BUSINESS

Salisbury, a Connecticut corporation, formed in 1998, is the bank holding
company for the Bank, a Connecticut-chartered and FDIC insured commercial bank
headquartered in Lakeville, Connecticut. Salisbury's principal business consists
of the business of the Bank. The Bank, formed in 1848, is engaged in customary
banking activities, including general deposit taking and lending activities to
both retail and commercial markets, and trust and wealth advisory services. The
Bank conducts its banking business from fourteen full-service offices in the
towns of: Canaan, Lakeville, Salisbury and Sharon, Connecticut; Great
Barrington, South Egremont and Sheffield, Massachusetts; and, Fishkill,
Newburgh, New Paltz, Poughkeepsie, Red Oaks Mill, Dover Plains and Millerton,
New York, and its trust and wealth advisory services from offices in Lakeville,
Connecticut.

Critical accounting conventions and estimates

Salisbury's consolidated financial statements follow U.S. GAAP as applied to the
banking industry in which it operates. Application of these principles requires
management to make estimates, assumptions and judgments that affect the amounts
reported in the financial statements. These estimates, assumptions and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported. Estimates, assumptions and judgments are necessary when
assets and liabilities are required to be recorded at fair value, when a decline
in the value of an asset not carried at fair value warrants an impairment
write-down or valuation reserve to be established, or when an asset or liability
needs to be recorded contingent upon a future event.

Salisbury's significant accounting policies are presented in Note 1 of Notes to
Consolidated Financial Statements, which, along with this Management's
Discussion and Analysis, provide information on how significant assets are
valued in the financial statements and how those values are determined.
Management believes that the following accounting estimates are the most
critical to aid in fully understanding and evaluating Salisbury's reported
financial results, and they require management's most difficult, subjective or
complex judgments, resulting from the need to make estimates about the effect of
matters that are inherently uncertain.

The allowance for loan losses represents management's estimate of credit losses
inherent in the loan portfolio. Determining the amount of the allowance for loan
losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
the balance sheet. Note 1 describes the methodology used to determine the
allowance for loan losses. A discussion of the factors driving changes in the
amount of the allowance for loan losses is included in the "Provision and
Allowance for Loan Losses" section of Management's Discussion and Analysis.

Management, with the assistance of a third party, evaluates goodwill and
identifiable intangible assets for impairment annually using valuation
techniques that involve observations and adjustments as to comparable
transactions, estimates for discount rates, projected future cash flows and time
period calculations, all of which are susceptible to change based on changes in
economic conditions and other factors.

For both goodwill and base deposit intangible asset, the comparable transaction method was used to assess and conclude that there was no November 30, 2020. The current discounted economic value methodology was also used to test goodwill for impairment.

Future events, or changes in the estimates, which are used to determine the
carrying value of goodwill and identifiable intangible assets or which otherwise
adversely affect their value or estimated lives could have a material adverse
impact on the results of operations.

Management evaluates securities for other-than-temporary impairment giving
consideration to the extent to which the fair value has been less than cost,
estimates of future cash flows, delinquencies and default severity, the intent
and ability of Salisbury to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value, and the
likelihood that Salisbury will be required to sell the security before recovery
in fair value to meet liquidity needs. The consideration of the above factors is
subjective and involves estimates and assumptions about matters that are
inherently uncertain. Should actual factors and conditions differ materially
from those used by management, the actual realization of gains or losses on
investment securities could differ materially from the amounts recorded in the
financial statements.

The following discussion and analysis of Salisbury the consolidated results of operations should be read in conjunction with the consolidated financial statements and footnotes.

RESULTS OF OPERATIONS

Comparison of completed years December 31, 2020 and 2019

COVID-19 has placed significant health and economic pressure on the communities
the Bank serves, the State of Connecticut, the United States and other
countries. In response, the Bank has proactively implemented several steps such
as those set forth below to support the safety and well-being of its employees
and customers, which procedures continue through the date of this Report:

The Bank practices social distancing by following the guidelines of the Center

for disease control and requires many of its employees to work from home or

from alternative locations. From December 31, 2020, about 25% of

Salisbury employees worked from home or elsewhere.

The Bank continues to operate drive-thru windows in twelve of its fourteen

branches as well as its electronic banking platform to continue to serve

customers.

Salisbury will continue to monitor this pandemic as the situation continues to evolve and will adjust its business model accordingly.

 20



Net interest and dividend income

Net interest and dividend income (presented on a tax-equivalent basis) increased
$4.1 million, or 11.9%, in 2020 over 2019. The net interest margin increased 1
basis point to 3.28% from 3.27%, due to a 57 basis point decrease in the average
cost of interest-bearing liabilities partly offset by a 43 basis point decrease
in the average yield on interest-earning assets. The net interest margin was
affected by changes in the mix of interest-earning assets and funding
liabilities, asset and liability growth, and the effects of changes in market
interest rates on the pricing and re-pricing of assets and liabilities. The
following table sets forth the components of Salisbury's net interest income and
yields on average interest-earning assets and interest-bearing funds. Income and
yields on tax-exempt securities are presented on a fully taxable equivalent
basis.

Years ended December 31,                                   Average Balance                            Income / Expense                    Average Yield / Rate
(dollars in thousands)                             2020            2019            2018         2020         2019         2018           2020       2019       2018
Loans (a)(d)(f)                             $ 1,019,999     $   922,906     $   871,557     $ 41,267     $ 40,176     $ 37,504           4.02 %     4.35 %     4.30 %
Securities (c)(d)                                89,616          96,150          87,880        2,563        2,940        2,406           2.86       3.06       2.74
FHLBB stock                                       3,163           3,287           4,748          141          227          238           4.45       6.91       5.01
Short term funds (b)                             65,935          36,109          41,348          154          675          695           0.23       1.87       1.68
Total earning assets                          1,178,713       1,058,452       1,005,533       44,125       44,018       40,843           3.73       4.16       4.06
Other assets                                     63,434          58,204          53,630
Total assets                                $ 1,242,147     $ 1,116,656     $ 1,059,163
Interest-bearing demand deposits            $   183,870     $   155,463    
$   147,751          441          602          460           0.24       0.39       0.31
Money market accounts                           256,402         222,090         195,741        1,145        2,333        1,391           0.45       1.05       0.71
Savings and other                               175,204         175,011         171,662          464        1,517        1,100           0.26       0.87       0.64
Certificates of deposit                         144,489         159,862         134,057        1,840        2,872        1,706           1.27       1.80       1.27
Total interest-bearing deposits                 759,965         712,426    
    649,211        3,890        7,324        4,657           0.51       1.03       0.72
Repurchase agreements                             7,986           4,913           3,340           20           24           12           0.25       0.49       0.36
Finance lease                                     2,965           4,010           2,839          141          170          178           4.75       4.24       6.27
Note payable                                        226             262             296           14           16           18           6.08       6.11       6.08
Subordinated debt (net of issuance costs)         9,870           9,847    
      9,823          618          624          624           6.26       6.34       6.35
FHLBB advances                                   40,093          38,303          64,250          605        1,143        1,734           1.49       2.98       2.70
Total interest-bearing liabilities              821,105         769,761    
    729,759        5,288        9,301        7,223           0.64       1.21       0.99
Demand deposits                                 294,588         231,221         223,329
Other liabilities                                 6,956           6,699           6,266
Shareholders' equity                            119,498         108,975          99,809

Total liabilities and equity $ 1,242,147 $ 1,116,656 $ 1,059,163
Net interest income (d)

                                                                     $ 38,837     $ 34,717     $ 33,620
Spread on interest-bearing funds                                           
                                                             3.09       2.95       3.07
Net interest margin (e)                                                                                                                  3.28       3.27       3.35

(a) Includes unrecorded loans.

(b) Includes interest bearing deposits in other banks and federal funds sold.

(c) Average securities balances are based on amortized cost.

(d) Includes tax-exempt income from $ 0.7 million, $ 0.6 million and $ 0.5 million,

respectively for 2020, 2019 and 2018 on tax-exempt securities and loans for

whose income and returns are calculated on a tax-equivalent basis.

(e) Net interest income divided by average interest earning assets.

(f) Interest income for 2020, 2019 and 2018 reflects the net accretion related to

      the fair value adjustments of loans acquired in the Riverside Bank
      acquisition in the amount of $0 million, $0 million and $0.8 million,
      respectively.

The following table shows the changes in net interest income (presented on a tax equivalent basis) due to volume and rate.

