<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-Q

(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

                                                        OR

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

FOR THE TRANSITION PERIOD FROM              TO


                             COMMISSION FILE #0-9623

                                   ----------

                                    UST CORP.
             (Exact Name of Registrant as Specified in its Charter)


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


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


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


                                    NO CHANGE
         (Former name, former address and former fiscal year, if changed
                               since last year.)

         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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. At October 30, 1998,
there were 42,745,834 shares of common stock outstanding, par value $.625 per
share.



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



<PAGE>   2


                                    UST CORP.

                                TABLE OF CONTENTS

                                                                           PAGE
                                                                           ----

PART I.  FINANCIAL INFORMATION

           ITEM 1.  Financial Statements

              Consolidated Balance Sheets - September 30, 1998
                 and December 31, 1997....................................... 3

              Consolidated Statements of Income -- Three and Nine 
                 Months Ended September 30, 1998 and 1997.................... 4

              Consolidated Statements of Changes in Stockholders' 
                 Investment -- Nine Months Ended September 30, 1998 
                 and 1997.................................................... 5

              Consolidated Statements of Cash Flows -- Nine Months 
                 Ended September 30, 1998 and 1997........................... 6

              Notes to Consolidated Financial Statements..................... 8


           ITEM 2.  Management's Discussion and Analysis of 
                 Financial Condition and Results of Operations.............. 13

           ITEM 3.  Quantitative and Qualitative Disclosures 
                 about Market Risk.......................................... 29


PART II. OTHER INFORMATION

           ITEM 1. Legal Proceedings........................................ 30

           ITEM 6. Exhibits and Reports on Form 8-K......................... 30

           SIGNATURES ...................................................... 30





                                       2

<PAGE>   3

                          PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

                                    UST CORP.
                           CONSOLIDATED BALANCE SHEETS
                  (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                      SEPTEMBER 30,   DECEMBER 31,
                                                                          1998           1997
                                                                      ------------    -----------
<S>                                                                    <C>             <C>
                                     ASSETS

Cash, due from banks and interest-bearing deposits ..................  $  112,688      $  120,521
Federal funds sold and other short-term investments .................      17,424          81,000
Securities:
  Securities available-for-sale:
      Mortgage-backed securities ....................................     936,823         697,791
      U.S. Treasury and federal agencies, and other securities ......     270,756         249,645
                                                                       ----------      ----------
              Total securities available-for-sale ...................   1,207,579         947,436
  Securities held-to-maturity .......................................                     260,307
                                                                       ----------      ----------
              Total securities ......................................   1,207,579       1,207,743
Loans:
  Loans - net of unearned discount of $40,552 in 1998 and
      $31,662 in 1997 (Note 2) ......................................   4,181,778       3,967,529
  Reserve for possible loan losses (Note 2) .........................     (65,146)        (68,539)
                                                                       ----------      ----------
              Total loans, net ......................................   4,116,632       3,898,990
Premises, furniture and equipment, net ..............................      87,026          85,692
Intangible assets, net ..............................................      53,240          58,991
Other property owned, net ...........................................       3,391           7,046
Other assets ........................................................      70,931          72,995
                                                                       ----------      ----------
              Total assets ..........................................  $5,668,911      $5,532,978
                                                                       ==========      ==========

                    LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
  Noninterest-bearing ...............................................  $  771,118      $  781,926
  Interest-bearing:
      NOW ...........................................................     136,180         128,293
      Money market ..................................................     812,011         786,358
      Regular savings ...............................................     944,076         866,164
      Time:
           Certificates of deposit over $100 thousand ...............     309,511         326,102
           Other ....................................................   1,162,322       1,276,697
                                                                       ----------      ----------
           Total deposits ...........................................   4,135,218       4,165,540
Short-term borrowings ...............................................     837,176         589,881
Other borrowings ....................................................      89,423         226,345
Other liabilities ...................................................      78,823          62,156
                                                                       ----------      ----------
              Total liabilities .....................................   5,140,640       5,043,922
Commitments and contingencies (Note 3)
Stockholders' investment (Note 4):
  Preferred stock $1 par value; Authorized - 4,000,000  shares;
      Outstanding -- none
  Common stock $.625 par value; Authorized - 75,000,000 and
      45,000,000 shares in 1998 and 1997, respectively
  Issued - 42,691,469 and 42,097,643 shares in 1998
      and 1997, respectively ........................................      26,682          26,528
  Additional paid-in capital ........................................     199,906         191,645
  Retained earnings .................................................     289,307         268,049
  Accumulated other comprehensive income ............................      13,659           3,164
  Deferred compensation and other ...................................      (1,283)           (330)
                                                                       ----------      ----------
              Total stockholders' investment ........................     528,271         489,056
                                                                       ----------      ----------
              Total liabilities and stockholders' investment ........  $5,668,911      $5,532,978
                                                                       ==========      ==========

</TABLE>


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




                                       3
<PAGE>   4

                                    UST CORP.
                        CONSOLIDATED STATEMENTS OF INCOME
                  (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED          NINE MONTHS ENDED
                                                          SEPTEMBER 30,              SEPTEMBER 30,
                                                     ---------------------       ----------------------
                                                      1998          1997           1998          1997
                                                     -------      --------       --------      --------
<S>                                                  <C>          <C>            <C>           <C>     
Interest income:
    Interest and fees on loans .................... $ 89,041      $ 84,290       $263,262      $242,156
    Interest and dividends on securities:
        Taxable ...................................   16,941        18,225         52,381        55,566
        Nontaxable and preferential rate income ...      508           540          1,773         1,526
    Interest on federal funds sold and other
        short-term investments ....................    1,024         1,760          3,147         4,023
                                                    --------      --------       --------      --------
             Total interest income ................  107,514       104,815        320,563       303,271
                                                    --------      --------       --------      --------
Interest expense:
    Interest on deposits ..........................   32,916        33,432         98,922        97,736
    Interest on borrowings ........................   11,862        11,770         34,054        34,846
                                                    --------      --------       --------      --------
             Total interest expense ...............   44,778        45,202        132,976       132,582
                                                    --------      --------       --------      --------
    Net interest income ...........................   62,736        59,613        187,587       170,689
Provision for possible loan losses (Note 2) .......      789           850          1,010         2,200
                                                    --------      --------       --------      --------
    Net interest income after provision for
        possible loan losses ......................   61,947        58,763        186,577       168,489
                                                    --------      --------       --------      --------

Noninterest income:
    Asset management fees .........................    3,732         3,254         11,311         9,599
    Deposit account service charges ...............    3,017         2,789          8,819         7,975
    Corporate services income, net ................    1,493         1,452          4,490         4,211
    Securities gains (losses), net ................      862          (488)         2,606        (1,054)
    Gain on sale of loans .........................      193             1            588         1,911
    Other .........................................    2,595         2,462          7,661         7,680 
                                                    --------      --------       --------      --------
             Total noninterest income .............   11,892         9,470         35,475        30,322
                                                    --------      --------       --------      --------
Noninterest expense:
    Salary and employee benefits ..................   23,980        22,524         71,703        68,128
    Restructuring charges .........................   11,505                       11,505        11,751
    Acquisition and merger-related expense ........    8,046           946          8,071         3,796
    Occupancy, net ................................    3,898         3,775         11,948        11,217
    Equipment depreciation and maintenance ........    2,512         2,403          7,904         6,547
    Data processing services ......................    2,263         1,806          6,392         5,433
    Year 2000 readiness expense ...................    1,738            42          3,077            42
    Intangible asset amortization .................    1,589         2,004          5,213         5,336
    Advertising and promotion .....................    1,495         1,836          4,378         4,793
    Professional and consulting fees ..............      908         1,646          3,618         4,873
    Foreclosed asset and workout expense ..........      429           429          3,128         1,585
    Other .........................................    8,667         6,271         22,931        21,621
                                                    --------      --------       --------      --------
             Total noninterest expense ............   67,030        43,682        159,868       145,122
                                                    --------      --------       --------      --------
    Income before income taxes ....................    6,809        24,551         62,184        53,689
    Income tax provision ..........................    5,071         9,253         24,265        20,143
                                                    --------      --------       --------      --------
             Net income ........................... $  1,738      $ 15,298       $ 37,919      $ 33,546
                                                    ========      ========       ========      ========

Per share data (Note 4):
    Basic earnings per share ......................  $  0.04      $   0.36       $   0.90      $   0.80   
    Diluted earnings per share ....................  $  0.04      $   0.36       $   0.88      $   0.79   
    Cash dividends declared per share .............  $  0.14      $   0.10       $   0.39      $   0.27   
                                                                                                

</TABLE>


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




                                       4
<PAGE>   5
                                    UST CORP.
         CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                           ACCUMULATED                    
                                            COMPREHENSIVE          ADDITIONAL                  OTHER       DEFERRED 
                                               INCOME      COMMON    PAID-IN    RETAINED   COMPREHENSIVE  COMPENSATION           
                                               (LOSS)       STOCK    CAPITAL    EARNINGS   INCOME (LOSS)   AND OTHER     TOTAL  
                                            -------------  ------  ----------   --------   -------------  ------------   -----
<S>                                                        <C>      <C>         <C>          <C>             <C>       <C>     
Balance December 31, 1996,
   as previously reported ..................               $18,328  $111,158    $181,645     $(2,576)        $  466    $309,021

