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

                                  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, 1997

                                       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 31, 1997,
there were 29,718,593  shares of common stock  outstanding,  par value $.625 per
share.

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




                                    UST Corp.

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                                            PAGE
<S>                                                                                                                         <C>  
PART I.   FINANCIAL INFORMATION

           ITEM 1.  Financial Statements

             Consolidated Balance Sheets -- September 30, 1997 and December 31, 1996.......................................... 3

             Consolidated Statements of Income -- Three and Nine Months Ended September 30, 1997 and 1996..................... 4

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

             Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1997 and 1996........................... 6

             Notes to Consolidated Financial Statements....................................................................... 7


           ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11


PART II.  OTHER INFORMATION

           ITEM 1.  Legal Proceedings.........................................................................................22

           ITEM 6.  Exhibits and Reports on Form 8-K..........................................................................22

           SIGNATURES ........................................................................................................22
</TABLE>


                                       2







                          PART I. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                                    UST CORP.
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                      September 30,   December 31,

                                                                                          1997            1996
                                                                                       ----------     ------------
                                                                                          (Dollars in thousands)
                                                        ASSETS
<S>                                                                                  <C>               <C>       
Cash, due from banks and interest-bearing deposits.............................       $    92,171       $  140,069
Federal funds sold and other short-term investments............................           129,731          142,901
Securities:
  Securities available-for-sale:
    Mortgage-backed securities ................................................           437,385          267,726
    U.S. Treasury and federal agencies and other securities....................           275,030          414,077
                                                                                       ----------     ------------
           Total securities available-for-sale.................................           712,415          681,803
  Securities held-to-maturity (Note 5).........................................                            145,564
                                                                                       ----------     ------------
           Total securities....................................................           712,415          827,367
Loans:
  Loans -- net of unearned discount of $14,617,000 in 1997 and
    $18,721,000 in 1996 (Note 2)...............................................         2,637,467        2,452,813
  Reserve for possible loan losses (Note 2) ...................................           (49,969)         (50,204)
                                                                                       ----------     ------------
           Total loans, net....................................................          2,587,498       2,402,609
Premises, furniture and equipment, net.........................................            64,258           53,439
Intangible assets, net.........................................................            59,634           66,826
Other real estate and vehicles owned, net .....................................             1,106            1,792
Loans held-for-sale............................................................                             12,446
Other assets...................................................................            44,036           50,793
                                                                                       ----------     ------------
           Total assets........................................................       $ 3,690,849       $3,698,242
                                                                                      ===========       ==========

                                   LIABILITIES AND STOCKHOLDERS' INVESTMENT
Deposits:
   Noninterest-bearing.........................................................     $     618,862       $  599,927
   Interest-bearing: 
      NOW......................................................................            42,268          381,782
      Money market.............................................................           628,746          313,548
      Regular savings..........................................................           662,295          649,974
   Time:
      Certificates of deposit over $100 thousand...............................           162,401          168,081
      Other....................................................................           749,355          742,500
                                                                                      -----------         --------
           Total deposits......................................................         2,863,927        2,855,812
Short-term borrowings..........................................................           427,782          412,331
Other borrowings...............................................................            18,063           66,091
Other liabilities..............................................................            66,743           68,419
                                                                                      -----------         --------
           Total liabilities...................................................         3,376,515        3,402,653
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 -- 45,000,000 shares;
    Issued -- 28,531,343 and 28,020,645 shares in 1997 and 1996, respectively..            17,832           17,590
  Additional paid-in capital...................................................           116,087          110,644
  Retained earnings............................................................           179,767          169,465
  Unrealized gain (loss) on securities available-for-sale, net of tax..........               245           (2,576)
  Deferred compensation and other..............................................               403              466
                                                                                      -----------       ----------
           Total stockholders' investment......................................           314,334          295,589
                                                                                      -----------       ----------
           Total liabilities and stockholders' investment......................     $   3,690,849      $ 3,698,242
                                                                                     ============      ===========
</TABLE>

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

                                       3






                                    UST Corp.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED            NINE MONTHS ENDED

                                                                           SEPTEMBER 30,                 SEPTEMBER 30,

                                                                           1997      1996          1997           1996
                                                                           ----      ----          ----           ----
                                                                          (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Interest income:

<S>                                                              <C>             <C>             <C>             <C>         
  Interest and fees on loans .................................   $     58,198    $     43,698    $    165,324    $    128,979
  Interest and dividends on securities:
    Taxable ..................................................         10,840          13,368          33,858          39,686
    Nontaxable ...............................................            140             150             528           1,106
  Interest on federal funds sold and other 
   short-term investments.....................................          1,657             450           3,728             440
                                                                 ------------    ------------    ------------    ------------
                Total interest income ........................         70,835          57,666         203,438         170,211
                                                                 ------------    ------------    ------------    ------------
Interest expense:
  Interest on deposits .......................................         21,064          17,838          61,485          53,123
  Interest on borrowings .....................................          5,550           6,389          16,976          18,128
                                                                 ------------    ------------    ------------    ------------
                Total interest expense .......................         26,614          24,227          78,461          71,251
                                                                 ------------    ------------    ------------    ------------
  Net interest income ........................................         44,221          33,439         124,977          98,960
Provision for possible loan losses (Note 2) ..................            300         (14,301)            600         (17,674)
                                                                 ------------    ------------    ------------    ------------
  Net interest income after provision for possible loan losses         43,921          47,740         124,377         116,634
                                                                 ------------    ------------    ------------    ------------

Noninterest income:
  Asset management fees ......................................          3,255           3,255           9,600           9,807
  Service charges on deposit accounts ........................          2,416           1,518           6,837           4,612
  Corporate services income, net .............................          1,444           1,092           4,210           3,349
  Securities (losses) gains, net .............................           (578)          1,523          (1,151)          1,450
  Gain on sale of loans held-for-sale ........................                                          1,804              16
  Other ......................................................          1,666           2,205           5,611           5,127
                                                                 ------------    ------------    ------------    ------------
                 Total noninterest income ....................          8,203           9,593          26,911          24,361
                                                                 ------------    ------------    ------------    ------------

