<PAGE>

                                 UNITED STATES
                       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, 1999


                                   000-22929
                            ------------------------
                               Commission File No.


                             TALBOT BANCSHARES, INC.
                           --------------------------
            (Exact name of registrant as specified in its charter)


                   Maryland                              52-2033630
    --------------------------------------            -------------
    (State or Other Jurisdiction of                   (I.R.S. Employer
    Incorporation or Organization)                    Identification No.)

    18 East Dover Street, Easton, Maryland                   21601
    ---------------------------------------              ------------
    (Address of Principal Executive Offices)              (Zip Code)


                                (410) 822-1400
               --------------------------------------------------
               Registrant's Telephone Number, Including Area Code


            Securities  Registered under Section 12(b) of the Act:
                                      None.

            Securities  Registered under Section 12(g) of the Act:
                           Common Stock Par Value $.01

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

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


   The aggregate market value of the Corporation's voting stock held by non-
       affiliates of the registrant as of March 22, 2000 was $54,893,318

    The number of shares outstanding of the registrant's  common stock, as
                       of March 22, 2000 was 1,193,333.
<PAGE>

                       Documents Incorporated by Reference

   Portions of Talbot  Bancshares,  Inc definitive  Proxy Statement for its 2000
Annual Stockholders' Meeting, as filed with the Commission on March 24, 2000 are
incorporated  by reference into Part III of this report.  Portions of the Annual
Report to Stockholders  for the year ended December 31, 1999 are incorporated by
reference  into  Parts I and II of this  report.  Except for parts of the Talbot
Bancshares,  Inc. Annual Report expressly incorporated herein by reference, this
Annual  Report  in not to be  deemed  filed  with the  Securities  and  Exchange
Commission.

<TABLE>
<CAPTION>
                                 FORM 10K INDEX


                                                                                           Page(s)
                                     Part I
<S>                                                                                      <C>
   Item 1.    Business                                                                        3
   Item 2.    Properties                                                                     10
   Item 3.    Legal Proceedings                                                              11
   Item 4.    Submission of Matters to a Vote of Security Holders                            11

                                     Part II

   Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters          11
   Item 6.    Selected Financial Data                                                        11
   Item 7.    Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                                      11
   Item 7a.   Quantitative and Qualitative Disclosures About Market Risk                     11
   Item 8.    Financial Statements and Supplementary Data                                    12
   Item 9.    Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure                                                           12

                                Part III

   Item 10.   Directors and Executive Officers of the Registrant                             12
   Item 11.   Executive Compensation                                                         12
   Item 12.   Security Ownership of Certain Beneficial Owners and Management                 12
   Item 13.   Certain Relationships and Related Transactions

                                 Part IV

   Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K               12
</TABLE>

                                        2
<PAGE>

                                     PART I


ITEM 1.    BUSINESS

GENERAL

Talbot Bancshares,  Inc. (the "Company") is a Maryland corporation  organized on
March 10, 1997 which  became a registered  bank  holding  company on May 1, 1997
under the Bank  Holding  Company Act of 1956,  as amended  (the "BHC Act").  The
Company  engages in the  business  of banking  through its sole  subsidiary  The
Talbot Bank of Easton,  Maryland (the "Bank"), a commercial bank chartered under
the laws of the State of Maryland. The Company acquired the Bank under a Plan of
Reorganization  and Share  Exchange  (the  "Plan")  proposed by  management  and
approved by the Bank's stockholders at their annual meeting held April 23, 1997.
Pursuant  to the Plan each share of Bank stock was  exchanged  for two shares of
Company stock.  The Bank's charter was not affected by the  reorganization.  The
Company has issued and outstanding  1,193,333 shares of common stock , par value
$0.01 per share ("Shares") held by 460 holders of record March 22, 2000.

The Bank currently  accounts for substantially all of the Company's assets.  The
deposits of the Bank are insured by the Federal  Deposit  Insurance  Corporation
("FDIC").  The Company's and the Bank's main office is located in Talbot County,
Maryland,  at 18 East Dover Street,  Easton,  Maryland 21601. The Bank commenced
operation  in 1885 and is  engaged  in general  commercial  and  retail  banking
business serving  individuals and businesses in Talbot and Dorchester  Counties,
Maryland.  The Bank  currently  operates four banking  offices in Talbot County,
three in Easton,  Maryland and one in Saint  Michaels,  Maryland.  The Bank also
operates a branch in Dorchester  County,  Maryland in the city of Cambridge.  At
December 31, 1999 the Company had total assets of $327  million,  total loans of
$219 million and total deposits of $274 million.


PRINCIPAL SERVICES

The Bank is an independent  community  bank providing  service to businesses and
individuals in its market area.  Services  offered are  essentially  the same as
those  offered by larger  regional  institutions  which  compete  with the Bank.
Services  provided  to  businesses   include   commercial   checking,   savings,
certificate of deposit and overnight investment sweep accounts.  The Bank offers
all forms of commercial  lending including secured and unsecured loans,  working
capital loans, lines of credit, term loans, accounts receivable financing,  real
estate acquisition development, construction loans and letters of credit. Direct
Deposit  of  payroll,  PC  banking  and  telephone  banking  services  are  also
available.

