 leverage
capital  ratio of not less than (i) 4.8  percent,  no later  than ten days after
consummation of the acquisition of sixteen BayBank branches; and (ii) 5 percent,
no later than three months after  consummation of the acquisition of the BayBank
branches  and for a period of six  months  thereafter.  At  December  31,  1996,
USTrust's Tier 1 leverage capital ratio was 5.77 percent.

UST Bank/Connecticut

On November 29, 1996, the Company completed the sale of its Connecticut  banking
subsidiary,  UST Bank/Connecticut  ("UST/Conn"),  to Lafayette American Bank and
Trust  company,  a subsidiary of HUBCO,  Inc., a New  Jersey-based  bank holding
company.  Under the terms of the  transaction,  the Company received cash of $13
million representing  UST/Conn's capital plus a deposit premium of 7 percent. As
a result,  the Company  recorded a $6.8 million gain on the sale in  noninterest
income.  The positive effect on capital from the gain and cash proceeds received
in the  sale  transaction  provided  the  Company  with the  necessary  funds to
contribute capital to USTrust to facilitate the aforementioned  Branch Purchase.
At the time of the sale,  UST/Conn had total assets, of $107 million,  including
loans of $70  million,  securities  of $22  million,  federal  funds sold of $15
million,  premises and equipment of $.5 million,  and other real estate owned of
$.1 million.  Liabilities totaled $101 million and included  noninterest-bearing
deposits  of $22  million,  $41  million in savings  deposits,  certificates  of
deposit of $32 million and $4 million in other borrowings.


                                       39


         Notes to consolidated Financial Statements, December 31, 1996

Walden Bancorp, Inc.

Subsequent to December 31, 1996, on January 3, 1997,  the Company  completed its
acquisition of Walden Bancorp,  Inc.  ("Walden"),  a multi-bank  holding company
headquartered  in Acton,  Massachusetts.  The transaction was accounted for as a
pooling of interests and was structured as a tax-free  exchange of 1.9 shares of
the Company's  common stock for each share of Walden common stock. The Company's
outstanding stock increased by 10,125,540 shares to a total of 28,144,163 shares
on the date of acquisition. Based on the closing price of the Company's stock as
of January  3, 1997,  the market  value of the  shares  exchanged  totaled  $207
million.   Walden's  two  subsidiary  banks,  The  Bank  of  Braintree  and  The
Co-operative  Bank of Concord operate a total of seventeen  branches  located in
Massachusetts  counties of Middlesex,  Norfolk and Plymouth. It is expected that
these  banks  will be merged  with  USTrust,  the  Company's  principal  banking
subsidiary,  during 1997. At December 31, 1996, Walden had total loans and total
assets of $604 million and $1.0 billion,  respectively,  and total  deposits and
total stockholders' investment of $750 million and $98 million, respectively.

The  following  unaudited pro forma  consolidated  financial  information  as of
December 31, 1996 and for the years ended  December 31, 1996,  1995 and 1994 has
been  prepared  to give  effect to the Walden  acquisition  using the pooling of
interests method of accounting.  The unaudited pro forma consolidated statements
of income data have been  derived from the audited  statements  of income of the
Company and Walden for the years ended  December  31, 1996,  1995 and 1994.  The
unaudited  pro forma  balance  sheet  data have been  derived  from the  audited
consolidated  balance  sheets of the Company and Walden as of December 31, 1996.
Such unaudited pro forma consolidated  financial  information is not necessarily
indicative of the results of operations or financial  condition which would have
actually been reported had the merger of the Company and Walden  occurred on the
assumed  dates,  nor is it  necessarily  indicative  of the  future  results  of
operations  or  financial  condition  of the Company.  The  unaudited  pro forma
December 31, 1996 balance sheet data reflects an after-tax  charge for estimated
merger  and  reorganization  expenses  as of the  date  of this  filing  of $9.1
million,  ($13.5  million  pre-tax)  net of an  estimated 40 percent tax benefit
(after excluding $2.5 million of nondeductible  expense);  however,  since these
expenses are  nonrecurring,  they have not been  reflected in the  unaudited pro
forma statements of income data. The pro forma statements of income data also do
not  give  effect  to any  anticipated  cost  savings  in  connection  with  the
combination.

<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Statements of Income Data: 

                                                                                   Year Ended December 31,
(Dollars in thousands, except share amounts)                              1996            1995            1994
<S>                                                                   <C>              <C>             <C>      
Net interest income                                                   $ 135,255        $ 133,360       $ 127,792
Provision (credit) for possible loan losses                             (17,300)          14,115          25,481
Noninterest income                                                       44,216           38,698          38,002
Noninterest expense                                                     126,329          118,820         119,133
Net income                                                            $  43,181        $  24,257       $  14,234
Net income per share                                                  $    1.52        $     .86       $     .51
</TABLE>

Unaudited Pro Forma Consolidated Balance Sheet Data: 
(Dollars in thousands)                                        December 31, 1996

Total loans, net of reserve for possible loan losses              $ 2,402,609
Total assets                                                        3,684,743
Total deposits                                                      2,855,812
Total stockholders' investment                                    $   286,490

(3) Restrictions on Cash and Due From Banks

At December 31, 1996 and 1995,  cash and due from banks  included  $32.7 million
and $34.8  million,  respectively,  to satisfy the reserve  requirements  of the
Federal Reserve.


                                       40

(4) Securities

A comparison of the amortized  cost,  estimated fair value and gross  unrealized
gains  and   losses  as  of   December   31,   1996  and  1995  for   securities
available-for-sale follows:



<TABLE>
<CAPTION>
                                                                                     1996
                                                                               Gross          Gross
                                                            Amortized     Unrealized     Unrealized              Fair
(Dollars in thousands)                                           Cost          Gains         Losses             Value
<S>                                                         <C>            <C>           <C>                <C>       
Securities available-for-sale: 
        Mortgage-backed securities: 
                FHLMC                                       $ 139,886      $     735     $   (1,783)        $ 138,838 
                FNMA                                           78,931            370         (1,161)           78,140   
                                                            ---------      ---------     ----------         ---------
                        Total mortgage-backed securities      218,817          1,105         (2,944)          216,978 
U.S. Treasury and federal agencies                            172,828             96         (2,863)          170,061 
Asset-backed securities                                        61,640             75            (74)           61,641 
FHLBB equity securities*                                       38,851                                          38,851 
Corporate debt securities                                      30,142             42             (4)           30,180 
States and municipalities                                       2,233             42                            2,275 
Marketable equity securities                                    1,667            257             (6)            1,918 
Foreign governments                                               365                                             365 
All other securities*                                           5,905                                           5,905 
                                                            ---------      ---------     ----------         ---------
                Total securities available-for-sale         $ 532,448      $   1,617     $   (5,891)        $ 528,174
                                                            =========      =========     ==========         =========
</TABLE>

* Equity  securities  of the  Federal  Home Loan Bank of  Boston  ("FHLBB")  and
certain other securities,  which did not have readily determinable market values
at December  31, 1996,  were  carried at cost.  The  Company's  largest  banking
subsidiary,  USTrust,  became a member of the FHLBB in 1996 and is  required  to
invest  in  the  FHLBB  in an  amount  equal  to the  greater  of 1  percent  of
residential mortgage loans,  including certain  mortgage-backed  securities,  or
three-tenths  of 1  percent  of  total  assets  or  a  specified  percentage  of
outstanding advances.

<TABLE>
<CAPTION>
                                                                                            1995
                                                                                    Gross          Gross
                                                                Amortized      Unrealized     Unrealized          Fair
(Dollars in thousands)                                               Cost           Gains         Losses         Value
<S>                                                              <C>            <C>            <C>            <C>       
Securities available-for-sale: 
        Mortgage-backed securities:  
                FHLMC                                            $155,916       $   1,486      $    (411)     $156,991  
                FNMA                                               89,239             799           (508)       89,530  
                                                                 --------       ---------      ---------      --------
                        Total mortgage-backed securities          245,155           2,285           (919)      246,521 
U.S. Treasury and federal agencies                                197,641             570         (1,244)      196,967 
Asset-backed securities                                            85,157             443                       85,600
Corporate debt securities                                          40,499             323             (2)       40,820 
States and municipalities                                           3,169              85                        3,254 
Marketable equity securities                                        1,806             159            (20)        1,945 
Foreign governments                                                   390                                          390 
All other securities                                                  176                                          176  
                                                                 --------       ---------      ---------      --------
                        Total securities available-for-sale      $573,993       $   3,865      $  (2,185)     $575,673
                                                                 ========       =========      =========      ========
</TABLE>

The amortized cost and estimated  fair value of debt  securities at December 31,
1996 and 1995, by  contractual  maturity,  are shown in the table below.  Actual
maturities  are  expected to differ from  contractual  maturities  because  some
borrowers have the right to prepay without penalty.  Mortgage-backed  securities
are shown at their  final  maturity  but are  expected to have  shorter  average
lives. Equity securities,  which have no contractual maturity,  are presented in
the aggregate.


                                       41



         Notes to consolidated Financial Statements, December 31, 1996

<TABLE>
<CAPTION>
                                                            1996                        1995
                                                  Amortized       Estimated    Amortized    Estimated
(Dollars in thousands)                                 Cost      Fair Value         Cost   Fair Value
<S>                                               <C>            <C>            <C>         <C>       
Securities available-for-sale:
Mortgage-backed securities: 
        Due after 1 year through 5 years          $     573      $      591
        Due after 5 years through 10 years           62,928          63,040     $ 38,276    $  38,521 
        Due after 10 years                          155,316         153,347      206,879      208,000   
                                                  ---------      ----------     --------    ---------
                Total mortgage-backed securities    218,817         216,978      245,155      246,521
All other debt securities: 
        Due in 1 year or less                        33,839          33,885       22,052       22,197 
        Due after 1 year through 5 years            199,930         198,196      233,296      233,676 
        Due after 5 years through 10 years           32,964          31,949       70,594       70,198 
        Due after 10 years                              475             492          914          960   
                                                  ---------      ----------     --------    ---------
                Total debt securities               486,025         481,500      572,011      573,552
Equity securities and other                          46,423          46,674        1,982        2,121   
                                                  ---------      ----------     --------    ---------
                Total                             $ 532,448      $  528,174     $573,993    $ 575,673
                                                  =========      ==========     ========    =========
</TABLE>

Total gross realized gains, gross realized losses, and proceeds from the sale or
other  disposition  of securities  available-for-sale  for the three years ended
December 31 were:

(Dollars in thousands)                   1996           1995        1994
Securities available-for-sale:
        Debt securities:
                Gross realized gains    $    14      $    132     $    79      
                Gross realized losses      (333)         (229) 
                Proceeds from sales*     28,809        53,474      60,061
        Equity securities:  
                Gross realized gains    $ 1,551      $  2,148     $ 1,026  
                Gross realized losses      (119)         (249)  
                Proceeds from sales*      1,585         2,545       1,608

*  Excluded  from  1996  proceeds  from  sales  was a  reduction  in  securities
available-for-sale of $21.4 million in debt securities and $.1 million in equity
securities in connection with the UST/Conn sale.

