<PAGE>   1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following discussion should be read in conjunction with the consolidated
financial statements and related notes included in this report. Certain amounts
reported for prior years have been reclassified to conform to the 1999
presentation. The discussion contains certain forward-looking statements
regarding the future performance of the Company. All forward-looking information
is inherently uncertain and actual results may differ substantially from the
assumptions, estimates, or expectations reflected or contained in the
forward-looking information.

        The financial condition and results of operations of MASSBANK Corp. (the
"Company") essentially reflect the operations of its subsidiary, MASSBANK (the
"Bank").

        The Company's consolidated net income depends largely upon net interest
income, which is the difference between interest income from loans and
investments ("interest-earning assets") and interest expense on deposits and
borrowed funds ("interest-bearing liabilities"). Net interest income is
significantly affected by general economic conditions, policies established by
regulatory authorities and competition.

        The Company's earnings results are also affected by the provision for
loan losses; non-interest income, such as fee-based revenues and net securities
gains or losses; non-interest expense; and income taxes.

FINANCIAL CONDITION

The Company's total assets decreased $21.9 million, or 2.3%, to $924.7 million
at December 31, 1999. The decline in total assets reflects a decrease in total
investments of $45.6 million partially offset by an increase in total loans and
other assets of $20.4 million and $3.3 million, respectively.

        The Bank's total loan portfolio at December 31, 1999, prior to the
allowance for loan losses, amounted to $325.4 million compared with $305.0
million at December 31, 1998, an increase of $20.4 million or 6.7%. This
increase resulted primarily from an increase in residential mortgage loans and
commercial loans. MASSBANK benefited from the favorable mortgage interest rate
environment during the first half of 1999; however, an increase in interest
rates during the last half of the year significantly reduced the demand for
mortgage refinancings. Total loan originations reached $82.4 million in 1999,
compared with $105.2 million in 1998. This includes a $15.0 million commercial
loan to a single borrower with AAA credit.

        Total investments consisting of investment securities and other
short-term investments, including term federal funds sold and interest-bearing
bank deposits, decreased $45.6 million from $624.1 million at December 31, 1998
to $578.5 million at year-end 1999. The decrease is mainly attributable to a
decrease in short-term investments, term federal funds sold and trading
securities of $36.8 million, $25.0 million and $24.8 million, respectively.
These were partially offset by an increase in longer term investments. The
primary components of the Bank's investment securities portfolio, U.S. Treasury
securities, U.S. Government agency securities, and mortgage-backed securities
increased by $22.6 million, $7.0 million and $9.8 million, respectively, during
1999. Other investments increased by $1.6 million in 1999.

        The decrease in total investments also reflects a decrease in net
unrealized gains on the Bank's securities available for sale from $19.8 million
at December 31, 1998 to $3.7 million at December 31, 1999. The decrease in
market value of the Bank's investment securities available for sale portfolio is
primarily due to an upward movement in market interest rates and the resulting
downward movement in debt securities prices by year-end 1999.

        The change in the market value of the Bank's available for sale
securities also had the effect of decreasing stockholders' equity by $9.7
million in 1999. The net unrealized gains on securities available for sale, net
of tax effect, reported as part of stockholders' equity totaled $2.0 million at
year-end 1999, down from $11.7 million at December 31, 1998. Also contributing
to the decrease in stockholders' equity was the payment of $3.8 million in
dividends to stockholders and the cost of additional shares of treasury stock
repurchased during the year in the amount of $7.6 million. These were partially
offset by the Company's record net income of $11.3 million in 1999 and the
issuance of common stock under the Company's stock option plan. Total
stockholders' equity was $101.5 million at December 31, 1999 representing a book
value per share of $30.65 compared to $110.5 million at year-end 1998
representing a book value $31.58 per share.

        Deposit accounts of all types have traditionally been the primary source
of funds for the Bank's lending and investment activities. The Bank's deposit
flows are influenced by prevailing interest rates, competition, and other market
conditions. The Bank's management attempts to manage its deposits through
selective pricing and marketing. Total deposits decreased $6.0 million during
1999 to $818.0 million at December 31, 1999, from $824.0 million at year-end
1998. This modest decrease was due in part to the strong performance of certain
sectors of the equity securities market which made it more difficult to attract
new deposits and some deposit outflow resulting from customer concerns about the
Year 2000 ("Y2K").


                                                                              13
<PAGE>   2
ASSET QUALITY

Asset quality continued to improve during 1999. Nonaccrual loans, generally
those loans which are 90 days or more delinquent, decreased to $0.8 million at
December 31, 1999, from $1.0 million at December 31, 1998. The bank's provision
for loan losses, which amounted to $193 thousand in 1998, decreased by $53
thousand to $140 thousand in 1999. Loan charge-offs, net of recoveries, amounted
to $35 thousand in 1999, down from $77 thousand in 1998, which continued the
trend of recent years.

        The Bank continued to add to its allowance for loan losses in 1999 due
to the continued growth of its loan portfolio. The bank's allowance for loan
losses at December 31, 1999 totaled approximately $2.6 million, representing
321% of nonaccrual loans and 0.79% of total loans. The bank believes that its
allowance for loan losses is adequate to cover the risks inherent in the loan
portfolio under current conditions. Real estate acquired through foreclosure
totaled only $62 thousand at year-end 1999.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS 1999 AND 1998

MASSBANK Corp. reported consolidated net income of $11.3 million or $3.35 in
basic earnings per share in 1999 compared to net income of $10.9 million or
$3.09 in basic earnings per share in 1998. This was the seventh consecutive year
of record net income for the Company. Diluted earnings per share for 1999
increased 9.4% to $3.25 from $2.97 in 1998.

        In 1999, the Company's return on average assets rose to a new high of
1.20% from 1.17% in the prior year. Return on average realized equity also
increased, from 11.08% in 1998 to 11.35% in 1999.

        Increases in both net income and earnings per share in 1999 compared to
1998 primarily reflect an increase in securities gains of $1.1 million, a
decrease in the provision for loan losses of $53 thousand and the Company's
lower effective income tax rate. These improvements were partially offset by a
decrease of $512 thousand in net interest income, a decrease of $168 thousand in
non-interest income (exclusive of securities gains) and an increase in
non-interest expense of $51 thousand. Additionally, the earnings per share
increase in 1999 was positively affected by the reduced number of average common
shares outstanding as a result of the Company's purchase of 210,967 shares of
its common stock, during 1999, pursuant to its stock repurchase program.

NET INTEREST INCOME

Net interest income on a fully taxable equivalent ("FTE") basis totaled $25.1
million for 1999 and $25.7 million for 1998. This decrease was principally
attributable to a decline in net interest margin, partially offset by the
positive effect of average earning asset growth. The net interest margin for
1999 was 2.72%, a decline from 2.81% reported in 1998. The Company's average
earning assets increased $9.8 million to $922.7 million in 1999, from $912.9
million in 1998.

        The tables on pages 23 and 24 set forth, among other things, the extent
to which changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have effected interest
income and expense during the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes due to (1) changes in volume and (2) changes in interest
rates.

INTEREST AND DIVIDEND INCOME

Interest and dividend income on a fully taxable equivalent basis totaled $58.3
million for the year ended December 31, 1999, compared to $60.0 million for the
year ended December 31, 1998. The yield on average earning assets was 6.32% in
1999, down from 6.56% in the prior year. The average total earning assets of the
Company increased to $922.7 million in 1999, up $9.8 million from $912.9 million
in 1998.

        As shown in the rate/volume analysis table on page 24, the decline in
yield on average earning assets resulted in a decrease in interest and dividend
income in 1999 of $2.6 million from 1998. Conversely, the total effect of higher
average earning assets on interest and dividend income in 1999 was a $942
thousand increase over 1998, resulting in a net decrease in total interest and
dividend income of $1.6 million from 1998.


14
<PAGE>   3
INTEREST EXPENSE

Total interest expense decreased $1.1 million or 3.3% to $33.2 million for the
year ended December 31, 1999 from $34.3 million for the year ended December 31,
1998. This decrease is due to a decline in the Company's average cost of funds
from 4.23% in 1998 to 4.02% in 1999, partially offset by the higher interest
expense resulting from an increase in the Company's average total deposits, from
$811.6 million in 1998 to $826.7 million in 1999.

        The Company's lower cost of funds in 1999 was the result of changes in
market interest rates and certain pricing strategies which the bank implemented
during the year.

        As shown in the rate/volume analysis table on page 24, the effect on
total interest expense from changes in interest-bearing deposit rates was a $1.6
million decrease from 1998. Conversely, the total effect of higher average total
deposits on interest expense in 1999 was a $516 thousand increase over 1998,
resulting in a net decrease in total interest expense of $1.1 million from 1998.

PROVISION FOR LOAN LOSSES

The provision for loan losses represents a charge against current earnings and
an addition to the allowance for loan losses. The provision for loan losses in
1999 was $140 thousand compared to $193 thousand in 1998. In determining the
amount to provide for loan losses, the key factor is the adequacy of the
allowance for loan losses. In making its decision, management considers a number
of factors, including the risk characteristics of the loan portfolio, underlying
collateral, current and anticipated economic conditions, and trends in loan
delinquencies and charge-offs. At December 31, 1999, the allowance for loan
losses was $2.6 million representing 321% of nonaccrual loans. The Banks
nonaccrual loans totaled $0.8 million at December 31, 1999 down from $1.0
million a year earlier. Net charge-offs also declined to $35 thousand in 1999
from $77 thousand in the prior year. Management believes that the allowance for
loan losses as of year-end 1999 is adequate to cover the risks inherent in the
loan portfolio under current conditions.

NON-INTEREST INCOME

Non-interest income consists of gains or losses on securities, deposit account
service fees and other non-interest income.

        Non-interest income increased to $5.6 million for the year ended
December 31, 1999, from $4.6 million for the year ended December 31, 1998. This
improvement is due to an increase in securities gains in 1999 compared to 1998.

        Net securities gains totaled $4.0 million in 1999 compared to $2.9
million in the prior year. This increase is primarily attributable to the
favorable performance of the Company's equity securities portfolio which has
produced strong returns over the past five years. Management believes the equity
markets will return to levels which represent more closely the historical norms
than has recently been the case, and does not anticipate the trend of recent
years gains to continue.

        All other non-interest income combined decreased $168 thousand to $1.5
million in 1999 from $1.7 million in the prior year, due to a decrease in
deposit account service fees and other non-interest income of $87 thousand and
$81 thousand, respectively.

