<PAGE>
 
                                                                    EXHIBIT 13.1
Financing Manufacturers Worldwide(R)


                            [GRAPHIC APPEARS HERE]


                                                             First International
                                                             Bancorp

                                                             First International
                                                             Bank



                                                             1998 Annual Report
<PAGE>
 
Corporate Profile

First International Bancorp, Inc. and First International Bank, N.A., both
headquartered in Hartford, Connecticut, specialize in providing innovative
credit, trade and financial solutions to small and medium size manufacturing
companies located in the United States and international emerging markets. The
Company offers flexible and attractive terms to borrowers and is a national
leader in the use of commercial loan guarantee programs made available by the 
U. S. Small Business Administration, the U. S. Department of Agriculture and the
Export-Import Bank of the U. S. The Company maintains preferred status under
these programs in several jurisdictions and received Ex-Im Bank's "Small
Business Bank of the Year" award for 1997.





                                 [LOGO OF FIRST INTERNATIONAL BANK APPEARS HERE]

                                                         www.FirstInterBank.com
<PAGE>
 
First International Bancorp, Inc.
Index to Consolidated Financial Statements

 2   Letter to Shareholders and Clients
 
 4   Summary Financial Highlights
 
 5   Management's Discussion and Analysis of Financial Condition and Results of
     Operations

21   Report of Independent Accountants

22   Consolidated Balance Sheets as of December 31, 1998 and 1997

23   Consolidated Statements of Income for the years ended December 31, 1998,
     1997 and 1996

24   Consolidated Statements of Changes in Stockholders' Equity for the years
     ended December 31, 1998, 1997 and 1996

25   Consolidated Statements of Cash Flows for the years ended December 31,
     1998, 1997 and 1996

26   Notes to Consolidated Financial Statements
  
44   Directors and Officers and General Information


                                                                               1
<PAGE>
 
To Our Shareholders and Clients

I am pleased to report that 1998 was a year of excellent performance and major
strategic accomplishments for First International Bancorp, Inc. and First
International Bank. Our Company's net income increased approximately 60% to $7.0
million ($.86 per share), which represents the fifth consecutive year of record
earnings. Return on average equity for 1998 was 16% calculated on an equity base
that had grown significantly following our September 1997 public offering.
      
     As a reflection of our Company's continuing geographical expansion and
commitment to financing small and medium size manufacturers worldwide, we
adopted a new logo and changed the banking subsidiary's name to First
International Bank from First National Bank of New England in early 1999. We
have also launched a new interactive website, www.FirstInterBank.com, and invite
you to visit this useful source of information about our Company's products,
resources and initiatives.

     In 1998 the Company once again achieved the status of the largest combined
user in the United States of the three primary federal commercial loan guarantee
programs. First International Bank underwrote $121 million in SBA 7(a) loans,
ranking 10th in the nation overall and 4th among banks. The Company finished
second nationally under the USDA's Business & Industry program, with $37 million
in loan originations. For the second year in a row, we were also the largest
user of Ex-Im Bank guarantee and insurance programs in the United States
measured by number of transactions, with 103. The Bank enjoys SBA preferred
lender status in 19 U.S. locations, USDA certified lender status on a national
basis, and Ex-Im Bank AA delegated lending authority nationally for export
working capital lines of credit. We are proud to remain a leader in working with
these agencies to deliver their programs to qualifying manufacturing companies.

[GRAPHIC OF WORLD MAP APPEARS HERE]

Representatives Throughout The World

     The Company opened new domestic representative offices during 1998 in
Cleveland, Ohio and Detroit, Michigan, bringing our network of U.S. offices to
11. We plan to open at least two more domestic offices this year in the Midwest,
where there is a high concentration of profile manufacturing companies.
Internationally, we established a new representative relationship with a firm
based in Ghana to cover West Africa. Our international representatives now total
12 and provide us with a presence in most of the major international emerging
markets.

     The Company's marketing capabilities were further enhanced in 1998 through
the establishment of strategic alliances with large, national and international
organizations which are leaders in their fields. Products are (or will soon be)
available to our manufacturing clients for equipment finance in conjunction with
six chapters of the National Tooling & Machining Association, for energy finance
in conjunction with the National Rural Utilities Cooperative Finance Corporation
and North American Power Brokers, Inc., and for international trade finance in
association with Panalpina, Inc. In addition, we have entered into a business
relationship with CIGNA Financial Services, Inc. with respect to providing
investment, discount brokerage and cash management services. All investment
related services will be supported by CIGNA Financial Services' registered
representatives. These alliances will help leverage our resources in order to
identify prospects and serve existing clients.

     The diversity of our Company's international capabilities in terms of both
locations and products has enabled us to turn global economic turbulence into a
business opportunity. First International Bank finances two-way trade flows, so
that in countries such as Korea and Brazil where currency devaluations have
negatively impacted local demand for U.S. exports, we are actively assisting our
local clients in their effort to export more to the U.S. and other countries.
Conversely, demand for U.S. exports in markets such as Mexico, which recovered
from earlier economic difficulties, is strong and represents a growing source of
export financing business for us. In 1998 our Company obtained private insurance
policies covering our trade financing activities in multiple countries and with
respect to multiple products and borrowers. These policies are complementary to
our use of Ex-Im Bank programs. We lend internationally only in U.S. dollars
(taking no currency


2
<PAGE>
 
risk), and we continue to see vast opportunities for our Company in the
international marketplace.

     1998 was an important year for the Company in terms of increasing the
diversity of our funding sources. Despite volatility in the capital markets
during the second half of the year, we successfully completed two commercial
loan securitizations, obtained commitments for warehouse lines
totaling $125 million, and entered into a $65 million commercial paper conduit
facility. The new funding sources provided us with the opportunity to sell our
last retail branch together with its checking, savings and money market
accounts. Following the closing of this sale, which is planned for March 1999,
the Company will fund its lending operations through a combination of
federally-insured certificates of deposit and capital markets activities. This
diversified wholesale funding strategy is more closely aligned with the
Company's overall business, and allows us to exit the operationally expensive
and highly regulated retail banking business.

     I was pleased to announce in December 1998 that Leslie A. Galbraith, First
International Bank's Chief Financial Officer since 1990, was promoted to the
additional positions of President and Chief Operating Officer. Leslie has also
assumed the chairmanship of the Bank's Operating Committee, which is comprised
of Executive Vice Presidents Richard W. Bradshaw, Brian J. Charlebois, David J.
Etter, Paul J. Falvey, James G. Fortsch and Frank P. La Monaca. These management
changes have allowed me to focus more on our strategic direction and business
alliances, product innovation and delivery, and human resources development.
Beginning in February 1999, we welcomed to First International Bank's board of
directors two new members, Dean Goodermote, President and CEO of Process
Software Corporation, and Douglas Woods, President and CEO of Liberty Precision
Industries, Ltd. These two outside directors, who are "sitting" chief executive
officers of their companies, will provide valuable counsel and oversight with
respect to our business.

[PIE CHART APPEARS HERE]

Total Loans Managed at December 31, 1998

Ex-Im Bank                    16%
SBA/USDA Loans Guaranteed     42%
Consumer                       1%
Other Commercial              24%
Other International            2% 
SBA/USDA Loans Unguaranteed   15% 

$779 Million

[PHOTO APPEARS HERE]

First International Bank's Operating Committee; standing left to right Dave
Etter, Rich Bradshaw, Jim Fortsch and Paul Falvey; seated left to right Brian
Charlebois, Leslie Galbraith and Frank La Monaca.

     Sadly, I must note the passing in August 1998 of Mr. Bernard M. Waldman, a
director of our Company since 1971. Much more than a director, Mr. Waldman was a
beloved friend and inspiration for all who knew him. Our achievements are his
legacy.

     On behalf of our employees, I would like to thank you for continuing to
support the Company's exciting and challenging mission in the global
marketplace.

/s/ Brett N. Silvers

Brett N. Silvers
Chairman and Chief Executive Officer
March 1999

[PHOTO APPEARS HERE]


                                                                               3
<PAGE>
 
Summary Financial Highlights
(Dollars in Thousands)

<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------------------------------
Year Ended December 31                         1998            1997            1996            1995            1994 
---------------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>             <C>             <C>             <C>  
Total Loans Managed                        $779,055        $573,545        $380,432        $260,842        $193,369
Non-Interest Income to Net Revenue             68.5%           64.7%           50.6%           38.2%           42.7%

Return on Average Equity                       15.9%           20.5%           25.5%           19.3%           11.7%
Return on Average Assets                        3.0%            2.5%            2.1%            1.5%             .9%

Interest Income                            $ 18,088        $ 14,625        $ 13,305        $ 11,601        $  7,997
Interest Expense                           $  7,924        $  6,371        $  5,741        $  4,869        $  3,150

Net Interest Income                        $ 10,164        $  8,254        $  7,564        $  6,732        $  4,847
Gain on Loan Sales                         $ 16,959        $ 11,810        $  5,844        $  2,859        $  2,730
Loan Servicing Income and Other Fees       $  5,153        $  3,300        $  1,899        $  1,294        $    878
Total Net Revenues                         $ 32,276        $ 23,364        $ 17,509        $ 10,885        $  8,455

Operating Expenses                         $ 17,700        $ 13,801        $  8,425        $  6,128        $  5,129
Provision for Possible Loan Losses         $  3,071        $  2,239        $  3,487        $  1,237        $  1,683
Net Income                                 $  7,033        $  4,429        $  3,244        $  2,026        $  1,060

Basic Earnings Per Share                   $    .89        $    .70        $    .56        $    .35        $    .18
Diluted Earnings Per Share                 $    .86        $    .67        $    .56        $    .35        $    .18
Dividend Payout Ratio                          13.5%           16.5%           20.3%            8.1%             .0%
Average Equity to Average Assets               18.8%           12.2%            8.1%            7.8%            7.9%
Total Capital to Risk Weighted Assets          21.8%           17.6%           11.6%           10.7%            9.3%

Total Assets                               $273,726        $218,851        $161,642        $141,223        $125,609
Total Loans                                $113,946        $135,398        $114,627        $106,992        $ 95,118
Total Stockholders' Equity                 $ 49,071        $ 42,148        $ 14,216        $ 11,602        $  9,675

Non-performing Loans                       $  3,104        $  2,364        $  2,252        $  1,258        $  2,246
Allowance for Loan Losses                  $  4,000        $  3,100        $  3,000        $  2,000        $  2,000
Allowance for Loan Losses to
     Non-performing Loans                       129%            131%            133%            159%             89%
Allowance to Total Loans                        3.3%            2.3%            2.6%            1.9%            2.1%
---------------------------------------------------------------------------------------------------------------------
</TABLE> 

       Net Income

[BAR CHART APPEARS HERE]

1998              $7,000,000
1997              $4,400,000
1996              $3,200,000
1995              $2,000,000
1994              $1,100,000

    Total Loans Managed

[BAR CHART APPEARS HERE]

1998            $779,000,000
1997            $574,000,000
1996            $380,000,000
1995            $261,000,000
1994            $193,000,000


4
<PAGE>
 
Management's Discussion and Analysis of Financial 
Condition and Results of Operations



     The following discussion and analysis of the consolidated financial
condition and results of operations of First International Bancorp, Inc. (the
"Company") should be read in conjunction with the Company's consolidated
financial statements, including the related notes thereto, and other
information.

General

     First International Bancorp, Inc., a Delaware corporation, is a one bank
holding company incorporated in 1985 and regulated by the Board of Governors of
the Federal Reserve System. Its principal asset and subsidiary is First
International Bank, N.A., (the "Bank") a national banking association
established in 1955 and regulated by the Office of the Comptroller of the
Currency (the "OCC"). The Bank changed its name from First National Bank of New
England on February 1, 1999 to more closely reflect the markets it serves.

     In September 1997, the Company completed an underwritten public offering
whereby 1,955,000 shares of common stock were issued for net proceeds of $23.8
million.

     On December 31, 1998 the Company entered into an agreement with Hudson
United Bank to sell the Company's last retail branch and its checking, savings
and money market deposits. The Company will retain its certificates of deposit
and continue to offer certificates of deposit to retail and brokered depositors.
The transaction is expected to close by the end of the first quarter of 1999.
(See "Anticipated Changes in Funding Sources" for further discussion of the
funding sources to be used by the Company.)

     The Company specializes in providing credit, trade and financial solutions
to small and medium size manufacturing companies located in the United States
and international emerging markets. The Company serves its target market by
offering flexible and attractive terms to borrowers and manages its credit risk
through the combined utilization of commercial loan guarantee programs made
available by three U. S. federal agencies, the U. S. Small Business
Administration (the "SBA"), the U. S. Department of Agriculture (the "USDA") and
the Export-Import Bank of the U. S. ("Ex-Im Bank"), as well as through the use
of private credit insurance policies.

     For the federal fiscal year ending September 30, 1998, the Company was the
country's largest Ex-Im Bank lender measured by number of transactions; the
second largest USDA Business and Industry lender measured by dollar volume; and
the tenth largest SBA 7(a) lender measured by dollar volume (and the largest in
New England). The Company maintains preferred status for government guaranteed
lending programs in several jurisdictions.

     Except for historical information contained herein, certain matters
discussed in this annual report are "forward looking statements" as defined in
the Private Securities Litigation Reform Act (PSLRA) of 1995, which involve risk
and uncertainties that exist in the Company's operations and business
environment, and are subject to change based on various factors. The Company
wishes to take advantage of the "safe harbor" provisions of the PSLRA by
cautioning readers that numerous important factors discussed below, among
others, in some cases have caused and in the future could cause the Company's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. The following include some,
but not all, of the factors or uncertainties that could cause actual results to
differ from projections:

 .    A general economic slowdown.

 .    Inability of the Company to continue its growth strategy either
     domestically or internationally.

 .    Disruption in the U. S. capital markets, delaying or preventing the Company
     from receiving funding under warehouse lines of credit or completing loan
     sales or securitizations.

 .    Unpredictable delays or difficulties in the development and introduction of
     new products and programs.

 .    Risks associated with government guarantee loan programs, since a
     substantial portion of the Company's business still depends upon the
     continuation of the various government guarantee loan programs as discussed
     below.

     The Company believes that it has the product offerings, facilities,
personnel and financial resources for continued business success in competitive
markets. However, future revenues, costs, margins and profits are all influenced
by a number of factors, including those discussed above.


Recent Growth

     In contrast to many other banks, the Company derives a majority of its
revenues from non-interest income, principally gains on the sale of commercial
and international loans and related loan servicing income. During the past three
years of operations, the Company has achieved significant earnings growth
primarily as a result of increases in the sale and, most recently, the
securitization of government guaranteed and other commercial loans, net interest
income, which is the difference between interest earned on interest-earning


                                                                               5
<PAGE>
 
assets (principally loans) and interest paid on interest-bearing liabilities
(principally deposits), and fee income on loans serviced for others. The Company
has expanded its domestic loan origination activities into the Northeast,
Mid-atlantic and Midwest regions of the United States and its international
presence in emerging markets. The Company plans to continue its U. S. expansion
in 1999 by opening additional representative offices.

--------------------------------------------------------------------------------
                                                      December 31,
                                          1998           1997           1996
--------------------------------------------------------------------------------
                                              (net income in thousands)

Net income ........................  $   7,033      $   4,429      $   3,244
Basic earnings per share ..........  $     .89      $     .70      $     .56
Diluted earnings per share ........  $     .86      $     .67      $     .56


Anticipated Changes in Funding Sources 

     During 1998 and the first quarter of 1999, the Company entered into
transactions that effected changes in the manner in which the Company obtains
funding for its lending business. Such transactions included:

 .    the sale of the Company's last branch, including checking, savings and
     money market accounts;

 .    establishment of a warehouse loan facility, pursuant to which up to $75
     million is available to the Company (based upon the contractual advance
     rates against the qualifying principal balance of the loans pledged to
     secure the facility);

 .    a commitment for a second warehouse loan facility pursuant to which up to
     $50 million would be available to the Company (based upon the contractual
     advance rates against the qualifying principal balance of the loans pledged
     to secure the facility; the pledged loans will consist of the unguaranteed
     portion of loans guaranteed by the SBA); the Company plans to establish
     this facility once SBA approval is received;

 .    establishment of a commercial paper conduit facility, pursuant to which the
     Company has the right to sell commercial revolving lines of credit and
     other qualifying loans during the term of the facility. The Company will be
     required to retain ownership of subordinated interests in the loans sold to
     provide a credit enhancement to the purchaser in varying percentages
     depending on the type of loan sold. The Company sold loans totaling
     approximately $21 million in December 1998 under this facility;

 .    a securitization transaction completed in June 1998 pursuant to which the
     Company received approximately $24 million from a sale of the unguaranteed
     portions of loans originated by the Company that were guaranteed in part by
     the SBA; and

 .    a securitization transaction in December 1998 pursuant to which the Company
     received approximately $55 million from a sale of other loans originated by
     the Company.

     Following the sale of the Company's checking, savings and money market
accounts, the Company expects to obtain funding for its operations from retail
and brokered certificates of deposit, warehouse lines of credit, the sale of
loans on a loan-by-loan basis, through private placement securitizations and
from the sale of loans to a commercial paper conduit. See "Quantitative and
Qualitative Disclosures about Market Risk and Asset/Liability Management" for
further discussion of certain risks associated with such funding sources.

     The following discussions make reference to average balances of certain
assets and liabilities as well as volume and rate changes. For further
information with respect to these matters see the tables set forth on pages 11
and 12.


Accounting for Loan Sales

     Gains from loan sales, securitizations and servicing income represented
approximately 66% of the total net interest income and non-interest income for
the year ended December 31, 1998. Detailed below is a discussion of the relevant
accounting principles governing loan sales and securitizations and the Company's
servicing activities.


SBA and USDA Loan Sales

     The majority of the Company's SBA and USDA guaranteed loans are variable
rate, indexed to the Prime Rate as quoted in The Wall Street Journal ("Prime").
The Company generally sells the guaranteed portions of these loans at
origination at a premium. For example, if the Company sells a 20-year SBA or
USDA guaranteed mortgage loan with an interest rate of Prime plus 1.50%, the
Company receives a premium because the market demands a yield of less than Prime
plus 1.50%. Investors in the guaranteed portions demand rates between U.S.
Treasury bills and commercial loans due to prepayment risks and other factors
inherent in the guaranteed loans. After the loan sale, an investor will receive
the pro rata principal and pro rata interest at the note rate less any ongoing
guarantee and Company servicing fees. When the Company sells an SBA loan for a
premium, it will generally retain the minimum required servicing fee of 1%. The
Company does elect from time to time to retain a higher servicing fee and sell a
loan for a lesser premium or at par.

     The Company does sell the unguaranteed portions of the SBA and USDA loans
on a loan-by-loan basis at or above par. In accordance with SBA and USDA
regulations, the Company is required to retain a 5% interest in the unguaranteed
portion of the loan when some of the unguaranteed portion is sold on a
loan-by-loan basis. The SBA has recently published new rules regarding the
securitization of the unguaranteed portions of SBA loans which are discussed
below. In June 1998 the Company completed a securitization of the unguaranteed
portions of SBA loans and expects to utilize securitizations for the sale of the
unguaranteed portions of SBA and USDA loans. See "Securitization and Sale of
Loans."

     When the Company sells part of a loan, the gain recognized is based on the
relative fair market value of the loan sold, the portion of the loan retained
and any other assets created in the transaction. The Company creates a servicing
asset when it sells loans on a servicing-retained basis with a 


6
<PAGE>
 
servicing fee in excess of "adequate compensation." This servicing asset is
equal to the net present value of the estimated cash flows in excess of such
compensation. The original principal balance of a loan must be allocated between
the guaranteed portion sold, the unguaranteed portion retained and the servicing
asset, resulting in a discount being recognized on the unguaranteed retained
portion of the loan.

     In connection with calculating gain on sale, the Company must make certain
assumptions which include (i) the amount of adequate compensation used to
determine the amount of the servicing asset that the Company will recognize at
the date of the sale, (ii) the estimated life of the underlying loan used in
projecting the time period over which the Company will receive the servicing
fee, and (iii) the discount rate used in the present value calculation of the
servicing asset.

     Prior to January 1, 1998, management defined adequate compensation as 40
basis points because there was no efficient market to determine market price.
Effective January 1, 1998, based on estimates from potential sub-servicers,
adequate compensation was defined as 20 basis points. Furthermore, the Company
estimates its cost to service loans plus a normal profit to be less than 20
basis points. The constant prepayment rates utilized by the Company in
estimating the lives of the loans depend on the original term of the loan,
industry and Company historical data. Such constant prepayment rates range from
6% to 12% per annum. The discount rate utilized in the net present value
calculation is equal to 400 basis points above the then current two year U.S.
treasury rate, which for 1998 was approximately 8-10%.