Noninterest expense:
  Salary and employee benefits ...............................         17,330          15,410          53,128          44,545
  Occupancy, net .............................................          3,076           2,612           9,257           7,888
  Equipment and furniture ....................................          1,970           1,276           5,404           3,705
  Intangible asset amortization ..............................          1,953             570           5,225           1,720
  Advertising and promotion ..................................          1,515             859           3,869           2,544
  Professional and consulting fees ...........................          1,395           1,399           3,768           3,828
  Service bureau and data processing .........................          1,256             622           4,053           1,770
  Restructuring charges ......................................                                         11,752
  Acquisition and merger-related expense .....................            232                           3,082
  Deposit insurance assessment ...............................            186           3,667             687           4,292
  Foreclosed asset and workout expense .......................             (6)            481             315           1,517
  Other ......................................................          4,881           3,879          16,474          11,575
                                                                 ------------    ------------    ------------    ------------
                Total noninterest expense ....................         33,788          30,775         117,014          83,384
                                                                 ------------    ------------    ------------    ------------
Income before income taxes ...................................         18,336          26,558          34,274          57,611
  Income tax provision .......................................          7,527          10,582          14,859          22,457
                                                                 ------------    ------------    ------------    ------------
                 Net income ..................................   $     10,809    $     15,976    $     19,415    $     35,154
                                                                 ============    ============    ============    ============

Per share data:
  Net income (Note 4) ........................................   $       0.37    $       0.57    $       0.67    $       1.24
  Cash dividends declared ....................................   $       0.12    $       0.08    $       0.32    $       0.22
  Weighted average number of common shares (Note 4) ..........     28,990,750      28,240,766      28,854,758      28,395,602
</TABLE>



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

                                       4








                                    UST CORP.
         CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                            ADDITIONAL             UNREALIZED      DEFERRED
                                                COMMON       PAID-IN    RETAINED   GAIN/(LOSS)   COMPENSATION
                                                STOCK        CAPITAL    EARNINGS  ON SECURITIES    AND OTHER    TOTAL
                                                ------      ---------   --------  -------------  ------------  -------             
                                                                       (DOLLARS IN THOUSANDS)

<S>                                          <C>          <C>          <C>         <C>          <C>         <C>    
Balance December 31, 1996, as
  previously reported .....................   $  11,262    $  75,710    $ 112,975   $  (2,453)   $     466   $ 197,960

Adjustments for the Walden Bancorp, Inc. ..
  pooling of interests ....................       6,328       34,934       56,490        (123)                  97,629
                                              ---------    ---------    ---------   ---------    ---------   ---------

Balance December 31, 1996, as restated ....      17,590      110,644      169,465      (2,576)         466     295,589

Net income ................................                                19,415                               19,415

Cash dividends declared ...................                                (9,113)                              (9,113)

Stock issued under stock option, restricted
  stock and stock purchase plans ..........         242        5,443                                             5,685

Change from unrealized loss to gain on
  securities available-for-sale, net of tax                                             2,821                    2,821

Activity in Directors Deferred Compensation
  Program and other, net ..................                                                            (63)        (63)
                                              ---------    ---------    ---------   ---------    ---------   ---------

Balance September 30, 1997 ................   $  17,832    $ 116,087    $ 179,767   $     245    $     403   $ 314,334
                                              =========    =========    =========   =========    =========   =========
</TABLE>


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


                                       5











                                    UST CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                        Nine Months Ended September 30,
                                                                                             1997            1996
                                                                                             ----            ----

                                                                                            (Dollars in thousands)

Cash flows from operating activities:

<S>                                                                                       <C>            <C>      
  Net income............................................................................  $  19,415      $  35,154

  Adjustments  to  reconcile  net  income  to net  cash  provided  by  operating
activities:
    Provision for possible loan losses..................................................        600        (17,674)
    Depreciation and amortization.......................................................     10,227          4,820
    Accretion of net securities discount................................................       (292)           (46)
    Securities losses (gains), net......................................................      1,151         (1,450)
    Gain on sale of other real estate owned, net........................................       (104)          (469)
    Gain on sale of loans held-for-sale.................................................     (1,804)           (16)
    Writedowns of other real estate owned...............................................         47            496
    Writedowns of fixed assets..........................................................      1,255
    Deferred income tax (benefit) expense...............................................     (2,609)         2,806
    Net change in other assets and other liabilities....................................      9,239        (19,698)
                                                                                           --------       --------
          Net cash provided by operating activities.....................................     37,125          3,923

Cash flows from investing activities:
  Sales of available-for-sale securities................................................    229,212         63,643
  Maturities of available-for-sale securities...........................................    147,928        110,654
  Maturities of held-to-maturity securities.............................................                    32,363
  Purchases of available-for-sale securities............................................   (258,055)      (186,438)
  Purchases of held-to-maturity securities..............................................                   (66,515)
  Net decrease in federal funds sold and other short-term investments...................     13,170         24,937
  Net increase in loans.................................................................   (188,656)       (73,021)
  Proceeds from other real estate owned.................................................      3,911          5,510
  Proceeds from loans held-for-sale.....................................................     14,250         12,926
  Purchases of premises and equipment...................................................    (17,076)        (4,613)
                                                                                           ---------      --------
          Net cash used by investing activities.........................................    (55,316)       (80,554)

Cash flows from financing activities:
  Net increase (decrease) in nontime deposits...........................................      6,940        (23,930)
  Net increase (decrease) in certificates of deposit....................................      1,175         (2,147)
  Net (decrease) increase in borrowings.................................................    (32,577)       105,030
  Cash dividends paid...................................................................     (7,982)        (4,753)
  Treasury stock acquired...............................................................                    (8,410)
  Issuance of common stock for cash, net................................................      2,737          3,242
                                                                                           --------       --------
          Net cash (used) provided by financing activities..............................    (29,707)        69,032
                                                                                           --------       --------
  Decrease in cash and cash equivalents.................................................    (47,898)        (7,599)
  Cash and cash equivalents at beginning of year........................................    140,069        126,115
                                                                                           --------       --------
  Cash and cash equivalents at end of period............................................  $  92,171      $ 118,516
                                                                                          =========      =========

Supplemental disclosure of cash flow information:
  Cash paid during the period for:
    Interest............................................................................  $  77,450      $  71,214
                                                                                          =========      =========
    Income taxes........................................................................  $   7,073      $  20,436
                                                                                          =========      =========
Noncash transactions:
  Transfers from other assets to securities available-for-sale..........................  $     180      $   4,180
                                                                                          =========      =========
  Transfers from securities held-to-maturity to available-for-sale (Note 5).............  $ 145,564      $   5,482
                                                                                          =========      =========
  Transfers from loans to other real estate owned, net..................................  $   4,658      $     550
                                                                                          =========      =========
  Common stock issuance.................................................................  $   1,028      $      93
                                                                                          =========      =========
</TABLE>


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

                                       6








                                    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   disclosures  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 prior
           period  amounts  included  in this Form 10-Q  have been  restated  to
           reflect the January 3, 1997 acquisition of Walden Bancorp,  Inc. as a
           pooling 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,  1996.
           Certain  prior  period  amounts  have been  reclassified  to  reflect
           current reporting classifications.