Years ended December 31, (in thousands)            2020 versus 2019                      2019 versus 2018
Change in interest due to                  Volume        Rate         Net        Volume        Rate         Net
Loans                                     $ 4,272     $ (3,181 )   $  1,091     $ 2,222     $    450     $ 2,672
Securities                                   (193 )       (184 )       (377 )       240          294         534
FHLBB stock                                    (6 )        (80 )        (86 )       (87 )         76         (11 )
Short term funds                              314         (835 )       (521 )       (93 )         73         (20 )
Interest-earning assets                     4,387       (4,280 )        107       2,282          893       3,175
Deposits                                      366       (3,800 )     (3,434 )       552        2,114       2,666
Repurchase agreements                          11          (15 )         (4 )         7            5          12
Finance lease                                 (46 )         17          (29 )        62          (70 )        (8 )
Note payable                                   (2 )          -           (2 )        (2 )          -          (2 )
Subordinated Debt                               -           (6 )         (6 )         2           (2 )         -
FHLBB advances                                 32         (570 )       (538 )      (737 )        147        (590 )
Interest-bearing liabilities                  361       (4,374 )     (4,013 )      (116 )      2,194       2,078
Net change in net interest income         $ 4,026     $     94     $  4,120

$ 2,398 $ (1,301) $ 1,097

Net interest and dividend income represents the difference between interest and
dividends earned on loans and securities and interest expense incurred on
deposits and borrowings. The level of net interest income is a function of
volume, rates and mix of both earning assets and interest-bearing liabilities.
Net interest income can be affected by changes in interest rate levels, changes
in the volume of assets and liabilities that are subject to re-pricing within
different future time periods, and in the level of non-performing assets.

 21




Interest and Dividend Income

Tax equivalent interest and dividend income of $44.1 million in 2020 was
essentially unchanged from 2019. Loan income increased $1.1 million, or 2.7%, to
$41.3 million in 2020. The increase was primarily due to a $97.1 million, or
10.5%, increase in average loans, which was partly offset by a 33 basis point
decrease in average yield.

Tax equivalent interest and dividend income from securities decreased $377
thousand, or 12.8%, to $2.6 million in 2020, as a result of a $6.5 million, or
6.8%, decrease in average security balances, and a 20 basis point decrease in
average yield. Interest from short term funds decreased $521 thousand in 2020 as
a result of a 164 basis point decrease in average yield, partially offset by a
$29.8 million, or 82.6%, increase in average short term balances.

Interest charges

Interest expense decreased $4.0 million, or 75.9%, to $5.3 million in 2020.
Interest expense on interest bearing deposit accounts decreased $3.4 million, or
46.9%, to $3.9 million in 2020, as a result of a $47.5 million, or 6.7%,
increase in average interest-bearing deposits and a 52 basis point decrease in
the average rate to 0.51%. Interest expense on money market accounts decreased
$1.2 million, or 50.9%, due to a 60 basis point decline in the average rate
partly offset by a $34.3 million, or 15.4% increase in average balance. Interest
expense on savings and other accounts decreased $1.1 million, or 69.4%, due to a
61 basis point decline in the average rate. Interest expense on certificates of
deposits decreased $1.0 million, or 35.9%,due to 53 basis point decline in the
average rate and a $15.3 million, or 9.6% decrease in average balance. The
decrease in the average certificate of deposit balance from 2019 reflected a
$12.5 million decrease in average one-way buys executed through the Certificate
of Deposit Account Registry Service ("CDARS"). CDARS is a product offered by
Promontory Interfinancial Network that enables participating financial
institutions to buy or sell excess funds to other members to fund operations and
to manage liquidity.

Interest expense on FHLBB advances decreased $538 thousand, or 47.1%, due to a
149 basis point decrease in the average borrowing rate to 1.49%, partly offset
by a $1.8 million, or 4.7%, increase in average advances.

In December 2015, Salisbury issued $10 million of subordinated debentures. The
proceeds of such issuance, along with cash-on-hand, were used by Salisbury to
fully redeem $16 million of its outstanding Series B Preferred Stock, which was
issued pursuant to the participation in the U.S. Treasury's SBLF program.
Interest expense on the subordinated debt for 2020 and 2019 was $0.6 million and
$0.6 million, respectively.

Provision and allowance for loan losses

The provision for loan losses was $5.0 million for 2020, compared with $1.0
million for 2019. Net loan charge-offs were $0.2 million and $0.6 million, for
the respective years. The higher provision for loan losses in 2020 primarily
reflected management's assessment of the impact of COVID-19 on certain
qualitative and environmental factors and impaired loans as well as loan growth.
Management will continue to monitor the impact of the virus on its borrowers and
adjust the allowance as appropriate. The length of time required for the economy
to substantially recover from the virus will have a direct impact on Salisbury's
provision and allowance for loan losses. A longer recovery or another forced
shutdown that leads to sustained levels of unemployment will likely result in an
increase in Salisbury's provision and allowance for loan losses.

The following table shows the changes in the allowance for loan losses and other statistical data:

Years ended December 31, (dollars in
thousands)                                        2020          2019          2018          2017          2016
Balance, beginning of period               $     8,895     $   7,831     $   6,776     $   6,127     $   5,716
Acquisition Discount Transfer                        -           663             -             -             -
Provision for loan losses                        5,038           955         1,728         1,020         1,835
Charge-offs
Real estate mortgages                              (70 )        (461 )        (558 )        (733 )      (1,031 )
Commercial and industrial                         (362 )        (145 )        (108 )        (162 )        (452 )
Consumer                                           (70 )         (36 )         (81 )         (76 )         (67 )
Charge-offs                                       (502 )        (642 )        (747 )        (971 )      (1,550 )
Recoveries
Real estate mortgages                              306             5            18           286            32
Commercial and industrial                            2            46            27           296            72
Consumer                                            15            37            29            18            22
Recoveries                                         323            88            74           600           126
Net charge-offs                                   (179 )        (554 )        (673 )        (371 )      (1,424 )
Balance, end of period                     $    13,754     $   8,895     $ 

7 831 $ 6,776 $ 6,127

Loans receivable, gross                    $ 1,041,864     $ 934,946     $ 915,689     $ 807,190     $ 768,064
Non-performing loans                             5,648         3,620         6,514         6,635         8,792
Accruing loans past due 30-89 days               6,838         2,077         2,165         3,536         4,537
Ratio of allowance for loan losses:
to loans receivable, gross                        1.32 %        0.95 %        0.85 %        0.84 %        0.80 %
to non-performing loans                         243.50        245.72        120.21        102.13         69.69
Ratio of non-performing loans
to loans receivable, gross                        0.54          0.39          0.71          0.82          1.14
Ratio of accruing loans past due 30-89
days
to loans receivable, gross                        0.66          0.22          0.24          0.44          0.59


 22




The reserve coverage at December 31, 2020, as measured by the ratio of allowance
for loan losses to gross loans, was 1.32%, as compared with 0.95% at December
31, 2019. Excluding loans advanced under the SBA's Paycheck Protection Program,
the ratio of the allowance to gross loans was 1.44% at December 31, 2020.
Non-performing loans (non-accrual loans and accruing loans past-due 90 days or
more) increased $2.0 million to $5.6 million, or 0.54% of gross loans
receivable, at December 31, 2020, up from $3.6 million or 0.39% of gross loans
receivable at December 31, 2019. The increase in non-performing loans from the
prior year end primarily reflected loans of $3.7 million placed on non-accrual
status partly offset by loan sales of $0.7 million, loan payments of $0.5
million and loans returned to accruing status of $0.5 million. Accruing loans
past due 30-89 days increased from $2.1 million, or 0.22%, of gross loans
receivable at December 31, 2019 to $6.8 million, or 0.66%, of gross loans
receivable at December 31, 2020. The increase included loans of $3.0 million
that matured in fourth quarter 2020, most of which are expected to renew in
first quarter 2021. See "Overview - Loan Credit Quality" below for further
discussion and analysis.

Income other than interest

The following table details the main categories of non-interest income.

Years ended December 31, (dollars
in thousands)                           2020        2019        2018         2020 vs. 2019           2019 vs. 2018
Trust and wealth advisory           $  4,194     $ 3,995     $ 3,700     $   199         5.0 %   $  295          8.0 %
Service charges and fees               3,072       4,028       3,718        (956 )     (23.7 )      310          8.3
Mortgage banking activities, net       1,621         423         397       1,198       283.2         26          6.5
Gains (Losses) on CRA mutual fund         19          25         (18 )     
  (6 )     (24.0 )       43       (238.9 )
Gains on securities, net                 196         263         318         (67 )     (25.5 )      (55 )      (17.3 )
Bank-owned life insurance
("BOLI") income                          495         392         337         103        26.3         55         16.3
Gain on bank-owned life insurance        601           -         341         601         n/a       (341 )     (100.0 )
Other                                    125         124         152           1         0.8        (28 )      (18.4 )
Total non-interest income           $ 10,323     $ 9,250     $ 8,945     $

1,073 11.6% $ 305 3.4%

Non-interest income increased $1.0 million, or 11.6%, in 2020 versus 2019. Trust
and Wealth Advisory revenues increased $199 thousand mainly due to growth in
asset-based fees. Service charges and fees decreased $956 thousand from 2019.
During the twelve-month period ended December 31, 2020, Salisbury waived
approximately $754 thousand in various deposit fees, including overdraft and ATM
fees, to support customers affected by COVID-19. These fees were reinstituted in
late November 2020. Mortgage banking activities, net increased $1.2 million on
higher sales volume. Mortgage loan sales totaled $59.8 million in 2020 versus
$6.4 million in 2019. Loans serviced under the FHLBB Mortgage Partnership
Finance Program totaled $134.4 million and $106.3 million at December 31, 2020
and 2019, respectively. In 2020, the Bank recorded a non-taxable gain of $601
thousand related to proceeds received from a BOLI policy due to the death of a
covered former employee. Other income primarily includes rental property income.