     Actual prepayment rates may be affected by a variety of economic and other
factors, including prevailing interest rates and the availability of alternative
financing. The effect of these factors varies depending on the types of loans.
Estimated prepayment rates are based on management's expectations of future
prepayments, and, while management believes that the term of amortization and
market interest rate on the variable rate loans somewhat reduce the prepayment
risk, there can be no assurance that management's prepayment estimates are
accurate. If the actual prepayment rate of loans sold is higher than projected
at the time such loans were sold, the carrying value of the servicing asset
would be reduced by a charge to earnings. Because the Company also recognizes a
discount on the retained loan, an adjustment to the discount would be made which
would partially offset the effect of the negative servicing adjustment. If the
actual prepayment rate for loans sold is lower than estimated, the carrying
value of the servicing asset is not increased, although the total income would
exceed previously estimated amounts.

     The servicing asset is amortized against the servicing fee income received
monthly, on an effective interest method, and the discount on the retained loan
is accreted to interest income on an effective interest method. The servicing
asset is carried at the lower of amortized cost or net realizable value.

Ex-Im Bank and Other Commercial Loan Sales

     Sales of 100% of Ex-Im Bank guaranteed medium term loans are generally made
at the carrying value, although the Company receives a servicing fee above the
20 basis points defined as adequate compensation resulting in the recognition of
a gain at the time of the sale equal to the calculated servicing asset and any
net loan origination fees. The Company uses a discount factor on the estimated
cash flows equal to 400 basis points above the then current two-year U.S.
treasury rate. The Company adjusts for prepayments on these 3-5 year term loans
as they occur, although prepayments are minimal due to the lack of alternative
U.S. dollar financing in the international markets served and the fact that such
Ex-Im Bank financing is unsecured.

     The Company also sells 100% of certain other unguaranteed commercial loans
and certain residential and other consumer loans on a loan by loan basis where
no portion of the loan is retained on the Company's balance sheet.


Securitization and Sale of Loans

     Beginning in 1998, the Company has securitized and sold certain whole loans
and the unguaranteed portions of certain government guaranteed loans that it
originates. In such securitization transactions the Company sells a pool of
loans to a trust, which in turn issues certificates representing beneficial
ownership interests in the trust or which issues notes and sells such securities
through private placement transactions. For all securitizations, the Company is
the servicer of the underlying loans. In order to provide credit enhancement for
the certificates or notes, the Company will retain subordinated certificates or
notes and establish a cash reserve account, all of which represent "retained
interests" in the securitizations and are referred to as such in the discussion
below. The Company established special purpose subsidiaries to facilitate the
securitizations. The unguaranteed portions of SBA loans utilized "FNBNE SBA
Holdings, Inc.", the commercial term loan securitization utilized "FNBNE
Business Loans Holdings, Inc." and the sale of commercial revolving lines of
credit to the commercial paper conduit was completed through "FNBNE Funding
Corp." Generally, the Company retains risks in the form of default, prepayment
and, in the revolving lines of credit, interest rate risk.

     The interest-only strips retained by the Company are recorded at estimated
fair value and classified as an investment available-for-sale. The fair value of
an interest-only strip is determined by computing the present value of the
estimated cash flows to the Company as servicer, after providing for losses and
prepayments and, in certain transactions, estimated interest rate risk.

     The Company as servicer, by contract, receives annual servicing fees
ranging from 40-100 basis points of the outstanding principal balance of the
loans and the rights to any additional cash flows arising after the investors in
the securitization trust have received the contracted return. The investors and
the securitization trust have no recourse to the Company's other assets. The
Company's retained interests 


                                                                               7
<PAGE>
 
are subordinate to the investor's interests. SBA regulations require that the
Company hold retained interests in the unguaranteed portion of securitized loans
equal to 10% of the transaction.

     Key economic assumptions used in calculating a gain on the transaction and
in calculating the gain on sale and interest-only strips resulting from the
securitizations and commercial paper sale completed during the year are as
follows:

--------------------------------------------------------------------------------
                                                                     Commercial
                                                Securitizations      Paper Sale
                                          ------------------------- ------------
                                           Unguaranteed    
                                             Portions      Term      Revolving
                                           of SBA Loans  Commercial  Commercial
                                          -------------- ----------- -----------

Prepayment speed ...........................    8.0%        8.0%        7.5%
Weighted-average life (in years) ...........  13.75       10.65         3.0
Aggregate expected credit losses ...........   5.74%       4.22%       1.25%
Discount rate for servicing cash flows .....   9.48%       8.43%       8.47%


Results of Operations  


Comparison of the Years Ended December 31, 1998, 1997 and 1996

     Net Income. Net income totaled $7.0 million in 1998 an increase of $2.6
million or 59% from 1997 net income of $4.4 million, which had increased $1.2
million or 37% from 1996 net income of $3.2 million.

     The increase in 1998 net income reflects a $5.2 million or 44% increase in
the gain on loan sales to $17.0 million for 1998. Included in the gains for 1998
are $4.1 million of gains recognized on the securitization of certain loans.
Gains from the sale of guaranteed loans increased $2.7 million or 29%. Operating
expenses increased $3.9 million in 1998 reflecting additions to lending and
credit administration personnel and the related office expense associated with
increased employees.

     The increase in 1997 net income from 1996 reflects an increase in the sales
of all loan types as the Company continued its domestic and international
geographic expansion. Gains on loan sales increased by $6.0 million or 100% to
$11.8 million from 1996 to 1997. The results for fiscal 1996 included a $2.2
million gain on the sale of a suburban branch facility and related deposits.

     Net Interest Income. Net interest income increased $1.9 million or 23% to
$10.2 million in 1998 due to a $47.9 million or 29% increase in average
interest-earning assets offset by a 42 basis point decrease in the yield on
earning assets. The decrease in the earnings yield was a result of Prime rate
decreases totaling 75 basis points over the last four months of the year and a
reflection of the increase in assets held in liquid investment securities. The
reduced yield on assets was somewhat mitigated by a relatively flat cost of
funds. Average interest-bearing liabilities increased $30.8 million or 25% while
the cost of funds decreased 2 basis points.

     Net interest income increased $690,000 or 9% to $8.3 million in 1997 from
1996 due to a $16 million or 12% increase in average interest-bearing assets
offset by an 11 basis point decrease in the margin. The decrease in the margin
was the result of a more significant portion of assets held in investment
securities and an increase in the portion of interest-bearing liabilities in the
Company's higher rate premier money market savings account. Average
interest-bearing liabilities increased $6.4 million or 6%.

     Interest Income. Interest income increased $3.5 million or 24% to $18.1
million in 1998 from $14.6 million in 1997 due to a $33.9 million or 26%
increase in average loans outstanding and a $13.9 million or 100% increase in
average investments. The yield on loans and investments decreased by 34 basis
points and 24 basis points, respectively, reflecting the 75 basis point decrease
in the Prime rate during 1998.

     Interest income increased $1.3 million or 10% to $14.6 million in 1997 from
$13.3 million in 1996 due to a $7.3 million or 6% increase in average loans
outstanding and a $8.6 million or 82% increase in average investments. The yield
on investments decreased 10 basis points due to the shorter term investments
made in 1997.

     Interest Expense. Interest expense increased $1.5 million or 23% to $7.9
million from $6.4 million in 1998 due to a $31 million or 25% increase in
interest bearing deposits. The increase in average balances was mitigated by a
relatively flat cost of funds for interest bearing liabilities, which decreased
by 2 basis points. The premier money market accounts average balance increased
$20 million or 27% during 1998. Interest expense increased $1.0 million on these
deposits to $4.9 million in 1998 from $3.9 million in 1997, although the cost of
funds remained flat. A $5.1 million or 17% increase in non-interest bearing
demand deposits contributed to keeping the overall cost of liabilities to 4.18%
for 1998 or a total increase of 4 basis points from 1997.

     Interest expense increased $630,000 or 11% to $6.4 million in 1997 from
$5.7 million in 1996 due to a 14 basis point increase in the average rate paid
on the Company's premier money market accounts, as the underlying external index
increased during 1997 and greater reliance was placed on these accounts to fund
balance sheet growth. Total average deposits increased 5% while the average
balance of the money market savings accounts increased 18% in 1997. An increase
in the rates offered for time deposits due to competitive demands resulted in a
26 basis point increase in the cost of interest bearing liabilities, although a
$4.2 million, or 17% increase in non-interest bearing demand deposits held the
overall cost of liabilities to 4.14% for 1997, representing a 13 basis point
increase for 1997.

     Provision for Possible Loan Losses. The provision for possible loan losses
totaled $3.1 million in 1998, $2.2 million in 1997 and $3.5 million in 1996. The
provision is affected by net loan charge-offs, changes in the level and mix of
loans, changes in asset quality and general economic conditions. The allowance
for loan losses balance was increased by $900,000 or 29% to $4.0 million at
December 31, 1998. See "Allowance for Loan Losses."
     

8
<PAGE>
 
     Non-Interest Income. The components of non-interest income are detailed
below:
--------------------------------------------------------------------------------
                                                    Years Ended December 31, 
                                                 1998        1997        1996
--------------------------------------------------------------------------------
                                                   (dollars in thousands)

Non-interest income:
Gain on loan sales:
  SBA sales ................................  $ 6,101     $ 5,056     $ 3,558
  USDA sales ...............................    3,390       1,901         805
  Ex-Im working capital sales ..............      474         251         201
  Ex-Im medium term sales ..................    2,274       2,305         340
  Unguaranteed portions of
    SBA and USDA sales .....................      436       1,522         842
  Other commercial sales ...................      190         775          98
  Loan-backed securitizations ..............    4,094          --          -- 
                                              -------     -------     ------- 
    Gain on loan sales .....................   16,959      11,810       5,844

Loan servicing income and fees .............    4,353       2,618       1,475
Other non-interest income ..................      703         438         424
Income on stockholder note receivable ......       64         244          -- 
Gain on securities sales ...................       33          -- 
Gain on branch sale ........................       --          --       2,202
                                              -------     -------     ------- 
    Total non-interest income ..............  $22,112     $15,110     $ 9,945
                                              =======     =======     =======

    Non-interest income increased $7.0 million or 46% to $22.1 million in 1998
from $15.1 million in 1997 due to a $5.1 million increase in gain on loan sales
and securitizations and a $1.7 million increase in loan servicing income.

    Gains on the guaranteed portions of SBA and USDA loan sales increased $2.5
million or 36% in 1998 reflecting the continuing contribution of the Company's
four New England representative offices and the maturation of the five offices
opened in 1997. The $223,000 or 89% increase in gains on Ex-Im working capital
loan sales reflects the increased marketing and cross selling efforts by the
Company's lenders. Gains on the sale of Ex-Im Bank medium term loans were
relatively flat in 1998 as compared to 1997 as the Company's international
lenders also originated loans under a newly introduced privately-insured short
and medium term loan program which provides an alternative to the Ex-Im Bank
guaranteed loans to foreign buyers of U.S. made goods. The insurance, which
covers up to 95% of the commercial risk, is provided by a major triple A rated
private company. The Company plans to include these privately-insured loans in
securitizations in 1999.

     In 1998, the Company completed two securitizations and a sale to a
commercial paper conduit; gains on these transactions totaled $4.1 million. (See
"Loan Securitizations.")

     Although most of the unguaranteed portions of SBA loans were included in
the June 1998 SBA Loan-backed securitization, the Company did complete sales of
the unguaranteed portions of SBA and USDA loans on a non-recourse,
servicing-retained loan-by-loan basis. In 1998 the gain on these sales was
$436,000 on sales of loans totaling $8.2 million. In 1997, gains from the sale
of unguaranteed portions of SBA and USDA loans totaled $1.5 million on sales of
$29.2 million. 

     Loan servicing income comprises the servicing fees received on loans sold
on a servicing retained basis, net of amortization of the servicing asset.

--------------------------------------------------------------------------------
                                                     Years Ended December 31, 
                                                   1998       1997       1996
--------------------------------------------------------------------------------
                                                     (dollars in thousands)

Loan Servicing Income and Fees
Loan servicing income:
  SBA guaranteed loans .....................   $  1,716   $  1,203   $    921
  USDA guaranteed loans ....................        348        278        151
  Ex-Im working capital loans ..............        225        186         56
  Ex-Im medium term loans ..................        448        264         43
  Other commercial loans ...................        176        123         65
  Securitized loans ........................         53         --         -- 
  Residential and consumer loans ...........         51         64         59
                                               --------   --------   --------  
        Total loan servicing income ........      3,017      2,118      1,295
Other loan fees ............................      1,336        500        180
                                               --------   --------   --------  
        Total loan servicing income 
            and fees .......................   $  4,353   $  2,618   $  1,475
                                               ========   ========   ========
Loans serviced for others
    (at period end) 
    Outstanding balance ....................   $656,532   $429,077   $153,850
                                               ========   ========   ========


     The increases in total loan servicing income reflect the growth of the
servicing portfolios. The $899,000 or 42% increase in loan servicing income to
$3.0 million in 1998 reflects the $185.4 million or 62% increase in the average
balance of commercial loans serviced for others to $486.2 million in 1998 from
$300.8 million in 1997. The 64% increase in loan servicing income to $2.1
million in 1997 from $1.3 million in 1996 reflects the $115.1 million or 62%
increase in the average balance of loans serviced for others over the period.

     Although servicing income continues to increase, the margin of servicing
income to serviced loans has decreased as a result of an increase in the
servicing portfolio of Ex-Im term loans and unguaranteed commercial loans which
carry a lower servicing fee.

     Other loan fees are comprised primarily of fees earned on letters of
credit, which increased $116,000 or 34% to $461,000 in 1998 from $345,000 in
1997 due to greater demand from the Company's exporting borrowers who have the
need for letters of credit to support their trade activities. Included in other
loan fees is a $97,000 gain on the sale of residential mortgage servicing rights
to 168 residential mortgage loans as the Company divested operational functions
not directly related to its primary commercial loan servicing business.
Additionally, fees forfeited by potential borrowers who chose not to close loans
with the Company increased by $174,000 to $231,000 in 1998 from $57,000 in 1997.

     The non-interest income increase of $5.2 million in 1997 from 1996 reflects
a $6.0 million increase in gain on loans sales and a $1.1 million increase in
the loan servicing income, offset by the $2.2 million non-recurring gain on the
sale of the Company's suburban branch facility and its deposits in 1996.


                                                                               9
<PAGE>
 
     The servicing asset for loans sold is as follows:

--------------------------------------------------------------------------------
                                                      At December 31, 
                                            1998          1997          1996
--------------------------------------------------------------------------------
                                                  (dollars in thousands)

Servicing Asset
  SBA ..............................      $4,499        $3,155        $3,100
  USDA .............................         900           375           483
  Ex-Im medium term ................       2,749         2,025           374
  Other commercial .................         867           124           181
                                          ------        ------        ------
    Total servicing asset ..........      $9,015        $5,679        $4,138
                                          ======        ======        ======


     In addition to the above, interest-only strips from the loan-backed
securitizations and sale to the commercial paper conduit facility completed in
1998 totaling $4.1 million are included in the Company's available-for-sale
investment portfolio.

     Non-Interest Expense. Increases in non-interest expense reflect the
Company's growth over the periods as indicated below:

--------------------------------------------------------------------------------
                                                   Years Ended December 31,
                                             1998          1997          1996
--------------------------------------------------------------------------------
                                                  (dollars in thousands)
Non-interest expense:
Salaries and benefits ................   $ 11,235      $  9,537      $  5,089
Occupancy ............................      1,523           985           774
Furniture and equipment ..............      1,007           692           462
Outside services .....................        773           556           321
Office expenses ......................        834           556           421
Marketing ............................      1,453           847           691
Other ................................        875           628           667
                                         --------      --------      --------
  Total non-interest expense .........   $ 17,700      $ 13,801      $  8,425
                                         ========      ========      ========

Selected Data
Total servicing portfolio ............   $779,055      $573,544      $380,432
                                         ========      ========      ========
Number of loans serviced .............      2,050         1,938         1,519
                                         ========      ========      ========
Number of total personnel ............        182           131            92
                                         ========      ========      ========
Number of loan officers ..............         69            46            26
                                         ========      ========      ========


     Non-interest expenses increased $3.9 million or 28% in 1998 from 1997 due
to a 39% increase in personnel. The number of loan officers increased by 50% to
69 in 1998 as two new domestic representative offices were opened and the
existing offices and international business units were further staffed. The
remaining additions to personnel were primarily in the credit administration and
loan servicing business units. Geographic expansion and personnel additions
resulted in an increase in occupancy and related expenses as new offices were
leased and additional office space in the Company's Hartford, Connecticut
headquarters was occupied.

     Marketing expense increased $606,000 or 72% in 1998 reflecting increased
expenses associated with the marketing and referral activities of the Company's
international Master Agents. These expenses increased $281,000 to $412,000 in
1998. Domestic and international travel expenses also increased reflecting the
Company's continued geographic expansion. The $217,000 or 39% increase in
outside services reflects the increase in accounting and legal fees associated
with the increased reporting requirements of an SEC registrant and the diligence
on banking laws in each of the new states and countries where domestic and
international representative offices were opened in 1998.

     Non-interest expenses increased $5.4 million or 64% in 1997 from 1996 due
to a 42% increase in personnel as five new representative offices were opened
and the number of Hartford based loan officers in both the domestic and
international business units was increased during the year. Salary and benefits
expense for 1997 also included approximately $636,000 associated with bonuses
paid to officers in connection with the successful completion of the September
1997 public offering.

     Marketing expenses increased $156,000 or 23% in 1997 reflecting the
increase in international activity as the Company finalized Master Agency
agreements in targeted countries. The $235,000 or 73% increase in 1997 from 1996
in outside services reflected the increase in legal fees associated with the
Master Agency agreements as well as new product development and state banking
law diligence associated with the opening of the five domestic representative
offices.

     The Company's efficiency ratios, calculated as the ratio of non-interest
expenses to the sum of net interest income and non-interest income, excluding
the 1996 gain on the branch sale were 55%, 59% and 55% for the years ended
December 31, 1998, 1997 and 1996, respectively.

     Income Taxes. The effective income tax rates for the years ended December
31, 1998, 1997 and 1996 were 38.9%, 39.5% and 42.0%, respectively, reflecting a
1% decrease in the State of Connecticut statutory tax rate in 1998 and a $34,000
State of Connecticut tax refund received in September 1998 that resulted from a
statutory change relating to the 1991 through 1995 tax years.


10
<PAGE>
 
     The following table sets forth the components of the Company's net interest
income and yield on average interest earning assets and rate on interest bearing
liabilities.

