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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-K
 þ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004  o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from______________to____________ Commission File Number 0-15137 MASSBANK Corp.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    04-2930382
(I.R.S. Employer
Identification No.)
 123 HAVEN STREET
Reading, Massachusetts
(Address of principal executive offices)
    
    01867
(Zip Code)
 Registrants telephone number, including area code: (781) 662-0100 Securities registered pursuant to Section 12(b) of the Act:  Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class) 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 þ  No o 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 registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934.
Yes þ  No o As of February 28, 2005, there were 4,405,542 shares of the registrants
common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of MASSBANK Corp.s 2004 Annual Report to Stockholders are
incorporated by reference in Parts I, II, III and IV of this Form 10-K.
Portions of the Definitive Notice of Annual Meeting and Proxy Statement for
the 2005 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Form 10-K. The aggregate market value of the registrants voting and non-voting common
stock held by non-affiliates of the registrant, computed by reference to the
closing price per share of common stock on June 30, 2004, the last day of the
registrants most recently completed second fiscal quarter, as reported on the
NASDAQ National Market, was $134,731,573. Although directors and executive
officers of the registrant were assumed to be affiliates of the registrant
for the purposes of this calculation, this classification is not to be
interpreted as an admission of such status.




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FORM 10-K
MASSBANK Corp.
For the Year Ended December 31, 2004 TABLE OF CONTENTS PageDescription
    
    NumberPart 1Item 1 Business
    
    
    4Executive Officers of the Registrant
    
    
    26Item 2 Properties
    
    
    28Item 3 Legal Proceedings
    
    
    28Item 4 Submission of Matters to a Vote of Security Holders
    
    
    28Part IIItem 5 Market for the Registrants Common Stock and Related Stockholder Matters
    
    
    29Item 6 Selected Financial Data
    
    
    30Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 8 Financial Statements and Supplementary Data
    
    
    30Item 9 Changes in and Disagreements with Independent Registered Public Accounting Firm on Accounting and Financial Disclosure
    
    
    31Item 9A Controls and Procedures
    
    
    31Part IIIItem 10 Directors and Executive Officers of the Registrant
    
    
    31Item 11 Executive Compensation
    
    
    31Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    31Item 13 Certain Relationships and Related Transactions
    
    
    32Item 14 Principal Accountant Fees and Services
    
    
    32Part IVItem 15 Exhibits and Financial Statement Schedules
    
    
    32Signatures
    
    
    36Ex-13 2004 Annual ReportEx-21 Subsidiaries of the RegistrantEx-23 Consent of KPMG LLPEx-31.1 Sect. 302 Certification of the C.E.O.Ex-31.2 Sect. 302 Certification of the C.F.O.Ex-32.1 Sect. 906 Certification of the C.E.O.Ex-32.2 Sect. 906 Certification of the C.F.O.
  2




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Forward-Looking Statement Disclosure. This Annual Report on Form 10-K may contain forward-looking information,
including information concerning the Companys expectations of future business
prospects. These forward-looking statements are made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995. The
Company may also make forward-looking statements in other documents filed with
the Securities and Exchange Commission (SEC), in its annual and quarterly
reports to stockholders, in press releases and other written materials, and in
oral statements made by the Companys officers, directors or employees. You
can identify forward-looking statements by the use of the words may, could,
should, believe, expect, anticipate, intend, estimate, assume,
will, would, and other expressions which predict or indicate future events
and trends and which do not relate to historical matters. These forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause the Companys actual results or performance to be materially
different from the results and performance expressed or implied by the forward-
looking statements. Forward-looking statements include, but are not limited to,
statements concerning the Companys belief, expectations or intentions
concerning the Companys future performance, the financial outlook of the
markets it serves and the performance and activities of its competitors. These
statements reflect the Companys current views, are based on numerous
assumptions and are subject to numerous risks and uncertainties, and other
factors including but not limited to the following:  -
    The strength of the local economy and the U.S. economy in general;-
    Unexpected fluctuations in market interest rates;-
    Unexpected fluctuations in the market for equities, bonds, federal
funds and other financial instruments;-
    An increase in the level of non-performing assets;-
    An increase in competitive pricing pressures within the Companys
market which may result in the following:  
    An increase in the Companys cost of funds;
    A decrease in loan originations;
    A decrease in deposits; and
    Limit the ability of the Company to attract and retain
banking customers;  -
    Adverse legislative or regulatory developments;-
    A significant decline in residential real estate values in the
Companys market area.-
    Adverse impacts resulting from the continuing war on terrorism;-
    An increase in other employee-related costs; and-
    The impact of deflation or inflation, and other factors described
in the Companys annual report. Internet Access The Company maintains a website at www.MASSBANK.com. The Company will make
available free of charge on or through its website its annual reports on Form
10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (Exchange Act) as soon as
reasonably practicable following its filing of the same with the SEC. In
addition, the Companys code of ethics is posted on the Companys website. 3




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PART I 
 Item 1. Business Business of MASSBANK Corp. General MASSBANK Corp. (sometimes referred to as the Company) is a general
business corporation incorporated under the laws of the State of Delaware on
August 11, 1986. MASSBANK Corp. was organized for the purpose of becoming the
holding company for MASSBANK (the Bank). The Company is a one-bank holding
company registered with the Board of Governors of the Federal Reserve System
(Federal Reserve Board) under the Bank Holding Company Act of 1956, as amended.
As of and since December 2, 1986, the effective date of the reorganization
whereby MASSBANK Corp. became the holding company for the Bank, the Bank has
been a wholly owned subsidiary of MASSBANK Corp. The only office of MASSBANK
Corp., and its principal place of business, is located at the main office of
the Bank at 123 Haven Street, Reading, Massachusetts 01867. MASSBANK Corp. currently has no material assets other than its investment
in the Bank. The Companys primary business, therefore, is managing its
investment in the stock of the Bank. MASSBANK Corp. is classified by the
Commonwealth of Massachusetts as a securities corporation for tax purposes
which restricts its business to buying, selling, dealing in, or holding
securities on its own behalf. In the future, MASSBANK Corp. may become an
operating company or acquire banks or companies engaged in bank-related
activities. In addition, MASSBANK Corp. may elect to become a financial
holding company and to engage in activities permissible to financial holding
companies. See Supervision and Regulation of the Company and its
Subsidiaries. The principal sources of revenues for MASSBANK Corp. are dividends from
the Bank and, to a lesser extent, interest income received from its interest-
bearing bank deposits. These revenues are used primarily for the payment of
dividends to stockholders and for the repurchase of stock pursuant to the
Companys stock repurchase program. MASSBANK Corp.s assets at December 31,
2004 are represented by its investment in the Bank of $105.3 million, interest-
bearing bank deposits of $4.2 million and other assets of $0.5 million. See
Note 17 to the Consolidated Financial Statements for Parent Company only
financial information. At December 31, 2004, MASSBANK Corp. on a consolidated
basis had total assets of $976.2 million, deposits of $849.5 million, and
stockholders equity of $110.0 million which represents 11.27% of total assets.
Book value per share at December 31, 2004 stood at $25.11, compared to $25.17
at year-end 2003. The Company does not own or lease any real estate or personal property.
Instead it intends to utilize during the immediate future the premises,
equipment and furniture of the Bank without the direct payment of rental fees
to the Bank. Competition The primary business of MASSBANK Corp. currently is the ongoing business
of the Bank. Therefore, the competitive conditions faced by MASSBANK Corp.
currently are the same as those faced by the Bank. See Business of MASSBANK
- Competition. In addition, many banks and financial institutions have
formed holding companies. It is likely that these holding companies will
attempt to acquire commercial banks, thrift institutions or companies engaged
in bank-related activities. MASSBANK Corp. would face competition in
undertaking any such acquisitions and in operating any such entity subsequent
to its acquisition. 4




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Employees MASSBANK Corp. does not employ any persons other than its management
which also serves as management of, and is paid by, the Bank. See Item 10 
Directors and Executive Officers of the Registrant. MASSBANK Corp. utilizes
the support staff of the Bank from time to time and paid the Bank $12,000 in
2004 for the support. Dividends MASSBANK Corp. paid total cash dividends of $1.00 per share in 2004
compared to $0.92 per share in 2003. The Companys dividend payout ratios
(cash dividends paid divided by net income) for 2004 and 2003 were 60% and
52%, respectively. 5




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##### Table of Contents



Business of MASSBANK General MASSBANK is a Massachusetts-chartered savings bank founded in 1872 as the
Melrose Savings Bank. In 1983, the Reading Savings Bank was merged with and
into the Melrose Savings Bank and the name of the resulting institution was
changed to MASSBANK for Savings. In 1986, the Bank converted from mutual to
stock form of ownership. In 1996, the name of the bank was changed from
MASSBANK for Savings to MASSBANK. The Bank is primarily engaged in the business of attracting deposits from
the general public through its fifteen full service banking offices in
Reading, Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Stoneham,
Tewksbury, Westford and Wilmington, and originating residential and commercial
real estate mortgages, construction loans, commercial loans, and a variety of
consumer loans. The Bank invests a significant portion of its funds in U.S.
Treasury and Government agency securities (including callable agency
securities), mortgage-backed securities, federal funds sold, and other
authorized investments. The Bank also invests a portion of its funds in equity
securities traded on a national securities exchange or quoted on the NASDAQ
System. The Banks earnings depend largely upon net interest income, which is
the difference between the interest and dividend income derived by the Bank
from its loans and investments (interest-earning assets) and the interest paid
by the Bank on its deposits (interest-bearing liabilities). Net interest income
is significantly affected by general economic conditions, particularly changes
in interest rates, competition, government legislation and policies affecting
fiscal affairs, monetary policies of the Federal Reserve System, and the actions
of the bank regulatory authorities. Earnings results are also affected by the
Companys provisions (credit) for loan losses; loan and investment activities,
particularly residential mortgage loan and mortgage-backed securities prepayment
activity; changes in non-interest income, such as fee-based revenues and
securities gains or losses; non-interest expense; and income taxes. The Banks deposits are insured to applicable limits by the Bank Insurance
Fund (BIF) of the Federal Deposit Insurance Corporation (the FDIC) and excess
deposit balances are insured by the Depositors Insurance Fund, Inc. (DIF), a
private industry-sponsored deposit insurer. The Bank recognizes that loan and investment opportunities change over
time and that yields derived from such opportunities can vary significantly
even when the risks associated with those opportunities are comparable. By
developing a relatively liquid loan and investment portfolio, the Bank has
attempted to position itself so as to be able to take advantage of these
changing opportunities. Consequently, the Bank expects that the relative mix
of its loan and investment portfolios will change over time in response to
changing market conditions. 6