Non-interest charges

The following table details the main categories of non-interest charges.

Years ended December 31, (dollars
in thousands)                           2020         2019         2018          2020 vs. 2019            2019 vs. 2018
Salaries                            $ 11,828     $ 12,048     $ 12,003     ($  220 )       (1.8 %)   $    45         0.4 %
Employee benefits                      4,533        4,384        4,280         149          3.4          104         2.4
Premises and equipment                 4,019        4,016        4,535     
     3          0.1         (519 )     (11.4 )
Data processing                        2,211        2,201        2,119          10          0.5           82         3.9
Professional fees                      2,741        2,213        2,236         528         23.9          (23 )      (1.0 )
OREO gains, losses and
write-downs, net                           -          408          275        (408 )     (100.0 )        133        48.4
Collections, OREO, and loan
related                                  323          436          578        (113 )      (25.9 )       (142 )     (24.6 )
FDIC insurance                           466          261          579         205         78.5         (318 )     (54.9 )
Marketing and community support          573          619          815         (46 )       (7.4 )       (196 )     (24.0 )
Amortization of intangibles              321          388          454     
   (67 )      (17.3 )        (66 )     (14.5 )
Other                                  2,023        1,938        1,961          85          4.4          (23 )      (1.2 )
Non-interest expense                $ 29,038     $ 28,912     $ 29,835     $   126          0.4 %    ($  923 )      (3.1 %)


Non-interest expenses increased $126 thousand, or 0.4%, in 2020 versus 2019.
Salaries decreased $220 thousand as higher production and incentive accruals as
well as higher overtime costs were more than offset by an increase in deferred
compensation costs associated with originating loans, including PPP loans.
Benefits increased $149 thousand compared to the same period in 2019. The
increase was primarily due to a one-time reduction of $328 thousand received in
the fourth quarter 2019 due to the modification of key terms of agreements
related to BOLI policies and higher accruals for performance based restricted
stock units, partly offset by lower expenses for phantom stock appreciation
units. See Note 16 for a further discussion of Salisbury's Long-Term Incentive
Compensation Plans. Premises and equipment increased $3 thousand mainly due to
increased software expense partially offset by lower depreciation, building
maintenance and utilities costs. Data processing increased $10 thousand mainly
due to ATM fees and core data processing costs partially offset by lower Trust
and Wealth data processing expense. The increase in professional fees of $528
thousand versus the twelve month period 2019 primarily reflected higher
consulting and investment management expenses, partly offset by lower legal
costs. Collections, OREO and loan related expense decreased $113 thousand due to
OREO losses in the twelve month period 2019. The increase in FDIC insurance
expense primarily reflected non-recurring assessment credits of $240 thousand
received in 2019. Marketing and community support costs decreased $46 thousand
compared to the same period in 2019 primarily due to lower marketing
expenditures partially offset by increased contributions. Amortization of
intangible assets decreased $67 thousand due to the aging off of expenses
related to previous acquisitions. Other expenses increased $85 thousand and
primarily reflected accruals related to litigation matters occurring in the
normal course of business.

 23




Income Taxes

The effective income tax rates for 2020 and 2019 were 17.0% and 17.5%,
respectively. Salisbury's effective tax rate was less than the 21% federal
statutory rate due to tax-exempt income, primarily from municipal bonds, tax
advantaged loans and bank-owned life insurance. Fluctuations in the effective
tax rate generally result from changes in the mix of taxable and tax-exempt
income. For further information on income taxes, see Note 13 of Notes to
Consolidated Financial Statements.

Salisbury did not incur Connecticut income tax in 2020, 2019 or 2018, other than
minimum state income tax, as a result of a Connecticut law that permits banks to
shelter certain mortgage income from the Connecticut corporation business tax
through the use of a special purpose entity called a Passive Investment Company
or PIC. Salisbury avails itself of this benefit through its PIC, SBT Mortgage
Service Corporation. Salisbury's income tax provision reflects the full impact
of the Connecticut legislation. Salisbury does not expect to pay other than
minimum Connecticut state income tax in the foreseeable future unless there is a
change in Connecticut tax law.

Comparison of completed years December 31, 2019 and 2018

Net interest and dividend income

Net interest and dividend income represents the difference between interest and
dividends earned on loans and securities and interest expense incurred on
deposits and borrowings. The level of net interest income is a function of
volume, rates and mix of both earning assets and interest-bearing liabilities.
Net interest income can be affected by changes in interest rate levels, changes
in the volume of assets and liabilities that are subject to re-pricing within
different future time periods, and in the level of non-performing assets.

Interest and dividends

Tax equivalent interest and dividend income increased $3.2 million, or 7.8%, to
$44.0 million in 2019. Loan income increased $2.7 million, or 7.1%, to $40.2
million in 2019. The increase was primarily due to a $51.3 million, or 5.9%,
increase in average loans, and a 5 basis point increase in average yield.
Interest income for 2019 and 2018 reflects purchase accounting adjustments
consisting of net accretion related to the fair value adjustments of loans
acquired in the Riverside Bank acquisition in the amount of $0 million and $0.8
million, respectively.

Tax equivalent interest and dividend income from securities increased $0.5
million, or 22.2%, to $2.9 million in 2019, as a result of a $8.3 million, or
9.4%, increase in average security balances, and a 32 basis point increase in
average yield. Interest from short term funds decreased $20 thousand in 2019 as
a result of a 19 basis point increase in average yield, partially offset by a
$5.2 million, or 12.7%, decrease in average short term balances.

Interest charges

Interest expense increased $2.1 million, or 28.8%, to $9.3 million in 2019.
Interest expense on interest bearing deposit accounts increased $2.7 million, or
57.2%, to $7.3 million in 2019, as a result of a $63.2 million, or 9.7%,
increase in average interest-bearing deposits and a 31 basis point increase in
the average rate to 1.03%. The increase in the average certificate of deposit
balance from 2018 reflected higher average brokered certificates of deposits
balances of $20.3 million and a $3.0 million increase in average one-way buys
executed through the Certificate of Deposit Account Registry Service ("CDARS").
CDARS is a product offered by Promontory Interfinancial Network that enables
participating financial institutions to buy or sell excess funds to other
members to fund operations and to manage liquidity.

Interest expense on FHLBB advances decreased $0.6 million, or 34.1%, due to a
$25.9 million, or 40.4%, decrease in average advances, partially offset by a 28
basis point increase in the average borrowing rate to 2.98%.

In December 2015, Salisbury issued $10 million of subordinated debentures. The
proceeds of such issuance, along with cash-on-hand, were used by Salisbury to
fully redeem $16 million of its outstanding Series B Preferred Stock, which was
issued pursuant to the participation in the U.S. Treasury's SBLF program.
Interest expense on the subordinated debt for 2019 and 2018 was $0.6 million and
$0.6 million, respectively.

Provision and allowance for loan losses

The provision for loan losses was $1.0 million for 2019, compared with $1.7
million for 2018. Net loan charge-offs were $0.6 million and $0.7 million, for
the respective years. The lower provision for loan losses in 2019 primarily
reflected lower originations. In first quarter 2019, Salisbury transferred the
remaining unearned credit-related discount on loans acquired in its 2014
acquisition of Riverside Bank to the allowance for loan loss reserves. As a
result of this transfer, gross loans receivable and the allowance for loan
losses increased by $0.7 million. The balance of net loans receivable did not
change as a result of this transfer.

The reserve coverage at December 31, 2019, as measured by the ratio of allowance
for loan losses to gross loans, was 0.95%, as compared with 0.85% at December
31, 2018. Non-performing loans (non-accrual loans and accruing loans past-due 90
days or more) decreased $2.9 million to $3.6 million, or 0.39% of gross loans
receivable, at December 31, 2019, down from $6.5 million or 0.71% of gross loans
receivable at December 31, 2018. The decline in non-performing loans from the
prior year end primarily reflected pay-offs of $1.6 million, upgrades to
performing status of $0.9 million and write-downs of $0.4 million. Accruing
loans past due 30-89 days decreased $0.1 million to $2.1 million, or 0.22% of
gross loans receivable at December 31, 2019. See "Overview - Loan Credit
Quality" below for further discussion and analysis.