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------------------------
                                                                            For the Years Ended
                                               December 31, 1998              December 31, 1997            December 31, 1996 
------------------------------------------------------------------------------------------------------------------------------------
                                                    Interest   Average           Interest      Average            Interest  Average 
                                           Average   Earned/   Yield/   Average   Earned/      Yield/   Average    Earned/   Yield/ 
                                           Balance    Paid      Rate    Balance    Paid         Rate    Balance     Paid      Rate 
                                           --------------------------  ------------------------------- -----------------------------
                                                                           (dollars in thousands) 
<S>                                        <C>       <C>         <C>    <C>       <C>           <C>     <C>        <C>         <C> 
Total interest earning assets:
  Loans (1)
    Commercial ........................... $158,604  $ 15,016    9.47%  $120,913  $12,002       9.93%   $109,637   $ 10,882    9.93%
    Residential ..........................    4,847       392    8.09%     8,129      595       7.32%     12,848      1,059    8.24%
    Other consumer .......................    1,247       114    9.15%     1,668      156       9.35%        874         86    9.84%
                                           --------  --------    -----  --------  -------       -----   --------   --------    -----
  Total Loans ............................  164,698    15,522    9.42%   130,710   12,753       9.76%    123,359     12,027    9.75%
  Investment securities(2) ...............   19,793     1,154    5.83%    19,085    1,156       6.06%     10,495        646    6.16%
  Federal funds sold .....................   26,310     1,412    5.37%    13,139      716       5.45%     12,153        632    5.20%
                                           --------  --------    -----  --------  -------       -----   --------   --------    -----
  Total investment securities and
    federal funds sold ...................   46,103     2,566    5.57%    32,224    1,872       5.81%     22,648      1,278    5.64%
                                           --------  --------    -----  --------  -------       -----   --------   --------    -----
Total earning assets .....................  210,801    18,088    8.56%   162,934   14,625       8.98%    146,007     13,305    9.11%
                                                     --------    -----            -------       -----              --------    -----
Total non-earning assets .................   25,190                       14,957                          11,485            
                                           --------                     --------                        --------               
Total assets ............................. $235,991                     $177,891                        $157,492            
                                           ========                     ========                        ========

Total interest bearing liabilities:
  Deposits
    Interest bearing demand deposits ..... $  8,964  $    212    2.37%  $  7,406  $  183        2.47%   $  8,705   $    241    2.77%
    Premier money market .................   92,591     4,928    5.32%    72,965   3,869        5.30%     61,519      3,176    5.16%
    Other savings ........................    9,889       295    2.98%     6,268     135        2.15%     12,607        386    3.06%
    Certificates of deposit ..............   34,184     1,934    5.66%    30,825   1,786        5.79%     28,384      1,564    5.51%
    IRA certificates of deposit ..........    9,310       527    5.66%     6,552     364        5.56%      6,436        347    5.39
                                           --------  --------    -----  --------  -------       -----   --------   --------    -----
Total Deposits ...........................  154,938     7,896    5.10%   124,016   6,337        5.11%    117,651      5,714    4.86%
Other borrowings .........................      605        28    4.63%       702      34        4.84%        623         27    4.33%
                                           --------  --------    -----  --------  -------       -----   --------   --------    -----
  Total interest bearing liabilities .....  155,543     7,924    5.09%   124,718   6,371        5.11%    118,274      5,741    4.85%
                                           --------  --------    -----  --------  -------       -----   --------   --------    -----

Non-interest bearing liabilities
  Demand deposits ........................   34,136                       29,066                          24,862           
  Other liabilities ......................    2,042                        2,458                           1,630           
                                           --------                     --------                        --------               
Total non-interest bearing liabilities ...   36,178                       31,524                          26,492           
Stockholders' equity .....................   44,270                       21,649                          12,726           
                                           --------                     --------                        --------               
Total liabilities and                                                                                                       
  stockholders' equity.................... $235,991                     $177,891                        $157,492            
                                           ========                     ========                        ========
Net interest income/net interest spread ..           $ 10,164    3.47%            $  8,254      3.87%              $  7,564    4.26%
                                                     ========    =====            ========      =====              ========   ======

  Net interest margin ....................                       4.82%                          5.07%                          5.18%
                                                                ======                          =====                         ======

Average interest earning assets/average
 interest bearing liabilities ............                     135.53%                        130.64%                        123.45%
                                                               =======                        =======                        =======

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

</TABLE> 

(1)  For purposes of these computations, non-accruing loans are included in the
     average balances.

(2)  The yield does not give effect to changes in fair value that are reflected
     as a component of stockholders' equity.

                                                                              11
<PAGE>
 
     The following rate/volume analysis shows the portions of the net change in
interest income due to changes in volume or rate. The changes in net interest
income due to both volume and rate have been allocated proportionally to changes
due to volume and changes due to rate.

<TABLE> 
<CAPTION> 
-----------------------------------------------------------------------------------------------------------------------------
                                                             Year Ended December 31,             Year Ended December 31,
                                                              1998 Compared to 1997              1997 Compared to 1996 
                                                                 Changes due to:                     Changes due to: 
                                                       --------------------------------     ---------------------------------
                                                        Volume       Rate        Total       Volume       Rate        Total 
                                                       --------------------------------     ---------------------------------
                                                                                (dollars in thousands) 
<S>                                                    <C>          <C>        <C>          <C>          <C>        <C> 
Increase (decrease) in net interest income due to:
Loans
  Commercial loans ................................    $ 3,568      $(554)     $ 3,014      $ 1,119      $   1      $ 1,120
  Residential loans ...............................       (265)        62         (203)        (346)      (118)        (464)
  Other consumer loans ............................        (39)        (3)         (42)          74         (4)          70
                                                       -------      -----      -------      -------      -----      -------  
    Total loans ...................................      3,264       (495)       2,769          847       (121)         726

Investment securities .............................         42        (44)          (2)         520        (10)         510
Federal funds sold ................................        707        (11)         696           54         30           84
                                                       -------      -----      -------      -------      -----      -------  
    Total investments and federal funds sold ......        749        (55)         694          574         20          594
                                                       -------      -----      -------      -------      -----      -------  
    Total interest earning assets .................      4,013       (550)       3,463        1,421       (101)       1,320
                                                       -------      -----      -------      -------      -----      -------  
Deposits
  Interest-bearing demand deposits ................         37         (8)          29          (32)       (26)         (58)
  Premier money market savings ....................      1,043         16        1,059          607         86          693
  Other savings ...................................        108         52          160         (136)      (115)        (251)
  Time deposits ...................................        189        (41)         148          141         81          222
  IRA time deposits ...............................        156          7          163            6         11           17
                                                       -------      -----      -------      -------      -----      -------  
    Total deposits ................................      1,533         26        1,559          586         37          623
FHLB advances .....................................         (5)        (1)          (6)           4          3            7
                                                       -------      -----      -------      -------      -----      -------  
    Total interest-bearing liabilities ............      1,528         25        1,553          590         40          630
                                                       -------      -----      -------      -------      -----      -------  
    Change in net interest income .................    $ 2,485      $(575)     $ 1,910      $   831      $(141)     $   690
                                                       =======      =====      =======      =======      =====      ======= 
</TABLE> 

Financial Condition

     General. Total assets increased $54.9 million or 25% to $273.7 million at
December 31, 1998 from $218.9 million at December 31, 1997 and $57.3 million or
36% from the December 31, 1996 balance of $161.6 million. These increases
reflect increases in the receivables from loans sold, loan servicing assets and
federal funds which was funded by growth in deposit accounts, retained earnings
and net proceeds from the Company's September 30, 1997 public offering.

     Cash and Cash Equivalents. Cash and cash equivalents increased by $40.9
million or 235% to $58.3 million at December 31, 1998 reflecting receipt of the
proceeds from commercial loan securitizations completed in December. The cash
balances were relatively flat at $17.4 million at December 31, 1997 from $18.9
million at December 31, 1996. In 1998 the Company maintained greater funds on
hand as federal funds sold which provided overnight liquidity for the Company's
increased volume of loan originations.

     Investment Securities. The investment securities portfolio increased $13.3
million or 60% to $35.6 million at December 1998 from $22.3 million at December
31, 1997 and increased $6.4 million or 40% in 1997 from the December 31, 1996
balance of $15.9 million. The portfolios have historically been comprised of
U.S. Treasury and other U.S. government mortgage-backed securities and
collateralized mortgage obligations with average lives of less than five years.
As a result of the Company's 1998 securitizations, the portfolios include $15.6
million of rated and unrated subordinate interests in securities and
interest-only strips totaling $4.1 million from the transactions. Refer to Note
2 of the Company's consolidated financial statements for additional information.

     Loans. Loans decreased by $21.7 million or 17% to $108.9 million at
December 31, 1998 from $130.6 million at December 31, 1997 and increased $21.2
million or 19% from $109.4 million at December 31, 1996. The decrease in the
loan portfolios is the result of the successful securitization of $113.3 million
of unguaranteed commercial loans during 1998, a portion of which was comprised
of loans originated in prior years.

     Loan Securitizations. During 1998 the Company completed two commercial loan
securitization transactions and a sale to a commercial paper conduit involving
the issuance of $113.3 million of senior and subordinated securities.
Approximately 56% of the $117.1 million loans included in the securitizations
were originated in 1998. In connection with the "SBA Loan Backed Series 1998-1",
completed in June 1998, a $24.2 million Class A certificate rated AA by Moody's
Investor Services, Inc. was sold in a private placement. A $2.7 million Class B
certificate rated BBB by Moody's Investor Services, Inc. is held by the Company.
Related to "Business Loan Trust 1998-A" backed by commercial term loans and
completed in December 1998, a $55 million senior note rated AAA by Duff and
Phelps Credit Rating Co. and Aaa by Moody's Investor Services, Inc. was 


12
<PAGE>
 
sold in a private placement. A $3.2 million A rated note, a $3.2 million BBB
rated note and a $3.1 million unrated note are held by the Company from this
securitization. A $21.4 million sale to an asset-backed commercial paper conduit
facility also occurred in December 1998. The Company holds a $3.8 million
subordinated interest to the senior $21.4 million loans sold.

     In 1998, cash proceeds from the securitization of commercial loans totaled
$85.3 million net of subordinated certificates and notes and the required
initial deposits to the cash reserves held by the Company.
      

     The following table summarizes the Company's 1998 securitization
transactions and the commercial paper sale.

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------
                                                                                          Commercial
                                                         Securitizations                  Paper Sale
                                              -----------------------------------       --------------
                                                Unguaranteed    
                                                  Portions               Term             Revolving
                                                of SBA Loans          Commercial          Commercial
                                              ---------------        ------------       --------------    
                                                                 (dollars in thousands)
<S>                                           <C>                    <C>                <C> 
Total loans securitized or sold .................   $26,901             $65,000              $25,205  
Senior certificates .............................   $24,210             $55,250              $21,424  
Subordinate interests held  
 by Company .....................................   $ 2,691             $ 9,750              $ 3,781  
Total cash reserve requirement ..................        7%                 10%                  N/A  
Initial cash reserve requirement ................        3%                  7%                  N/A  
Initial cash reserve deposit ....................   $   807             $ 4,550                  N/A  
Gain recorded ...................................   $ 2,648             $ 1,052              $   394  
Gain as a percentage of loans securitized .......     9.84%               1.62%                1.56% 
Month closed ....................................      June            December             December  
</TABLE> 

     The significantly higher gain, stated as a percentage of loans securitized,
for the unguaranteed portions of SBA loans reflects the fact that such loans are
carried at a discount following the sale of the guaranteed portions and the
stronger capital markets environment in June 1998.
     
     Allowance for Loan Losses. The Company reviews the adequacy of the
allowance for loan losses quarterly. The allowance totaled $4.0 million at
December 31, 1998, an increase of $900,000 or 29% from the $3.1 million balance
at December 31, 1997, which was a slight increase from the $3.0 million balance
at December 31, 1996.

<TABLE> 
<CAPTION> 

Activity in the Allowance for Loan Losses
------------------------------------------------------------------------------------------
                                                                   At December 31,
                                                            1998        1997        1996
------------------------------------------------------------------------------------------
                                                                (dollars in thousands)
<S>                                                     <C>         <C>         <C> 
Balance of allowance for loan
losses at the beginning of the period ...............   $  3,100    $  3,000    $  2,000
Charge-offs:
     Commercial .....................................        876         279         168
     SBA ............................................        775         262         478
     Investor mortgage ..............................        582       1,395       1,730
     Private ........................................         83          46          27
     USDA ...........................................         --          68          -- 
     Residential and other consumer .................          8         195         124
                                                        --------    --------    --------
       Total charge-offs ............................      2,324       2,245       2,527
                                                        --------    --------    --------

Recoveries:
     Commercial .....................................         30          77          16
     SBA ............................................         --          13          -- 
     Investor mortgage ..............................        123           6          13
     Private ........................................         --          --          10
     Residential and other consumer .................         --          10           1
                                                        --------    --------    --------
       Total recoveries .............................        153         106          40
                                                        --------    --------    --------
Net charge-offs .....................................      2,171       2,139       2,487

Provision for loan losses ...........................      3,071       2,239       3,487
                                                        --------    --------    --------
Balance of allowance for loan losses at end of period   $  4,000    $  3,100    $  3,000
                                                        ========    ========    ========  
Total loans .........................................   $113,946    $135,398    $114,627
                                                        ========    ========    ========  
Allowance to total loans ............................       3.3%        2.3%        2.6%
                                                        ========    ========    ========  
Net charge-offs/average outstanding loans ...........      1.37%       1.71%       2.12%
                                                        ========    ========    ========  
</TABLE> 

                                                                              13
<PAGE>
 
     During 1998, the trend in net charge-offs as measured against average
outstanding loans continued to decline. Included in net charge-offs are SBA loan
charge-offs which represent losses realized on the unguaranteed portion of SBA
loans after the liquidation of collateral.

     The Company believes that the increase in charge-offs emanating from the
SBA and commercial portfolios reflects the normal seasoning of these portfolios.
As the Company generally extends both SBA and commercial loans to the same
borrowers, it is expected that there will be a high degree of correlation as to
the changes in credit losses from these two portfolios.

     The Company monitors the performance of the portfolios by use of Static
Loss Pool Analysis. For purposes of this analysis, seasoned portfolios are
defined as having been originated at least 8 quarters prior to the analysis.
Using a 22-quarter time period, the SBA portfolio has generated an average
annual loss of 73 basis points. During the same time period, the commercial loan
portfolio has generated an average annual loss of 50 basis points. The average
annual losses arising from originations in the most recent eight quarters have
been substantially below the levels of the "seasoned" portfolios.
      
     Net charge-offs from the investor mortgage portfolio, which is comprised of
multi-family urban residential units located in various Connecticut inner
cities, represented 25%, 62% and 69% of the total charge-offs for the years
ended 1998, 1997 and 1996, respectively. The outstanding balance of this
portfolio at December 31, 1998 totaled $3.1 million.

     The Company tracks charge-offs by relationship and has noted no appreciable
increase in the number of relationships charged off. For the years ended
December 31, 1998, 1997 and 1996, the charge-offs were comprised of 16, 16 and
21 lending relationships, respectively. The Company estimates that it has
approximately 998 commercial lending relationships at December 31, 1998.

     The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis, and
therefore allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict use of the allowance to absorb
losses in any category. The unallocated portion of the allowance represents an
amount that is not specifically allocated to one of the loan portfolios.


<TABLE>  
<CAPTION> 
--------------------------------------------------------------------------------------------------------------------------------
                                                                                          December 31,
                                                                 1998         1997           1996           1995           1994 
--------------------------------------------------------------------------------------------------------------------------------
                                                                                    (dollars in thousands)
<S>                                                          <C>          <C>            <C>           <C>            <C>  
Allocation of the allowance by category of loans
Unguaranteed portions of:
  SBA and USDA loans ......................................  $  1,050     $    853       $    491       $    563       $    338
  Ex-Im Bank working capital loans ........................       245          145             44              2             -- 
Other international loans .................................       483           --             --             --             -- 
Commercial mortgage loans .................................       128          250            271            483            237
Other commercial loans ....................................     1,367        1,052            475            316            353
Investor mortgage loans ...................................        63          269          1,061            399            581
Residential and other consumer loans ......................        43           67            113             72            106
Loans held for sale .......................................        43           --             --             --             --
Unallocated ...............................................       578          464            545            165            385
                                                             ---------    ---------      ---------      ---------       --------    

  Total allowance for loan losses .........................  $  4,000     $  3,100       $  3,000       $  2,000       $  2,000
                                                             =========    =========      =========      =========      ========= 

Percent of loans in each category to total loans
Unguaranteed portions of:
  SBA and USDA loans .......................................    30.0%        26.9%          30.5%          38.5%          32.0%
  Ex-Im Bank working capital loans ........................       3.9          2.8            3.0            0.2             -- 
Other international loans .................................      15.4           --             --             --             -- 
Ex-Im Bank medium term loans ..............................        --          0.5            1.8            0.1            0.2
Commercial mortgage loans ...............................         8.5         14.7           16.4           14.5           17.1
Other commercial loans ..................................        29.7         44.8           29.4           26.9           21.6
Investor mortgage loans .................................         2.6          4.1            6.6            7.2            9.9
Residential and other consumer loans ....................         2.9          6.2           12.3           12.6           19.2
Loans held for sale .......................................       7.0           --             --             --             --
                                                             ---------    ---------      ---------      ---------       --------    

  Total ...................................................      100%       100.0%         100.0%         100.0%         100.0%
                                                             =========    =========      =========      =========      ========= 
</TABLE> 
                                         

14
<PAGE>
 
     The following table sets forth information regarding the Company's
non-performing loans at the dates indicated:
<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------------------------------------------
                                                                                        December 31,
                                                          1998            1997              1996            1995           1994
----------------------------------------------------------------------------------------------------------------------------------
                                                                                   (dollars in thousands)
<S>                                                   <C>             <C>              <C>              <C>             <C>  
Non-Performing Loans
Commercial:
  Unguaranteed portions:
    SBA and USDA loans ............................   $  1,533        $  1,226(1)       $    188        $    419        $    -- 
    Ex-Im Bank working capital loans ..............        418              --                --              --             -- 
  Other international loans .......................        112              --                --              --             -- 
  Commercial mortgage loans .......................          6              39                --              --            703
  Other commercial loans ..........................        890             535               132              --            106
  Investor mortgage loans .........................         --             415             1,853             839          1,437
Consumer ..........................................        145             149                79              --             -- 
                                                      ---------       ---------         ---------       ---------       --------- 
Total non-performing loans ........................   $  3,104        $  2,364          $  2,252        $  1,258        $ 2,246
                                                      =========       =========         =========       =========       ========= 
Total loans .......................................   $113,946        $135,398          $114,627        $106,992        $95,118
                                                      =========       =========         =========       =========       ========= 
Non-performing loans to total loans ...............      2.53%           1.75%             1.96%           1.18%          2.36%
                                                      =========       =========         =========       =========       ========= 
Non-performing loans to total assets ..............      1.13%           1.08%             1.39%           0.89%          1.79%
                                                      =========       =========         =========       =========       ========= 
Allowance to total non-performing loans ...........       129%            131%              133%            159%            89%
                                                      =========       =========         =========       =========       ========= 
</TABLE> 

(1)Excludes the Company's only guaranteed USDA loan not sold of $345,000 which
is fully guaranteed as to the collection of principal and interest.


     Although the balance of non-performing SBA/USDA and commercial loans
increased in 1998, the Company believes that this reflects the effects of the
seasoning of the portfolio. The Company manages the non-performing assets
actively, including a quarterly review of the net realizable value of collateral
securing these loans. Any deterioration in the relationship between the loan
amount and the net realizable value of the collateral will be considered in the
evaluation of the allocation of the Allowance attributed to the subject loan
and/or a partial charge-off.

     The Company had no loans past due 90 days and accruing interest at any
period end as presented in the above table.

     Other Real Estate Owned. It is the Company's policy, whenever possible, not
to take title to real property collateralizing loans, thereby avoiding
management time and any environmental liabilities associated with holding such
properties. From the year end 1996 to 1998 reporting periods discussed herein,
the highest balance of other real estate owned totaled $97,000.

     Receivable From Loans Sold. Receivable from loans sold represents the
balance of loans sold for which funding has not yet been received. Government
guaranteed loans are generally sold within a day of origination and settled
within 30 days of the trade date. During this thirty day period, the Company
reviews and delivers closing documents to the investor. The receivable balance
fluctuates with the month's loan sale activity and tends to be higher at any
quarter end due to increased loan closing activity. The annual average balance
of this receivable has ranged from $8-10 million. The Company actively monitors
the settlement of loans to ensure that this source of liquidity is effectively
managed.
     
     Prepaid Expenses and Other Assets. Prepaid Expenses and Other Assets is
comprised principally of servicing assets as discussed in "Accounting for Loan
Sales" and "Non-interest Income."

------------------------------------------------------------------------------
                                                       At December 31,
                                                1998        1997        1996
------------------------------------------------------------------------------
                                                   (dollars in thousands)

Other Assets
Servicing assets ..........................  $ 9,015      $5,679      $4,138
Prepaid expenses and 
  other assets ............................    4,414       1,143         631
                                             -------      ------      ------
                Total other assets ........  $13,429      $6,822      $4,769
                                             =======      ======      ======
  
     At December 31, 1998 prepaid expenses and other assets includes $1.2
million of prepaid fees related to the warehouse facilities and the commercial
paper conduit. These fees will be expensed over the terms of the underlying
facilities. Additionally, other assets include $625,000 of accrued interest
receivable related to the securitization transactions. Cash flows from the
transactions will offset this amount after the required cash reserve accounts
have been fully funded.

     Deposits. Deposits have historically been the Company's primary funding
source and have increased to sustain the Company's balance sheet growth. See
"Liquidity and Capital Resources."

     Federal Home Loan Bank of Boston Advances. Periodically, the Company
utilizes Federal Home Loan Bank ("FHLB") advances to provide short term
liquidity. As of December 31, 1998, the Bank had a $3.5 million unused line of
credit from the FHLB. 


                                                                              15
<PAGE>
 
Stockholders' Equity. Stockholders' equity increased $6.9 million to $49.0
million at December 31, 1998 from $42.1 million at December 31, 1997 primarily
due to the retention of earnings. Stockholders' equity increased $27.9 million
to $42.1 million at December 31, 1997 from $14.2 million at December 31, 1996
due to the issuance of 1,955,000 shares of common stock in an underwritten
public offering completed in September 1997, resulting in net proceeds to the
Company of $23.8 million and the retention of earnings. The Company has paid
quarterly dividends of $.03 per share since the fourth quarter of 1995. As
explained in Note 7 to the Company's consolidated financial statements, the
Company holds a note receivable from the Company's Chief Executive Officer
related to the issuance of 614,600 shares of common stock in June 1994, which is
reflected as a separate component of stockholders' equity.