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##### Table of Contents



Market Area The Bank is headquartered in Reading, Massachusetts, which is located
approximately 15 miles north of Boston. The Banks market area includes a
significant portion of eastern Massachusetts and is served by a network of
15 branch offices located on a broad arc stretching from Medford and Everett
in the south, Dracut in the north, and Westford in the west. The Banks general market area consists of the municipalities in which it
operates banking offices and all of the contiguous cities and towns. The Bank currently operates banking offices in the municipalities of
Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Reading,
Stoneham,
Tewksbury, Westford and Wilmington. Lending Activities The Banks net loan portfolio totaled $234.9 million at December 31, 2004. The following table sets forth information concerning the Banks loan portfolio
by type of loan at the dates shown: (In thousands) At December 31,
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Mortgage loans:Residential:Conventional
    
    $
    224,542
    
    
    $
    240,443
    
    
    $
    300,528
    
    
    $
    293,764
    
    
    $
    269,859FHA and VA
    
    
    45
    
    
    
    84
    
    
    
    133
    
    
    
    259
    
    
    
    471Commercial
    
    
    1,623
    
    
    
    1,601
    
    
    
    2,348
    
    
    
    2,641
    
    
    
    3,117Construction
    
    
    84
    
    
    
    81
    
    
    
    654
    
    
    
    993
    
    
    
    683Total mortgage loans
    
    
    226,294
    
    
    
    242,209
    
    
    
    303,663
    
    
    
    297,657
    
    
    
    274,130Premium on loans
    
    
    5
    
    
    
    10
    
    
    
    20
    
    
    
    51
    
    
    
    105Deferred mortgage loan
origination fees
    
    
    (102
    )
    
    
    (333
    )
    
    
    (895
    )
    
    
    (1,239
    )
    
    
    (1,284
    )Mortgage loans, net
    
    
    226,197
    
    
    
    241,886
    
    
    
    302,788
    
    
    
    296,469
    
    
    
    272,951Other loans:Consumer:Installment
    
    
    327
    
    
    
    415
    
    
    
    798
    
    
    
    1,178
    
    
    
    1,829Guaranteed education
    
    
    1,616
    
    
    
    2,333
    
    
    
    3,293
    
    
    
    4,937
    
    
    
    6,266Other secured
    
    
    504
    
    
    
    518
    
    
    
    515
    
    
    
    873
    
    
    
    1,169Home equity lines of credit
    
    
    7,284
    
    
    
    7,549
    
    
    
    11,102
    
    
    
    12,271
    
    
    
    12,624Unsecured lines of credit
    
    
    161
    
    
    
    166
    
    
    
    187
    
    
    
    201
    
    
    
    224Total consumer loans
    
    
    9,892
    
    
    
    10,981
    
    
    
    15,895
    
    
    
    19,460
    
    
    
    22,112Commercial
    
    
    109
    
    
    
    139
    
    
    
    116
    
    
    
    15,088
    
    
    
    15,084Total other loans
    
    
    10,001
    
    
    
    11,120
    
    
    
    16,011
    
    
    
    34,548
    
    
    
    37,196Total loans
    
    
    236,198
    
    
    
    253,006
    
    
    
    318,799
    
    
    
    331,017
    
    
    
    310,147Allowance for loan losses (1)
    
    
    (1,307
    )
    
    
    (1,554
    )
    
    
    (2,271
    )
    
    
    (2,494
    )
    
    
    (2,594
    )Net loans
    
    $
    234,891
    
    
    $
    251,452
    
    
    $
    316,528
    
    
    $
    328,523
    
    
    $
    307,553
   (1)
    The allowance for loan losses for 2002 and 2001 has been restated to reflect the
reclassification of the allowance for loan losses on off-balance sheet credit
 exposures (shown separately on the balance sheet) and to facilitate comparison
with the current fiscal year. 7




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The following table shows the maturity distribution and interest
rate sensitivity of the Banks loan portfolio at December 31, 2004: Maturity/Scheduled Payments (1)Within
    
    
    One to
    
    
    Five to
    
    
    After(In thousands)
    
    one year
    
    
    five years
    
    
    ten years
    
    
    ten years
    
    
    TotalMortgage loans:Residential
    
    $
    115
    
    
    $
    11,083
    
    
    $
    64,880
    
    
    $
    148,421
    
    
    $
    224,499Commercial & construction
    
    
    12
    
    
    
    106
    
    
    
    508
    
    
    
    1,072
    
    
    
    1,698Total mortgage loans
    
    
    127
    
    
    
    11,189
    
    
    
    65,388
    
    
    
    149,493
    
    
    
    226,197Other loans
    
    
    393
    
    
    
    3,801
    
    
    
    4,761
    
    
    
    1,046
    
    
    
    10,001Total loans
    
    $
    520
    
    
    $
    14,990
    
    
    $
    70,149
    
    
    $
    150,539
    
    
    $
    236,198
   (1)
    Loan amounts are accumulated as if the entire balance came due on the last
contractual payment date. Accordingly, the amounts do not reflect proceeds
 from contractual loan amortization or anticipated prepayments. The following table shows the amounts, included in the table above, which
are due after one year and which have fixed or adjustable interest rates: Total Due After One YearFixed
    
    
    Adjustable(In thousands)
    
    Rate
    
    
    Rate
    
    
    TotalMortgage loans:Residential
    
    $
    202,861
    
    
    $
    21,523
    
    
    $
    224,384Commercial & construction
    
    
    84
    
    
    
    1,602
    
    
    
    1,686Total mortgage loans
    
    
    202,945
    
    
    
    23,125
    
    
    
    226,070Other loans
    
    
    833
    
    
    
    8,775
    
    
    
    9,608Total loans
    
    $
    203,778
    
    
    $
    31,900
    
    
    $
    235,678
 Mortgage Lending. The Bank believes that the repayment periods of long-term first
mortgage loans, the general resistance of the public in our market area to variable rate
mortgage instruments and the highly competitive nature of the mortgage industry require a
prudent approach to mortgage lending. Consequently, as part of its policy of generally
attempting to match the maturities of its assets and its liabilities, the Bank has
attempted to keep its mortgage loan portfolio to a level at which the Bank believes there

is an acceptable risk-to-reward ratio in light of opportunities in the market-place and its
long-term objectives. In 2004, however, the Banks mortgage loan portfolio decreased $15.7
million or 6.5%. At December 31, 2004 the mortgage loan portfolio totaled $226.2 million
compared to $241.9 million at December 31, 2003. The decrease in loans is principally due
to loan principal payments, paydowns and payoffs combined with a decline in loan origination
activity. Loan originations totaled $60.3 million in 2004, down 27.0% from $82.6 million
in 2003. In todays economic climate, there is a tremendous amount of competition for
mortgages in the Banks area. Consequently, increasing the size of the loan portfolio
will take time. In the meantime, short-term mortgage-backed securities may be used as
substitutes for loans as certain of their financial characteristics are very similar to
short-term mortgage loans. If interest rates increase in 2005 and the shape of the yield
curve is positive, the Bank will likely add mortgage-backed securities to its portfolio. 8




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Mortgage Lending (continued) Loan originations come from a number of sources, including referrals from
real estate brokers, walk-in customers, purchasers of property owned by existing
customers and refinancings for existing customers. In addition to actively
soliciting loan applications, the Bank conducts an advertising and promotion
program, directed both toward the general public and real estate professionals
who might refer potential borrowers. Substantially all of the real estate loans originated by the Bank during
2004 were secured by real estate located in the Banks primary lending area,
reflecting the Banks commitment to serve the credit needs of the local
communities in which it operates banking offices. The Bank makes both conventional fixed and adjustable-rate loans on one-
to-four family residential properties for a term of ten to thirty years. The
Bank currently retains all of the mortgages it originates for its own portfolio.
These are primarily 10, 12, 15 or 20 year fixed rate and adjustable rate
mortgages (ARMs). The few long-term (30 year) fixed rate mortgage loans that
the Bank originates from time to time are also added to the loan portfolio.
Adjustable rate mortgage loans have rates that are re-set at either 1, 3, 5, 7
or 10 year intervals and are indexed to various financial indices. In addition to its traditional mortgage products, the Bank offers several
other loan programs which have been well received by customers. It offers ARM
programs featuring an initial fixed rate for 5 or 7 years and a 1 year
adjustable rate thereafter. A special first time home buyers program has also
been instituted featuring a discounted ARM. This program is designed for first-
time home buyers meeting certain income and property location criteria. At December 31, 2004, 1-4 family residential mortgage loans totaled $224.5
million, or 95.0% of the total loan portfolio, compared to $240.2 million, or
94.9% of the total loan portfolio, at December 31, 2003. Residential mortgage
and construction loan originations decreased to $53.7 million in 2004, from
$74.9 million in 2003. Much of this volume was due to mortgage refinancing.
Origination volumes are sensitive to interest rates and are affected by the
interest rate environment. The low interest rate environment in 2004 created

demand for mortgage refinancings, but also a high level of loan paydowns and
payoffs for the Bank. Although the Bank originated $53.1 million in residential
mortgage loans in 2004, it saw its residential mortgage loan portfolio decline
as a result of the prepayment activity. The Bank also originates construction loans and mortgage loans secured by
commercial or investment property. The commercial and multifamily real estate
mortgages and construction loans totaled approximately $1.7 million, or 0.7% of
the total loan portfolio at December 31, 2004. In 2004 construction loan
originations amounted to $0.6 million. There were no commercial real estate
mortgage loan originations in 2004 or 2003. 9