Adjustment for the Somerset 
   Savings Bank pooling of 
   interests (Note 5) ......................                 1,977    33,272      (5,401)                                29,848
Adjustment for the Affiliated 
   Community Bancorp, Inc. 
   pooling of interests (Note 5) ...........                 5,890    39,920      57,518        (532)        (1,394)    101,402
                                                           -------  --------    --------     -------         ------    --------
Balance December 31, 1996, 
   as restated .............................               $26,195  $184,350    $233,762     $(3,108)        $(928)    $440,271

Comprehensive income (Note 6):
   Net income ..............................   $33,546                            33,546                                 33,546
   Other comprehensive income:
      Unrealized securities 
        gains, net of $2,406 tax 
        expense ............................     3,242
      Less: Reclassification of 
        securities losses included 
        in net income, net of $437 
        tax benefit ........................      (617)                                        3,859                      3,859
                                               -------
           Total other comprehensive 
             income ........................     3,859
                                               -------
           Total comprehensive income ......   $37,405
                                               =======
Cash dividends declared ....................                                     (11,436)                               (11,436)
Activity related to stock option, 
   restricted stock and stock 
   purchase plans. .........................                   243     6,152                                              6,395
Activity in Directors Deferred
   Compensation Program and other, net......                                                                    480         480
                                                           -------  --------    --------     -------         ------    --------
Balance September 30, 1997 .................               $26,438  $190,502    $255,872      $  751         $ (448)   $473,115
                                                           =======  ========    ========      ======         ======    ========

Balance December 31, 1997,
   as previously reported ..................               $18,601  $117,236    $201,355     $ 2,245         $  689    $340,126

Adjustment for the Somerset 
   Savings Bank pooling of 
   interests (Note 5) ......................                 1,978    33,333         566                                 35,877
Adjustment for the Affiliated 
   Community Bancorp,  Inc. 
   pooling of interests (Note 5) ...........                 5,949    41,076      66,128         919         (1,019)    113,053
                                                           -------  --------    --------     -------         ------    --------
Balance December 31, 1997, 
   as restated .............................               $26,528  $191,645    $268,049      $3,164         $ (330)   $489,056

Comprehensive income (Note 6):
   Net income ..............................   $37,919                            37,919                                 37,919
   Other comprehensive income:
      Unrealized securities 
        gains, net of $6,215 
        tax expense ........................    12,020
      Less: Reclassification of 
        securities gains included 
        in net income, net of $1,081 
        tax expense ........................     1,525
                                               -------
           Total other comprehensive 
              income .......................    10,495                                        10,495                     10,495
                                               -------
           Total comprehensive income ......   $48,414
                                               =======
Cash dividends declared ....................                                     (16,707)                               (16,707)

Activity related to stock option, 
   restricted stock and stock 
   purchase plans ..........................                   154     8,261                                              8,415

Activity in Directors Deferred
   Compensation Program and other, net .....                                          46                       (953)       (907)
                                                           -------  --------    --------     -------         ------    --------
Balance September 30, 1998 .................               $26,682  $199,906    $289,307     $13,659        $(1,283)   $528,271
                                                           =======  ========    ========     =======        =======    ========

</TABLE>
 


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





                                       5
<PAGE>   6


                                    UST CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            NINE MONTHS ENDED
                                                                               SEPTEMBER 30,
                                                                        -------------------------
                                                                          1998             1997
                                                                        ---------       ---------
<S>                                                                     <C>             <C>      

Cash flows from operating activities:
  Net income .........................................................  $  37,919       $  33,546
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Provision for possible loan losses ...............................      1,010           2,200
    Depreciation and amortization ....................................     13,475          10,769
    Accretion of securities discount, net ............................       (836)            (94)
    Securities gains (losses), net ...................................     (2,606)          1,054
    Gain on sale of other property owned, net ........................       1856             330
    Gain on sale of loans held-for-sale ..............................       (588)         (1,889)
    Writedowns of fixed assets .......................................        710           1,255
    Deferred income tax benefit ......................................     (3,670)         (3,337)
    Net change in other assets and other liabilities .................     14.914           9,612
                                                                        ---------       ---------
          Net cash provided (used) by operating activities ...........     62,184          53,446

Cash flows from investing activities:
  Proceeds from sales of securities available-for-sale ...............    299,610         267,679
  Proceeds from sales of securities held-to-maturity .................     24,127          25,136
  Proceeds from maturities of securities available-for-sale ..........    105,633         165,356
  Proceeds from maturities of securities held-to-maturity ............    139,886          19,197
  Purchases of securities available-for-sale .........................   (544,505)       (335,325)
  Purchases of securities held-to-maturity ...........................    (19,011)        (58,900)
  Net decrease in federal funds sold and other .......................     60,283          13,170
  Net increase in loans ..............................................   (230,777)       (249,877)
  Net increase in loans held-for-sale ................................      3,955            (944)
  Proceeds from other property owned .................................      6,481           8,509
  Proceeds from loans held-for-sale ..................................                     14,250
  Net proceeds from sale of bank subsidiary...........................      7,795           
  Purchases of premises and equipment ................................     (9,768)        (18,734)
                                                                        ---------       ---------
          Net cash (used) provided by investing activities ...........   (156,291)       (150,483)

Cash flows from financing activities:
  Net increase (decrease) in nontime deposits ........................    103,402          33,093
  Net (decrease) increase in certificates of deposit .................   (116,024)         41,138
  Net increase (decrease) in short-term and other borrowings .........    110,373         (12,708)
  Cash dividends paid ................................................    (15,291)        (10,305)
  Issuance of common stock for cash, net .............................      3,814           3,156
                                                                        ---------       ---------
          Net cash provided (used) by financing activities ...........     86,274          54,374
                                                                        ---------       ---------
  Decrease in cash and cash equivalents ..............................     (7,833)        (42,663)
  Cash and cash equivalents at beginning of year .....................    120,521         158,538
                                                                        ---------       ---------
  Cash and cash equivalents at end of period .........................  $ 112,688       $ 115,875
                                                                        =========       =========

Supplemental disclosure of cash flow information:
  Cash paid during the period for:
    Interest .........................................................  $ 132,816       $ 128,120
                                                                        =========       =========
    Income taxes .....................................................  $  35,777       $  12,092
                                                                        =========       =========
Noncash transactions:
  Transfers from other assets to securities available-for-sale .......                  $     180
                                                                                        =========
  Transfers from securities held-to-maturity to available-for-sale ...  $ 170,758       $ 145,564
                                                                        =========       =========

</TABLE>



                                       6
<PAGE>   7

<TABLE>

  <S>                                                                   <C>             <C>      

  Transfers from loans to other property owned .......................  $  10,009       $   7,669 
                                                                        =========       =========
  Common stock issuance ..............................................  $   4,601       $   1,504
                                                                        =========       =========

</TABLE>

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




                                       7
<PAGE>   8

                                    UST CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)   BASIS OF PRESENTATION

            The consolidated financial statements of UST Corp. and its
      subsidiaries (the "Company") included herein have been prepared by the
      Company, without audit, pursuant to the rules and regulations of the
      Securities and Exchange Commission. Certain information and footnote
      disclosure normally included in financial statements prepared in
      accordance with generally accepted accounting principles have been
      condensed or omitted pursuant to such rules and regulations. The Company,
      however, believes that the disclosures are adequate to make the
      information presented not misleading. All applicable prior period amounts
      included in this Form 10-Q have been restated to reflect the October 1997
      acquisition of Firestone Financial Corp., the July 1998 acquisition of
      Somerset Savings Bank, and the August 1998 acquisition of Affiliated
      Community Bancorp, Inc., as poolings of interests. Refer to Note 5 for a
      further discussion of acquisitions. The amounts shown reflect, in the
      opinion of management, all adjustments necessary for a fair presentation
      of the financial statements for the periods reported. These financial
      statements should be read in conjunction with the financial statements and
      the notes thereto included in the Company's Annual Report on Form 10-K for
      the fiscal year ended December 31, 1997. Certain prior period amounts have
      been reclassified to reflect current reporting classifications.

            The results of operations for the three and nine months ended
      September 30, 1998 and 1997 are not necessarily indicative of the results
      of operations for the full year or any other interim period.

(2)   RESERVE FOR POSSIBLE LOAN LOSSES

            Analysis of the reserve for possible loan losses for the nine months
      ended September 30, 1998 and 1997 is as follows:


<TABLE>
<CAPTION>
                                                                   1998           1997
                                                                  -------        -------
                                                                  (DOLLARS IN THOUSANDS)
            <S>                                                   <C>            <C>    

            Balance at beginning of period.....................   $68,539        $65,979

            Chargeoffs.........................................    11,076          5,375
            Recoveries on loans previously charged-off.........     6,726          4,630
                                                                  -------        -------
            Net chargeoffs.....................................     4,350            745

            Provision for possible loan losses ................     1,010          2,200
            Reserve of sold bank...............................       (53)       
                                                                  -------        -------
            Balance at end of period...........................   $65,146        $67,434
                                                                  =======        =======
</TABLE>


            The reserve for possible loan losses is determined based on a
      consistent, systematic method which analyzes the size and risk of the loan
      portfolio. See "Credit Quality and Reserve for Possible Loan Losses" in
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations herein.