Liquidity and Capital Resources

     Management considers scheduled cash flows from existing borrowers,
projected deposit levels, estimated liquidity needs from maturing and
disintermediating deposits, approved extensions of credit, and unadvanced
commitments to existing borrowers in determining the level and maturity of
funding necessary to support operations. Historically, the Company has increased
the level of deposits to support its planned loan growth. The Company also has
supported its growth by regularly selling loans on a servicing retained basis.
In 1998 and during the first quarter of 1999, the Company entered into the
following transactions, all of which taken together will significantly change
the manner in which the Company funds its operations and plans to support its
future growth:

 .    Pursuant to an Agreement for Purchase and Sale of Assets and Assumption of
     Liabilities with Hudson United Bank (the "Deposit Buyer"), the Company 
     agreed to sell its last retail branch and its checking, savings and money
     market accounts;

 .    The Company obtained a warehouse loan facility pursuant to which up to $75
     million is available to the Company (based upon the contractual advance
     rate against the principal balance of the loans pledged to secure the
     facility);

 .    The Company obtained a commitment for a second warehouse loan facility
     pursuant to which, upon approval of the facility by the SBA and execution
     of definitive documents, up to $50 million will be available to the Company
     (based upon the contractual advance rate against the principal balance of
     the loans pledged to secure the facility; the pledged loans will consist of
     the unguaranteed portion of loans guaranteed by the SBA);

 .    The Company obtained a commercial paper conduit facility, pursuant to which
     the Company has the right to sell up to $65 million of loans during the
     term of the facility. The Company must retain subordinated interests in the
     loans sold, equal to differing amounts based on the type of loan sold. The
     Company sold loans totaling $21 million under this facility in December; 

 .    The Company entered into a securitization transaction in June 1998 pursuant
     to which the Company received approximately $24 million from a sale of the
     unguaranteed portions of loans originated by the Company that were
     guaranteed in part by the SBA; and

 .    The Company entered into a securitization transaction in December 1998
     pursuant to which the Company received approximately $55 million from a
     sale of unguaranteed commercial loans originated by the Company.

     The funding provided and made available by the foregoing transactions, in
addition to planned increases in brokered and retail certificates of deposit, is
expected to be sufficient to fund the sale by the Company of its retail branch
(that is, to fund the payment to the Deposit Buyer of the amount of the deposit
liabilities assumed by the Deposit Buyer, less the premium and other amounts
payable to the Company). Management of the Company believes that the funding
provided by the foregoing transactions will also be sufficient, when combined
with the amounts available to the Company from issuance of brokered and retail
certificates of deposit and other sources of revenues, for the Company's
on-going liquidity requirements.

     The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
result in certain mandatory and discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
condition. The regulations require that the Bank meet specific capital adequacy
guidelines as calculated under regulatory accounting practices. The Bank's
capital classification is also subject to qualitative judgments by the
regulators about interest rate risk, concentration of credit risk and other
factors.

     Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Tier I capital to
total average assets (as defined), and minimum ratios of Tier I and total
capital to risk weighted assets. The Bank's capital ratios are well in excess of
regulatory minimum requirements. As the Company is a small bank holding company,
it is not subject to any additional capital ratio requirements. See Note 7 to
the consolidated financial statements for a table of minimum required and actual
capital ratios.

Quantitative and Qualitative Disclosures About
Market Risk and Asset/Liability Management

     The Company completed two loan sales and securitization transactions in
1998. In 1998, approximately 24% of the Company's $16.9 million gain on loan
sales were attributed to the two securitizations of commercial loans and the
sale of loans to a commercial paper conduit. The Company expects to continue to
sell loans to the commercial paper conduit and complete asset-backed loan
private placements in the capital markets to securitize and sell the
unguaranteed portions of SBA and USDA loans,


16
<PAGE>
 
commercial loans and privately-insured international loans. The Company expects
to continue to sell the guaranteed portions of SBA, USDA and Ex-Im Bank loans on
a loan-by-loan basis. Such government guaranteed loans represented approximately
50% of the total loans originated in 1998.

     Although reliance on the capital markets for the sale of such loans
presents the Company with new risks related to liquidity and earnings
volatility, the Company believes that its diversified sales and funding strategy
provides it with the ability to manage such risks. The Company believes that its
overall strategy of blending whole loan sales of government guaranteed loans
with the securitization of commercial loans and its on-going ability to sell
loans to the commercial paper conduit provide a diversified array of loan sales
alternatives. As far as sources of funds, after the sale of the branch discussed
earlier, the Company will continue to receive funding from retail and brokered
certificates of deposit and from the warehouse lines provided by the investment
banking firm that lead managed the Company's initial public offering in
September 1997.

     Several factors will affect the Company's ability to access its warehouse
lines of credit and complete securitizations in the future, including conditions
in the securities markets generally, and in the asset-backed securities market
specifically, the credit quality of the Company's loan portfolio, compliance of
the Company's loans with the eligibility requirements established in connection
with the warehouse lines and securitizations, the Company's ability to provide
third-party credit enhancement and adequately service its loan portfolio, and
the absence of any material downgrading or withdrawal of ratings given to
securities previously issued in the Company's securitizations.

     During the third quarter of 1998 and continuing into the fourth quarter of
1998, the capital markets experienced rapid and extreme changes evidenced by a
decline of investor demand for certain asset-backed securities that carried a
credit agency rating less than the highest ratings available and a widening of
the spreads between the interest rates on treasury securities and interest rates
on asset-backed securities. The "flight to quality" by asset-backed investors
requires issuers like the Company to provide a greater level of credit
enhancement to attain higher credit ratings for a larger percentage of the
securitization in order to make the transaction marketable. The widening of
spreads in the asset-backed capital markets reduces the earnings on a
securitization and, if such events were to occur in the future, could limit the
amount of borrowings available to the Company under its warehouse lines of
credit and may make future securitizations economically unfeasible.

     Any substantial reduction in the accessibility of the warehouse lines of
credit or the securitization market for the Company's loans or any adverse
change in the terms of such securitizations could have an adverse effect on the
Company's financial condition or results of operations.

     An earnings at risk model is one tool utilized by the Company to measure
interest rate risk. Such a model computes the estimated effect on net income
from changes in interest earned on assets and expenses paid on liabilities, as
well as the impact of off-balance sheet items in the event of a range of assumed
changes in market interest rates. This analysis estimates the risk of loss in
market risk sensitive instruments in the event of a sudden and sustained one
hundred to three hundred basis point increase or decrease in the market interest
rates. The Company's Board of Directors has adopted an interest rate risk
policy, which establishes maximum decreases in net income and capital in the
event of a sudden and sustained change in market interest rates.

     At December 31, 1998, the estimated changes in the Company's net income
based on the hypothetical changes in interest rates were within the limits
established by the Board of Directors.

     Such an earnings at risk calculation is based on the estimated change in
interest income and interest expense utilizing numerous assumptions, including
historical relationships between various indices utilized by the Company in
setting interest rates and management's judgment as to the expected relationship
of such rates in the current environment. This calculation utilizes such
relative levels of market interest rates as well as assumptions regarding loan
prepayments and deposit decays and should not be relied upon as indicative of
actual results. Importantly, the computations do not contemplate any actions the
Company could undertake in response to changes in interest rates.

     Certain shortcomings are inherent in the method of analysis presented in
the computation of earnings at risk. Actual results may differ from those
presented should market conditions vary from assumptions used in the
calculation. In the event of a change in interest rates, prepayment and early
withdrawal levels could deviate significantly from those assumed in the earnings
at risk calculation. Finally, the ability of many borrowers to repay their
adjustable rate loans and the value of the underlying collateral may decrease in
the event of interest rate decreases.

     The Company seeks to manage its assets and liabilities to reduce the
potential adverse impact on net interest income that might result from changes
in interest rates. Control of interest rate risk is conducted through systematic
monitoring of maturity mismatches. The Company's investment decision-making
takes into account not only the rates of return and their underlying degree of
risk, but also liquidity requirements, including minimum cash reserves,
withdrawal and maturity of deposits and additional demand for funds. For any
given period, the pricing structure is matched when an equal amount of assets
and liabilities reprice. An excess of assets or liabilities over these matched
items results in a gap or mismatch, as shown in the following table. A negative
gap denotes liability sensitivity and normally means that 

                                                                              17
<PAGE>
 
a decline in interest rates would have a positive effect on net interest income,
while an increase in interest rates would have a negative effect on net interest
income. However, significant variations may exist in the degree of interest rate
sensitivity between individual asset and liability types within the repricing
periods presented due to differences in their repricing elasticity relative to
the change in the general level of interest rates. All of the Company's assets
and liabilities are U.S. dollar-denominated and, therefore, the Company bears no
foreign exchange risk.

     The majority of the Company's assets reprice according to contractual
arrangements although the Company has historically had fairly broad discretion
over the frequency and magnitude of interest rate changes on its liabilities
which has enabled the Company to minimize the impact of any general changes in
the interest rate environment. This discretion may be more limited in the future
due to the sources of funds anticipated to be utilized in the future as
discussed above and in "Liquidity and Capital Resources."
     
     The Company utilizes the analysis detailed below to generally monitor the
composition of assets and liabilities and focuses on the one-year mismatch. The
Company believes the positive one year cumulative gap of $4.1 million or 2%
reflects a relatively balanced position.

     For purposes of the following analysis, checking and savings account
repricing is presented 20% in the 0-90 day period, 20% in the 91-180 day period,
30% in the 181-365 day period and 30% in the 1-5 year period. Although the
elasticity of such deposits cannot be tied to any one-time period, these are the
assumptions which have been developed by the Company based on historical
experience and are utilized for internal and regulatory reporting purposes.


<TABLE> 
<CAPTION> 
-----------------------------------------------------------------------------------------------------------------------------
                                                                December 31, 1998
                                       0 to 90    91 to 180  181 to 365     1 to 5        Over 5 
                                         Days        Days        Days        Years        Years         Total 
-----------------------------------------------------------------------------------------------------------------------------
                                                            (dollars in thousands) 

<S>                                    <C>         <C>          <C>          <C>          <C>         <C>  
Commercial loans ...................   $ 85,049    $  6,833     $  2,691     $  4,340     $ 11,487     $ 110,400
Residential loans ..................         --       1,566          364          529          554         3,013
Other consumer loans ...............        160           8           41          270           54           533
Investments ........................     21,073       4,310        3,632        4,535        2,033        35,583
Federal funds sold .................     44,930          --           --           --           --        44,930
                                       --------    --------     --------     --------     --------     ---------      
  Total interest earning assets ....   $151,212    $ 12,717     $  6,728     $  9,674     $ 14,128     $ 194,459
                                       ========    ========     ========     ========     ========     ========= 
Checking ...........................   $ 11,187    $ 11,185     $ 16,778     $ 16,778           --     $  55,928
Money market savings ...............     20,695      20,696       31,044       31,044           --       103,479
Other savings ......................      2,868       2,867        4,301        4,301           --        14,337
Time deposits ......................     31,374       4,938        7,560        2,258           --        46,130
Treasury, tax and loan .............      1,047          --           --           --           --         1,047
                                       --------    --------     --------     --------     --------     ---------      
  Total interest bearing liabilities   $ 67,171    $ 39,686     $ 59,683     $ 54,381     $     --     $ 220,921
                                       ========    ========     ========     ========     ========     ========= 
Interest sensitivity gap ...........   $ 84,041    $(26,969)    $(52,955)    $(44,707)    $ 14,128     $ (26,462)
                                       ========    ========     ========     ========     ========     ========= 
Cumulative gap .....................   $ 84,041    $ 57,072     $  4,117     $(40,590)    $(26,462)
                                       ========    ========     ========     ========     ========     
Cumulative gap as a percentage of
    total interest earning assets ..        43%         29%           2%         (21)%        (14)%
                                       ========    ========     ========     ========     ========     
</TABLE> 

Importantly, the above table reflects the balance sheet as of December 31, 1998
and does not consider the projected sources of funding which are expected to be
utilized after the sale of the Company's last retail branch and checking,
savings and money market accounts.

18
<PAGE>
 
Seasonality

     The Company's business is seasonal, as the level of domestic loan
originations tends to be lower during the first quarter when many U. S.
companies have not yet produced their fiscal financial statements and during the
third quarter when many U. S. manufacturers shut down for a limited time for
summer vacation. Further, as the Company relies more on securitizations for the
sale of loans, the Company's earnings will also be lower in the quarters when
loans originated are held in portfolio for a future securitization.

Impact of Inflation

     The consolidated financial statements and related data presented elsewhere
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of the Company is reflected in increased operating
costs. Interest rates have a significant impact on the Company's performance.
Increases in interest rates affect the ability of the Company's borrowers to
service their variable rate debt. Furthermore, inflation can directly affect the
value of loan collateral in general, and real estate collateral in particular.
These factors are taken into account in the initial underwriting process and
over the life of the loans. The Company believes that it has the systems in
place to continue to manage the rates, liquidity and interest rate sensitivity
of the Company's assets and liabilities.

Year 2000 Compliance

     As the Year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two digit date
position which represents the year (e.g., `95 is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., `99) could be the
maximum date value these systems will be able to accurately process.

     Utilizing the guidance provided by the Federal Institutions Examination
Council ("FFIEC") as a framework, the Company has developed a Year 2000
Compliance Program as discussed below. The Company's Year 2000 Compliance
Workplan ("Workplan") includes the following broad components:

 .    Review of Mission Critical Systems for Year 2000 Readiness

 .    Renovation of Internal Mission Critical Systems

 .    Renovation of External Mission Critical Systems

 .    Testing of Mission Critical Systems

 .    Development of Business Resumption Contingency Plan

 .    Assessment of Customer Risk

 .    Remediation Contingency Plan

     Senior management and the Technology Committee of the Board of Directors
are responsible for monitoring compliance with the Workplan. In addition, the
Company's primary regulator, the Office of the Comptroller of the Currency,
performs periodic off-site inquiries and on-site visitations to assess the
status of the Company's Year 2000 readiness and progress against the Workplan
and federal regulations. While the Company has devoted a significant amount of
human resources to address its Year 2000 readiness, management does not believe
that the resultant deferral of other information technology ("IT") projects has
had a material impact on the Company's financial condition or results of
operations.

     The Company has reviewed all mission critical systems, prioritized the
details of the plan and its resources, and has established deadlines for each of
the components of the Workplan. The Company's primary internal mission critical
systems included a deposit item processing system, wide area network which
supports word processing and spreadsheet applications as well as other external
software systems, and an AS/400 operating system. The Company determined that
the deposit item processing system could not be readily made Year 2000 compliant
and, therefore, outsourced this function in the first quarter of 1998. Total
annual costs for this third party service are estimated at $130,000 and are
estimated to be reduced to $36,000 after the sale of the branch and related
deposits. The Company's word processing and spreadsheet software applications
and the AS/400 operating system were upgraded to Year 2000 compliant versions in
the first half of 1998. Total costs of such software upgrades approximated
$55,000. Certain hardware components were also upgraded in conjunction with
these software initiatives at an estimated of cost of $20,000. Management
estimates that additional costs to be incurred to execute the Workplan will not
exceed $20,000.

     Third party vendors support the Company's other mission critical IT and
non-IT systems. During the fourth quarter of 1998, the Year 2000 readiness of
the systems provided by third party suppliers and other material third parties
were tested and found to be compliant.

     Development of the Business Resumption Contingency Plan is well underway at
December 31, 1998, as required by the FFIEC. Although the Company expects that
each mission critical system will be Year 2000 Compliant, such a plan will be
designed to mitigate serious disruptions to the Company's business flow.

     The Company's Workplan also requires that the Year 2000 readiness of major
borrowers, wholesale time deposit brokers, investment bankers providing
borrowing facilities to the Company, and primary loan purchasers be evaluated.
Documentation has been received from these parties and it appears to meet the
FFIEC standards for determining Year 2000 preparedness and provides information
to assess any potential risk to the Company. The Company has reviewed the
documentation and it appears that the parties have adequately assessed Year 2000
risks and undertaken efforts to mitigate potential problems.


                                                                              19
<PAGE>
 
     The above expectations are subject to uncertainties. If for example, the
Company fails to identify and address all Year 2000 problems in the mission
critical operations, fails to develop a comprehensive contingency plan, or is
affected by the inability of critical third parties to continue operations due
to such problems, the results of the Company's operations or financial condition
could be materially impacted. Such impact might result from operational
difficulties of the Company's borrowers and their resultant inability to repay
their loans to the Company; an inability of the Company to access wholesale
funds providers or other borrowing facilities; and an inability of the Company
to normally process deposit, loan or loan investor transactions.

     Based on the current information and the efforts to date, however, it is
not expected that Year 2000 problems will have a material effect on the
Company's results of operations or financial condition. It also does not appear
that a Remediation Contingency Plan will be required. If it is subsequently
determined that such a plan is required, it will be developed pursuant to the
applicable FFIEC guidance.


Recent Accounting Pronouncement

SFAS No. 133

     In June 1998, the FASB issued No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all of the Company's
financial statements issued after December 31, 1999. This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities, and requires that all derivatives be recognized as either assets or
liabilities in the entity's balance sheet and be measured at fair value. Changes
in the fair value of the derivative instruments are to be recognized depending
on the intended use of the derivative and whether or not it has been designated
as a hedge. This statement is not expected to have a significant impact upon the
Company's financial position, results of operations or cash flows.


20
<PAGE>
 
Report of Independent Accountants

The Board of Directors and Stockholders of 
First International Bancorp, Inc.

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in stockholders' equity and
cash flows present fairly, in all material respects, the financial position of
First International Bancorp, Inc. and Subsidiary (the "Company") at December 31,
1998 and December 31, 1997 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.