Services to individuals  include checking  accounts,  various savings  programs,
mortgage loans,  home improvement  loans,  installment and other personal loans,
credit cards, personal lines of credit, automobile and other consumer financing,
safe deposit services,  debit cards, 24 hour telephone banking, PC banking,  and
24 hour automatic teller machine  services  through the HONOR network.  The Bank
has a branch in Cambridge,  Maryland  offering  full service  banking 6 days per
week with extended hours.

LENDING ACTIVITIES

The Company originates secured and unsecured loans for business purposes.  It is
typical for commercial loans to be secured by real estate,  accounts receivable,
inventory equipment or other assets of the business.  Commercial loans generally
involve a greater  degree of  credit  risk than one to four  family  residential
mortgage loans.  Repayment is often dependent on the successful operation of the
business and may be affected by adverse  conditions in the local economy or real
estate market. The financial condition and cash flow of commercial  borrowers is
therefore, carefully analyzed during the loan approval process, and continues to
be monitored by obtaining  business  financial  statements,  personal  financial
statements  and income tax  returns.  The  frequency  of this on going  analysis
depends upon the size and complexity of the credit and collateral  which secures
the loan. It is also the Company's general policy to obtain personal  guarantees
from the principals of the commercial loan borrowers.

The Company provides  residential real estate construction loans to builders and
individuals  for single family  dwellings.  Residential  construction  loans are
usually  granted  based upon "as  completed"  appraisals  and are secured by the
property under construction. Additional collateral may be taken if loan to value
ratios exceed 75%.  Site  inspections  are performed to determine  pre-specified
stages of completion  before loan proceeds are disbursed.  These loans typically
have maturities of six


                                        3
<PAGE>

to twelve  months and may be fixed or variable  rate.  Permanent  financing  for
individuals  offered by the  Company  includes  fixed rate loans with three year
balloons, or variable rate loans with five year balloons. Permanent financing is
often  provided by third party lenders for borrowers  seeking  longer term fixed
rate loans.

The risk of loss associated with real estate construction  lending is controlled
through conservative underwriting procedures such as loan to value ratios of 75%
or less,  obtaining  additional  collateral when prudent, and closely monitoring
construction projects to control disbursement of funds on loans.

The Company  originates fixed and variable rate  residential  mortgage loans. As
with any consumer  loan,  repayment is  dependent on the  borrower's  continuing
financial  stability  which can be  adversely  impacted  by job  loss,  divorce,
illness, or personal bankruptcy.  Underwriting standards recommend loan to value
ratios  of 75% based on  appraisals  performed  by  approved  appraisers  of the
Company. Title insurance protecting the Company's lien priority as well as fire,
and casualty insurance are required.

Commercial real estate loans are primarily those secured by office condominiums,
retail  buildings,  warehouses  and general  purpose  business  space.  The risk
associated  with these loans is reduced by low loan to value ratio  standards as
well as the thorough financial analysis performed and the Company's knowledge of
the local economy in which it lends.

A variety of  consumer  loans are  offered to  customers  including  home equity
loans,  credit cards and other  secured and  unsecured  lines of credit and term
loans.  Careful analysis of an applicant's  creditworthiness is performed before
granting credit and on going monitoring of loans  outstanding is performed in an
effort to minimize risk of loss by identifying problem loans early.

COMPETITIVE CONDITIONS

The Bank is subject to  substantial  competition in all aspects of its business.
The Bank competes  principally  with five other  commercial  banks which operate
offices in Talbot  County,  four of which have resources  substantially  greater
than the Bank's. In Dorchester  County the Bank competes  principally with seven
other   commercial  banks  and  one  savings  bank.  The  Bank  also  encounters
competition  from consumer loan companies,  brokerage  firms,  credit unions and
other nonbank  institutions  in both Talbot and  Dorchester  counties.  The Bank
engages  in  traditional  marketing  activities  such as  advertising  in  local
newspapers,  trade  journals  and other  publications,  and  radio  advertising.
Officers,  Directors and employees of the Bank  represent the bank through their
involvement   on  boards  of  nonprofit   organizations   and  other   community
organizations, as well as their participation in community events. The Bank also
relies on referrals from satisfied customers.

The following  table sets forth deposit data for Talbot and Dorchester  Counties
as of June 30, 1999, the most recent date for which  comparative  information is
available.