             The results of operations for three and nine months ended September
           30, 1997 and 1996 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, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>

                                                                         1997              1996
                                                                         ----              ----

                                                                         (Dollars in thousands)
<S>                                                                   <C>                <C>    
           Balance at beginning of period.....................        $ 50,204           $68,120

           Chargeoffs/transfers...............................           4,410             6,355
           Recoveries on loans previously charged-off.........           3,575             8,652
                                                                       -------           -------
           Net chargeoffs (recoveries)........................             835            (2,297)

           Provision (credit) for possible loan losses .......             600           (17,674)
                                                                       -------          ---------
           Balance at end of period...........................        $ 49,969           $52,743
                                                                      ========           =======
</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  on a monthly  basis.  See  "Credit  Quality and
            Reserve for Possible  Loan Losses" in  Management's  Discussion  and
            Analysis of Financial Condition and Results of Operations herein.


                                       7





                                    UST CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(3)        COMMITMENTS AND CONTINGENCIES

             At September 30, 1997,  the Company had the  following  off-balance
           sheet financial  instruments  whose contract amounts represent credit
           risk:

                                                     Contract or Notional Amount
                                                     ---------------------------
                                                        (Dollars in thousands)

          Commitments to extend credit..................        $793,000

          Standby letters of credit and
            financial guarantees written................          67,000

          Commercial letters of credit..................           3,000

          Foreign exchange contracts....................           3,000


(4)        NET INCOME PER SHARE CALCULATION

           Net income per share is computed using the weighted average number of
           shares of common  stock and  common  stock  equivalents  outstanding.
           Common stock equivalents  consist primarily of dilutive stock options
           computed under the treasury  stock method.  Average  dilutive  common
           stock  equivalents  totaled  489,559  and  455,148 for the three- and
           nine-month  periods  ended  September  30,  1997,  respectively,  and
           449,202  and  447,046  for the three- and  nine-month  periods  ended
           September 30, 1996.

           On March 3, 1997,  the Financial  Accounting  Standards  Board issued
           SFAS No. 128,  "Earnings Per Share." This  Statement  supersedes  APB
           Opinion No. 15  regarding  the  presentation  of  earnings  per share
           ("EPS") on the face of the income  statement.  SFAS No. 128  replaces
           the  presentation  of Primary EPS with a Basic EPS  calculation  that
           excludes  the  dilutive  effect  of  common  stock  equivalents.  The
           Statement  requires a dual  presentation  of Basic and  Diluted  EPS,
           which is computed  similarly  to Fully  Diluted  EPS  pursuant to APB
           Opinion No. 15, for all  entities  with complex  capital  structures.
           This  Statement is effective  for fiscal years ending after  December
           15,  1997  and  requires  restatement  of all  prior-period  EPS data
           presented.  The net  income  per share for the three and nine  months
           ended  September 30, 1997 would not materially  change under SFAS No.
           128.


                                       8





                                    UST Corp.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(5)       ACQUISITIONS

                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. On April 18, 1997, The Co-operative
           Bank of Concord  was merged into  USTrust,  the  Company's  principal
           banking  subsidiary.  The  Braintree  Savings  Bank was  merged  into
           USTrust on May 16, 1997. The following presentation reflects key line
           items on a  historical  basis for Walden  and UST Corp.  and on a pro
           forma  combined  basis  assuming  the  merger  was in effect  for the
           periods presented.

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

<S>                                             <C>                       <C>                       <C>
YEAR ENDED DECEMBER 31, 1996
    Net interest income ......................   $   96,126                $   39,129                $  135,255
    Net income ...............................       32,662                    10,519                    43,181
    Net income per share .....................         1.79                      1.97                      1.52
    Total assets .............................    2,706,614                   995,628                 3,698,242
    Total deposits ...........................    2,105,866                   749,946                 2,855,812
    Total shareholders' investment ...........      197,960                    97,629                   295,589
                                                                                                  

THREE MONTHS ENDED SEPTEMBER 30, 1996                                                             
    Net interest income ......................   $   23,604                $    9,835                $   33,439
    Net income ...............................       12,938                     3,038                    15,976
    Net income per share .....................         0.71                      0.58                      0.57
                                                                                                  

NINE MONTHS ENDED SEPTEMBER 30, 1996                                                              
    Net interest income ......................   $   69,683                $   29,277                $   98,960
    Net income ...............................       26,299                     8,855                    35,154
    Net income per share .....................         1.45                      1.65                      1.24
    Total assets .............................    2,031,648                 1,049,393                 3,081,041
    Total deposits ...........................    1,496,812                   759,412                 2,256,224
    Total shareholders' investment ...........      190,101                    95,049                   285,150
</TABLE>
                                                                               

         Upon the completion of the Walden acquisition, the Company redesignated
$146 million of former Walden  securities  from  held-to-maturity  to securities
available-for-sale.

                                       9








                                    UST CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(5)       ACQUISITIONS (CONT'D.)


                Subsequent  to  September  30, 1997,  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  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  provides,  directly  or  through  equipment
           dealers,  secured  installment loan and lease financing to commercial
           customers   throughout  the  United  States  and  Canada.   Firestone
           specializes in financing of coin-operated amusement, vending machines
           and  laundry  equipment.   Firestone  will  initially  operate  as  a
           subsidiary  of UST  Corp.  Application  has  been  made to  USTrust's
           regulators to transfer this subsidiary to USTrust. On the acquisition
           date  Firestone had total loans and leases, assets and  stockholders'
           investment  of  approximately  $84  million,  $85  million,  and  $14
           million,  respectively.  The Company  recognized during the quarter a
           one-time $232 thousand pre-tax charge for  acquisition-related  costs
           in  connection  with  this  transaction.  Firestone  recognized  $714
           thousand during the quarter ended September 30, 1997, in nonrecurring
           costs associated with the acquisition transaction.


