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

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                                  ------------

                   For the fiscal year ended December 31, 1998
                           Commission file no. 0-22861

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

                        FIRST INTERNATIONAL BANCORP, INC.
             (Exact name of registrant as specified in its charter)

                  Delaware                                 06-1151731
         (State or other jurisdiction of                (I.R.S. Employer
         incorporation or organization)                 Identification No.)

280 Trumbull Street
Hartford, CT                                                  06103
(Address of principal executive offices)                    (Zip Code)

       Registrant's telephone number, including area code: (860) 727-0700

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

           Securities Registered Pursuant to Section 12(b) of the Act:

                              (Title of each class)
                     Common Stock, par value $.10 per share

        Securities Registered Pursuant to Section 12(g) of the Act: None

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

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

As of March 12, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price of the common stock
as reported by the Nasdaq Stock Market of $11.875 was approximately $59,542,782.

As of March 12, 1999, the Registrant had 7,957,587 shares of Common Stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:
Part II, items 5, 6, 7, 7A and 8 are incorporated by reference to First
International Bancorp's, Inc. 1998 Annual Report to Shareholders which is
included as an exhibit hereto. 

Part III, items 10, 11, 12 and 13 are incorporated by reference to First
International Bancorp, Inc.'s definitive proxy statement to stockholders which
will be filed with the Securities and Exchange Commission no later than 120 days
after December 31, 1998.

--------------------------------------------------------------------------------
<PAGE>
 
                                TABLE OF CONTENTS

         PART 1                                                         Page No.

ITEM 1.  BUSINESS                                                          1

ITEM 2.  PROPERTIES                                                       24

ITEM 3.  LEGAL PROCEEDINGS                                                25

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
         HOLDERS                                                          25

         PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND
         RELATED STOCKHOLDER MATTERS                                      26

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA                             26

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS                    26

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES                         26
         ABOUT MARKET RISK

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                      26

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
         ON ACCOUNTING AND FINANCIAL DISCLOSURE                           26

         PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT               26

ITEM 11. EXECUTIVE COMPENSATION                                           26

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT                                                   26

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                   26

         PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
         REPORTS ON FORM 8-K                                              27
<PAGE>
 
                                     PART 1


ITEM 1:  BUSINESS


General

Overview

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"). In 1998, the Bank established three special purpose
subsidiaries to facilitate loan securitizations and sales to a commercial paper
conduit. 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 March 26, 1999, the Company sold its last retail branch and its checking,
savings and money market accounts. The Company retained its certificates of
deposit and continues to offer certificates of deposit to retail and brokered
depositors. (See "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
in 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.

                                       1
<PAGE>
 
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 totaling approximately $150 million;

 .    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); this facility is subject to SBA
     approval and satisfactory negotiation of final terms with all parties.

 .    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 commercial 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 deposits, warehouse lines of credit, the sale of loans
on a loan-by-loan basis, private placement securitizations and from the sale of
loans to a commercial paper conduit.

Loan Originations

Management believes that the specialized market knowledge and experience of the
Company's lending officers, combined with a broad range of commercial and
international financing products, enable the Company to satisfy the needs of its
small and medium size manufacturing clients. Brand recognition for the Company
is maintained by incorporating the servicemark 

                                       2
<PAGE>
 
Financing Manufacturers Worldwide(R) in its logos. The Company's domestic and
international lending relationships generally range from $150,000 to $2.5
million.

The Company's Commercial business units underwrite lines of credit, term loans,
industrial mortgages and trade financing for businesses located in the
Northeast, Mid-atlantic, and Midwest regions of the United States. Commercial
lenders operate from the Company's Hartford, Connecticut headquarters, as well
as from regional representative offices located in Boston and Springfield,
Massachusetts; Providence, Rhode Island; Morristown, New Jersey; Pittsburgh and
Philadelphia, Pennsylvania; Rochester, New York; Washington D.C.; Detroit,
Michigan; and Cleveland, Ohio. The Company plans to continue its U. S. expansion
in 1999 by opening additional representative offices. The Company's domestic
loan officers are trained to understand the specific financial needs of small
and medium size manufacturers, and to use government guaranteed and other
commercial loan products to respond to those needs. Domestic loan officers
participate in industrial trade organizations representing the Company's target
market and conduct other marketing activities to reach potential borrowers.

The Company's International business units underwrite Ex-Im Bank guaranteed and
insured and private sector insured short and medium term loans to small and
medium size manufacturers located in various international emerging markets. The
International business units also underwrite Ex-Im Bank guaranteed revolving
lines of credit to U.S. manufacturers and in 1998, began offering privately
insured loans to U.S. importers of foreign-made goods. See "International
Banking Services and Products." International lending activities support trade
flows between the United States and emerging markets. The Company's
International business units operate from its Hartford, Connecticut headquarters
and are assisted in their efforts by contractual international marketing
representatives, or "master agents", many of whom are actively involved in
providing financial, accounting, consulting and/or engineering services to
manufacturers in their home countries. Contractual marketing arrangements have
been established with professionals in Argentina, Brazil, Central America,
India, Indonesia, Korea, Mexico, Philippines, Poland, South Africa, Turkey and
West Africa. The Company began lending internationally in 1994 and has increased
these loan originations from $397,000 in 1994 to $1.8 million in 1995, $13.6
million in 1996, $60.9 million in 1997 and $110.4 million in 1998.

Underwriting

The Company's underwriting activities are initiated from each of its lending
offices and supported and approved at the Hartford, Connecticut headquarters.
Commercial lending officers analyze the creditworthiness of proposed borrowers
and evaluate each borrower's financial statements, credit reports, business
plans and other data to determine if the credit and proposed collateral satisfy
the Company's specific lending standards and policies. All credit memoranda are
reviewed by an independent credit officer and may require additional approval
depending on the particular circumstances of the financing package. Domestic and
international loans undergo a substantially identical approval process.

                                       3
<PAGE>
 
Loan Sales and Securitizations

The Company seeks to achieve high returns while meeting the growing credit needs
of its target market by selling a portion of its commercial and international
loans on a non-recourse, servicing-retained basis. A separate Capital Markets
business unit was established in 1996 to sell loans (or the unguaranteed
portions of loans), including domestic and international loans, that lack
federal guarantees. The Capital Markets business unit directs its resources
toward identifying non-government guaranteed secondary loan markets to generate
non-interest income and as a further means of mitigating credit risk, leveraging
capital and replenishing liquidity.

In 1998, the Company began securitizing and selling certain whole loans and the
unguaranteed portions of certain government guaranteed loans that it originates,
and selling commercial revolving lines of credit to a commercial paper conduit.
In such securitization and commercial paper 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. In order to provide credit
enhancement for the certificates or notes, the Company will generally retain
subordinated certificates or notes and establish a cash reserve account. The
Company also records an interest-only strip in connection with the transactions.
For all securitizations and sales, the Company is the servicer of the underlying
loans. In 1998 the Bank established three special purpose subsidiaries to
facilitate completion of these transactions.


Business Strategy

The Company's strategy is to serve small and medium size manufacturers through
the following key activities:

Domestic Loan Origination Activities. Commercial business units currently
operate from the Hartford, Connecticut headquarters, as well as from regional
loan production or "representative" offices located in Boston and Springfield,
Massachusetts; Providence, Rhode Island; Pittsburgh and Philadelphia,
Pennsylvania; Morristown, New Jersey; Rochester, New York; Washington D.C.;
Detroit, Michigan and Cleveland, Ohio. The Company intends to continue to expand
into new markets by opening additional representative offices as marketing
diligence is completed.