/s/ PricewaterhouseCoopers LLP

January 27, 1999




                                                                              21
<PAGE>
 
First International Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets     

December 31, 1998 and 1997 
(dollars in thousands) 

<TABLE> 
<CAPTION> 
-----------------------------------------------------------------------------------------
                                                                      1998         1997   
-----------------------------------------------------------------------------------------
<S>                                                                 <C>          <C> 
Assets
Cash and due from banks .......................................    $ 13,405     $ 10,944
Federal funds sold ............................................      44,930        6,450
                                                                  ----------    ---------
    Cash and cash equivalents .................................      58,335       17,394
Investment securities (Note 2):
  Available for sale at fair value ............................      31,456       12,767
  Held to maturity at amortized cost
    (fair value $1,989 and $7,429) ..............................     1,986        7,435
  U.S. Agency stocks at cost ....................................     2,177        2,069
Loans, net (Note 3) ...........................................     108,958      130,625
Loans held for sale ...........................................       8,577        9,070
Receivable from loans sold (Note 1) ...........................      43,610       28,775
Accrued interest receivable ...................................       1,383        1,200
Premises and equipment, net (Note 4) ..........................       3,815        2,694
Prepaid expenses and other assets .............................      13,429        6,822
                                                                  ----------    ---------
    Total assets ...............................................   $273,726     $218,851
                                                                  ==========    =========

Liabilities and Stockholders' Equity
Deposits (Note 5) .............................................    $219,874     $172,321
U.S. Treasury demand note .....................................       1,047        1,085
Accrued interest payable ......................................         768          745
Other liabilities .............................................       2,966        2,552
                                                                  ----------    ---------
    Total liabilities .........................................     224,655      176,703

Commitments and Contingencies (Notes 3 and 4)

Stockholders' equity (Notes 1, 7, 8, 9 and 13):
  Common stock, $.10 par value, 12,000,000 shares authorized;
  7,952,637 and 7,866,735 shares issued and outstanding .......         795          787
  Preferred stock, $.10 par value, 2,000,000 shares authorized;
    no shares issued and outstanding ..........................          --           -- 
  Paid-in capital in excess of par value ......................      32,561       32,083
  Stockholder note receivable .................................        (941)        (877)
  Accumulated other comprehensive income ......................         428           12
  Retained earnings ...........................................      16,228       10,143
                                                                  ----------    ---------
    Total stockholders' equity ................................      49,071       42,148
                                                                  ----------    ---------
    Total liabilities and stockholders' equity ................   $ 273,726    $ 218,851 
                                                                  ==========   ==========
</TABLE> 



--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements

22
<PAGE>
 
First International Bancorp, Inc. and Subsidiary
Consolidated Statements of Income

Years Ended December 31, 1998, 1997 and 1996 
(dollars in thousands, except per share amounts)

<TABLE> 
<CAPTION> 

--------------------------------------------------------------------------------
                                                     1998      1997      1996 
--------------------------------------------------------------------------------
<S>                                               <C>       <C>       <C>  
Interest income:
  Loans, including net fees .....................  $15,522   $12,753   $12,027
  Investment securities .........................    1,154     1,156       646
  Federal funds sold ............................    1,412       716       632
                                                  --------- --------  --------
    Total interest income .......................   18,088    14,625    13,305
                                                  --------- --------  --------
Interest expense:
  Deposits ......................................    7,896     6,337     5,714
  Other .........................................       28        34        27
                                                  --------- --------  --------
    Total interest expense ......................    7,924     6,371     5,741
                                                  --------- --------  --------
    Net interest income .........................   10,164     8,254     7,564

Provision for possible loan losses ..............    3,071     2,239     3,487
                                                  --------- --------  --------
  Net interest income after
    provision for possible loan losses ..........    7,093     6,015     4,077

Non-interest income:
 Gain on sale of guaranteed commercial loans ....   12,239     9,513     4,904
 Gain on commercial loan-backed securitizations .    4,094        --        -- 
 Gain on sale of commercial loans ...............      626     2,297       940
 Loan servicing income and fees .................    4,353     2,618     1,475
 Service charges and other deposit fees .........      500       438       424
 Other income ...................................      267       244        -- 
 Gain on sale of securities .....................       33        --        -- 
 Gain on branch sale ............................       --        --     2,202
                                                  --------- --------  --------
   Total non-interest income ....................   22,112    15,110     9,945
                                                  --------- --------  --------
   Total operating income .......................   29,205    21,125    14,022
                                                  --------- --------  --------
Non-interest expense:
  Salaries and benefits .........................   11,235     9,537     5,089
  Occupancy .....................................    1,523       985       774
  Office expenses ...............................      834       556       421
  Marketing .....................................    1,453       847       691
  Furniture and equipment .......................    1,007       692       462
  Outside services ..............................      773       556       321
  Other .........................................      875       628       667
                                                  --------- --------  --------
    Total non-interest expense ..................   17,700    13,801     8,425
                                                  --------- --------  --------
    Income before income taxes ..................   11,505     7,324     5,597

Provision for income taxes ......................    4,472     2,895     2,353
                                                  --------- --------  --------
    Net income ..................................  $ 7,033   $ 4,429   $ 3,244
                                                  ========= ========  ========
Basic earnings per share  (Notes 1 and 7) .......  $   .89   $   .70   $   .56
                                                  ========= ========  ========
Diluted earnings per share (Notes 1 and 7) ......  $   .86   $   .67   $   .56
                                                  ========= ========  ========
</TABLE> 


--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements

                                                                              23
<PAGE>
 
First International Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE> 
<CAPTION> 

----------------------------------------------------------------------------------------------------------------------------------
                                                                                          Accumulated Other
                                                                                           Comprehensive
                                                                                               Income
                                                                                         -------------------
                                                                  Paid-in                    Unrealized 
                                                                 Capital in  Stockholder   Holding Gain (Loss) 
                                                      Common     Excess of      Note        on Investments      Retained         
                                                      Stock      Par Value   Receivable    Available-for-Sale   Earnings    Total
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>        <C>         <C>           <C>                <C>         <C> 
  Balance at January 1, 1996 ......................   $ 576      $  8,202    $(1,007)          $ (28)         $  3,859    $ 11,602
Repurchase and retirement of 7,875 shares of                                                                                
  common stock (Note 7) ...........................      (1)          (21)        --              --                --         (22) 
Issuance of 21,000 shares of common stock under                                                                             
  option plan (Note 8) ............................       2            41         --              --                --          43  
Dividends on common stock ($.11/share) ............      --            --         --              --              (658)       (658) 
Principal payment on stockholder note                                                                                        
  receivable (Note 7) .............................      --            --         53              --                --          53  
Comprehensive income:                                                                                                       
  Increase in unrealized holding loss, net of taxes      --            --         --             (46)               --         (46) 
  Net income ......................................      --            --         --              --             3,244       3,244  
                                                                                                                          --------
  Comprehensive income ............................      --            --         --              --                --       3,198  
                                                      -----      --------      ------          ------         --------    --------
    Balance at December 31, 1996 ..................     577         8,222       (954)            (74)            6,445      14,216  

Issuance of 145,350 shares of common stock                                                                                   
  under option plan (Note 8) ......................      14           249         --              --                --         263  
Issuance of 1,955,000 shares of common stock                                                                                
  at public offering (Note 1) .....................     196        23,612         --              --                --      23,808  
Dividend on common stock ($.12/share) .............      --            --         --              --              (731)       (731) 
Discount on stockholder note receivable (Note 7) ..      --            --         92              --                --          92  
Accretion on stockholder note receivable (Note 7) .      --            --        (15)             --                --         (15) 
Comprehensive income:                                                                                                       
  Decrease in unrealized holding loss, net of taxes      --            --         --              86                --          86  
  Net income ......................................      --            --         --              --             4,429       4,429
                                                                                                                          --------  
  Comprehensive income ............................      --            --         --              --                --       4,515  
                                                      -----      --------      ------          ------         --------    --------
    Balance at December 31, 1997 ..................     787        32,083       (877)             12            10,143      42,148  

Issuance of 85,902 shares of common stock                                                                                   
  under option plan (Note 8 ) .....................       8           478         --              --                --         486  
Dividends on common stock ($.12/share) ............      --            --         --              --              (948)       (948) 
Accretion on stockholder note receivable (Note 7) .      --            --        (64)             --                --         (64) 
Comprehensive income:                                                                                                       
  Increase in unrealized holding gain, net of taxes      --            --         --             416                --         416  
  Net income ......................................      --            --         --              --             7,033       7,033  
                                                                                                                          --------
  Comprehensive income ............................      --            --         --              --                --       7,449  
                                                      =====      ========    ========          ======         ========    ========
    Balance at December 31, 1998 ..................   $ 795      $ 32,561    $  (941)          $ 428          $ 16,228    $ 49,071
                                                      =====      ========    ========          ======         ========    ========

----------------------------------------------------------------------------------------------------------------------------------
</TABLE> 
The accompanying notes are an integral part of the consolidated financial
statements

24
<PAGE>
 
First International Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows

For the Years Ended December 31, 1998, 1997 and 1996 
(dollars in thousands)
<TABLE> 
<CAPTION>                                                   
-----------------------------------------------------------------------------------------------------------------------------
                                                                                       1998            1997            1996
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>              <C>              <C> 
Cash flows from operating activities:
  Net income .................................................................      $   7,033       $   4,429       $   3,244
                                                                                  ------------     -----------     ----------- 
Adjustments to reconcile net income to
  net cash provided by operating activities:
  Depreciation and amortization ..............................................            678             644             374
  Amortization of investment premiums, net ...................................             16               7              55
  Accretion of loan discount, net ............................................          1,930           1,161           1,042
  Provision for possible loan losses .........................................          3,071           2,239           3,487
  Provision for loss on other real estate owned ..............................             35              --             200
  Increase in other liabilities ..............................................            745           1,004             686
  Increase in deferred loan costs ............................................           (322)            (42)            (15)
  (Increase) decrease in accrued interest receivable .........................           (183)           (377)             54
  Increase in accrued interest payable .......................................             22             123             324
  Deferred income tax provision (benefit) ....................................           (173)            121            (249)
  Gain on sale of investment securities ......................................            (33)             --              -- 
  Gain on sale of loans ......................................................        (16,959)        (11,810)         (5,844)
  Loss on sale of other real estate owned ....................................              3              --              -- 
  (Increase) decrease in receivable from loans sold ..........................        (14,836)        (18,434)            932
  Increase in prepaid expenses and other assets ..............................         (6,786)         (2,113)         (1,395)
  Discount on stockholder note receivable ....................................             --              92              -- 
  Accretion on stockholder note receivable ...................................            (64)            (15)             -- 
  (Increase) decrease in loans held for sale .................................            493          (9,070)             --
Loans originated for sale ....................................................       (322,065)       (223,830)       (132,839)
Proceeds from sale of loans originated for sale ..............................        342,399         244,516         141,568
                                                                                  ------------     -----------     ----------- 
    Total adjustments ........................................................        (12,029)        (15,784)          8,380
                                                                                  ------------     -----------     ----------- 
    Net cash provided by (used in) operating activities ......................         (4,996)        (11,355)         11,624

Cash flows from investing activities:
  Net decrease (increase) in loans ...........................................         13,516         (33,406)        (14,119)
  Purchase of investment securities available for sale .......................        (34,486)        (13,587)        (10,514)
  Purchase of investment securities held to maturity .........................             --          (8,496)           (500)
  Purchase of equity securities ..............................................           (709)           (782)           (415)
  Proceeds from sales of investment securities available for sale ............          4,537              --              --
  Proceeds from maturities and principal repayments of
    investment securities available for sale .................................         11,876          11,998           1,500
  Proceeds from maturities of mortgage-backed securities available for sale ..             60             486           4,023
  Proceeds from maturities and principal repayments of
    investment securities held to maturity ...................................          4,525           4,000              -- 
  Proceeds from maturities of mortgage-backed securities held to maturity ....            925             123           1,526
  Proceeds from sale of equity securities ....................................            602              --              -- 
  Proceeds from sale of branch premises ......................................             --              --             275
  Proceeds from sale of other real estate owned ..............................             51              --             100
  Capital expenditures, net ..................................................         (1,799)         (1,823)           (894)
                                                                                  ------------     -----------     ----------- 
    Net cash used in investing activities ....................................           (902)        (41,487)        (19,018)
                                                                                  ------------     -----------     ----------- 
Cash flows from financing activities:
  Net increase in deposits ...................................................         47,553          28,005          15,954
  Net increase (decrease) in other borrowings ................................            (37)             24             841
  Proceeds from sale of common stock at public offering, net .................             --          23,808              -- 
  Proceeds from issuance of common stock under option plan ...................            271             263              43
  Repurchase of common stock .................................................             --              --             (22)
  Dividends paid .............................................................           (948)           (731)           (658)
  Principal payment on stockholder note receivable ...........................             --              --              53
                                                                                  ------------     -----------     ----------- 
    Net cash provided by financing activities ................................         46,839          51,369          16,211
                                                                                  ------------     -----------     ----------- 
    Net increase (decrease) in cash and equivalents ..........................         40,941          (1,473)          8,817
  Cash and cash equivalents at beginning of year .............................         17,394          18,867          10,050
                                                                                  ------------     -----------     ----------- 
  Cash and cash equivalents at end of year ...................................      $  58,335       $  17,394       $  18,867
                                                                                  ============     ============    =========== 
Supplemental disclosures of cash flow information:
Cash paid during the year for:
  Interest ...................................................................      $   7,902       $   6,248       $   5,418
  Income taxes ...............................................................      $   3,182       $   2,791       $   2,664
Non-cash items:
  Real estate acquired in settlement of loans ................................      $     186              --              -- 
------------------------------------------------------------------------------------------------------------------------------
</TABLE> 
The accompanying notes are an integral part of the consolidated financial
statements

                                                                              25
<PAGE>
 
First International Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements




--------------------------------------------------------------------------------
1.   Summary of Significant Accounting Policies:

Basis of Presentation

     The consolidated financial statements include the accounts of First
International Bancorp, Inc. (the "Company") and the consolidated accounts of its
wholly-owned subsidiary, First International Bank, N. A., (the "Bank"), formerly
known as First National Bank of New England. In 1998, the Bank established three
special purpose subsidiaries to facilitate loan securitizations and sales to a
commercial paper conduit. Intercompany accounts and transactions have been
eliminated in consolidation.

     The Bank operates a full service branch at its headquarters in Hartford,
Connecticut and representative offices, which are responsible for regional loan
origination efforts, in Boston and Springfield, Massachusetts; Providence, Rhode
Island; Rochester, New York; Morristown, New Jersey; Philadelphia and
Pittsburgh, Pennsylvania; Washington D.C.; Cleveland, Ohio; and Detroit,
Michigan.

     The Bank sold a suburban branch facility and certain deposits in 1996.

     In December 1998, the Company signed an agreement to sell its main branch
premises, which is its only branch, and all of its checking, savings and money
market accounts. This transaction is expected to close in March 1999. (See Note
16.) The Company will retain its retail and brokered certificate of deposit
accounts. Expected other sources of funding will include warehouse credit lines,
a commercial paper conduit and loan securitizations and sales. The Company's
primary revenues are derived from net interest income and the origination and
sale, on a servicing retained basis, of commercial loans. In 1998, the Company
also began to securitize and sell commercial loans and portions thereof.

     The Company completed an underwritten public stock offering of 1,700,000
shares in September 1997 and issued an additional 255,000 shares in October when
the underwriters exercised their option to purchase such shares. The offering
resulted in net proceeds to the Company of $23.8 million.

     The Bank is a national leader in the use of loan guarantee programs offered
by the U.S. Small Business Administration ("SBA"), the U.S. Department of
Agriculture ("USDA") and the Export-Import Bank of the United States ("Ex-Im
Bank"). Continued availability of such loan guarantees are dependent upon timely
and adequate federal budget appropriations. Each of these federal programs is
funded through September 1999, but there can be no assurance of sufficient
budgetary allocations to allow a continuation of such programs in substantially
their current form.

     In preparing the consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and the results of operations
for the period. Material estimates in these consolidated financial statements
relate to the allowance and provision for possible loan losses, the valuation of
other real estate owned and the estimated lives of loans sold or securitized
where servicing has been retained. Market conditions are evaluated and
independent appraisals of significant properties are obtained by management as
needed in the process of setting the estimates. Notwithstanding this diligence,
such estimates are particularly sensitive to the economic environment and can be
significantly affected by changing economic conditions affecting the value of
the collateral, interest rates, borrowers' financial position and other factors.
Accordingly, actual results could differ significantly from the estimates.

Investment Securities

     Securities that may be sold as part of the Company's asset/liability or
liquidity management, or in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or for other similar factors, are
classified as available-for-sale and carried at fair market value. Unrealized
holding gains and losses on such securities are reported net of related taxes as
a separate component of stockholders' equity. Debt securities that the Company
has the ability and positive intent to hold to maturity are classified as
held-to-maturity and carried at amortized cost. Realized gains and losses on the
sales of all investment securities are reported in earnings and computed using
the specific identification cost basis. Declines in the market value of
investment securities that are deemed to be other than temporary are charged to
income.

Loans

     Loans are stated at their principal amount outstanding. Interest income on
loans is recognized on the simple interest method based upon the principal
amount outstanding.

     Receivable from loans sold and gain on commercial loan sales are
attributable to the sale of commercial loans which have been at least partially
guaranteed by the SBA, the 


26
<PAGE>
 
USDA or Ex-Im Bank as well as the sale of unguaranteed commercial loans.
Transactions are generally settled within 30 days of the sale. The gain on the
sale of a portion of a loan is based on the relative fair market values of the
loan sold and the loan retained. A portion of the gain on commercial loan sales
is due to a servicing asset which represents the present value of the
differential between the servicing fee received by the Company and adequate
compensation, defined as the fee a sub-servicer would require to assume the role
of servicer, after considering the estimated effects of prepayments. The
discount rate utilized in calculating the servicing asset approximates the
market rate an investor would demand on a risk-adjusted basis. The servicing
asset is amortized as a charge to non-interest income over the estimated lives
of the underlying loans on an effective interest method. The servicing asset is
analyzed periodically for impairment based on the term of the serviced loan, the
perceived alternatives for refinancing, the current interest rate environment
and historical default and prepayment patterns, and is carried at the lower of
amortized cost or net realizable value.

     The discount on retained loans, which relates to the retained portion of
the unguaranteed portion of SBA and USDA loans, is reflected as a reduction of
loans in the consolidated balance sheet. The discount is recorded in interest
income over the estimated life of the retained loan on an effective interest
method.

Loans Held for Sale

     The Company classifies loans for which it does not have a positive intent
to hold to maturity as loans held for sale and carries them at the lower of cost
or market based on the aggregate value of the portfolio.

Loan Origination Fees (Costs)

     Fees for loan originations and commitments, and related origination costs,
are deferred and recognized as a yield adjustment utilizing the interest method
over the contractual life of the related loan, adjusted for prepayment and
sales.

Provision/Allowance For Possible Loan Losses

     The Company evaluates the collectibility of impaired loans, as defined
below, based on the present value of expected future cash flows discounted at
the historical effective interest rate, except that all collateral-dependent
loans are measured for collectibility of contractual principal and interest
based on the estimated fair value of the collateral. Smaller-balance homogeneous
loans consisting of residential mortgages and consumer loans are evaluated for
collectibility by the Company based on historical loss experience rather than on
an individual loan-by-loan basis. The Company evaluates all impaired loans,
other than small balance loans, on an individual loan-by-loan basis; it does not
aggregate impaired loans into major risk classifications. The Company considers
a loan to be impaired when, based on current information and events, it is
probable that it will be unable to collect all amounts of contractual interest
and principal as scheduled in the loan agreement. An insignificant delay of
under 60 days or a 10% shortfall in the amount of the payment is not an event
that, when considered in isolation, would automatically cause the Company to
consider a loan to be impaired. The Company places a loan on nonaccrual status
when it is 90 days or more past due or when, in management's assessment, the
full collectibility of principal and interest is uncertain. Except for certain
restructured loans, impaired loans are loans that are on nonaccrual status.

     When an impaired loan or a portion of an impaired loan is deemed
uncollectible, the portion deemed uncollectible is charged against the allowance
for loan losses and subsequent recoveries, if any, are credited to the
allowance.

     The Company recognizes interest income on impaired loans on a cash basis
and reverses any accrued interest income at the date of determination.

     Management determines the adequacy of its allowance for possible loan
losses primarily through periodic reviews of the loan portfolio, loan
delinquencies, collateral on loans and past payment history adjusted for such
factors as known changes in the character of the loan portfolio and current
economic conditions. Consideration is also given to anticipated economic
conditions, as well as other relevant factors in establishing the allowance. The
allowance is increased by provisions for loan losses charged to income and
decreased by charge offs, net of recoveries.

Securitizations

     The Company securitizes and sells certain unguaranteed commercial loans and
the unguaranteed portion of certain guaranteed commercial loans. In connection
with these transactions, the Company records a gain which is based on the fair
market value of the assets securitized and is required to retain one or more of
the following retained interests in the securitized assets: interest-only
strips, subordinated certificates, servicing rights and cash reserve accounts.
Subsequent to the securitization, the retained interests are carried at fair
value. To obtain fair values, quoted market prices are used if available. If
fair value quotes are unavailable, the Company estimates fair value based on the
present value of future cash flows expected based on key assumptions (i.e.,
credit loss, prepayment speed, discount rate). Subordinated certificates and
interest-only strips are classified as investments available-for-sale.

Other Real Estate Owned

     Other real estate owned ("OREO"), representing property acquired by
foreclosure or acceptance of a deed in lieu of foreclosure, is carried at the
lower of the unpaid loan balance at the date of acquisition or fair value less
estimated disposal costs. Improvements are capitalized to the extent realizable.
Holding and selling costs are expensed as incurred.

Premises and Equipment

     Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized over the period of the related lease. Costs of maintenance and repairs
are expensed, while major improvements are capitalized.


                                                                              27
<PAGE>
 
Income Taxes

     Income taxes are provided based on the asset/liability method of
accounting. Deferred income taxes and tax benefits are recognized for the future
income tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A valuation
allowance is established when it is more likely than not that some portion of
the deferred tax asset will not be realized.

Earnings Per Share

     Earnings per share for all periods presented have been calculated in
accordance with SFAS No. 128, "Earnings Per Share" which requires the
presentation of basic and diluted earnings per share. Basic earnings per share
is determined based on the weighted average shares outstanding, while diluted
earnings per share reflects the potential dilution that could occur if options
to issue common stock were exercised. (See Note 7.)

Stock Option Plans

     The Company has chosen not to adopt fair value accounting for stock based
compensation and continues to employ intrinsic value accounting for its option
plans as detailed in Note 8. Certain disclosures as if fair value accounting had
been adopted, including pro forma net income and earnings per share, have been
made in these financial statements.

Common Stock Split

     On June 26, 1997, the Company's stockholders approved a 3.5-for-1 stock
split to stockholders of record on July 14, 1997, effective August 7, 1997.
Stockholders' equity has been restated to give retroactive recognition to the
stock split in prior periods by reclassifying from paid-in capital in excess of
par value to common stock an amount equal to the par value of the additional
shares arising from the split. In addition, all references to the number of
shares, per share amounts and stock option data have been restated.

Cash and Cash Equivalents

     For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one day periods or terms of less than 30 days.

     The Company is required to maintain certain levels of cash reserves at the
Federal Reserve Bank of Boston based on its deposit accounts. Such required
reserves totaled $1,082,000 at December 31, 1998.

     Included in cash are certain restricted deposit accounts, related to the
Company's loan securitization transactions. Such deposits totaled $5,973,000 at
December 31, 1998.