                                       10







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,  1996.  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 1996 financial data included in this  discussion
has been restated to reflect the January 3, 1997  acquisition of Walden Bancorp,
Inc. ("Walden") as a pooling of interests.

HIGHLIGHTS

       Net income for the quarter ended  September 30, 1997,  was $10.8 million,
or $0.37 per share,  compared with $16.0  million,  or $0.57 per share,  for the
same period in 1996. The 1996 quarter  included a $14.6 million pre-tax earnings
credit  recorded  through the  provision for possible loan losses and a one-time
charge of $3.0 million to reflect the  Company's  liability for an assessment on
certain deposits insured by the Savings  Association  Insurance Fund.  Excluding
these one-time  charges and credits,  the comparable third quarter 1996 earnings
were $9.3 million,  or $0.33 per share.  For the nine months ended September 30,
1997,  net income was $19.4  million,  or $0.67 per share,  compared  with $35.2
million, or $1.24 per share. Results for the 1997 period included a nonrecurring
charge of $3.1 million for certain nondeductible  merger-related  expenses and a
pre-tax charge of $11.8 million  primarily  associated  with the  acquisition of
Walden. The nine-month 1996 period included a net $17.7 million pre-tax earnings
credit recorded  through the provision for possible loan losses.  Both the third
quarter  and first  nine  months of this year were  positively  affected  by the
fourth  quarter  1996  acquisition  of 20  banking  branches  resulting  in  the
assumption  of $508  million  in loans and $744  million  in  deposit  and other
liabilities  from two banking  subsidiaries  of  BankBoston  Corp.  ("the Branch
Purchase").

       Return on average  equity and average  assets were 14.15 percent and 1.19
percent,  respectively,  comparatively  lower  than the 22.64  percent  and 2.08
percent earned in the same quarter last year which  included the  aforementioned
$14.6 million pre-tax  credit.  This period's  performance  ratios are above the
second  quarter  1997  return on average  equity of 10.96  percent and return on
average assets of .93 percent,  as the quarterly  improvement  trend  continued.
Operating  expense  efficiency also reflected  significant  improvement over the
second  quarter of this year from 70 percent to 64 percent.  These  improvements
reflect  operating  cost savings  resulting from the merger of Walden banks with
the Company's principal banking subsidiary, USTrust, late in the second quarter.

NET INTEREST INCOME ANALYSIS

       Net interest income on a fully taxable equivalent basis was $44.4 million
in the third quarter 1997,  compared with $33.6 million in the same quarter last
year. For the first nine months of 1997, net interest  income on a fully taxable
equivalent  basis was $125.5 million compared with $100.0 million last year. The
increase  in net  interest  income  for  both  periods  was due  largely  to the
additional volume of interest-earning  assets and  interest-bearing  liabilities
acquired in the Branch Purchase.

       Average loan volume increased $601 million and $580 million over the same
quarter  and first  nine  months  of 1996,  respectively,  reflecting  the loans
acquired  in the  Branch  Purchase  and loan  growth  over the past  year.  This
quarter's  average loan growth was 2 percent,  or $50 million,  compared  with 4
percent,  or $87 million, in the second quarter of this year. Average securities
decreased  $207 million and $148 million for the three- and nine- month periods,
respectively,  as a part  of a  portfolio  restructuring  program  to  sell  off
lower-yielding  securities.  As shown in the table below,  the increase in loans
and an  increase  in federal  funds  sold,  partially  reduced by lower  average
securities resulted in a $11.7 million and $33.4 million volume-related increase
in  interest  income for the three- and  nine-month  comparisons,  respectively.
Average interest-bearing  liabilities increased $310 million for the quarter and
$390 million

                                       11







for the first  nine  months due mostly to the  deposits  acquired  in the Branch
Purchase.  This increase in  liabilities  added $2.0 million and $7.8 million in
volume-related   interest   expense  in  the  three-  and  nine-month   periods,
respectively.  The  effect on net  interest  income  from  changes  in volume of
interest-earning assets and interest-bearing liabilities was an increase of $9.7
million  and $25.6  million for the three and nine months  ended  September  30,
1997.

       Yield on loans  increased 14 basis points to 9.01 percent for the quarter
while the  year-to-date  yield  decreased 14 basis points from last year to 8.84
percent.  In comparison to last year,  1997 loan yields  reflect the effect of a
lower  interest rate  environment  and some  external  pressure on loan pricing.
These  downward  pressures  on loan  yield  were more  than  offset in the third
quarter of this year with an unusually high level of interest income  recoveries
on former nonaccrual  loans.  Securities yield increased 27 basis points to 6.15
percent  this  quarter  and 7 basis  points to 6.13  percent  for the first nine
months  of  this  year  reflecting  the  benefit  of a  portfolio  restructuring
initiative  to  increase  yield.  The net effect on  interest  income  from rate
changes on earning  assets was an increase of $1.4  million for the  three-month
period and a decrease of $250 thousand for the nine-month  comparison.  Yield on
interest-bearing  liabilities  decreased  13 basis points and 22 basis points to
3.97  percent  and  3.62  percent  for  the  three-  and   nine-month   periods,
respectively. The effect on total interest expense from changes in rates and mix
of  deposits  and other  interest-bearing  liabilities  was an increase  of $419
thousand  for the  quarter and a decrease of $614  thousand  for the  nine-month
period.  The net effect of rate changes on net interest income for the three and
nine months ending  September 30, 1997,  compared to the same periods last year,
was an increase of $1.0 million and $364 thousand, respectively.