<TABLE>
<CAPTION>
                                                                                                        % of
Talbot County                                                                       Deposits            Total
---------------------------------------------------------------------------------------------------------------------------
                                                                                (in thousands)
<S>                                                                             <C>                   <C>
The Talbot Bank of Easton, Maryland                                                  $232,339           39.61%
St. Michaels Bank                                                                     110,154           18.78
NationsBank, National Association                                                      82,204           14.01
Crestar Bank                                                                           58,330            9.94
Easton Bank & Trust                                                                    40,844            6.96
Farmers Bank                                                                           29,354            5.01
Allfirst Bank                                                                          28,495            4.86
First Mariner Bank                                                                      4,877             .83
                                                                                   ----------        --------

       Total                                                                         $586,597          100.00%
                                                                                     ========          =======
</TABLE>
Source:  FDIC DataBook




                                        4
<PAGE>

<TABLE>
<CAPTION>
                                                                                                          % of
Dorchester County                                                                 Deposits               Total
---------------------------------------------------------------------------------------------------------------------------
                                                                                (in thousands)
<S>                                                                             <C>                    <C>
The National Bank of Cambridge                                                       $129,704           34.21%
Bank of the Eastern Shore                                                              92,359           24.36
NationsBank, National Association                                                      30,452            8.03
Atlantic Bank                                                                          28,987            7.65
Hebron Savings Bank                                                                    32,459            8.56
Allfirst Bank                                                                          26,223            6.92
Crestar Bank                                                                           18,851            4.97
Provident State Bank of Preston, Maryland                                              15,106            3.99
The Talbot Bank of Easton, Maryland                                                     4,963            1.31
                                                                                     --------          ------
       Total                                                                         $379,104          100.00%
                                                                                     ========          ======
</TABLE>
Source:  FDIC DataBook

SUPERVISION AND REGULATION

The following is a summary of the material  regulations and policies  applicable
to the Company and its  subsidiaries  and is not intended to be a  comprehensive
discussion.  Changes  in  applicable  laws and  regulations  may have a material
effect on the business of the Company and Bank.

General

The Company is a bank holding company, registered with the Federal Reserve under
the BHC Act and as such is subject to the supervision, examination and reporting
requirements  of the BHC Act and the  regulations  of the Federal  Reserve Board
(the "FRB").

The Bank is a state  chartered  bank in Maryland  and is a member of the Federal
Deposit  Insurance  Corporation  (the  "FDIC").  The  Bank  is  subject  to  the
regulation,  supervision, and reporting requirements of the FDIC, as well as the
Maryland  Commissioner  of  Financial  Regulation.  The Bank is also  subject to
numerous state and federal  statutes and  regulations  that affect its business,
activities.

Regulation of Bank Holding Companies

Under the BHC Act,  the  company  may not  directly  or  indirectly  acquire the
ownership  or  control  of  five  percent  or  more  of  the  voting  shares  or
substantially  all of the assets of any company,  including a bank,  without the
prior  approval of the FRB. The BHC Act also  restricts  the types of businesses
and activities in which a bank holding company and its  subsidiaries may engage.
Activities  are  generally  limited  to those  which the FRB finds to be closely
related to, or incidental to, the business of banking.

Pursuant  to the  Gramm-Leach  Bliley  Act,  the Company has elected to become a
"financial holding company" and may engage in activities that are in addition to
the business of banking.  A financial holding company may engage in a full range
of  financial  activities,   including,   insurance  and  securities  sales  and
underwriting activities, and real estate development,  with new expedited notice
procedures. The Gramm-Leach-Bliley Act is described in more detail below.

Subsidiary  banks of bank  holding  companies  are subject to certain  statutory
limits of the  transfer  of funds to the  holding  company or any of its nonbank
subsidiaries,  whether  in the  form of loans or  other  extensions  of  credit,
investments in their securities and on the use of their securities as collateral
for loans to any  borrower.  Such  transfers of a  subsidiary  bank to a holding
company or one of its  nonbanking  subsidiaries  is limited in amount,  and such
loans and  extensions of credit are required to be  collateralized  in specified
amounts.

Under FRB policy,  the Company is expected to act as a source of strength to its
subsidiary bank and the FRB may charge the bank holding company with engaging in
unsafe and unsound  practices  for failure to commit  resources  to a subsidiary
bank

                                        5
<PAGE>

when required. In addition,  under the Financial  Institutions Reform,  Recovery
and Enforcement Act of 1989 ("FIRREA"),  depository  institutions insured by the
FDIC can be held liable for any losses incurred by, or reasonably anticipated to
be  incurred  by,  the FDIC in  connection  with (i) the  default  of a commonly
controlled  FDIC-insured  depository institution or (ii) any assistance provided
by the FDIC to a commonly  controlled  FDIC-insured  depository  institution  in
danger of default.  Accordingly in the event that any insured  subsidiary of the
Company  causes a loss to the FDIC,  other insured  subsidiaries  of the Company
could be required to  compensate  the FDIC by  reimbursing  it for the estimated
amount of such loss. Such cross guaranty  liabilities  generally are superior in
priority to  obligations  of a financial  institution  to its  stockholders  and
obligations to other affiliates.