Comprehensive Income

     In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting comprehensive income, defined
as the change in equity of a business enterprise during a period from nonowner
sources. The Company's comprehensive income is comprised of net income and the
unrealized holding gain (loss) on investments classified as available-for-sale.

Segment Information

     In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 supersedes SFAS 14 "Financial
Reporting for Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS No. 131
did not affect results of operations or financial position. (See Note 12.)

Reclassifications

     Certain amounts from 1997 and 1996 have been reclassified to conform to
the 1998 presentation.

Recent Accounting Pronouncement

SFAS No. 133    

     In June 1998, the FASB issued No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all of the Company's
financial statements issued after December 31, 1999. This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities, and requires that all derivatives be recognized as either assets or
liabilities in the entity's balance sheet and be measured at fair value. Changes
in the fair value of the derivative instruments are to be recognized depending
on the intended use of the derivative and whether or not it has been designated
as a hedge. This statement is not expected to have a significant impact upon the
Company's financial position, results of operations or cash flows.

28
<PAGE>
 
--------------------------------------------------------------------------------
2.  Investment Securities:

Securities classified as available-for-sale (carried at fair value) and as
held to maturity (carried at amortized cost) as of December 31, 1998 and 1997
are as follows:

<TABLE> 
<CAPTION> 
--------------------------------------------------------------------------------------------------------------------
                                                                         Gross             Gross          Estimated
                                                     Amortized         Unrealized        Unrealized         Fair 
                                                       Cost              Gains             Losses           Value
--------------------------------------------------------------------------------------------------------------------
                                                                           (dollars in thousands)
<S>                                                  <C>               <C>               <C>              <C> 
December 31, 1998

Available for Sale
U.S. Treasury obligations .....................      $ 11,579          $     15          $     (1)         $11,593
U.S. Government mortgage-backed securities ....            88                 3                --               91
Mutual funds ..................................            19                --                --               19
Commercial loan-backed securities .............        14,930               696                --           15,626
Interest-only strips ..........................         4,127                --                --            4,127
                                                     --------          --------          ---------         -------
                                                     $ 30,743          $    714          $     (1)         $31,456
                                                     ========          ========          =========         =======
Held to Maturity
U.S. Government mortgage-backed securities ....      $  1,361          $      4          $     (1)         $ 1,364
Debt securities of foreign governments ........           625                --                --              625
                                                     --------          --------          ---------         -------
                                                     $  1,986          $      4          $     (1)         $ 1,989
                                                     ========          ========          =========         =======
December 31, 1997

Available for Sale
U.S. Treasury obligations .....................      $ 12,013          $     15          $     (3)         $12,025
U.S. Government mortgage-backed securities ....           648                 9                --              657
Mutual funds ..................................            85                --                --               85
                                                     --------          --------          ---------         -------
                                                     $ 12,746          $     24          $     (3)         $12,767
                                                     ========          ========          =========         =======
Held to Maturity
U.S. Government mortgage-backed securities ....      $  2,285          $      4          $    (10)         $ 2,279
Debt securities of foreign governments ........         1,150                --                --            1,150
Variable rate preferred stock .................         4,000                --                --            4,000
                                                     --------          --------          ---------         -------
                                                     $  7,435          $      4          $    (10)         $ 7,429
                                                     ========          ========          =========         =======
</TABLE> 

Stock securities are carried at cost and are comprised of the following:

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------
                                                                                                 December 31, 
------------------------------------------------------------------------------------------------------------------
                                                                                             1998            1997
                                                                                           -----------------------
                                                                                            (dollars in thousands) 
<S>                                                                                        <C>              <C> 
Federal Reserve Bank ...................................................................       $  933       $  224
Federal Home Loan Bank of Boston (FHLBB) ...............................................          645        1,246
Private Export Funding Corporation .....................................................          599          599
                                                                                               ------       ------
                                                                                               $2,177       $2,069
                                                                                               ======       ======
</TABLE> 

     The Company is required to hold common stock investments in the Federal
Reserve Bank based on First International Bank's capital and in the FHLBB based
on borrowings from the FHLBB (Note 6).

        At December 31, 1998 and December 31, 1997, investments with a carrying
value of $13,303,000 and $14,422,000, respectively, were pledged to
collateralize public and government deposits, as required by law, and certain of
the Bank's lines of credit. The Bank sold two debt securities with a par value
of $4,500,000 in 1998, recording gains of $32,600. There were no sales of debt
securities for the two year period ended December 31, 1997.

                                                                              29
<PAGE>
 
The contractual maturities of debt securities at December 31, 1998 and 1997 are
as follows:

--------------------------------------------------------------------------------
                                                                      Weighted
                                           Amortized      Fair         Average
                                             Cost         Value         Yield 
--------------------------------------------------------------------------------
                                                  (dollars in thousands)
December 31, 1998 

Available for sale
Due in one year or less ...............    $11,599       $11,613        6.18%
Due after one year
        through five years ............      3,669         3,669        7.62%
Due after 10 years ....................     15,387        16,083        5.76%
Mortgage-backed securities ............         88            91        8.11%
                                           -------       -------        -----
                                           $30,743       $31,456        6.15%
                                           =======       =======        =====
Held to maturity
Due after one year
        through five years ............    $   100       $   100        7.75%
Due after five years
        through ten years .............        525           525        7.46%
Mortgage-backed securities ............      1,361         1,364        6.48%
                                           -------       -------        -----
                                           $ 1,986       $ 1,989        6.80%
                                           =======       =======        =====


--------------------------------------------------------------------------------
                                                                      Weighted
                                           Amortized      Fair         Average
                                             Cost         Value         Yield 
--------------------------------------------------------------------------------
                                                  (dollars in thousands)
December 31, 1997 

Available for sale
Due in one year or less ...............    $ 5,588       $ 5,588        5.65%
Due after one year
        through five years ............      6,510         6,522        5.82%
Mortgage-backed securities ............        648           657        6.22%
                                           -------       -------        -----
                                           $12,746       $12,767        5.77%
                                           =======       =======        =====
Held to maturity
Due after one year
        through five years ............    $ 4,545       $ 4,545        4.43%
Due after five years
        through ten years .............      1,100         1,100        7.88%
Mortgage-backed securities ............      1,790         1,784        6.09%
                                           -------       -------        -----
                                           $ 7,435       $ 7,429        5.34%
                                           =======       =======        =====

--------------------------------------------------------------------------------
3.   Loans:

     The outstanding balances of loans originated and held by the Company are as
follows:

--------------------------------------------------------------------------------
                                                           December 31,
                                                       1998           1997
--------------------------------------------------------------------------------
                                                     (dollars in thousands)
Commercial and industrial ......................   $  78,750      $  71,836
Commercial real estate .........................      31,650         55,192
Residential real estate ........................       3,013          6,515
Consumer loans and lines of credit .............         533          1,855
                                                   ---------      ---------
      Total loans ..............................     113,946        135,398
                                                   =========      =========

Less: Allowance for possible loan losses .......       4,000          3,100
      Discount on retained loans ...............       1,419          1,782
      Net deferred loan origination costs ......        (431)          (109)
                                                   ---------      ---------
           Loans, net ..........................   $ 108,958      $ 130,625
                                                   =========      =========

At December 31, 1998, the Company had fixed and variable rate loans with
maturities greater than one year totaling $11,464,000 and $58,814,000
respectively.

     The scheduled maturities of the Company's loan portfolio as of December 31,
1998 are as follows:

<TABLE> 
<CAPTION> 
-------------------------------------------------------------------------------------
                                                  After One
                                   Within One   Year Through   After Five
                                      Year       Five Years      Years       Total
-------------------------------------------------------------------------------------
                                               (dollars in thousands)
<S>                                <C>          <C>           <C>           <C> 
Commercial and industrial .......   $40,264       $11,095      $ 27,391     $ 78,750
Commercial real estate ..........     2,843           988        27,819       31,650
Residential loans ...............       436           493         2,084        3,013
Consumer loans and                                                      
        lines of credit .........       125           270           138          533
                                    -------       -------      --------     --------
                                    $43,668       $12,846      $ 57,432     $113,946
                                    =======       =======      ========     ========
</TABLE> 

     The outstanding balances of loans originated by the Company and sold to
others on a servicing retained basis are as follows:


--------------------------------------------------------------------------------
                                                            December 31,
                                                       1998             1997
--------------------------------------------------------------------------------
                                                      (dollars in thousands) 
Guaranteed Loans: 
SBA ..........................................      $245,073         $195,454
USDA .........................................        75,526           45,806
Ex-Im Bank ...................................       117,726           82,794
FHLMC ........................................           455           17,305
                                                    --------         --------
                                                    $438,780         $341,359
                                                    --------         -------- 
Unguaranteed Portions
and Unguaranteed Loans:
SBA ..........................................      $ 48,323         $ 51,673
USDA .........................................         6,173            5,326
Securitized commercial .......................       104,133               -- 
Other commercial .............................        56,957           27,235
Home equity lines ............................         2,166            3,484
                                                    --------         -------- 
                                                    $217,752         $ 87,718
                                                    --------         -------- 
Total loans serviced for others ..............      $656,532         $429,077
                                                    ========         ========

30
<PAGE>
 
     During 1998 the Bank completed two commercial loan securitization
transactions and a sale to a commercial paper conduit. These transactions
resulted in the issuance of $113.3 million of senior and subordinated securities
and included $117.1 million of loans. Key economic assumptions used in recording
these transactions and in measuring the Bank's retained interests were as
follows:

<TABLE> 
<CAPTION> 
--------------------------------------------------------------------------------------
                                                                            Commercial
                                                  Securitizations           Paper Sale
                                            --------------------------      ----------
                                            Unguaranteed    
                                              Portions         Term         Revolving
                                            of SBA Loans    Commercial      Commercial
                                            ------------    ----------      ----------
<S>                                         <C>             <C>             <C> 
Prepayment speed .........................       8.0%           8.0%            7.5%
Weighted-average life
        (in years) .......................      13.75          10.65            3.0
Aggregate expected
        credit losses ....................       5.74%         4.22%           1.25%
Discount rate for
        servicing cash flows .............       9.48%         8.43%           8.47%
</TABLE> 

     In connection with the December 1998 sale of revolving commercial loans, a
subsidiary of the Bank entered into an interest rate swap with a notional amount
of $19,000,000 to mitigate the interest rate risk inherent in the transaction.
The swap provides for net settlement on a monthly basis, which is recorded as an
adjustment to interest income. At December 31, 1998 there had been no
settlements related to the swap transaction.

     Changes in the Allowance for possible loan losses were as follows:

--------------------------------------------------------------------------------
                                                          December 31, 
                                                  1998       1997       1996 
--------------------------------------------------------------------------------
                                                     (dollars in thousands) 

Reserve at beginning of year .................. $ 3,100    $ 3,000    $ 2,000
Provision charged to income ...................   3,071      2,239      3,487
Recoveries on loans previously charged off ....     153        106         40
Loans charged off .............................  (2,324)    (2,245)    (2,527)
                                                -------    -------    -------
                Balance at end of year ........ $ 4,000    $ 3,100    $ 3,000
                                                =======    =======    =======

     Certain information with regard to impaired loans is detailed below:

--------------------------------------------------------------------------------
                                                           December 31,
                                                       1998            1997
--------------------------------------------------------------------------------
                                                      (dollars in thousands) 

Impaired loans ................................       $2,959          $2,215
Allocated allowance ...........................       $  731          $  644
Average recorded investment ...................       $2,587          $2,194
Interest income recognized ....................       $  152          $  131

     The carrying value of the impaired loans has been calculated based on the
estimated fair value of the underlying collateral.

     Nonaccrual loans totaled $3,104,000 and $2,364,000 at December 31, 1998 and
1997, respectively. The gross interest income that would have been recorded if
the non-accrual loans had been current in accordance with their original terms
would have been $176,000 and $231,000 for the years ended December 31, 1998 and
1997, respectively. The actual amount of interest income recognized on those
loans was $160,000 and $134,000 for the years ended December 31, 1998 and 1997,
respectively. There were no loans over 90 days and still accruing interest at
each period end presented.

     Loans to principal stockholders, directors, companies of which directors
are principal owners, individuals directly related to or affiliated with
directors, and executive officers aggregated $662,000 and $602,000 at December
31, 1998 and 1997, respectively. During 1998, repayments and sales amounted to
$639,000 while advances under new or existing loans totaled $699,000.

        In the normal course of business, the Bank enters into agreements to
extend credit which are not reflected in the accompanying consolidated financial
statements.

        Outstanding credit commitments are detailed below:

--------------------------------------------------------------------------------
                                                           December 31,
                                                       1998            1997
--------------------------------------------------------------------------------
                                                      (dollars in thousands)

Commercial lines of credit .....................     $61,652         $47,987
Consumer lines of credit .......................         373             530
Performance letters of credit ..................       8,284          18,975
Financial letters of credit ....................      14,593           1,415
Commercial letters of credit ...................       8,433           1,542
                                                     -------         -------
        Total credit commitments ...............     $93,335         $70,449
                                                     =======         =======

     At December 31, 1998 and 1997, letters of credit totaling $18,801,000 and
$17,548,000, respectively, carry the guarantee of Ex-Im Bank.

     Commitments to extend such credit are agreements to lend to a client as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. Since some of the agreements may expire
without being drawn upon or may be terminated by the Bank, these amounts do not
necessarily represent a future cash requirement of the Bank. Prior to entering
into any agreement to extend credit, the Bank evaluates the client's
creditworthiness in accordance with loan underwriting standards as approved by
the Board of Directors. The amount of collateral obtained, if deemed necessary,
is based on management's credit evaluation of the client. Collateral for
commercial loan commitments varies but may include accounts receivable,
inventory, property, plant and equipment and commercial real estate.

     Although the Bank's maximum exposure to credit loss is the total contract
amount of the commitments and letters of credit noted above, management does not
anticipate any material losses as a result of these agreements and does not
consider them to represent an undue level of credit, interest or liquidity risk
for the Bank.

                                                                              31
<PAGE>
 
     The Bank specializes in lending to small and medium size commercial
enterprises and professional firms throughout the Northeast, the Mid-atlantic
and Midwest regions of the U.S. Approximately 30% of the loans outstanding have
been made to borrowers located in Connecticut. Such loans and loan commitments
are generally collateralized by real estate or other assets.

     The Bank also lends to companies in various international emerging markets.
Such U.S. dollar denominated loans are either (i) fully guaranteed by Ex-Im
Bank and are sold at origination to various investors on a non-recourse,
servicing retained basis or, (ii) insured by a privately issued credit insurance
policy which provides coverage of up to 95% of the commercial risk of the
transaction.

     Gains on the sale of these loans and the related servicing income in
aggregate and by significant country is detailed below. 

--------------------------------------------------------------------------------
                                         For the Years Ended December 31, 
                                     1998         1997        1998       1997 
                                   Gains from loan sales     Servicing income
--------------------------------------------------------------------------------
                                              (dollars in thousands)

All international ..............    $2,274       $2,229       $430       $264
Brazil .........................    $  873       $1,326       $284       $ 95
Dominican Republic .............    $  320       $   15       $  9         --
Philippines ....................    $  275           --       $  7         --

     No other countries account for a significant portion of gain on loan sales
or servicing income.

     Loans held by the Bank to borrowers located outside the U.S. totaled
$14,272,000 at December 31, 1998.

     The Company reported total revenues from the gain on loan sales, interest
income and loan servicing income from loans made to companies located outside
the U.S. in the aggregate amounts of $4,242,000, $3,199,000 and $471,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. The Company does
not have any assets located outside of the U.S. 

--------------------------------------------------------------------------------
4. Premises, Equipment and Leases:

--------------------------------------------------------------------------------
                                                             December 31,
                                                          1998          1997
--------------------------------------------------------------------------------
                                                        (dollars in thousands) 

Buildings and leasehold improvements ...............     $2,252        $1,590
Furniture, fixtures, and equipment .................      4,544         3,408
                                                         ------        ------
                                                          6,796         4,998
Less: Accumulated depreciation
                and amortization ...................      2,981         2,304
                                                         ------        ------
        Premises and equipment, net ................     $3,815        $2,694
                                                         ======        ======

     The Company leases its corporate offices in Hartford, Connecticut and other
facilities for its U.S. representative offices. Each of the leases provide for
minimum and contingent rentals and include renewal options. Total rental expense
for the years ended December 31, 1998, 1997 and 1996 was $1,279,000, $833,000
and $636,000 respectively. Minimum future obligations for premises under
noncancelable leases are as follows:

--------------------------------------------------------------------------------
                Year End                   Operating Leases 
--------------------------------------------------------------------------------
                                        (dollars in thousands) 

                  1999                          $1,321 
                  2000                           1,554 
                  2001                           1,469
                  2002                           1,433 
                  2003                              96 
                  Thereafter                        10
                                                ------
                                                $5,883 
                                                ======
--------------------------------------------------------------------------------
5.      Deposits:

<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------------------------------
                                                            1998                   1997                  1996
                                                     --------------------   -------------------   -------------------
                                                                 Weighted              Weighted              Weighted 
                                                                  Average               Average               Average
                                                       Amount      Rate      Amount      Rate       Amount      Rate 
---------------------------------------------------------------------------------------------------------------------
                                                                            (dollars in thousands) 
<S>                                                  <C>         <C>        <C>        <C>         <C>       <C> 
Transaction Accounts:
        Non-interest bearing checking ............   $ 44,599         -%    $ 38,236         -%    $ 27,888         -%
        Interest bearing checking ................     11,329      2.51        7,867      2.51        8,248      2.52
                                                     --------      ----     --------      ----     --------      ----
                Total checking accounts ..........     55,928      0.51       46,103      0.43       36,136      0.58

Savings accounts .................................    117,816      4.86       92,003      5.25       69,278      5.09
Time deposits under $100,000 .....................     19,034      5.56       26,542      5.88       37,085      5.57
Time deposits $100,000 or more ...................     27,096      5.49        7,673      5.26        1,817      5.06
                                                     --------      ----     --------      ----     --------      ----
                Total deposits ...................   $219,874      3.89%    $172,321      4.06%    $144,316      4.08%
                                                     ========      ====     ========      ====     ========      ====
</TABLE> 

32
<PAGE>
 
--------------------------------------------------------------------------------
                                                        December 31,
Time Deposit Maturities                       1998         1997         1996
--------------------------------------------------------------------------------
                                                  (dollars in thousands) 
Time deposits maturing within:
1 year ..................................   $43,872      $31,593      $35,712
2 years .................................     1,390        1,984        2,350
3 years .................................       294          245          290
4 years .................................       115          219          259
5 years .................................       459          174          206
More than 5 years .......................        --           --           85
                                            -------      -------      -------
Total time deposits .....................   $46,130      $34,215      $38,902
                                            =======      =======      =======

--------------------------------------------------------------------------------
Maturity Period of Time                                      December 31,
Deposits Over $100,000                                           1998
--------------------------------------------------------------------------------
                                                        (dollars in thousands) 

Three months or less ..............................            $23,338 
Over three through six months .....................                603
Over six through twelve months ....................              2,694 
Over one year .....................................                461
                                                               -------
Total time deposits over $100,000 .................            $27,096  
                                                               =======
--------------------------------------------------------------------------------
6.   Funding Sources:

Warehouse Credit Lines:

     The Bank has a $75 million warehouse line of credit with Prudential
Securities Credit Corporation ("Prudential") to fund commercial (non-government
guaranteed) loan originations. The Bank also has a commitment from Prudential
for a $50 million warehouse line of credit to fund the unguaranteed portion of
SBA loans. Upon approval of the SBA and execution of closing documents this line
will be available to the Company. Advances under each of the facilities will be
at an interest rate of LIBOR plus 120 basis points and the advance rates are
between 80% and 85% of the principal balance outstanding on the loans pledged to
collateralize the facility. The term of each facility is one year. There were no
outstanding advances at December 31, 1998 under the warehouse line of credit.

Commercial Paper Conduit:

     The Bank has a $65 million commercial paper conduit facility with First
Union Capital Markets to fund the purchase of revolving lines of credit and
certain other commercial loans. At December 31, 1998, $21.4 million was sold
under this facility. The facility is a three year committed facility that is
renewable annually.

Brokered Certificates of Deposit:

     The Bank has the ability to solicit wholesale certificates of deposit
through established brokers. At December 31, 1998, the Bank had written
agreements with five national brokers for the issuance of such deposits. As a
well-capitalized institution (see Note 7) the Bank may utilize brokered
certificates of deposit to the extent deemed appropriate by the Company. At
December 31, 1998, the Bank had $20 million of such deposits outstanding which
mature on March 24, 1999.

Federal Home Loan Bank of Boston Advances:

     The Bank currently has the ability to borrow approximately $3.5 million
from the FHLBB under a line of credit. Any outstanding advances from the FHLBB
are collateralized mortgage loans on residential properties and certain U.S.
Treasury and Agency-issued securities.