       The yield on total  average-earning  assets increased to 8.31 percent and
8.15 percent  from 7.90 percent and 8.02 percent from the three- and  nine-month
periods last year,  respectively.  The earning asset yield increase reflects the
effect of a  favorable  change in mix of  earning  assets.  As a  percentage  of
interest-earning  assets,  higher-yielding loans increased to 75 percent for the
three- and nine-month  periods,  respectively,  from 67 percent for both periods
last year. Yield on interest-bearing liabilities decreased from 4.10 percent and
4.12  percent  last year to 3.97  percent  and 3.88  percent  for the three- and
nine-month  periods  this  year,  respectively.  As a result of these  favorable
changes,  interest  rate  margin and spread for the quarter  improved  from 4.59
percent and 3.80  percent  last year to 5.20 percent and 4.34 percent this year.
For the  nine-month  period,  margin and spread  increased from 4.67 percent and
3.90 percent last year to 5.02 percent and 4.27 percent this year.

  
                                       12








       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
months ended  September  30, 1997 when  compared  with the three and nine months
ended  September  30,  1996.  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,
                                                 1997 COMPARED WITH 1996                   1997 COMPARED WITH 1996
                                          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*......       $ 13,624      $   838       $14,462         $38,424      $(2,169)     $  36,255
  Interest and dividends on
securities:
        Taxable....................         (3,163)         635        (2,528)         (6,676)         848         (5,828)
        Nontaxable*................            (12)         (13)          (25)            (74)        (465)          (539)
  Interest on federal funds sold and         1,246          (39)        1,207           1,752        1,536          3,288
                                           -------       ------        ------         -------       ------       --------
other..............................
        Total interest income*.....         11,695        1,421        13,116          33,426         (250)        33,176
                                           -------       ------        ------         -------       ------       --------
Interest expense:
  Interest on regular savings, NOW and
    money market deposits..........          2,003          530         2,533           6,417          402          6,819
  Interest on time deposits........            770          (77)          693           2,580       (1,037)         1,543
  Interest on borrowings...........           (805)         (34)         (839)         (1,173)          21         (1,152))
                                           -------       ------        ------         -------       ------       --------
        Total interest expense.....          1,968          419         2,387           7,824         (614)         7,210
                                           -------       ------        ------         -------       ------       --------
Net interest income................       $  9,727      $ 1,002       $10,729        $ 25,602      $   364      $  25,966
                                          ========      =======       =======        ========      =======      =========
</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 $82 thousand and $282  thousand on loans and $58 thousand
     and $253  thousand on nontaxable  securities  for the three and nine months
     ended September 30, 1997, respectively.


NONINTEREST INCOME

       Total  noninterest  income  decreased  $1.4 million  compared to the same
quarter last year to $8.2  million.  The 1997 quarter  includes $578 thousand in
realized  securities  losses  compared with $1.5 million in realized  securities
gains in 1996. This year's net securities losses,  which total $1.2 million year
to date,  reflect a  portfolio  restructuring  program to sell off  low-yielding
securities which concluded during the third quarter.  Other  noninterest  income
also  decreased  this quarter as a result of unusually  high residual  income on
terminating  equipment leases in 1996.  Partially offsetting these decreases was
the favorable combined effect of the Branch Purchase,  increased service charges
on deposit  accounts and growth in corporate  services  income.  Deposit service
charges increased $898 thousand while corporate services income,  which includes
merchant  credit  card income net of card  processing  expense,  increased  $352
thousand.

       Total  noninterest  income  increased  $2.6 million  compared to the same
nine-month  period  in  1996 to  $26.9  million.  Consistent  with  the  quarter
comparison,  service charges on deposit  accounts and corporate  services income
increased  a combined  $3.1  million.  This  year's  realized  gain on the loans
held-for-sale  portfolio was $1.8 million  compared to a nominal gain last year.
Partially  offsetting  these income  increases  was the change from net realized
gains to losses on securities sales of $2.6 million.


                                       13





NONINTEREST EXPENSE

       Total  noninterest  expense  increased $3.0 million and $33.6 million for
the three and nine months ended September 30, 1997,  respectively.  Increases in
personnel costs,  occupancy,  and equipment and furniture reflect the operations
of twenty  additional  banking  branches  acquired in the Branch  Purchase.  The
increase in intangible asset  amortization  reflects the amortization of premium
incurred  in  the  Branch  Purchase.   The  increases  in  both  comparisons  in
advertising and promotion are consistent with the Company's growth in assets and
reflects the many product promotions and this year's advertising campaign,  "THE
other BIG BANK." Service bureau and data  processing  costs  increased over last
year as a result of a higher use of nonaffiliated  banks' ATM's by new customers
and increased  processing  costs due to the Branch Purchase.  Other  noninterest
expense  increased  $1.0 million and $4.9 million for the three- and  nine-month
periods.  The increases in other  noninterest  expense reflect higher  operating
expenses among numerous expense categories,  many the result of the operation of
twenty additional  banking  branches.  The largest of the increases were: higher
checkbook expense due to the replacements  offered to deposit customers acquired
in the  Branch  Purchase,  replacement  of  stationery  and  supplies  with  the
Company's new logo,  settlement of a certain  litigation matter during the year,
and higher  communication  expenses  such as  telephone,  postage  and  delivery
charges.  The  nine-month  comparison to last year also  reflects  restructuring
charges  of $11.8  million  which  included  expenses  paid and  provisions  for
severance  payments to former Walden executives and staff,  writeoffs of certain
Walden assets and contract buyouts,  systems conversion costs, and certain other
expenses  associated  with the  integration of the Walden banking  subsidiaries.
Year-to-date,   merger-related   expense  of  $3.1  million  was  primarily  for
professional  services paid in connection  with the Walden  acquisition  of $2.8
million and Firestone acquisition of $232 thousand.

       Earlier this year the Company assembled a project team of senior officers
and outside  consultants to assess the impact of the so-called Year 2000 problem
on its  information  systems and certain  information  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 information  systems,  primarily  computer  software  programs,  to
properly  recognize  and  process  date-sensitive  information  as the year 2000
approaches.  Affected system  inventories have been completed and the Company is
proceeding through what it calls its assessment phase. Once the assessment phase
is complete,  a specific  work plan which will include cost  estimates,  will be
developed and implemented.  In a number of cases new Year 2000 compliant systems
have been  installed  or are already in process in the normal  course of upgrade
and functionality improvement. The Company currently believes it will be able to
modify or replace  any  affected  systems in time to  minimize  any  detrimental
effects  on  operations.  The cost of the plan  development  and  implementation
however,  may materially  affect the future operating  results of the Company in
the  period(s) in which such expense is incurred.  If the  Company's  resolution
plan were  unsuccessful,  it may have a  material  adverse  effect on its future
operating results and financial condition of the Company.