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##### Table of Contents



Mortgage Lending (continued) The total amount of first mortgage loans held by the Bank at December 31,
2004 was $226.2 million as indicated in the maturity distribution table
appearing on page nine. Of this amount, $23.1 million was subject to interest
rate adjustments. The remaining $203.1 million represents fixed rate mortgage
loans, which constitute 86.0% of the Companys total loans. Fees received for originating loans and related direct incremental loan
origination costs are offset and the resulting net amount is deferred
and
amortized over the life of the related loans. The Bank also receives fees relating to existing loans, primarily late
charges and prepayment penalties. Other Loans. The Bank makes a variety of consumer loans and had a
consumer loan portfolio of approximately $9.9 million at December 31, 2004
representing 4.2% of the Banks total loan portfolio. Of this amount, $1.6
million or 0.7% of the total loan portfolio are education loans guaranteed by
the American Student Assistance Services Corporation. The balance of the Banks consumer loan portfolio consists of home equity
lines of credit and consumer loan contracts such as automobile loans, home
improvement loans and other secured and unsecured financings. These loans
totaled $8.3 million at December 31, 2004, representing 3.5% of the Banks
total loan portfolio. At December 31, 2004, the Bank also had $0.1 million in outstanding loans
to commercial enterprises not secured by real estate. Loan Approval. The Banks loan approval process for all loans generally
includes a review of an applicants financial statements, credit history,
banking history and verification of income. For mortgage loans, the Bank
generally obtains an independent appraisal of the subject property. The Bank
has a formal lending policy approved by the Board of Directors of the Bank
which delegates levels of loan approval authority to Bank personnel. All
loans in excess of established limits require approval of the Banks Board of
Directors. The Bank issues commitments to prospective borrowers to make loans
subject to certain conditions for generally up to 60 days. The interest rate
applicable to the committed loans is usually the rate in effect at the time
a rate lock fee is paid. At December 31, 2004, the Bank had issued commitments
on residential first mortgage loans totaling $3,811,000, and had commitments
to advance funds on construction loans and unused credit lines, including unused
portions of home equity lines of credit, of $89,000 and $33,909,000,
respectively. In addition, the Bank had commitments to provide $3,926,000,
which represents its participating share of the funding for an affordable
housing project in Lowell, Massachusetts, $45,000 in commitments to advance
funds for business development in downtown Lowell and unused commercial loan
credit lines of $55,000. Loan Delinquencies. It is the Banks policy to manage its loan portfolio
so as to recognize problem loans at an early stage and thereby minimize loan
losses. Loans are considered delinquent when any payment of principal or
interest is one month or more past due. The Bank generally commences collection
procedures, however, when accounts are 15 days past due. It is the Banks
practice to generally discontinue accrual of interest on all loans for which
payments are 90 days or more past due. Loans with delinquent payments 90 or
more days past due, as shown in the table on the following page, totaled
$74,000 at December 31, 2004, down from $230,000 at year-end 2003. 10




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##### Table of Contents



Real Estate Acquired through Foreclosure. Real estate acquired through foreclosure is comprised of foreclosed
properties where the Bank has actually received title and loans determined to
be substantially repossessed. Real estate loans that are substantially
repossessed include only those loans for which the Bank has taken possession of
the collateral but has not completed legal foreclosure proceedings. Loan
losses arising from the acquisition of such properties are charged against the
allowance for loan losses. Real estate acquired through foreclosure is
recorded at the lower of the carrying value of the loan or the fair value of
the property constructively or actually received, less estimated costs to sell
the property following foreclosure. Operating expenses and any subsequent
provisions to reduce the carrying value to fair value are charged to current
period earnings. Gains or losses upon disposition are reflected in earnings
as realized. At year-end 2004, MASSBANK had no real estate acquired through
foreclosure. Non-Performing Assets The following table shows the composition of non-performing assets at the
dates shown: (In thousands) At December 31,
    
    2004
    
    
    2003
    
    
    2002
    
    

    2001
    
    
    2000Nonaccrual loans:Mortgage loans:Residential:Conventional
    
    $
    41
    
    
    $
    152
    
    
    $
    269
    
    
    $
    477
    
    
    $
    386FHA and VA
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    4
    
    
    
    8Consumer
    
    
    33
    
    
    
    78
    
    
    
    149
    
    
    
    163
    
    
    
    171Total nonaccrual loans
    
    
    74
    
    
    
    230
    
    
    
    420
    
    
    
    644
    
    
    
    565Total non-performing assets
    
    $
    74
    
    
    $
    230
    
    
    $
    420
    
    
    $
    644
    
    
    $
    565Percent of non-performing loans to
total loans
    
    
    0.03
    %
    
    
    0.09
    %
    
    
    0.13
    %
    
    
    0.19
    %
    
    
    0.18
    %Percent of non-performing assets to
total assets
    
    
    0.01
    %
    
    
    0.02
    %
    
    
    0.04
    %
    
    
    0.07
    %
    
    
    0.06
    %
 The reduction in interest income associated with nonaccrual loans is as
follows: (In thousands) Years Ended December 31,
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Interest income that would have been
recorded under original terms
    
    $
    4
    
    
    $
    17
    
    
    $
    31
    
    
    $
    60
    
    
    $
    48Interest income actually recorded
    
    
    1
    
    
    
    20
    
    
    
    27
    
    
    
    37
    
    
    
    36Reduction (increase) in interest income
    
    $
    3
    
    
    $
    (3
    )
    
    $
    4
    
    
    $
    23
    
    
    $
    12
 11




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##### Table of Contents



Allowance for Loan Losses and Allowance for Loan Losses on Off-Balance Sheet Credit
Exposures The Company maintains an allowance for probable losses that are inherent in the
Companys loan portfolio. The allowance for loan losses is increased (decreased) by
provisions (credits) charged to operations based on the estimated loan loss exposure
inherent in the portfolio. Management uses a methodology to systematically measure
the amount of estimated loan loss exposure inherent in the portfolio for purposes of
establishing a sufficient allowance for loan losses. The methodology includes three
elements: an analysis of individual loans deemed to be impaired, general loss
allocations for various loan types based on loss experience factors and an unallocated
allowance which is maintained based on managements assessment of many factors
including the risk characteristics of the portfolio, concentrations of credit, current
and anticipated economic conditions that may effect borrowers ability to pay, and
trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are
charged directly to the allowance. While management uses the information available in
establishing the allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Banks allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance based on
judgments different from those of management. In 2004, the Bank recorded a negative
provision for loan losses of $242 thousand due to the quality of loans in the
portfolio and a decrease in the size of the Banks loan portfolio. This compares to
a negative provision for loan loses of $502 thousand in 2003 The Company also maintains an allowance for probable losses on its outstanding
loan commitments. The allowance for loan losses on off-balance sheet credit exposures
(shown separately on the balance sheet) is maintained based on expected drawdowns of
committed loans and their loss experience factors and managements assessment of
various other factors including current and anticipated economic conditions that may
effect the borrowers ability to pay, and trends in loan delinquencies and charge-offs. The allowance for loan losses on off-balance sheet credit exposures totaled $588
thousand and $626 thousand, respectively, at December 31, 2004 and 2003. In 2004, the
Company recorded a negative provision for off-balance sheet credit exposures of $39
thousand compared to a provision of $16 thousand in 2003. The credit or provision is
included in other non-interest expense. The following table sets
forth the activity in the allowance for loan losses during the years indicated: (In thousands) Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance at beginning of year
    
    $
    1,554
    
    
    $
    2,271
    
    
    $
    2,494
    
    
    $
    2,594
    
    
    $
    2,555Provision (credit) for loan losses
    
    
    (242
    )
    
    
    (502
    )
    
    
    
    
    
    
    40
    
    
    
    60Transfer to allowance for loan losses on
off-balance sheet credit exposures
    
    
    
    
    
    
    (226
    )
    
    
    (235
    )
    
    
    (149
    )
    
    
    Charge-offs: Consumer loans
    
    
    (5
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (22
    )
    
    
    (24
    )Recoveries:Residential real estate
    
    
    
    
    
    
    
    
    

    
    6
    
    
    
    25
    
    
    
    2Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    Consumer loans
    
    
    
    
    
    
    15
    
    
    
    10
    
    
    
    1
    
    
    
    1Net recoveries (charge-offs)
    
    
    (5
    )
    
    
    11
    
    
    
    12
    
    
    
    9
    
    
    
    (21
    )Balance at end of year
    
    $
    1,307
    
    
    $
    1,554
    
    
    $
    2,271
    
    
    $
    2,494
    
    
    $
    2,594Allowance for loan losses as a percent
of total loans outstanding at year-end
    