At December  31,  1996,  securities  carried at $309.7  million  were pledged to
secure public and trust deposits, securities sold under agreements to repurchase
and for other purposes as required by law.

(5) Loans

The composition of the loan portfolio (net of unearned discount) at December 31,
1996 and 1995 was as follows:

(Dollars in thousands)                             1996    1995    
Commercial and financial                    $  746,762     $  642,940
Commercial real estate: 
        Construction                            27,256         16,937 
        Developer, investor and land           172,390        207,710
Consumer: 
        Residential mortgage                   443,071         85,806 
        Home equity                             86,046         70,066 
        Indirect automobile installment        301,072        197,148 
        Other consumer                          31,026         23,015
Lease financing                                 40,519         28,455
                                            ----------     ----------
                                             1,848,142      1,272,077
Reserve for possible loan losses               (38,789)       (56,029)
                                            ----------     ----------
                                            $1,809,353     $1,216,048
                                            ==========     ==========

                                       42


Most  of the  Company's  lending  activity  is  with  customers  located  within
Massachusetts.   At  year-end  1996,  the  Company's  exposure  to  credit  risk
principally  secured by commercial real estate, home equity and residential real
estate  included  $729  million  of  loans.  Refer  to  Note  16 for  additional
discussion of concentration of credit risk.

Reserve for Possible Loan Losses

An analysis of the  reserve for  possible  loan losses for the three years ended
December 31, 1996, 1995 and 1994 is as follows:

<TABLE>
<CAPTION>
(Dollars in thousands)                          1996           1995         1994
<S>                                          <C>           <C>           <C>      
Balance at beginning of period               $   56,029    $   64,088    $  64,465

Chargeoffs/transfers                              5,859        29,074       31,059
Recoveries on loans previously charged-off        9,323         7,925        6,401
                                             ----------    ----------    ---------
Net (recoveries) chargeoffs                      (3,464)       21,149       24,658

Provision (credit) for possible loan losses     (18,600)       13,090       24,281
Reserve of sold bank                             (2,104)
                                             ----------    ----------    ---------
Balance at end of period                     $   38,789    $   56,029    $  64,088
                                             ==========    ==========    =========
</TABLE>

At December 31, 1996, total impaired loans were $24.2 million,  comprised of $.5
million  that  required  reserves of $.3 million and $23.7  million that did not
require a related  reserve  since there was no dollar  impairment as measured by
the  provisions of SFAS No. 114. As of December 31, 1995,  total  impaired loans
were $25.7  million  comprised  of $1.4 million  that  required  reserves of $.3
million and $24.3  million that did not require a related  reserve.  The average
recorded  investment in impaired loans for the years ended December 31, 1996 and
1995 was $21 million and $45 million,  respectively. The methodology used in the
required  reserve  calculation  utilized the fair value of  collateral.  For the
years  ended  December  31,  1996 and 1995,  the  amount of  interest  income on
impaired  loans that would have been  recognized if the loans had been paying in
accordance  with  their  original  terms,  was $2.6  million  and $2.9  million,
respectively, while the amount recognized as interest income in the same periods
was $.5 million and $.9 million, respectively.

(6) Premises, Furniture and Equipment

A summary of the accounts as of December 31, 1996 and 1995 is as follows:

(Dollars in thousands)                               1996         1995    
Land                                              $   3,201   $    2,746
Buildings and leasehold improvements                 40,263       33,037
Furniture and equipment                              19,882       15,343
                                                  ---------   ----------
                                                     63,346       51,126
Accumulated depreciation and amortization           (21,834)     (19,286)
                                                  ---------   ----------
                                                  $  41,512   $   31,840
                                                  =========   ==========
Depreciation and amortization expenses reflected in the consolidated  statements
of income were $3.8  million,  $3.4 million and $3.9  million in 1996,  1995 and
1994, respectively.

(7) Other Real Estate Owned

Other real estate owned is stated net of a valuation  allowance.  An analysis of
the  valuation  allowance  for the three  years  ended  December  31, 1996 is as
follows:

        Year Ended December 31,
(Dollars in thousands)              1996       1995        1994

Balance at beginning of period     $  568     $ 1,044     $ 4,635
Chargeoffs                           (744)     (2,511)     (5,951)
Provision charged to operations       496       2,035       2,360
                                   ------     -------     -------
Balance at end of period           $  320     $   568     $ 1,044
                                   ======     =======     =======


                                       43



Notes to consolidated Financial Statements, December 31, 1996

The net cost of other real estate owned included in foreclosed asset and workout
expense in the income statement was  approximately  $700 thousand,  $3.6 million
and $5.3  million in 1996,  1995 and 1994,  respectively.  These  costs  include
provisions  charged to operations to reflect reductions in net realizable value,
net gain or loss on sales and cost of maintaining and operating the properties.

(8) Short-term and Other Borrowings

Short-term borrowings consisted of the following at December 31, 1996 and 1995:

(Dollars in thousands)                                      1996         1995

Short-term borrowings:
        Federal funds purchased                          $  96,677    $  57,406
        Securities sold under agreements to repurchase     236,552      172,689
        Treasury tax and loan note account                  14,837       12,867
Other borrowings                                                            143
                                                         ---------    ---------
                                                         $ 348,066    $ 243,105 
                                                         =========    =========

During the year the Company's largest subsidiary bank, USTrust,  became a member
of the FHLBB.  As of December 31, 1996,  the bank had a borrowing  capacity with
the FHLBB of $287.5 million which the bank utilized and classified as short-term
borrowings  during the year.  As of December  31, 1996,  however,  there were no
FHLBB advances outstanding.

The weighted  average  interest rates for short-term  borrowings at December 31,
1996 and 1995 were 4.93  percent  and 4.98  percent,  respectively.  The average
outstanding short-term borrowings were $328.8 million in 1996 and $179.3 million
in 1995. The approximate  weighted  average  interest rates during the year were
4.95 percent in 1996 and 5.18 percent in 1995.  The maximum amount of short-term
borrowings  outstanding  at any month end was $577.8  million in 1996 and $243.0
million in 1995.

(9) Employee Benefit Plans

The Company has a noncontributory,  defined benefit retirement plan covering all
employees who meet specified age and employment  requirements.  The Company also
has a nonqualified,  unfunded supplemental retirement plan, which covers certain
officers of the Company.  The plans provide  pension  benefits that are based on
the employee's  compensation  during the highest four  consecutive  years before
retirement.  The  following  summary  sets forth each plan's  funded  status and
amounts included in the Company's consolidated balance sheets as of December 31,
1996 and 1995:

<TABLE>
<CAPTION>
                                                                          Qualified Plan       Supplemental Plan
(Dollars in thousands)                                                    1996      1995        1996        1995    

Actuarial present value of benefit obligations: 
<S>                                                                    <C>        <C>         <C>         <C>      
        Vested benefit obligation                                      $ 15,781   $ 15,124    $  1,372    $  1,186 
        Nonvested benefit obligation                                      1,159        402          91          26 
                                                                       --------   --------    --------    --------
        Accumulated benefit obligation                                   16,940     15,526       1,463       1,212 
        Effect of projected future compensation levels                    4,423      3,863         423         330
                                                                       --------   --------    --------    --------
Projected benefit obligation for service rendered to date                21,363     19,389       1,886       1,542
Plan assets, primarily listed stocks and U.S. bonds                      22,907     20,514
                                                                       --------   --------    --------    --------
Excess (deficiency) of plan assets over projected benefit obligation      1,544      1,125      (1,886)     (1,542)
Unrecognized (gain) loss                                                   (454)     2,753        (238)       (197)
Unrecognized prior service asset (obligation)                             1,115       (683)        541         292
Unrecognized net transition asset                                        (1,083)    (1,354)
                                                                       --------   --------    --------    --------
Prepaid (accrued) costs included in other assets (other liabilities)   $  1,122   $  1,841    $ (1,583)   $ (1,447) 
                                                                       ========   ========    ========    ========
</TABLE>

The actuarial assumptions used were as follows:

                                                          1996            1995

Discount rate                                             7.5%            7.0%
Rate of increase of future compensation levels            4.5%            4.0%
Expected rate of return on plan assets                    8.0%            9.0%


                                       44



Net pension cost for 1996, 1995 and 1994 included the following components:

(Dollars in thousands)                              1996      1995      1994

Service cost benefit earned during the period     $ 1,337   $   862   $ 1,050
Interest cost on projected benefit obligation       1,473     1,377     1,265
Return on plan assets                              (3,032)   (4,248)      325
Net amortization and deferral                       1,173     2,805    (1,789)
                                                  -------   -------   -------
        Net pension cost                          $   951   $   796   $   851
                                                  =======   =======   =======

The Company has an Employee  Savings Plan which  qualifies as a deferred  salary
arrangement  under Section 401(k) of the Internal  Revenue Code. Under the Plan,
participating  employees  may defer a portion up to 10  percent of their  pretax
earnings not to exceed the Internal Revenue Service annual contribution  limits.
During 1996 the Company matched each eligible  employee's  contributions up to 5
percent of the employee's earnings. The rate of matching was 100 percent for the
first 1 percent of each  employee's  contribution  and a rate of 25 percent  for
contributions of greater than 1 percent up to the 5 percent  maximum.  Effective
January  1,  1997,  the  Company  increased  the  maximum  amount  participating
employees  may defer from 10 percent to 12 percent.  The Company also  increased
its matching  contribution from 5 percent to 6 percent. The new rate of matching
is 100 percent  for the first 2 percent of each  employee's  contribution  and a
rate of 25  percent  for  contributions  greater  than 2 percent up to the new 6
percent maximum.

The  Company  has  an  employee  stock  ownership  plan  ("ESOP")  which  covers
substantially  all of its  employees.  The plan is  administered  by a committee
designated  by the Board of  Directors  and is  maintained  in a separate  trust
established for that purpose.  Under the plan, the Company  contributes either a
fixed amount or a percentage of compensation of all participants.

Certain key employees are awarded  shares of the Company's  common stock through
the Company's Restricted Stock Ownership Plan adopted in 1989 and the restricted
stock  program of the Stock  Compensation  Plan  adopted in 1992 and  amended in
1994.  Under these  restricted  stock plans 512,970  shares of common stock have
been granted.  The shares vest to the employee over varying schedules.  In 1996,
44,466  restricted  shares vested under this plan.  At December 31, 1996,  there
were 54,600 unvested restricted shares outstanding.