Capital Requirements

The Company is subject to various regulatory capital  requirements  administered
by the federal banking  agencies.  Failure to meet minimum capital  requirements
can initiate certain mandatory, and possibly additional discretionary actions by
regulators,  that if  undertaken,  could  have a direct  material  effect on the
Company's financial statements.  Under capital adequacy guidelines there are two
basic measures: a risk-based measure and a leverage measure.

The risk-based  capital  guidelines are established to make  regulatory  capital
requirements more sensitive to risk profiles of banks and bank holding companies
and to account  for off balance  sheet  exposure.  Assets and off balance  sheet
items are assigned to broad risk categories, each with appropriate weights.

A banking  organization's  capital is divided into two tiers.  "Tier 1", or core
capital,  includes common equity,  retained  earnings,  minority interest in the
equity accounts of consolidated subsidiaries,  noncumulative perpetual preferred
stock,  and a limited  amount of  cumulative  perpetual  preferred  stock,  less
goodwill  and  certain  other  intangible  assets.  "Tier 2",  or  supplementary
capital,  includes,  among other things,  limited life preferred  stock,  hybrid
capital instruments,  mandatory convertible securities,  qualifying subordinated
debt,  and  the  allowance  for  loan  and  lease  losses,  subject  to  certain
limitations, and less required deductions.  "Total Capital" is the sum of Tier 1
and  Tier 2  capital.  The  Tier 1  component  must  comprise  at  least  50% of
qualifying  total  capital.  Regulatory  guidelines  require a minimum  of total
capital to risk-adjusted  assets ratio of 8 percent and a minimum Tier 1 capital
to risk weighted assets ratio of 4 percent.  Institutions which meet or exceed a
Tier 1 ratio of 6 percent,  a total  capital  ratio of 10  percent  and a tier 1
leverage  ratio of 5 percent  are  considered  well  capitalized  by  regulatory
standards.

Federal Deposit Insurance Corporation Improvement Act of 1991

In December 1991 , Congress  enacted the Federal Deposit  Insurance  Corporation
Improvement  Act of  1991  ("FDICIA"),  which  substantially  revised  the  bank
regulatory and funding  provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things,  (i) a  recapitalization  of the Bank Insurance Fund of
the FDIC (the "BIF") by increasing the FDIC's borrowing  authority and providing
for  adjustments in its assessment  rates;  (ii) annual on-site  examinations of
federally-insured  depository institutions by banking regulators; (iii) publicly
available  annual  financial  condition  and  management  reports for  financial
institutions,   including   audits   by   independent   accountants;   (iv)  the
establishment of uniform accounting  standards by federal banking agencies;  and
(v) the  establishment  of a "prompt  corrective  action"  system of  regulatory
supervision and intervention, based on capitalization levels, with more scrutiny
and restrictions placed on institutions with lower levels of capital.

FDICIA  establishes a system of prompt corrective action to resolve the problems
of  undercapitalized  institutions.   Under  this  system  the  federal  banking
regulators  are required to rate  supervised  institutions  on the basis of five
capital    categories:     "well-capitalized,"     "adequately     capitalized,"
"undercapitalized,"    "significantly    undercapitalized,"    and   "critically
undercapitalized;"  and to take certain mandatory actions, and are authorized to
take other  discretionary  actions,  with respect to  institutions  in the three
undercapitalized  categories.  The  severity of the actions will depend upon the
category in which the institution is placed.  A depository  institution is "well
capitalized"  if it has a total risk based  capital  ratio of 10% of greater,  a
Tier 1 risk based capital ratio of 6% of greater,  and a leverage ratio of 5% or
greater  and is not  subject  to any  order,  regulatory  agreement,  or written
directive to meet and maintain a specific capital level for any capital measure.
An "adequately  capitalized" institution is defined as one that has a total risk
based capital ratio of 8% of greater, a Tier 1 risk based capital ratio of 4% or
greater and a leverage ratio of 4% or greater (or 3% or greater in the case of a
bank with a composite CAMEL rating of 1).


                                        6
<PAGE>

FDICIA  generally  prohibits a  depository  institution  from making any capital
distribution,  including the payment of cash  dividends,  or paying a management
fee to its holding  company if the depository  institution  would  thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit capital  restoration plans. For a capital
restoration plan to be acceptable,  the depository  institution's parent holding
company must guarantee  (subject to certain  limitations)  that the  institution
will comply with such capital restoration plan.

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 and  requirements to
reduce  total  assets and stop  accepting  deposits  from  correspondent  banks.
Critically   undercapitalized   depository   institutions  are  subject  to  the
appointment of a receiver or conservator,  generally  within 90 days of the date
such institution is determined to be critically undercapitalized.

At December 31, 1999 the Bank had the necessary  capital levels to be considered
"well capitalized."