NON-INTEREST EXPENSE

Non-interest expense totaled $12.6 million for 1999, compared with $12.5 million
in 1998. Expenses increased by only $51 thousand in 1999, due to the Company's
cost containment efforts and the reasons summarized below:

        Salaries and employee benefits expenses increased by only $10 thousand
to $7.4 million in 1999 compared to 1998. Annual merit increases and the
slightly higher costs of employee benefits were partly offset by staff
reductions and a decrease of $96 thousand in the Company's Employee Stock
Ownership Plan ("ESOP") expense. The ESOP expense is tied closely to the average
market price of the Company's common stock which declined during 1999. Also
contributing to the slight increase in salaries and employee benefits expenses
was a decrease of $41 thousand in loan origination related salary expenses being
deferred (and amortized over the life of the loans) due to a decrease in
residential lending activity in 1999 compared to 1998.

        Occupancy and equipment expense increased by 4.2% or $87 thousand to
$2.1 million in 1999. This increase reflects higher depreciation expense due to
the building and leasehold improvements completed in 1998 and 1999, and an
increase in real estate tax expense in 1999, due partly to the larger dollar
amount of real estate tax abatements received in 1998 compared to 1999.

        All other non-interest expenses combined consisting of data processing,
professional services, advertising and marketing, amortization of intangibles,
deposit insurance, contributions and other expenses remained relatively flat,
decreasing $46 thousand in 1999 compared to 1998.

        The bank's efficiency ratio, which measures how much it costs to
generate one dollar of revenue, continued its steady improvement of the past
several years, reaching 40.9% in 1999.


15
<PAGE>   4
INCOME TAX EXPENSE

The Company recorded income tax expense of $6.5 million in 1999, an increase of
$65 thousand when compared to the prior year. The increase in income tax expense
is due primarily to higher pretax earnings partially offset by a slight
reduction in the Company's effective income tax rate. The effective income tax
rate for the year ended December 31, 1999 was 36.66%, down from 37.26% in the
prior year. The decrease in the Company's effective income tax rate in 1999 is
due, in part, to the scheduled reduction in the Bank's statutory state excise
tax rate from 10.91% in 1998 to 10.50% in 1999; and to the increased investment
income generated by the Bank's two security corporation subsidiaries which are
taxed at a lower rate than the Bank for state income tax purposes.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS 1998 AND 1997

MASSBANK Corp. recorded net income for the year ended December 31, 1998 of $10.9
million or $3.09 in basic earnings per share compared to $10.2 million or $2.88
in basic earnings per share for the year ended December 31, 1997. This was the
sixth consecutive year of record net income for the Company. Diluted earnings
per share for 1998 increased to $2.97 from $2.77 in the prior year.

        In 1998, MASSBANK's return on average assets rose to 1.17% from 1.12% in
the prior year. Return on average realized equity was 11.08% in 1998, down
slightly from 11.11% in 1997. The Company's favorable earnings performance in
1998 is mainly attributable to higher securities gains and lower non-interest
expenses and provision for loan losses, partially offset by a decrease in net
interest income and non-interest income (exclusive of securities gains).

NET INTEREST INCOME

The Company's net interest income on a fully taxable equivalent ("FTE") basis
was $25.7 million in 1998, a decrease of $0.5 million from the prior year. The
decrease is the result of a lower net interest margin, due mainly to the
flattening of the yield curve which was seen in 1998, partially offset by the
positive effect of average earning asset growth. The Company's net interest
margin was 2.81% in 1998, down from its prior year net interest margin of 2.93%.
The Company's average earning assets increased $18.3 million or 2.0% to $912.9
million in 1998, from $894.6 million in 1997.

        The tables on pages 23 and 24 set forth, among other things, the extent
to which changes in interest rates and changes in the average balances of
interest-earning assets and interest-bearing liabilities have effected interest
income and expense during the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes due to (1) changes in volume and (2) changes in interest
rates.

INTEREST AND DIVIDEND INCOME

Interest and dividend income on a fully taxable equivalent basis was $60.0
million for the year ended December 31, 1998, compared to $60.9 million for the
year ended December 31, 1997. The average total earning assets of the Company
increased to $912.9 million in 1998, up $18.3 million from $894.6 million in
1997. As reflected in the table on page 23, the Company saw a decline in yield
in all categories of earning assets this past year. This resulted in an overall
decline in yield on total average earning assets of 25 basis points in 1998. The
yield on average earning assets for the year ended December 31, 1998 was 6.56%
compared to 6.81% in the prior year.

        As exhibited in the rate/volume analysis table on page 24, the total
effect of lower market interest rates on interest income in 1998 was a $1.9
million decline from 1997. Conversely, the total effect of higher average
earning assets on interest income in 1998 was a $1.0 million increase over 1997,
resulting in a net decrease in total interest and dividend income of $899
thousand from 1997.

INTEREST EXPENSE

Total interest expense decreased 1.0% to $34.3 million for the year ended
December 31, 1998 from $34.7 million for the year ended December 31, 1997. This
decrease is due to a decrease in the Company's average cost of funds from 4.30%
in 1997 to 4.23% in 1998, partially offset by the higher interest expense
resulting from an increase in the Company's average total deposits, from $807.3
million in 1997 to $811.6 million in 1998.

        The principal reason for the Company's lower cost of funds was lower
market interest rates in 1998.

        As exhibited in the rate/volume analysis table on page 24, the effect on
total interest expense from changes in interest-bearing deposit rates from a
year ago was a $522 thousand decrease from 1997. Conversely, the total effect of
higher average deposits on interest expense in 1998 was a $161 thousand increase
over 1997, resulting in a net decrease in total interest expense of $361
thousand from 1997.


16
<PAGE>   5
PROVISION FOR LOAN LOSSES

The provision for loan losses in 1998 was $193 thousand compared to $260
thousand in 1997. In determining the amount to provide for loan losses, the key
factor is the adequacy of the allowance for loan losses. In making its decision,
management considers a number of factors, including the risk characteristics of
the loan portfolio, underlying collateral, current and anticipated economic
conditions, and trends in loan delinquencies and charge-offs. At December 31,
1998, the allowance for loan losses was approximately $2.5 million representing
244.0% of nonaccrual loans. The Bank's nonaccrual loans totaled $1.0 million at
December 31, 1998 compared to $1.8 million a year earlier. Net charge-offs
totaled $77 thousand in 1998 compared to $268 thousand in 1997. Management
believes that the allowance for loan losses is adequate to cover the risks
inherent in the loan portfolio under current conditions.

NON-INTEREST INCOME

Non-interest income consists of gains or losses on securities, deposit account
service fees, and other non-interest income.

        Non-interest income increased to $4.6 million for the year ended
December 31, 1998, from $3.8 million for the year ended December 31, 1997. This
improvement is due to an increase in securities gains in 1998.

        Net gains on securities totaled $2.9 million in 1998 compared to $1.9
million in the prior year. The bank's equity securities portfolio continued to
contribute significant returns in 1998 through a combination of gains on the
sale of securities in the amount of $2.6 million and unrealized gains. The
pretax unrealized gains in the bank's equity securities portfolio amounted to
$10.5 million at year-end 1998, up from $8.2 million at December 31, 1997. All
other non-interest income combined decreased $162 thousand to $1.7 million from
$1.9 million in the prior year.

NON-INTEREST EXPENSE

One measure often used in the banking industry to assess the level of
non-interest expense is the efficiency ratio. The efficiency ratio measures how
much it cost to generate one dollar of revenue. MASSBANK's efficiency ratio
continued its steady improvement of the past several years, reaching 41.4% in
1998.

        MASSBANK's non-interest expenses (i.e., operating expenses) decreased by
$910 thousand to $12.5 million in 1998, from $13.4 million a year ago. This
decrease is due largely to non-recurring expenses incurred in 1997, summarized
below, and to a decrease in compensation expenses which are tied to the
Company's stock performance.

        Salaries and employee benefits decreased by $317 thousand or 4.1%, to
$7.4 million in 1998, from $7.7 million in 1997. The decrease reflects a
reduction of $311 thousand in Deferred Compensation Plan expenses which are tied
to the Company's stock performance. The price of MASSBANK Corp. stock decreased
by $8.50 or 17.8% in 1998, from $47.62 at December 31, 1997 to $39.12 at
December 31, 1998. Conversely, in 1997 the Company saw the price of its common
stock increase by $19.03 or 66.6%. This significantly increased Deferred
Compensation Plan expenses in 1997. Normal salary increases and higher employee
benefit costs, in 1998, were partly offset by staff reductions and more loan
origination related salary expenses (which are amortized over the life of the
loans) being deferred due to increased residential lending activity in 1998.

        Occupancy and equipment expense decreased by $37 thousand to $2.1
million in 1998. This decrease reflects a reduction in utilities expenses and a
drop in real estate tax expenses due to real estate tax abatements received in
1998.

        Data processing expenses increased by $72 thousand to $510 thousand in
1998, from $438 thousand in the previous year. 1997 expenses, however, reflect a
reduction of $150 thousand due to a one-time credit the bank negotiated as part
of its initial contract with a new service bureau. This temporary reduction in
data processing expense was used, in part, to defray nonrecurring expenses the
bank incurred in converting to the new service bureau.

        Professional services expenses increased by $54 thousand to $461
thousand in 1998, from $407 thousand in 1997. This increase was due mostly to
higher legal fees.


                                                                              17
<PAGE>   6
NON-INTEREST EXPENSE (continued)

        In 1998, the Company did not incur any merger and acquisition related
expenses. As a result, 1998 expenses when compared to the prior year, show a
decrease of $156 thousand due to the nonrecurring merger and acquisition related
expenses incurred in 1997 in connection with the bank's acquisition of the
Glendale Co-operative Bank ("Glendale").

        Advertising and marketing expenses declined slightly in 1998 to $171
thousand, from $187 thousand in the prior year.

        The amortization of intangibles expense increased by $51 thousand to
$302 thousand in 1998, from $251 thousand in 1997. The increase reflects the
additional amortization of goodwill recorded in 1998 in connection with the
Glendale acquisition. In 1997, the goodwill was only amortized for a partial
year since the acquisition was completed in July of that year.

        Deposit insurance expense totaled $116 thousand in 1998, unchanged from
the prior year.

        The bank's contributions expense decreased by $650 thousand to $14
thousand in 1998, from $664 thousand in the prior year. This decrease is due to
a significant contribution made in the prior year. The bank, in 1997,
contributed appreciated securities valued at $622 thousand to establish and
endow a tax exempt private foundation. The establishment of the MASSBANK
Charitable Foundation benefits the bank by reducing its contributions expense in
1998 and future years, since many of the contributions previously made by the
bank are now made by the Foundation.

        Other expenses increased by $89 thousand to $1.5 million in 1998, from
$1.4 million in 1997 due to increases in several other non-interest expense
categories.