Financing Trade with International Emerging Markets. The International business
units operating from the Hartford, Connecticut headquarters are assisted in
their efforts abroad by contractual relationships with international master
agents in Argentina, Brazil, Central America, India, Indonesia, Korea, Mexico,
Philippines, Poland, South Africa, Turkey and West Africa. The master agents are
actively involved in providing professional financial services to small and
medium size manufacturers in their home countries. The Company also provides
working capital to U.S. manufacturers who export to, and in 1998 the Company
began financing U.S. imports from, international emerging markets.

                                       4
<PAGE>
 
Lending Activities and Policies

The Company's distribution of domestic and international commercial loan
originations are detailed below:

<TABLE> 
<CAPTION> 
                                                                      For the Years Ended               
                                                           ------------------------------------------   
                                                            December 31, 1998      December 31, 1997    
                                                           -------------------    -------------------   
Loan Originations                                          Principal Percentage   Principal Percentage  
                                                           --------- ----------   --------- ----------  
                                                                      (Dollars in thousands)            
<S>                                                        <C>       <C>          <C>       <C>         
Domestic:                                                                                               
  SBA loans..........................................      $122,178         31%   $100,382         33%  
  USDA loans.........................................        45,162         12%     30,404         10%  
  Other commercial loans.............................       113,888         29%     84,975         28%  
                                                           --------   --------    --------   --------   
   Total domestic banking............................       281,228         72%    215,761         71%  
                                                                                                        
International:                                                                                          
  Ex-Im working capital lines........................        37,276         10%     30,347         10%  
  Ex-Im medium term loans............................        48,248         12%     60,852         19%  
  Other international loans..........................        24,925          6%         --         --   
                                                           --------   --------    --------   --------   
   Total international banking.......................       110,449         28%     91,199         29%  
                                                           --------   --------    --------   --------   
                                                                                                        
   Total commercial loan originations................      $391,677        100%   $306,960        100%  
                                                           ========   ========    ========   ========    
</TABLE> 

Marketing

Domestic Lending

The Company originates domestic loans through its 53 commercial loan officers in
eleven offices who seek to establish long-term relationships with their clients.
The Company believes it is uniquely positioned to serve its domestic market
through an ability to provide clients with a flexible combination of lines of
credit, term loans and mortgages for industrial property and trade financing.
The Company generally utilizes the SBA, USDA Ex-Im Bank and/or privately insured
loan guarantee and insurance programs as a part of a financing package in light
of an applicant's particular situation. The Company's participation in these
programs enables it to provide clients with longer loan terms than are typically
available to small and medium size manufacturers.

Commercial loan officers are responsible for marketing, underwriting, servicing,
monitoring and collecting payments on their portfolio of loans. The Company
believes that this broad range of responsibilities enables the commercial loan
officers to establish strong working relationships with both existing and
prospective clients and promotes strong client service and prudent loan
portfolio management. Commercial loan officers are encouraged to keep apprised
of market conditions through frequent contact with clients and potential
borrowers, to develop specific knowledge of their clients' businesses, and to
offer flexible structuring of loan products. In consultation with the borrower,
a commercial loan officer will evaluate the financing needs of the business and
then recommend the best way to structure the lending transaction to fit the
client's unique needs.

                                       5
<PAGE>
 
The marketing efforts by commercial loan officers include participation in trade
associations serving the needs of small and medium size manufacturers;
contacting accountants, attorneys and other professionals known by the Company
to have contact with businesses in need of financing; personal visits; direct
mail solicitations; and referrals from existing clients. Since the target client
of both domestic and international loan officers is often the same, there is an
active cross-selling effort between these two areas.

Marketing Agreements

In addition to the marketing efforts of the Bank's domestic lending officers,
the Bank is seeking to market its domestic loan products through marketing
agreements with various trade and cooperative associations. In 1998, the Bank
entered into such agreements ("Marketing Agreements") with the National Rural
Utilities Cooperative Finance Corporation, and with various regional chapters of
the National Tooling & Machining Association. The Marketing Agreements provide,
among other things, for the applicable trade or cooperative association to
develop and implement a marketing plan pursuant to which the Bank has
implemented an expedited and streamlined credit application and approval process
for association members who desire commercial term loans from the Bank. The Bank
retains the sole discretion as to the credit standards to be applied and as to
whether to make any particular loan. The Marketing Agreements further provide
for the Bank to pay quarterly and annual compensation to such trade and
cooperative associations based upon the amount of loans made by the Bank to the
members of the associations.

International Lending

The Company has four international loan officers in the Trade Finance business
unit who target U.S. exporters eligible for trade financing programs, including
those supported by Ex-Im Bank. These loan officers market pre-export working
capital lines of credit. This International business unit has also recently
begun targeting U. S. buyers of goods from certain international emerging
markets. As with the domestic lending relationships, the Trade Finance business
unit is responsible for marketing, underwriting, servicing, monitoring and
collecting its portfolio of loans.

The Company has twelve international loan officers in its Americas and
Asia/Africa/Europe business units who target foreign purchasers of U. S. goods
eligible for short and medium term financing supported by Ex-Im Bank guarantees
and private sector insurance. These International business units are also
responsible for marketing, underwriting, servicing, monitoring and collecting
payments on their portfolios of loans.

Internationally, the Company has established contractual marketing relationships
with professional firms in twelve emerging markets who, in the course of
conducting their primary business, have frequent contact with local
manufacturers who require financing to purchase U.S. goods or are manufacturing
goods for export to the U. S. Prior to entering into relationships with these
"Master Agents," the Company conducts due diligence, including visiting the
prospective 

                                       6
<PAGE>
 
representative and conducting local diligence concerning their business
reputation and legal status. The Company also requires that each Master Agent be
trained on the Company's products and services at the Hartford, Connecticut
headquarters. Each Master Agent markets, on behalf of the Company, Ex-Im Bank
guaranteed and insured short and medium terms loans and privately insured export
loans in its respective market. Once the Master Agent develops a lead with a
potential borrower, it directs the prospect to a U.S.-based loan officer who
completes the application process. The Master Agent receives a negotiated fee
when a loan referral made to the Company has been underwritten and closed. The
Master Agent assists the loan officer in obtaining certain information from the
applicant and in responding to inquiries of the applicant, but does not have any
direct underwriting responsibilities. All decisions with respect to referrals of
Master Agents are made by the Company, which retains full control over
international loan originations.

Marketing efforts include visits to and direct mail solicitation of, U.S.-based
exporters of capital goods, direct mail solicitation of foreign-based
manufacturers and industrial trade organizations and in-country marketing by the
Company's network of Master Agents. The Company also entered into a contractual
strategic marketing alliance with Panalpina, Inc., a leading international
freight forwarding company to provide access to additional trade finance
opportunities.

Domestic Lending Services and Products

Loan Products and the Origination Process

The commercial loans originated by the Company include industrial mortgage loans
(i.e., loans to businesses collateralized by industrial real property),
equipment term loans and revolving lines of credit to manufacturers, wholesalers
and distributors, many of which are exporters. The typical commercial borrower
is a privately owned and operated company with annual sales of $2 million to $25
million, employing 10-175 workers, which has been in business for at least three
years. A number of the Company's borrowers have a proprietary product line,
export their products and/or have a geographically diverse client base. The
Company is typically the borrower's primary lender and provides loans which are
collateralized by assets of the borrower.

The Company originates loans to a variety of industries; however, based upon its
loss experience and economic forecasts, the Company may decide to de-emphasize
industries from time to time.