Income other than interest

Non-interest income increased $305 thousand, or 3.4%, in 2019 versus 2018. Trust
and Wealth Advisory revenues increased $295 thousand primarily due to increased
market values and a higher volume of assets under management. Service charges
and fees increased $310 thousand from 2018 on higher interchange and wire fees
as well as higher loan prepayment penalties. Gains on sales of mortgage loans
increased $27 thousand on higher sales volume. Mortgage loans sales totaled $6.4
million in 2019 versus $4.6 million in 2018. Loans serviced under the FHLBB
Mortgage Partnership Finance Program totaled $106.3 million and $111.4 million
at December 31, 2019 and 2018, respectively. In 2018, the Bank recorded a
non-taxable gain of $341 thousand related to proceeds received from a BOLI
policy due to the death of a covered former employee.

 24




Non-Interest Expense

Non-interest expenses decreased $923 thousand, or 3.1%, in 2019 versus 2018.
Salaries expense increased $45 thousand due to higher base salaries, merit
increases, and short-term incentive accruals partly offset by lower production
accruals due to lower loan volume. Employee benefits expense for 2019 included a
non-recurring reduction of $328 thousand, which reflected changes to the
calculation of death benefits for bank-owned life insurance policies. This
credit, as well as lower 401K and ESOP accruals, was more than offset by higher
medical insurance costs and higher deferred compensation accruals. Premises and
equipment expense decreased $519 thousand from 2018 as the prior year included a
charge of $171 thousand to write-off the remainder of the lease and fixed assets
related to the Bank's previously occupied Fishkill, New York branch location as
well as a charge of $95 thousand to write-off the remaining term of a
third-party software contract. Software maintenance costs and depreciation costs
were also lower. Data processing expense increased $82 thousand mainly as a
result of higher core data processing costs. The decrease of $23 thousand in
professional fees reflected lower consulting and internal audit costs partly
offset by higher external audit and regulatory exam costs, as well as higher
investment management expenses. OREO losses and write-downs increased $133
thousand from 2018. Collections, OREO and appraisal expenses decreased $142
thousand primarily due to lower appraisal fees, lower carrying costs and lower
taxes. The $318 thousand decrease in FDIC insurance reflected $240 thousand in
non-recurring assessment credits received by the Bank in 2019. Marketing and
community support decreased $196 thousand due to costs incurred in the prior
year for the Fishkill, New York branch relocation, the timing of contributions
and lower overall marketing spend. Amortization of intangibles and all other
operating expenses collectively decreased $89 thousand from 2018.

Income taxes

The effective income tax rates for 2019 and 2018 were 17.5% and 16.2%,
respectively. Salisbury's effective tax rate was less than the 21% federal
statutory rate due to tax-exempt income, primarily from municipal bonds, tax
advantaged loans and bank-owned life insurance. Fluctuations in the effective
tax rate generally result from changes in the mix of taxable and tax-exempt
income. For further information on income taxes, see Note 13 of Notes to
Consolidated Financial Statements.

Salisbury did not incur Connecticut income tax in 2019, 2018 or 2017, other than
minimum state income tax, as a result of a Connecticut law that permits banks to
shelter certain mortgage income from the Connecticut corporation business tax
through the use of a special purpose entity called a Passive Investment Company
or PIC. Salisbury avails itself of this benefit through its PIC, SBT Mortgage
Service Corporation. Salisbury's income tax provision reflects the full impact
of the Connecticut legislation. Salisbury does not expect to pay other than
minimum Connecticut state income tax in the foreseeable future unless there is a
change in Connecticut tax law.

Overview

Assets

During 2020, Salisbury's assets increased by $181.2 million to $1.294 billion,
while net loans increased $100.3 million at December 31, 2020. Asset and loan
growth included approximately $85 million of PPP loans. Salisbury also
experienced a significant build up in cash balances as a result of the funding
of the PPP loans. The balance of cash and cash equivalents increased $66.3
million to $93.2 million at December 31, 2020. Salisbury has employed excess
cash to pay down borrowings and invest in additional available-for-sale
securities. At December 31, 2020, Salisbury's tangible book value and book value
per common share were $38.78 and $43.88, respectively. At December 31, 2020, the
Bank's Tier 1 leverage and total risk-based capital ratios were 8.90% and
13.57%, respectively. As of December 31, 2020, the Bank was categorized as "well
capitalized."

Short-term securities and funds

During 2020, securities increased $5.1 million to $101.0 million, while
short-term funds (cash and due from banks and interest-bearing deposits with
other banks) increased $66.3 million to $93.2 million. The carrying values of
securities are as follows:

December 31, (dollars in thousands)                          2020         2019         2018
Available-for-Sale
U.S. Government agency notes                            $   7,851     $  4,644     $  7,670
Municipal bonds                                            27,617       27,193        5,379
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-
sponsored enterprises                                      36,573       29,357       57,446
Collateralized mortgage obligations:
U.S. Government agencies                                   17,454       25,499       17,747
Corporate bonds                                             8,916        5,108        3,576
CRA mutual fund                                               917          882          836
Non-Marketable
FHLBB stock                                                 1,713        3,242        4,496
Total Securities                                        $ 101,041     $ 95,925     $ 97,150

Salisbury evaluates securities for OTTI where the fair value of a security is
less than its amortized cost basis at the balance sheet date. As part of this
process, Salisbury considers whether it has the intent to sell each debt
security and whether it is more likely than not that it will be required to sell
the security before its anticipated recovery. If either of these conditions is
met, Salisbury recognizes an OTTI charge to earnings equal to the entire
difference between the security's amortized cost basis and its fair value at the
balance sheet date. For securities that meet neither of these conditions, an
analysis is performed to determine if any of these securities are at risk for
OTTI.

Salisbury evaluates securities for strategic fit and may reduce its position in
securities, although it is not more likely than not that Salisbury will be
required to sell these securities before recovery of their cost basis, which may
be maturity, and does not intend to sell these securities. Management does not
consider any of its securities to be OTTI at December 31, 2020. It is possible
that future loss assumptions could change necessitating Salisbury to recognize
future OTTI. Salisbury evaluates securities for strategic fit and may reduce its
position in securities, although it is not more likely than not that Salisbury
will be required to sell securities before recovery of their cost basis, which
may be maturity.

Cumulative other comprehensive income as of December 31, 2020 including net unrealized capital gains from holding, net of tax, $ 3.0 million, which represents an increase of
$ 1.6 million of December 31, 2019.

 25




Loans

During 2020, net loans receivable increased $100.3 million, or 11%, to $1.027
billion at December 31, 2020. Salisbury's retail lending department originates
residential mortgage, home equity loans and lines of credit, and consumer loans
for the portfolio. During 2020, Salisbury originated a record $147.6 million of
residential mortgage loans and $9.0 million of home equity loans for the
portfolio, compared with $53.4 million and $7.5 million, respectively, in 2019.
During 2020, total residential mortgage and home equity loans receivable
declined by $1.7 million to $425.7 million at December 31, 2020, and represent
40.9% of gross loans receivable. During 2020, Salisbury's residential mortgage
lending department also originated and sold $59.8 million of residential
mortgage loans, compared with $6.4 million during 2019. All such sold loans were
sold through the FHLBB Mortgage Partnership Finance Program with servicing
retained by Salisbury. Consumer loans, amounted to $7.9 million at December 31,
2020, representing 0.7% of gross loans receivable.

Salisbury's commercial lending department specializes in lending to small and
mid-size companies, businesses and municipalities. More specifically, we meet
our clients' credit needs by providing short-term and long-term financing,
construction loans, commercial mortgages, equipment, working capital, property
improvement loans and municipal financing. The department also works with both
the Small Business Administration ("SBA") and United States Department of
Agriculture ("USDA") Government Guaranteed Lending Programs; however, such loans
represent a very small percent of the commercial loan portfolio. Salisbury
originated $221.8 million of commercial loans during 2020 compared with $155.4
million in 2019. Total commercial loans, which include commercial real estate,
commercial and industrial and municipal loans, increased $101.6 million to
$591.2 million at December 31, 2020, and represent 56.7% of gross loans
receivable. Additionally, in 2020, Salisbury processed 932 loan applications for
nearly $100 million under the SBA's PPP program. At December 31, 2020
approximately $85 million of these loans remained on Salisbury's balance sheet.
These loans are categorized as "commercial and industrial" in the table below.