Interstate Banking Legislation

The  Riegle-Neal  Interstate  Banking and Branching  Efficiency  Act of 1994 was
enacted into law on  September  29, 1994.  The law  provides  that,  among other
things,  substantially all state law barriers tot he acquisition of banks by out
of state bank holding companies are eliminated effective September 29, 1995. The
law also permitted interstate branching by banks effective June 1, 1997, subject
to the ability of states to opt-out  completely  or to set an earlier  effective
date. Maryland generally  established an earlier effective date of September 29,
1995.


Gramm-Leach Bliley Act

In  November,  1999 the  Gramm-Leach  Bliley Act  ("GLBA")  was signed into law.
Effective  in pertinent  part on March 11,  2000,  GLBA revises the Bank Holding
Company Act of 1956 and repeals the affiliation provisions of the Glass-Steagall
Act of 1933, which, taken together, limited the securities,  insurance and other
non-banking  activities of any company that  controls an FDIC insured  financial
institution.  Under GLBA, bank holding  companies can elect,  subject to certain
qualifications,  to become a "financial  holding  company." GLBA provides that a
financial  holding  company may engage in a full range of financial  activities,
including insurance and securities sales and underwriting  activities,  and real
estate development, with new expedited notice procedures.

Maryland law generally  permits  Maryland state chartered  banks,  including the
Bank, to engage in the same  activities,  directly or through an  affiliate,  as
national banking  associations.  GLBA permits certain qualified national banking
associations  to form  financial  subsidiaries,  which have broad  authority  to
engage in all financial  activities  except  insurance  underwriting,  insurance
investments,  real estate investment or development,  or merchant banking. Thus,
the GLBA has the effect of broadening the permitted activities of Maryland state
chartered banks.

Effects of Monetary Policy

The Company and its bank  subsidiary  are  effected by the ongoing and  changing
monetary policies set forth by regulatory authorities including the FRB. Through
its powers the FRB can  influence the supply of bank credit and affect the level
of economic activity.  Changes in the discount rate and reserve requirements are
among the instruments used to influence the market.  These influences can impact
the overall growth and  distribution of bank loans,  investments,  and deposits,
and can also, affect the rates charged on loans and paid for deposits.

The  monetary  policies of the FRB have in the past and will  continue to affect
the operating results of all financial institutions including Talbot Bancshares,
Inc., and its subsidiary.


Federal Securities Law

The Company's common stock is registered with the SEC under Section 12(g) of the
Securities  and  Exchange  Act of 1934 , as amended (the  "Exchange  Act").  The
Company  is  subject  to  information,   proxy  solicitation,   insider  trading
restrictions and other requirements under the Exchange Act.

                                        7
<PAGE>

EMPLOYEES
At March 22,  2000 the  Company and the Bank had 81  full-time  employees  and 4
part-time employees.

SEASONALITY
Seasonality does not have a material impact on the Company's operations.

RISK FACTORS

Regulatory  Risks. The banking industry is subject to many laws and regulations.
Regulations  protect  depositors,  not  stockholders.  The Maryland  Division of
Financial  Regulation,  Federal Deposit  Insurance  Corporation and the Board of
Governors  of the  Federal  Reserve  System  regulate  the Company and the Bank.
Regulations  and laws  increase the  Company's  operating  expenses,  affect the
Company's  earnings,  and put the Company at a disadvantage  with less regulated
competitors,  such as finance companies, mortgage banking companies, and leasing
companies.

Exposure to Local  Economic  Conditions.  Most of the loans made by the Bank are
made to Maryland borrowers.  A decline in local economic conditions would affect
the Company's earnings.

Credit Risks and Inadequacy of Loan Loss Reserve.  When borrowers default and do
not  repay  the  loans  made to them  by the  Bank,  the  Company  loses  money.
Experience shows that some borrowers either will not pay on time or will not pay
at all. In these cases, the Bank will cancel, or "write off," the defaulted loan
or loans.  A "write off" reduces the Company's  assets and affects the Company's
earnings.  The Company anticipates losses by reserving what it believes to be an
adequate  cushion so that it does not have to take a large loss at any one time.
However,  actual loan losses  cannot be predicted,  and the Company's  loan loss
reserve may not be sufficient.

Interest Rate Risk.  The Company's  earnings  depend greatly on its net interest
income,  the difference between the interest earned on loans and investments and
the interest paid on deposits. If the interest rate paid on deposits is high and
the interest rate earned on loans and investments is low, net interest income is
small and the Company earns less.  Because  interest  rates are  established  by
competition, the Company cannot completely control its net interest income.

Risks  Associated  with Real  Estate  Lending.  The Bank makes many real  estate
secured  loans.  Real estate loans are in demand when interest rates are low and
economic  conditions  are  good.  Even  when  economic  conditions  are good and
interest rates are low, these conditions may not continue.  The Company may lose
money if the  borrower  does not pay a real estate loan.  If real estate  values
decrease, then the Company may lose more money when borrowers default.