The interest rates accruing on the Company's commercial loans are typically
Prime-based, changing monthly or quarterly when the Prime Rate changes. The
Company also makes fixed rate loans from time to time. The Company originates
certain loans for sale through loan purchase programs pre-established with
investors. The term of a loan depends upon whether the loan is guaranteed or is
underwritten for a loan purchase program. Government guarantee programs give
clients access to longer term financing and slower amortization than otherwise
available. A government guaranteed mortgage loan has a maximum term and
amortization of up to 30 years, while the term and amortization of an
unguaranteed mortgage loan typically does not exceed 15 years. Equipment loans
are underwritten to correspond to the useful life of the 

                                       7
<PAGE>
 
equipment and generally range from 5-15 years. SBA guaranteed working capital
term loans range from 7-10 years, while unguaranteed working capital revolving
lines of credit have one-year terms. Medium term loans are generally fully
amortizing.

The primary collateral sought by the Company for commercial loans consists of
liens which are generally first liens, on owner-occupied industrial real estate,
equipment, inventory and/or accounts receivable, although additional collateral
may include junior liens on residential properties. The Company generally
requests the personal guarantee of the principals of a business because the
Company believes this induces the guarantor to facilitate repayment of the loan.

In striving to meet the credit needs of its clients, the Company utilizes
government guarantee loan programs which allow it to offer longer-term loans
while mitigating the credit risk to the Company through the government
guarantee. The two government guarantee loan programs utilized by the Company's
Commercial business units to provide financing to its niche market are discussed
below.

SBA Guaranteed Loan Originations

The Company utilizes the SBA's 7(a) loan program for eligible borrowers. The
Company has Preferred Lender status in nineteen SBA "districts." Preferred
Lender status allows the Bank to approve loans on behalf of the SBA, with the
national SBA processing center's concurrence that the applicant meets the SBA
eligibility requirements. The SBA generally completes its eligibility review
within 24 hours of submission. The Company has Certified Lender status in twenty
districts. Certified Lender status entitles the Bank to 72-hour turnaround from
local SBA district offices for approval of loan applications.

The SBA's 7(a) loan program provides for a guarantee equal to 75% of the
principal balance, up to a maximum guarantee of $750,000 per borrower.

The Company makes SBA loans to businesses which qualify under agency regulations
as a "small business." The primary operative SBA eligibility criterion are
privately-owned manufacturers employing fewer than 500 workers. Loans may
generally be used for the acquisition or refinancing of plant and equipment,
working capital and debt consolidation.

In the event of default, the SBA and Company share in any collections or
collateral on a pari passu basis. For example, if a loan carries a 75%
guarantee, the SBA receives 75% of all collections while the Company receives
25% of such amounts, beginning with the initial recovery. The SBA also
reimburses the Company's collection costs on a similar basis.

If the SBA establishes that any resulting loss is attributable to a failure by
the Company to comply with SBA policies and procedures in connection with the
origination, documentation or funding of a loan, the SBA may decline to pay the
guaranteed amount, or if the guaranty has already been paid, may seek recovery
of funds from the Company. With respect to guaranteed SBA loan participations
which have been sold, the SBA will first honor its guarantee and then 

                                       8
<PAGE>
 
seek compensation from the Company in the event that a loss is deemed to be
attributable to such failure to comply with SBA policies and procedures.

USDA Guaranteed Loan Originations

The Company utilizes the Business and Industry Program ("B&I Program") of the
USDA when applicable based on an applicant's geographical location and other
characteristics. The B&I Program provides for 80% guarantees on loans with
principal balances up to $5 million and 70% guarantees on loans with principal
balances up to $10 million and, therefore, enables the Company to provide
financing to borrowers with greater needs than those eligible for SBA loans and
non-guaranteed commercial loans from the Company, due to legal lending limit
constraints. The stated purpose of this program is to support industry,
employment and general economic and environmental conditions in rural
communities, which are defined as towns with fewer than 50,000 inhabitants. Such
loans may be utilized for acquisition, improvement or refinancing of plant,
equipment, working capital and debt consolidation.

Loans to be guaranteed under the B&I Program are submitted to the USDA district
office and, depending on that office's loan authority, may be required to be
forwarded to the national USDA for approval. The USDA approved the Company as a
Certified Lender in 1997, making it one of the first USDA Certified Lenders
nationally. As a Certified Lender, the Company is recognized as a "Subject
Matter Expert" and is able to reserve funds, which facilitates the processing of
USDA loans.

The guarantee of the USDA also provides for pari passu recovery of collection
proceeds, and for recourse to the Company similar to that discussed above for
SBA loans in the event the Company is found to have been negligent in the
origination, documentation or funding of USDA loans.


Domestic Underwriting

For the Company's domestic underwriting process, the Company's staff seeks to:
(i) analyze borrowers' credit profiles; (ii) assess the collateral underlying a
loan; (iii) assure compliance with eligibility requirements for inclusion under
any applicable guarantee programs; and (iv) obtain or provide appropriate
documentation for the transaction.

Domestic lending officers receive and assemble initial applications, analyze the
creditworthiness of proposed borrowers, prepare credit memoranda, and aided by
staff, prepare any required government guarantee loan application forms and
conduct credit and trade reference checks. In the course of analyzing the
creditworthiness of prospective borrowers, commercial lending officers evaluate
each applicant's and any guarantors' financial statements, credit reports,
appraisals and other information regarding the value of collateral the
experience, strength and continuity of the borrower's management business plans
and other data to determine if the credit and collateral satisfy the Company's
standards and compliance with any applicable government guaranteed loan program
requirements. Such standards may include debt service coverage ratios, or other
financial ratios, reasonableness of the borrower's projections (when submitted),
the 

                                       9
<PAGE>
 
experience, strength and continuity of the borrower's management, the financial
condition of individual guarantors, the value of collateral, and compliance with
government guarantee loan program requirements. The originating officer performs
on-site inspections to determine the condition of a borrower's facility, the
manner in which business is being conducted, the condition and maintenance of
assets, the existence of environmental issues, and other market conditions.

Originating lending officers have no authority to approve a loan on their own.
Subject to approval by the Credit Policy Officer, the business manager of each
commercial business unit and the Company's Division Executives have lending
authority in accordance with their experience. Any loans above this lending
authority must be approved by the Loan Committee of the Bank's Board of
Directors. All loans to a borrower and its affiliates are aggregated to
determine whether they are within an individual's lending authority.

Upon initial approval by a business manager, the credit memorandum must be
approved by the Credit Policy Officer, who reports to the Chief Credit Officer.
The Credit Policy Officer reviews the memorandum and supporting file for
compliance with internal Company policy as well as applicable government
guarantee requirements. If additional approvals are required, the credit
memorandum is forwarded to the appropriate parties as noted above. If the
financing package includes a government guaranteed loan, the application is
forwarded to the applicable government agency as required.

The Company performs a credit analysis on all applications, considering the type
and value of the assets collateralizing a loan, the characteristics of the
borrower, the borrower's industry, and the anticipated debt service ratio. The
Company generally requires that a borrower's most recently completed fiscal year
financial statements demonstrate historical debt service coverage ratio of at
least 1.25 to 1. If requested funding is for plant or line of business
expansions, consideration may also be given to projected results and, therefore,
certain loans may be granted when historical debt service coverage is less than
1.25 to 1.

Real property taken as primary collateral for a loan is valued by an independent
appraiser in accordance with federal banking regulations, and the appraisal is
then subject to an internal review in accordance with such regulations.
Equipment serving as primary collateral for a loan is generally valued by an
independent equipment appraiser. The Company will generally obtain a Phase I
environmental report completed in accordance with the standards of the American
Society for Testing and Materials on any commercial real property to be
mortgaged. Additional environmental reporting and remediation are required prior
to closing if environmental issues either exist or are suspected.

The Company's standard underwriting criteria details the maximum advance rates
which are utilized for each type of collateral. Commercial property is generally
given a collateral value for underwriting purposes equal to 80% of the appraised
value; finished goods and raw material are generally valued at 50% of book
value; trade accounts receivable under 90 days are generally valued at 75% of
book value.