                                       8
<PAGE>   9

                                    UST CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(3)   COMMITMENTS AND CONTINGENCIES

            At September 30, 1998, the Company had the following off-balance
      sheet financial instruments whose contract amounts represent credit risk:

<TABLE>
<CAPTION>
                                                    CONTRACT OR NOTIONAL AMOUNT
                                                    ---------------------------
                                                       (DOLLARS IN THOUSANDS)
        <S>                                                <C>         

        Commitments to extend credit ....................  $1,051,000  
        Standby letters of credit and financial                      
           guarantees written ...........................      85,000
        Loans sold with recourse ........................       9,621
        Commercial letters of credit ....................       6,000
        Foreign exchange contracts ......................       2,000
</TABLE>
                                                            
(4)   EARNINGS PER SHARE CALCULATION

            The Company computes earnings per share in accordance with SFAS No.
      128. This Statement supersedes APB No. 15 regarding the presentation of
      earnings per share ("EPS") on the face of the income statement. SFAS No.
      128 replaced 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 No. 15, for all
      entities with complex capital structures. This Statement was effective for
      fiscal years ending after December 15, 1997 and requires restatement of
      all prior period EPS data presented, including quarterly information. The
      Company's common stock equivalents consist primarily of dilutive
      outstanding stock options computed under the treasury stock method. Basic
      and Diluted EPS computations for the three and nine months ended September
      30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                 SEPTEMBER 30,             SEPTEMBER 30,
                                                             -------------------        -------------------
                                                              1998         1997          1998         1997
                                                             -------     -------        -------     -------
                                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                          <C>         <C>            <C>         <C>    

Basic earnings per share computation:
   Numerator:
      Net income ..........................................  $ 1,738     $15,298        $37,919     $33,546
   Denominator:
      Weighted average shares outstanding .................   42,606      42,267         42,247      42,082
Basic earnings per share ..................................  $  0.04     $  0.36        $  0.90     $  0.80

Diluted earnings per share computation:
   Numerator:
      Net income ..........................................  $ 1,738     $15,298        $37,919     $33,546
   Denominator:
      Weighted average shares outstanding .................   42,606      42,267         42,247      42,082
      Dilutive stock options ..............................      785         579            993         577
                                                             -------     -------        -------     -------
        Weighted average diluted shares outstanding .......   43,391      42,846         43,240      42,659
                                                             =======     =======        =======     =======

Diluted earnings per share ................................  $  0.04     $  0.36        $  0.88     $  0.79

</TABLE>





                                       9
<PAGE>   10

                                    UST CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(5)   ACQUISITIONS

      Walden Bancorp, Inc.

            On January 3, 1997, the Company completed its acquisition of Walden
      Bancorp, Inc. ("Walden"), a $1.0 billion 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 Braintree Savings Bank and The Co-operative Bank of
      Concord, operated a total of seventeen branches located in the
      Massachusetts counties of Middlesex, Norfolk and Plymouth. The
      Co-operative Bank of Concord and The Braintree Savings Bank were merged
      into USTrust during the second quarter of 1997. In the first quarter of
      1997 the Company recognized a nondeductible charge of $2.8 million in
      nonrecurring acquisition and merger-related expense and a pre-tax $11.8
      million restructuring charge associated with the transaction.

      Firestone Financial Corp.

            On October 15, 1997, the Company completed its acquisition of
      Firestone Financial Corp. ("Firestone"), an $85 million small business
      equipment finance company headquartered in Newton, Massachusetts. The
      transaction was accounted for as a pooling of interests and was structured
      as a tax-free exchange of 0.59 shares of the Company's common stock for
      each share of Firestone common stock. The Company's outstanding stock
      increased by 1,180,000 to a total of 29,716,593 shares on the date of
      acquisition. Based on the closing price of the Company's stock as of
      October 15, 1997, the market value of the shares exchanged totaled $31
      million. Firestone operates as a wholly-owned subsidiary of USTrust.

      Somerset Savings Bank

            On July 20, 1998, the Company completed its acquisition of Somerset
      Savings Bank ("Somerset"), a Massachusetts savings bank headquartered in
      Somerville. The transaction was accounted for as a pooling of interests
      and was structured as a tax-free exchange of 0.19 shares of the Company's
      common stock for each share of Somerset common stock. The Company's
      outstanding stock increased by 3,203,373 shares to a total of 33,100,551
      shares on the date of acquisition. Based on the closing price of the
      Company's stock as of July 20, 1998, the market value of the shares
      exchanged totaled $88.9 million. Somerset operated six branches in
      Middlesex County. At the date of acquisition, Somerset was merged with and
      into USTrust, a principal subsidiary bank of the Company. Also, upon the
      completion of the acquisition, the Company redesignated approximately $82
      million of former Somerset securities from the held-to-maturity
      classification to securities available-for sale.




                                       10
<PAGE>   11

                                    UST CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(5)   ACQUISITIONS (CONT'D.)

      Affiliated Community Bancorp, Inc.

            On August 7, 1998, the Company completed its acquisition of
      Affiliated Community Bancorp, Inc. ("Affiliated"), a multi-bank holding
      company headquartered in Waltham, Massachusetts. The transaction was
      accounted for as a pooling of interests and was structured as a tax-free
      exchange of 1.41 shares of the Company's common stock for each share of
      Affiliated common stock. The Company's outstanding stock increased by
      9,439,735 shares to a total of 42,542,386 shares on the date of
      acquisition. Based on the closing price of the Company's stock as of
      August 7, 1998, the market value of the shares exchanged was $225 million.
      Affiliated's three subsidiary banks, The Federal Savings Bank
      ("Federal"), Lexington Savings Bank ("Lexington") and Middlesex Bank &
      Trust Company ("Middlesex"), operate a total of thirteen branch offices in
      Middlesex County. It is expected that Federal and Lexington will be merged
      with and into USTrust during the fourth quarter. As contemplated by the
      terms of the agreement under which the Affiliated acquisition was
      consummated, Middlesex Bank & Trust Company, a $28 million bank, was sold
      for $8.24 million to a private investor unaffiliated with the Company.
      Upon the completion of the Affiliated acquisition, the Company
      redesignated approximately $137 million of former Affiliated securities
      from the held-to-maturity classification to securities available-for-sale.

      The following presentation reflects key line items on a historical basis
      for Somerset, Affiliated and UST Corp. and on a pro forma combined basis
      assuming the mergers were in effect for the periods presented:

<TABLE>
<CAPTION>
                                              UST CORP., AS         SOMERSET, AS        AFFILIATED, AS        UST CORP.,
                                           ORIGINALLY REPORTED  ORIGINALLY REPORTED   ORIGINALLY REPORTED     RESTATED
                                           -------------------  -------------------   -------------------     --------
                                                            (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S>                                            <C>                   <C>                  <C>                <C>        

YEAR ENDED DECEMBER 31, 1997
   Net interest income......................   $  175,205            $ 19,826             $   35,499         $  230,530 
   Net income...............................       32,393               5,967                 11,856             50,216 
   Net income per diluted share.............         1.08                0.35                   1.78               1.18 
   Total assets.............................    3,838,258             539,672              1,155,048          5,532,978 
   Total deposits...........................    2,978,215             455,886                731,439          4,165,540 
   Total shareholders' investment...........      340,126              35,877                113,053            489,056 
                                                                                                                        
THREE MONTHS ENDED SEPTEMBER 30, 1997                                                                                   
   Net interest income......................   $   45,737            $  4,960             $    8,916         $   59,613 
   Net income...............................       10,600               1,749                  2,949             15,298 
   Net income per diluted share.............         0.35                0.10                   0.43               0.36 
                                                                                                                        
NINE MONTHS ENDED SEPTEMBER 30, 1997                                                                                    
   Net interest income......................   $  129,540            $ 14,780             $   26,369         $  170,689 
   Net income...............................       20,273               4,445                  8,828             33,546 
   Net income per diluted share.............         0.67                0.26                   1.32               0.79 
   Total assets.............................    3,775,950             520,339              1,128,579          5,424,868 
   Total deposits...........................    2,863,927             457,813                705,434          4,027,174 
   Total shareholders' investment...........      328,624              34,333                110,158            473,115 
                                                                                            

</TABLE>



                                       11

<PAGE>   12

(6)   COMPREHENSIVE INCOME

            On January 1, 1998, the Company adopted Statement of Financial
      Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
      130"), which requires companies to report all changes in stockholders'
      investment during a period, except those resulting from investment by
      owners and distribution to owners, in a financial statement for the period
      in which they are recognized. The Company has chosen, as allowed by SFAS
      No. 130, to disclose Comprehensive Income, which encompasses net income
      and unrealized gains or losses on securities available-for-sale, in the
      Consolidated Statements of Changes in Stockholders' Investment. Prior
      years have been restated to conform to SFAS No. 130 requirements. The
      impact of this Statement for the nine months ended September 30, 1997 was
      to increase reported net income of $33.5 million to a total comprehensive
      net income of $37.4 million. The impact for the nine months ended
      September 30, 1998 was to increase reported income of $37.9 million to a
      total comprehensive net income of $48.4 million.