Other Borrowings:

     The Bank also maintains lines of credit at various correspondent banks
which are primarily used for the issuance or confirmation of letters of credit.
At December 31, 1998, these lines aggregated $31 million of which $15 million is
required to be collateralized upon usage. Letters of credit totaling $17 million
were outstanding for the Bank's clients at December 31, 1998 under such lines.

--------------------------------------------------------------------------------
7.   Stockholders' Equity:

Earnings Per Share Calculation:

     The table detailed below reconciles the number of shares used in the basic
earnings per share ("EPS") calculation to the number of shares used in the
diluted EPS calculation in accordance with SFAS 128 (see Note 1). There were no
changes to net income available to common stockholders between the basic and
diluted EPS calculations. 

--------------------------------------------------------------------------------
                                                     Years Ended December 31, 
                                                     1998      1997      1996 
--------------------------------------------------------------------------------
                                                      (shares in thousands) 
Common shares outstanding for basic EPS ........    7,909     6,330     5,763
Dilutive securities from stock option plans ....      291       237        72
                                                    -----     -----     -----
Common shares outstanding
        for diluted EPS ........................    8,200     6,567     5,835
                                                    =====     =====     =====

                                                                              33
<PAGE>
 
     Options to purchase 227,000 shares of common stock at a weighted average
price of $15.00 per share were outstanding at the end of 1998, but were not
included in the computation of diluted EPS because the exercise price of the
options exceeded the average market price of the common shares.

Stockholder Note Receivable:

     In June 1994 the Board of Directors approved the issuance of 614,600 shares
(as adjusted for the common stock split) of the Company's common stock to the
Company's Chief Executive Officer at a price of $1.69 per share. The terms of
the transaction provided for a cash down payment of $17,560 and a promissory
note in the amount of $1,020,000 for the balance. The note is collateralized by
the stock issued. Principal is due at maturity on December 31, 2000. Interest
was to accrue at the rate of 7% and was due at maturity; however, upon
completion of the public offering in September 1997, the accrued interest was
forgiven and it was converted to a non-interest bearing note (See Note 1). The
note was then discounted to yield a market rate of interest. The President is
legally entitled to any cash dividends declared, although the promissory note
provided that 75% of such cash dividends must be retained by the Company and
applied to the note as a repayment of principal. This repayment provision was
eliminated effective January 1, 1997. 

     Although the stock is legally outstanding, since a note was accepted in
exchange for a portion of the issue price, the note receivable is presented as a
separate component of stockholders' equity. These shares are legally outstanding
and are included in the earnings per share calculations as of the date of
issuance. On January 27, 1999, the Company agreed to forgive the remaining
principal balance of the stockholder note receivable and agreed to pay a bonus
to the Company's Chief Executive Officer equal to the amount of his resulting
tax liability. These transactions will be reflected in the results for the
quarter ended March 31, 1999 through an increase in salaries expense.

Repurchase and Retirement of Common Stock:

     The Board of Directors has authorized the Company's repurchase of up to
400,000 shares of common stock, subject to market conditions at any time through
March 31, 1999. No shares have been repurchased since 1996. In 1996 the Company
repurchased and retired 8,000 shares of the Company's common stock for an
average purchase price of $2.78 per share.

Preferred Stock:

     The Company has established a class of 2,000,000 shares of preferred stock.
The Board of Directors was granted the power to establish and designate the
different series and voting powers, designations, preferences and other rights,
qualifications, limitations or restrictions to be placed upon any shares of
preferred stock to be issued by the Company.

Dividends:

     Dividends payable by First International Bancorp, Inc. are generally
unrestricted (see below), although the ability of the Company to pay dividends
may, from time to time, be dependent upon the dividends paid to it by the Bank.
A national bank must obtain the approval of the Office of the Comptroller of the
Currency (OCC) if the total of all dividends declared in any calendar year
exceeds the bank's net profits, as defined, for that year combined with its
retained net profits for the preceding two calendar years.

Regulatory Capital Requirements:

     Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets (as defined in regulations). Management believes
that, as of December 31, 1998 and 1997, the Bank meets all capital adequacy
requirements to which it is subject and that, under the current regulations, the
Bank will continue to meet its minimum capital requirements in the foreseeable
future.

     As of December 31, 1998 and 1997, the most recent notifications from the
Office of the Comptroller of the Currency categorized the Bank as
well-capitalized under the regulatory framework for prompt corrective action. To
be categorized as well-capitalized, the Bank must maintain minimum total and
Tier I risk-based and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since the notification that management
believes have changed the Bank's category.

34
<PAGE>
 
<TABLE> 
<CAPTION> 
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Amounts 
                                                                                        Amounts           To be Well Capitalized 
                                                                                      For Capital         Under Prompt Corrective 
                                                        Actual Amounts             Adequacy Purposes         Action Provisions 
                                                      Capital        Ratio        Capital       Ratio       Amount         Ratio
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                 (dollars in thousands)
<S>                                                   <C>            <C>          <C>           <C>        <C>           <C> 
As of December 31, 1998:
Total Capital/Risk Weighted Assets .................   $49,929       21.78%       $18,343        8.00%      $22,929       10.00%
Tier I Capital/Risk Weighted Assets ................   $47,181       20.58%       $ 9,171        4.00%      $13,757        6.00%
Tier I Capital/Average Assets ......................   $47,181       18.59%       $10,151        4.00%      $12,689        5.00%

As of December 31, 1997:
Total Capital/Risk Weighted Assets .................   $31,415       17.57%       $14,348        8.00%      $17,935       10.00%
Tier I Capital/Risk Weighted Assets ................   $29,170       16.32%       $ 7,174        4.00%      $10,761        6.00%
Tier I Capital/Average Assets ......................   $29,170       14.74%       $ 8,258        4.00%      $10,322        5.00%

As of December 31, 1996:
Total Capital/Risk Weighted Assets .................   $14,253       11.62%       $ 9,811        8.00%      $12,264       10.00%
Tier I Capital/Risk Weighted Assets ................   $12,702       10.36%       $ 4,906        4.00%      $ 7,358        6.00%
Tier I Capital/Average Assets ......................   $12,702        8.44%       $ 6,017        4.00%      $ 7,522        5.00%

</TABLE> 
--------------------------------------------------------------------------------
8.   Stock Option Plans:

     The Company's 1994 Incentive Stock Option Plan allows for the award of
options to officers which vest immediately. As of December 31, 1998, 45,064
shares were available for issuance under this plan.

     The Company's Amended and Restated 1996 Stock Option Plan provides for the
issuance of options that may be granted to full time officers and directors.
These options would generally vest ratably over a four-year period beginning one
year after the grant date. A total of 970,106 shares have been authorized for
issuance under this plan. At December 31, 1998 there were 328,509 shares
available for issuance under the plan.

     Both plans provide that the options may be granted to purchase common stock
at a price not less than the fair market price of the Company's stock at the
date for the granting of such options, and unless otherwise provided, the
options have a ten year term. The plans also provide that options granted and
the related option price are adjusted to reflect changes in the shares
outstanding due to stock splits and dividends, or other adjustments.

     The following tables detail the activity under the 1994 Incentive Stock
Option Plan and 1996 Stock Option Plan:

--------------------------------------------------------------------------------
                                                                      Average 
                                                      Option           Option 
1994 Incentive Stock Option Plan                      Shares           Price 
--------------------------------------------------------------------------------

Outstanding at January 1, 1996 ................       304,500          $1.752
        Granted ...............................        83,653           2.191
        Exercised .............................       (21,000)          2.045
        Canceled ..............................       (37,538)          1.866
                                                      --------         ------
Outstanding at December 31, 1996 ..............       329,615           1.832
        Exercised .............................      (144,325)          1.765
        Canceled ..............................        (5,513)          2.191
                                                      --------         ------
Outstanding at December 31, 1997 ..............       179,777           1.875
        Exercised .............................       (57,013)          1.758
        Canceled ..............................          (263)          2.191
                                                      --------         ------
Outstanding at December 31, 1998 ..............       122,501          $1.929
                                                      ========         ======

                                                                              35
<PAGE>
 
--------------------------------------------------------------------------------
                                                                      Average 
                                                       Option          Option 
1996 Stock Option Plan                                 Shares          Price 
--------------------------------------------------------------------------------

Outstanding at January 1, 1996 .................           --         $    --
        Granted ................................       46,663           2,191
        Canceled ...............................       (1,568)          2,191
                                                     ---------        -------
Outstanding at December 31, 1996 ...............       45,095           2,191
        Granted ................................      453,025           5,356
        Exercised ..............................       (1,025)          2,191
        Canceled ...............................      (44,240)          2,642
                                                     ---------        -------
Outstanding at December 31, 1997 ...............      452,855           5,313
        Granted ................................      225,500          14,969
        Exercised ..............................      (13,889)          3,121
        Canceled ...............................      (37,783)          5,704
                                                     ---------        -------
Outstanding at December 31, 1998 ...............      626,683         $ 8,913
                                                     =========        =======

     In July 1997, the Company's Board of Directors approved the grant of
options to purchase 5,000 shares of common stock to each non-employee director
in recognition of their prior service at the price of $8.50 per share. A total
of 40,000 options, which vested 180 days from the date of grant were awarded at
that date. There are 25,000 options outstanding with a remaining contractual
life of 8.60 years at December 31, 1998.

Certain information with regard to options outstanding at December 31, 1998 is
detailed below:

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------------------
                                                                             Weighted-
                                                            Number of         Average         Weighted-       
                                                             Options         Remaining         Average            Number 
                                  Range of               Outstanding at   Contractual Life    Exercise        Exercisable at 
                                Exercise Price          December 31, 1998     (years)           Price       December 31, 1998
------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                      <C>               <C>                 <C>           <C>  
1994 Incentive Stock 
           Option Plan:        $1.689 to $2.191              122,501            6.30            $1.929           122,501
                                                                                                       
1996 Stock Option Plan:        $2.191 to $2.631              218,417            8.00            $2.589            91,791 
                                   $6.875                      1,000            9.80            $6.875               --- 
                                    $8.50                    174,566            8.60            $8.500            89,091
                                   $9.875                      5,000            9.90            $9.875               ---
                               $13.5 to $14.375               79,000            9.40           $14.209             3,750
                             $15.375 to $16.3125             148,700            9.10           $15.432             4,198
                                                           ---------                         ---------         ---------
        Total, Both Plans:                                   749,184                            $7.687           311,331 
                                                           =========                         =========         =========
</TABLE> 

     There is no compensation expense for any options granted prior to July 15,
1997, the date of the Company's initial filing with the Securities and Exchange
Commission indicating its intent to complete a public stock offering (Note 1),
based on the minimum value methodology assuming a four year expected life and
annual dividends ranging from 4.6% to 6.2% of the exercise prices.

     In estimating the compensation which would be attributable to each option
grant since July 15, 1997 if fair value accounting were to be utilized, the
Company has used the Black Scholes option pricing model with the following
weighted average assumptions for options granted in 1998 and 1997: dividend
yield of 1.0% and 1.4%; expected volatility of 37.5% and 30%; risk free interest
rate of 5.08% and 6.14%; and an expected life of 5 years. Had compensation been
determined in accordance with the fair value provisions of SFAS No. 123, the
Company's net income, basic earnings per share and diluted earnings per share
would have been reduced to the pro forma amounts indicated below:

--------------------------------------------------------------------------------
                                                     December 31,
                                                1998              1997
--------------------------------------------------------------------------------
Net income (in thousands)
        As reported                         $   7,033         $   4,429
        Pro forma                           $   6,577         $   4,336

Basic earnings per share
        As reported                         $     .89         $     .70
        Pro forma                           $     .83         $     .69

Diluted earnings per share
        As reported                         $     .86         $     .67
        Pro forma                           $     .80         $     .66


36
<PAGE>
 
--------------------------------------------------------------------------------
9.   Income Taxes:

The components of the income tax provision (benefit) for the years ended
December 31 are as follows:

--------------------------------------------------------------------------------
                                              1998        1997        1996
--------------------------------------------------------------------------------
                                                   (dollars in thousands) 
Current Provision:
        Federal ...........................  $3,346     $ 2,047      $ 1,883
        State .............................     953         727          719
                                             ------     -------      ------- 
                                              4,299       2,774        2,602
                                             ------     -------      ------- 
Deferred Provision (Benefit):
        Federal ...........................     135          87         (184)
        State .............................      38          34          (65)
                                             ------     -------      ------- 
                                                173         121         (249)
                                             ------     -------      ------- 
    Total provision for income taxes ......  $4,472     $ 2,895      $ 2,353
                                             ======     =======      ======= 

The effective tax rates differ from the federal statutory rate due to state
taxes, net of the federal benefit and a dividend received deduction. In 1998 the
Company received a $34,000 State of Connecticut tax refund resulting from a
statutory change relating to prior years. The State of Connecticut statutory tax
rate has decreased in each of the last 3 years.

The components of the net deferred tax asset (liability) at December 31 are as
follows:

--------------------------------------------------------------------------------
                                                       1998            1997 
                                                 Federal  State  Federal State 
--------------------------------------------------------------------------------
                                                     (dollars in thousands) 
Deferred tax assets:
        Allowance for possible loan losses ....   $ 499   $ 136   $ 123  $ 38 
        Other .................................      92      25      74    23
                                                  -----   -----   -----  ---- 
      Total deferred tax assets ...............     591     161     197    61
                                                  -----   -----   -----  ---- 
Deferred tax liabilities:                                
        Investments mark-to-market ............     222      61       7     2
        Depreciation ..........................      74      20      88    27
        Deferred loan costs ...................     167      46      32    10
        Deferred gain on sale of loans ........     404     109      --    -- 
        Other .................................       6       1       2     1
                                                  -----   -----   -----  ---- 
      Total deferred tax liabilities ..........     873     237     129    40
                                                  -----   -----   -----  ---- 
      Net deferred tax assets (liabilities) ...   $(282)  $ (76)  $  68  $ 21
                                                  =====   =====   =====  ==== 

The allocation of the deferred tax provision involving items charged to current
year income and items charged directly to stockholders' equity for the year
ended December 31, are as follows:

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------ 
                                                                  1998                1997 
                                                            Federal    State    Federal   State 
------------------------------------------------------------------------------------------------ 
                                                                  (dollars in thousands) 
<S>                                                         <C>        <C>      <C>       <C> 
Deferred tax provision allocated to shareholders' equity      $215      $59      $ 46      $16
Deferred tax provision allocated to income .............       135       38        87       34
                                                            ------    -----     -----    ----- 
        Total deferred tax provision ...................      $350      $97      $133      $50
                                                            ======    =====     =====    ===== 
</TABLE> 

                                                                              37
<PAGE>
 
--------------------------------------------------------------------------------
10.  Employee Benefit Plan:

     The Company maintains a contributory savings plan which qualifies under
Section 401(k) of the Internal Revenue Code for employees meeting certain
service requirements. Eligible employees may make contributions to the Plan
based on specified percentages of their compensation. Beginning July 1, 1998,
the Company matched 100% of employees' contribution, up to 6% of compensation.
The matching contribution was 85% in prior periods. The Company's matching
contributions totaled $290,000, $139,000 and $96,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
--------------------------------------------------------------------------------

11.  Estimated Fair Values of Financial Instruments:

     Statement of Financial Accounting Standards No. 107 "Disclosures About Fair
Value of Financial Instruments" (SFAS 107) requires the Company to disclose fair
value information for certain of its financial instruments, including loans,
securities, deposits, borrowings and other such instruments. Quoted market
prices are not available for a significant portion of the Company's financial
instruments and, as a result, the fair values presented may not be indicative of
net realizable or liquidation values. Fair values are estimates derived using
present value or other valuation techniques and are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics and other factors. In addition, fair value estimates are based
on market conditions and information about the financial instrument at a
specific point in time. Fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. Such items include loan servicing, core
deposit intangibles and other customer relationships, premises and equipment,
foreclosed real estate and income taxes. In addition, the tax ramifications
relating to the realization of the unrealized gains and losses may have a
significant effect on fair value estimates, and have not been considered in the
estimates. 

     The following is a summary of the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments pursuant to SFAS
107:

Cash, cash equivalents and other: The fair value of cash and due from banks,
federal funds sold, accrued interest receivable and accrued interest payable, is
considered to approximate the book value due to their short-term nature and
negligible credit losses.

Securities: Securities classified as available-for-sale are carried at fair
value. Fair value for securities available for sale and held to maturity was
determined by secondary market and independent broker quotations where
available, or by the Company's estimate of market value.

Loans: The fair values for loans are estimated using discounted cash flow
analyses, and interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.

Loans held for sale: The fair values for loans held for sale are based on
estimated sales prices derived from the current market conditions.

Deposit liabilities: The fair value for demand and savings deposits is equal to
the amount payable on demand at the balance sheet date which is equal to the
carrying value. The fair value of certificates of deposit was estimated by
discounting cash flows using rates currently offered by the Bank for deposits of
similar remaining maturities. 

The fair value information of the Company's financial instruments required to be
valued by SFAS No. 107 are as follows:

--------------------------------------------------------------------------------
                                      December 31, 1998    December 31, 1997 
--------------------------------------------------------------------------------
                                    Carrying  Estimated   Carrying  Estimated 
                                     Value   Fair Value     Value  Fair Value 
                                 -----------------------------------------------
                                               (dollars in thousands) 
Financial Assets
Cash and due from banks ........... $ 13,405   $ 13,405   $ 10,944   $ 10,944
Federal funds sold ................   44,930     44,930      6,450      6,450
Securities available for sale .....   31,456     31,456     12,767     12,767
Securities held to maturity .......    1,986      1,989      7,435      7,429
Loans .............................  108,958    109,970    130,625    130,567
Loans held for sale ...............    8,577      8,630      9,070      9,207
Accrued interest receivable .......    1,383      1,383      1,200      1,200

Financial Liabilities
Deposits
        Checking .................. $ 55,928     55,928   $ 46,103   $ 46,103
        Savings ...................  117,816    117,816     92,003     92,003
        Time deposits .............   46,130     46,349     34,215     34,402
U.S. Treasury demand note .........    1,047      1,047      1,085      1,085
Accrued interest payable ..........      768        768        745        745



38
<PAGE>
 
--------------------------------------------------------------------------------
12.  Segment Information:

     The Company has determined that its reportable segments are its domestic
Commercial Banking divisions, its International Banking division and its Loan
Servicing business unit. The domestic Commercial Banking divisions are an
aggregation of the Commercial Banking-East and Commercial Banking-West
divisions, which included 6 and 8 business units, respectively, at December 31,
1998. The Commercial Banking divisions offer SBA, USDA and other commercial
loans to small and medium size manufacturers in the U.S. Each Commercial
division is headed by an Executive Vice President and the divisions offer the
same products and services and have the same marketing approach. The
International Banking division is comprised of two business units which market
Ex-Im Bank guaranteed loans and privately insured loans to small and medium size
manufacturers located in international emerging markets and the Company's Trade
Finance business unit, which provides Ex-Im Bank guaranteed export working
capital lines of credit to U.S. companies and import financing for U. S.
companies.

     The Loan Servicing business unit is responsible for all loan operations
functions, which include the preparation of loan documents, the maintenance of
loans and the servicing of loans managed for others.

     The segment information prepared internally and utilized for
decision-making includes only revenues from gain on loan sales and certain fees
and only certain expenses. Gains on the sale of loans and loan related fee
income are allocated to business units and aggregated for each division. As
detailed in the reconciliation below, the gain on securitizations was not fully
allocated to the business units in 1998. Direct expenses, principally personnel
costs, and a limited amount of certain other expenses, such as supplies and
indirect marketing are allocated to the business units. The Company does not
allocate interest income or interest expense to business units, nor allocate the
loan loss provision, corporate overhead expense or income taxes. Likewise,
assets, including loans, are not allocated among business units and, therefore,
are not disclosed below. The Company is currently evaluating the costs and
benefits of making certain additional income, expense and asset allocations in
the future.

     The accounting policies of the segments are the same as those described in
Note 1. There are no intersegment revenues.