    
    0.55
    %
    
    
    0.61
    %
    
    
    0.83
    %
    
    
    0.80
    %
    
    
    0.84
    %Allowance for loan losses as a percent
of nonaccrual loans
    
    
    1766.2
    %
    
    
    675.7
    %
    
    
    632.1
    %
    
    
    10.4
    %
    
    
    459.1
    %
 12




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##### Table of Contents



Investment Activities The Bank believes that investment opportunities in United States
Government, corporate and other securities are at times more attractive than
the opportunities present in the loan market. As compared to loans, these
investments of the Bank are generally shorter-term and hence more liquid, are
subject to lower risk of loss, and present an opportunity for appreciation.
In addition, these investments often permit the Bank to better match the
maturities of its assets and its liabilities. The Banks investment portfolio is managed by its officers in accordance
with an investment policy approved by the Banks Board of Directors. The
objectives of that policy are to provide a level of liquidity, earnings and
diversification consistent with the exercise of prudent investment judgment.
The policy authorizes the senior management of the Bank to make and execute
investment decisions and requires that those persons report all investment
transactions to the Banks Board of Directors at each of its regular meetings.
In addition, management is required to report all gains or losses on all
securities transactions at each meeting of the Banks Board of Directors.
Purchases and sales of securities by the Bank are generally required to be
made on a competitive basis and all investments must be permitted by
applicable law. The Bank invests in a wide variety of securities and obligations,
including: Federal funds sold (which are sold only to institutions included on
the Banks internally-prepared approved list of adequately capitalized
institutions); commercial paper and bankers acceptances; United States
Treasury and Government agency obligations (including callable agency
securities); United States agency guaranteed and other mortgage-backed
securities; investment grade corporate debt securities (generally limited to
those rated A or better by Standard & Poors); mutual funds; and equity
securities traded on a national securities exchange or quoted on the NASDAQ
System. Under the investment policy management determines the appropriate
classification of securities at the time of purchase. Those debt securities
that the Company has the intent and the ability to hold to maturity are
classified as securities held to maturity and are carried at amortized
historical cost. Those securities held for indefinite periods of time and not intended to
be held to maturity are classified as available for sale. Securities held for
indefinite periods of time include securities that management intends to use
as part of its asset/liability management strategy and that may be sold in
response to changes in market conditions, interest rates, prepayment risk, the
need to increase regulatory capital and other factors. The Company records
investment securities available for sale at aggregate market value with the
net unrealized holding gains or losses reported, net of tax effect, as a
separate component of stockholders equity until realized. As of December 31,
2004, stockholders equity included accumulated other comprehensive income of
approximately $1.8 million, representing the net unrealized gains on securities
available for sale, less applicable income taxes. Securities that are bought and held principally for the purpose of sale in
the near term are classified as trading securities. Trading generally reflects
active and frequent buying and selling, and trading securities are generally
used with the objective of generating profits on short-term differences in price
caused by market volatility. Investments classified as trading securities are
stated at market value with unrealized gains and losses included in earnings. 13




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##### Table of Contents



Investment Activities (continued) Income on debt securities available for sale is accrued and included in
interest and dividend income. The specific identification method is used to determine realized gains or
losses on sales of securities available for sale which are also reported in
non-interest income under the caption gains on securities available for sale,
net. When a security suffers a loss in value which is considered other than
temporary, such loss is recognized by a charge to earnings. Most of the Companys mortgage-backed securities are currently classified
as available for sale. At times of low loan demand, short-term mortgage-backed
securities may be used as substitutes for loans as certain of their financial
characteristics are very similar to short-term mortgage loans. At December 31, 2004, the Companys investments, which consist of
securities available for sale (including mortgage-backed securities), securities
held to maturity, trading securities, short-term investments (including federal
funds sold) and interest-bearing deposits in banks totaled $704.6 million,
representing 72.2% of the Companys total assets. 14




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##### Table of Contents



The following table sets forth the composition of the Companys investment
portfolio as of the dates indicated: Investment Portfolio (In thousands) At December 31,
    
    2004
    
    
    2003
    
    
    2002Federal funds sold:Overnight federal funds
    
    $
    193,728
    
    
    $
    145,684
    
    
    $
    221,586Term federal funds
    
    
    
    
    
    
    45,000
    
    
    
    Total federal funds sold
    
    
    193,728
    
    
    
    190,684
    
    
    
    221,586Money market investment funds
    
    
    302
    
    
    
    23,337
    
    
    
    27,077Interest-bearing deposits in banks:Money market accounts
    
    
    220
    
    
    
    511
    
    
    
    87Certificates of deposit
    
    
    2,718
    
    
    
    5,685
    
    
    
    4,854Total short-term investments and
interest-bearing bank deposits
    
    $
    196,968
    
    
    $
    220,217
    
    
    $
    253,604Percent of total assets
    
    
    20.2
    %
    
    
    21.8
    %
    
    
    25.1
    %
 (In thousands) At December 31,
    
    2004
    
    
    2003
    
    
    2002Securities held to maturity: (a)Mortgage-backed securities
    
    $
    4,877
    
    
    
    
    
    
    
    Securities available for sale: (b)(c)U.S. Treasury obligations
    
    
    125,097
    
    
    $
    123,642
    
    
    $
    103,246U.S. Government agency obligations
    
    
    188,519
    
    
    
    198,463
    
    
    
    73,838Equity securities
    
    
    7,428
    
    
    
    11,466
    
    
    
    13,833Mortgage-backed securities
    
    
    122,709
    
    
    
    95,658
    
    
    
    189,105Total securities available for sale
    
    
    443,753
    
    
    
    429,229
    
    
    
    380,022Trading
securities: (b)U.S. Treasury obligations
    
    
    57,878
    
    
    
    72,408
    
    
    
    36,228Equity securities
    
    
    1,131
    
    
    
    222
    
    
    
    19Investments in mutual funds
    
    
    4
    
    
    
    3
    
    
    
    2Total trading securities
    
    
    59,013
    
    
    
    72,633
    
    
    
    36,249Total securities
    
    $
    507,643
    
    
    $
    501,862
    
    
    $
    416,271Percent of total assets
    
    
    52.0
    %
    
    
    49.7
    %
    
    
    41.2
    %Total investments
    
    $
    704,611
    
    
    $
    722,079
    
    
    $
    669,875Total investments as a percent of total assets
    
    
    72.2
    %
    
    
    71.4
    %
    
    
    66.4
    %
   (a)
    
    At amortized cost.(b)
    
    At market value.(c)
    
    The market value of callable agency securities included in securities available
for sale at December 31, 2004, 2003 and 2002, totaled $158.8 million, $192.4
million and $73.8 million, respectively. 15




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##### Table of Contents



The following table presents the amortized cost of debt securities available for
sale at December 31, 2004 maturing within stated periods with the weighted average
 interest yield from securities falling within the range of maturities: Debt Securities Available for Sale U.S.U. S.
    
    
    Government
    
    
    Mortgage-Treasury
    
    
    agency
    
    
    backed(Dollars in thousands)
    
    obligations
    
    
    obligations (2)
    
    
    securities (1)
    
    
    TotalMaturing within 1 yearAmount
    
    $
    77,895
    
    
    $
    10,010
    
    
    $
    7
    
    
    $
    87,912Yield
    
    
    2.10
    %
    
    
    1.99
    %
    
    
    9.25
    %
    
    
    2.09
    %Maturing after 1
but within 5 yearsAmount
    
    
    45,633
    
    
    
    155,987
    
    
    
    7,988
    
    
    
    209,608Yield
    
    
    2.74
    %
    
    
    3.04
    %
    
    
    6.54
    %
    
    
    3.11
    %Maturing after 5
but within 10 yearsAmount
    
    
    1,963
    
    
    
    23,995
    
    
    
    28,829
    
    
    
    54,787Yield
    
    
    4.30
    %
    
    
    4.30
    %
    
    
    6.64
    %
    
    
    5.53
    %Maturing after 10
but within 15 yearsAmount
    
    
    
    
    
    
    40
    
    
    
    81,755
    
    
    
    81,795Yield
    
    
    
    
    
    
    4.20
    %
    
    
    5.20
    %
    
    
    5.19
    %Maturing after 15 yearsAmount
    
    
    
    
    
    
    
    
    
    
    199
    
    
    
    199Yield
    
    
    
    
    
    
    
    
    
    
    4.72
    %
    
    
    4.72
    %TotalAmount
    
    $
    125,491
    
    
    $
    190,032
    
    
    $
    118,778
    
    
    $
    434,301Yield
    
    
    2.36
    %
    
    
    3.14
    %
    
    
    5.63
    %
    
    
    3.60
    %
   (1)
    
    Mortgage-backed securities are shown based on contractual maturities.
Actual maturities will differ from contractual maturities due to
scheduled
amortization and prepayments.(2)
    
    The amortized cost of callable securities included in securities available for sale
totaled $160.0 million as of December 31, 2004. At December 31, 2004, the Company did not have an investment in any
issuer (other than securities of the U.S. Government and Government Agencies)
 in excess of 10% of stockholders equity. 16




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##### Table of Contents



Deposits and Other Sources of Funds General. Deposits have been the Banks primary source of funds for
making investments and loans. In addition to deposits, the Banks other major
sources of funds are derived from amortization and prepayment of loans and
mortgage-backed securities, from sales, calls or maturities of investment
securities, and from operations. Deposit flows can vary significantly and are
influenced by prevailing interest rates, money market conditions, economic
conditions and competition. The Bank can respond to changing market conditions
and competition through the pricing of its deposit accounts. Management can
attempt to control the level of its deposits to a significant degree through
its pricing policies. Another important factor in attracting deposits is
convenience. In addition to the Banks fifteen conveniently located banking
offices, customers can access accounts through the Banks Automated Teller
Machine (ATM) network. The Bank is a member of the Transaxion (TX), NYCE and
CIRRUS System, Inc. (CIRRUS) networks which allow access to ATMs in over
100,000 locations worldwide. Additionally, MASSBANK has joined with over 400
other financial institutions to form the SUM Program. This program allows
MASSBANK customers to access over 2,500 SUM ATMs throughout the Northeast and
Midwest without having to pay an access or surcharge fee. Deposits. A substantial amount of the Banks deposits are derived from
customers who live or work within the Banks market area. The Bank does not
solicit deposits through any outside agents. The Banks deposits at
December 31, 2004 consist of regular, silver and smart savings accounts, holiday
club savings accounts, NOW and Super NOW accounts, regular and business checking
accounts, money market deposit accounts, IRA and Keogh accounts, and term
deposit accounts. Deposits decreased by $33.0 million or 3.7% to $849.5 million at
December 31, 2004, from $882.5 million at year-end 2003. Management believes
that increased competition for deposits and more attractive returns from
alternative investments, such as stocks and mutual funds, were the principal
reasons for deposit outflows. These competing investment vehicles have recently
produced higher returns than bank deposits. Borrowed Funds. From time to time the Bank has obtained funds through
repurchase agreements with its customers and federal funds purchased. The
Bank also has the ability, although it has never exercised it, to borrow from
the Federal Reserve Bank and The Depositors Insurance Fund, Inc. The Bank did
not have any borrowed funds in 2004 or 2003. 17




---



##### Table of Contents



DEPOSITS The following table shows the composition of the deposits as of the dates
indicated: 2004
    
    
    2003
    
    
    2002Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of(In thousands) at December 31,
    
    Amount
    
    
    Deposits
    
    
    Amount
    
    
    Deposits
    
    
    Amount
    
    
    DepositsDemand and NOWNOW
    
    $
    58,991
    
    
    