                                       12
<PAGE>   13

ITEM 2. 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 in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997. 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-Q
for a further discussion. All applicable prior period financial data included in
this discussion has been restated to reflect the 1997 acquisition of Firestone
Financial Corp. ("Firestone") and the 1998 acquisitions of Somerset Savings Bank
("Somerset") and Affiliated Community Bancorp, Inc. ("Affiliated") as poolings
of interests.

HIGHLIGHTS

      Net income for the quarter, which included merger-related and
restructuring charges, was $1.7 million, or $0.04 per diluted share, compared
with $15.3 million, or $0.36 per diluted share, for the same period last year.
The third quarter 1998 results included nonrecurring charges of $8.1 million for
nondeductible merger-related expenses and a pre-tax charge of $11.5 million for
restructuring expenses associated with the Somerset and Affiliated acquisitions.
Third quarter 1997 results included $946 thousand of merger-related expenses
related to the acquisition of Firestone. Excluding these merger and
restructuring costs, operating earnings for the quarter were $16.9 million, or
$0.39 per diluted share, compared with $16.2 million, or $0.38 per diluted share
last year.

      This quarter's earnings reflect a $3.1 million increase net interest
margin due to favorable changes in asset and liability mix and earning asset
growth, increases in asset management and deposit fee income, and an increase
in realized securities gains of $1.4 million. This quarter also included a
one-time cost of $2.0 million resulting from the upgrade of the Company's
automated branch platform and teller systems and $1.7 million in Year 2000
readiness expense. For the nine months ended September 30, 1998, net income was
$37.9 million, or $0.88 per diluted share compared with $33.5 million, or $0.79
per diluted share for the same period last year. Results for both year-to-date
periods included merger-related and restructuring charges associated with
acquisitions.

      Return on average equity and average assets were 1.32 percent and .12
percent for the third quarter of 1998. Excluding merger-related and
restructuring charges, operating returns on average equity and average assets
were 12.86 percent and 1.20 percent compared with 14.05 percent and 1.22
percent, respectively, last year. The decrease in these performance ratios was
reflective of the one-time $2.0 million automated branch and teller systems
costs and $1.7 million in Year 2000 readiness expense this quarter.

NET INTEREST INCOME ANALYSIS

      Net interest income on a fully taxable equivalent basis was $63.0 million
for the quarter ended September 30, 1998, compared with $59.9 million for the
same period a year ago. For the first nine months of 1998, net interest income
was $188.5 million compared with $171.8 million last year. The increase in net
interest income in both comparisons was due to a combination of earning asset
growth, favorable changes in earning asset and deposit mix, noninterest and low
cost deposit growth and lower borrowing costs.





                                       13
<PAGE>   14

      Average loans increased 10 percent in both the three- and nine-month
periods, or $392 million and $380 million, respectively, from the same period
last year to $4.134 billion and $4.039 billion, respectively, this year. As
exhibited in the table below, loan growth was the largest contributor to the
improvement in net interest income, with an $8.6 million volume-related interest
income increase for the quarter and a $24.9 million increase for the nine months
ended September 30. Lower-yielding assets, such as securities, decreased an
average of $82 million and $74 million for the three- and nine-month periods,
respectively, and average Federal Funds sold decreased $34 million and $18
million for the same periods. Average low-cost savings deposits, including
regular savings, NOW and money market increased $140 million and $75 million
from the three- and nine-month periods last year while higher-cost certificates
of deposit decreased an average of $78 million and $34 million, respectively.
Noninterest-bearing deposits increased an average of $111 million and $159
million from the three- and nine-month periods last year. The effect on net
interest income from these favorable changes in volume of interest-earning
assets and interest-bearing liabilities was an increase of $6.3 million and
$20.0 million for the three and nine months ended September 30, 1998 compared
with the same periods last year.

      Yield on earning assets declined 23 basis points for the three months
ended September 30, 1998 while the decrease for the nine-month period was
limited to 2 basis points. A decrease in loan yield of 40 basis points in the
quarter comparison and 14 basis points in the nine-month comparison was the
largest factor affecting total earning asset yield. Loan yields, in particular
rates on new commercial loans, are below last year's levels reflective of the
competitive pressure on loan pricing. In addition, this quarter and also the
nine-month period reflected lower interest income recoveries on payoffs of
nonaccrual loans than the same periods last year. While there has been a lot of
volatility, market rates, particularly short term, have been on a downward
trend. The Federal Reserve Board recently announced two interest rate cuts in
the rate charged to member banks for borrowings from the Federal Reserve.
Following the announcement, the Company's subsidiary banks, consistent with most
banks across the country, decreased the prime lending rate a total of 50 basis
points. As a result, the Company's yield on earning assets is expected to
decrease further in future quarters.

      The cost of interest-bearing liabilities decreased 15 basis points this
quarter to 4.20 percent and 4 basis points to 4.23 percent for the nine-month
period. While rates on deposits, such as NOW, money market and regular savings
increased slightly to assist in maintaining the strong growth in these low-cost
deposits, time certificates of deposit decreased 13 basis points this quarter
compared to a year ago as older certificates matured and repriced at the current
lower offering rates. The Company expects to continue to adjust rates on new
certificates as well as some savings products consistent with the general trend
in interest rates. Borrowing costs decreased 26 basis points in the three-month
period and 22 basis points in the nine-month period to 5.37 percent and 5.40
percent, respectively. The decrease reflects the replacement of long-term,
higher rate borrowings with overnight borrowings which allows the Company to
take advantage of falling interest rates and reduce its funding costs. The net
effect of rate changes on net interest income for the three and nine months
ended September 30, 1998, compared with the same periods last year, was a
decrease of $3.2 million for both periods.

      As a result of the aforementioned yield and volume changes, the interest
rate margin and spread decreased slightly from 4.72 percent and 3.93 percent,
respectively, last year, to 4.71 percent and 3.85 percent, respectively, this
year. This quarter's interest rate margin and spread were also lower than the
4.78 percent and 3.94 percent in the second quarter of this year. The Company,
in anticipation of continued falling interest rates has positioned its balance
sheet to be liability sensitive which should allow it to take greater advantage
of falling funding costs. As part of this positioning, the Company extended the
average life of earning assets to reduce the effects of earning assets repricing
at lower rates. The Company expects that this position will assist in
maintaining its current level of interest rate margin and spread. Although such
expectations, which are subject to the volatility of market interest rates, may
not be actually realized. For a further discussion, refer to the caption
Interest Rate Risk contained in this Form 10-Q. For the year-to-date period
through September 30, the interest rate margin and spread of 4.80 percent and
3.96 percent, respectively, were ahead of last year of 4.63 percent and 3.94
percent, respectively.




                                       14
<PAGE>   15

      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 three- and
nine-month periods ended September 30, 1998 when compared with the three and
nine months ended September 30, 1997. Changes attributable to both rate and
volume are allocated on a weighted basis.


<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED SEPTEMBER 30,          NINE MONTHS ENDED SEPTEMBER 30,
                                                      1998 COMPARED WITH 1997                   1998 COMPARED WITH 1997
                                                INCREASE (DECREASE) DUE TO CHANGE IN:     INCREASE (DECREASE) DUE TO CHANGE IN:
                                                ------------------------------------      ------------------------------------  
                                                 AVERAGE         AVERAGE                   AVERAGE       AVERAGE
                                                 VOLUME           RATE         TOTAL        VOLUME         RATE         TOTAL
                                                ----------       -------      ------      ---------      -------       ------- 
                                                                       (DOLLARS IN THOUSANDS)
<S>                                               <C>          <C>            <C>           <C>          <C>           <C>     

Interest income:
  Interest and fees on loans*.................... $ 8,562      $(3,843)       $4,719        $24,859      $(3,851)      $21,008 
  Interest and dividends on securities:                                                                                        
      Taxable....................................  (1,417)         133        (1,284)        (4,027)         842        (3,185)
      Nontaxable and preferential 
         rate income* ...........................      89         (132)          (43)           509         (281)          228 
  Interest on federal funds sold and other.......    (456)        (280)         (736)          (772)        (104)         (876)
                                                  -------       ------        ------        -------      -------       ------- 
        Total interest income*........ ..........   6,778       (4,122)        2,656         20,569       (3,394)       17,175 
                                                  -------       ------        ------        -------      -------       ------- 
Interest expense:                                                                                                              
  Interest on regular savings, NOW and                                                                                         
    money market deposits........................     920          174         1,094          1,429        1,351         2,780 
  Interest on time deposits......................  (1,079)        (531)       (1,610)        (1,419)        (175)       (1,594)
  Interest on borrowings.........................     652         (560)           92            583       (1,375)         (792)
                                                  -------       ------        ------        -------      -------       ------- 
        Total interest expense...................     493         (917)         (424)           593         (199)          394 
                                                  -------       ------        ------        -------      -------       ------- 
Net interest income.............................. $ 6,285      $(3,205)       $3,080        $19,976      $(3,195)      $16,781 
                                                  =======      =======        ======        =======      =======       ======= 
</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
    adjustments were $61 and $196 thousand on loans and $219 and $762 thousand
    on nontaxable and preferential rate taxable securities for the three and
    nine months ended September 30, 1998, respectively.