The main categories of loans receivable and loans held for sale are as follows:

December 31, (in thousands)                   2020          2019          2018          2017          2016
Residential 1-4 family                 $   352,001     $ 346,299     $ 345,862     $ 317,639     $ 301,128
Residential 5+ multifamily                  37,058        35,455        36,510        18,108        13,625
Construction of residential 1-4
family                                       8,814        11,889        12,041        11,197        10,951
Home equity lines of credit                 27,804        33,798        34,433        33,771        35,487
Residential real estate                    425,677       427,441       428,846       380,715       361,191
Commercial                                 310,841       289,795       283,599       249,311       235,482
Construction of commercial                  31,722         8,466         8,976         9,988         5,398
Commercial real estate                     342,563       298,261       292,575       259,299       240,880
Farm land                                    3,198         3,641         4,185         4,274         3,914
Vacant land                                 14,079         7,893         8,322         7,883         6,600
Real estate secured                        785,517       737,236       733,928       652,171       612,585
Commercial and industrial                  227,148       169,411       162,905       132,731       141,473
Municipal                                   21,512        21,914        14,344        17,494         8,626
Consumer                                     7,687         6,385         4,512         4,794         5,380
Loans receivable, gross                  1,041,864       934,946       915,689       807,190       768,064
Deferred loan origination fees and
costs, net                                    (372 )       1,362         1,421         1,289         1,247
Allowance for loan losses                  (13,754 )      (8,895 )      (7,831 )      (6,776 )      (6,127 )
Loans receivable, net                  $ 1,027,738     $ 927,413     $ 909,279     $ 801,703     $ 763,184
Loans Held-for-sale
Residential 1-4 family                 $     2,735     $     332     $       -     $     669     $       -

The composition of loans receivable by distribution of scheduled maturities is as follows:

December 31, 2020 (in thousands)     Within 1 year      Within 2-5 years       After 5 years            Total
Residential                        $         3,690     $           9,674     $       384,509     $    397,873
Home equity lines of credit                      -                   562              27,242           27,804
Commercial                                  11,567                18,935             280,339          310,841
Construction of commercial                     389                 3,968   
          27,365           31,722
Land                                         2,693                 6,827               7,757           17,277
Real estate secured                         18,339                39,966             727,212          785,517
Commercial and industrial                   13,520               116,143   
          97,485          227,148
Municipal                                   13,714                 2,510               5,288           21,512
Consumer                                       316                 1,816               5,555            7,687
Loans receivable, gross            $        45,889     $         160,435   
 $       835,540     $  1,041,864


 26



The composition of fixed, variable or revisable rate receivables is as follows:

December 31, 2020 (in thousands)                               Variable or
adjustable
                                      Fixed interest rates         interest rates          Total Loans
Residential                          $            205,333     $          192,540         $      397,873
Home equity lines of credit                             -                 27,804                 27,804
Commercial                                         71,127                239,714                310,841
Construction of commercial                         15,892                 15,830                 31,722
Land                                                9,824                  7,453                 17,277
Real estate secured                               302,176                483,341                785,517
Commercial and industrial                         170,120                 57,028                227,148
Municipal                                          19,916                  1,596                 21,512
Consumer                                            2,775                  4,912                  7,687
Loans receivable, gross              $            494,987     $          546,877         $    1,041,864
Percentage of Total                                  47.5 %                 52.5 %                100.0 %


Loan Credit Quality

Salisbury has cooperative relationships with the vast majority of its
non-performing loan customers. Substantially all non-performing loans are
collateralized with real estate and the repayment of such loans is largely
dependent on the return of such loans to performing status or the liquidation of
the underlying real estate collateral. Salisbury pursues the resolution of all
non-performing loans through collections, restructures, voluntary liquidation of
collateral by the borrower and, where necessary, legal action. When attempts to
work with a customer to return a loan to performing status, including
restructuring the loan, are unsuccessful, Salisbury will initiate appropriate
legal action seeking to acquire property by deed in lieu of foreclosure or
through foreclosure, or to liquidate business assets.

On March 22, 2020, the federal banking agencies issued an "Interagency Statement
on Loan Modifications and Reporting for Financial Institutions Working with
Customers Affected by the Coronavirus", this guidance encourages financial
institutions to work prudently with borrowers that may be unable to meet their
contractual obligations because of the effects of the virus. The guidance goes
on to explain that the federal banking agencies conclude that short-term
modifications (e.g. six months) made on a good faith basis to borrowers who were
current as of the implementation date of the relief program are not Troubled
Debt Restructurings ("TDRs"). Section 4013 of the CARES Act addresses
modifications resulting from the pandemic and specified that virus related
modifications on loans that were current as of December 31, 2019 are not TDRs.
The Bank has applied Section 4013 guidance and implemented a loan payment
deferral program which allows residential, commercial and consumer borrowers,
who have been adversely affected by the virus and whose loans were not more than
30 days past due at December 31, 2019, to defer loan payments for up to three
months. Borrowers may apply to the Bank for additional deferments, which will be
evaluated on a case-by-case basis.

As of December 31, 2020, 15 commercial loans ($29.8 million loan balances) were
granted payment deferrals. Approximately sixty percent of the deferred loan
payments ($17.9 million loan balance) related to borrowers in the hospitality
industry and another thirty percent ($8.5 million loan balance) related to
borrowers in the entertainment & recreation industry. The loan balance for which
payments were deferred represented approximately 3.1% of Salisbury's gross loan
balance at December 31, 2020, excluding loans granted under the SBA's Paycheck
Protection Program. There were no outstanding deferrals related to residential
and consumer loans as of December 31, 2020. The Bank will continue to accrue
interest on such deferred payments, which will be added to a borrower's final
payment. Salisbury evaluated each borrower's request for loan payment deferrals
on a case-by case-basis. Salisbury also reviewed the credit characteristics and
internal risk rating assigned to each borrower that was granted a deferral. This
review considered several factors, which included an assessment of COVID-19's
impact on the operations of the business, other sources of liquidity available
to a borrower for loan payments, the borrower's cooperation, the value of
collateral and the number of payment deferrals granted to that borrower.
Salisbury also considered a borrower's ability to make partial payments, which
represent a subset or combination of principal, interest and mortgage taxes. At
December 31, 2020, six of the loans deferring payments were deferring principal
only, eight loans were deferring principal and interest and one loan was
deferring principal and mortgage taxes.

The CARES Act provides emergency economic relief to individuals and businesses
impacted by the virus. The CARES Act authorized the SBA to temporarily guarantee
loans under a new 7(a) loan program called the Paycheck Protection Program
("PPP"). As a qualified SBA lender, the Bank was automatically qualified to
originate loans under the PPP. Salisbury processed 932 PPP loans for a principal
balance of approximately $100 million primarily for existing customers. The
expected forgiveness amount is the amount of loan principal the lender
reasonably expects the borrower to spend on payroll costs, mortgage interest,
rent and utilities during the covered period after the loans are funded. On June
5, 2020, the Paycheck Protection Program Flexibility Act ("PPPFA") was signed
into law. The PPPFA increased the covered period from eight weeks to twenty-four
weeks, reduced the portion of the loan that must be spent on payroll costs from
75% to 60% and extended the term of loans that are not forgiven from two years
to five years. For PPP loans originated prior to June 5, 2020, borrowers and
lenders may mutually agree to increase the loan term to five years. The vast
majority of PPP loans processed by Salisbury have a two-year term. Management
funded these short-term loans through a combination of deposits, short-term
Federal Home Loan Bank ("FHLB") advances, and brokered deposits. Salisbury did
not participate in the Federal Reserve's Paycheck Protection Program Liquidity
Facility ("PPPLF"). As of December 31, 2020, Salisbury had approximately $85
million of PPP loans on its balance sheet.

On December 27, 2020 the Consolidated Appropriations Act, 2021 was signed into
law. Certain provisions of the CARES Act were modified and extended by the Act.
One of the features of the Act was the provision of $284 billion in additional
funding for the PPP program, including a Second draw Paycheck Protection Program
for qualifying businesses for which there was a quarterly revenue reduction of
at least 25% compared to the same quarter in 2019. Salisbury will participate in
the additional PPP program, which began in January 2021. Salisbury expects the
demand for second draws to be lower. The Bank will fund the loans through
deposits, short-term FHLB advances or brokered certificate of deposits, as
necessary.

Overdue loans

Loans past due 30 days or more increased $5.5 million during 2020 to $9.9
million, or 0.95% of gross loans receivable at December 31, 2020, compared with
$4.4 million, or 0.47% of gross loans receivable at December 31, 2019. The
increase included loans of $3.0 million that matured during fourth quarter 2020,
most of which are expected to renew in first quarter 2021.

 27



The components of loans past due 30 days or more are as follows:

(in thousands)                            2020      2019      2018
Past due 30-59 days                    $ 5,263   $ 1,351   $ 1,435
Past due 60-89 days                      1,575       726       730
Past due 90-179 days                         1         3       795
Past due 180 days and over                  11         -         -
Accruing loans                           6,850     2,080     2,960
Past due 30-59 days                        480       290       208
Past due 60-89 days                        179         -       108
Past due 90-179 days                       768       271       812
Past due 180 days and over               1,665     1,775     3,517
Non-accrual loans                        3,092     2,336     4,645

Total loans past due 30 days or more $ 9,942 $ 4,416 $ 7,605

Credit quality segments

Salisbury classifies loans receivable into the following credit quality segments.

Impaired loans include all unrecognized loans and restructured distressed debts

loans, and represent loans for which it is probable that Salisbury will not be

able to collect all principal and interest amounts due in accordance with the

contractual clauses of loan agreements.