    6.95
    %
    
    $
    56,108
    
    
    
    6.36
    %
    
    $
    57,293
    
    
    
    6.48
    %Demand accounts (non interest-bearing)
    
    
    28,662
    
    
    
    3.37
    
    
    
    28,948
    
    
    
    3.28
    
    
    
    28,034
    
    
    
    3.17Total demand and NOW
    
    
    87,653
    
    
    
    10.32
    
    
    
    85,056
    
    
    
    9.64
    
    
    
    85,327
    
    
    
    9.65Savings:Regular
savings and special notice accounts
    
    
    549,657
    
    
    
    64.71
    
    
    
    595,575
    
    
    
    67.49
    
    
    
    535,122
    
    
    
    60.54Money market accounts
    
    
    11,656
    
    
    
    1.37
    
    
    
    12,256
    
    
    
    1.39
    
    
    
    13,825
    
    
    
    1.57Total savings
    
    
    561,313
    
    
    
    66.08
    
    
    
    607,831
    
    
    
    68.88
    
    
    
    548,947
    
    
    
    62.11Time certificates of deposit:Fixed rate certificates
    
    
    145,249
    
    
    
    17.10
    
    
    
    129,210
    
    
    
    14.64
    
    
    
    170,527
    
    
    
    19.29Variable rate certificates
    
    
    55,250
    
    
    
    6.50
    
    
    
    60,411
    
    
    
    6.84
    
    
    
    79,127
    
    
    
    8.95Total time certificates
of deposit
    
    
    200,499
    
    
    
    23.60
    
    
    
    189,621
    
    
    
    21.48
    
    
    
    249,654
    
    
    
    28.24
    %Total deposits
    
    $
    849,465
    
    
    
    100.00
    %
    
    $
    882,508
    
    
    
    100.00
    %
    
    $
    883,928
    
    
    
    100.00
    %
 In the following table the average amount of deposits and average rate is
shown for each of the years as indicated. 2004
    
    
    2003
    
    
    2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average(In thousands) Years Ended December 31,
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateNOW accounts
    
    $
    56,273
    
    
    
    0.30
    %
    
    $
    55,150
    
    
    
    0.45
    %
    
    $
    54,570
    
    
    
    0.66
    %Demand (non
interest-bearing) accounts
    
    
    28,020
    
    
    
    
    
    
    
    27,483
    
    
    
    
    
    
    
    27,329
    
    
    
    Escrow deposits of borrowers
    
    
    773
    
    
    
    0.27
    
    
    
    950
    
    
    
    0.16
    
    
    
    1,065
    
    
    
    0.40Money market accounts
    
    
    11,727
    
    
    
    0.53
    
    
    
    13,466
    
    
    
    0.63
    
    
    
    14,959
    
    
    
    1.41Savings accounts
    
    
    573,512
    
    
    
    1.48
    
    
    
    581,998
    
    
    
    1.88
    
    
    
    456,775
    
    
    
    2.62Time certificates of deposit
    
    
    192,386
    
    
    
    2.08
    
    
    
    213,282
    
    
    
    2.15
    
    
    
    315,987
    
    
    
    3.22$
    862,691
    
    
    
    1.48
    %
    
    $
    892,329
    
    
    
    1.78
    %
    
    $
    870,685
    
    
    
    2.61
    %
 18




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##### Table of Contents



Investment Management and Trust Services The Banks Trust and Investment Services Division offers a variety of
investment, trust and estate planning services and also serves as
trustee,
executor, and executors agent for bank customers. As of December 31, 2004 the Trust Division had approximately $25.0
million (market value) of assets in custody and under management. Competition The Bank faces substantial competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from
other thrift institutions, commercial banks, credit unions and mortgage
banking companies. The Bank competes for loans principally on the basis of
interest rates and loan fees, the types of loans originated and the quality of
services provided to borrowers. In attracting deposits, the Banks primary competitors are other thrift
institutions, commercial banks, mutual funds and credit unions located in its
market area. The Banks attraction and retention of deposits depends on its
ability to provide investment opportunities that satisfy the requirements of
customers with respect to rate of return, liquidity, risk and other factors.
The Bank attracts a significant amount of deposits through its branch offices
primarily from the communities in which those branch offices are located. The
Bank competes for these deposits by offering competitive rates, convenient
branch and ATM locations and convenient business hours. The Bank also faces strong competition from banks and other financial
services providers in the banks market area for both loans and deposits. 19




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##### Table of Contents



Supervision and Regulation of the Company and its Subsidiary The business in which the Company and its subsidiary are engaged is
subject to extensive supervision, regulation and examination by various bank
regulatory authorities and other governmental agencies. State and federal
banking laws have as their principal objective either the maintenance of the
safety and soundness of financial institutions and the federal deposit insurance
system or the protection of consumers or classes of consumers, and depositors in
particular, rather than the specific protection of stockholders of a bank or its
parent company. Set forth below is a brief description of certain laws and regulations that
relate to the regulation of the Company. To the extent the following material
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statute or regulation. Regulation of the Company. As a registered bank holding company, we are subject
to regulation under the Bank Holding Company Act of 1956, as amended, (BHCA)
and to inspection, examination and supervision by the Board of Governors of the
Federal Reserve System, (FRB). The Company is also subject to laws of the
Commonwealth of Massachusetts and the jurisdiction of the Massachusetts Board
of Bank Incorporation (BBI) and the Massachusetts Commissioner of Banks
(Commissioner). The Company is incorporated in the State of Delaware and is
therefore also subject to Delaware corporation law. The FRB has the authority to issue orders to bank holding companies to cease and
desist from unsound banking practices and violations of conditions imposed by,
or violations of agreements with, the FRB. The FRB is also empowered to assess
civil money penalties against companies or individuals who violate the BHCA or
orders or regulations thereunder, to order termination of non-banking activities
of non-banking subsidiaries of bank holding companies, and to order termination
of ownership and control of a non-banking subsidiary by a bank holding company.
Under the BHCA, the Company may not generally engage in activities or acquire
more than 5% of any class of voting securities of any company engaged in
activities other than banking or activities that are closely related to banking.
However, if the Company elects to be treated as a financial holding company, the
Company may engage in activities that are financial in nature or incidental or
complimentary to such financial activities, as determined by the FRB and the
Secretary of the Department of the Treasury. The Company has not elected
financial holding company status. Under certain circumstances, the Company may
be required to give notice to or seek approval of the FRB before engaging in
activities other than banking. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. (Riegle-Neal), Riegle-Neal permits adequately capitalized and adequately managed bank
holding companies, as determined by the FRB, to acquire banks in any state
subject to certain concentration limits and other conditions. Riegle-Neal also
generally authorizes the interstate merger of banks. In addition, among other
things, Riegle-Neal permits banks to establish new branches on an interstate
basis provided that the law of the host state specifically authorizes such
action. However, as a bank holding company, we are required to obtain prior FRB
approval before acquiring more than 5% of a class of voting securities, or
substantially all of the assets of a bank holding company, bank or savings
association. Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring control of a bank holding company, such as
the Company, unless the FRB has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the FRB, the
acquisition of 10% or more of a class of voting securities of a bank holding
company with a class of securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended, would, under the circumstances set forth in
the presumption, constitute acquisition of control of the bank holding company. 20




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##### Table of Contents



Supervision and Regulation of the Company and its Subsidiary (continued) In addition, a company is required to obtain the approval of the FRB under the
BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding
company) or more of any class of outstanding voting securities of a bank holding
company, or otherwise obtaining control or a controlling influence over that
bank holding company. Massachusetts law also imposes certain limitations on
the ability of persons and entities to acquire control of banking institutions
and their parent companies. Bank Holding Company Dividends. The FRB has authority to prohibit bank holding
companies from paying dividends if such payment is deemed to be an unsafe or
unsound practice. The FRB has indicated generally that it may be an unsafe or
unsound practice for bank holding companies to pay dividends unless the bank
holding companys net income over the preceding year is sufficient to fund the
dividends and the expected rate of earnings retention is consistent with the
organizations capital needs, asset quality and overall financial condition.
In addition, Delaware corporate law includes limitations on a corporations
payment of dividends if such dividends exceed the corporations surplus or
current net profits. The Company depends upon dividends received from its
subsidiary bank to fund its activities, including the payment of dividends.
As described below, the Federal Deposit Insurance Corporation (FDIC) may
regulate the amount of dividends payable by the subsidiary bank. The inability
of the bank to pay the dividend may have an adverse effect on the Company. Regulation of the Bank. The Companys subsidiary bank (Bank) is subject to
regulation, supervision and examination by the Massachusetts Division of Banks
(Division) and the FDIC. Insurance of Accounts and FDIC Regulation. The Bank pays deposit insurance
premiums to the FDIC based on an assessment rate established by the FDIC for
Bank Insurance Fund-member institutions. The FDIC has established a risk-based
premium system under which the FDIC classifies institutions based on their
capital ratios and on other relevant factors and generally assesses higher rates
on those institutions that tend to pose greater risks to the federal deposit
insurance funds. The Federal Deposit Insurance Act (FDIA) does not require
the FDIC to charge all banks deposit insurance premiums when the ratio of
deposit insurance reserves to insured deposits is maintained above specified
levels. However, as a result of general economic conditions and recent bank
failures, it is possible that the ratio of deposit insurance reserves to insured
deposits could fall below the minimum ratio that FDIA requires, which would
result in the FDIC setting deposit insurance assessment rates sufficient to
increase deposit insurance reserves to the required ratio. We cannot predict
whether the FDIC will be required to increase deposit insurance assessments
above their current levels. Bank Holding Company Support of Subsidiary Banks. Under FRB policy, a bank
holding company is expected to act as a source of financial and managerial
strength to each of its subsidiary banks and to commit resources to their
support. This support may be required at times when the bank holding company
may not have the resources to provide it. Similarly, under the cross-guarantee
provisions of FDIA, the FDIC can hold any FDIC-insured depository institution
liable for any loss suffered or anticipated by the FDIC in connection with (1)
the default of a commonly controlled FDIC-insured depository institution; or
(2) any assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default. Our subsidiary bank is an FDIC-
insured depository institution. 21