No Assurance of Growth.  The Company's  ability to increase  assets and earnings
depends upon many factors,  including  competition  for deposits and loans,  the
Company's branch and office  locations,  avoidance of credit losses,  and hiring
and  training  of  personnel.  Many of these  factors  are beyond the  Company's
control.

Competition. Other banks and non-banks, including savings and loan associations,
credit unions,  insurance  companies,  leasing companies,  small loan companies,
finance companies, and mortgage companies, compete with the Company. Some of the
Company's  competitors  offer  services and  products  that the Company does not
offer.  Larger  banks and  non-bank  lenders can make  larger  loans and service
larger  customers.  Law changes now permit  interstate  banks which may increase
competition. Increased competition may decrease the Company's earnings.

No  Assurance  of Cash or  Stock  Dividends.  Whether  dividends  may be paid to
stockholders  depends on the  Company's  earnings,  its capital  needs,  law and
regulations,  and other factors.  The Company's payment of dividends in the past
does not mean that the Company will be able to pay dividends in the future.

Stock Not Insured. Investments in the shares of the Company's common stock are
not deposits that are insured against loss by the government.

Risk Involved in Acquisitions. Part of the Company's growth may come from buying
other  banks  and  companies.  A  newly  purchased  bank or  company  may not be
profitable after the Company buys it and may lose money,  particularly at first.
The new bank or company may bring with it unexpected  liabilities  or bad loans,
bad employee relations, or the new bank or company may lose customers.


                                        8
<PAGE>

Risk of Claims.  Customers  may sue the Company for losses due to the  Company's
alleged breach of fiduciary duties, errors and omissions of employees,  officers
and  agents,  incomplete  documentation,  the  Company's  failure to comply with
applicable laws and regulations,  or many other reasons.  Also, employees of the
Company  conduct all of the Company's  business.  The employees may knowingly or
unknowingly violate laws and regulations. Company management may not be aware of
any  violations  until after their  occurrence.  This lack of knowledge will not
insulate  the Company  from  liability.  Claims and legal  actions may result in
legal expenses and liabilities that may reduce the Company's  profitability  and
hurt its financial condition.

Developments  in  Technology.   Financial  services  use  technology,  including
telecommunications,   data  processing,  computers,  automation,  Internet-based
banking,  debit  cards,  and "smart"  cards.  Technology  changes  rapidly.  The
Company's  ability to compete  successfully  with other banks and  non-banks may
depend on whether it can exploit  technological  changes. The Company may not be
able to exploit  technological changes and expensive new technology may not make
the Company more profitable.

Market for Common Stock.  The Company's shares of common stock are not listed on
any exchange, and there is currently no organized trading market. Prices for the
Company's  common  stock may not be the actual  value or the trading  price in a
liquid trading market.

Anti-Takeover  Effects of Certain  Charter and Bylaw  Provisions.  The Company's
Articles of  Incorporation  and Bylaws divide the  Company's  Board of Directors
into three  classes and each class serves for a staggered  three-year  term.  No
director  may be removed  except for cause,  and then only by a vote of at least
two-thirds of the total eligible  stockholder  votes. In addition,  Maryland law
contains  anti-takeover  provisions that apply to the Company.  These provisions
may discourage or make it more difficult for another  company to buy the Company
or may reduce the market price of the Company's common stock.


STATISTICAL INFORMATION

<TABLE>
<CAPTION>
                                                  Maturities of Loan Portfolio
                                                        ecember 31, 1999
                                                         (In Thousands)

                                                                       Maturing
                                                     Maturing         After one          Maturing
                                                     Within          But Within        After Five
                                                     One Year        Five Years           Years              Total
-------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>               <C>               <C>
Real Estate Construction
      and land development                            $  5,092            $6,276        $   -              $ 11,368
Commercial, financial and agricultural                  24,341            26,251            2,822            53,414
Mortgage                                                38,031            98,784            9,388           146,203
Consumer                                                 4,171             3,378              242             7,791
                                                      --------           -------           ------          --------
     Total                                             $71,635          $134,689          $12,452          $218,776
                                                       =======          ========          =======          ========

</TABLE>
<TABLE>
<CAPTION>
                             Classified by Sensitivities of Loans to Changes in Interest Rates
<S>                                                  <C>               <C>               <C>              <C>
Fixed-Interest Rate Loans                              $51,751          $122,076          $10,212          $184,039
Adjustable-Interest Rate Loans                          19,884            12,613            2,240            34,737
                                                       -------           -------           ------           -------
Total                                                  $71,635          $134,689          $12,452          $218,776
                                                       =======          ========          =======          ========

</TABLE>





                                        9
<PAGE>

                  Allocation of the Allowance for Credit Losses
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                                    December 31,
                                                             1999          1998         1997         1996         1995
                                                          --------------------------------------------------------------
<S>                                                       <C>             <C>          <C>           <C>          <C>
Commercial Financial and Agricultural                       $1,219          $767         $880         $883         $768
Real Estate-Construction                                        54            92          100           71           69
Real Estate-Mortgage                                         1,241         1,004          944          936          984
Consumer                                                       229           148          238          155          138
Unallocated                                                   -              571          376          683          118
                                                        ----------        ------       ------       ------       ------
                                                            $2,743        $2,582       $2,538       $2,728       $2,077
                                                            ======        ======       ======       ======       ======