Unfunded loans, a subset of impaired loans, are loans for which the allowance

interest was dropped because, in the opinion of management,

recovery of principal or interest is unlikely.

Non-performing loans include unrecorded loans and past due loans

90 days and more which are well guaranteed, being collected and

where full recovery of principal and interest is reasonably assured.

Non-performing assets consist of non-performing loans and real estate acquired

in the settlement of loans.

Loans restructured for distressed debts are loans for which concessions such as

reduction in interest rates, other than normal market rate adjustments, or

deferral of payment of principal or interest, extension of due dates, or

reduction of the principal balance or accrued interest, have been granted due to a

the financial situation of the borrower. Loan restructuring is used when management

believes that granting a concession will increase the likelihood of the full

or partial recovery of principal and interest.

Potential problem loans consist of performing loans to which a

Substandard credit risk rating and is not classified as impaired.

Non-performing assets

Non-performing assets increased $1.7 million to $5.6 million at December 31,
2020, or 0.44% of assets, from $3.9 million or 0.35% of assets at December 31,
2019. The increase from the prior year end primarily reflected loans of $3.7
million placed on non-accrual status partly offset by loan sales of $0.7
million, loan payments of $0.5 million and loans of $0.5 million which returned
to accruing status. The components of non-performing assets are as follows:
December 31, (in thousands)                  2020      2019      2018      2017       2016
Residential 1-4 family                    $ 1,508   $ 1,551   $ 2,092   $ 2,045   $  1,920
Residential 5+ multifamily                    861       861     1,000       151        163
Home equity lines of credit                   154       105       411        66        519
Commercial                                  2,544       914     1,640     3,622      4,901
Farm land                                     158       186       216       250      1,002
Vacant land                                    37         -         -         -          -
Real estate secured                         5,262     3,617     5,359     6,134      8,505
Commercial and industrial                     374         -       360       470         27
Consumer                                        -         -         -         -          4
Non-accrual loans                           5,636     3,617     5,719     6,604      8,536
Accruing loans past due 90 days and over       12         3       795      
 31        256
Non-performing loans                        5,648     3,620     6,514     6,635      8,792
Foreclosed assets                               -       314     1,810       719      3,773
Non-performing assets                     $ 5,648   $ 3,934   $ 8,324   $ 7,354   $ 12,565

The interest income reductions associated with unrecorded loans are as follows:

Years completed the 31st of December, (in thousands) 2020 2019 2018 Result according to initial conditions $ 297 $ 302 $ 328
Recognized income

                             57       40       36
Reduction in interest income              $  240   $  262   $  292


 28



The past due status of non-performing loans is as follows:

the 31st of December, (in thousands) 2020 2019 2018 Current

                      $ 2,545   $ 1,281   $ 1,074
Past due 30-59 days              480       290       208
Past due 60-89 days              179         -       108
Past due 90-179 days             769       274     1,607

180 days or more past due 1,675 1,775 3,517 Total past due receivables $ 5,648 $ 3,620 $ 6,514


At December 31, 2020, 45.06% of non-performing loans were current with respect
to loan payments, compared with 35.39% at December 31, 2019. Loans past due 180
days and over are substantially all mortgage loans in the process of foreclosure
or litigation.

Salisbury endeavors to work constructively to resolve its non-performing loan
issues with customers. Substantially all non-performing loans are collateralized
with real estate and the repayment of such loans is largely dependent on the
return of such loans to performing status or the liquidation of the underlying
real estate collateral.

Debt in difficulty Restructured loans

Troubled debt restructured loans decreased $1.0 million in 2020 to $7.8 million,
or 0.75% of gross loans receivable, from $8.8 million, or 0.94% of gross loans
receivable at December 31, 2019. The components of troubled debt restructured
loans are as follows:

December 31, (in thousands)                      2020      2019      2018
Residential 1-4 family                        $ 2,798   $ 3,901   $ 2,824
Residential 5+ multifamily                        103       116       675
Home equity lines of credit                         -         -        47
Personal                                           26        36         -
Vacant land                                       130       180       190
Commercial                                      3,105     3,419     2,924
Real estate secured                             6,162     7,652     6,660
Commercial and industrial                         111       126       141
Accruing troubled debt restructured loans       6,273     7,778     6,801
Residential 1-4 family                            378       152       289
Residential 5+ multifamily                        861       861     1,000
Vacant land                                        37         -         -
Commercial                                        269         -         -
Real estate secured                             1,545     1,013     1,289
Commercial and Industrial                           -         -         -

Restructured loans from unaccumulated distressed debts 1,545 1,013 1,289 Restructured loans from distressed debts

              $ 7,818   $ 8,791   $ 8,090


The past due status of restructured loans for distressed debts is as follows:

December 31, (in thousands)                      2020      2019      2018
Current                                       $ 5,737   $ 7,227   $ 6,340
Past due 30-59 days                               536       470       461
Past due 60-89 days                                 -        81         -
Accruing troubled debt restructured loans       6,273     7,778     6,801
Current                                           237        19       359
Past due 30-59 days                                 -         -        67
Past due 60-89 days                                 -         -         -
Past due 90-179 days                              178       133       634
Past due 180 days and over                      1,130       861       229

Restructured loans for unaccumulated distressed debts 1,545 1,013 1,289 Total restructured loans for distressed debts $ 7,818 $ 8,791 $ 8,090


At December 31, 2020, 76.41% of troubled debt restructured loans were current
with respect to loan payments, as compared with 82.43% at December 31, 2019. As
of December 31, 2020, 2019 and 2018, there were specific reserves on troubled
debt restructured loans amounting to $397 thousand, $582 thousand, and $252
thousand, respectively.

 29




Potential Problem Loans
Potential problem loans consist of performing loans that have been assigned a
substandard credit risk rating and are not classified as impaired. Potential
problem loans increased $8.3 million during 2020 to $18.2 million, or 1.75% of
gross loans receivable at December 31, 2020, compared with $9.9 million, or
1.06% of gross loans receivable at December 31, 2019. The increase reflected the
downgrade of two commercial loans of $9.5 million, partly offset by the payoff
of a commercial & industrial line of credit of $0.8 million and other activity
of $0.4 million. The components of potential problem loans were as follows:
December 31, (in thousands)        2020      2019      2018
Residential 1-4 family         $  1,620   $ 2,109   $ 1,300
Residential 5+ multifamily          732       760         -
Home equity lines of credit           -         -        29
Residential real estate           2,352     2,869     1,329
Commercial                       13,703     3,886     5,567
Construction of commercial          229       241       141
Commercial real estate           13,932     4,127     5,708
Farm land                         1,427     1,521         -
Real estate secured              17,711     8,517     7,037
Commercial and industrial           486     1,384       605
Consumer                              1         2         -
Total potential problem loans  $ 18,198   $ 9,903   $ 7,642

The past due status of potential problem loans was as follows:

December 31, (in thousands)        2020      2019      2018
Current                        $ 17,598   $ 9,654   $ 6,543
Past due 30-59 days                  40       108        78
Past due 60-89 days                 560       138       226
Past due 90-179 days                  -         3       795
Total potential problem loans  $ 18,198   $ 9,903   $ 7,642

AT December 31, 2020, 96.70% of potential problem loans were up to date on loan repayments, compared to 97.49% at December 31, 2019. Management cannot predict to what extent economic or other factors could affect the future payment capacity of these borrowers, and there can be no assurance that these loans will not be placed on a non-accounting status, restructured or require provisions. increased for loan losses.

Deposits and loans

Deposits increased $ 209.6 million in 2020, or 23%, to $ 1.1 billion at
December 31, 2020, compared to $ 919.5 million at December 31, 2019. The increase in deposits partly reflects the financing of PPP loans in 2020. Retail pensions have declined $ 1.4 million in 2020 at $ 7.1 million at
December 31, 2020, compared to $ 8.5 million at December 31, 2019.