INCOME TAXES

       The Company  recorded  income taxes of $7.5 million  compared  with $10.6
million for the same quarter last year. The decrease is the direct result of the
lower level of pre-tax  income.  The effective tax rate for the quarter was 41.0
percent  compared  with 39.8 percent a year ago.  Included in other assets as of
September 30, 1997 was a deferred tax asset of approximately $11.1 million.  The
Company  believes  that it is more  likely  than not that  the  benefit  of this
deferred asset will be realized.

ASSETS

       Total assets at September 30, 1997 were $3.691 billion,  a decrease of $7
million since the  beginning of the year.  Loan growth of $185 million to $2.637
billion was partially  offset by a decline in securities of $115 million to $712
million.  The  securities  decrease  reflects  restructuring  of  the  Company's
portfolios.  Also,  during the year, the securities  held-to-maturity  portfolio
existing at December 31, 1996 was redesignated as securities available-for-sale.
Intangible  assets  decreased $7 million as a result of amortization  during the
year and a  reallocation  of the Branch  Purchase  price  based upon  receipt of
appraisals of certain assets acquired.

                                       14








       The following table presents the composition of the loan portfolio:


<TABLE>
<CAPTION>
                                      SEPTEMBER 30,   JUNE 30,    MARCH 31,  DECEMBER 31,  SEPTEMBER 30,
                                           1997        1997         1997         1996         1996
                                           -----       -----        ----         ----         ----
                                                         (DOLLARS IN THOUSANDS)
<S>                                   <C>          <C>          <C>          <C>          <C>       
Commercial and financial ..........   $  861,934   $  855,846   $  811,454   $  820,540   $  705,468
Commercial real estate:
  Construction ....................       59,447       47,392       30,895       29,624       22,286
  Developer, investor and land ....      252,772      283,481      317,050      305,056      314,693
Consumer:
  Residential mortgage ............      735,583      772,157      779,464      804,109      466,925
  Home equity .....................      111,063      111,692      108,820      107,310      114,566
  Indirect automobile installment .      516,187      403,804      337,672      302,044      288,305
  Other consumer ..................       37,900       37,401       40,280       40,461       40,974
Lease financing ...................       62,581       50,828       47,193       43,669       38,963
                                      ----------   ----------   ----------   ----------   ----------
        Total loans ...............   $2,637,467   $2,562,601   $2,472,828   $2,452,813   $1,992,180
                                      ==========   ==========   ==========   ==========   ==========
</TABLE>


       The Company's  commercial  loan  portfolios  listed above totaled  $1.174
billion at September  30, 1997,  reflecting a net increase of $19 million  since
year-end 1996 and $132 million from a year ago. Commercial loans acquired in the
1996 Branch  Purchase  totaled $111 million while  commercial  loans sold in the
fourth quarter 1996 sale of UST Bank/ Connecticut,  a former banking subsidiary,
were  approximately  $19 million.  Excluding  these events,  the commercial loan
portfolios  grew $40 million from a year ago.  Beginning  with the June 30, 1997
presentation  above,  certain  balances  reflect  reclassifications  among  loan
categories of former Walden bank loans as compared to prior periods.

       Residential  loans  decreased $69 million during the year to $736 million
due to normal  amortization.  Since the Company does not  originate  residential
mortgage  loans,  growth  in  this  portfolio  is not  expected  unless  through
acquisition.  The increase in  residential  loans from a year ago reflects loans
acquired in the Branch Purchase.

       The indirect  automobile  loan portfolio  continues to experience  strong
growth as planned.  This  portfolio grew 71 percent or $214 million in the first
nine  months of this year to $516  million.  In  comparison  to a year ago,  the
portfolio  has grown 79 percent,  or $228  million.  This  quarter's  growth was
particularly high, 28 percent, or $112 million, due to the exiting of some large
lending  competitors from the market. This level of very high growth rate is not
expected in future  quarters.  These loans are subjected to the Company's credit
quality  standards and are not what is referred to in the industry as "subprime"
or high risk automobile loans.

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 the
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, 1997, liquidity,  which includes excess cash, funds sold
and unpledged  securities,  totaled approximately $493 million, or 14 percent of
total assets.

  
                                       15






       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 $8 million  since
year-end  1996 to $2.864  billion.  Noninterest-bearing  deposits  increased $19
million to $619 million. Interest-bearing savings deposits, including NOW, money
market and regular savings, decreased $12 million to $1.333 billion. The savings
deposit  balances also reflect a shift from NOW to money market deposits of over
$300 million since the beginning of the year.  This was a result of an overnight
deposit sweep process implemented earlier this year by the Company's  subsidiary
bank,  USTrust.  This process  transfers  certain NOW account  balances to money
market  accounts on a nightly  basis then  returns the balances to a NOW account
status the following morning. The effect of this process, which has no impact on
an  individual  customer's  account  status,  is a reduction of the cash reserve
balances required to be maintained at the Federal Reserve Bank. This process has
become a customary procedure for most large institutions and has Federal Reserve
Board approval. Time certificates of deposit were relatively flat since year-end
December  31,  1996 at $912  million.  Short-term  and other  borrowings,  which
consist  principally  of  securities  sold under  agreement  to  repurchase  and
borrowings  from the  Federal  Home Loan  Bank,  decreased  $33  million to $446
million,  reflective  of the  reduction  in federal  funds sold,  cash and lower
securities balance.

       As shown in the  Consolidated  Statements  of Cash  Flows,  cash and cash
equivalents  decreased $48 million during the nine-month  period ended September
30, 1997.  Cash provided by operations  resulted  largely from net income earned
during the period.  Cash used by  investing  activities  was due to an excess of
purchases  of  securities  and  increased  loan  volume  over cash  provided  by
securities  sales and  maturities.  Net cash used by  financing  activities  was
primarily due to decreases in borrowings.