                                       10
<PAGE>
 
Although the maximum prescribed collateral values are generally utilized in the
Company's analyses, there may be instances where the maximum values are reduced
or, due to the borrower's situation, special consideration may be given to
applications exceeding the general standards. Proposed exceptions to the
Company's loan policy are reviewed by the approving officers and Loan Committee,
when applicable. Decisions to approve such loans are made on a case-by-case
basis and depends upon the overall creditworthiness of the applicant. The
overall trends in underwriting exceptions are monitored by the Chief Credit
Officer and the Company's Loan Committee.

International Lending Services and Products

The Company's International Lending business units underwrite revolving lines of
credit to U.S. manufacturers, short and medium term loans to foreign buyers of
U.S. goods, short term loans to U.S. buyers of foreign goods, and letters of
credit issued in connection with such facilities.

The International lending business units include the following:

<TABLE> 
<CAPTION> 
Business Units/Territory                Products Used                             Description
------------------------                -------------                             ------------
<S>                                     <C>                                       <C> 
Trade Finance  (principally the         Working capital line of credit; 90%       One year revolving line of credit
Northeast, Mid-atlantic and Midwest)    Ex-Im guaranteed; indexed to U.S.         to U.S. manufacturers
                                        Prime, variable daily; U.S. dollar        collateralized by export accounts
                                        denomination                              receivable and inventory

                                        90-360 day U.S. import term loan;         Financing of accounts receivable
                                        discount note; 95% privately insured      due from U.S. manufacturer
                                                                                  purchasing goods from international
                                                                                  emerging markets; unsecured

Americas (principally Argentina,        Short and medium term loan; 100%          1- to 5-year term loans to foreign
Brazil, Central America, Mexico)        guaranteed by Ex-Im Bank or privately     purchasers of qualified U.S. made
                                        insured (generally 95%); indexed to       inventory and equipment; unsecured
Asia/Africa/Europe (principally         6-month LIBOR, variable semi-annually;    or secured by equipment
India, Indonesia, Korea, Philippines,   U.S. dollar denominated
Poland, South Africa, Turkey and West
Africa)
</TABLE> 

Ex-Im Bank is an independent agency of the U.S. whose mission is to facilitate
export financing of U.S. goods and services by neutralizing the effect of export
credit subsidies from other governments and absorbing credit risks that the
private sector will not accept. The Company 

                                       11
<PAGE>
 
utilizes the Ex-Im Bank's loan guarantee and insurance programs designed to
support small and medium size U.S. exporters. In 1997 the Company received Ex-Im
Bank's annual "Small Business Bank of the Year" award.

International Lending - United States
Export Working Capital and U.S. Import Loan Products and the Origination Process

The typical U.S. client for the Company's international products is a U.S.-based
manufacturer with sales of $2 million to $25 million and export financing needs.
The Trade Finance business unit handles these clients, which comprise the same
target profile as for the Company's domestic loan officers.

The one-year revolving Ex-Im Bank working capital lines of credit are indexed to
WSJ Prime and adjust daily. The primary collateral for these loans includes
export-related accounts receivable and inventory. The accounts receivable are
generally insured under an Ex-Im Bank insurance policy, private export credit
insurance or an acceptable letter of credit. Open accounts receivable may
qualify as collateral if approved in advance by the Company and Ex-Im Bank.
Borrowers must submit borrowing base certificates to the Company to evidence the
availability of acceptable collateral when an advance is requested, and monthly
thereafter.

The Company is one of approximately twelve lenders in the U.S. with "AA Level
Delegated Authority" status with respect to Ex-Im Bank's working capital loan
guarantee program and, therefore, has authority to approve working capital lines
up to $5 million per borrower, up to an aggregate portfolio of $75 million
without prior Ex-Im Bank approval.

In the event of a loan default, the Company and Ex-Im Bank share in all loan
recovery proceeds on a pari passu basis in accordance with the 90%
guaranteed/10% unguaranteed ratio. The Company also has the responsibility to
ensure that loans are underwritten, documented and funded in accordance with
Ex-Im Bank polices and procedures in order to avoid loss of the guarantee.

The loans made by the Company to finance the purchase by U.S. manufacturers of
goods from international emerging markets are unsecured loans which are
discounted at origination to yield a market rate. The Company has obtained a
credit risk policy from a private sector insurance company to insure loans made
under this program. In the event of a loan default, the insurance company will
pay the Company, subject to certain deductibles, 95% of the principal balance,
plus accrued interest. The Company has the responsibility to ensure that loans
are underwritten, documented and funded in accordance with the insurance policy
in order to avoid loss of the insurance.

                                       12
<PAGE>
 
International Lending  - Emerging Markets
Short and Medium Term Loan Products and the Origination Process

Emerging market-based clients of the Company's Americas and Asia/Africa/Europe
business units are typically small and medium size manufacturers requiring
financing to purchase equipment, components and raw materials from the U.S.

The Company primarily uses Ex-Im Bank guarantee and insurance programs to
mitigate its credit risk to the borrower. In 1998, as an alternative to the
Ex-Im Bank product, the Company obtained a credit risk insurance policy for
short and medium term loans to manufacturers in certain international emerging
markets from a private sector insurance company. The underwriting criteria are
substantially the same under both the Ex-Im Bank and privately insured programs,
although Ex-Im Bank imposes U.S. content measurements.

The Ex-Im Bank guarantee or insurance provides a 100% cover on the medium term
loans and generally a 95% cover on the short-term loans. The private sector
insurance policy generally insures 95% of the short and medium term loans. With
the private sector insurance policy, the Company has discretionary credit
approval authority for loans up to $750,000 which meet the underlying criteria
of the private sector insurance policy. The Company tends to utilize the
insurance policy for smaller dollar requests to facilitate approval time.

Medium term loans are generally 3-5 years in term, and finance the acquisition
of qualified U.S.-made capital goods. The Ex-Im Bank program allows the
financing of up to the lower of 85% of purchase price or 100% of U.S. content.
Certain other U.S. content and product requirements must also be met. The loans
range in size from $150,000 to $10 million and are U.S. dollar-denominated.
Although the purchase of the equipment is being financed, the Ex-Im Bank loans
are unsecured; the Company relies on the borrower's cash flow and the 100% Ex-Im
Bank guarantee or Ex-Im insurance. The Company does obtain a security interest
in the equipment being underwritten pursuant to the private sector insurance
policy.

International lending officers are responsible for marketing, underwriting,
servicing, monitoring and collecting their portfolios of loans. Because the
medium term loans are fully amortizing with semi-annual payments, there is less
post-closing analysis required for performing loans than for other types of
loans made by the Company.

In the event of default, Ex-Im Bank handles the liquidation of Ex-Im guaranteed
medium term loans and pays the Company 100% of the principal balance, plus
accrued interest. See "Delinquency and Collection Activities."


International Lending Underwriting

International lending officers receive and assemble initial applications,
analyze the creditworthiness of proposed borrowers, prepare memoranda, and aided
by staff prepare the required Ex-Im Bank and private sector insurance loan
application forms and conduct credit and 

                                       13
<PAGE>
 
trade reference checks. For short and medium term loans, in-country Master
Agents, where applicable, aid in the transaction by obtaining required financial
or operational data from borrowers and generally assist in the loan origination
and closing process.

The Company's international lending officers will often visit the prospective
U.S. borrower's place of business and perform on-site inspections. The Company
will generally instruct its in-country Master Agents to make such inspections of
foreign borrowers. Although certain of the international loans are unsecured,
site inspections are conducted in most cases because such information is helpful
in assessing a borrower's operations.