Financial information for the Company's business segments is as follows:
--------------------------------------------------------------------------------
                                            For the Years Ended December 31, 
Commercial Banking Division                    1998       1997        1996
--------------------------------------------------------------------------------
                                                  (dollars in thousands)

Gains on the sale of loans ...............   $ 11,560   $  7,384   $   4,396
Other loan-related income ................        198         76          51
                                             ---------  ---------  ----------
        Total allocated revenues .........     11,758      7,460       4,447
Allocated non-interest expense ...........      5,800      3,998       2,155
                                             ---------  ---------  ----------  
        Direct net contribution ..........   $  5,958   $  3,462   $   2,292
                                             =========  =========  ==========
Number of business units at year end .....         14         10           5
                                             =========  =========  ========== 
Number of lending officers ...............         53         35          19
                                             =========  =========  ========== 
--------------------------------------------------------------------------------
                                               For the Years Ended December 31,
International Banking Division                  1998       1997        1996
--------------------------------------------------------------------------------
                                                    (dollars in thousands)

Gains on the sale of loans ...............   $  2,814   $  2,555   $     541
Other loan-related income ................        603        258          43
                                             ---------  ---------  ----------
        Total allocated revenues .........      3,417      2,813         584
Allocated non-interest expense ...........      2,239      1,633         888
                                             ---------  ---------  ----------
        Direct net contribution ..........   $  1,178   $  1,180   $   (304)
                                             =========  =========  ==========
Number of business units at year end .....          3          3           2
                                             =========  =========  ==========
Number of lending officers ...............         16         11           7
                                             =========  =========  ==========
--------------------------------------------------------------------------------
                                              For the Years Ended December 31,
Loan Servicing Business Unit                    1998       1997        1996
--------------------------------------------------------------------------------
                                                   (dollars in thousands)

Loan servicing income ....................   $  3,017   $  2,119   $   1,294
Allocated non-interest expense ...........      1,265      1,442         609
                                             ---------  ---------  ----------
        Direct net contribution ..........   $  1,752   $    677   $     685
                                             =========  =========  ==========
Loans under management at year end .......   $779,055   $573,545   $ 380,432
                                             =========  =========  ==========

                                                                              39
<PAGE>
 
Detailed below are reconciliations of the amounts reported for each business
segment to the amounts reported in the consolidated income statement:

<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------------------------
                                                Commercial  International   Loan    Unallocated   Consolidated
For the Year Ended December 31, 1998              Banking     Banking     Servicing   Amounts        Totals
----------------------------------------------------------------------------------------------------------------
                                                                    (dollars in thousands)
<S>                                               <C>        <C>         <C>       <C>           <C>   
Total allocated revenues .......................   $11,758    $3,417       $3,017       $---        $18,192
Interest income ................................    13,341     1,675           --      3,072         18,088
Unallocated gain on the sale of commercial loan-                                               
        backed securitizations .................        --        --           --      2,598          2,598
Other fees and income ..........................        --        --           --      1,322          1,322
                                                   -------  --------     --------    -------       --------    
        Total revenues .........................    25,099     5,092        3,017      6,992         40,200
                                                   -------  --------     --------    -------       --------    
Non-interest expense ...........................     5,800     2,239        1,265      8,396         17,700
Interest expense ...............................        --        --           --      7,924          7,924
Provision for possible loan losses .............        --        --           --      3,071          3,071
                                                   -------  --------     --------    -------       --------    
        Total expenses .........................     5,800     2,239        1,265     19,391         28,695
                                                   =======  ========     ========    =======       ========
                Income before income taxes .....   $19,299    $2,853       $1,752   $(12,399)       $11,505
                                                   =======  ========     ========    =======       ========
<CAPTION> 
----------------------------------------------------------------------------------------------------------------
                                                Commercial  International   Loan    Unallocated   Consolidated
For the Year Ended December 31, 1997              Banking     Banking     Servicing   Amounts        Totals
----------------------------------------------------------------------------------------------------------------
                                                                   (dollars in thousands)
<S>                                               <C>        <C>         <C>       <C>           <C>   
Total allocated revenues .......................    $7,460    $2,813       $2,119   $     --        $12,392
Interest income ................................    12,082       671           --      1,872         14,625
Unallocated gain on the sale of commercial loan-                                                
        backed securitizations .................        --        --           --      1,871          1,871
Other fees and income ..........................        --        --           --        847            847
                                                   -------  --------     --------    -------       --------    
        Total revenues .........................    19,542     3,484        2,119      4,590         29,735
                                                   -------  --------     --------    -------       --------    
Non-interest expense ...........................     3,998     1,633        1,442      6,728         13,801
                                                                                                
Interest expense ...............................        --        --           --      6,371          6,371
Provision for possible loan losses .............        --        --           --      2,239          2,239
                                                   -------  --------     --------    -------       --------    
        Total expenses .........................     3,998     1,633        1,442     15,338         22,411
                                                   -------  --------     --------    -------       --------    
                Income before income taxes .....   $15,544    $1,851         $677   $(10,748)        $7,324
                                                   =======  ========     ========   ========       ========    
<CAPTION> 
----------------------------------------------------------------------------------------------------------------
                                                  Commercial International   Loan    Unallocated  Consolidated
For the Year Ended December 31, 1996               Banking    Banking     Servicing   Amounts       Totals
----------------------------------------------------------------------------------------------------------------
                                                                    (dollars in thousands)
<S>                                               <C>        <C>         <C>       <C>           <C>   
Total allocated revenues .......................    $4,447     $584        $1,294        $--         $6,325
Interest income ................................    11,841      186            --      1,278         13,305
Unallocated gain on the sale of commercial loan-                                                
        backed securitizations .................        --       --            --        907            907
Other fees and income ..........................        --       --            --      2,713          2,713
                                                   -------  --------     --------    -------       --------    
        Total revenues .........................    16,288      770         1,294      4,898         23,250
                                                   -------  --------     --------    -------       --------    
Non-interest expense ...........................     2,155      888           609      4,773          8,425
                                                   -------  --------     --------    -------       --------    
Interest expense ...............................        --       --            --      5,741          5,741
Provision for possible loan losses .............        --       --            --      3,487          3,487
                                                   -------  --------     --------    -------       --------    
        Total expenses .........................     2,155      888           609     14,001         17,653
                                                   -------  --------     --------    -------       --------    
                Income before income taxes .....   $14,133    $(118)         $685    $(9,103)        $5,597
                                                   =======  ========     ========   ========       ========    
</TABLE> 

40
<PAGE>
 
--------------------------------------------------------------------------------
13.  Other Comprehensive Income:
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------- 
                                                            For the Years Ended December 31,
                                                               1998       1997      1996
----------------------------------------------------------------------------------------------
                                                                 (dollars in thousands) 
<S>                                                            <C>        <C>       <C> 
Unrealized holding gains (losses) on investments available-
        for-sale arising during period ...................     $690       $148      ($77)
Tax expense (benefit) ....................................      274         62       (31)
                                                              -----      -----     ------ 
       Other comprehensive income net of tax .............     $416       $ 86      ($46)
                                                              =====      =====     ====== 
</TABLE>                                  


--------------------------------------------------------------------------------
14.  Parent Company Financial Information:

First International Bancorp, Inc. is the parent company of First International
Bank. There have been no loans extended from the Bank to First International
Bancorp, Inc. since inception of the holding company.
<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------
First International Bancorp, Inc.                             For the Years Ended December 31,
Condensed Balance Sheets                                          1998               1997 
----------------------------------------------------------------------------------------------
                                                                   (dollars in thousands)
<S>                                                            <C>                <C> 
Assets
Cash on deposit with Bank subsidiary .......................      $267             $7,334
Investment securities:
    Available for sale, at fair value ......................        19                 85
    Held to maturity, at amortized cost (fair value $4,000).        --              4,000
Investment in the Bank .....................................    48,503             30,622
Other assets ...............................................       282                107
                                                               -------            ------- 
        Total assets .......................................   $49,071            $42,148
                                                               =======            ======= 
Liabilities and Stockholders' Equity
Stockholders' equity .......................................   $49,071            $42,148
                                                               -------            ------- 
        Total liabilities and stockholders' equity .........   $49,071            $42,148
                                                               =======            ======= 
</TABLE> 

<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------
First International Bancorp, Inc.                            For the Years Ended December 31,         
Condensed Statements of Income                                  1998       1997      1996
----------------------------------------------------------------------------------------------
                                                                  (dollars in thousands) 
<S>                                                           <C>        <C>       <C> 
Dividends from Bank ............................                $650       $731      $415
Net interest income from investments ...........                 116        102        -- 
Equity in undistributed net income of the Bank .               6,366      3,796     2,829
Non-interest expense, net ......................                 (87)      (284)       -- 
                                                             -------    -------   -------
        Income before income taxes .............               7,045      4,345     3,244

           Provision (benefit) for income taxes                   12        (84)       --
                                                             -------    -------   -------
        Net income .............................              $7,033     $4,429    $3,244
                                                             =======    =======   =======
</TABLE> 

                                                                              41
<PAGE>
 
<TABLE> 
<CAPTION> 
-----------------------------------------------------------------------------------------------------------------------
First International Bancorp, Inc.                                                   For the Years Ended December 31,     
Condensed Statements of Cash Flows                                                1998            1997           1996
-----------------------------------------------------------------------------------------------------------------------
                                                                                       (dollars in thousands) 
<S>                                                                            <C>             <C>             <C> 
Cash flow from operating activities
Net income .................................................................     $7,033          $4,429         $3,244

Adjustments to reconcile net income to net cash provided by operating
activities:
        Equity in undistributed net income of subsidiary ...................     (6,366)         (3,796)        (2,829)
        Decrease (increase) in other assets ................................         40            (107)            -- 
        Stockholder note receivable discount ...............................         --              92             -- 
        Stockholder note receivable accretion ..............................        (64)            (15)            -- 
                                                                               ---------        --------       --------
                Net cash provided by operations ............................        643             603            415
                                                                               =========        ========       ========
Cash flows from investing activities:
        Purchase of investment securities available for sale, net ..........     (4,068)         (4,085)            -- 
        Proceeds from maturities and sales of securities held to maturity
                 and available for sale ....................................      8,135              --             -- 
        Additional investment in Bank subsidiary ...........................    (11,100)        (12,545)            -- 
                                                                               ---------        --------       --------
                Net cash used in investing activities ......................     (7,033)        (16,630)            -- 
                                                                               ---------        --------       --------
Cash flows from financing activities:
        Proceeds from sale of common stock under option plan ...............        271             263             43
        Proceeds from sale of common stock at public offering, net .........         --          23,808             -- 
        Repurchase of common stock .........................................         --              --            (22)
        Dividends paid .....................................................       (948)           (731)          (658)
        Principal payment on stockholder note receivable ...................         --              --             53
                                                                               ---------        --------       --------
                Net cash provided by (used in) financing activities ........       (677)         23,340           (584)
                                                                               ---------        --------       --------
                Net increase (decrease) in cash and cash equivalents .......     (7,067)          7,313           (169)
Cash and cash equivalents beginning of year ................................      7,334              21            190
                                                                               ---------        --------       --------
Cash and cash equivalents end of year ......................................       $267          $7,334            $21
                                                                               =========       =========       ========
</TABLE> 

-------------------------------------------------------------------------------
15.  Selected Quarterly Consolidated Financial Information (unaudited):
-------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
1998 Quarter Ended                                                    March 31   June 30 September 30 December 31 
-----------------------------------------------------------------------------------------------------------------
                                                                            (dollars in thousands) 
<S>                                                                   <C>        <C>       <C>        <C>  
Net interest income ................................................   $2,792     $2,481    $2,690     $2,201 
Provision for possible loan losses .................................      781      1,125       659        506 
                                                                       ------     ------    ------     ------  
        Net interest income after provision for possible loan losses    2,011      1,356     2,031      1,695 
Gain on sale of loans ..............................................    2,822      5,537     2,543      6,057 
Other non-interest income ..........................................    1,087      1,425     1,108      1,534 
                                                                       ------     ------    ------     ------         
        Total operating income .....................................    5,920      8,318     5,682      9,286 
        Non-interest expense .......................................    3,541      4,290     4,323      5,546 
                                                                       ------     ------    ------     ------    
        Income before income taxes .................................    2,379      4,028     1,359      3,740 
Provision for income taxes .........................................      976      1,587       474      1,436 
                                                                       ------     ------    ------     ------     
        Net income .................................................   $1,403     $2,441      $885     $2,304 
                                                                       ------     ------    ------     ------  
Basic earnings per share ...........................................     $.18       $.31      $.11       $.29 
                                                                       ------     ------    ------     ------  
Diluted earnings per share .........................................     $.17       $.30      $.11       $.28  
                                                                       ======     ======    ======     ======  
<CAPTION> 
-----------------------------------------------------------------------------------------------------------------
1997 Quarter Ended                                                     March 31  June 30 September 30 December 31 
-----------------------------------------------------------------------------------------------------------------
                                                                                 (dollars in thousands) 
<S>                                                                   <C>        <C>       <C>        <C>  
Net interest income ................................................   $1,799     $1,812    $2,119     $2,523
Provision for possible loan losses .................................      368        591       157      1,123
                                                                       ------     ------    ------     ------  
        Net interest income after provision for possible loan losses    1,431      1,221     1,962      1,400
Gain on sale of loans ..............................................    2,222      3,256     1,739      4,593
Other non-interest income ..........................................      618        707     1,064        912
                                                                       ------     ------    ------     ------  
        Total operating income .....................................    4,271      5,184     4,765      6,905
        Non-interest expense .......................................    2,496      3,414     3,472      4,419
                                                                       ------     ------    ------     ------  
        Income before income taxes .................................    1,775      1,770     1,293      2,486
Provision for income taxes .........................................      763        729       542        861
                                                                       ------     ------    ------     ------  
        Net income .................................................   $1,012     $1,041      $751     $1,625
                                                                       ======     ======    ======     ======  
Basic earnings per share ...........................................     $.17       $.18      $.13       $.22
                                                                       ======     ======    ======     ======  
Diluted earnings per share .........................................     $.17       $.18      $.12       $.20
                                                                       ======     ======    ======     ======  
</TABLE> 

42
<PAGE>
 
--------------------------------------------------------------------------------
16.  Agreement to Sell Branch and Deposits:

     On December 31, 1998, First International Bank entered into an Agreement
for Purchase and Sale of Assets and Assumption of Liabilities (the "Deposit Sale
Agreement") with Hudson United Bank. Pursuant to the Deposit Sale Agreement, the
Bank will sell its single branch in Hartford and approximately $150 million in
checking, savings and money market accounts to Hudson United Bank for a premium
of 6% of such deposits.

     Following the sale of the branch, the Bank will continue to offer
FDIC-insured depository accounts in the form of certificates of deposit. The
Bank expects to fund its business with certificates of deposit, warehouse credit
lines, a commercial paper conduit and loan securitizations and sales. The branch
and deposit sale is expected to close by the end of the first quarter of
1999.


--------------------------------------------------------------------------------
Notes  




                                                                              43
<PAGE>
 
Directors and Officers



---------------------------------------
First International Bank
Board of Directors 

William J. Anderson

* Michael R. Carter
  Carter Morse & Company

  Brian J. Charlebois
  Executive Vice President

* Arnold Chase
  Chase Enterprises

* Cheryl Chase
  Chase Enterprises

  Craig M. Cooper
  Fairbank Mortgage Company

  Leslie A. Galbraith
  President, Chief Operating Officer 
  and Chief Financial Officer

  Dean Goodermote
  Process Software Corporation

* Frank P. Longobardi, CPA
  Haggett, Longobardi & Company

  David G. Sandberg

* Brett N. Silvers
  Chairman and Chief Executive Officer

  Kenneth R. Sonenclar
  Classics Interactive, Inc.

  Douglas K. Woods
  Liberty Precision Industries, Ltd.


* Member of First International 
  Bancorp, Inc. Board of Directors

---------------------------------------
First International Bancorp, Inc. 
Officers 

Brett N. Silvers 
Chairman, Chief Executive Officer 
and President

Leslie A. Galbraith 
Executive Vice President, 
Secretary and Treasurer 

---------------------------------------
First International Bank
Officers

Chairman and Chief Executive Officer
Brett N. Silvers

President, Chief Operating Officer 
and Chief Financial Officer 
Leslie A. Galbraith

Executive Vice Presidents
Richard W. Bradshaw
Brian J. Charlebois
David J. Etter
Paul J. Falvey
James G. Fortsch
Frank P. La Monaca

Senior Vice Presidents
Charles E. Baker
David M. Baroody
Bradley C. Berryman
Cynthia D. Bradley
David B. Cook
Tyler T. Foster
Ira J. Gottlieb
Stephen M. Greene
Thomas G. Hollinger
Theodore J. Horan
Timothy Jones
Keith D. Kelly
Frank M. Mac Hugh
Todd D. Maugans
Gerald F. O'Loughlin
Constance E. Perrine
Charles E. Poehnert
Richard M. Rabideau
Leona M. Rapelye
Michael J. Rister
Matthew J. Roach
Gerald R. Tavernier, Jr.
Shaun P. Williams


44
<PAGE>
 
General Information



--------------------------
Corporate Headquarters

280 Trumbull Street
Hartford, CT  06103
(860) 727-0700
www.FirstInterBank.com
NASDAQ:  FNCE

Transaction Counsel

Updike, Kelly & Spellacy
One State Street
Hartford, CT  06123

Corporate Counsel

Bingham Dana LLP
100 Pearl Street
Hartford, CT  06103

Independent Accountants

PricewaterhouseCoopers LLP
100 Pearl Street
Hartford, CT  06103

Transfer Agent

Requests for changes in the registration of stock certificates, replacement of
lost or destroyed certificates, or undeliverable dividend checks should be
referred to the Company's Transfer Agent:

ChaseMellon Shareholder Services
Securities Transfer Services
111 Founders Plaza, Suite 1100
East Hartford, CT  06108
1-800-288-9541
TDD Line 1-800-231-5469
From Outside U.S.: 201-329-8668
TDD Foreign Line: 201-329-8354
www.chasemellon.com

Annual Meeting

Tuesday, April 27, 1999, 4:00 p.m.
The Hilton Hartford Hotel
315 Trumbull Street
Hartford, CT  06103

Form 10-K

A copy of First International Bancorp, Inc.'s annual report and Form 10-K as
filed with the Securities and Exchange Commission is available upon request to
the Company's Chief Financial Officer:

Leslie Galbraith
First International Bancorp, Inc.
280 Trumbull Street
Hartford, CT 06103
860-241-2529
galbraithl@FirstInterBank.com.

Investor Relations

Media representatives, analysts and investors seeking information are invited to
contact the Vice President of Corporate Communications:

Katie Armstrong
First International Bancorp, Inc.
280 Trumbull Street
Hartford, CT 06103
860-241-4705
armstrongk@FirstInterBank.com

Market for the Company's Common Stock and Related Stockholder Matters

     The Company's common stock was listed on The Nasdaq Stock Market(SM) under
the symbol FNCE on September 23, 1997. The Company's initial public offering was
paid at $13.50 per share. The following table sets forth the range of the high
and low closing sales prices for the Company's common stock on the Nasdaq:

1998                             High       Low
------------------------------------------------- 
Fourth Quarter                  $12       $6 7/8   
Third Quarter                   $14 3/4   $9 1/2   
Second Quarter                  $17 3/8   $14 3/8  
First Quarter                   $17 3/4   $12 1/2   

1997                             High       Low
------------------------------------------------- 
Fourth Quarter                  $18 1/2   $11 1/4 
Third Quarter (from 9/23/97)    $18 1/2   $15 1/2  

     On March 5, 1999, the Company had approximately 181 stockholders of record.
This number does not include beneficial owners holding shares through nominee or
"street" names. The Company believes the number of beneficial stockholders is in
excess of 1400.

        Holders of the common stock are entitled to receive dividends when, as,
and if declared by the Board of Directors, out of funds legally available for
such purpose. The Company has paid quarterly cash dividends to its stockholders
since October 1995 equal to $.03 per share.

     The Company currently plans to continue to declare and pay quarterly cash
dividends on approximately the same basis to the holders of the common stock.
However, there can be no assurance that dividends will be declared and paid in
the future. In determining whether and to what extent the Company should declare
and pay dividends, the Company's Board of Directors will consider, among other
factors, the Company's consolidated financial condition and results of
operations, tax considerations, general economic conditions and capital
requirements. Additionally, the Company's ability to declare and pay dividends
may depend upon the receipt of dividends from its wholly owned subsidiary, First
International Bank, N.A. which is restricted by the requirements of federal
banking law. See Note 7 of the Consolidated Financial Statements.
<PAGE>
 
[LOGO OF FIRST INTERNATIONAL BANK APPEARS HERE]

Financing manufacturers worldwide(R)


Corporate Headquarters

Hartford
280 Trumbull Street
Hartford, CT  06103
(860) 727-0700
(860) 525-2083 (fax)
www.FirstInterBank.com

U. S. Representative Offices

Boston, MA
Cleveland, OH
Detroit, MI
Morristown, NJ
Philadelphia, PA 
Pittsburgh, PA 
Providence, RI 
Rochester, NY 
Springfield, MA 
Washington, DC

International 
Representatives

Argentina
Brazil
Central America
India
Indonesia
Korea
Mexico
Philippines
Poland
South Africa
Turkey
West Africa


Member FDIC, 
Equal Housing Lender