Expenses relating to the plans were as follows:

<TABLE>
<CAPTION>
                                           Year Ended December 31,
                                           Employee                     Employee Savings
(Dollars in thousands)    Pension   Stock Ownership   Restricted Stock       Plan 401(k)     
<C>                          <C>               <C>                <C>               <C> 
1996                         $951              $425               $531              $453
1995                          796               425                490               273
1994                          851               425                558               198     
</TABLE>

(10) Stock Options

The Company has a Stock  Compensation  Plan for officers and key employees under
the terms of which the Company may issue incentive  stock options,  nonqualified
stock  options and shares of  restricted  stock.  At December 31,  1996,  64,509
shares of the Company's common stock remained  available for future grants.  The
Company's Stock  Compensation  Plan provides that the number of shares of common
stock  reserved for future grants under the plan be increased by an amount equal
to 1.25  percent  of the number of shares  outstanding  on the first day of each
fiscal  year.  As a result,  as of January 1, 1997,  225,233  additional  common
shares are to be reserved  for future  grants.  The vesting  periods for options
under  this Plan  range from  immediate  vesting  at grant date to 5 years.  The
expiration periods for options under this Plan range from 5 to 10 years.

The Company has two stock option plans for Directors,  the 1996 Director  Option
Plan and the 1995  Director  Option Plan.  Eligible  Directors  received  option
grants at fair value for 5,000  shares in 1996 and up to 7,500 shares in 1995. A
total of 150,000 shares of the Company's common stock were reserved for issuance
under each Plan.  The vesting  periods for options  under these Plans range from
immediate  vesting at grant date to 3 years. The expiration  periods for options
under these Plans range from 5 to 10 years.

The vesting  periods for certain options under the  aforementioned  employee and
Director  Plans  can be  accelerated  in  accordance  with  the  Plans  based on
prescribed  movement  in the  market  price  of the  Company's  stock  or  other
conditions.  Under all option Plans the option exercise price equaled the market
price of the Company's stock on date of grant.


                                       45


         Notes to consolidated Financial Statements, December 31, 1996

The Company has opted to continue to measure  stock  compensation  in accordance
with APB Opinion No. 25. Refer to Note 1, Recent Accounting Developments,  for a
further  discussion.  If the  Company had  determined  stock  compensation  cost
consistent  with the fair  value  alternative  contained  in SFAS No.  123,  the
Company's  net income and  earnings per share would have been reduced to the pro
forma amounts presented in the table below.

                                                         Year Ended December 31,
(Dollars in thousands, except share amounts)                 1996      1995

Net income:
        As reported                                         $ 32,662  $ 14,958
        Pro forma                                           $ 31,959  $ 14,790
Earnings per share:
        As reported                                         $   1.79  $    .83
        Pro forma                                           $   1.75  $    .82

The following  table presents the activity for the employee stock option program
under the Stock Compensation Plan and the activity in the Stock Option Plans for
Directors for the years ended December 31, 1996, 1995, and 1994:

                         Number of Shares   Exercise Price  Weighted Average
                             Under Option        Per Share    Exercise Price

Outstanding December 31, 1993     709,359      $5.00 - $12.00    $ 6.74
Granted in 1994                 1,004,500      $9.00 - $13.38    $10.41
Canceled in 1994                 (283,337)     $6.07 - $13.38    $12.50
Exercised in 1994                (128,358)     $6.07 - $8.62     $6.17
                                ---------
Outstanding December 31, 1994   1,302,164      $5.00 - $12.00    $8.46
                                ---------                                

Granted in 1995                   282,300      $10.75 - $14.13   $13.21
Canceled in 1995                  (26,365)     $6.07 - $9.75     $8.68
Exercised in 1995                (195,206)     $5.00 - $9.75     $6.74
                                ---------
Outstanding December 31, 1995   1,362,893      $5.00 - $14.13    $9.61
                                ---------

Granted in 1996                   320,500      $13.44 - $14.81   $13.91
Canceled in 1996                  (34,849)     $6.07 - $12.88    $10.16
Exercised in 1996                (384,804)     $6.07 - $13.44    $7.04
                                ---------
Outstanding December 31, 1996   1,263,740      $5.00 - $14.81    $11.47
                                =========

Options exercisable at:  
        December 31, 1994         769,186      $5.00  - $12.00   $8.06  
        December 31, 1995         838,614      $5.00  - $14.13   $8.48  
        December 31, 1996       1,141,340      $5.00  - $14.81   $11.30

At December 31, 1996, 199,840 of the 1,263,740 options outstanding have exercise
prices between $5.00 and $9.00,  with a weighted average exercise price of $8.85
and a  weighted  average  remaining  contractual  life of 2.8  years.  Of  these
options,  197,840 are exercisable at a weighted average exercise price of $8.85.
The remaining  1,063,900  options have exercise prices between $9.75 and $14.81,
with a  weighted  average  exercise  price  of  $11.96  and a  weighted  average
remaining  contractual  life  of  5.4  years.  Of  these  options,  943,500  are
exercisable at a weighted average exercise price of $11.81.

The  weighted  average  fair value of  options  granted  during the years  ended
December 31, 1996 and 1995 was $1.99 and $3.36, respectively.  The fair value of
each option  grant is  estimated  on the date of grant  using the  Black-Scholes
option pricing model with the following  weighted-average  assumptions  used for
grants in 1996 and 1995:

                                                 Year Ended December 31,
                                                     1996        1995    
Risk-free interest rate                              5.94%       5.15%
Expected dividend yield                              3.5%        3.5%
Expected life in years                               2.3         2.0
Expected volatility                                 18.12%      18.25%

                                       46




In December  1994,  the Board of  Directors  authorized  an option  substitution
program  permitting  employees to surrender options with an option price of more
than $9.75 (the fair market  value) in exchange for new options on a one-for-one
basis. Outstanding options for 273,500 shares were exchanged under the program.

The Company  has a Directors  Deferred  Compensation  Program  under which up to
250,000 shares of the Company's  common stock may be granted to Directors of the
Company or its banking  subsidiaries who choose to receive their Director's fees
or stipend in shares of the Company in lieu of cash.

(11) Noninterest Expense

Deposit Insurance Assessment

The Company's deposit insurance assessment reflects premiums paid to two Federal
Deposit  Insurance  Corporation  ("FDIC") funds, the Bank Insurance Fund ("BIF")
for banks,  as well as the  Savings  Association  Insurance  Fund  ("SAIF")  for
savings and loan associations  ("Thrifts") due to the Company's 1990 purchase of
deposits of a failed Thrift  institution.  The deposit insurance  assessment for
the year ended  December 31, 1996 reflects a reduction in expense due to reduced
premium rates by the FDIC on BIF  balances,  offset with a one-time $3.0 million
assessment by the SAIF on the former Thrift deposits held by the Company.

Acquisition Charges

The 1996  acquisition  charges  include  $793  thousand in expenses  incurred in
connection  with the  January  1997  acquisition  of Walden  and a $5.1  million
provision for acquisition expenses related to the Branch Purchase for a total of
$5.9  million.

The 1996 acquisition charges for Walden were primarily for professional,  legal,
accounting and investment banking services incurred which were not contingent on
the  completion of the  transaction.  The Branch  Purchase  provision  consisted
largely of customer-related expenses such as direct mailings, replacement checks
and ATM and Debit cards,  promotions,  target  advertising and various incentive
programs directed toward the new customers acquired in the purchase transaction.
The major components of acquisition charges were:

(Dollars in thousands)                              Year Ended December 31, 1996

Customer communications and retention                       $  3,185
Professional services                                          2,043
Regulatory fees and filings                                      172
Other                                                            533
                                                            --------
                                                            $  5,933
                                                            ========

During  1997,  the Company  expects to record a pretax  restructuring  charge of
approximately $13.5 million in connection with the Walden acquisition.

Other Noninterest Expense

The major components of other noninterest expense were:

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
(Dollars in thousands)                                    1996      1995      1994
<S>                                                     <C>       <C>       <C>    
Furniture and equipment depreciation and maintenance    $ 4,164   $ 3,572   $ 3,476
Legal and consulting                                      2,994     2,356     3,553
Advertising and promotion                                 2,867     2,123     2,307
Amortization of intangibles                               1,703     1,798     1,367
Service bureau and other data processing                  1,657     1,274     1,173
Facility consolidation provisions                            84     1,895       480
All other                                                12,463     9,951    11,171
                                                        -------   -------   -------
        Total other noninterest expense                 $25,932   $22,969   $23,527
                                                        =======   =======   =======

</TABLE>

                                       47



         Notes to consolidated Financial Statements, December 31, 1996

(12) Income Taxes

The income tax provision  (benefit)  included in the consolidated  statements of
income consisted of the following:

                                         Year Ended December 31,
(Dollars in thousands)               1996           1995            1994

Current tax expense (benefit)*:
        Federal                    $ 11,705       $  7,860       $  (6,230)
        State                         5,997          2,867           1,147
                                   --------       --------       ---------
                                     17,702         10,727          (5,083)
                                   --------       --------       ---------
Deferred tax expense (benefit):
        Federal                       4,463         (1,735)          6,588
        State                        (1,151)           177             546
                                   --------       --------       ---------
                                      3,312         (1,558)          7,134
                                   --------       --------       ---------
                 Total             $ 21,014       $  9,169       $   2,051
                                   ========       ========       =========

* The 1996 and 1995 current  provisions  do not reflect  $301  thousand and $286
thousand,  respectively, of tax benefits related to stock options exercised that
were credited directly to additional paid-in capital.

As of December 31, 1996 and 1995,  cumulative  deferred tax assets,  included in
the  consolidated  balance sheets as other assets,  amounted to $5.0 million and
$8.7 million,  respectively,  while cumulative  deferred tax liabilities of $1.3
million and $1.7  million,  respectively,  were  included in other  liabilities.
Additionally,  at  December  31,  1996,  there  were tax refund  receivables  of
approximately  $2 million  included in other assets while  current taxes payable
were approximately $2 million in both periods and included in other liabilities.

The components of the net deferred tax asset were as follows:

<TABLE>
<CAPTION>
                                                                        December 31,
(Dollars in thousands)                                             1996           1995    

<S>                                                              <C>            <C>     
Book provision for loan losses in excess of tax                  $ 16,173       $ 23,117
Alternative minimum tax credit                                      3,243          6,768
Deferred compensation benefits not deducted for tax                 1,905          1,449
Book writedowns on foreclosed real estate, not deducted for tax       137            240
Securities mark to market adjustment deferred for tax                 114         (1,198)
Tax basis in core deposits less than book                              71           (355)
Tax deductions on leveraged leases deferred for book              (11,407)       (14,919)
Loan mark to market adjustment for tax                             (2,189)       (12,990)
Cumulative tax depreciation in excess of book                      (1,551)          (583)
Tax basis in partnership investment less than book                   (789)          (704)
Pension expense deducted for tax not book                            (557)          (741)
Investment tax credits                                                             5,498
Valuation allowance (state)                                                         (181)
Other, net                                                         (1,479)         1,582   
                                                                 --------       --------
                Total net deferred tax asset                     $  3,671       $  6,983
                                                                 ========       ========
</TABLE>


                                       48




The provisions for income taxes differ from the amounts computed by applying the
U.S. statutory federal tax rate of 35 percent in 1996 and 1995 and 34 percent in
1994, to income before income taxes principally due to:

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
(Dollars in thousands)                                             1996        1995        1994
<S>                                                              <C>         <C>         <C>     
Tax at statutory rate                                            $ 18,772    $  8,444    $  2,311
Increases (reductions) from:
        Tax-exempt income on investment securities and loans         (457)       (596)       (676)
        State income taxes, net of federal income tax benefit       3,150       1,979       1,118
        Low income housing credits                                   (911)       (724)       (911)
        Nondeductible expenses and other, net                         460          66         209
                                                                 --------    --------    --------
Tax expense recorded                                             $ 21,014    $  9,169    $  2,051
                                                                 ========    ========    ========
</TABLE>

(13) Capital

The  Company  and its banking  subsidiaries  are  subject to various  regulatory
capital  requirements  administered by the federal banking agencies.  Failure to
meet minimum capital  requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's  financial  statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
the Company and its subsidiary banks must meet specific capital  guidelines that
involve quantitative  measures of assets,  liabilities,  and certain off-balance
sheet items as calculated under  regulatory  accounting  practices.  The capital
amounts and  classifications  are also subject to  qualitative  judgments by the
regulators about components, risk weightings, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company and its banking subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of Total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996,  that the Company meets all capital  adequacy  requirements to which it is
subject and that USTrust, while undercapitalized by regulatory definition, is in
compliance  with the capital  conditions set forth in the FDIC's approval of the
purchase of twenty banking branches discussed below.