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##### Table of Contents



Supervision and Regulation of the Company and its Subsidiary (continued) Regulatory Capital Requirements. The FRB and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations. In addition, these regulatory agencies may from time to
time require that a banking organization maintain capital above the minimum
levels, whether because of its financial condition or actual or anticipated
growth. The FRB risk-based guidelines define a three-tier capital framework. Tier 1
capital includes common shareholders equity and qualifying preferred stock,
less goodwill and other adjustments. Tier 2 capital consists of preferred stock
not qualifying as Tier 1 capital, mandatory convertible debt, limited amounts of
subordinated debt, other qualifying term debt and the allowance for credit
losses up to 1.25 percent of risk-weighted assets. Tier 3 capital includes
subordinated debt that is unsecured, fully paid, has an original maturity of at
least two years, is not redeemable before maturity without prior approval by
the FRB and includes a lock-in clause precluding payment of either interest or
principal if the payment would cause the issuing banks risk-based capital ratio
to fall or remain below the required minimum. The sum of Tier 1 and Tier 2
capital less investments in unconsolidated subsidiaries represents qualifying
total capital. Risk-based capital ratios are calculated by dividing Tier 1 and
total capital by risk-weighted assets. Assets and off-balance sheet exposures
are assigned to one of four categories of risk-weights, based primarily on
relative credit risk. The minimum Tier 1 capital ratio is four percent and the
minimum total capital ratio is eight percent. The Companys tier 1 capital (to
risk-weighted assets) calculation equals 39.16%. The leverage ratio is determined by dividing Tier 1 capital by adjusted average
total assets. Although the stated minimum ratio is 100 to 200 basis points
above three percent, banking organizations are required to maintain a ratio of
at least five percent to be classified as well capitalized. The Companys
leverage ratio is 11.15%. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
among other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires
the federal bank regulatory agencies to implement systems for prompt corrective
action for insured depository institutions that do not meet minimum capital
requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to
meet the capital guidelines could also subject a banking institution to capital
raising requirements. An undercapitalized bank must develop a capital
restoration plan and its parent holding company must guarantee that banks
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of five percent of the banks assets at
the time it became undercapitalized or the amount needed to comply with the
plan. Furthermore, in the event of the bankruptcy of the parent holding
company, such guarantee would take priority over the parents general unsecured
creditors. In addition, FDICIA requires the various regulatory agencies to
prescribe certain non-capital standards for safety and soundness relating
generally to operations and management, asset quality and executive compensation
and permits regulatory action against a financial institution that does not meet
such standards. 22




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##### Table of Contents



Supervision and Regulation of the Company and its Subsidiary (continued) The various regulatory agencies have adopted substantially similar regulations
that define the five capital categories identified by FDICIA, using the total
risk-based capital, Tier 1 risk-based capital and leverage capital ratios as
the relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered under-capitalized. Under the regulations, a well capitalized institution must have
a Tier 1 risk-based capital ratio of at least six percent, a total risk-based
capital ratio of a least ten percent and a leverage ratio of at least five
percent and not be subject to a capital directive order. Regulators also must
take into consideration (a) concentrations of credit risk; (b) interest rate
risk (when the interest rate sensitivity of an institutions assets does not
match the sensitivity of its liabilities or its off-balance-sheet position);
and (c) risks from non-traditional activities, as well as an institutions
ability to manage those risks, when determining the adequacy of an institutions
capital. This evaluation will be made as a part of the institutions regular
safety and soundness examination. In addition, the Company, and any Bank with
significant trading activity, must incorporate a measure for market risk in
their regulatory capital calculations. Limitations on Bank Dividends. The FDIC has the authority to use its
enforcement powers to prohibit a bank from paying dividends if, in its opinion,
the payment of dividends would constitute an unsafe or unsound practice.
Federal law also prohibits the payment of dividends by a bank that will result
in the bank failing to meet its applicable capital requirements on a pro forma
basis. Customer Information Security. The FDIC and other bank regulatory agencies have
adopted final guidelines for establishing standards for safeguarding nonpublic
personal information about customers that implement provisions of the Gramm-Leach Bliley Act (1999) (GLBA), which establishes a comprehensive framework
to permit affiliations among commercial banks, insurance companies, securities
firms, and other financial service providers by revising and expanding the
BHCA framework. Specifically, the Information Security Guidelines established
by the GLBA require each financial institution, under the supervision and
ongoing oversight of its Board of Directors or an appropriate committee thereof,
to develop, implement and maintain a comprehensive written information security
program designed to ensure the security and confidentiality of customer
information, to protect against anticipated threats or hazards to the security
or integrity of such information; and to protect against unauthorized access to
or use of such information that could result in substantial harm or
inconvenience to any customer. Privacy. The GLBA requires financial institutions to implement policies and
procedures regarding the disclosure of nonpublic personal information about
consumers to nonaffiliated third parties. In general, the statute requires
financial institutions to explain to consumers their policies and procedures
regarding the disclosure of such nonpublic personal information, and, unless
otherwise required or permitted by law, financial institutions are prohibited
from disclosing such information except as provided in their policies and
procedures. 23




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##### Table of Contents



Supervision and Regulation of the Company and its Subsidiary (continued) USA Patriot Act. The USA Patriot Act of 2001, designed to deny terrorists and
others the ability to obtain anonymous access to the U.S. financial system, has
significant implications for depository institutions, broker-dealers and other
businesses involved in the transfer of money. The USA Patriot Act, together
with the implementing regulations of various federal regulatory agencies, have
caused financial institutions, including banks, to adopt and implement
additional, or amend existing, policies and procedures with respect to, among
other things, anti-money laundering compliance, suspicious activity and currency
transaction reporting, customer identity verification and customer risk
analysis. The statute and its underlying regulations also permit information
sharing for counter-terrorist purposes between federal law enforcement agencies
and financial institutions, as well as among financial institutions, subject to
certain conditions, and require the FRB (and other federal banking agencies) to
evaluate the effectiveness of an applicant in combating money laundering
activities when considering applications filed under Section 3 of the BHCA or
under the Bank Merger Act. Management believes that the Company is in
compliance with all the requirements prescribed by the USA Patriot Act and all
applicable final implementing regulations. The Community Reinvestment Act. The Community Reinvestment Act (CRA) requires
lenders to identify the communities served by the institutions offices and
other deposit taking facilities and to make loans and investments and provide
services that meet the credit needs of these communities. Regulatory agencies
examine each of the banks and rate such institutions compliance with CRA as
Outstanding, Satisfactory, Needs to Improve, or Substantial
Noncompliance. Failure of an institution to receive at least a Satisfactory
rating could inhibit such institution or its holding company from undertaking
certain activities, including engaging in activities newly permitted as a
financial holding company under the GLBA and acquisitions of other financial
institutions. The FRB must take into account the record of performance of banks
in meeting the credit needs of the entire community served, including low-and
moderate-income neighborhoods. The Bank has achieved a rating of Satisfactory
on their last examination. The Commonwealth of Massachusetts also has enacted
substantially similar community reinvestment requirements. 24




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##### Table of Contents



Employees MASSBANK Corp. utilizes the support staff of the Bank from time to time
for which a $12,000 fee was paid to the Bank in 2004. No separate compensation
is being paid to the executive officers of MASSBANK Corp., all of whom are
executive officers of the Bank and receive compensation as such. As of
December 31, 2004, the Bank had 111 full-time employees (including 32 officers)
and 49 part-time employees (including 1 officer). None of the Banks employees
is represented by a collective bargaining group, and management believes that
its employee relations are good. The Bank provides its employees with formal
training in product knowledge, sales techniques, mortgage origination, fair
lending, privacy and various other bank related functions and topics. In
addition, each supervisor at the Bank receives management training before
assuming his or her supervisory duties and periodically thereafter. The Bank
maintains a comprehensive employee benefits program for qualified employees that
includes a qualified pension plan, an Employee Stock Ownership Plan (ESOP),
health and dental insurance, life and long-term disability insurance and
tuition assistance. Subsidiaries The Bank has three wholly owned subsidiaries: Readibank Investment
Corporation, Melbank Investment Corporation, and Readibank Properties, Inc. Readibank Investment Corporation and Melbank Investment Corporation were
established for the purpose of managing portions of the Banks investment
portfolio. They are classified by the Commonwealth of Massachusetts as
securities corporations for tax purposes which restricts their business to
buying, selling, dealing in, or holding securities on their own behalf. As
securities corporations they are currently taxed at a lower rate than the Bank.
Legislative proposals have recently been discussed which may impact this
favorable tax treatment. Assets of Readibank Investment Corporation and Melbank Investment
Corporation totaled $162.9 million and $164.5 million,
respectively, at
December 31, 2004. Readibank Properties, Inc. was incorporated primarily for the purpose of
real estate development projects. These projects were completed many years ago
and this subsidiary is currently inactive. Its assets totaled $618 thousand at
December 31, 2004, consisting primarily of an inter-company receivable from the
Bank. 25




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##### Table of Contents



Executive Officers of the Registrant The executive officers of the Company and the Bank and the age of each
officer as of December 31, 2004 are as follows: Name
    
    Age
    
    OfficeGerard H. Brandi
    
    
    56
    
    
    Chairman of the Board of Directors,
President and Chief Executive
Officer of the Company and the BankDavid F. Carroll
    
    
    57
    
    
    Vice President of the BankReginald E. Cormier
    
    
    56
    
    
    Senior Vice President, Treasurer and
Chief Financial Officer of the
Company and the BankThomas J. Queeney
    