INCOME TAX EXPENSE

The Company recorded income tax expense of $6.5 million in 1998 compared to $6.0
million in 1997. The increase in income tax expense is due primarily to higher
pretax earnings and a slight increase in the Company's effective income tax
rate. The effective income tax rate for the year ended December 31, 1998 was
37.3%, up from 37.1% in the prior year. The increase in the Company's effective
income tax rate in 1998 was due to a non-recurring income tax benefit in the
amount of $260 thousand the Company recorded in 1997 as a result of having
donated appreciated securities to establish and endow a tax exempt private
foundation. This reduced the effective income tax rate for 1997. In 1998, there
were two factors which reduced the effective income tax rate for the year. The
Company, in 1998, received a state tax refund, net of federal tax, of
approximately $44 thousand due to the settlement of a state tax issue from prior
years. It also changed its year-end for tax filing purposes from October 31 to
December 31. This change, because of the bank tax reform legislation signed into
law in 1995 which lowered the bank tax rate from 12.54% to 10.50% over five
years, accelerated the scheduled reduction in the Bank's state excise tax rate
by one full year from 11.32% to 10.91%. For years beginning after 1998, the rate
is 10.50%.

LIQUIDITY AND CAPITAL RESOURCES

The Bank must maintain a sufficient level of cash and assets which can readily
be converted into cash in order to meet cash outflows from normal depositor
requirements and loan demands. The Bank's primary sources of funds are deposits,
loan amortization and prepayments, sales or maturities of investment securities
and income on earning assets. In addition to loan payments and maturing
investment securities, which are relatively predictable sources of funds, the
Bank maintains a high percentage of its assets invested in overnight federal
funds sold, which can be immediately converted into cash, and United States
Treasury and Government agency securities, which can be sold or pledged to raise
funds. At December 31, 1999, the Bank had $86.2 million or 9.3% of total assets
and $158.6 million or 17.1% of total assets invested, respectively, in overnight
federal funds sold and United States obligations.

        The Bank is a Federal Deposit Insurance Corporation insured institution
subject to the FDIC regulatory capital requirements. The FDIC regulations
require all FDIC insured institutions to maintain minimum levels of Tier I
capital. Highly rated banks (i.e., those with a composite rating of 1 under the
CAMELS rating system) are required to maintain a minimum leverage ratio of Tier
I capital to total average assets of at least 3.00%. An additional 100 to 200
basis points are required for all but these most highly rated institutions. The
Bank is also required to maintain a minimum level of risk-based capital. Under
the risk-based capital standards, FDIC insured institutions must maintain a Tier
I capital to risk-weighted assets ratio of 4.00% and


18
<PAGE>   7
LIQUIDITY AND CAPITAL RESOURCES (continued)

are generally expected to meet a minimum total qualifying capital to
risk-weighted assets ratio of 8.00%. The risk-based capital guidelines take into
consideration risk factors, as defined by the regulators, associated with
various categories of assets, both on and off the balance sheet. Under the
guidelines, capital strength is measured in two tiers which are used in
conjunction with risk adjusted assets to determine the risk-based capital
ratios. Tier II capital components include supplemental capital components such
as qualifying allowance for loan losses, qualifying subordinated debt and up to
45 percent of the pretax net unrealized holding gains on certain available for
sale equity securities. Tier I capital plus the Tier II capital components are
referred to as total qualifying capital.

        The capital ratios of the Bank and the Company currently exceed the
minimum regulatory requirements. At December 31, 1999, the Bank had a leverage
Tier I capital to average assets ratio of 10.48%, a Tier I capital to
risk-weighted assets ratio of 30.93% and a total capital to risk-weighted assets
ratio of 32.98%. The Company, on a consolidated basis, had ratios of leverage
Tier I capital to average assets of 10.54%, Tier I capital to risk-weighted
assets of 31.10% and total capital to risk-weighted assets of 33.15% at December
31, 1999.

YEAR 2000 ISSUE

The Company's effort to address the Year 2000 (Y2K) issue began in 1997 and
culminated in a business as usual 1999 year-end and a smooth transition into the
Year 2000. The Company did not experience any disruptions in its operating
activities resulting from the date rollover to Year 2000. Additionally,
management does not expect any Y2K issue to have a material adverse effect on
the Company's operations or financial results.

        Since 1997, the Company has incurred total Y2K project related
expenditures, excluding personnel costs, of approximately $295 thousand. Most of
these expenditures were to replace or upgrade computer systems that were not
believed to be Year 2000 compliant. Expenditures for 1999 totaled $242 thousand.
Approximately $78 thousand of the current year's expenditures were expensed as
incurred, while the cost of new hardware and software of approximately $164
thousand was capitalized and will be amortized over the hardware and software's
useful life in accordance with the Company's standard accounting practices.

ASSET AND LIABILITY MANAGEMENT

The goal of asset/liability management is to ensure that liquidity, capital and
market risk are prudently managed. Asset/liability management is governed by
policies reviewed and approved annually by the Bank's Board of Directors (the
"Board"). The Board establishes policy limits for long-term interest rate risk
assumption and delegates responsibility for monitoring and measuring the
Company's exposure to interest rate risk to the Asset/Liability Committee
("ALCO"). The ALCO which is comprised of members of the Company's Board of
Directors, members of senior management and the bank's comptroller, generally
meets three times a year to review the economic environment and the volume, mix
and maturity of the Company's assets and liabilities.


                                                                              1
<PAGE>   8
INTEREST RATE RISK

The primary goal of interest-rate risk management is to control the Company's
exposure to interest rate risk both within limits approved by the Board and
within narrower guidelines approved by ALCO. These limits and guidelines reflect
the Company's tolerance for interest rate risk over both short-term and
long-term time horizons. The Company monitors its interest rate exposures using
a variety of financial tools. It also produces a GAP analysis quarterly,
reflecting the known or assumed maturity, repricing and other cash flow
characteristics of the Company's interest-earning assets and interest-bearing
liabilities.

        Interest rate risk materializes in two forms, market value risk and
reinvestment risk.

        Financial instruments calling for future cash flows show market value
increases or decreases when rates change. Management monitors the potential
change in market value of the Company's debt securities assuming an immediate
(parallel) shift in interest rates of up to 200 basis points up or down. Results
are calculated using industry standard modeling analytics and securities data
from The Bloomberg. The Company uses the results to review the potential changes
in market value resulting from immediate rate shifts and to manage the effect of
market value changes on the Company's capital position.

        Reinvestment risk occurs when an asset and the liability funding the
asset do not reprice and/or mature at the same time. The difference or mismatch
with respect to repricing frequency and/or maturity is a risk to net interest
income.

        Complicating management's efforts to control the Company's exposure to
interest rate risk is the fundamental uncertainty of the maturity, repricing
and/or runoff characteristics of a significant portion of the Company's assets
and liabilities. This uncertainty often reflects optional features embedded in
these financial instruments. The most important optional features are embedded
in the Company's deposits, loans and mortgage-backed securities.

        For example, many of the Company's interest-bearing deposit products
(e.g., savings, money market deposit accounts and NOW accounts) have no
contractual maturity. Customers have the right to withdraw funds from these
deposit accounts freely. Deposit balances may therefore run off unexpectedly due
to changes in competitive or market conditions. In addition, when market
interest rates rise, customers with time certificates of deposit ("CDs") often
pay a penalty to redeem their CDs and reinvest at higher rates. Given the
uncertainties surrounding deposit runoff and repricing, the interest rate
sensitivity of the Company's liabilities cannot be determined precisely.

        Similarly, customers have the right to prepay loans, particularly
residential mortgage loans, usually without penalty. As a result, the Company's
mortgage based assets (i.e., mortgage loans and mortgage-backed securities) are
subject to prepayment risk. This risk tends to increase when interest rates fall
due to the benefits of refinancing. Since the future prepayment behavior of the
Company's customers is uncertain, the interest rate sensitivity of mortgage
based assets cannot be determined exactly.

        Management monitors and adjusts the difference between the Company's
interest-earning assets and interest-bearing liabilities repricing within
various time frames ("GAP position").

        GAP analysis provides a static view of the maturity and repricing
characteristics of the Company's balance sheet positions. The interest rate GAP
is prepared by scheduling all interest-earning assets and interest-bearing
liabilities according to scheduled or anticipated repricing or maturity. The GAP
analysis identifies the difference between an institution's assets and
liabilities that will react to a change in market rates. GAP analysis theory
postulates that if the GAP is positive and rates increase, the institution's net
interest spread will increase as more assets than liabilities react to the rate
change. If the GAP is negative, more liabilities than assets will react to a
change in market rates. If rates rise, the institution's net interest spread
will fall as more liabilities react to market rates than assets.

        In contrast, however, the Company's one-year GAP position in recent
years has been negative and its net interest spread has moved in the same
direction as the change in market rates rather than in the opposite direction as
GAP analysis theory postulates. One of the more significant reasons for this is
the fact that a GAP presentation does not reflect the degrees to which interest
earning assets and deposit costs respond to changes in market interest rates.
The rates on all financial instruments do not always move by the same amount as
the general change in market rates. In addition, the Company has elected, in
recent years, either not to raise rates or to raise rates by a modest amount on
its savings and transaction-oriented accounts in response to an increase in
market rates. It should be noted that for the above two reasons, among others,
the Company's net interest spread has moved in the same direction as market
interest rates in the past and may in the near future despite having a negative
cumulative one-year GAP position.


20
<PAGE>   9
INTEREST RATE RISK (continued)

        The Company's policy is to limit its one-year GAP position to 15.0% of
total assets. The Company has historically managed its interest rate GAP
primarily by lengthening or shortening the maturity structure of its securities
portfolio, by continually modifying the composition of its securities portfolio
and by selectively pricing and marketing its various deposit products.