Prior to the  initiation of the purchase of the twenty former Bank of Boston and
BayBank  branches,  USTrust  was  defined as "well  capitalized"  as its capital
levels  significantly  exceeded the  required  minimum  level for each  relevant
capital  category.  In advance of the  execution  of a  definitive  agreement to
purchase the branches,  pro forma financial  information  and  projections  were
presented to the  regulators  setting forth a program under which the bank would
become "adequately capitalized." The regulations prescribe that the FDIC, in its
discretion, may approve an application pursuant to the Federal Deposit Insurance
Act where it is required to consider  the  adequacy of capital or the  financial
resources  of the  insured  depository  institution  where  it  finds  that  the
Applicant has committed to and is in compliance  with a reasonable  plan to meet
its minimum leverage capital  requirements  within a reasonable time period. The
transaction  received the approval of bank  regulators  with the condition  that
USTrust  must have a Tier 1 leverage  capital  ratio of not less  than:  (i) 4.8
percent,  no later than ten days after  consummation  of the  acquisition of the
sixteen BayBank branches;  and (ii) 5 percent,  no later than three months after
consummation of the acquisition of the BayBank  branches and for a period of six
months  thereafter.  At December 31, 1996,  USTrust was in  compliance  with the
foregoing  provisions.  As measured by the ratio of Total  capital to risk-based
assets at December 31, 1996, USTrust  temporarily fell below  therequirements of
an "adequately capitalized" bank. Management believes that USTrust will meet all
of the conditions of an "adequately capitalized" bank during 1997 at or prior to
the merger of the Walden banks with and into  USTrust.  Until  USTrust meets the
conditions of an "adequately  capitalized"  bank, it may not issue  dividends or
make other  capital  distributions  and may not  accept  brokered  or  high-rate
deposits in accordance  with federal  banking  regulations.  The Company expects
that the foregoing  conditions and restrictions will not have a material adverse
impact on the future operations of USTrust.

The  actual  capital   amounts  and  ratios  of  the  Company  and  its  banking
subsidiaries are presented in the following summary.



                                       49



         Notes to consolidated Financial Statements, December 31, 1996

<TABLE>
<CAPTION>
                                                                         December 31, 1996
                                                        Amount                                Percent 
                                                    Adequately         Well                Adequately           Well   
                                                   Capitalized  Capitalized               Capitalized    Capitalized
(Dollars in millions)                      Actual     Minimums     Minimums        Actual    Minimums       Minimums   
<S>                                       <C>          <C>         <C>            <C>          <C>         <C>
UST Corp. Consolidated:                                                                                                
        Tier 1 leverage capital           $ 146.7      $  92.3         N/A          6.36%       4.00%           N/A    
        Tier 1 capital                      146.7         84.7         N/A          6.93%       4.00%           N/A    
        Total (Tier 1 and Tier 2) capital   173.1        168.4         N/A          8.23%       8.00%           N/A    
                                                                                                                       
USTrust:                                                                                                               
        Tier 1 leverage capital             126.4        109.6      $109.6          5.77%       5.00%         5.00%    
        Tier 1 capital                      126.4         84.0       126.0          6.02%       4.00%         6.00%    
        Total (Tier 1 and Tier 2) capital   152.7        167.1       208.9          7.31%       8.00%        10.00%    
                                                                                                                       
USTC:                                                                                                                  
        Tier 1 leverage capital               2.1           .7          .8         12.43%       4.00%         5.00%    
        Tier 1 capital                        2.1           .3          .5         27.87%       4.00%         6.00%    
        Total (Tier 1 and Tier 2) capital     2.1           .6          .8         27.88%       8.00%        10.00%    



                                                                         December 31, 1995
                                                        Amount                                Percent 
                                                    Adequately         Well                Adequately           Well   
                                                   Capitalized  Capitalized               Capitalized    Capitalized
(Dollars in millions)                      Actual     Minimums     Minimums        Actual    Minimums       Minimums   

UST Corp. Consolidated: 
        Tier 1 leverage capital           $ 167.4      $  75.8          N/A         8.83%       4.00%            N/A 
        Tier 1 capital                      167.4         65.3          N/A        10.24%       4.00%            N/A 
        Total (Tier 1 and Tier 2) capital   187.8        127.7          N/A        11.75%       8.00%            N/A 

USTrust: 
        Tier 1 leverage capital             141.7        107.3     $   89.4         7.92%       6.00%*         5.00% 
        Tier 1 capital                      141.7         62.1         93.2         9.12%       4.00%          6.00% 
        Total (Tier 1 and Tier 2) capital   161.1        121.5        151.9        10.60%       8.00%         10.00%

USTC: 
        Tier 1 leverage capital               5.0           .9           .8        32.99%       6.00%*         5.00%
         Tier 1 capital                       5.0           .3           .4        69.65%       4.00%          6.00% 
        Total (Tier 1 and Tier 2) capital     5.0           .5           .7        69.65%       8.00%         10.00%

</TABLE>

* Both USTrust and United  States Trust Company were under  respective  Board of
Directors'  resolutions  that  required  each bank to maintain a Tier 1 leverage
capital  of at least 6 percent  and not pay a  dividend  which  would  cause the
individual  bank's Tier 1 leverage  capital to fall below 6 percent.  Such Board
resolutions  with  regulatory  approval  were  rescinded  during 1996 and are no
longer applicable.

Dividends

The Company and its banking subsidiaries' ability to pay dividends is subject to
certain limitations imposed by statutes of the Commonwealth of Massachusetts and
limitations imposed by bank and bank holding company  regulators.  Massachusetts
statutes  restrict the amount of dividends payable by banks to be the balance of
their undivided  profits,  net of any amount transferred to capital in excess of
par  value.  It is not  likely,  however,  that  bank and bank  holding  company
regulators would allow an institution to dividend any amounts which would reduce
that institution's capital to below minimum capital requirements.

In 1996 the Company declared quarterly cash dividends totaling $5.2 million,  or
$0.29 per share to stockholders.  During the year the Company received dividends
from  subsidiaries  of $6 million  from USTC,  $5.7  million from USTrust and $1
million from JSA Financial Corporation,  a nonbanking subsidiary, and $3 million
from UST/Conn, a former banking subsidiary sold during the year. During 1996 the
Company  contributed  as capital $13 million to USTrust to facilitate the Branch
Purchase. Refer to Note 2 for a further discussion of the Branch Purchase.


                                       50




Shareholder Rights Plan

In 1995, the Company's Board of Directors approved a Shareholder Rights Plan and
distributed  preferred  share purchase rights to  shareholders.  The rights will
become  exercisable only if a person or group (i) acquires 15 percent or more of
the Company's  common stock,  (ii) announces a tender offer that would result in
ownership of 15 percent or more of the common stock,  or (iii) is declared to be
an  "Adverse  Person" by the  Company's  Board of  Directors.  "Adverse  Person"
includes  any  person or group  who owns at least 10  percent  of the  Company's
common  stock and  attempts an action that would  adversely  impact the Company.
Each right would entitle a stockholder  to purchase  1/100th of a share of a new
series of junior participating preferred stock.

Once a person or group has acquired 15 percent or more of the outstanding common
stock of the Company or is declared an "Adverse  Person" by the Company's  Board
of Directors, each right may entitle its holder (other than the acquiring person
or Adverse  Person) to purchase,  at an exercise price of $40,  shares of common
stock of the Company (or any organization  that acquires the Company) at a price
equal to 50 percent of their current market price. Under certain  circumstances,
the Continuing Directors (as defined in the rights plan) may exchange the rights
for common stock (or  equivalent  securities) on a one-for-one  basis  excluding
rights  held by the  acquiring  person or  Adverse  Person.  The  rights  may be
redeemed by action of the Board of Directors for $.001 per right.

Stock Repurchase Program

In 1995,  the Company's  Board of Directors  approved a common stock  repurchase
program  authorizing  the  repurchase of up to 500,000  shares subject to market
conditions  and other  factors.  The  repurchased  shares  were held as treasury
shares to be used for general  corporate  purposes,  including  employee benefit
plans.  In the third quarter of 1996 the program was terminated  with a total of
250,000 shares  repurchased,  all of which were reissued in connection  with the
exercise of stock options and deferred compensation distributions.

(14) Related Party Transactions

In the ordinary  course of business,  the Company's  banking  subsidiaries  have
granted loans to certain of the Company's directors and executive officers.  All
such  transactions are made on substantially  the same terms as those prevailing
at the same  time for  individuals  not  affiliated  with  the  Company  and its
subsidiaries  and at the time they were  granted did not  involve  more than the
normal risk of collectibility.  At December 31, 1996, none of these transactions
were on  nonaccrual  status,  nor did they involve  delinquent,  substandard  or
restructured  loans.

An analysis of loans  outstanding  in excess of $60  thousand to  directors  and
officers related to the foregoing entities at December 31, 1996 is as follows:

(Dollars in thousands)
Balance, December 31, 1995                                   $18,744
Repayments                                                    (3,172)
Other reductions*                                               (359)
                                                             -------
Balance, December 31, 1996                                   $15,213
                                                             =======

* Other reductions are loans outstanding to directors and officers who ceased to
be directors or officers of the Company or its subsidiary  banks during the year
or their balance decreased below $60 thousand.

(15) Commitments and Contingencies

Commitments  for  leased  premises  expire at various  dates  through  2010.  At
December 31, 1996,  minimum rental  commitments for noncancelable  leases are as
follows:

(Dollars in thousands)
1997                                                        $ 5,228
1998                                                          4,880
1999                                                          4,479
2000                                                          3,953
2001                                                          2,583
thereafter                                                    4,929
                                                            -------
        Total                                               $26,052
                                                            =======


                                       51




         Notes to consolidated Financial Statements, December 31, 1996

Rent expense for the years ended December 1996,  1995 and 1994 was $3.4 million,
$3.9 million, and $4.1 million, respectively.