       At September 30, 1997, the parent Company had $1.6 million in cash and $4
million in short-term  securities  purchased  under agreement to resell compared
with $.8 million and $14  million,  respectively,  at year end.  The decrease in
excess funds was primarily due to the net of a $20 million capital  contribution
to USTrust, dividends paid to shareholders,  and the receipt of $14.5 million in
dividends from subsidiaries during the first nine months of 1997.

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 21 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 or the  London  Interbank  Offered  Rate  ("LIBOR").  The
following table summarizes the Company's GAP position at September 30, 1997. 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



                                       16








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,
1997, the one-year  cumulative GAP position was positive at $1 million,  or less
than 1 percent of total assets.

<TABLE>
<CAPTION>
                                                                      Interest Sensitive Periods
                                              --------------------------------------------------------------------------
                                              0-30 DAYS       31-90 DAYS       91-365 DAYS     OVER 1 YEAR        TOTAL
                                                                          (DOLLARS IN MILLIONS)
<S>                                           <C>              <C>              <C>              <C>            <C>     
Loans, net of reserve...................      $    982         $ 111            $  355           $ 1,139        $  2,587
Federal funds sold and other............           130                                                               130
Securities..............................            14            53                88               558             713
Other assets............................            21                               3               237             261
                                               -------          ----             -----            ------         -------
       Total assets.....................      $  1,147         $ 164            $  446           $ 1,934        $  3,691
                                              --------         -----            ------           -------        ========

Interest-bearing deposits...............      $    522         $ 126            $  493           $ 1,104        $  2,245
Borrowed funds..........................           364            33                34                15             446
Noninterest-bearing deposits............           144                                               475             619
Other liabilities and stockholders'           
equity.................................             40                                               341             381
                                              --------          ----             -----            ------         -------
       Total liabilities and equity.....      $  1,070         $ 159            $  527           $ 1,935        $  3,691
                                              --------         -----            ------           -------        ========

GAP for period..........................      $     77          $  5            $  (81)          $    (1)
                                              ========          ----            -------          -------
Cumulative GAP..........................                        $ 82             $   1            $    0
                                                                ====             =====            ======

As a percent of total assets............          2.09%         2.22%              .03%
</TABLE>

CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES

       At September 30, 1997, substandard loans were $37.1 million compared with
$35.5 million at December 31, 1996. 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.

                                       17







       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,
                                                   1997              1997            1997             1996             1996
                                                ------------      ---------     --------------     ------------    -------------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                               <C>             <C>              <C>             <C>               <C> 
Nonperforming assets:
   Nonaccrual loans.........................       $ 28,504        $ 26,275         $ 25,755        $ 33,710          $ 36,301
   Accruing loans 90 days or more past due..          2,047             826              524             997             1,184
   Other real estate and vehicles owned, net
     (OREO and OVO).........................          1,106             692            1,638           1,792             2,342
   Restructured loans.......................                                             754           1,264               810
                                                    -------         -------          -------         -------           -------
Total nonperforming assets..................       $ 31,657        $ 27,793         $ 28,671        $ 37,763          $ 40,637
                                                   ========        ========          =======        ========          ========

Reserve for possible loan losses............       $ 49,969        $ 50,155         $ 50,155         $50,204          $ 52,743
Net chargeoffs for the quarter..............            486             300               49             809                83
OREO and OVO reserve........................            367             367              320             320               412

Ratios:
   Reserve to nonaccrual loans..............          175.3%          190.9%           194.7%          148.9%            145.3%
   Reserve  to  total  of  nonaccrual   loans,
accruing
     loans 90 days or more past due, and
     restructured loans.....................          163.6%          185.1%           185.5%          139.6%            137.7%
   Reserve to period-end loans..............            1.9%            2.0%             2.0%            2.0%              2.6%
   Nonaccrual loans and accruing loans over
     90 days past due to period-end loans,
     OREO, and OVO..........................            1.2%            1.1%             1.1%            1.4%              1.9%
   Annualized net chargeoffs to
     average loans..........................             .1%             nil              nil             .1%              nil
   OREO and OVO reserve to OREO and OVO.....           33.2%           34.7%            16.3%           15.2%             17.6%
</TABLE>


       As shown in the  table  above,  total  nonperforming  assets  were  $31.7
million at September 30, 1997,  which  reflects an increase in nonaccrual  loans
during the quarter,  while total  nonperformers  were down $6.1 million from the
end of 1996.  The level of  nonperforming  assets at quarter end continues to be
within the range of  industry  norms  relative to the  Company's  size and total
volume of loans.  A nominal  provision for possible loan losses of $300 thousand
was recorded  during the quarter as asset quality  remained  relatively  stable.
Losses of $1.6 million were charged  against the reserve  during the quarter and
recoveries on loans  previously  charged off totaled $1.1 million.  At September
30,  1997,  the  reserve  balance  was $50.0  million and equaled 175 percent of
nonaccrual loans and 1.9 percent of total loans.

       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 largest component of the
Company's consumer loan portfolio excluding residential mortgage loans, was 2.90
percent at September  30, 1997  compared with 2.89 percent at December 31, 1996.
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 in future periods.


                                       18








       At September 30, 1997, total impaired loans were $18.6 million, comprised
of $1.0 million that  required a reserve for possible loan losses of $.8 million
and $17.6 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 on
a monthly basis using a consistent,  systematic  methodology  which analyzes 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.  This  analysis is documented
using  a  combination  of  numerical  and  qualitative   analysis  and  includes
sensitivity testing and a written conclusion.

       No portion of the  reserve is  restricted  to any loan or group of loans,
and the entire reserve is available to absorb 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,
                                                  1997          1997          1997            1996            1996
                                                  -----         -----         -----           ----            ----
<S>                                                <C>          <C>           <C>             <C>             <C> 
Reserve for possible loan losses allocation 
   to loans outstanding:
   Commercial and financial...............        $17,535       $17,315       $17,501       $16,473         $15,090
   Commercial real estate:
      Construction.......................           1,132           897           622           556             451
      Developer, investor and land........          3,696         4,241         5,215         4,638           5,414
   Consumer*..............................         19,860        18,626        15,737        15,836          11,626
   Lease financing........................            782           635           590           589             488
   Unallocated............................          6,964         8,441        10,490        12,112          19,674
                                                  -------       -------       -------       -------         -------
      Total loan loss reserve.............        $49,969       $50,155       $50,155       $50,204         $52,743
                                                  =======       =======       =======       =======         =======
</TABLE>
----------

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

         The reserve for possible loan losses was $50.0 million at September 30,
1997,  consistent  with the June and  March  1997  and  December  1996  year-end
balances. The unallocated portion of the reserve was 14 percent at September 30,
1997 compared with 24 percent at year end. The decrease of 10 percentage points,
or $5.1  million,  reflects a  reallocation  of the reserve to  commercial  loan
categories  at the Walden  banks and an  increase  in reserve  allocated  to the
consumer category consistent with loan growth.