        The following table summarizes the Company's GAP position at December
31, 1999. As of this date, the Company's one-year cumulative GAP position was
negative $27.5 million, or approximately 3.0% of total assets. The cumulative
GAP-asset ratio measures the direction and extent of imbalance between an
institution's assets and liabilities repricing through the end of a particular
period.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                               INTEREST SENSITIVITY PERIODS
                                               3 MONTHS        3 TO 6       6 MONTHS        1 TO 5         OVER
(IN THOUSANDS)                                  OR LESS        MONTHS       TO 1 YEAR        YEARS        5 YEARS         TOTAL
---------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>           <C>            <C>            <C>           <C>            <C>
INTEREST-EARNING ASSETS:
Loans                                          $  44,553     $  10,399      $  23,617      $ 131,641     $ 115,155      $ 325,363
Short-term investments:
   Federal funds sold                             86,211            --             --             --            --         86,211
   Investment in money market funds               24,717            --             --             --            --         24,717
Interest-bearing deposits in banks                 1,815           570            107          1,349            --          3,841
Securities held to maturity                           --            --             --            230            --            230
Securities available for sale                     49,561        21,207         54,527        229,416       102,791        457,502
Trading securities                                 6,042            --             --             --            --          6,042
---------------------------------------------------------------------------------------------------------------------------------
     Total interest-earning assets             $ 212,899     $  32,176      $  78,251      $ 362,636     $ 217,946      $ 903,908
---------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits                                       $ 199,888     $  85,219      $  65,708      $  91,804     $ 352,399      $ 795,018
---------------------------------------------------------------------------------------------------------------------------------
     Total interest-bearing liabilities        $ 199,888     $  85,219      $  65,708      $  91,804     $ 352,399      $ 795,018
---------------------------------------------------------------------------------------------------------------------------------
GAP for period                                 $  13,011     $ (53,043)     $  12,543      $ 270,832     $(134,453)     $ 108,890
Cumulative GAP - December 31, 1999             $  13,011     $ (40,032)     $ (27,489)     $ 243,343     $ 108,890
Cumulative GAP as a percent of total assets          1.4%         (4.3%)         (3.0%)         26.3%         11.8%
---------------------------------------------------------------------------------------------------------------------------------
Cumulative GAP - December 31, 1998             $  19,810     $ (21,045)     $ (21,579)     $ 257,318     $ 127,451
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                              21
<PAGE>   10
INTEREST RATE RISK (continued)

The following table shows the Company's financial instruments that are sensitive
to changes in interest rates, categorized by expected maturity, and the
instruments' fair values as of December 31, 1999.

<TABLE>
<CAPTION>
                                                                   EXPECTED MATURITY DATE
                                                                    AT DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)                                    2000             2001             2002             2003
--------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>              <C>              <C>
INTEREST SENSITIVE ASSETS:
Fixed rate securities                          $ 101,305        $  75,627        $  67,566        $  54,412
   Average interest rate(1)                         6.44%            6.75%            6.75%            6.84%
Variable rate securities(2)                       28,565               --               --              --
   Average interest rate(1)                         3.15%              --               --              --
Fixed rate loans                                  35,177           29,722           26,506           25,727
   Average interest rate                            6.88%            6.86%            6.89%            6.88%
Variable rate loans                               21,322            5,597            5,130            4,500
   Average interest rate                            6.93%            7.49%            7.50%            7.54%
Other fixed rate assets                              677            1,145              204              --
   Average interest rate                            6.11%            5.09%            6.08%             --
Other variable rate assets(3)                    112,743               --               --              --
   Average interest rate                            4.27%              --               --              --
--------------------------------------------------------------------------------------------------------------
     Total interest sensitive assets           $ 299,789        $ 112,091        $  99,406        $  84,639
--------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE LIABILITIES:
Savings and money market
     deposit accounts                          $  11,415        $   6,313        $   6,218        $   6,129
   Average interest rate                            3.28%            3.25%            3.25%            3.26%
Fixed rate certificates of deposit               230,133           58,496           11,333            1,146
   Average interest rate                            4.92%            5.19%            5.25%            5.09%
Variable rate certificates of deposit             35,997           26,031           27,931              106
   Average interest rate                            6.48%            6.53%            5.25%            6.70%
NOW accounts                                          --               --               --               --
   Average interest rate                              --               --               --               --
Escrow deposits of borrowers                       1,477               --               --               --
   Average interest rate                            0.25%              --               --               --
Deposit acquisition premium,
   net of amortization                              (230)            (230)             (27)              --
--------------------------------------------------------------------------------------------------------------
     Total interest sensitive liabilities      $ 278,792        $  90,610        $  45,455        $  7,381
--------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                              EXPECTED MATURITY DATE
                                                               AT DECEMBER 31, 1999
                                                                                              FAIR VALUE
--------------------------------------------------------------------------------------------
(IN THOUSANDS)                                    2004        THEREAFTER         TOTAL        AT 12/31/99
---------------------------------------------------------------------------------------------------------
<S>                                            <C>             <C>             <C>              <C>
INTEREST SENSITIVE ASSETS:
Fixed rate securities                          $  29,170       $ 105,662       $ 433,742        $ 433,742
   Average interest rate(1)                         7.15%           7.20%           6.83%
Variable rate securities(2)                          --           1,467          30,032           30,032
   Average interest rate(1)                          --            6.61%           3.32%
Fixed rate loans                                  22,282         110,820         250,234          246,373
   Average interest rate                            6.90%           6.80%           6.85%
Variable rate loans                                4,067          34,515          75,131           74,772
   Average interest rate                            7.55%           7.80%           7.48%
Other fixed rate assets                              --              --           2,026            2,026
   Average interest rate                             --              --            5.53%
Other variable rate assets(3)                        --              --         112,743          112,743
   Average interest rate                             --              --            4.27%
---------------------------------------------------------------------------------------------------------
     Total interest sensitive assets           $  55,519       $ 252,464       $ 903,908        $ 899,688
---------------------------------------------------------------------------------------------------------
INTEREST SENSITIVE LIABILITIES:
Savings and money market
     deposit accounts                          $   6,048       $ 316,967       $ 353,090        $ 353,090
   Average interest rate                            3.26%           3.44%           3.42%
Fixed rate certificates of deposit                   872             443         302,423          302,065
   Average interest rate                            4.87%           5.12%           4.98%
Variable rate certificates of deposit                 28              --          90,093           90,093
   Average interest rate                            6.70%             --            6.56%
NOW accounts                                          --          48,422          48,422           48,422
   Average interest rate                              --            0.98%           0.98%
Escrow deposits of borrowers                          --              --           1,477            1,477
   Average interest rate                              --              --            0.25%
Deposit acquisition premium,
   net of amortization                                --              --            (487)              --
---------------------------------------------------------------------------------------------------------
     Total interest sensitive liabilities      $   6,948       $ 365,832       $ 795,018        $ 795,147
---------------------------------------------------------------------------------------------------------
</TABLE>

(1) Securities rates presented are on a tax equivalent basis.

(2) Includes equity securities.

(3) Consists of overnight Federal funds sold, money market funds and
    interest-bearing deposits in banks.

        The Company uses certain assumptions to estimate fair values and
expected maturities. For interest-sensitive assets, expected maturities are
based upon contractual maturity, and projected repayments and prepayments of
principal. For interest-sensitive deposit liabilities, maturities are based on
contractual maturity and estimated deposit runoff based on the Bank's own
historical experience. The actual maturity of the Company's financial
instruments could vary significantly from what has been presented in the above
table if actual experience differs from the assumptions used.

OTHER MARKET RISKS

The Company's investment securities portfolio includes equity securities with a
market value of approximately $21.5 million at December 31, 1999. The net
unrealized gains on these securities totaled $8.6 million at year-end 1999.
Movements in equity prices may effect the amount of securities gains or losses
which the Company realizes from the sale of these securities and thus may have
an impact on earnings.


22
<PAGE>   11
AVERAGE BALANCE SHEETS

<TABLE>
<CAPTION>
(IN THOUSANDS) YEARS ENDED DECEMBER 31,     1999                            1998                             1997
                                           INTEREST  AVERAGE              INTEREST   AVERAGE               INTEREST  AVERAGE
                                AVERAGE    INCOME/   YIELD/    AVERAGE    INCOME/    YIELD/      AVERAGE   INCOME/   YIELD/
                               BALANCE(4)  EXPENSE   RATE(4)  BALANCE(4)  EXPENSE    RATE(4)   BALANCE(4)  EXPENSE   RATE(4)
-----------------------------------------------------------------------------------------------------------------------------
<S>                            <C>         <C>       <C>      <C>         <C>        <C>       <C>         <C>       <C>
ASSETS:
Earning assets:
   Federal funds sold           $128,124   $  6,294   4.91%   $137,123    $  7,316    5.34%    $106,890    $ 5,840    5.46%
   Short-term investments(2)      22,600      1,105   4.89      26,792       1,440    5.37       26,369      1,459    5.53
   Investment securities         164,117      8,931   5.44     145,863       8,473    5.81      166,949     10,554    6.32
   Mortgage-backed securities    275,361     18,735   6.80     299,368      20,496    6.85      321,521     22,368    6.96
   Trading securities             10,760        495   4.60      16,460         819    4.98       12,741        735    5.77
   Mortgage loans(1)             292,172     20,516   7.02     264,898      19,413    7.33      235,587     17,704    7.51
   Other loans(1)                 29,516      2,256   7.64      22,375       2,021    9.03       24,584      2,224    9.05
---------------------------------------------------           ------------------------         -------------------
     Total earning assets        922,650     58,332   6.32%    912,879      59,978    6.56%     894,641     60,884    6.81%
-----------------------------------------------------------------------------------------------------------------------------
Allowance for
   loan losses                    (2,498)                       (2,375)                          (2,245)
-----------------------------------------------------------------------------------------------------------------------------
     Total earning assets
        less allowance for
        loan losses              920,152                       910,504                          892,396
Other assets                      19,923                        19,512                           18,956
-----------------------------------------------------------------------------------------------------------------------------
     Total assets               $940,075                      $930,016                         $911,352
-----------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
   Demand and NOW               $ 74,933        504   0.67%   $ 70,159         554    0.79%    $ 65,895        536    0.81%
   Savings                       353,851     12,060   3.41     349,637      11,959    3.42      355,395     12,240    3.44
   Time certificates of
     deposit                     397,935     20,640   5.19     391,816      21,807    5.57      386,062     21,905    5.67
---------------------------------------------------           ------------------------         -------------------
     Total deposits              826,719     33,204   4.02%    811,612      34,320    4.23%     807,352     34,681    4.30%
-----------------------------------------------------------------------------------------------------------------------------
Other liabilities                  7,209                         9,776                            7,296
-----------------------------------------------------------------------------------------------------------------------------
     Total liabilities           833,928                       821,388                          814,648
-----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:            106,147                       108,628                           96,704
     Total liabilities and
        stockholders' equity    $940,075                      $930,016                         $911,352
-----------------------------------------------------------------------------------------------------------------------------
Net interest income (tax-
   equivalent basis)                         25,128                         25,658                          26,203
Less adjustment of tax-
   exempt interest income                      (126)                          (144)                           (151)
-----------------------------------------------------------------------------------------------------------------------------
Net interest income                        $ 25,002                       $ 25,514                         $26,052
-----------------------------------------------------------------------------------------------------------------------------
Interest rate spread                                  2.30%                           2.33%                           2.51%
-----------------------------------------------------------------------------------------------------------------------------
Net interest margin(3)                                2.72%                           2.81%                           2.93%
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Loans on nonaccrual status are included in the average balance.