NONINTEREST INCOME

      Total noninterest income increased $2.4 million this quarter to $11.9
million. Realized gains this quarter of $862 thousand were recorded from the
sale of smaller denomination securities and those containing risk of prepayment
in a falling interest rate environment and sales of certain equity securities
held by the parent Company. This compares with a net loss of $488 thousand in
the same quarter last year. Asset management fees were up 15 percent, or $478
thousand, from the same quarter a year ago. Service charges on deposit accounts
increased 8 percent, or $228 thousand, due to the growth in noninterest-bearing
and saving deposit balances. Gain on sale of loans this quarter of $193
thousand, included gains recorded on the sale of $21 million in substandard
commercial and residential loans.

      For the first nine months of this year, total noninterest income increased
$5.2 million to $35.5 million. Securities gains totaled $2.6 million, a $3.7
million increase over the $1.1 million in realized losses recorded last year.
Asset management fees increased 18 percent, or $1.7 million due to growth in
balances under management, and deposit services charges increased 11 percent due
to growth in deposits. Gain from loan sales this year were $588 million, which
includes gains on sale of fixed rate residential mortgage loans in the secondary
market and gains on sale of substandard loans. The $1.9 million gain last year
was mostly from the sale of substandard loans.



                                       15

<PAGE>   16

NONINTEREST EXPENSE

      Total noninterest expense was $67.0 million, $23.3 million higher than the
same quarter a year ago. This quarter included $11.5 million in restructuring
charges and $8.1 million in nondeductible acquisition and merger-related expense
related to the Somerset and Affiliated acquisitions, compared with $946 thousand
in merger costs associated with the acquisition of Firestone Financial Corp. in
1997. Acquisition and merger-related expense consisted of professional fees paid
to attorneys, accountants and investment advisory firms for work performed on
the acquisition transactions. Restructuring charges included expenses paid and
provisions for severance payments to Somerset and Affiliated executives and
staff, processing systems conversions and deconversion costs, customer
communications related to the effect of the acquisitions, and write-offs of
certain Somerset and Affiliated assets. Year 2000 readiness expense was $1.7
million this quarter compared with a nominal expense last year. Refer to below
for a further discussion of Year 2000. Other noninterest expense increased $2.4
million from the same quarter last year. The increase includes a one-time cost
of $2.0 million in connection with the upgrade of the Company's automated branch
platform and teller systems.

      The third quarter operating efficiency ratio, which excludes realized
gains/losses on sales of securities and loans and merger-related and
restructuring expenses was 64.5 percent compared with 61.4 percent for the same
period last year. Excluding unusual charges such as the Year 2000 readiness
expense of $1.7 million and $2.0 million expense associated with the branch
automation, the efficiency ratio for the third quarter of this year was 59.4
percent.

      For the nine months ended September 30, 1998, noninterest expense
increased $14.7 million to $159.9 million. This year included $19.6 million in
merger and restructuring charges compared with $15.5 million last year. Year
2000 readiness expense was $3.1 million in 1998 compared to a nominal expense
last year. Personnel costs increased $3.6 million from last year. Foreclosed
asset and workout expense of $3.1 million this year included a $1.8 million
writedown of other real estate owned formerly held by Somerset. Other
noninterest expense this year included the aforementioned costs associated with
branch automation.

      The merger of Somerset with and into USTrust, a principal banking
subsidiary of the Company, occurred during the third quarter. Consequently, the
integration and conversion of Somerset operating systems with USTrust systems
began late in the quarter and will continue into the fourth quarter. Also the
merger with and into USTrust and system integration and conversions of the
Affiliated banks, The Federal Savings Bank and Lexington Savings Bank, is
expected to occur in the fourth quarter of this year. As a result, the Company's
noninterest expenses reflected little cost savings associated with the
acquisitions in the third quarter of this year and limited savings is expected
in the fourth quarter.


Year 2000

      In 1997, the Company assembled a project team of senior officers and
outside consultants to assess the impact of the Year 2000 problem on its systems
and certain systems of its customers, vendors and other parties that service or
otherwise interact with the Company. The Year 2000 problem, which is common to
most corporations, concerns the inability of computer-based systems, including
among others, computer hardware, embedded chips, and computer software programs,
to recognize properly and process date-sensitive information involving 20th and
21st century dates. Data processing for the Company's major operating systems
(loans and deposits) is conducted in-house using programs developed primarily by
third-party vendors. Inventory and Year 2000 readiness assessment of all
information and noninformation systems and applications have been completed and
all third-party vendors who provided applications to the Company have been
contacted. Efforts to bring the major operating systems, and certain outsourced
applications, into compliance with Year 2000 requirements have or will be
accomplished primarily through the installation of updated or replacement
programs developed by third parties. In addition, the status of all Company
facilities and all significant third-party providers of goods and services to
the Company has been assessed. Starting in




                                       16
<PAGE>   17

March 1998, the Company retained the services of Arthur Andersen LLP, Atlantic
Data Services, Inc., and certain additional outside advisors and programmers to
augment the Company's efforts in addressing its Year 2000 compliance. Arthur
Andersen's efforts have been focused upon assisting the Company in project
management and progress assessment.

      Bank regulatory agencies have issued guidance as to the standards they
will use when assessing Year 2000 readiness. The failure of a financial
institution, such as the Company, to take appropriate steps to address
deficiencies in their Year 2000 project management process may result in
regulatory enforcement actions which could have a material adverse effect on the
institution, result in the imposition of civil money penalties, or result in the
delay (or receipt of an unfavorable or critical evaluation of management of a
financial institution in connection with regulatory review) of applications
seeking to acquire other entities or otherwise expand the institution's
activities.

      The Company's Year 2000 Readiness Program contains a number of discrete
segments, including among others, Awareness and Assessment, Project Planning,
Remediation, Unit Test Plans, Unit Testing, Commercial (including evaluation and
monitoring stages), Retail, Contingency Plans for Information Systems and
Contingency Plans for Business Continuation. Awareness and Assessment, Project
Planning for all aspects and Unit Test Plans for mission critical technology
systems have been completed. Mission critical systems are defined by the Company
as those vital to the successful continuance of core business activities. Test
Plans for noncritical applications are in process of development and are
expected to be completed during the first quarter of 1999.

      The Remediation phase, wherein software and hardware are either modified
or replaced, is well underway and presently scheduled to be substantially
completed by year-end 1998 for mission critical applications and by mid-1999 for
nonmission critical applications. Specifically, during the third quarter of
1998, the Company successfully installed a new commercial loan system, upgraded
its deposit system to the vendor's latest version, and began installing a new
teller system. Mission critical systems testing is targeted to be substantially
complete by December 31, 1998 and nonmission critical systems are expected to be
completely tested by the end of the first half of 1999. To help achieve the
completion of testing for nonmission critical applications, the Company has
engaged the services of an additional third-party vendor, Command Systems, Inc.

      The initial portion of the Commercial phase, which includes the evaluation
of credit risk stemming from problems borrowers may have in resolving their own
Year 2000 issues, has been completed; however, monitoring of the remediation
efforts of high risk customers will be ongoing. During the monitoring stage the
Company is implementing a course of action and procedures designed to reduce any
increased potential credit risk as a result of borrowers' Year 2000 issues. Also
encompassed in this phase is the in-process evaluation, assessment and
monitoring of the state of readiness of the Company's funds providers and the
capital markets. The Retail phase is largely focused on customer communications
as to the state of the Company's Year 2000 readiness. The initial communications
have been distributed and the process is ongoing.

      Contingency Planning (other than business continuation planning) for
all mission critical technology systems has been completed and will be updated
periodically during 1998 and 1999. The process of updating the Company's
existing Business Continuation Plan to address Year 2000 issues began July 1.
The Company has yet to identify any operating system which appears unlikely to
be Year 2000 compliant or for which a suitable alternative cannot be
implemented. Since, however, the Company is heavily dependent on third parties
for software and other support, there are risks that the Company's operations
could be disrupted by adverse developments affecting the operations of these
third parties. Such risks include, among other matters, an inability to process
and underwrite loan applications, to credit deposits and withdrawals from
deposit accounts, to credit loan payments or track delinquencies, to properly
reconcile and record daily activity or to engage in normal banking activities.
Additionally, if those commercial borrowers whose operations depend heavily on
automated systems experience Year 2000 compliance problems affecting their
ability to repay, the Company's financial condition and results of operations
could be adversely affected by requirements to record additional loan loss
provisions. Furthermore, the Company faces financial risk from





                                       17
<PAGE>   18

its fund providers as the Year 2000 problem may produce some deposit contraction
forcing a change to alternative and higher cost funding sources. Finally, to the
extent that certain utility and communication services utilized by the Company
face Year 2000 problems, the Company's operations could be disrupted. Utilizing
the resources of the Company's existing Disaster Recovery consultant, all
Business Continuation Plans will address Year 2000 issues with completion of
initial contingency plans targeted for December 31, 1998.