In the ordinary  course of  business,  the Company and its  subsidiaries  become
defendants  in a variety of  judicial  and  administrative  proceedings.  In the
opinion of  management  there is no proceeding  pending,  or to the knowledge of
management threatened,  which in the event of an adverse decision,  would result
in a material adverse change in the financial condition or results of operations
of the Company.

(16) Financial Instruments With On- and Off-Balance Sheet Risk

The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing  needs of its  customers.  These
financial  instruments include commitments to extend credit,  standby letters of
credit  and  financial  guarantees,   and  foreign  exchange  contracts.   Those
instruments  involve,  to varying degrees,  elements of credit risk in excess of
the amount  contained in the balance sheet.  The contract or notional amounts of
those  instruments  reflect  the  extent  of  involvement  the  Company  has  in
particular classes of financial instruments.

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other party to the  financial  instrument  or  commitments  to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual  notional  amount of those  instruments.  The Company  uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.

The Company generally requires collateral or other security to support financial
instruments with credit risk.

<TABLE>
<CAPTION>
                                                                              Contract or Notional Amount
(Dollars in thousands)                                                December 31, 1996       December 31, 1995
<S>                                                                       <C>                     <C>      
Financial instruments whose contract amount represents credit risk:
  Commitments to extend credit                                            $ 652,000               $ 387,000
  Standby letters of credit and financial guarantees written                 57,000                  48,000
  Commercial letters of credit                                                4,000                   3,000
  Foreign exchange contracts                                                  2,000                   1,000
</TABLE>

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition  established  in the contract  during its
term.  Commitments  generally have fixed expiration  dates or other  termination
clauses  and may require  payment of a fee.  Since many of the  commitments  are
expected to expire without being fully drawn upon, the total commitment  amounts
do not necessarily  represent future cash  requirements.  The Company  evaluates
each  customer's  credit  worthiness  on a  case-by-case  basis.  Of  the  total
commitments  to extend credit,  approximately  $132 million and $70 million were
secured by real estate at December 31, 1996 and December 31, 1995, respectively.

The amount of  collateral  obtained is based on  management's  evaluation of the
credit risk.  Collateral  held on  commitments  and loans varies but may include
cash, accounts receivable, inventory, property, plant and equipment. Standby and
commercial  letters of credit and financial  guarantees  written are conditional
commitments  issued by the Company to guarantee the  performance  of, or payment
by, a customer  to a third  party.  Those  guarantees  are  primarily  issued to
support  private  borrowing  arrangements.  The credit risk  involved in issuing
letters of credit is  essentially  the same as that  involved in extending  loan
facilities to customers.  The Company holds various  collateral to support these
commitments including (but not limited to) cash, account receivables, inventory,
property  plant  and  equipment.   The  extent  of  collateral  held  for  those
commitments varies from zero to one hundred percent.

The Company's  primary loan market is the New England region.  Most of the loans
outstanding are from eastern  Massachusetts  and a substantial  portion of these
loans are various types of real estate  loans;  still others have real estate as
additional  collateral.  Approximately  92 percent of the Company's  outstanding
commercial and commercial real estate loans are collateralized.

The Company enters into foreign currency exchange  contracts to purchase or sell
foreign currencies at a future date at a predetermined  exchange rate. Contracts
are  purchased  on  the  open  market   exclusively  to  assist  customers  with
international  transactions  denominated in foreign  currencies.  The Company is
exposed  to credit  risk in the  event the  customer  fails to  deliver  or take
delivery of the agreed upon  currency  whereby  the  Company  would  execute the
transaction with another counterparty at the prevailing currency valuation.  The
positive  fair  value,   which  represents  the  credit  exposure  of  contracts
outstanding, was insignificant at December 31, 1996 and 1995.



                                       52





The  Company's  securities  portfolio  includes  a  significant   investment  in
mortgage-backed  securities.  These  securities carry prepayment risk due to the
fact that prevailing  interest rates could decline.  Under such circumstances an
unusually  high  percentage  of homeowners  may choose to refinance  their first
mortgages to take advantage of these lower rates with the result that, under the
Company's  accounting policy,  adjustments  reducing gross unamortized  premiums
would be required. Refer to Note 1 for a discussion of accounting policies.

(17) Parent Company Financial Information

Summarized  information  relative to the balance sheets at December 31, 1996 and
1995 and  statements  of income and cash flows for the three years in the period
ended  December 31, 1996 of UST Corp.  (parent  company  only) are  presented as
follows:

Balance Sheets - Parent Company Only
<TABLE>
<CAPTION>
                                                                         December 31,
(Dollars in thousands)                                                1996        1995    
<S>                                                                <C>          <C>     
Assets:
        Cash, due from banks and interest-bearing deposits         $    837     $    952
        Securities purchased under agreements to resell              14,000        5,000
        Securities available-for-sale                                 2,208           
        Investment in banking subsidiaries                          179,771      161,920
        Investment in nonbanking subsidiaries                         3,909        5,139
        Premises, furniture and equipment, net                          393           76
        Other assets                                                  5,351        3,645
                                                                   --------     --------
                Total assets                                       $206,469     $176,732
                                                                   ========     ========
Liabilities and Stockholders' Investment:
        Other borrowings                                                        $    143
        Other liabilities                                          $  8,509        2,921
        Stockholders' investment                                    197,960      173,668
                                                                   --------     --------
                Total liabilities and stockholders' investment     $206,469     $176,732
                                                                   ========     ========
</TABLE>

Statements of Income - Parent Company Only

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
(Dollars in thousands)                                    1996         1995         1994
<S>                                                    <C>          <C>          <C>      
Dividend income                                        $  15,658    $   5,000    $   3,000
Undistributed equity in net income of subsidiaries        13,777       10,518        2,492
Gain on sale of bank subsidiary                            6,806
Other income                                               4,685        4,216          731
                                                       ---------    ---------    ---------
                                                          40,926       19,734        6,223
Expenses                                                   8,264        4,776        1,477
                                                       ---------    ---------    ---------
                        Net income                     $  32,662    $  14,958    $   4,746
                                                       =========    =========    =========
</TABLE>


                                       53



         Notes to consolidated Financial Statements, December 31, 1996

Statements of Cash Flows - Parent Company Only

<TABLE>
<CAPTION>
                                                                                         Year Ended December 31, 
(Dollars in thousands)                                                             1996           1995            1994
<S>                                                                             <C>            <C>            <C>       
Cash flows from operating activities: 
        Net income                                                              $ 32,662       $ 14,958       $   4,746 
        Adjustments to reconcile net income to net cash 
                provided by operating activities: 
                Depreciation and amortization                                        220            125             447 
                Undistributed income of subsidiaries                             (13,777)       (10,518)         (2,492) 
                Noncash dividend from subsidiary                                  (2,158) 
                Gain on sale of bank subsidiary                                   (6,806) 
                Loss (gain) on sale of securities                                                     2              (5) 
                (Increase) decrease in other assets                               (1,756)          (558)            536 
                Increase (decrease) in other liabilities                           4,808         (1,262)            316   
                                                                                --------       --------       ---------
                        Net cash provided by operating activities                 13,193          2,747           3,548
Cash flows from investing activities: 
        Proceeds from securities                                                                 15,957          19,961 
        Purchase of securities                                                                                  (35,912) 
        Purchases of premises and equipment                                         (415)           (10) 
        Proceeds from sale of bank subsidiary                                     13,435 
        Net (increase) decrease in short-term investments                         (9,000)        (5,000)         21,000 
        Equity contributed to subsidiaries                                       (13,000)        (7,500)         (5,400)   
                                                                                --------       --------       ---------
                        Net cash (used) provided investing activities             (8,980)         3,447            (351)
Cash flows from financing activities: 
        Repayment of other borrowings                                                            (8,000)         (4,000) 
        Proceeds from issuance of common stock, net                                2,795          1,388             792 
        Treasury stock acquired                                                   (3,363) 
        Cash dividends paid                                                       (3,760)          (888)  
                                                                                --------       --------       ---------
                        Net cash used by financing activities                     (4,328)        (7,500)         (3,208) 
                                                                                --------       --------       ---------
        Decrease in cash and cash equivalents                                       (115)        (1,306)            (11) 
        Cash and cash equivalents beginning of year                                  952          2,258           2,269 
                                                                                --------       --------       ---------
        Cash and cash equivalents end of year                                   $    837       $    952       $   2,258
                                                                                ========       ========       =========
Supplemental disclosure of cash flow information: 
        Cash paid during the year for: 
                Interest                                                        $     56       $    607       $     938 
                                                                                ========       ========       =========
                Income taxes                                                    $ 12,160       $  4,970 
                                                                                ========       ========
        Noncash transactions: 
                Transfers from other assets to securities available-for-sale    $     50 
                                                                                ======== 
                Dividend of equity securities received from subsidiary          $  2,158
                                                                                ======== 

</TABLE>


Cash dividends  paid to the Company in 1996 by  consolidated  bank  subsidiaries
totaled  $14.7  million,  $4.0  million in 1995 and $3.0  million in 1994.  Cash
dividends  paid to the Company by nonbank  subsidiaries  totaled $1.0 million in
both 1996 and 1995 and none in 1994.

(18) Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial  Instruments," requires
disclosure of the fair market value of financial  instruments,  whether  assets,
liabilities or off-balance  sheet  commitments,  if  practicable.  The following
methods and  assumptions  were used to estimate  the fair value of each class of
financial  instruments.  Fair value estimates which were derived from discounted
cash flows or broker quotes cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument.

Cash and due from banks,  federal funds sold and other short-term  investments -
For these short-term instruments the carrying amount is a reasonable estimate of
fair value.

Securities  available-for-sale - For marketable securities fair values are based
on quoted market prices or dealer quotes.

Loans - For  certain  homogeneous  categories  of  loans,  such  as  residential
mortgages and home equity loans,  fair value is estimated based on broker quotes
on sales of similar loans. The fair value of fixed rate


                                       54


 
loans was estimated by discounting  anticipated  future cash flows using current
rates at which  similar  loans would be made to borrowers  with  similar  credit
ratings  and for the same  remaining  maturities.  The fair value of  performing
variable rate loans is the same as the book value at the reporting  date because
the loans reprice when the market changes.

Deposit  liabilities - The fair value of noncertificate  deposit accounts is the
amount payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated by discounting the anticipated  future cash
payments  using the rates  currently  offered for deposits of similar  remaining
maturities.

Short-term and other borrowings - For these short-term  instruments the carrying
amount is a reasonable estimate of fair value.

Off-balance  sheet  financial  instruments - For  commitments  to extend credit,
standby and commercial  letters of credit and foreign  exchange  contracts,  the
carrying amount which represents accruals of deferred income (fees) arising from
these  instruments,  and the fair value of such deferred income is not material.
Refer to Note 16 for notional or contract  amounts and a further  discussion  of
off-balance sheet financial instruments.

Values not determined - SFAS No. 107 excludes certain assets from its disclosure
requirements  including real estate included in banking  premises and equipment,
and the intangible value inherent in the Company's deposit  relationships (i.e.,
core deposits). Accordingly, the aggregate fair value amounts presented below do
not represent the underlying value of the Company.