(2) Short-term investments consist of interest-bearing deposits in banks and
    investments in money market funds.

(3) Net interest income (tax equivalent basis) before provision for loan losses
    divided by average interest-earning assets.

(4) Includes the effects of SFAS No. 115.


                                                                              23
<PAGE>   12
RATE/VOLUME ANALYSIS

The following table presents, for the years indicated, the changes in interest
and dividend income and the changes in interest expense attributable to changes
in interest rates and changes in the volume of earning assets and
interest-bearing liabilities. A change attributable to both volume and rate has
been allocated proportionately to the change due to volume and the change due to
rate.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                      1999 COMPARED TO 1998                    1998 COMPARED TO 1997
(IN THOUSANDS)                                         INCREASE (DECREASE)                      INCREASE (DECREASE)
YEARS ENDED DECEMBER 31,                                     DUE TO                                   DUE TO
                                                VOLUME         RATE          TOTAL       VOLUME          RATE         TOTAL
-----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>           <C>           <C>           <C>           <C>           <C>
INTEREST AND DIVIDEND INCOME:
   Federal funds sold                          $  (463)      $  (559)      $(1,022)      $ 1,616       $  (140)      $ 1,476
   Short-term investments                         (212)         (123)         (335)           23           (42)          (19)
   Investment securities                         1,000          (524)          476        (1,248)         (826)       (2,074)
   Trading securities                             (266)          (58)         (324)          194          (110)           84
   Mortgage-backed securities                   (1,634)         (127)       (1,761)       (1,521)         (351)       (1,872)
   Mortgage loans                                1,939          (836)        1,103         2,157          (448)        1,709
   Other loans                                     578          (343)          235          (200)           (3)         (203)
-----------------------------------------------------------------------------------------------------------------------------
       Total interest and dividend income          942        (2,570)       (1,628)        1,021        (1,920)         (899)
-----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
   Deposits:
     Demand and NOW                                 36           (86)          (50)           34           (16)           18
     Savings                                       144           (43)          101          (197)          (84)         (281)
     Time certificates of deposit                  336        (1,503)       (1,167)          324          (422)          (98)
-----------------------------------------------------------------------------------------------------------------------------
       Total interest expense                      516        (1,632)       (1,116)          161          (522)         (361)
-----------------------------------------------------------------------------------------------------------------------------
Net interest income                            $   426       $  (938)      $  (512)      $   860       $(1,398)      $  (538)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

IMPACT OF INFLATION AND CHANGING PRICES

MASSBANK Corp.'s financial statements presented herein have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time, due to the fact that substantially all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services.

RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes comprehensive
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in its balance sheet and measure
those instruments at fair market value. Under this Statement, an entity that
elects to apply hedge accounting is required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. The Company intends to adopt
SFAS No. 133 as of January 1, 2001. The Statements are not expected to have a
material effect on the Company's consolidated financial statements.


24
<PAGE>   13
INDEPENDENT AUDITORS' REPORT

[KPMG LOGO]


The Board of Directors and Stockholders
MASSBANK Corp.:

                  We have audited the accompanying consolidated balance sheets
of MASSBANK Corp. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

                  We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

                  In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
MASSBANK Corp. and subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.

Boston, Massachusetts

                                                   KPMG LLP

January 11, 2000


                                                                              25
<PAGE>   14
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31,                                                           1999               1998
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                     <C>               <C>
ASSETS:
Cash and due from banks                                                                                 $  10,476         $   7,038
Short-term investments (Note 2)                                                                           110,928           147,776
------------------------------------------------------------------------------------------------------------------------------------
     Total cash and cash equivalents                                                                      121,404           154,814
------------------------------------------------------------------------------------------------------------------------------------
Term federal funds sold                                                                                        --            25,000
Interest-bearing deposits in banks                                                                          3,841             2,033
Securities held to maturity, at amortized cost
   (market value of $230 in 1999 and $354 in 1998) (Note 3)                                                   230               354
Securities available for sale, at market value
   (amortized cost of $453,844 in 1999 and $398,343 in 1998) (Note 3)                                     457,502           418,126
Trading securities, at market value (Note 4)                                                                6,042            30,793
Loans (Notes 5, 7 and 11):
   Mortgage loans                                                                                         288,580           283,654
   Other loans                                                                                             36,785            21,335
------------------------------------------------------------------------------------------------------------------------------------
     Total loans                                                                                          325,365           304,989
   Less: allowance for loan losses (Note 6)                                                                (2,555)           (2,450)
------------------------------------------------------------------------------------------------------------------------------------
     Net loans                                                                                            322,810           302,539
------------------------------------------------------------------------------------------------------------------------------------
Premises and equipment (Note 9)                                                                             4,127             4,320
Real estate acquired through foreclosure (Note 7)                                                              62                86
Accrued interest receivable                                                                                 5,045             5,058
Goodwill                                                                                                    1,288             1,387
Accrued income tax asset, net                                                                                 292                --
Other assets                                                                                                2,073             2,115
------------------------------------------------------------------------------------------------------------------------------------
     Total assets                                                                                       $ 924,716         $ 946,625
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Notes 10 and 11):
   Demand and NOW                                                                                       $  72,938         $  76,173
   Savings                                                                                                353,090           348,049
   Time certificates of deposit                                                                           392,516           400,524
   Deposit acquisition premium, net of amortization                                                          (487)             (715)
------------------------------------------------------------------------------------------------------------------------------------
     Total deposits                                                                                       818,057           824,031
Escrow deposits of borrowers                                                                                1,477             1,438
Employee stock ownership plan liability (Note 15)                                                             468               625
Accrued income taxes payable                                                                                   --               723
Deferred income taxes payable (Note 12)                                                                       199             6,761
Other liabilities                                                                                           3,036             2,558
------------------------------------------------------------------------------------------------------------------------------------
     Total liabilities                                                                                    823,237           836,136
------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 8 and 9)                                                         --                --
Stockholders' equity (Notes 12, 14, 15 and 16):
   Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued                        --                --
   Common stock, par value $1.00 per share; 10,000,000 shares
      authorized, 7,407,432 and 7,384,332 shares issued, respectively                                       7,407             7,384
   Additional paid-in capital                                                                              60,591            60,003
   Retained earnings                                                                                       85,873            78,308
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          153,871           145,695
   Treasury stock at cost, 4,096,189 and 3,885,222 shares, respectively                                   (53,890)          (46,272)
   Accumulated other comprehensive income (Note 1)                                                          1,966            11,691
   Common stock acquired by ESOP (Note 15)                                                                   (468)             (625)
------------------------------------------------------------------------------------------------------------------------------------
     Total stockholders' equity                                                                           101,479           110,489
------------------------------------------------------------------------------------------------------------------------------------
     Total liabilities and stockholders' equity                                                         $ 924,716         $ 946,625
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.


26
<PAGE>   15
MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31,                          1999             1998              1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>              <C>               <C>
INTEREST AND DIVIDEND INCOME:
   Mortgage loans                                                               $20,516          $19,413           $17,704
   Other loans                                                                    2,256            2,021             2,224
   Securities available for sale:
     Mortgage-backed securities                                                  18,735           20,496            22,368
     Other securities                                                             8,790            8,310            10,385
   Trading securities                                                               495              819               735
   Federal funds sold                                                             6,294            7,316             5,840
   Other investments                                                              1,120            1,459             1,477
--------------------------------------------------------------------------------------------------------------------------
        Total interest and dividend income                                       58,206           59,834            60,733
--------------------------------------------------------------------------------------------------------------------------

INTEREST EXPENSE:
   Deposits:
     NOW                                                                            504              554               536
     Savings                                                                     12,060           11,959            12,240
     Time certificates of deposit                                                20,640           21,807            21,905
--------------------------------------------------------------------------------------------------------------------------
        Total interest expense                                                   33,204           34,320            34,681
--------------------------------------------------------------------------------------------------------------------------
        Net interest income                                                      25,002           25,514            26,052
PROVISION FOR LOAN LOSSES (Note 6)                                                  140              193               260
--------------------------------------------------------------------------------------------------------------------------
        Net interest income after provision for loan losses                      24,862           25,321            25,792
--------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
   Deposit account service fees                                                     724              811               924
   Gains on securities, net                                                       4,033            2,893             1,939
   Other                                                                            805               886              935
--------------------------------------------------------------------------------------------------------------------------
        Total non-interest income                                                 5,562            4,590             3,798
--------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
   Salaries and employee benefits                                                 7,436            7,426             7,743
   Occupancy and equipment                                                        2,146            2,059             2,096
   Data processing                                                                  486              510               438
   Professional services                                                            481              461               407
   Merger and acquisition related expense                                           --               --                156
   Advertising and marketing                                                        198              171               187
   Amortization of intangibles                                                      327              302               251
   Deposit insurance                                                                114              116               116
   Contributions                                                                     21               14               664
   Other                                                                          1,357            1,456             1,367
--------------------------------------------------------------------------------------------------------------------------
        Total non-interest expense                                               12,566           12,515            13,425
--------------------------------------------------------------------------------------------------------------------------
        Income before income taxes                                               17,858           17,396            16,165
INCOME TAX EXPENSE (Note 12)                                                      6,547            6,482             5,998
--------------------------------------------------------------------------------------------------------------------------
        Net income                                                              $11,311          $10,914           $10,167
--------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
   Basic                                                                      3,374,623        3,528,817         3,524,657
   Diluted                                                                    3,478,944        3,676,642         3,663,310
EARNINGS PER SHARE (in dollars):
   Basic                                                                      $    3.35          $  3.09           $  2.88
   Diluted                                                                         3.25             2.97              2.77
--------------------------------------------------------------------------------------------------------------------------
</TABLE>




See accompanying notes to consolidated financial statements.