    
    42
    
    
    Vice President and Senior Trust
Officer of the BankWilliam F. Rivers
    
    
    49
    
    
    Vice President of the BankDonald R. Washburn
    
    
    61
    
    
    Senior Vice President of the BankDonna H. West
    
    
    59
    
    
    Senior Vice President of the Bank
and Assistant Secretary of the
Company
 Gerard H. Brandi. Mr. Brandi has served in various capacities with
MASSBANK since he joined the Bank in 1975 as Vice President of the Lending
Division. He served as Senior Vice President from 1978 to 1981, Executive
Vice President and Senior Lending Officer from 1981 to 1983, and Executive
Vice President and Treasurer from 1983 to 1986. Mr. Brandi was named
President of the Company and the Bank in 1986, Chief Executive Officer in
1992 and Chairman in 1993. David F. Carroll. Mr. Carroll retired on December 31, 2004. He had
been employed by the Bank since 1983 and had been Vice President of Operations
since 1984. He served as Vice President of the Lending Division for a year
before becoming Vice President of Operations. Reginald E. Cormier. Mr. Cormier joined the Bank as Treasurer in
September, 1987 and served in this capacity until his promotion to Vice
President, Treasurer and Chief Financial Officer in January, 1995. In
December 1999, he was promoted to Senior Vice President, Treasurer and Chief
Financial Officer. Thomas J. Queeney. Mr. Queeney joined the Bank in 1986 as a Management
Trainee in Loan Origination. He became an Assistant Manager in 1987 and was
promoted to Assistant Treasurer in 1988. He then served as a Marketing and
Investor Relations Representative until his promotion to Loan Servicing
Manager in 1990. In 1992, he was promoted to Loan Officer and Commercial
Lending Manager. He was promoted to Assistant Vice President, Lending in
1997, where he served until his promotion to AVP/Trust Administrator in July
of 1998. In January of 1999, he was promoted to Vice President and Senior
Trust Officer. William F. Rivers. Mr. Rivers joined the Bank as Vice President of
Operations and Mr. David Carrolls successor in 2004. Prior to joining the
Bank Mr. Rivers worked for Medford Bank for over 28 years. His most recent
position there was Senior Vice President, Operations & Administration. 26




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##### Table of Contents



Executive Officers of the Registrant (continued) Donald R. Washburn. Mr. Washburn joined the Bank in 1973 as a Loan
Officer. He became an Assistant Vice President in January, 1977 and a Vice
President in the Lending Division in June, 1980. Mr. Washburn served as Vice
President of the Operations Division from February, 1983 to January, 1984, as
Vice President of the Community Banking Division from January, 1984 to
January, 1986 and as Vice President of the Lending Division from January, 1986
until his promotion to Senior Vice President of the Lending Division in June,
1994. Donna H. West. Mrs. West has been employed by the Bank since 1979 and
has served as Vice President of the Community Banking Division since October,
1987. Starting at the Bank as an Assistant Branch Manager in 1979, Mrs. West
became a Branch Manager in 1981, an Assistant Treasurer and Branch Manager in
1982, an Assistant Treasurer and Regional Branch Administrator in 1984 and an
Assistant Vice President and Regional Branch Administrator in 1986. She
served in this capacity until her October, 1987 promotion to Vice President of
the Community Banking Division. In June, 1994, Mrs. West was promoted to
Senior Vice President of the Community Banking Division. 27




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##### Table of Contents



Item 2. Properties The main office of MASSBANK Corp. and MASSBANK is located at 123 Haven
Street, Reading, Massachusetts. Additionally, the Bank has fourteen branches
and three operations facilities. The Bank owns its main office, three
operations facilities and nine of its branches. All of the remaining branches
and other facilities are leased under various leases. At December 31, 2004,
management believes that the Banks existing facilities are adequate for the
conduct of its business. The following table sets forth certain information relating to the Banks
existing facilities. Owned
    
    Lease
    
    Renewalor
    
    Expiration
    
    OptionLocation
    
    
    
    Leased
    
    Date
    
    ThroughMAIN OFFICE:
    
    123 Haven Street, Reading, MA
    
    Owned
    
    
    
    BRANCH
    
    291 Chelmsford Street, Chelmsford, MA
    
    Owned
    
    
    
    OFFICES:
    
    17 North Road, Chelmsford, MA
    
    Owned
    
    
    
    45 Broadway Road, Dracut, MA
    
    Leased
    
    2012
    
    2022738 Broadway, Everett, MA
    
    Owned
    
    
    
    50 Central Street, Lowell, MA
    
    Owned
    
    
    
    755 Lakeview Avenue, Lowell, MA
    
    Owned
    
    
    
    4110 Mystic Valley Pkwy, Medford, MA
    
    Leased
    
    2005
    
    476 Main Street, Melrose, MA
    
    Owned
    
    
    
    27 Melrose Street, Towers Plaza,Melrose, MA
    
    Leased
    
    2014
    
    240 Main Street, Stoneham, MA
    
    Leased
    
    2009
    
    20141800 Main Street, Tewksbury, MA
    
    Owned
    
    
    
    203 Littleton Road, Westford, MA
    
    Owned
    
    
    
    370 Main Street, Wilmington, MA
    
    Owned
    
    
    
    219 Lowell Street, Luccis Plaza,Wilmington, MA
    
    Leased
    
    2006
    
    OPERATIONS
    
    159 Haven Street, Reading, MA
    
    Owned
    
    
    
    FACILITIES:
    
    169 Haven Street, Reading, MA
    
    Owned
    
    
    
    11 North Road, Chelmsford, MA
    
    Owned
    
    
    
    
 
 Item 3. Legal Proceedings From time to time, MASSBANK Corp. and/or the Bank are involved as a
plaintiff or defendant in various legal actions incident to their business.
As of December 31, 2004, none of these actions individually or in the aggregate
is believed by management to be material to the financial condition of MASSBANK
Corp. or the Bank. 
 Item 4. Submission of Matters to a Vote of Security Holders None during the fourth quarter of 2004. 28




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##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Stock and Related Stockholder Matters The information contained under the caption MASSBANK Corp. and
Subsidiaries Stockholder Data in the Registrants 2004 Annual Report to
Stockholders is incorporated herein by reference. Issuer Purchases of Equity Securities The following table sets forth purchases made by the Company of its
shares of common stock under the stock repurchase program during the year
ended December 31, 2004: Total Numberof Shares
    
    
    Maximum NumberPurchased as
    
    
    of Shares ThatPart of Publicly
    
    
    May Yet BeTotal Number
    
    
    Average Price
    
    
    Announced
    
    
    Purchased Underof Shares
    
    
    Paid Per
    
    
    Repurchase
    
    
    The RepurchasePeriod
    
    Purchased
    
    
    Share
    
    
    Program (1)
    
    
    ProgramJanuary 1 
January 31,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000March 1 
March 31,
2004
    
    
    5,000
    
    
    $
    39.05
    
    
    
    5,000
    
    
    
    95,000May 1 
May 31,
2004
    
    
    33,000
    
    
    $
    33.72
    
    
    
    33,000
    
    
    
    62,000June 1 
June 30,
2004
    
    
    5,000
    
    
    $
    33.05
    
    
    
    5,000
    
    
    
    57,000November 1 
November 30,
2004
    
    
    15,823
    
    
    $
    37.25
    
    
    
    15,823
    
    
    
    41,177December 1 
December 31,
2004
    
    
    15,000
    
    
    $
    37.00
    
    
    
    15,000
    
    
    
    26,17773,823
    
    
    $
    35.46
    
    
    
    73,823
    
    
    
    26,177January 19,
2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000126,177
   (1)
    On January 22, 2004, the Registrant announced that its Board of Directors
had authorized management to repurchase up to 100,000 shares of its common
stock in the open market or through private transactions during the next
twelve months. On January 19, 2005 the Registrant announced that its Board
of Directors had extended, for another year, the stock repurchase program
which it authorized in January 2004. Additionally, the Board approved an
increase of 100,000 in the number of shares of the Registrants common
stock authorized for repurchase in the current program, bringing the total shares available for repurchase to 126,177. 29




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##### Table of Contents



Item 5. (Continued) In addition, the following number of shares were purchased by the
Companys Directors Deferred Compensation Plan and Trust
during the year
Ended December 31, 2004: Total Number
    
    
    Average Priceof Shares
    
    
    Paid PerPeriod
    
    Purchased
    
    
    ShareMarch 1, -
March 31,
2004
    
    
    1,000
    
    
    $
    39.40June 1, -
June 30,
2004
    
    
    400
    
    
    $
    33.30November 1, -
November 30,
2004
    
    
    500
    
    
    $
    37.251,900
    
    
    $
    37.55
 
 Item 6. Selected Financial Data The information contained under the caption MASSBANK Corp. and
Subsidiaries  Selected Consolidated Financial Data in the
Registrants 2004
Annual Report to Stockholders is incorporated herein by reference. This selected consolidated financial data should be read in conjunction
with the consolidated statements and related notes thereto appearing in the
Registrants 2004 Annual Report to Stockholders which are incorporated herein
by reference. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations The information contained under the caption Managements Discussion and
Analysis of Financial Condition and Results of Operations in
the Registrants
2004 Annual Report to Stockholders is incorporated herein by reference. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information contained under the captions Asset and Liability
Management, Interest Rate Risk and Other Market Risks included in
Managements Discussion and Analysis of Financial Condition and Results of
Operations section of the Registrants 2004 Annual Report to Stockholders is
incorporated herein by reference. 
 Item 8. Financial Statements and Supplementary Data The Registrants consolidated financial statements and notes thereto,
together with the reports of KPMG LLP, contained in the Registrants 2004 Annual
Report to Stockholders are incorporated herein by reference. The unaudited
quarterly financial data set forth on page 60 of such Annual Report is
incorporated herein by reference. 30