The  carrying  amount  and  estimated  fair  values of the  Company's  financial
instruments at December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                                1996                                1995
(Dollars in thousands)            Carrying Amount     Fair Value      Carrying Amount      Fair Value   
<S>                                    <C>            <C>                  <C>             <C>          
Financial instrument assets:                                                                            
        Cash and due from banks        $  111,532     $  111,532           $   89,799      $   89,799   
        Securities                        528,174        528,174              575,673         575,673   
        Federal funds sold                127,469        127,469                                        
        Loans, net                      1,769,340      1,796,218            1,187,949       1,230,762   
        Loans held-for-sale                   102            102               13,098          13,098   
Financial instrument liabilities:                                                                       
        Deposits                                                                                        
                Noninterest-bearing    $  540,014     $  540,014           $  372,917      $  372,917   
                NOW                       259,265        259,265              166,011         166,011   
                Money market              243,749        243,749              210,924         210,924   
                Regular savings           457,769        457,769              244,680         244,680   
                Time                      605,069        605,977              518,205         522,189   
        Short-term and other borrowings   348,066        348,066              243,105         243,105   
</TABLE>
                                                                      
(19) Consolidated Selected Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>
                            For Year Ended December 31, 1996          For Year Ended December 31, 1995  
                           ----------------------------------        ----------------------------------
(Dollars in thousands,      Fourth    Third   Second    First         Fourth    Third   Second    First 
 except per share amounts) Quarter  Quarter  Quarter  Quarter        Quarter  Quarter  Quarter  Quarter 
                           -------  -------  -------  -------        -------  -------  -------  ------- 
<S>                        <C>      <C>      <C>      <C>            <C>      <C>      <C>      <C>     
Interest income            $43,263  $38,552  $37,700  $38,139        $37,954  $37,626  $36,467  $35,920 
Interest expense            16,820   14,948   15,018   14,742         14,311   13,921   12,867   11,436 
Net interest income         26,443   23,604   22,682   23,397         23,643   23,705   23,600   24,484 
Provision (credit) for                                                                                  
  possible loan losses              (14,600)  (5,500)   1,500          1,800    2,790    3,670    4,830 
Net interest income after                                                                               
  provision for possible                                                                                
  loan losses               26,443   38,204   28,182   21,897         21,843   20,915   19,930   19,654 
Noninterest income          14,193    9,143    6,952    7,000          7,170    7,083    7,007    8,710 
Noninterest expense         30,510   25,546   20,710   21,572         21,619   21,287   21,211   24,070 
Income tax expense           3,763    8,863    5,600    2,788          2,895    2,566    2,182    1,524 
Net income                   6,363   12,938    8,824    4,537          4,499    4,145    3,544    2,770 
Earnings per share         $  0.35  $  0.71  $  0.49  $  0.25        $  0.25  $  0.23  $  0.20  $  0.16 
                                                                   
</TABLE>

                                       55



         Notes to consolidated Financial Statements, December 31, 1996

Net income  increased  steadily  throughout  1995 and into the first  quarter of
1996. The remaining quarters of 1996 reflect substantial increases in net income
over the 1995 quarters.  The net income trend  throughout the first five periods
represented above was largely  attributed to a decline in provision for possible
loan losses and reduced  foreclosed  asset and workout  expense.  The second and
third quarters of 1996 were  influenced by $5.5 million and $14.6 million credit
provisions for possible loan losses, respectively.

Net  interest  income  had been on a slow  decline  in the  first  six  quarters
consistent  with the  movement of  interest  rates and  earning  asset  volumes.
Internal  asset  growth  improved  net  interest  income in the third and fourth
quarters of 1996 which also benefited  from the earning  assets  acquired in the
December Branch Purchase.

Noninterest income was relatively consistent throughout the periods presented at
approximately  $7 million,  except for the first  quarter 1995 and third quarter
1996 which included securities gains, and fourth quarter 1996 which included the
$6.8 million gain on the sale of UST/Conn.

As discussed,  noninterest expense was on the decline throughout most of the two
years due to lower  foreclosed  asset and workout  expense  consistent  with the
reduced  level of problem  assets.  The third quarter 1996  noninterest  expense
increased sharply due to the one-time $3.0 million SAIF assessment.  Noninterest
expense  for the fourth  quarter of 1996  included  acquisition  charges of $5.9
million and higher operating  expenses  incurred in connection with the December
Branch Purchase.

ITEM  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

None

                                    PART III

ITEM 10. Directors and Executive Officers of the Registrant

                           Executive Policy Committee

In 1987,  the Board of  Directors  of the Company  created an  Executive  Policy
Committee which is the primary management forum of the Company for all strategic
and policy  decisions.  All  decisions of the  Executive  Policy  Committee  are
subject to the review and approval of the Board of Directors of the Company. The
Executive  Policy  Committee has been directed by the Board of Directors to make
recommendations  to the Board  concerning  adoption of policies,  strategies and
programs  concerning the following,  among other matters:  (a)  acquisitions and
dispositions of corporate entities, assets and/or investments;  (b) the issuance
of equity and/or debt; (c) engaging in new business activities;  (d) the hiring,
termination,  training and motivation of senior management;  (e) the development
of  marketing  programs  concerning  financial  services;  (f)  improvements  to
operations,  service delivery and implementation of procedures for cost control;
(g) improvements to the financial  reporting and financial control systems;  (h)
improvements  to  the  business   information   systems;  and  (i)  improvements
concerning risk management and legal and regulatory  compliance programs.  As of
March 15, 1997,  there were 11 members of the Executive  Policy  Committee.  The
members of the Committee are  identified  and the  background of each  Committee
member is set forth below under "Executive Officers".


                                       56




                               Executive Officers

The names and ages of the executive  officers of the Company and each  executive
officer's  position with the Company and its principal  subsidiaries  are listed
below.  Each such executive  officer is elected annually by the Directors of the
Company (or the  Directors  of the  applicable  subsidiary  of the  Company) and
serves until his or her  successor is duly chosen and  qualified or until his or
her earlier death, removal or disqualification.

                                 Positions and Offices with the Company  (and/or
                                 where  appropriate,  position  with  one of the
Name                     Age     Company's subsidiaries)

*Neal F. Finnegan        59      President, Chief Executive Officer and Director
                                 of the  Company  and  Chairman,  President  and
                                 Chief Executive  Officer of USTrust,  Braintree
                                 and Concord

*Domenic Colasacco       48      Executive Vice  President/Trust  and Investment
                                 Management  and  Director  of the  Company  and
                                 Chairman and President of USTC

*James K. Hunt           53      Executive  Vice   President,   Chief  Financial
                                 Officer and Treasurer of the Company; Executive
                                 Vice President and Chief  Financial  Officer of
                                 USTrust;   Executive  Vice   President,   Chief
                                 Financial  Officer and  Treasurer  of Braintree
                                 and  Concord  and   Treasurer  of  UST  Leasing
                                 Corporation

*Eric R. Fischer         51      Executive Vice  President,  General Counsel and
                                 Clerk of the Company; Executive Vice President,
                                 General Counsel and Secretary of USTrust, USTC,
                                 Braintree  and Concord and Clerk of UST Capital
                                 Corp. and UST Leasing Corporation

*Kathie S. Stevens       46      Executive  Vice  President  and Senior  Lending
                                 Officer  of  the  Company;  Vice  Chairman  and
                                 Senior Lending Officer of USTrust and President
                                 of UST Capital Corp.

*Katharine C. Armstrong  52      Executive Vice President/Commercial  Lending of
                                 the Company, USTrust, Braintree and Concord

*Robert T. McAlear       54      Executive  Vice   President/Controlled   Loans,
                                 Credit  and  Acquisition   Integration  of  the
                                 Company; Vice Chairman of USTrust and Executive
                                 Vice President and Chief  Operating  Officer of
                                 Braintree

*Suzanne Moot            47      Executive Vice  President/Marketing  and Retail
                                 Banking of the Company and USTrust

*Walter E. Huskins, Jr.  57      Executive Vice  President/Administration of the
                                 Company and USTrust;  Executive  Vice President
                                 and Chief  Operating  Officer  of  Concord  and
                                 President of UST Leasing Corporation

*Linda J. Lerner         52      Senior Vice  President/Human  Resources  of the
                                 Company, USTrust and USTC

*Kenneth L. Sullivan     60      Senior Vice President/Operations of the Company
                                 and Senior Vice  President of USTrust George T.
                                 Clarke 50 Senior Vice  President and Controller
                                 of the Company and USTrust and Treasurer of UST
                                 Capital Corp.

* Member, Executive Policy Committee

The following sets forth the principal  occupation during the past five years of
each of the executive officers of the Company.

Mr. Finnegan has served as President and Chief Executive  Officer of the Company
since  1993.  During the prior five  years,  Mr.  Finnegan  was  Executive  Vice
President in charge of Private  Banking at Bankers Trust Company,  New York, New
York. From 1986 to 1988, Mr. Finnegan was President and Chief Operating  Officer
of Bowery Savings Bank in New York City.  From 1982 to 1986 he was Vice Chairman
of Shawmut  Corporation in Boston.  Mr. Finnegan also serves as Vice Chairman of
the Board of Trustees of Northeastern University. Mr. Finnegan is also Chairman,
President and Chief  Executive  Officer of USTrust,  Braintree and Concord and a
Director and Chairman of the Executive Committee of USTC.

Mr. Colasacco was elected Executive Vice President and a Director of the Company
in 1990.  In 1993,  he was also elected  Chairman of the Board and  President of
USTC.  Prior to that time, he served as an Executive  Vice President of USTC. He
also directs the trust and investment  management  activities of the Company and
its subsidiaries.  Mr. Colasacco has been an officer of the Company or of one of
its subsidiaries since 1974.

Mr. Hunt was elected  Executive Vice  President,  Treasurer and Chief  Financial
Officer of the Company in 1994. Prior to joining the Company, Mr. Hunt served as
Executive  Vice  President at Peoples  Bancorp of  Worcester,  Inc.,  Worcester,
Massachusetts,  from 1987 through  mid-1994.  He also serves as  Executive  Vice
President and Chief  Financial  Officer of USTrust,  Executive  Vice  President,
Chief Financial Officer




                                       57



and  Treasurer  of  Braintree  and  Concord  and as  Treasurer  of  UST  Leasing
Corporation and various other nonbanking subsidiaries.

Mr. Fischer was elected  Executive Vice President,  General Counsel and Clerk of
the Company in 1992. Prior to 1992, he served as Senior Vice President,  General
Counsel and Assistant Clerk of the Company.  Before joining the Company in 1986,
he served as Assistant  General  Counsel of Bank of Boston  Corporation  and its
principal subsidiary, The First National Bank of Boston. Mr. Fischer is, and has
been since  1984,  a member of the  faculty of the Morin  Center for Banking and
Financial  Law  Studies of Boston  University  School of Law.  He also serves as
Executive  Vice  President,  General  Counsel and  Secretary  of USTC,  USTrust,
Braintree and Concord and Clerk of UST Capital  Corp.,  UST Leasing  Corporation
and various other nonbanking subsidiaries.