                                                                              27
<PAGE>   16

MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31,                                         1999               1998               1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                               $ 11,311           $ 10,914           $ 10,167
   Adjustments to reconcile net income to net cash provided
     by (used in) operating activities:
     Depreciation and amortization                                               993                928                853
     Loan interest capitalized                                                   (58)               (88)               --
     Amortization of ESOP shares committed to be released                        163                243                184
     Charitable contribution of appreciated securities                           --                 --                 622
     Decrease in accrued interest receivable                                      13                337                464
     Increase (decrease) in other liabilities                                    478               (734)                56
     (Decrease) increase in current income taxes payable                      (1,015)              (517)               435
     Accretion of discounts on securities, net of
        amortization of premiums                                                (961)            (1,152)            (1,178)
     Net trading securities activity                                          25,174             (8,671)           (16,480)
     Gains on securities available for sale                                   (3,954)            (2,798)            (1,831)
     Gains on trading securities                                                 (79)               (95)              (108)
     (Decrease) increase in deferred mortgage loan origination fees,
        net of amortization                                                       (3)               231                168
     Deferred income tax (benefit) expense                                      (161)               146               (372)
     (Increase) decrease in other assets                                        (327)                85                553
     Loans originated for sale                                                   --                (129)              (770)
     Loans sold                                                                  --                 129                770
     Provision for loan losses                                                   140                193                260
     Provisions for losses and writedowns on real estate acquired
        through foreclosure                                                      --                 --                 (21)
     Gains on sales of real estate acquired through foreclosure                  --                  (5)               (34)
     Gains on sales of premises and equipment                                     (2)               --                  (1)
     Increase (decrease) in escrow deposits of borrowers                          39                (64)               231
--------------------------------------------------------------------------------------------------------------------------
        Net cash provided by (used in) operating activities                   31,751             (1,047)            (6,032)
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Cash and cash equivalents for acquisitions                                    --                 --              (2,874)
   Purchases of term federal funds                                               --             (35,000)           (30,000)
   Proceeds from maturities of term federal funds                             25,000             30,000             20,000
   Increase in interest-bearing bank deposits                                 (3,117)              (766)            (1,649)
   Proceeds from maturities of interest-bearing bank deposits                  1,309                816              1,240
   Proceeds from sales of investment securities available for sale            72,582             26,580             42,741
   Proceeds from maturities of investment securities held to maturity
     and available for sale                                                   65,800             43,650             59,000
   Purchases of investment securities available for sale                    (169,020)           (59,291)           (63,696)
   Purchases of investment securities held to maturity                           --                 --                (230)
   Purchases of mortgage-backed securities                                   (88,397)           (10,043)           (63,661)
   Principal repayments of mortgage-backed securities                         68,430             70,203             42,246
   Principal repayments of securities held to maturity                            44                 18                 18
   Principal repayments of securities available for sale                         124                  4                 85
   Loans originated                                                          (82,415)          (105,103)           (57,787)
   Loan principal payments received                                           62,254             71,687             48,560
   Loans purchased                                                              (345)               --                (201)
   Purchases of premises and equipment                                          (376)              (508)              (491)
   Proceeds from sale of premises and equipment                                    2                --                   9
   Proceeds from sale of real estate acquired through foreclosure                 86                316                964
   Net advances on real estate acquired through foreclosure                       (4)               (20)               (30)
--------------------------------------------------------------------------------------------------------------------------
     Net cash (used in) provided by investing activities                     (48,043)            32,543             (5,756)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

(Continued)

28

<PAGE>   17


MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
(In thousands) Years ended December 31,                                         1999               1998               1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                <C>                <C>
Cash flows from financing activities:
   Net (decrease) increase in deposits                                        (6,202)            13,978             (8,523)
   Payments to acquire treasury stock                                         (7,618)            (4,703)            (1,665)
   Issuance of common stock under stock option plan                              351                741                466
   Tax benefit resulting from stock options exercised                             97                329                260
   Cash dividends paid on common stock                                        (3,759)            (3,605)            (3,124)
   Tax benefit resulting from dividends paid on unallocated shares
     held by the ESOP                                                             13                 15                 15
--------------------------------------------------------------------------------------------------------------------------
     Net cash (used in) provided by financing activities                     (17,118)             6,755            (12,571)
--------------------------------------------------------------------------------------------------------------------------
     Net (decrease) increase in cash and cash equivalents                    (33,410)            38,251            (24,359)
Cash and cash equivalents at beginning of year                               154,814            116,563            140,922
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                    $121,404           $154,814           $116,563
--------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash transactions:
   Cash paid during the year for interest                                    $33,204            $34,319            $34,671
   Cash paid during the year for taxes, net of refunds                         7,617              6,185              5,237
   Purchases of securities executed but not settled at beginning of
   year which settled during the year                                            129                 32                --
   Sales of securities executed but not settled at beginning
   of year which settled during the year                                         583                --                 --
Non-cash transactions:
   SFAS 115:
     (Decrease) increase in stockholders' equity                              (9,725)             2,620              5,070
     (Decrease) increase in deferred tax liabilities                          (6,401)             1,688              3,510
     Securities reclassified from available for sale to trading                  --               1,111                --
   Transfers from loans to real estate acquired through foreclosure               58                377                376
   Transfers from loans to other assets                                          --                  56                --
   Transfers from premises and equipment to other assets                         --                   9                --
   Purchases of securities executed but not settled as of year-end               117                129                 32
   Sales of securities executed but not settled as of year-end                   202                583                --
   Cost of donated securities                                                    --                 --                   2
--------------------------------------------------------------------------------------------------------------------------
In connection with the acquisition of Glendale Co-operative Bank in July,
 1997, assets acquired and liabilities assumed  were as follows:

   Assets acquired                                                               --                 --            $ 31,561
   Goodwill                                                                      --                 --               1,530
   Liabilities assumed                                                           --                 --              30,217
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                                                              29


<PAGE>   18


MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
(In thousands except share data) Years ended December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------------------------------------------------
                                                                                       Accumulated      Common
                                                Additional                                   other       stock
                                      Common       paid-in     Retained     Treasury comprehensive    acquired
                                       stock       capital     earnings        stock        income     by ESOP       Total

--------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>          <C>          <C>         <C>            <C>          <C>      <C>
Balance at December 31, 1996          $5,476       $57,858      $65,756     $(39,904)      $4,001       $ (937)  $  92,250
   Net Income                            --            --        10,167          --           --           --       10,167
   Other comprehensive income,
     net of tax: Unrealized
     gains on securities, net of
     reclassification adjustment
     (Note 1)                            --            --           --           --         5,070          --        5,070
   Comprehensive income                  --            --           --           --           --           --       15,237
   Cash dividends declared
     ($0.885 per share)                  --            --        (3,124)         --           --           --       (3,124)
   Tax benefit resulting from
     dividends paid on unallocated
          shares held by the ESOP        --            --            15          --           --           --           15
   Net decrease in liability to ESOP     --            --           --           --           --           156         156
   Amortization of ESOP shares
     committed to be released            --            184          --           --           --           --          184
   Purchase of treasury stock            --            --           --        (1,665)         --           --       (1,665)
   Exercise of stock options and
     related tax benefits                 31           695          --           --           --           --          726
   Transfer resulting from
      four-for-three stock split       1,830           --        (1,830)         --           --           --          --
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997           7,337        58,737       70,984      (41,569)       9,071         (781)    103,779
   Net Income                            --            --        10,914          --           --           --       10,914
   Other comprehensive income,
     net of tax: Unrealized gains on
     securities, net of
     reclassification adjustment
     (Note 1)                            --            --           --           --         2,620          --        2,620
   Comprehensive income                  --            --           --           --           --           --       13,534
   Cash dividends declared
     ($1.02 per share)                   --            --        (3,605)         --           --           --       (3,605)
   Tax benefit resulting from
     dividends paid on unallocated
     shares held by the ESOP             --            --           15          --           --           --           15
   Net decrease in liability to ESOP     --            --           --           --           --           156         156
   Amortization of ESOP shares
     committed to be released            --            243          --           --           --           --          243
   Purchase of treasury stock            --            --           --        (4,703)         --           --       (4,703)
   Exercise of stock options and
     related tax benefits                47          1,023          --           --           --           --        1,070
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998           7,384        60,003       78,308      (46,272)      11,691         (625)    110,489
   Net Income                             --            --       11,311          --           --           --       11,311
   Other comprehensive loss,
          net of tax:
     Unrealized (losses) on
       securities, net of
     reclassification adjustment
              (Note 1)                    --           --           --           --        (9,725)         --       (9,725)
   Comprehensive income                   --            --           --           --           --           --        1,586
   Cash dividends declared
     ($1.11 per share)                    --            --        (3,759)         --           --           --       (3,759)
   Tax benefit resulting from
     dividends paid on unallocated
     shares held by the ESOP              --         --            13          --           --           --           13
   Net decrease in liability to ESOP      --            --           --           --           --           157         157
   Amortization of ESOP shares
     committed to be released             --            163          --           --           --           --          163
   Purchase of treasury stock             --            --           --        (7,618)         --           --       (7,618)
   Exercise of stock options and
     related tax benefits                 23           425          --           --           --           --          448
--------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999          $7,407       $60,591      $85,873     $(53,890)      $1,966        $(468)   $101,479
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.

30


<PAGE>   19

  Massbank Corp. and Subsidiaries

   Notes to Consolidated Financial Statements
   Years ended December 31, 1999, 1998 and 1997

1. Summary of Significant Accounting Policies

   Massbank Corp. (the "Company") is a Delaware chartered holding company whose
   principal subsidiary is Massbank (the "Bank"). The Bank operates fifteen full
   service banking offices in Reading, Melrose, Stoneham, Wilmington, Medford,
   Chelmsford, Tewksbury, Westford, Dracut, Lowell and Everett providing a
   variety of deposit, lending and trust services. As a Massachusetts chartered
   savings bank whose deposits are insured by the Federal Deposit Insurance
   Corporation ("FDIC") and the Depositors Insurance Fund ("DIF"), the
   activities of the Bank are subject to regulation, supervision and examination
   by federal and state regulatory authorities, including, but not limited to
   the FDIC, the Massachusetts Commissioner of Banks and the DIF. In addition,
   as a bank holding company, the Company is subject to supervision, examination
   and regulation by the Board of Governors of the Federal Reserve System.

   Basis of Presentation

   The consolidated financial statements include the accounts of the Company and
   its wholly-owned subsidiary Massbank and its subsidiaries: Readibank
   Properties, Inc., Readibank Investment Corporation and Melbank Investment
   Corporation. The accounts of Massbank's subsidiary, Readibank Equipment
   Corporation, which was sold in October, 1997 are also included through the
   sale date.

           The Company has one reportable operating segment. All significant
   intercompany balances and transactions have been eliminated in consolidation.
   The accounting and reporting policies of the Company conform to generally
   accepted accounting principles and to general practices within the banking
   industry. In preparing the consolidated financial statements, management is
   required to make estimates and assumptions that affect the reported amounts
   of assets and liabilities at the balance sheet date and income and expenses
   for the period. Material estimates that are particularly susceptible to
   change in the near term relate to the determination of the allowance for loan
   losses.

           Certain amounts in the prior years' consolidated financial statements
   were reclassified to permit comparison with the current fiscal year.

   Investments in Debt and Equity Securities

   Under its 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, changes in 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, 1999, stockholders' equity included
   approximately $2.0 million, representing the net unrealized gains on
   securities available for sale, less applicable income taxes. Investments
   classified as trading securities are stated at market value with unrealized
   gains and losses included in earnings.