</TABLE>
Other  statistical  information  required  in  this  Item 1 is  incorporated  by
reference  from the  information  appearing in the  Company's  Annual  Report to
Stockholders for the year ended December 31, 1999, as follows:

<TABLE>
<CAPTION>
DISCLOSURE REQUIRED BY GUIDE 3                            REFERENCE TO 1999 ANNUAL REPORT
------------------------------                            -------------------------------
<S>                                                      <C>
(I)    Distribution of Assets, Liabilities and            Average Balances; Yields and Rates (page 4)
       Stockholders' Equity; Interest Rates and           Rate/Volume Analysis (page 5)
       Interest Differential                              Non-performing Assets (page 7)


(II)   Investment Portfolio                               Weighted Average Maturities and
                                                          Weighted Average Yields (page 9)
                                                          Notes to Financial Statements, Note 3 - Investment in
                                                          Debt Securities - (pages 23 and 24)

(III)  Loan Portfolio                                     Year End Loan Composition (page 10)
                                                          Non-performing Assets (page 7)

(IV)   Summary of Loan Loss Experience                    Provision and Allowance for Credit Losses (page 6)

(V)    Deposits                                           Deposits (pages 10 and 11)

(VI)   Return on Equity and Assets                        Return on Equity and Assets (page 15)

(VII)  Short-Term  Borrowings                             Short Term  Borrowings (page   11)
                                                          Notes  to Financial  Statements, Note  8-Short Term
                                                          Borrowings  (page  27)
                                                          Notes   to   Financial Statements,  Note 14 -
                                                          Line of  Credit  (page 33)
</TABLE>

Item 2.    PROPERTIES

The  Company's  and the Bank's main  office is located at 18 East Dover  Street,
Easton,  Maryland.  A second  Easton  office is located on Marlboro Road at Tred
Avon  Square and the Third  Easton  office is  located  on  Elliott  Road in the
Carlton Business Park. The Saint Michaels office is located on Route 33 at Saint
Michaels Village.

The Bank owns three of the four banking offices it currently  operates in Talbot
County.  The Bank  leases  the  office  located  on  Route 33 in Saint  Michaels
Village. The annual rent for this office which lease expires in 2001 is $36,700.


                                       10
<PAGE>

The Bank also owns the  building  at 21 Dover  Street,  Easton,  Maryland  which
contains its bookkeeping and loan services departments.

The Bank operates a branch in Cambridge,  Maryland,  located at 2745  Dorchester
Square Shopping Center pursuant to a lease agreement. The annual rent under this
lease agreement is $42,360.


Item 3.    LEGAL PROCEEDINGS

There are no material pending legal  proceedings other than the ordinary routine
litigation  incidental  to the business to which the Company,  the Bank,  or its
subsidiaries  is a party or to which any of their  properties is subject.  There
are also no material  proceedings  known to  management  to which any  Director,
officer, or affiliate of the Company,  any person holding beneficially in excess
of five (5)  percent  of the  Company's  Shares,  or any  associate  of any such
Director, officer or security holder is a party.


Item 4.    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

No matters were submitted to security holders for vote during the fourth quarter
of 1999.  Information  required  for this  Item for  Executive  Officers  of the
Registrant  is included in Item 10 -- "Directors  and Executive  Officers of the
Registrant" which is incorporated herein by reference.


                                     PART II


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

Incorporated by reference from Annual Report to Stockholders  for the year ended
December  31, 1999 under  "Managements  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - Recent Stock Prices and  Dividends,"  page
14, and "Notes to Financial  Statements - Regulatory  Capital  Requirements"  on
pages 32 and 33. The  Company  has issued and  outstanding  1,193,333  shares of
common stock, par value $0.01 per share ("Shares") held by 460 holders of record
March 22, 2000.

Item 6.    SELECTED FINANCIAL DATA

Incorporated by reference from Annual Report to Stockholders  for the year ended
December 31, 1999, page 15.

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

Incorporated by reference from Annual Report to Stockholders  for the year ended
December  31, 1999 under  "Managements  Discussion  and  Analysis  of  Financial
Condition and Results of Operations," pages 3 through 14. Reference is also made
to the information provided under the heading "Statistical  Information" in Part
I, Item I, incorporated by reference herein.


Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding the Market Risk of the Company's financial instruments
see "Managements  Discussion and Analysis of Financial  Condition and Results of
Operations, Market Risk and Interest Rate Sensitivity" on pages 12 and 13 of the
Annual  Report  to  Stockholders  for the year  ended  December  31,  1999.  The
Company's principal market risk exposure is to interest rates.