The approval process is substantially similar to that followed by the commercial
lending officers. The Credit Policy Officer reviews the memorandum and
supporting file for compliance with internal Company policies as well as
applicable Ex-Im Bank or private insurer program parameters. As with the
domestic lending, exceptions to the Company's and Ex-Im Bank's loan policies are
entertained on a case-by-case basis by the approving loan officers, and
acceptance of exceptions depends upon the overall creditworthiness of the
applicant.

Working capital lines of credit are collateralized by export-related inventory
and accounts receivable less than 90 days old; such collateral has maximum
prescribed collateral values of 75% and 90%, respectively. As is the case with
respect to domestic loans, the collateral value required to support a loan is
based on the borrower's individual circumstances, and applications exceeding the
Company's general standards may receive special consideration.

For short and medium term loans, debt service coverage and operating history are
reviewed in the underwriting process. The lending officer also considers the
availability to the borrower of U.S. dollars and other "hard" currency revenue
sources from sales to the U.S. and other stable currency markets.

While most working capital lines of credit are within the Company's "AA
Delegated Authority", applications which do not comply with and/or are above the
Company's authority, and all Ex-Im Bank short and medium term loans, require
Ex-Im Bank approval. U.S. import loans in excess of $500,000, and short and
medium term loans in excess of $750,000, require approval from the private
sector insurance company if they are to carry such insurance.


Capital Markets and Loan Servicing

Capital Markets Activities

The Capital Markets business unit was established in July 1996 to assume
responsibility for the non-recourse, servicing-retained sale of SBA, USDA and
Ex-Im Bank government guaranteed loans and to identify markets for the sale of
non-guaranteed mortgage, term and revolving loans on a non-recourse,
servicing-retained basis. In 1998, the Capital Markets business unit completed
the two securitizations of the unguaranteed portions of SBA loans and certain
whole commercial loans and a sale of revolving lines of credit to a commercial
paper conduit. Such 

                                       14
<PAGE>
 
capital markets activities allow the Company to leverage capital, replenish
liquidity, mitigate the risk of balance sheet exposure to any single borrower,
and reduce reliance on government guaranteed loan programs for revenue.

The guaranteed portions of SBA and USDA loans are generally sold during the
quarter of origination on a single loan basis to established brokers. Brokers
generally pool the SBA guaranteed portions. USDA loans are individually sold.
The guaranteed portions of the Ex-Im Bank loans and lines of credit are sold to
various parties, including Private Funding Export Funding Corporation ("PEFCO").
PEFCO is a private corporation established with the support of the United States
Treasury and Ex-Im Bank to assist in financing exports of U.S. goods and
services by making direct loans to foreign importers of U.S. made goods, and to
provide liquidity support for private sector lending utilizing Ex-Im Bank
programs. The Company is a 1% shareholder and one of among approximately 50
PEFCO shareholders, with a common stock investment of $599,000 at December 31,
1998.

SBA and USDA regulations permit the Company to sell a portion of the
unguaranteed amount of loans originated under their respective programs. 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. SBA regulations require that the
Company hold retained interests in the unguaranteed portion of securitized loans
equal to 10% of the transaction. Upon the sale of such unguaranteed portions,
the Company shares in the payment stream and collateral on a pari passu basis
with all (guaranteed and unguaranteed) investors, beginning with the initial
recovery.

In 1998 the Company completed commercial loan securitization transactions and
sales 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. In connection with the Business
Loan Trust 1998-A backed by commercial term loan securitization 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 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. The Company holds a $3.8 million subordinated interest to the
senior $21.4 million loans sold in the commercial paper sale.

The Capital Markets business unit has developed a list of potential buyers of
non-guaranteed mortgage loans, term loans and revolving lines of credit and
devotes substantial resources to the identification of such buyers. A primary
objective in the negotiation and sale of such loans is the Company's retention
of sole responsibility for borrower contact. Investors meet with borrowers only
in rare circumstances, and generally rely on the Company to prudently service
and monitor 

                                       15
<PAGE>
 
lending relationships. The Company believes that this is important to maintain
client relationships and also reflects investor confidence in its servicing
ability and reputation.

Loan Servicing Activities

At December 31, 1998, the total loan portfolio managed by the Company was $779.1
million as compared to $573.5 million at December 31, 1997.

The Company services substantially all of the loans it originates, whether
securitized, sold to investors or held in portfolio. Servicing includes
collecting payments from borrowers and remitting applicable payments and
required reports to any investors; accounting for principal, interest and any
real estate taxes or other escrow receipts and payments; contacting delinquent
borrowers; supervising foreclosures; and liquidating collateral when required.
Other than tasks performed by the assigned lending officers, loan servicing
functions are centralized in the Hartford, Connecticut headquarters.

The Company receives servicing fees on loans serviced for others in varying
amounts, as determined under the particular terms of the sale. Management
believes that servicing most loans originated enhances the Company's
relationship with borrowers. This contact allows the Company to continue to
offer its loan and deposit products to clients who may need additional
financing. Further, such arrangements provide an additional and profitable
revenue stream that is less cyclical than the business of originating and
selling loans.

After a loan is closed, the Loan Servicing business unit reviews the loan files
to confirm that loans were originated in accordance with any applicable
government guarantee program guidelines and Company policies. Thereafter, the
loan officers and the Loan Review business unit conduct periodic reviews of the
borrower's financial condition.


Delinquency and Collection Activities

The assigned loan officer retains responsibility for routine collection of his
or her portfolio. The Company attempts to collect all loans on a 30-day basis,
leaving very few loans past due 30 days or more at any month end. An officer's
initial collection efforts generally begin when an account is 15 days past due.
At 20 days past due, a reminder notice is sent to the borrower and the officer
again attempts to contact the borrower to determine the reason for the
delinquency and if the account will be brought current.

If a borrower is unable to make a payment within 30 days of the due date as of
month-end, and has not made acceptable alternative arrangements with the
Company, the officer issues a past due letter requiring the borrower to make the
required payment within 10 business days by certified or cashiers check. If
payment is not remitted on time, the account is transferred to the Company's
Asset Recovery business unit for consideration of additional collection
procedures, including issuance of a demand letter and possible liquidation of
collateral.

                                       16
<PAGE>
 
The Asset Recovery business unit is responsible for contacting the borrower and
analyzing its current and projected financial condition, the reasons leading to
the delinquency and the value of the collateral available to the Company. The
Asset Recovery Officer then proposes a workout plan to the Chief Credit Officer
and other involved members of senior management. The Asset Recovery business
unit will also provide any required notices and generally seek to comply with
applicable government guarantee program or investor requirements.

If a modification of loan terms or other acceptable workout cannot be achieved
within a reasonable time frame, the Company will liquidate the collateral
securing the loan. The Company prefers not to take title to real property or
equipment unless required to facilitate the collection process. The Company
solicits assistance from the principals of the delinquent borrower to effect the
liquidation of any property, with title remaining in the borrower's name,
thereby avoiding a lengthy foreclosure or repossession process and exposure to
the Company regarding environmental or other liability issues. The Company has
generally found principals of borrowers to be cooperative in assisting the
Company to liquidate collateral efficiently. The Company follows the same
general workout procedures for substantially all of the loans serviced.

If a loan carries an SBA guarantee, the responsible SBA District Office will be
notified of the delinquency and will be presented with a liquidation plan within
60-90 days of such delinquency. Unless the SBA objects, the Company will carry
out the terms of the liquidation plan. As a Preferred Lender, the Bank has
responsibility and authority over liquidation procedures on all SBA guaranteed
loans serviced. Any loss after liquidation of collateral is allocated pro rata
between the guaranteed and unguaranteed portions of an SBA Loan. After an SBA
loan becomes 60-90 days past due, the SBA, at the Company's request, will
repurchase the guaranteed portion of the principal balance of the loan at par
from the secondary market investor, together with accrued interest covering a
period of up to 120 days.