      The Company believes that it will be able to modify or replace any
affected systems in time to minimize any detrimental effects on the Company's
operations. In a large number of cases, Year 2000 compliant systems have been
installed or are in the process of installation. The Company expects that it
will incur costs to replace existing hardware and software which will be
capitalized and amortized in accordance with the Company's existing accounting
policy while maintenance or modification costs will be expensed as incurred. At
September 30, 1998, Year 2000 readiness expense totaled $3.1 million, all of
which was recorded during the first nine months of 1998. Although total costs
for the entire project have yet to be determined, the Company expects to incur,
as current operating expense (including the above $3.1 million), costs in the
range of $7 million to $8 million to assure Year 2000 readiness. This estimate
represents an increase over the original estimate of $4 million to $5 million
and results primarily from additional third-party costs to be incurred in the
testing phase. These costs and estimates do not include internal costs incurred
for Year 2000 matters. Such internal costs, which are not separately tracked by
the Company, consist principally of payroll costs of the Company's information
systems group. Capital expenditures for new equipment and software purchases are
expected to total an additional $1 million. This estimate does not include the
cost of a number of system installations previously planned by the Company in
the normal course of business. Costs of the Year 2000 project are based on
current estimates and actual results could vary significantly from such
estimates. If the Company's Year 2000 Readiness Program were unsuccessful, it
would have a material adverse effect on its future operating results and the
financial condition of the Company. Accordingly, the Company's Board of
Directors is actively involved in monitoring management's efforts to address
Year 2000 readiness and has instructed management to allocate appropriate
resources to address these matters.

      Ultimately, an estimation of the efforts of the Company in addressing the
Year 2000 issue in a successful and timely manner depends to a large extent not
only on the corrective measures that the Company undertakes, but also on the
efforts undertaken by businesses and other independent entities who provide data
to, or receive data from, the Company as borrowers, vendors or customers. In
particular, the Company's credit risk associated with its borrowers may increase
as a result of problems such borrowers may have in resolving their own Year 2000
issues. Although the Company has completed its initial evaluation, it is a
continuing process and is subject to re-evaluation. It is not possible to
quantify the magnitude of any potential increased credit risk at this time. The
impact of the Year 2000 problem on borrowers, however, could result in increases
in problem loans and credit losses in future years.

INCOME TAXES

      The Company recorded income taxes in the third quarter of this year of
$5.1 million which resulted in an effective tax rate of 74.5 percent compared
with $9.3 million at an effective rate of 37.7 percent for the same period last
year. The Company recorded $8.1 million this quarter and $946 thousand in the
third quarter of 1997 in nondeductible merger-related expenses. Excluding these
expenses from pre-tax income, the effective tax rate for this quarter was 34.1
percent and 36.3 percent last year. The decrease in effective rate was mostly
attributable to the formation of a wholly-owned Real Estate Investment Trust
("REIT") subsidiary earlier this year. The REIT holds a substantial portion of
the Company's commercial real estate loan portfolio, which was originated by and
transferred from USTrust. Income earned by a REIT is taxed at a lower state tax
rate than a bank.

      Included in other assets as of September 30, 1998 was a deferred tax asset
of approximately $18.9 million. The Company believes that it is more likely than
not that the benefit of this deferred asset will be realized in future periods.





                                       18
<PAGE>   19

ASSETS

      Total assets at September 30, 1998 were $5.669 billion, an increase of
$136 million since the beginning of the year. Loan growth of $214 million to
$4.182 billion was net of a $21 million sale of substandard loans in the third
quarter. The increase in assets from loan growth was partially offset by a $61
million decrease in federal funds sold and a lower balance of cash. The
following table presents the composition of the loan portfolio:


<TABLE>
<CAPTION>
                                        SEPTEMBER 30,    JUNE 30,       MARCH 31,    DECEMBER 31,   SEPTEMBER 30,
                                            1998           1998           1998          1997            1997                
                                        -----------     ----------     ----------    -----------    ------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                      <C>            <C>            <C>            <C>            <C>       

Commercial and financial................ $1,215,197     $1,134,797     $1,060,745     $1,076,980     $  994,023
Commercial real estate:
  Construction..........................     64,408        103,162        105,170        109,787        120,519
  Developer, investor and land..........    520,741        530,353        524,245        540,924        559,925
Commercial lease financing..............     74,961         65,366         58,965         56,260         55,466

Consumer:
  Residential mortgage..................  1,196,963      1,240,197      1,297,330      1,371,021      1,390,215
  Home equity...........................    125,446        129,365        131,905        134,874        134,061
  Indirect automobile installment.......    859,978        753,362        676,999        605,486        516,187
  Other consumer........................     39,102         41,715         42,611         45,914         46,668
  Indirect automobile lease financing ..     84,982         62,119         40,822         26,283         10,582
                                         ----------     ----------     ----------     ----------     ----------
        Total loans..................... $4,181,778     $4,060,436     $3,938,792     $3,967,529     $3,827,646
                                         ==========     ==========     ==========     ==========     ==========
</TABLE>

      The Company's commercial loan portfolios listed above totaled $1.800
billion at September 30, 1998, reflecting a net increase of $73 million since
year end and $126 million from a year ago. The net increase was primarily due to
the purchase of an $80 million commercial loan portfolio during the first
quarter of 1998 as new loan originations and advances were offset with payoffs.

      Residential loans decreased $174 million during the first nine months to
$1.197 billion due to high levels of prepayment and normal amortization. The
currently low interest rate environment has accelerated prepayment rates in this
portfolio and is expected to continue in the near term. Accompanying the
Company's acquisition of Affiliated this quarter was the residential mortgage
loan origination operations of Lexington Savings Bank. Following the merger of
Lexington with and into USTrust during the fourth quarter, the Company expects
to expand residential mortgage origination activities throughout all of USTrust
branch and retail service outlets. Prior to this acquisition, the Company's
subsidiary banks did not provide residential origination services.

      The indirect automobile loan portfolio grew 42 percent, or $254 million,
in the first nine months of this year to $860 million. In comparison with a year
ago, the portfolio grew 66 percent, or $344 million, due to the exiting of some
larger competitors from the market during the latter half of 1997. Management
expects growth in this portfolio to be at the more moderate pace as competition
has recently intensified. These loans are subjected to the Company's credit
quality standards and are not what is referred to in the industry as "subprime"
automobile loans.

      Beginning in the second half of 1997, the Company made available indirect
automobile lease financing through existing client automobile dealers. This
portfolio totaled $85 million at September 30, 1998, compared with $26 million
at year end.





                                       19
<PAGE>   20

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, liability sources such as increased deposits, utilization of a
Federal Home Loan Bank 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 September 30, 1998, liquidity, which includes excess cash, funds sold
and unpledged securities, totaled approximately $499 million, or 9 percent of
total assets.

      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 and other borrowings. Total deposits decreased $30 million since
year-end 1997 to $4.135 billion. Noninterest-bearing deposits decreased $11
million. Savings deposits increased $111 million while certificates of deposit
decreased $131 million. Short-term and other borrowings, which consist
principally of securities sold under agreement to repurchase and borrowings from
the Federal Home Loan Bank ("FHLB"), increased $110 million to $927 million. The
decrease in other borrowings since year end reflects the maturity of long-term
FHLB borrowings in the first nine months of this year, refinanced as short-term
or overnight FHLB borrowings.

      As shown in the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased $10 million during the nine-month period ended September
30, 1998. Cash provided by operations resulted largely from net income earned
during the period. Cash used by investing activities was due to net new loan
fundings partially offset by a reduction in federal funds sold. Net cash
provided by financing activities was primarily due to a shift in the deposit
mix from certificates of deposit to nontime deposits and increased short-term
and other borrowings.

      At September 30, 1998, the parent Company had $3 million in cash and $4
million in repurchase agreements compared to $6 million in cash and $4 million
in repurchase agreements at year end. The decrease in cash was primarily due to
$11 million in dividends paid to shareholders net of $8 million in dividends
received from subsidiaries.

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. 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 23 percent of total assets. The Company manages 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, U.S. Treasuries or the London Interbank Offered Rate
("LIBOR").




                                       20

<PAGE>   21

       The following table summarizes the Company's GAP position at September
30, 1998.

<TABLE>
<CAPTION>
                                                                        INTEREST SENSITIVE PERIODS
                                               -------------------------------------------------------------------------
                                               0-30 DAYS       31-91 DAYS       91-365 DAYS     OVER 1 YEAR        TOTAL
                                               ---------       ----------       -----------     -----------        -----   
                                                                          (DOLLARS IN MILLIONS)
<S>                                             <C>              <C>              <C>              <C>            <C>     

Loans, net of reserve........................   $1,305           $ 228            $ 724            $1,860         $4,117  
Federal funds sold and other.................       20                                                                20  
Securities...................................       61             106              190               851          1,208  
Other assets.................................                                                         324            324  
                                                ------           -----            -----            ------         ------  
        Total assets.........................   $1,386           $ 334            $ 914            $3,035         $5,669  
                                                ------           -----            -----            ------         ======  
                                                                                                                         
Interest-bearing deposits....................   $  885           $ 250            $ 715            $1,514         $3,364  
Borrowed funds...............................      820              33               43                31            927  
Noninterest-bearing deposits.................      164                                                607            771  
Other liabilities and 
     stockholders' equity ...................        7                                                600            607  
                                                ------           -----            -----            ------         ------  
        Total liabilities and equity.........   $1,876           $ 283            $ 758            $2,752         $5,669  
                                                ------           -----            -----            ------         ======  
                                                                                                                         
GAP for period...............................   $ (490)          $  51            $ 156            $  283                 
                                                ------           -----            -----            ------        
Cumulative GAP...............................   $ (490)          $(439)           $(283)           $    0                 
                                                ======           =====            =====            ======                 
                                                                                                  
As a percent of total assets.................    (8.64)%         (7.74)%          (4.99)%
                                                          
</TABLE>


      The majority of 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 that management deems appropriate. Securities and
noninterest-bearing deposits are categorized according to their expected lives
based on published industry prepayment estimates in the case of securities and
current management estimates for noninterest-bearing 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 September 30, 1998, the one-year cumulative GAP position was
negative at $283 million, or approximately 5 percent of total assets, in
anticipation of continued falling interest rates. Average life of earning assets
has been extended through reductions in federal funds sold and replacement and
build-up in the securities portfolio of long-term securities containing reduced
economic risk from prepayment. In addition, the average life of interest-bearing
liabilities has been shortened as long-term borrowings at maturity have been
replaced with short-term over overnight borrowings.