Ms.  Stevens,  who has served as Executive  Vice  President  and Senior  Lending
Officer of the Company  since 1993,  was also  elected to the  positions of Vice
Chairman and Senior Lending Officer of USTrust and Chairman of the Senior Credit
Committee  of the  Company and  USTrust in 1995.  Ms.  Stevens has been a senior
officer in the Commercial Lending function since she joined the Company in 1985.
Ms. Stevens is also President of UST Capital Corp.

Ms.  Armstrong  serves as  Executive  Vice  President/Commercial  Lending of the
Company,  USTrust,  Braintree  and  Concord.  In that  capacity she oversees the
commercial  lending,  asset-based  lending and  commercial  real estate  lending
functions of the Company.  From 1993 to 1995 Ms. Armstrong served as Senior Vice
President/Credit Administration of the Company. Ms. Armstrong joined the Company
in 1985 and served in various  credit  administration  functions from 1985 until
she assumed her position as Executive Vice President/Commercial Lending in 1995.

Mr. McAlear was elected Executive Vice President/Controlled  Loans and Credit of
the Company in 1994.  He has served as Vice  Chairman of USTrust since he joined
the Company in 1990. His primary responsibilities involve the supervision of the
controlled  loan,  owned  real  estate and credit  administration  functions  of
USTrust and the Company,  as well as supervision of the integration of banks and
branches  acquired  by the  Company.  Prior to 1990,  Mr.  McAlear  served as an
Executive  Vice  President in the lending  area of the Bank of New England.  Mr.
McAlear also serves as Executive Vice President and Chief  Operating  Officer of
Braintree.

Ms.   Moot   joined  the   Company  in  1995  and  serves  as   Executive   Vice
President/Marketing  and Retail  Banking of the  Company and  USTrust.  Prior to
joining the  Company,  Ms. Moot  served as a  consultant  to more than two dozen
commercial  and savings  bank  clients  between 1988 and 1995 and served as Vice
President of Commercial Marketing at Shawmut Bank, Boston, MA from 1985 to 1988.

Mr. Huskins was elected Executive Vice  President/Administration  of the Company
in August 1993. Mr. Huskins is also  responsible  for the leasing  activities of
the Company.  Prior to joining the Company,  Mr.  Huskins  served as  President,
Sterling Protection Company,  Watertown, MA (security systems) from 1990 to 1993
and as Vice Chairman of Chancellor  Corporation,  Boston, MA (leasing) from 1977
to 1989. Mr. Huskins also serves as Executive Vice President and Chief Operating
Officer  of Concord  and  Chairman  of the Board and  President  of UST  Leasing
Corporation.

Ms.  Lerner has served as Senior Vice  President of the Company since she joined
the Company in 1988. She directs the Human Resources  activities of the Company,
USTrust and USTC.  Prior to her  joining the  Company,  Ms.  Lerner  served in a
similar capacity for the Provident Institution for Savings in Boston.

Mr. Sullivan has served as Senior Vice President/Operations of the Company since
1994. He has served since 1988 and  continues to serve as Senior Vice  President
of USTrust.  In those capacities,  he has responsibility for the data processing
and information systems of the Company as well as for its operations activities.
Prior to 1988,  Mr.  Sullivan  served as Executive  Vice President of Operations
with BayBanks Systems,  Inc. in Waltham,  Massachusetts.  Prior to 1995, he also
served as President of UST Data Services Corp. which as of December 31, 1995 was
dissolved and became a division of USTrust.

Mr. Clarke was elected  Senior Vice  President and  Controller of the Company in
1994 and of USTrust in 1996.  From 1988 to 1994 he served as Vice  President and
Controller  of the Company.  Before  joining the Company,  Mr.  Clarke served as
Deputy  Comptroller  of The First  National  Bank of Boston.  Mr. Clarke is also
Treasurer of UST Capital Corp.

There are no arrangements or  understandings  between any executive  officer and
any  other  person  pursuant  to which he or she was  selected  as an  executive
officer.

Other than the information provided in the preceding paragraphs of this Item 10,
this item has been omitted since the Company will have filed a definitive  proxy
statement within 120 days after December 31, 1996, the close of its fiscal year.
The additional information required by this item is incorporated by reference to
such proxy statement.



                                       58




ITEM 11. Executive Compensation

This item has been omitted since the Company will have filed a definitive  proxy
statement within 120 days after December 31, 1996, the close of its fiscal year.
The information required by this item is incorporated by reference to such proxy
statement.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

This item has been omitted since the Company will have filed a definitive  proxy
statement within 120 days after December 31, 1996, the close of its fiscal year.
The information required by this item is incorporated by reference to such proxy
statement.

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
executive  officers and  directors  to file reports of ownership  and changes in
ownership with the Securities and Exchange  Commission.  Executive  Officers and
Directors are required by the SEC  regulation to furnish the Company with copies
of all Section 16(a) forms they file.

Based  on its  review  of the  copies  of  such  forms  received  by it and  the
information provided by the Directors of the Company, the Company believes that,
during 1996, all such filing  requirements  applicable to its executive officers
and directors were complied with by such individuals.

ITEM 13. Certain Relationships and Related Transactions

This item has been omitted since the Company will have filed a definitive  proxy
statement within 120 days after December 31, 1996, the close of its fiscal year.
The information required by this item is incorporated by reference to such proxy
statement.

                                    PART IV

ITEM 14. Exhibits. Financial Statement Schedules, and Reports on Form 8-K

(a)     List the following documents filed as part of this report:

1.      All financial statements

        UST Corp. and Subsidiaries

        See Index to Financial Statements.

2.      Financial  statement  schedules  required  to be filed by Item 8 of Form
        10-K and by Item 14(d)

        None (Information included in Financial Statements).

3.      Exhibits  required to be filed by Item 501 of Regulation S-K and by Item
        13(c)

        (3)     Articles: By-Laws

                3(a)    Articles  of  Organization  of the Company as amended to
                        date.*

                3(b)    By-laws of the  Company as amended to date.  (Exhibit to
                        Form 10-K for year ended December 31, 1994)**

        (4)     Instruments  defining the rights of security holders,  including
                indentures:

                4(a)    Specimen  of the  Company's  Common  Stock  Certificate.
                        (Exhibit 4.1 to Registrant's  Registration Statement No.
                        2-67787 on Form S-l.)**

                4(b)    Description  of rights of the  holders of the  Company's
                        Common  Stock  (Appearing  on  Page  76 of  Registrant's
                        Registration Statement No. 333-15521 on Form S-4).**

                4(c)    Note  Agreement,  dated  August  8,  1986,  between  the
                        Company and holders of the  Company's  8.5% Senior Notes
                        Due August 1, 1996. (Exhibit 4(d) to Registrant's Annual
                        Report  on Form  10-K for the year  ended  December  31,
                        1986.)**



                                       59





                4(d)    Rights Agreement,  dated September 19, 1995, between UST
                        Corp. and United States Trust Company,  as Rights Agent.
                        (Exhibit to  Registrant's  Form 8-A filed  September 26,
                        1995)**

                        4(d)(i)  Certificate of Vote  Establishing a Series of a
                                 Class of Stock.  (Exhibit A to Rights Agreement
                                 between  the Company  and United  States  Trust
                                 Company,  dated September 19, 1995 and filed as
                                 an  Exhibit  to  Registrant's  Form  8-A  filed
                                 September 26, 1995.)**

                        4(d)(ii) Form  of  Rights  Certificate.  (Exhibit  B  to
                                 Rights Agreement between the Company and United
                                 States Trust Company,  dated September 19, 1995
                                 and filed as an  Exhibit to  Registrant's  Form
                                 8-A filed September 26, 1995.)**

                        4(d)(iii)Summary   of  Rights  to   Purchase   Preferred
                                 Shares.  (Exhibit C to Rights Agreement between
                                 the Company and United  States  Trust  Company,
                                 dated  September  19,  1995  and  filed  as  an
                                 Exhibit   to   Registrant's   Form  8-A   filed
                                 September 26, 1995.)**

        (10)    Material Contracts

                10(a)   Affiliation Agreement and Plan of Reorganization,  dated
                        as of August  30,  1996,  between  UST Corp.  and Walden
                        Bancorp.  Inc.  (Exhibit to Form 8-K filed on  September
                        11, 1996)**

                10(b)   Purchase and Assumption Agreement,  dated as of June 18,
                        1996,  between  USTrust and The First  National  Bank of
                        Boston  and  joined  in by Bank of  Boston  Corporation.
                        (Exhibit to Form 8-K filed on July 1, 1996)**

                        10(b)(i) Amendments  to  the  Purchase  and   Assumption
                                 Agreement   between   USTrust   and  The  First
                                 National  Bank of Boston  and joined in by Bank
                                 of Boston Corporation.*

                10(c)   Definitive  Agreement  and Plan of  Merger,  dated as of
                        August 15,  1996,  between the  Company and HUBCO,  Inc.
                        (Exhibit to Form 8-K filed on August 16, 1996)**

                10(d)   Deferred  Compensation  Program,  as amended to June 16,
                        1992.  (Exhibit to Form 10-K for year ended December 31,
                        1992)**

                10(e)   Incentive Stock Option Plan, as amended to May 15, 1990.
                        (Exhibit  to Form  10-K  for  year  ended  December  31,
                        1992)**

                10(f)   Pension Plan, as amended to January 1, 1990. (Exhibit to
                        Form 10-K for year ended December 31, 1991)**

                        10(f)(i) Amendment   dated  December  20,  1994  to  the
                                 Pension Plan as  previously  amended on January
                                 1, 1990.  (Exhibit  to Form 10-K for year ended
                                 December 31, 1994)**

                        10(f)(ii)Amendment   dated  February  18,  1997  to  the
                                 Pension Plan.*

                10(g)   Executive Policy Committee  Deferred Benefits Plan dated
                        February 18, 1997.*

                10(h)   Employee Stock  Ownership Plan, as amended to January 1,
                        1991.  (Exhibit to Form 10-K for year ended December 31,
                        1991)**

                        10(h)(i) December 20, 1994  Amendment to Employee  Stock
                                 Ownership Plan.  (Exhibit to Form 10-K for year
                                 ended December 31, 1994)**

                10(i)   Employee Savings Plan (formerly known as  Profit-Sharing
                        Plan),  as amended to January 1, 1991.  (Exhibit to Form
                        10-K for year ended December 31, 1991)**

                        10(i)(i) Amendment,  as of January 1, 1994,  to Employee
                                 Savings  Plan.  (Exhibit  to Form 10-K for year
                                 ended December 31, 1994)**

                        10(i)(ii)Amendment  effective  as of  January 1, 1997 to
                                 Employee Savings Plan.*

                10(j)   1992 Stock  Compensation Plan.  (Registration  Statement
                        Nos. 33-54390 and 2-77803)**