USDA procedures require that the Company file a liquidation plan when it is
believed action should be taken on a delinquent loan, which is generally when
the loan is 60-90 days delinquent. The USDA has 30 days to review the plan. The
Company will then execute the approved plan or work with the USDA to arrive at a
mutually acceptable plan. Any loss after liquidation of collateral is allocated
pro rata between the guaranteed and unguaranteed portions of the USDA loan. The
holder of the guaranteed portion may request that the USDA repurchase the
guaranteed portion at any time, or the Company will request repayment on such
holder's behalf when liquidation is complete. The USDA does not impose any
restrictions on the number of days for which interest will be paid on the
guaranteed portions.

The liquidation of delinquent working capital and medium term Ex-Im Bank loans
is handled by Ex-Im Bank. The Company may submit a claim for repurchase at any
time between 30 and 120 days after a delinquency occurs, but at no time may such
claim be made more than 150 days after the delinquency. Ex-Im Bank will make
payment under its guarantee within 30 days after acceptance of the Company's
request.

In the event of default on a private sector insured loan, the Company handles
the liquidation of the loan during a 150 day waiting period. At the end of the
waiting period, subject to certain 

                                       17
<PAGE>
 
deductibles being satisfied, the private sector insurance company pays the
Company 95% of the principal balance, plus accrued interest. At that time the
insurance company assumes the liquidation of the loan.

The Company retains responsibility for the proper documentation and servicing of
all loans serviced for others, and may incur losses related to such loans if it
is found to be negligent by a guaranteeing agency, insurer or investor in
carrying out these duties.

Unguaranteed and uninsured loans or unguaranteed and uninsured portions of loans
held by investors are subject to negotiated servicing agreements, which in some
cases, provide investors with the option of assuming responsibility for all
collection efforts after a loan becomes 60-90 days delinquent. If the Company is
contractually responsible for collection efforts, the servicing agreements
generally require that the investor pre-approve liquidation actions.


Credit Risk Management

The Chief Credit Officer has primary responsibility for credit risk management,
ensuring the appropriateness of underwriting criteria and application thereof,
the implementation of RISCOPE/sm/, (the Company's proprietary commercial risk
assessment model), and the independent analyses of loans by the Loan Review
business unit.

The Credit Policy Officer, who reports to the Chief Credit Officer, reviews all
credit memoranda for compliance with the requirements of government guarantee
programs and Company credit policies. If, based on particular facts and
circumstances, policy exceptions are proposed by lending officers, the Credit
Policy Officer will ensure that all appropriate policy exceptions are documented
and approved by the authorized party. The Chief Credit Officer periodically
evaluates the nature and trends of such exceptions, reporting them quarterly to
the Board of Directors' Loan Committee.

The Bank "risk rates" its loan portfolio by monitoring changes in the financial
condition of borrowers, assessing overall economic trends, and assigning
numerical rating to individual loans. The Company applies a nine tiered risk
rating system. The rating system, in conjunction with other available
quantitative and qualitative data, is utilized to assist management in its
quarterly evaluation of the adequacy of the Allowance for Loan Losses.

The assigned lending officer has primary responsibility for risk ratings, and
such officer's decisions are periodically reviewed by the Loan Review business
unit. Risk ratings are based on the borrower's operating cash flow, industry,
product line, earnings, assets, liability, management experience, debt capacity,
and prior credit history with the Company.

The Company has developed a proprietary risk analysis model, RISCOPE/sm/, used
in the initial underwriting, post-closing loan monitoring and rating process by
lending officers and the Loan Review business unit. RISCOPE/sm/ assists the
Company in quantifying the credit risk of commercial clients. The model takes
into account quantitative and qualitative factors and was

                                       18
<PAGE>
 
designed to analyze the Company's primary client base: small and medium size
manufacturers. Additionally, the model helps management identify weaknesses in
credits earlier than might otherwise be done if payment default were their only
manifestation.

The Loan Review business unit reviews the loan portfolio to evaluate the
appropriateness of officer risk ratings and overall trends in the portfolio.
Loan Review results are reported to the Loan Committee of the Board quarterly.


Private Banking

Historically, the Company's Private Banking business unit provided funding for
the Company by managing its deposit base, which consisted of demand deposits,
money market accounts and time certificates of deposits, by targeting the
commercial depository accounts of small and medium size manufacturers, as well
as the personal accounts of their principals, and by offering a full array of
financial products. Subsequent to the sale of the Company's checking, savings
and money market accounts, the Private Banking business unit will continue to
solicit retail certificates of deposit.

The Company has entered into a contractual agreement with CIGNA Financial
Services, Inc. with respect to providing investment, brokerage and cash
management services. The Company's Private Banking business unit has not yet
introduced these services as legal and regulatory diligence is currently
underway. Once introduced, all investment services will be supported by CIGNA
Financial Services' registered representatives.


Competition

The Company competes for clients with other commercial and savings banks,
finance companies, mutual funds, insurance companies, brokerage and investment
banking firms and certain other nonfinancial institutions, many of whom are able
to devote far greater resources than the Company to market, underwrite and
service loans to the same client base. The Company competes by emphasizing its
expertise and knowledge of its clients' businesses, commitment to service,
flexibility in structuring financial transactions, and strong relationships.
Through the combined utilization of government guaranteed loan programs, the
Company is able to provide flexible longer-term financing than would otherwise
be available to borrowers.


Regulation and Supervision

Holding Company Regulation

The Company is registered as a bank holding company and regulated and subject to
periodic examination by the Federal Reserve Bank ("FRB") under the Bank Holding
Company Act ("BHCA").

                                       19
<PAGE>
 
Pursuant to FRB regulations, the Company is limited to the business of owning,
managing or controlling banks and engaging in certain other bank-related
activities, including those activities that the FRB determines from time to time
to be closely related to banking. The BHCA requires, among other things, the
prior approval of the FRB if a bank holding company proposes to (i) acquire all
or substantially all of the assets of a bank, (ii) acquire direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any bank
(unless it already owns a majority of such bank's voting shares) or (iii) merge
or consolidate with any other bank holding company.

As a bank holding company, the Company is required by the FRB to act as a source
of financial strength and to take measures to preserve and protect the Bank. As
a result, the Company may be required to inject capital in the Bank if such a
need arises. The FRB may charge a bank holding company such as the Company with
unsafe and unsound practices for failure to commit resources to a subsidiary
bank when required.

To be considered regulatory capital, loans from the Company to the Bank must be
on terms subordinate in right of payment to deposits and to most other
indebtedness of the Bank.

The FRB, OCC and Federal Deposit Insurance Corporation (the "FDIC") collectively
have extensive enforcement authority over bank holding companies and national
banks in the United States. This enforcement authority, initiated generally for
violations of law and unsafe and unsound practices, includes, among other
things, the ability to assess civil money penalties, to initiate injunctive
actions and to terminate deposit insurance in extreme cases.

The bank regulatory agencies' enforcement authority was substantially enhanced
by the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). FIRREA significantly increased the amount of civil money penalties
and expanded the grounds for imposing such penalties. Also, under FIRREA, should
a Bank failure result in a loss to the FDIC, any other FDIC-insured subsidiaries
of the Company could be required to compensate the FDIC for the estimated amount
of the loss. Additionally, pursuant to FDICIA, the Company in the future could
have the potential obligation to guarantee the capital restoration plans of any
undercapitalized FDIC-insured subsidiaries it may control.


Interstate Banking

As of September 29, 1995, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "RNA") permitted adequately capitalized and managed
bank holding companies to acquire control of banks in any state. Additionally,
beginning on June 1, 1997, the RNA enabled banks to branch across state lines,
although individual states are authorized to permit interstate branches earlier
or to elect to opt out entirely.