                                       19






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
(as defined in the  regulations) to  risk-weighted  assets (as defined),  and of
Tier I capital (as defined) to average assets (as defined). Management believes,
as of September 30, 1997, that the Company and its subsidiary  banks meet all of
their respective capital adequacy requirements.

       As a  condition  to Federal  Deposit  Insurance  Corporation  approval of
USTrust's  fourth quarter 1996 Branch  Purchase,  USTrust was required to have a
Tier I leverage  capital ratio of not less than: (i) 4.8 percent,  no later than
ten days after consummation of the acquisition of sixteen BayBank branches;  and
(ii) 5 percent, no later than three months after consummation of the acquisition
of the  BayBank  branches  and  for a  period  of  six  months  thereafter.  The
aforementioned   conditions  expired  during  the  quarter  and  are  no  longer
applicable.

       The actual  capital  amounts  and ratios of the  Company  and its banking
subsidiaries as of September 30, 1997 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.....        $ 254.7        $  141.2           N/A          7.22%            4.00%           N/A
  Tier 1 capital..............          254.7           118.1           N/A          8.63%            4.00%           N/A
  Total   (Tier  1  and  Tier  2)       291.6           235.1           N/A          9.92%            8.00%           N/A
capital ......................

USTrust:
  Tier 1 leverage capital.....          236.2           140.7        $  175.8        6.71%            4.00%          5.00%
  Tier 1 capital..............          236.2           116.1           174.1        8.14%            4.00%          6.00%
  Total   (Tier  1  and  Tier  2)       272.4           231.2           289.0        9.43%            8.00%         10.00%
capital ......................

United States Trust Company:
  Tier 1 leverage capital.....            2.8              .7              .8       16.52%            4.00%          5.00%
  Tier 1 capital..............            2.8              .4              .6       26.20%            4.00%          6.00%
  Total   (Tier  1  and  Tier  2)         2.8              .8             1.1       26.28%            8.00%         10.00%
capital ......................
</TABLE>

       The Company paid cash dividends to  stockholders in the first nine months
of the year in the amount of $8.0  million.  On  September  16,  1997, a regular
quarterly  dividend to stockholders  was declared of $0.12 per share for a total
of $3.4 million payable on October 24, 1997. The Company received cash dividends
from subsidiaries  during the first nine months of 1997 of $14.5 million. In the
third quarter the subsidiaries declared dividends of $5.0 million, to be payable
in the fourth quarter of 1997.

                                       20


RECENT ACCOUNTING DEVELOPMENTS

       On June 30, 1996,  the  Financial  Accounting  Standards  Board  ("FASB")
issued Statement of Financial Accounting Standards ("SFAS No. 125"), "Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities."  This Statement  provides  accounting and reporting  standards for
transfers and servicing of financial assets and  extinguishments of liabilities.
The  standards  are based on consistent  application  of a financial  components
approach  that  focuses on control.  After a transfer of  financial  assets,  an
entity  recognizes  the  financial  and  servicing  assets it  controls  and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered,  and  derecognizes  liabilities when  extinguished.  This Statement
provides consistent  standards for distinguishing  transfers of financial assets
that are sales from  transfers  that are secured  borrowings.  This Statement is
effective  for  transactions  occurring  after  December 31, 1996,  and is to be
applied prospectively. This Statement was adopted on January 1, 1997 and did not
have a  material  impact on the  Company's  financial  condition  or  results of
operations.

       On March 3, 1997,  the FASB issued SFAS No.  128,  "Earnings  Per Share."
This  Statement  supersedes  APB Opinion No. 15 regarding  the  presentation  of
earnings per share ("EPS") on the face of the income statement.  Refer to Note 4
to the Notes to Consolidated Financial Statements for a further discussion.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

       The preceding  Management's  discussion contains certain  forward-looking
statements,  including  without  limitation  statements  regarding the Year 2000
problem, loan growth, and consumer loan delinquencies. 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. These forward-looking  statements are inherently uncertain,  and actual
results  may  differ  from  Company  expectations.  The  Company  disclaims  any
obligation  to announce  publicly  future  events or  developments  which affect
forward-looking  statements.  Risk factors that could impact  current and future
performance  include but are not  limited  to: (i) changes in asset  quality and
resulting credit  risk-related  losses and expense;  (ii) adverse changes in the
economy of the New England region,  the Company's  primary  market,  which could
accentuate  credit-related  losses and expenses;  (iii)  adverse  changes in the
local real estate  market can also  negatively  affect credit risk since most of
the Company's loans are concentrated in Eastern  Massachusetts and a substantial
portion of these  loans have real estate as primary  and  secondary  collateral;
(iv) an increasingly  competitive New England  financial  services  marketplace,
where a large number of bank  acquisitions and mergers has resulted in fewer but
much larger and  financially  stronger  competitors  which  could alter  Company
expectations;  (v) fluctuations in market rates and prices can negatively affect
net  interest  margin,  asset  valuations  and  expense  expectations;  and (vi)
changing regulatory  requirements of federal and state agencies could materially
impact future operations of the Company.


                                       21






                           PART II. OTHER INFORMATION


       For the quarter ended September 30, 1997, Items 2, 3, 4, and 5 of Part II
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.

             None.

         (b) Reports on Form 8-K.

             None.


         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 14, 1997                    By:  /s/ Neal F. Finnegan
                                                --------------------------------
                                                Neal F. Finnegan, President and
                                                Chief Executive Officer


Date: November 14, 1997                    By:  /s/ James K. Hunt
                                                --------------------------------
                                                James K. Hunt, Executive Vice
                                                President, Treasurer, and
                                                Chief Financial Officer
                                                (Principal Financial Officer and
                                                Principal Accounting Officer)



                                       22