      The Company also uses simulation analysis to measure the exposure of net
interest income to changes in interest rates over a relatively short (i.e., 12
month) time horizon. Simulation analysis involves projecting future interest
income and expense from the Company's assets, liabilities and off-balance sheet
positions under various scenarios. The Company's limits on interest rate risk
specify that, if interest rates were to shift immediately up or down 200 basis
points, estimated net interest income for the next 12 months should decline by
less than 10 percent. The following tables reflects the Company's estimated
exposure as a percentage of estimated net interest income, and consequently net
income, for the next 12 months, assuming an immediate shift in interest rates:

<TABLE>
<CAPTION>
                                           ESTIMATED EXPOSURE AS A PERCENTAGE
  RATE CHANGE (BASIS POINTS)                    OF NET INTEREST INCOME
  --------------------------               ----------------------------------
             <S>                                       <C>    

             +200                                      (3.00%)
             -200                                       3.00%

</TABLE>



                                       21
<PAGE>   22

      As shown in the table above, the Company's liability sensitive balance
sheet position would produce a 3 percent increase in net interest income over
the 12 months if rates were to decrease 200 basis points. Shortcomings are
inherent in a simulation analysis. Certain assets, such as adjustable rate
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the assets. Additionally, the proportion of
fixed-rate loans in the Company's portfolio could increase in future periods if
market interest rates remain at or decrease below current levels due to
refinance activity. Further, in the event of a change in interest rates, early
withdrawal and prepayments levels could deviate significantly from those assumed
in the analysis. Finally, the ability of some borrowers to repay their
adjustable rate mortgage loans may decrease in the event of interest rate
increases.

CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES

      At September 30, 1998, substandard loans were $34.1 million compared with
$53.8 million at December 31, 1997. A large portion of this year's decrease in
substandard loans was the result of the third quarter sale of $21 million in
substandard loans. 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
nonaccruals, 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 September 30, 1998, approximately 43 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 28 percent
were collateralized by owner-occupied commercial properties, approximately 49
percent were collateralized by commercial real estate, and approximately 9
percent by residential real estate. The remaining loans were collateralized by
real estate under construction and raw land.




                                       22
<PAGE>   23

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

<TABLE>
<CAPTION>
                                                  SEPTEMBER 30,     JUNE 30,        MARCH 31,      DECEMBER 31,    SEPTEMBER 30,
                                                     1998             1998            1998             1997            1997  
                                                  ------------      -------         --------       -----------     ------------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                                 <C>             <C>              <C>             <C>              <C>    

Nonperforming assets:
   Nonaccrual loans...............................  $25,354         $27,854          $32,489         $33,092          $36,656
   Accruing loans 90 days or more past due........    2,983           1,252            1,192           1,069            2,061
   Other property owned (OPO), net*...............    3,391           3,756            5,772           7,046            8,558
   Restructured loans (TDR's).....................    6,681          12,879           16,844          17,443           20,165
                                                    -------         -------          -------         -------          -------
Total nonperforming assets........................  $38,409         $45,741          $56,297         $58,650          $67,440
                                                    =======         =======          =======         =======          =======

Reserve for possible loan losses..................  $65,146         $68,708          $70,738         $68,539          $67,434
Net chargeoffs (recoveries) for the quarter.......    4,298              71           (1,082)           (425)             643
OPO reserve.......................................    5,611           5,604            3,582           3,628            3,205

Ratios:
   Reserve to nonaccrual loans....................    256.9%          246.7%           217.7 %         207.1%           184.0%  
   Reserve to total of nonaccrual loans,                                                                                       
     accruing loans 90 days or more past due,                                                                                  
     and restructured loans.......................    186.0%          163.6%           140.0 %         132.8%           114.5%  
   Reserve to period-end loans....................      1.6%            1.7%             1.8 %           1.7%             1.8%  
   Nonaccrual loans and accruing loans over                                                                                   
     90 days past due to period-end loans.........      0.7%            0.7%             0.8 %           0.9%             1.0%  
   Nonperforming assets to period-end                                                                                         
     loans and OPO................................      0.8%            1.0%             1.3 %           1.3%             1.5%  
   Annualized net (recoveries) chargeoffs                                                                                      
     to average loans.............................      0.4%            0.0%            (0.1)%           0.0%             0.1%  
   OPO reserve to OPO.............................     62.3%           59.9%            38.3 %          34.0%            27.2%  
                                                     
</TABLE>

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

*   Included in other property owned ("OPO") are other real estate, automobiles
    and equipment acquired through foreclosure or in settlement of loans and
    leases.

      As shown in the table above, total nonperforming assets were $38.4
million, a $20.2 million decrease from the $58.7 million at year end. This
quarter's reduction in TDR's of $6.2 million and higher level of net chargeoffs
of $4.3 million were recorded in connection with the sale of $21 million in
substandard commercial and residential loans. The year-to-date net chargeoffs of
$4.4 million and provision for possible loan losses this year of $1.0 million
resulted in a reserve of $65.1 million at September 30. The reserve to
nonaccrual loan ratio improved to 257 percent. The reduction in nonperforming
assets was the most significant factor in the $3.4 million reduction in the
Reserve for Loan Losses. Reserve to total loans changed from 1.7 percent at year
end to 1.6 percent at September 30.

      The Company's consumer loan delinquency rates (greater than 30 days past
due including nonaccruals) continue to remain at favorable levels. The
delinquency rate for the indirect automobile loans, the second largest component
of the Company's consumer loan portfolio was 3.20 percent at September 30, 1998,
consistent with year end, while above the 2.78 percent reported at June 30,
1998. The Company anticipates that the current high growth rate experience in
the indirect automobile loan portfolio will subside in future periods as well as
experience seasonal fluctuations. This factor, combined with the eventual
maturity of the existing portfolio, may result in an increase in the delinquency
rate and subsequent level of chargeoffs in future periods.




                                       23
<PAGE>   24

      At September 30, 1998, total impaired loans were $18.0 million, comprised
of $207 thousand that required a reserve for possible loan losses of $17
thousand and $17.8 million that did not require a related reserve. Impaired
loans, as defined in Statement of Financial Accounting Standards No. 114 ("SFAS
No. 114") are commercial and commercial real estate loans recognized by the
Company as nonaccrual and restructured.

      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 evaluated
using consistent, systematic methodologies which analyze the size and risk of
the loan and lease portfolio. 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.

      No portion of the reserve is restricted to any loan or group of loans, and
the entire reserve is available to absorb future 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 to each
category of loans is presented below:

<TABLE>
<CAPTION>
                                              SEPTEMBER 30,    JUNE 30,     MARCH 31,    DECEMBER 31,   SEPTEMBER 30,
                                                 1998            1998         1998          1997            1997  
                                              -----------      -------      --------     -----------    ------------
<S>                                            <C>             <C>          <C>            <C>            <C>    

Reserve for possible loan losses 
 allocation to loans outstanding:
   Commercial and financial.................   $18,642         $17,897      $20,455        $20,232        $19,549
   Commercial real estate:
      Construction..........................       988           1,605        1,747          1,900          2,115
      Developer, investor and land..........     7,989           8,839        8,485          8,831          9,597
   Commercial lease financing...............     1,421           1,202        1,138            974            837
   Consumer*................................    30,215          28,225       27,991         27,657         26,396
   Unallocated..............................     5,891          10,940       10,922          8,945          8,940
                                               -------         -------      -------        -------        -------
      Total loan loss reserve...............   $65,146         $68,708      $70,738        $68,539        $67,434
                                               =======         =======      =======        =======        =======
</TABLE>

----------

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


      The reserve for possible loan losses was $65.1 million at September 30,
1998, a decrease of $3.4 million since December 1997 and a decrease of $2.3
million from September 1997. The unallocated portion of the reserve was 9
percent at September 30, 1998 compared with 13 percent at year end reflecting
the increase in reserve allocated to the consumer and commercial loans
consistent with the growth in these portfolios since year end and an overall
improvement in asset quality in the third quarter directly attributable to a
sale of $21 million of substandard loans at the end of the quarter. A 14 percent
increase in reserve for consumer loans a year ago was consistent with the strong
growth in the consumer indirect automobile portfolio.