                                       20
<PAGE>
 
Regulation of the Bank

General

The Bank, as an FDIC-insured national bank, is subject to regulation primarily
by the OCC, and secondarily by the FDIC. As a national bank, the Bank is a
member of the Federal Reserve System and its operations are subject to certain
FRB regulations. Various other federal and state consumer laws and regulations
also affect the operations of the Bank.

As a national bank, the Bank may be able to engage in certain activities
approved by the OCC which the FRB would not necessarily approve for the Company.
The OCC has been particularly aggressive in recent years in allowing national
banks to undertake an ever-increasing range of securities and insurance
activities. Along these lines, pursuant to certain revisions of the OCC's
regulations pertaining to banking activities effective on December 31, 1996,
national banks are permitted on a case-by-case basis to operate subsidiaries
engaging in activities not permissible for the Bank itself. Although the revised
regulations do not authorize any specific new activities, it is expected that
national banks, if eligible and if they obtain the approval of the OCC, will use
these regulations to expand further into the insurance and securities
businesses.

The revised OCC regulations contain "fire walls" intended to protect a national
bank from the risks taken by a subsidiary, including imposing a 10% cap on the
amount of bank capital that may be invested in a new subsidiary, as well as
requirements that extensions of credit to an operating subsidiary be
fully-collateralized and that transactions between the bank and subsidiary be
conducted at arm's-length. The parent national bank's exposure to any losses the
subsidiary may incur are limited to the bank's equity investment in the
subsidiary. Parent national banks are required to be well-capitalized both
before and after an investment is made.

Since OCC approval is required on a case-by-case basis for an eligible bank to
engage in activities not permissible for the bank to conduct directly, the
effect of these revised regulations on the operations of national banks is
unclear. Further, it is expected that Congress will consider new banking
legislation in the near future addressing these revisions.

As a national bank, the Bank may ordinarily lend up to 15% of its capital on an
unsecured basis to any one borrower, and may lend up to an additional 10% of its
capital to that same borrower on a fully secured basis involving readily liquid
collateral having an established market value as determined by reliable and
continuously available price quotations, and equal at least to the amount
borrowed. In addition, there are various other circumstances in which the Bank
may lend in excess of such limits, including authority to lend up to 35% of
capital and surplus when the loan is secured by documents of title to readily
marketable staples, unlimited authority if loans are guaranteed by a U.S.
government agency, and certain other exceptions relevant to international trade
finance.

Federal law also imposes additional restrictions on the Bank with respect to
loans and credit to certain related parties and transactions with the Company's
principal stockholders, officers, directors and affiliates. Extensions of credit
to such persons (i) must be made on substantially

                                       21
<PAGE>
 
the same terms (including interest rates and collateral) as, and follow credit
underwriting procedures not less stringent than, those prevailing for comparable
transactions with members of the general public, and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.

Capital Adequacy

The federal bank regulatory authorities have adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a systematic
framework that makes regulatory capital requirements more sensitive to
differences in risk profile among banking organizations, takes off-balance sheet
exposures into explicit account in assessing capital adequacy, and minimizes
disincentives to holding liquid, low-risk assets. These risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
financial instruments into four weighting categories, with higher levels of
capital required for the categories perceived as representing greater risk.

Under these guidelines, a banking organization's capital is divided into two
tiers. The first tier ("Tier 1") includes common equity, perpetual preferred
stock (excluding auction rate, money market or remarketable issues) and minority
interests held by others in a consolidated subsidiary, less goodwill and any
disallowed intangibles. Supplementary ("Tier 2") capital includes, among other
items, cumulative and limited-life preferred stock, mandatory convertible
securities, subordinated debt and the allowance for loan and lease losses,
subject to certain limitations and less required deductions as provided by
regulation.

Banking organizations are required to maintain a risk-based capital ratio of
total capital (Tier 1 plus Tier 2) to risk-weighted assets of 8%, of which at
least 4% must be Tier 1 capital. Federal bank regulatory authorities may,
however, set higher capital requirements when a banking organization's
particular circumstances warrant. As a general matter, banking organizations are
expected to maintain capital ratios well above the regulatory minimums.

In addition, federal bank regulatory authorities have established guidelines for
a minimum leverage ratio (Tier 1 capital to average total assets). These
guidelines provide for a minimum leverage ratio of 3% for banking organizations
that meet certain specified criteria, including excellent asset quality, high
liquidity, low interest rate exposure and the highest regulatory rating. Banking
organizations not meeting these criteria or which are experiencing or
anticipating significant growth are required to maintain a leverage ratio which
exceeds the 3% minimum by a least 100 to 200 basis points. The risk based
capital and leverage ratios of the Bank as of December 31, 1998 and December 31,
1997 are set forth in Note 7 to the Company's Consolidated Financial Statements.

Failure to meet applicable capital guidelines could subject a bank or bank
holding company to a variety of enforcement remedies available to the federal
bank regulatory authorities, including limitation on the ability to pay
dividends, the issuance of a capital directive to increase capital and, in the
case of a bank, the termination of deposit insurance by the FDIC or (in severe
cases) the appointment of a conservator or receiver. 

                                       22
<PAGE>
 
Dividends

The Bank is subject to legal limitations on the frequency and amount of
dividends that can be paid to the Company. The OCC, in general, also has the
power to prohibit the payment of dividends by the Bank which would otherwise be
permitted under applicable regulations if the OCC determines that such dividends
would constitute an unsafe or unsound practice.

OCC approval is required for the payment of dividends by the Bank in any
calendar year if the total of all dividends declared by the Bank in that year
exceeds the current year's net income combined with the retained net income of
the two preceding years. "Retained net income" means the net income of a
specified period less any common or preferred stock dividends declared for that
period. Moreover, no dividends may be paid by a national bank in excess of its
undivided profits account. In addition, the FRB and the FDIC have issued policy
statements which provide that, as a general matter, insured banks and bank
holding companies may pay dividends only out of current operating earnings.

There are also statutory limits on other transfers of funds to the Company and
any other future non-banking subsidiaries of the Company by the Bank, whether in
the form of loans or other extensions of credit, investments or asset purchases.
Such transfers by the Bank generally are limited in amount to 10% of the Bank's
capital and surplus to the Company and any such future subsidiary of the
Company, or 20% in the aggregate to the Company and all such subsidiaries.
Furthermore, such loans and extensions of credit are required to be fully
collateralized in specified amounts depending on the nature of the collateral
involved.

FDICIA

FDICIA was enacted on December 19, 1991. It substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to other federal banking statutes.

A central feature of FDICIA is the requirement that the federal banking agencies
take "prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions they
supervise. Under these regulations, a depository institution is classified in
one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Based on the Bank's current regulatory capital
position, management believes that the Bank is "well capitalized."

FDICIA generally prohibits the Bank from making any capital distribution
(including payment of a cash dividend) or paying any management fees to the
Company if the Bank would thereafter be undercapitalized. Undercapitalized
depository institutions are subject to growth limitations and are required to
submit a capital restoration plan acceptable to federal banking agencies. If a

                                       23
<PAGE>
 
depository institution fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized."

Significantly undercapitalized depository institutions may be subject to a
number of other requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, reduce total assets,
and stop accepting deposits from correspondent banks. Critically
undercapitalized institutions are subject to the appointment of a receiver or
conservator, generally within 90 days of the date of such institution is
determined to be critically undercapitalized.