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##### Table of Contents



Item 9. Changes in and Disagreements with Independent Accountants on
Accounting and Financial Disclosure None. 
 Item 9A. Controls and Procedures As required by Rule 13a-15 under the Securities Exchange Act of 1934
(Exchange Act), the Company carried out an evaluation under the supervision and
with the participation of the Companys management, including the Companys
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure controls and procedures as
of the end of the period covered by this report. Based upon their evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective to ensure that
material information relating to the Company required to be disclosed by us in
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. In designing and evaluating the disclosure
controls and procedures, the Companys management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurances of achieving the desired control objectives, and
management necessarily was required to apply its judgment in designing and
evaluating the controls and procedures. The Company currently is in the process
of further reviewing and documenting its disclosure controls and procedures,
and its internal control over financial reporting, and may from time to time
make changes aimed at enhancing their effectiveness and to ensure that our
systems evolve with our business. Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting
during the fourth quarter of fiscal year 2004 that have materially affected,
or that are reasonably likely to materially affect, our internal controls over
financial reporting. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant The information appearing under the caption Election of Directors
and Compliance with Section 16(A) of the Exchange Act in the Registrants
definitive proxy statement relating to its 2005 Annual Meeting of Stockholders
is incorporated herein by reference. Information required by this item
concerning the Executive Officers of the Registrant is contained in Part I of
this Form 10-K. 
 Item 11. Executive Compensation The information appearing under the caption Executive Compensation
in the Registrants definitive proxy statement relating to its
2005 Annual
Meeting of Stockholders is incorporated herein by reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters The information appearing under the captions Election of Directors,
Principal Stockholders and Equity Compensation Plan Information in the
Registrants definitive proxy statement relating to its 2005 Annual Meeting
of Stockholders is incorporated herein by reference. 31




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions The information contained in Note 5 of the Consolidated Financial
Statements under the caption Loans in the
Registrants 2004 Annual Report
to Stockholders is incorporated herein by reference. 
 Item 14. Principal Accountant Fees and Services The information required by this item appears in the definitive proxy
statement filed pursuant to Regulation 14A for the 2005 Annual
Meeting of our
stockholders and is incorporated by reference. 
 PART IV 
 Item 15. Exhibits and Financial Statement Schedules The following financial statements and financial statement schedules
are contained herein or are incorporated herein by reference: (a)1. Financial Statements Reference to 2004Annual Reportto Stockholders(Pages)*Reports of Independent Registered Public Accounting Firm
    
    
    30Consolidated Balance Sheets at December 31,
2004 and 2003
    
    
    32Consolidated Statements of Income for the three
years ended December 31, 2004
    
    
    33Consolidated Statements of Cash Flows for the three
years ended December 31, 2004
    
    
    34-35Consolidated Statements of Changes in Stockholders
Equity for the three years ended December 31,
2004
    
    
    36Notes to Consolidated Financial Statements
    
    
    37-60
   *        Incorporated, by reference to pages 29 through 60 of the Registrants
2004 Annual Report to Stockholders attached to this filing as Exhibit 13. 2. Financial Statement Schedules All schedules are omitted as the required information is either not
applicable or is included in the consolidated financial statements or
related
notes. 3. Exhibits Exhibit No.
    
    Description of Exhibit3.1
    
    Restated Certificate of Incorporation of the
Registrant  incorporated by reference to Exhibit
3.1 of the Registrants Form S-4 Registration
Statement (Reg. No. 33-7916).
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Exhibit No.
    
    Description of Exhibit3.2
    
    By-Laws of the Registrant  incorporated by reference
to Exhibit 3 of the Registrants Form 10-Q for the
quarter ended September 30, 1991.4.1
    
    Shareholder Rights Agreement dated as of
January 18, 2000, between the Company and The First
National Bank of Boston, as Rights Agent  incorporated
herein by reference to the Exhibit to the Companys
Report on Form 8-K dated as of January 20, 2000.10.1
    
    MASSBANK Corp. 1986 Stock Option Plan, as amended -
incorporated by reference to Exhibit 28.1 to the
Registrants Form S-8 Registration Statement
(Reg. No. 33-11949).10.1.2
    
    Amendment to MASSBANK Corp. 1986 Stock Option Plan dated
April 19, 1991  incorporated by reference to Exhibit
10.1.2 to the Registrants annual report on Form 10-K
for the year ended December 31, 1992.10.1.3
    
    MASSBANK Corp. 1994 Stock Incentive Plan  incorporated
by reference to Exhibit 10.1 to the Registrants Form S-8
Registration Statement (Reg. No. 33-82110).10.1.4
    
    Amendment to MASSBANK Corp. 1994 Stock Incentive Plan
dated April 21, 1998  incorporated by reference to
Exhibit 10.1.4 to the Registrants annual report on Form
10-K for the year ended December 31, 1997.10.1.5
    
    MASSBANK Corp. 2004 Stock Option and Incentive Plan 
incorporated by reference to exhibit 10.1.5 to the
Registrants Form S-8 Registration Statement (Ref. No.
33-333118028).10.2
    
    MASSBANK for Savings Employees Stock Ownership Plan
and Trust Agreement  incorporated by reference to
Exhibit 10.2 of the Registrants Form S-4 Registration
Statement (Reg. No. 33-7916).10.2.1
    
    Amendments to the MASSBANK for Savings Employees Stock
Ownership Plan and Trust Agreement  incorporated by
reference to Exhibit 10.2.1 to the Registrants annual
report on Form 10-K for the year ended December 31, 1993.10.2.2
    
    Amendments to the MASSBANK for Savings Employees Stock
Ownership Plan and Trust Agreement  incorporated by
reference to Exhibit 10.2.2 to the Registrants annual
report on Form 10-K for the year ended December 31, 1997.10.2.3
    
    Amended and Restated MASSBANK Employees Stock Ownership
Plan and Trust Agreement incorporated by reference to
Exhibit 10.2.3 to the Registrants annual report on Form
10K for the year ended December 31, 2003.10.3.16
    
    Amended and Restated Employment Agreement with Gerard H.
Brandi dated as of October 28, 2002  incorporated by
reference to exhibit 10.3.16 to the Registrants quarterly
report on Form 10-Q for the period ended September 30,
2002.
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##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.3.17
    
    Amended and Restated Employment Agreement with David F.
Carroll dated as of October 28, 2002  incorporated by
reference to exhibit 10.3.17 to the Registrants quarterly
report on Form 10-Q for the period ended September 30,
2002.10.3.18
    
    Amended and Restated Employment Agreement with Reginald E.
Cormier dated as of October 28, 2002  incorporated by
reference to exhibit 10.3.18 to the Registrants quarterly
report on Form 10-Q for the period ended September 30,
2002.10.3.19
    
    Amended and Restated Employment Agreement with Donald R.
Washburn dated as of October 28, 2002  incorporated by
reference to exhibit 10.3.19 to the Registrants quarterly
report on Form 10-Q for the period ended September 30,
2002.10.3.20
    
    Amended and Restated Employment Agreement with Donna H.
West dated as of October 28, 2002  incorporated by
reference to exhibit 10.3.20 to the Registrants quarterly
report on Form 10-Q for the period ended September 30,
2002.10.3.21
    
    Form of Employment Agreement with Thomas J. Queeney dated
as of October 28, 2002  incorporated by reference to
exhibit 10.3.21 to the Registrants quarterly report on
Form 10-Q for the period ended September 30, 2002.10.4
    
    Form of Executive Supplemental Retirement Agreement, as
amended, with Gerard H. Brandi  incorporated by
reference to Exhibit 10.4 of Registrants annual report
on Form 10-K for the year ended December 31, 1986.10.4.1
    
    Amendments to the Executive Supplemental Retirement
Agreement with Gerard H. Brandi are incorporated by
reference to Exhibit 10.4.1 of the Registrants annual
report on Form 10-K for the year ended December 31, 1996.10.5
    
    Amended Deferred Compensation Plan for Directors of
MASSBANK Corp. adopted March 8, 2000  incorporated by
reference to Exhibit 10.5 of the Registrants annual
report on Form 10-K for the year ended December 31, 2000.10.6
    
    Deferred Compensation Program for Bank employees dated
November 14, 1994  incorporated by reference to Exhibit
10.6 of the Registrants annual report on Form 10-K for
the year ended December 31, 2001.11
    
    The computation of per share earnings can be readily
determined from the material contained in the Annual
Report on Form 10-K for the fiscal year ended
December 31, 2004.
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Exhibit No.
    
    Description of Exhibit12
    
    Statement re: Computation of Ratios  Not applicable as
MASSBANK Corp. does not have any debt securities
registered under Section 12 of the Securities Exchange
Act of 1934.13
    
    2004 Annual Report to Stockholders  except for those
portions of the 2004 Annual Report to Stockholders which
are expressly incorporated by reference in this report,
such 2004 Annual Report to Stockholders is furnished for
the information of the SEC and is not to be deemed
filed with the SEC.21
    
    Subsidiaries of the Registrant.23
    
    Consent of Independent Registered Public Accounting Firm 
KPMG LLP.31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 by Chief Executive Officer.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 by Chief Financial Officer.(b)
    
    Exhibits to this Form 10-K are attached or
incorporated by reference as stated in the
Index to Exhibits.
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Signatures Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized. MASSBANK CORP./s/ Gerard H. BrandiGerard H. BrandiChairman, President and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. /s/ Gerard H. Brandi
    
    Chairman, President,Gerard H. Brandi
    
    Chief Executive Officer andDirector
    
    March 14, 2005/s/ Reginald E. Cormier
    
    Senior Vice President, TreasurerReginald E. Cormier
    
    and Chief Financial Officer(Principal Financial andAccounting Officer)
    
    March 14, 2005/s/ Mathias B. Bedell
    
    Director
    
    March 14, 2005Mathias B. Bedell/s/ Allan S. Bufferd
    
    Director
    
    March 14, 2005Allan S. Bufferd/s/ Kathleen M. Camilli
    
    Director
    
    March 14, 2005Kathleen M. Camilli/s/ Peter W. Carr
    
    Director
    
    March 14, 2005Peter W. Carr/s/ Alexander S. Costello
    
    Director
    
    March 14, 2005Alexander S. Costello
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/s/Robert S. Cummings
    
    Director
    
    March 14, 2005Robert S. Cummings/s/Stephen E. Marshall
    
    Director
    
    March 14, 2005Stephen E. Marshall/s/Nancy L. Pettinelli
    
    Director
    
    March 14, 2005Nancy L. Pettinelli/s/Herbert G. Schurian
    
    Director
    
    March 14, 2005Herbert G. Schurian/s/Donald B. Stackhouse
    
    Director
    
    March 14, 2005Donald B. Stackhouse
 37