                                       24
<PAGE>   25

CAPITAL AND DIVIDENDS

      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 I capital to
risk-weighted assets, and of Tier I capital to average assets (all as defined in
the regulations). Management believes, as of September 30, 1998, that the
Company and its subsidiary banks meet all of their respective capital adequacy
requirements.

      The actual capital amounts and ratios of the Company and its banking
subsidiaries as of September 30, 1998 are presented in the following summary:

<TABLE>
<CAPTION>
                                                           AMOUNT                                   PERCENT
                                             ---------------------------------------   -------------------------------------
                                                         ADEQUATELY        WELL                    ADEQUATELY       WELL
                                                         CAPITALIZED     CAPITALIZED              CAPITALIZED    CAPITALIZED
                                             ACTUAL        MINIMUMS       MINIMUMS     ACTUAL       MINIMUMS       MINIMUMS
                                             ------        --------      -----------   ------       --------     -----------
                                                                           (DOLLARS IN MILLIONS)
<S>                                         <C>             <C>           <C>         <C>             <C>          <C> 

UST Corp. Consolidated:
  Tier 1 leverage capital................   $463.4          $220.3             *        8.42%         4.00%            *  
  Tier 1 capital.........................    463.4           179.2             *       10.41%         4.00%            *  
  Total (Tier 1 and Tier 2) capital .....    520.9           357.8             *       11.72%         8.00%            *  
                                                                                                                          
USTrust:                                                                                                                  
  Tier 1 leverage capital................    321.3           182.3        $227.9        7.05%         4.00%         5.00% 
  Tier 1 capital.........................    321.3           154.7         232.0        8.31%         4.00%         6.00% 
  Total (Tier 1 and Tier 2) capital .....    370.0           308.8         386.0        9.59%         8.00%        10.00% 
                                                                                                                          
The Federal Savings Bank:                                                                                                 
  Tier 1 leverage capital................     58.3            21.5          26.8       10.87%         4.00%         5.00% 
  Tier 1 capital.........................     58.3            11.0          16.4       21.29%         4.00%         6.00% 
  Total (Tier 1 and Tier 2) capital .....     61.8            21.9          27.4       22.55%         8.00%        10.00% 
  Tangible capital.......................     58.3            10.7             *       10.87%         2.00%            *    
                                                                                                                          
Lexington Savings Bank:                                                                                                   
  Tier 1 leverage capital................     49.1            20.8          26.0        9.44%         4.00%         5.00% 
  Tier 1 capital.........................     49.1            13.0          19.5       15.13%         4.00%         6.00% 
  Total (Tier 1 and Tier 2) capital .....     52.7            26.0          32.5       16.25%         8.00%        10.00% 
                                                                                                                          
United States Trust Company:                                                                                              
  Tier 1 leverage capital................      4.5             0.9           1.2       19.26%         4.00%         5.00% 
  Tier 1 capital.........................      4.5             0.6           0.8       32.13%         4.00%         6.00% 
  Total (Tier 1 and Tier 2) capital .....      4.6             1.1           1.4       32.18%         8.00%        10.00% 
                                           
</TABLE>

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

*  Not applicable




                                       25
<PAGE>   26

      On September 15, 1998, a regular quarterly dividend to stockholders was
declared of $0.14 per share for a total of $6.0 million payable on October 23,
1998. This quarter's dividend compares with $0.15 per share last quarter and
$0.10 per share for the same quarter last year. The second quarter dividend of
this year included a second, or additional, declaration by Affiliated to its
former shareholders. The additional quarterly dividend declaration aligned
Affiliated's dividend declaration and payment periods with that of the Company's
prior to the acquisition of Affiliated by the Company in the third quarter. The
additional dividend accounted for $0.02 of the $0.15 per share declared in the
second quarter by the Company as restated under the pooling of interests method
of accounting. For the first nine months of this year dividends declared totaled
$16.7 million, or $0.39 per share compared with $11.4 million, or $0.27 per
share for the same period last year.

      In October 1998, the Company announced that its Board of Directors
approved a stock repurchase program. Under the program, the Company is
authorized to repurchase up to 310,000 shares which constitutes less than 1
percent of the Company's common stock outstanding. The repurchase program will
not affect the Company's use of the pooling of interests method of accounting to
record the recent acquisitions by the Company of Affiliated and Somerset. The
program authorizes the Company to buy back common stock from time to time,
subject to prevailing market conditions. Purchases may be made on the open
market or in privately negotiated transactions. As of October 30, 1998, no
shares had been repurchased under this program.

RECENT ACCOUNTING DEVELOPMENTS

      In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." Refer to Note 6 to the Notes to Consolidated Financial
Statements for a further discussion.

      In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This Statement changes the
way public companies report segment information in annual financial statements
and requires public companies to report selected segment information in interim
financial reports to shareholders. Under the Statement's "management approach,"
public companies are to report financial and descriptive information about their
operating segments. Operating segments are components of an enterprise for which
separate financial information is produced internally and are subject to
evaluation by the chief operating decision maker in deciding how to allocate
resources to segments and assess segment performance. This Statement is
effective for fiscal years beginning after December 15, 1997; however, it is not
required to be applied for interim reporting in the initial year of application.
These disclosure requirements will have no material impact on the Company's
financial position or results of operations.

      In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This Statement does not
change the recognition or measurement associated with pension or postretirement
plans. It standardizes certain disclosures, requires additional information
about changes in the benefit obligations and about change in the fair value of
plan assets to facilitate analysis, and it eliminates certain disclosures that
were not deemed useful. This Statement is effective for financial statements
issued for periods beginning after December 15, 1997. These disclosure
requirements will have no impact on the Company's financial position or results
of operations.

      In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company does not expect that the adoption of this Statement
will have a material impact on the Company's financial position or results of
operations.




                                       26
<PAGE>   27

      In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This Statement further amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," as amended by
SFAS No. 115 and SFAS No. 125. This Statement requires that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. The Company does not expect that the adoption of this
Statement will have a material impact on the Company's financial position or
results of operation.





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<PAGE>   28

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

      The preceding Management's discussion and Notes to Consolidated Financial
Statements of this Form 10-Q contain certain forward-looking statements,
including without limitation statements regarding (i) rates of loan growth and
amortization; (ii) the rate of loan delinquencies and amounts of chargeoffs;
(iii) the level of reserve for possible loan losses; (iv) the amount and timing
of cost savings resulting from the Somerset and Affiliated banks' mergers with
and into USTrust; (v) the Company's ability to minimize any detrimental effects
of the Year 2000 problem and estimates of associated expense; (vi) expectations
regarding the Company's earning asset and cost of interest-bearing liabilities
rates as well as the effects on operating results from changes in market
interest rates; and (vii) utilization of deferred tax assets. 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) adverse changes in asset
quality and resulting credit risk-related losses and expenses; (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) adverse
changes in the local real estate market can also negatively affect credit risk
as 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; (iv) the consequences of continued bank acquisitions and mergers in
the Company's market, resulting in fewer but much larger and financially
stronger competitors which could increase competition for financial services to
the Company's detriment; (v) fluctuations in market rates and prices can
negatively affect net interest margin, asset valuations and expense
expectations; and (vi) changes in the regulatory requirements of federal and
state agencies applicable to bank holding companies and banks, such as the
Company and its Subsidiary Banks, which could have a materially adverse effect
on the Company's future operating results.





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<PAGE>   29

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      Refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations of this Form 10-Q under "Interest Rate Risk" for a
discussion of market risk.






                                       29

<PAGE>   30

                           PART II. OTHER INFORMATION


        For the quarter ended September 30, 1998, Items 2, 3, 4 and 5 are either
inapplicable or would elicit a response of "None" and, therefore, no reference
thereto has been made herein.


ITEM 1. LEGAL PROCEEDINGS.

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


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

        (a)     Exhibits.

                27.1    Article 9 Summary Financial Information for the nine
                        months ended September 30, 1998.

                27.2    Article 9 Restated Summary Financial Information for
                        the nine months ended September 30, 1997.

        (b)     Reports on Form 8-K.

                (i)     Report on Form 8-K filed July 31, 1998 (reporting the
                        consummation on July 20, 1998 of the Company's
                        acquisition of Somerset Savings Bank and providing
                        financial statements related thereto).

                (ii)    Report on Form 8-K filed August 13, 1998 (reporting the
                        consummation on August 7, 1998 of the Company's
                        acquisition of Affiliated Community Bancorp, Inc. and
                        providing financial statements related thereto).


        In accordance with the requirements of the Securities Exchange Act of
1934, the Company has caused this report to be signed on its behalf by the
undersigned duly authorized officers of the Company.




Date: November 13, 1998                  By: /s/ Neal F. Finnegan 
                                             ----------------------------------
                                             Neal F. Finnegan, President and  
                                             Chief  Executive Officer



Date: November 13, 1998                  By: /s/ James K. Hunt
                                             ----------------------------------
                                             James K. Hunt, Executive Vice 
                                             President, Treasurer and Chief 
                                             Financial Officer (Principal
                                             Financial Officer and Principal 
                                             Accounting Officer)





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