Community Reinvestment Act

The Federal Community Reinvestment Act (the "CRA") requires the OCC to evaluate
the Bank's performance in helping to meet the credit needs of the community. The
Bank defines its CRA marketplace as Hartford County. This definition is not
intended to restrict the availability of credit services throughout the Bank's
general service area, but represents a special commitment the Bank has made to
provide lending and depository services to the community. As a part of the CRA
program, the Bank is subject to periodic examinations by the OCC and maintains
comprehensive records of its CRA activities for this purpose. Following its most
recent examination in March 1998, the Bank received a rating of "Satisfactory."

The Bank is specifically interested in making financing available to small and
medium size manufacturers in its defined lending area. The Bank evaluates credit
applications without regard to race, color, religion, national origin, gender,
marital status or age, and does not discriminate against any loan applicant
whose income may come entirely or in part from any public assistance program, or
against any applicant who has exercised in good faith any right under the
Consumer Protection Act. The Company maintains preferred status with the SBA,
USDA and Ex-Im Bank which enables it to provide access to credit products that
might otherwise be unavailable.

ITEM 2.  PROPERTIES

The Company leases approximately 50,000 square feet in Hartford, Connecticut to
house its headquarters and lending and support staff. The Company maintains
leased space for representative offices in Boston and Springfield,
Massachusetts; Providence, Rhode Island; Morristown, New Jersey; Rochester, New
York; Philadelphia and Pittsburgh, Pennsylvania; Washington, D.C.; Detroit,
Michigan; and Cleveland, Ohio. The Company's leases generally provide for two
five-year renewal options and options on additional space. Management believes
that its existing facilities are adequate for their present and proposed uses
and that suitable facilities will be available on reasonable terms for any
additional space required.

                                       24
<PAGE>
 
ITEM 3.  LEGAL PROCEEDINGS

Neither the Company nor the Bank is involved in any legal proceedings except for
routine litigation incidental to the business of banking, none of which is
expected to have a material adverse effect on the Company's financial position,
results of operations or cash flows.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of 1998 to a vote of
security holders through solicitation of proxies or otherwise.

                                       25
<PAGE>
 
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Information required by this item may be found on the inside back cover of the
Company's 1998 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

Information required by this item may be found on page 4 of the Company's 1998
Annual Report to Shareholders, which is incorporated by reference and is filed
as Exhibit 13.1 hereto.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Information required by this item may be found on pages 5 through 20 of the
Company's 1998 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this item may be found on pages 16 through 18 of the
Company's 1998 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information required by this item may be found on pages 21 through 43 of the
Company's 1998 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None.

PART III

ITEMS 10 - 13

Information required by these items may be found in the Company's Proxy
Statement which is incorporated by reference.

                                       26
<PAGE>
 
PART IV 

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

A.   The following documents are filed as a part of this report:

     1.   Financial Statements set forth on pages 21 through 43 of the 1998
          Annual Report to Shareholders which is filed herewith as Exhibit 13.1.

          (i)    Report of Independent Accountants
                
          (ii)   Consolidated Balance Sheets as of December 31, 1998 and 1997

          (iii)  Consolidated Statements of Income for the Years Ended December
                 31, 1998, 1997 and 1996

          (iv)   Consolidated Statements of Changes in Stockholders' Equity for
                 the Years Ended December 31, 1998, 1997 and 1996

          (v)    Consolidated Statements of Cash Flows for the Years Ended
                 December 31, 1998, 1997 and 1996

     2.   Financial Schedules:

          None required.

     3.   Exhibits:

          Exhibit
          Number   Description
          ------   -----------
          3.1      Amended and Restated Certificate of Incorporation of the 
                   Registrant.*
  
          3.2      Amended and Restated By-laws of the Registrant.*

          10.1     Employment Agreement among Registrant, First National Bank 
                   of New England and Brett N. Silvers dated April 15, 1994; 
                   as amended by Letter Agreement dated July 3, 1997.*

          10.2     Promissory Note of Brett N. Silvers, payable to the 
                   Registrant, dated June 30, 1994, as amended.*

          10.3     Stock Pledge Agreement, dated June 30, 1994, between the 
                   Registrant and Brett N. Silvers, as amended.*

          10.4     Amended and Restated 1996 Stock Option Plan.*

          10.5     1994 Incentive Stock Option Plan, as amended.*

          10.6     401(k) Plan.*

          10.7     Lease between Cambridge One Commercial Plaza, LLC and the 
                   Bank dated June 1, 1997.*

          10.8     First Amendment of Lease between Cambridge One Commercial 
                   Plaza, LLC and the Bank dated November 30, 1998.

                                       27
<PAGE>
 
          10.9     Second Amendment of Lease between Cambridge One Commercial 
                   Plaza, LLC and the Bank dated as of March 26, 1999.

          10.10    Employment Agreement between the Bank and Leslie A. 
                   Galbraith dated August 25, 1997.*

          10.11    Employment Agreement Amendment between the Bank and Leslie A.
                   Galbraith dated December 2, 1998.

          10.12    Revolving Commercial Loan Warehouse and Security Agreement 
                   among Prudential Securities Credit Corporation, First 
                   National Bank of New England and First International 
                   Bancorp, Inc., dated as of December 4, 1998.

          10.13    Loan Purchase and Servicing Agreement among FNBNE Funding 
                   Corp., First National Bank of New England, First Union 
                   National Bank, Variable Funding Capital Corporation, First 
                   Union Capital Markets, a division of Wheat First Securities,
                   Inc. and Marine Midland Bank, dated as of December 23, 1998. 

          10.14    Pooling and Servicing Agreement between Marine Midland Bank 
                   and First National Bank of New England, dated as of May 31, 
                   1998.

          10.15    Sale and Servicing Agreement between FNBNE Business Loan 
                   Trust 1998-A and First National Bank of New England, dated 
                   as of December 1, 1998.

          13.1     1998 Annual Report to Shareholders.

          21.1     Subsidiaries of Registrant. 

          23.1     Consent of PricewaterhouseCoopers LLP

          27.1     Financial Data Schedule for the Year Ended December 31, 1998.

          99       Agreement for Purchase and Sale of Assets and Assumption of
                   Liabilities between First National Bank of New England and 
                   Hudson United Bank, dated as of December 31, 1998.**

          * Denotes an exhibit which has previously been filed as an exhibit to 
the Company's Registration Statement on Form S-1, Commission File No. 333-31339.

          ** Denotes an exhibit which has previously been filed as an exhibit to
the Company's Report on Form 8-K, Commission File No. 0-22861.

B.   Reports on Form 8-K.

     The Company did not file any Current Reports on Form 8-K during the quarter
ended December 31, 1998.

     The Company did file a Report on Form 8-K dated January 8, 1999 to report
the signing of the Agreement for Purchase and Sale of Assets and Assumption of
Liabilities between First National Bank of New England (now known as First
International Bank, N.A.) and Hudson United Bank, dated December 31, 1998.

                                       28
<PAGE>
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date:  March 29, 1999
                                            First International Bancorp, Inc.


                                            By: /s/ Brett N. Silvers
                                                -----------------------------
                                                Brett N. Silvers
                                                Chief Executive Officer

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

         Signature                    Title                          Date
         ---------                    -----                          ----

/s/ Brett N. Silvers
-------------------------
Brett N. Silvers                 Chief Executive Officer        March 29, 1999

/s/ Michael R. Carter
-------------------------
Michael R. Carter                Director                       March 29, 1999

/s/ Arnold L. Chase
-------------------------
Arnold L. Chase                  Director                       March 29, 1999

/s/ Cheryl A. Chase
-------------------------
Cheryl A. Chase                  Director                       March 29, 1999

/s/ Frank P. Longobardi
-------------------------
Frank P. Longobardi              Director                       March 29, 1999

/s/ Leslie A. Galbraith
-------------------------
Leslie A. Galbraith              Executive Vice President,      March 29, 1999
                                 Secretary and Treasurer

                                       29