The distribution of average total deposits by account type was as follows:

                                                   December 31, 2020                           December 31, 2019
(in thousands)                                                           Weighted      Average                    Weighted
                                       Average Balance      Percent      Average       Balance       Percent      Average
Demand deposits                      $         294,603        27.94 %       0.00 %   $  231,169        24.50 %       0.00 %
Interest-bearing checking accounts             183,870        17.44         0.24        155,463        16.48         0.39
Regular savings accounts                       175,204        16.61         0.26        175,011        18.55         0.87
Money market savings                           256,402        24.31         0.45        222,090        23.54         1.05
Certificates of deposit                        144,488        13.70        
1.27        159,863        16.94         1.80
Total deposits                       $       1,054,567       100.00 %       0.37 %   $  943,596       100.00 %       0.78 %

The classification of certificates of deposit by interest rate was as follows:

                    At December 31,
Interest rates        2020        2019
Less than 1.00%  $  73,538   $  34,261
1.00% to 1.99%      25,589      46,502
2.00% to 2.99%      31,889      46,463
3.00%                  498         498
Total            $ 131,514   $ 127,724


 30




The distribution of certificates of deposit by interest rate and maturity was as
follows:

                                                            At December 31, 2020
                        Less Than or
                        Equal to One     More Than One     More Than Two      More Than                   Percent of
Interest rates              Year          to Two Years    to Three Years     Three Years       Total         Total
Less than 1.00%        $      65,116     $     13,646     $       1,170     $     3,691     $  83,623         63.58 %
1.00% to 1.99%                 9,878           15,632             2,585           5,368        33,463         25.44 %
2.00% to 2.99%                 7,382              784             2,735           3,029        13,930         10.59 %
3.00% to 3.99%                     -              498                 -               -           498          0.38 %
Total                  $      82,376     $     30,560     $       6,490     $    12,088     $ 131,514        100.00 %

Expected maturities of certificates of deposit in denominations of $ 100,000 or more were:

December 31, 2020 (in                Within          Within           Within           Over
thousands)                          3 months       3-6 months       6-12 months       1 year         Total
Certificates of deposit
$100,000 and over                 $   10,640     $     24,591     $      19,027     $  30,837     $  85,095


FHLBB advances decreased $38.2 million during 2020 to $12.6 million at December
31, 2020, compared with $50.9 million at December 31, 2019. The net decrease
primarily reflected net new amortizing borrowings of $10.0 million offset by
$30.0 million of maturities and $3.2 million of amortization in 2020. In
addition, in fourth quarter 2020 Salisbury utilized excess cash to prepay a $15
million advance that was scheduled to mature in July 2021. Salisbury incurred a
penalty of approximately $60 thousand as a result of this prepayment. Salisbury
also has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB,
whereby upon the Bank's request an irrevocable letter of credit is issued to
secure municipal and certain other transactional deposit accounts. These letters
of credit are secured primarily by residential mortgage loans. The amount of
funds available from the FHLBB to the Bank is reduced by any letters of credit
outstanding. At December 31, 2020, $20.0 million of letters of credit were
outstanding compared with $18.0 million at December 31, 2019. Salisbury's excess
borrowing capacity at the FHLB was $255.5 million compared with $233.7 million
at December 31, 2019. The increase in capacity reflected the pledging of
additional residential and commercial loans as collateral.

The following table shows some information about short-term FHLBB advances:

December 31, (dollars in thousands)          2020       2019
Highest month-end balance during period  $ 15,000   $ 47,000
Ending balance                                  -     30,000
Average balance during period               5,956      5,670


Subordinated Debentures

In December 2015, Salisbury completed the issuance of $10.0 million in aggregate
principal amount of 6.00% Fixed to Floating Rate Subordinated Notes Due 2025
(the "Notes") in a private placement transaction to various accredited investors
including $500 thousand to certain of Salisbury's related parties. The Notes
have a maturity date of December 15, 2025 and bear interest at an annual rate of
6.00% from and including the original issue date of the Notes to, but excluding,
December 15, 2020 or the earlier redemption date payable semi-annually in
arrears on June 15 and December 15 of each year. Thereafter, from and including
December 15, 2020 to, but excluding, December 15, 2025, the terms of the note
payable provide that the annual interest rate will be reset quarterly and equal
to the three-month LIBOR, plus 430 basis points, as described in the Notes,
payable quarterly, in arrears, on March 15, June 15, September 15 and December
15 of each year during the time that the Notes remain outstanding through
December 15, 2025 or earlier redemption date. Salisbury is monitoring the
industry's transition from LIBOR as a market reference rate. The Notes are
redeemable, without penalty, on or after December 15, 2020 and, in certain
limited circumstances, prior to that date. As more completely described in the
Notes, the indebtedness evidenced by the Notes, including principal and
interest, is unsecured and subordinate and junior in right of Salisbury's
payments to general and secured creditors and depositors of the Bank. The Notes
also contain provisions with respect to redemption features and other matters
pertaining to the Notes. The Notes have been structured to qualify as Tier 2
capital for regulatory capital purposes, subject to applicable limitations. As a
result of the Notes being within five (5) years of their maturity date, Tier 2
capital at the parent company only will decrease in an amount equal to 20.0% of
the outstanding Notes per year until the Notes mature in 2025 or are earlier
redeemed.

Subordinated debentures totaled $9.9 million at December 31, 2020, which
includes $117 thousand of remaining unamortized debt issuance costs. The debt
issuance costs are being amortized to maturity. The effective interest rate of
the subordinated debentures is 6.25%.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS

In the normal course of business, Salisbury incurs various contractual obligations that may require future cash payments. Contractual obligations to
December 31, 2020 include operating leases, capital leases, contractual purchases and certain other benefit plans. For more details on leases, see note 5 to the consolidated financial statements.

The accompanying table summarizes Salisbury's off-balance sheet lending-related
financial instruments and significant cash obligations, by remaining maturity,
at December 31, 2020. Salisbury's lending-related financial instruments include
commitments that have maturities over one year. Contractual purchases include
commitments for future cash expenditures, primarily for services and contracts
that reflect the minimum contractual obligation under legally enforceable
contracts with contract terms that are both fixed and determinable. Excluded
from the following table are a number of obligations to be settled in cash,
primarily in under one year. These obligations are reflected in Salisbury's
Consolidated Balance Sheets and include deposits, FHLBB advances and repurchase
agreements that settle within standard market timeframes.

 31



December 31, 2020 (in thousands) Within After 1 year After 3 years After By remaining maturity

                1 year        Within 3 years      Within 5 years       5 years        Total
Residential                        $       -     $          5,177     $             -     $   6,484     $  11,661
Home equity lines of credit              500                    -          
       71        28,348        28,919
Commercial                             3,057                  305                 520         6,221        10,103
Land                                     496                    -                   -            70           566
Real estate secured                    4,053                5,482                 591        41,123        51,249
Commercial and industrial             33,173                  761               1,356        59,564        94,854
Municipal                                  -                1,554                   -           250         1,804
Consumer                                   5                    -                   -         2,072         2,077
Unadvanced portions of loans          37,231                7,797               1,947       103,009       149,984
Commitments to originate loans        49,753                    -          
        -             -        49,753
Standby letters of credit              4,647                  110                   -             1         4,758
Total                              $  91,631     $          7,907     $         1,947     $ 103,010     $ 204,495


LIQUIDITY

Salisbury manages its liquidity position to ensure it has sufficient funding
availability at all times to meet both anticipated and unanticipated deposit
withdrawals, loan originations and advances, securities purchases and other
operating cash outflows. Salisbury's primary source of liquidity is deposits and
though its preferred funding strategy is to attract and retain low cost
deposits, its ability to do so is affected by competitive interest rates and
terms in its marketplace, and other financial market conditions. Other sources
of funding include cash flows from loan and securities principal payments and
maturities, funds provided by operations, and discretionary use of national
market certificates of deposit and FHLBB advances. Liquidity can also be
provided through sales of securities and loans. Salisbury manages its liquidity
in accordance with a liquidity funding policy, and also maintains a contingency
funding plan that provides for the prompt and comprehensive response to
unexpected demands for liquidity. Management believes Salisbury's funding
sources will meet anticipated funding needs.

Operating activities for 2020 provided net cash of $13.8 million. Investing
activities utilized net cash of $114.0 million, principally from purchases of
securities of $37.4 million, net loan originations and principal collections of
$107.4 million, a $3.5 million investment in BOLI and capital expenditures of
$4.4 million, offset by sales, calls, and maturities of securities of $32.5
million, BOLI proceeds of $4.0 million and proceeds from the redemption of FHLB
stock of $1.5 million. Financing activities provided net cash of $166.5 million,
principally from a net deposit increase of $209.5 million and advances from
FHLBB for $16.0 million, partly offset by FHLB advances payments of $54.3
million, and common stock dividends of $3.3 million, and a decrease of $1.4
million in securities sold under agreements to repurchase.

Operating activities for 2019 provided net cash of $14.3 million. Investing
activities utilized net cash of $23.4 million, principally from purchases of
securities of $53.5 million, loan originations and principal collections, net of
$19.2 million, a $5.8 million investment in BOLI and capital expenditures of
$2.0 million, offset by sales, calls, and maturities of securities of $55.4
million. Financing activities utilized net cash of $22.5 million, principally
from the maturity of FHLBB advances of $37.0 million, a net deposit decrease of
$7.2 million, and common stock dividends of $3.2 million, partly offset by FHLB
advances of $20.5 million and an increase of $4.4 million in securities sold
under agreements to repurchase.

Operating activities for 2018 provided net cash of $13.3 million. Investing
activities utilized net cash of $118.1 million, principally from loan
originations and principal collections, net of $102.3 million and purchases of
securities of $41.6 million, offset by sales, calls, and maturities of
securities of $27.8 million. Financing activities provided net cash of $114.8
million, principally from a net deposit increase of $103.0 million, FHLBB
advances of $37.0 million and an increase of $2.4 million in securities sold
under agreements to repurchase, partly offset by net principal payments on FHLB
advances of $24.5 million and common stock dividends of $3.1 million.