                                       11
<PAGE>

Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Incorporated  by reference from the Annual Report to  Stockholders  for the year
ended December 31, 1999 under "Consolidated Financial Statements and Independent
Auditors' Report" on pages 16 through 37.

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

There were no changes in or  disagreements  with  accountants  on accounting and
financial disclosure.


                                    PART III


Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

A listing of Directors  of the  Registrant  is  incorporated  by reference  from
Definitive  Proxy  Statement to  Stockholders  for the 2000 Annual Meeting under
"Election of Directors," pages 1 through 4.

A listing of Executive  Officers of the Registrant is  incorporated by reference
from the Definitive  Proxy Statement to Stockholders for the 2000 Annual Meeting
under "Executive Officers, " page 12.

A description of compliance with reporting  requirements  under Section 16(a) of
the Securities and Exchange Act is incorporated by reference from the Definitive
Proxy  Statement to  Stockholders  for the 2000 Annual  Meeting  "Section  16(a)
Beneficial Ownership Reporting Compliance."

Item 11.   EXECUTIVE COMPENSATION

Incorporated  by reference from the Definitive  Proxy  Statement to Stockholders
for the 2000 Annual  Meeting under  "Executive  Compensation,  Benefit Plans and
Executive Compensation Committee Report," pages 7 through 11, under "Performance
Graph," pages 12 and 13, and the Director compensation discussion on page 5.

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated  by reference from the Definitive  Proxy  Statement to Stockholders
for the 2000 Annual Meeting under "Beneficial  Ownership of Common Stock," pages
5 through 7.

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated  by reference from the Definitive  Proxy  Statement to Stockholders
for the 2000 Annual Meeting under "Election of Directors" pages 1 through 5.


Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)    (1),(2)  FINANCIAL STATEMENTS

           Consolidated Statements of Income -- Years Ended December 31,
           1999, 1998, and 1997

           Consolidated Balance Sheets at December 31, 1999 and 1998

           Consolidated  Statements of Changes in Stockholders'  Equity -- Years
           Ended December 31, 1999, 1998 and 1997

           Consolidated  Statements  of Cash Flows -- Years Ended  December  31,
           1999, 1998 and 1997

           Notes to Consolidated Financial Statements as of December 31, 1999,
           1998 and 1997

           Report of Independent Auditors

       (3) Exhibits Required to be Filed by Item 601 of Regulation S-K
<PAGE>

                                       12

                                  EXHIBIT INDEX


       3.1 Articles of Incorporation of the Company is incorporated by reference
           from the Company's  Form 8-A,  filed with the Commission on August 1,
           1997 (File No. 000-22929)

       3.2 Bylaws of the Company is incorporated by reference from the Company's
           Form 8-A,  filed  with the  Commission  on  August 1, 1997  (File No.
           000-22929)

       13  1999 Annual Report to Stockholders filed herewith.

       21  List of  Subsidiaries is incorporated by reference from the Company's
           Form 8-K,  filed with the  Commission  on August  25,  1997 (File No.
           000-22929)

       23  Consent of Independent Auditors filed herewith.

       27  Financial Data Schedule is filed electronically herewith via EDGAR


(b)    Reports on Form 8-K

       None

(c)    Exhibits required by Item 601 of Regulation S-K

       See the Exhibits described in Item 14(a)(3) above.








                                      13
<PAGE>

                                   SIGNATURES

Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities  and
Exchange Act of 1934,  the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 29, 2000.

                                Talbot Bancshares, Inc.

Date:    March 29, 2000         By: /s/W. Moorhead Vermilye
                                    -----------------------
                                     W. Moorhead Vermilye


Date:    March 29, 2000         By: /s/ Susan E. Leaverton
                                    ----------------------
                                    Susan E. Leaverton, Secretary/Treasurer
                                    (Principal Accounting and Financial Officer)


         DIRECTORS


         /s/ Herbert L. Andrew, III
         -------------------------------
         Herbert L. Andrew, III


         /s/ Jerome M. McConnell
         -------------------------------
         Jerome M. McConnell



         -------------------------------
         Blenda W. Armistead


         /s/ Shari L. McCord
         -------------------------------
         Shari L. McCord


         /s/Lloyd L. Beatty, Jr.
         -------------------------------
         Lloyd L. Beatty, Jr.



         -------------------------------
         William H. Myers


         /s/Donald D. Casson
         -------------------------------
         Donald D. Casson


         /s/David L. Pyles
         -------------------------------
         David L. Pyles


         /s/Gary L. Fairbank
         -------------------------------
         Gary L. Fairbank


         /s/Christopher F. Spurry
         -------------------------------
         Christopher F. Spurry


         /s/Ronald N. Fox
         -------------------------------
         Ronald N. Fox


         /s/Richard C. Granville
         -------------------------------
         Richard C. Granville


         /s/W. Moorhead Vermilye
         -------------------------------
         W. Moorhead Vermilye



                                      14