                        10(j)(i) 1992 Stock  Compensation  Plan as  amended  and
                                 restated on November 15, 1994. (Exhibit to Form
                                 10-K for year ended December 31, 1994)**

                10(k)   Dividend  Reinvestment  Plan,  as  amended.  (Exhibit to
                        Registration Statement No. 33-38836 on Form S-3.)**



                                       60




                10(l)   1989  Directors  Stock Option Plan (Exhibit to Form 10-K
                        for year ended December 31, 1989)**

                10(m)   1995  Stock  Option  Plan  for  Non-Employee  Directors.
                        (Exhibit  to  Proxy  Statement  for  Annual  Meeting  of
                        Stockholders dated April 20, 1995)**

                        10(m)(i) 1996  Stock   Option   Plan  for   Non-Employee
                                 Directors.  (Exhibit  to  Proxy  Statement  for
                                 Annual Meeting of Stockholders  dated April 19,
                                 1996)**

                10(n)   Restated and amended Employment  Agreement,  dated as of
                        November  21,  1995,  between  the  Company  and Neal F.
                        Finnegan,  President and Chief Executive  Officer of the
                        Company.  (Exhibit to Form 10-K for year ended  December
                        31, 1995)**

                        10(n)(i) Amendment  effective  as of  January 1, 1997 to
                                 the  Employment  Agreement  between the Company
                                 and  Neal  F.  Finnegan,  President  and  Chief
                                 Executive Officer of the Company.*

                10(o)   Executive Employment  Agreements with certain members of
                        the Company's  Executive Policy  Committee,  dated as of
                        February 1, 1996:

                        10(o)(i) Restated Employment Agreement between UST Corp.
                                 and   Walter   E.   Huskins,   Executive   Vice
                                 President/Administration    of   the    Company
                                 (Exhibit  to Form 10-K for year ended  December
                                 31, 1995)**

                        10(o)(ii)Restated   Employment   Agreement  between  UST
                                 Corp.   and  James  K.  Hunt,   Executive  Vice
                                 President,    Chief   Financial   Officer   and
                                 Treasurer of the Company  (Exhibit to Form 10-K
                                 for year ended December 31, 1995)**

                        10(o)(iii) Restated  Employment  Agreement  between  UST
                                 Corp.  and  Eric  R.  Fischer,  Executive  Vice
                                 President,  General  Counsel  and  Clerk of the
                                 Company  (Exhibit  to Form 10-K for year  ended
                                 December 31, 1995)**

                        10(o)(iv)Restated   Employment   Agreement  between  UST
                                 Corp.   and  Linda  J.   Lerner,   Senior  Vice
                                 President/Human   Resources   of  the   Company
                                 (Exhibit  to Form 10-K for year ended  December
                                 31, 1995)**

                        10(o)(v) Restated Employment Agreement between UST Corp.
                                 and   Kenneth   L.   Sullivan,    Senior   Vice
                                 President/Operations of the Company (Exhibit to
                                 Form 10-K for year ended December 31, 1995)**

                        10(o)(vi)Restated   Employment   Agreement  between  UST
                                 Corp.  and  Katharine C.  Armstrong,  Executive
                                 Vice   President/Commercial   Lending   of  the
                                 Company  (Exhibit  to Form 10-K for year  ended
                                 December 31, 1995)**

                        10(o)(vii) Restated  Employment  Agreement  between  UST
                                 Corp.   and  Suzanne   Moot,   Executive   Vice
                                 President/Marketing  and Retail  Banking of the
                                 Company  (Exhibit  to Form 10-K for year  ended
                                 December 31, 1995)**

                        10(o)(viii) Employment  Agreement  between UST Corp. and
                                 Robert    T.    McAlear,     Executive     Vice
                                 President/Controlled  Loans  and  Credit of the
                                 Company  (Exhibit  to Form 10-K for year  ended
                                 December 31, 1995)**

                        10(o)(ix)Employment  Agreement  between  UST  Corp.  and
                                 Kathie S. Stevens,  Executive  Vice  President,
                                 Senior Lending Officer of the Company  (Exhibit
                                 to  Form  10-K  for  year  ended  December  31,
                                 1995)**

                        10(o)(x) Amendments  to Employment  Agreements  10(o)(i)
                                 through  10(o)(ix)  dated  as of  December  17,
                                 1996.*

                10(p)   Severance Pay Plan,  effective  January 1, 1995 (Exhibit
                        to Form 10-K for year ended December 31, 1995)**

                10(q)   Senior Officer Severance Pay Plan,  effective January 1,
                        1995  (Exhibit to Form 10-K for year ended  December 31,
                        1995)**



                                       61




                10(r)   Asset  Management  Employment  Agreement  by  and  among
                        Employee/Principals  of the Asset Management Division of
                        the United  States Trust Company and United States Trust
                        Company and UST Corp., effective as of January 1, 1995:

                        10(r)(i) Employment  Agreement  among UST Corp, USTC and
                                 Domenic   Colasacco,   President   of  USTC,  a
                                 wholly-owned subsidiary of the Company (Exhibit
                                 to  Form  10-K  for  year  ended  December  31,
                                 1995)**

                        10(r)(ii)Employment  Agreement among UST Corp., USTC and
                                 Robert  A.  Lincoln,   Senior  Vice  President,
                                 Senior  Portfolio  Manager of USTC  (Exhibit to
                                 Form 10-K for year ended December 31, 1995)**

                        10(r)(iii) Employment  Agreement  among UST Corp.,  USTC
                                 and  Stephen K. Moody,  Senior Vice  President,
                                 Senior  Portfolio  Manager of USTC  (Exhibit to
                                 Form 10-K for year ended December 31, 1995)**

                        10(r)(iv)Employment  Agreement among UST Corp., USTC and
                                 Lucia     B.      Santini,      Senior     Vice
                                 President/Administrator  of  USTC  (Exhibit  to
                                 Form 10-K for year ended December 31, 1995)**

                        10(r)(v) Employment  Agreement among UST Corp., USTC and
                                 Robert  B.  Zevin,   Senior   Vice   President,
                                 Economist and Senior Portfolio  Manager of USTC
                                 (Exhibit  to Form 10-K for year ended  December
                                 31, 1995)**

                10(s)   Asset  Management   Unifying   Agreement  by  and  among
                        Employee/Principals  of the Asset Management Division of
                        the United  States Trust Company and United States Trust
                        Company and UST Corp.,  effective  as of January 1, 1995
                        (Exhibit  to Form  10-K  for  year  ended  December  31,
                        1995)**

                        10(s)(i) Amendment  dated December 31, 1996 to the Asset
                                 Management  Unifying  Agreement  by  and  among
                                 Employee/Principals  of  the  Asset  Management
                                 Division of the United States Trust Company and
                                 United  States  Trust  Company  and UST  Corp.,
                                 effective as of January 1, 1995.*

        (11)    Statement re:  computation  of per share earnings (See Note 1 to
                the Notes to Consolidated Financial Statements.)*

        (21)    Subsidiaries of the Registrant*

        (23)    Consent of Arthur Andersen LLP*

        (27)    Article  9 Summary  Financial  Information  for 12 months  ended
                December 31, 1996*

*       Filed herewith.

**      Filed as part of a previous Commission filing and incorporated herein by
        reference.

(b)     Reports on Form 8-K

        None.

(d)     Exhibits being filed

        See Exhibit Index.

(e)  Financial Statement Schedules included in Financial Statements.



                                       62





                                   Signatures

Pursuant to the  requirements of Section 13 or 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.

UST Corp.

<TABLE>
    <S>                                          <C>
    By s/   NEAL F. FINNEGAN                     By s/   JAMES K. HUNT
       ------------------------                     ----------------------------
            Neal F. Finnegan                             James K. Hunt
            President and Chief Executive Officer        Executive Vice President and Treasurer  
            (Principal Executive Officer)                (Principal Financial Officer and        
            Date:  March 18, 1997                        Principal Accounting Officer)
                                                         Date:  March 18, 1997

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


By s/   CHESTER G. ATKINS                        By s/   SYDNEY L. MILLER                 
   --------------------------------                 --------------------------------      
        Chester G. Atkins, Director                      Sydney L. Miller, Director       
        Date: March 18, 1997                             Date: March 18, 1997             
By s/   DAVID E. BRADBURY                        By s/   VIKKI L. PRYOR                   
   --------------------------------                 --------------------------------      
        David E. Bradbury, Director                      Vikki L. Pryor, Director         
        Date: March 18, 1997                             Date: March 18, 1997             
By s/   ROBERT M. COARD                          By s/   GERALD M. RIDGE                  
   --------------------------------                 --------------------------------      
        Robert M. Coard, Director                        Gerald M. Ridge, Director        
        Date: March 18, 1997                             Date: March 18, 1997             
By s/   DOMENIC COLASACCO                        By s/   WILLIAM SCHWARTZ                 
   --------------------------------                 --------------------------------      
        Domenic Colasacco, Director and                  William Schwartz, Director       
        Executive Vice President                         Date: March 18, 1997             
        Date: March 18, 1997                     By s/   BARBARA C. SIDELL                
By s/   ROBERT L. CULVER                            --------------------------------      
   --------------------------------                      Barbara C. Sidell, Director      
        Robert L. Culver, Director                       Date: March 18, 1997             
        Date: March 18, 1997                     By s/   JAMES V. SIDELL                  
By s/   ALAN K. DERKAZARIAN                         --------------------------------      
   --------------------------------                      James V. Sidell, Director        
        Alan K. Derkazarian, Director                    Date: March 18, 1997             
        Date: March 18, 1997                     By s/   PAUL D. SLATER                   
By s/   DONALD C. DOLBEN                            --------------------------------      
   --------------------------------                      Paul D. Slater, Director         
        Donald C. Dolben, Director                       Date: March 18, 1997             
        Date: March 18, 1997                     By s/   EDWARD J. SULLIVAN               
By s/   NEAL F. FINNEGAN                            --------------------------------      
   --------------------------------                      Edward J. Sullivan, Director     
        Neal F. Finnegan, Director                       Date: March 18, 1997             
        President and Chief Executive Officer    By s/   G. ROBERT TOD                    
        Date: March 18, 1997                        --------------------------------      
By s/   EDWARD GUZOVSKY                                  G. Robert Tod, Director          
   --------------------------------                      Date: March 18, 1997             
        Edward Guzovsky, Director                By s/   MICHAEL J. VERROCHI              
        Date: March 18, 1997                        --------------------------------      
By s/   WALLACE M. HASELTON                              Michael J. Verrochi, Director    
   --------------------------------                      Date: March 18, 1997             
        Wallace M. Haselton, Director            By s/   GORDON M. WEINER                 
        Date: March 18, 1997                        --------------------------------      
By s/   BRIAN W. HOTAREK                                 Gordon M. Weiner, Director       
   --------------------------------                      Date: March 18, 1997             
        Brian W. Hotarek, Director               
        Date: March 18, 1997
By s/   FRANCIS X. MESSINA 
   --------------------------------
        Francis X. Messina, Director 
        Date: March 18, 1997

</TABLE>





                                       63