CAPITAL RESOURCES

Equity

Shareholders' equity increased $11.1 million in 2020 to $124.7 million at
December 31, 2020. Contributing to the increase in shareholders' equity was net
income of $11.9 million, a gain in other comprehensive income of $1.7 million
and restricted stock awards of $0.7 million to certain of Salisbury's directors
and employees, partially offset by common stock dividends declared of $3.3
million.

Capital required

The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Under current regulatory definitions, the Bank
meets all capital adequacy requirements to which it is subject and the Bank is
considered to be well-capitalized. As a result, the Bank pays lower federal
deposit insurance premiums than those banks that are not "well capitalized."
Requirements for classification as a well-capitalized institution and for
minimum capital adequacy along with the Bank's regulatory capital ratios are as
follows at December 31, 2020 and 2019 under the regulatory capital rules then in
effect:

                                     Minimum Capital
                                        Adequacy         Minimum Ratios to be
                                       Requirement         Well Capitalized          Actual Bank Ratios
                                     2020       2019        2020        2019             2020        2019
Total Capital (to risk-weighted
assets)                              8.00 %     8.00 %     10.00 %     

10.00% 13.57% 12.84% Common Equity Tier 1 Capital 4.50 4.50 6.50 6.50

            12.31       11.83
Tier 1 Capital (to risk-weighted
assets)                              6.00       6.00        8.00        8.00            12.31       11.83
Tier 1 Capital (to average
assets)                              4.00       4.00        5.00        5.00           8.90 1        9.60


1Excluding average PPP loan balances of $62.0 million, the Bank's Tier 1 Capital
(to average assets) ratio would have been approximately 9.35% at December 31,
2020.

 32




A well-capitalized institution, which is the highest capital category for an
institution as defined by the Prompt Corrective Action regulations issued by the
FDIC and the FRB, is one which maintains a Total Risk-Based ratio of 10% or
above, a Tier 1 Risk-Based ratio of 8% or above, a Common Equity Tier 1 ratio of
6.5% or above, and a Leverage ratio of 5% or above, and is not subject to any
written order, written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level. Maintaining strong
capital is essential to Salisbury and the Bank's safety and soundness. However,
the effective management of capital resources requires generating attractive
returns on equity to build value for shareholders while maintaining appropriate
levels of capital to fund growth, meet regulatory requirements and be consistent
with prudent industry practices.

The FRB's final rules implementing the Basel Committee on Banking Supervision's
capital guidelines for bank holding companies and their bank subsidiaries
include a common equity Tier 1 capital to risk-weighted assets minimum ratio of
4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require
a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a
minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised
of common equity Tier 1 capital, is also established above the regulatory
minimum capital requirements. This capital conservation buffer began phasing in
January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent
year by an additional 0.625% until it reached its final level of 2.50% on
January 1, 2019. Strict eligibility criteria for regulatory capital instruments
were also implemented under the final rules.

As of December 31, 2020, the Company and the Bank met each of their capital
requirements and the most recent notification from the FDIC categorized the Bank
as "well-capitalized." There are no conditions or events since that notification
that management believes have changed the Bank's category.

On September 17, 2019, the Office of the Comptroller of the Currency, the FRB
and the FDIC published its final rule establishing a "Community Bank Leverage
Ratio" ("CBLR") that simplifies capital requirements for certain community
banking organizations with less than $10 billion in total consolidated assets
(such as the Bank). Under the final rule, depository institutions and their
holding companies that meet certain criteria (generally, those with limited
amounts of off-balance sheet exposures, trading assets and liabilities, mortgage
servicing assets, and temporary difference deferred tax assets) ("qualifying
community banking organizations") may elect to report the components of its Tier
1 leverage ratio as a measure of capital adequacy. A qualifying community
banking organization with a CBLR of greater than 9% that "elects to use the CBLR
framework" will not be subject to other risk-based and leverage capital
requirements and will be considered to have met the well-capitalized ratio
requirements for purposes of the agencies' Prompt Corrective Action ("PCA")
framework. Under the final rule, if a bank that has opted to use the CBLR
framework subsequently fails to satisfy one or more of the qualifying criteria,
but continues to report a leverage ratio of greater than 8 %, the bank may
continue to use the framework and will be deemed "well capitalized" for a grace
period of up to two quarters. A qualifying community banking organization will
be required to comply with the generally applicable capital rule and file the
relevant regulatory reports if the banking organization: (1) is unable to
restore compliance with all qualifying criteria during the two-quarter grace
period( including achieving compliance with the greater than 9% leverage ratio
requirement); (2) reports a leverage ratio of 8% or less; or (3) ceases to
satisfy the qualifying criteria due to consummation of a merger transaction. The
final rule became effective on January 1, 2020. The Bank would qualify for the
CBLR methodology and would also be considered to be well capitalized if it
elected to utilize such methodology. The Bank is currently evaluating the
benefits of transitioning to this simplified methodology for assessing capital
adequacy.

On April 6, 2020, the regulators announced that the CBLR will be modified so
that: (1) beginning in the second quarter 2020 and until the end of the year, a
banking organization that has a leverage ratio of 8% or greater and meets
certain other criteria may elect to use the CBLR framework; and (2) community
banks will have until January 1, 2022 before the CBLR requirement is
re-established at greater than 9%. Under the interim final rules, the CBLR will
be 8% beginning in the second quarter 2020 and for the remainder of the calendar
year, 8.5% for calendar year 2021 and 9% thereafter. The Bank is currently
evaluating the benefits of transitioning to this simplified methodology for
assessing capital adequacy.

Dividends

In January 2020, the Board of Directors of Salisbury Bank approved a $0.01
increase in the quarterly dividend. During 2020 and 2019, Salisbury declared and
paid four quarterly common stock dividends of $0.29 and $0.28 per common share
each quarter, respectively, totaling $3.3 million and $3.2 million,
respectively. The Board of Directors of Salisbury declared a common stock
dividend of $0.29 per common share payable on February 26, 2021 to shareholders
of record on February 12, 2021. Common stock dividends, when declared, will
generally be paid the last business day of February, May, August and November,
although Salisbury is not obligated to pay dividends on those dates or at any
other time.

Salisbury's ability to pay cash dividends is dependent on the Bank's ability to
pay cash dividends to Salisbury. There are certain restrictions on the payment
of cash dividends and other payments by the Bank to Salisbury. Under Connecticut
law, the Bank cannot declare a cash dividend except from net profits, defined as
the remainder of all earnings from current operations. The total of all cash
dividends declared by the Bank in any calendar year shall not, unless
specifically approved by the Banking Commissioner, exceed the total of its net
profits of that year combined with its retained net profits of the preceding two
years.

FRB Supervisory Letter SR 09-4, February 24, 2009, revised March 30, 2009,
states that, as a general matter, the Board of Directors of a Bank Holding
Company ("BHC") should inform the Federal Reserve and should eliminate, defer,
or significantly reduce dividends if (1) net income available to shareholders
for the past four quarters, net of dividends previously paid during that period,
is not sufficient to fully fund the dividends; (2) the prospective rate of
earnings retention is not consistent with capital needs and overall current and
prospective financial condition; or (3) the BHC will not meet, or is in danger
of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC
should inform the Federal Reserve reasonably in advance of declaring or paying a
dividend that exceeds earnings for the period (e.g., quarter) for which the
dividend is being paid or that could result in a material adverse change to the
BHC capital position.

Salisbury believes that the payment of common stock cash dividends is
appropriate, provided that such payment considers Salisbury's capital needs,
asset quality, and overall financial condition and does not adversely affect the
financial stability of Salisbury or the Bank. The continued payment of common
stock cash dividends by Salisbury will be dependent on Salisbury's future core
earnings, financial condition and capital needs, regulatory restrictions, and
other factors deemed relevant by the Board of Directors of Salisbury.

 33



RECENTLY ISSUED ACCOUNTING STATEMENTS

See note 1 of the consolidated financial statements for details of recently published accounting statements and their expected impact on Salisbury
consolidated financial statements.

IMPACT OF INFLATION AND PRICE DEVELOPMENTS

Salisbury's consolidated financial statements and related notes thereto
presented elsewhere in this Form 10-K are prepared in conformity with U.S. GAAP,
which require the measurement of financial condition and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money, over time, due to inflation. Unlike some other types
of companies, the financial nature of Salisbury's consolidated financial
statements is more clearly affected by changes in interest rates than by
inflation. Interest rates do not necessarily fluctuate in the same direction or
in the same magnitude as the prices of goods and services. However, inflation
does affect Salisbury to some extent because, as prices increase, the money
supply grows and interest rates are affected by inflationary expectations. There
is no precise method, however, to measure the effects of inflation on the
Company's consolidated financial statements. Accordingly, any examination or
analysis of the financial statements should take into consideration the possible
effects of inflation. Although not a material factor in recent years, inflation
could impact earnings in future periods.

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