           Income on debt securities 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."
   When a security suffers a loss in value which is considered other than
   temporary, such loss is recognized by a charge to earnings.

   Loans

   Loans are reported at the principal amount outstanding, net of unearned fees.
   Loan origination fees and related direct incremental loan origination costs
   are offset and the resulting net amount is deferred and amortized over the
   life of the loan using the level-yield method.

           The Bank generally does not accrue interest on loans which are 90
   days or more past due. When a loan is placed on nonaccrual status, all
   interest previously accrued but not collected is reversed from income and all
   amortization of deferred loan fees is discontinued. Interest received on
   nonaccrual loans is either applied against principal or reported as income
   according to management's judgment as to the collectibility of principal.
   Interest accruals are resumed on such loans only when they are brought
   current with respect to interest and principal and when, in the judgment of
   management, the loans are estimated to be fully collectible as to both
   principal and interest.

           Impairment on loans for which it is probable that the creditor will
   be unable to collect all amounts due according to the contractual terms of
   the loan agreement are measured on a discounted cash flow method, or at the
   loan's observable market price, or at the fair value of the collateral if the
   loan is collateral dependent. However, impairment must be measured based on
   the fair value of the collateral if it is determined that foreclosure is
   probable. Impaired loans consist of all nonaccrual commercial loans.


                                                                              31
<PAGE>   20

1. Summary of Significant Accounting Policies (continued)

   Allowance for Loan Losses

   The Company maintains an allowance for probable losses that are inherent in
   the Company's loan portfolio. The allowance for loan losses is increased by
   provisions charged to operations based on management's assessment of many
   factors including the risk characteristics of the portfolio, underlying
   collateral, current and anticipated economic conditions that may affect the
   borrower's 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.

   Premises and Equipment

   Land is carried at cost. Premises, equipment and leasehold improvements are
   stated at cost, less accumulated depreciation and amortization computed
   primarily by use of the straight-line method over the estimated useful lives
   of the related assets or terms of the related leases.

   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.

   Goodwill

   The excess of purchase price over the fair value of net assets of acquired
   companies is classified and reported as goodwill. Goodwill is being amortized
   using the straight-line method, over 15 years.

   Deposit Acquisition Premium

   The deposit acquisition premium arising from acquisitions is reported net of
   accumulated amortization. Such premium is being amortized on a straight-line
   basis over 10 years.

   Pension Plan

   The Bank accounts for pension benefits on the net periodic pension cost
   method for financial reporting purposes. This method recognizes the
   compensation cost of an employee's pension benefit over that employee's
   approximate service period. Pension costs are funded in the year of accrual
   using the aggregate cost method.

   Employees' Stock Ownership Plan ("ESOP")

   The Company recognizes compensation cost equal to the fair value of the ESOP
   shares committed to be released. Dividends on unallocated ESOP shares are
   reported as a reduction of accrued interest on the ESOP loan. The Company
   reports loans from outside lenders to its ESOP as a liability on its balance
   sheet and reports interest cost on the debt. For earnings per share (EPS)
   computations, ESOP shares that have been committed to be released are
   considered outstanding. ESOP shares that have not been committed to be
   released are not considered outstanding.

   Stock-Based Compensation

   On January 1, 1996, the Company adopted Statement of Financial Accounting
   Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The
   Statement establishes financial accounting and reporting standards for
   stock-based compensation plans. SFAS No. 123 encourages, but does not
   require, a fair value based method of accounting for stock-based compensation
   plans. The Statement allows an entity to continue to measure compensation
   cost for those plans using the intrinsic value based method prescribed by
   Accounting Principles Board ("APB") Opinion No. 25. For those entities
   electing to use the intrinsic value based method, SFAS No. 123 requires pro
   forma disclosures of net income and earnings per share computed as if the
   fair value based method had been applied. The Company continues to account
   for stock-based compensation costs under APB Opinion No. 25.


   32


<PAGE>   21

      1.      Summary of Significant Accounting Policies (continued)

      Earnings Per Common Share

           Basic EPS excludes the dilutive effect of common stock equivalents.
      Diluted EPS is computed pursuant to APB Opinion No. 15 for all entities
      with complex capital structures.

           For earnings per share computations, ESOP shares that have been
      committed to be released are considered outstanding. ESOP shares that have
      not been committed to be released are not considered outstanding.

      Cash and Cash Equivalents

      For purposes of reporting cash flows, cash and cash equivalents consist of
      cash and due from banks, and short-term investments with original
      maturities of less than 90 days.

           As a regulated financial institution, the Bank is required to
      maintain certain reserve requirements of vault cash and/or deposits with
      the Federal Reserve Bank of Boston. At December 31, 1999 vault cash and/or
      deposits with the Federal Reserve Bank of Boston included in "Cash and Due
      from Banks," rose to $7.4 million, temporarily exceeding reserve
      requirements. The increase was due to the extra vault cash maintained by
      the Bank at the end of 1999 as part of its year 2000 preparedness efforts.

      Income Taxes

      The Bank recognizes income taxes under the asset and liability method.
      Under this method, deferred tax assets and liabilities are established for
      the temporary differences between the accounting basis and the tax basis
      of the Bank's assets and liabilities at enacted tax rates expected to be
      in effect when the amounts related to such temporary differences are
      realized or settled. The Bank's deferred tax asset is reviewed and
      adjustments to such asset are recognized as deferred income tax expense or
      benefit based upon management's judgment relating to the realizability of
      such asset. Based on the Bank's historical and current pretax earnings,
      management believes it is more likely than not that the Bank will realize
      its existing gross deferred tax asset.

      Comprehensive Income

      Comprehensive income is defined as "the change in equity of a business
      enterprise during a period from transactions and other events and
      circumstances from non-owner sources." It includes all changes in equity
      during a period except those resulting from investments by and
      distributions to shareholders. The term "comprehensive income" describes
      the total of all components of comprehensive income including net income.

           The Company's other comprehensive income and related tax effect for
      the year ended December 31, 1999 and the year ended December 31, 1998 is
      as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
      (In thousands) Years ended December 31,                    1999                                         1998
-----------------------------------------------------------------------------------------------------------------------------------
                                                                     Tax        Net-                             Tax          Net-
                                                   Before-Tax    (Expense)      of-Tax        Before-Tax     (Expense)        of-Tax
                                                      Amount   or Benefit      Amount            Amount    or Benefit        Amount

<S>                                                <C>             <C>       <C>                 <C>         <C>            <C>
      Unrealized gains (losses) on securities:

        Unrealized holding gains (losses)
           arising during period                   $(12,171)       $4,716    $(7,455)            $7,106      $(2,864)       $ 4,242
        Less: reclassification adjustment
            for gains realized in
                net income                           (3,954)        1,684     (2,270)            (2,798)       1,176        (1,622)
-----------------------------------------------------------------------------------------------------------------------------------
        Net unrealized gains (losses)               (16,125)        6,400     (9,725)             4,308       (1,688)         2,620
-----------------------------------------------------------------------------------------------------------------------------------
        Other comprehensive income (loss)          $(16,125)       $6,400    $(9,725)           $ 4,308      $(1,688)       $ 2,620
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                              33


<PAGE>   22

      2. SHORT-TERM INVESTMENTS

         Short-term investments consist of the following:

<TABLE>
<CAPTION>

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

         (IN THOUSANDS) AT DECEMBER 31,                                                              1999                 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>                   <C>
      Federal funds sold (overnight)                                                              $  86,211             $123,207
      Money market funds                                                                             24,717               24,569
-----------------------------------------------------------------------------------------------------------------------------------
              Total short-term investments                                                         $110,928             $147,776
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

      The investments above are stated at cost which approximates market value.

3.    INVESTMENT SECURITIES

      The amortized cost and market value of investment securities follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                    Gross              Gross
                                                            Amortized          Unrealized         Unrealized              Market
      (IN THOUSANDS) AT DECEMBER 31, 1999                        Cost               Gains             Losses               Value
-----------------------------------------------------------------------------------------------------------------------------------

<S>                                                       <C>               <C>                   <C>                  <C>
      Securities held to maturity:
         Other bonds and obligations                      $       230         $      --             $   --                $ 230
-----------------------------------------------------------------------------------------------------------------------------------

              Total securities held to maturity                   230                --                 --                  230
-----------------------------------------------------------------------------------------------------------------------------------

      Securities available for sale:
         Debt securities:
           U.S. Treasury obligations                          138,518                 122             (1,025)            137,615
           U.S. Government agency obligations                  16,143                --                 (128)             16,015
-----------------------------------------------------------------------------------------------------------------------------------
              Total                                           154,661                 122             (1,153)            153,630
-----------------------------------------------------------------------------------------------------------------------------------
           Mortgage-backed securities:
              Government National Mortgage Association         38,061                 251               (490)             37,822
              Federal Home Loan Mortgage Corporation          239,607                 311             (4,028)            235,890
              Federal National Mortgage Association             3,951                  74                (45)              3,980
              Collateralized mortgage obligations               4,649                  16                (22)              4,643
-----------------------------------------------------------------------------------------------------------------------------------
              Total mortgage-backed securities                286,268                 652             (4,585)            282,335
-----------------------------------------------------------------------------------------------------------------------------------
              Total debt securities                           440,929                 774             (5,738)            435,965
-----------------------------------------------------------------------------------------------------------------------------------
         Equity securities                                     12,915               8,985               (363)             21,537
-----------------------------------------------------------------------------------------------------------------------------------
              Total securities available for sale             453,844              $9,759            $(6,101)           $457,502
-----------------------------------------------------------------------------------------------------------------------------------
         Net unrealized gains on securities
           available for sale                                   3,658
-----------------------------------------------------------------------------------------------------------------------------------
              Total securities available for sale, net        457,502
-----------------------------------------------------------------------------------------------------------------------------------
              Total investment securities, net               $457,732
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


34


<PAGE>   23

     3. INVESTMENT SECURITIES (continued)

      The amortized cost and market value of investment securities follows:

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------
                                                                                    Gross              Gross
                                                            Amortized          Unrealized         Unrealized              Market
      (IN THOUSANDS) AT DECEMBER 31, 1998                        Cost               Gains             Losses               Value
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                 <C>                   <C>            <C>
      Securities held to maturity:
         Other bonds and obligations                         $    354          $      --              $  --             $    354
-----------------------------------------------------------------------------------------------------------------------------------
              Total securities held to maturity                   354                 --                 --                  354
-----------------------------------------------------------------------------------------------------------------------------------
      Securities available for sale:
         Debt securities:
           U.S. Treasury obligations                          112,627               2,354                --              114,981
           U.S. Government agency obligations                   8,966                  26                --                8,992
-----------------------------------------------------------------------------------------------------------------------------------
              Total                                           121,593               2,380                --              123,973
-----------------------------------------------------------------------------------------------------------------------------------
           Mortgage-backed securities:
              Government National Mortgage Association         48,347               1,517                --               49,864
              Federal Home Loan Mortgage Corporation          205,949               5,116                 (6)            211,059
              Federal National Mortgage Association             4,984                 181                --                5,165
              Collateralized mortgage obligations               6,193                  60                 (3)              6,250
              Other                                               223                  12                --                  235
-----------------------------------------------------------------------------------------------------------------------------------
              Total mortgage-backed securities                265,696               6,886                 (9)            272,573
-----------------------------------------------------------------------------------------------------------------------------------
              Total debt securities                           387,289               9,266                 (9)            396,546
-----------------------------------------------------------------------------------------------------------------------------------
         Equity securities                                     11,054              10,579                (53)             21,580
-----------------------------------------------------------------------------------------------------------------------------------
              Total securities available for sale             398,343             $19,845               $(62)           $418,126
-----------------------------------------------------------------------------------------------------------------------------------
         Net unrealized gains on securities
           available for sale                                  19,783
-----------------------------------------------------------------------------------------------------------------------------------
              Total securities available for sale, net        418,126
-----------------------------------------------------------------------------------------------------------------------------------
              Total investment securities, net               $418,480
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


During the years ended December 31, 1999, 1998 and 1997, the Company realized
gains and losses on sales of securities available for sale as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
      (IN THOUSANDS) AT DECEMBER 31,                                 1999                   1998                    1997
                                                                   Realized               Realized                 Realized
-----------------------------------------------------------------------------------------------------------------------------------
                                                              Gains       Losses      Gains      Losses        Gains     Losses
-----------------------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>           <C>          <C>       <C>            <C>           <C>
      U.S. Treasury obligations                           $       2     $   (576)   $   180   $     --       $    38       $ (35)
      Mortgage-backed securities                                --           --         --          --           --        (301)
      Marketable equity securities                            5,099         (571)     3,577        (959)       2,201         (96)
      Other equity securities                                   --           --         --          --            25         --
-----------------------------------------------------------------------------------------------------------------------------------
              Total realized gains (losses)                  $5,101      $(1,147)    $3,757       $(959)      $2,264       $(432)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Proceeds from sales of debt securities available for sale during 1999, 1998 and
1997 were $48.4 million, $13.1 million and $34.1 million, respectively. Proceeds
from sales of equity securities available for sale during 1999, 1998 and 1997,
were $24.1 million, $13.7 million and $8.6 million, respectively.

      There were no sales of investment securities held-to-maturity during 1999,
1998 and 1997.


                                                                              35


<PAGE>   24

3. INVESTMENT SECURITIES (continued)

      The amortized cost and market value of debt securities held to maturity
      and debt securities available for sale by contractual maturity are
      as follows:

<TABLE>
<CAPTION>


-----------------------------------------------------------------------------------------------------------------------------------
      (IN THOUSANDS) AT DECEMBER 31,                                      1999                                   1998
-----------------------------------------------------------------------------------------------------------------------------------
                                                           AMORTIZED              MARKET          AMORTIZED              MARKET
                                                                 COST               VALUE               COST               VALUE
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                 <C>                <C>                 <C>
      Investment securities held to maturity:
         Other bonds and obligations:
           Maturing after 1 year but within 5 years          $    230            $    230           $    230            $    230
           Maturing after 5 years but within 10 years             --                  --                  82                  82
           Maturing after 10 years but within 15 years            --                  --                  42                  42
-----------------------------------------------------------------------------------------------------------------------------------
              Total debt securities held to maturity              230                 230                354                 354
===================================================================================================================================
      Investment securities available for sale:
         U.S. Treasury obligations:
           Maturing within 1 year                              52,845              52,825             50,876              51,260
           Maturing after 1 year but within 5 years            82,707              81,919             58,790              60,557
           Maturing after 5 years but within 10 years           2,966               2,871              2,961               3,164
-----------------------------------------------------------------------------------------------------------------------------------
              Total                                           138,518             137,615            112,627             114,981
-----------------------------------------------------------------------------------------------------------------------------------

         U.S. Government agency obligations:
           Maturing within 1 year                               6,992               6,971              2,000               2,006
           Maturing after 1 year but within 5 years             9,000               8,899              6,771               6,788
           Maturing after 15 years                                151                 145                195                 198
-----------------------------------------------------------------------------------------------------------------------------------
              Total                                            16,143              16,015              8,966               8,992
-----------------------------------------------------------------------------------------------------------------------------------

         Mortgage-backed securities:
           Maturing within 1 year                                 523                 518                371                 367
           Maturing after 1 year but within 5 years             3,869               3,922              6,014               6,155
           Maturing after 5 years but within 10 years          56,571              56,227             35,087              36,073
           Maturing after 10 years but within 15 years        221,202             217,629            219,579             225,298
           Maturing after 15 years                              4,103               4,039              4,645               4,680
-----------------------------------------------------------------------------------------------------------------------------------
              Total                                           286,268             282,335            265,696             272,573
-----------------------------------------------------------------------------------------------------------------------------------
              Total debt securities available for sale        440,929             435,965            387,289             396,546
===================================================================================================================================
         Net unrealized gains on debt securities
           available for sale                                  (4,964)                --               9,257                 --
-----------------------------------------------------------------------------------------------------------------------------------
              Total debt securities available for sale,
                 net carrying value                          $435,965            $435,965           $396,546            $396,546

===================================================================================================================================
</TABLE>

      Maturities of mortgage-backed securities are based on contractual
      maturities. Actual maturities will differ from contractual maturities due
      to scheduled amortization and prepayments.


36

<PAGE>   25
4.   TRADING SECURITIES

     The amortized cost and market values of trading securities are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31,              1999                   1998
--------------------------------------------------------------------------------
                                    AMORTIZED   MARKET    AMORTIZED    MARKET
                                         COST    VALUE         COST     VALUE
--------------------------------------------------------------------------------
<S>                                  <C>        <C>        <C>         <C>
U.S. Treasury obligations            $4,960     $4,956     $29,690     $29,707
Investments in mutual funds           1,112      1,086       1,112       1,086
--------------------------------------------------------------------------------
        Total trading securities     $6,072     $6,042     $30,802     $30,793
================================================================================
</TABLE>

     During the years ended December 31, 1999, 1998 and 1997, the Company
     realized gains and losses on sales of trading securities as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31,           1999                  1998                   1997
----------------------------------------------------------------------------------------------------------
                                                REALIZED              REALIZED               REALIZED
                                            GAINS     LOSSES       GAINS     LOSSES      GAINS     LOSSES
----------------------------------------------------------------------------------------------------------
<S>                                         <C>       <C>          <C>       <C>         <C>       <C>
U.S. Treasury obligations                   $  4       $(11)       $ 48       $ --        $22       $ --
Investments in mutual funds                   --         --          11        (35)        --        (33)
Marketable equity securities                 132        (25)         55        (20)        46         --
----------------------------------------------------------------------------------------------------------
        Total realized gains (losses)       $136       $(36)       $114       $(55)       $68       $(33)
==========================================================================================================
</TABLE>

     Proceeds from sales of trading securities during 1999, 1998 and 1997 were
     $13.8 million, $50.2 million and $16.3 million, respectively. Unrealized
     gains or (losses) included in income in 1999, 1998 and 1997 were $(21)
     thousand, $36 thousand and $73 thousand, respectively.

5.   LOANS

     The Bank's lending activities are conducted principally in the local
     communities in which it operates banking offices, and to a lesser extent,
     in selected areas of Massachusetts and southern New Hampshire.

          The Bank offers single family and multi-family residential mortgage
     loans and a variety of consumer loans. The Bank also offers mortgage loans
     secured by commercial or investment property such as apartment buildings
     and commercial or corporate facilities; loans for the construction of
     residential homes, multi-family properties and for land development; and
     business loans for other commercial purposes. Most loans granted by the
     Bank are either collateralized by real estate or guaranteed by federal or
     local governmental authorities. The ability of single family residential
     and consumer borrowers to honor their repayment commitments is generally
     dependent on the level of overall economic activity within the borrowers'
     geographic areas. The ability of commercial real estate and commercial loan
     borrowers to honor their repayment commitments is generally dependent on
     the economic health of the real estate sector in the borrowers' geographic
     areas and the overall economy.


                                                                              37
<PAGE>   26
5.   LOANS (continued)

     The composition of the Bank's loan portfolio is summarized as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31,                           1999             1998
----------------------------------------------------------------------------------
<S>                                                    <C>              <C>
MORTGAGE LOANS:
   Residential:
     Conventional:
        Fixed rate                                     $ 247,512        $ 237,979
        Variable rate                                     38,917           42,702
     FHA and VA                                              740            1,181
   Commercial                                              2,471            2,257
   Construction                                              232              730
----------------------------------------------------------------------------------
         Total mortgage loans                            289,872          284,849
   Add: premium on loans                                     159              259
   Less: deferred mortgage loan origination fees          (1,451)          (1,454)
----------------------------------------------------------------------------------
         Mortgage loans, net                             288,580          283,654
----------------------------------------------------------------------------------
OTHER LOANS:
   Consumer:
     Installment                                           1,418            1,547
     Guaranteed education                                  7,037            7,967
     Other secured                                         1,318            1,366
     Home equity lines of credit                          11,737           10,159
     Unsecured                                               225              235
----------------------------------------------------------------------------------
         Total consumer loans                             21,735           21,274
   Commercial                                             15,050               61
----------------------------------------------------------------------------------
         Total other loans                                36,785           21,335
----------------------------------------------------------------------------------
         Total loans                                   $ 325,365        $ 304,989
==================================================================================
</TABLE>

     In the ordinary course of business, the Bank makes loans to its directors,
     officers and their associates and affiliated companies ("related parties")
     at substantially the same terms as those prevailing at the time of
     origination for comparable transactions with unrelated borrowers. An
     analysis of total related party loans for the year ended December 31, 1999
     follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
(IN THOUSANDS)
---------------------------------------------------------------------------------
<S>                                                                         <C>
Balance at December 31, 1998                                                $562
Additions                                                                    168
Repayments                                                                  (117)
---------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999                                                $613
=================================================================================
</TABLE>


38
<PAGE>   27
6.   ALLOWANCE FOR LOAN LOSSES

     An analysis of the activity in the allowance for loan losses is as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31,            1999           1998           1997
---------------------------------------------------------------------------------------
<S>                                              <C>            <C>            <C>
Balance at beginning of year                     $ 2,450        $ 2,334        $ 2,237
Glendale Co-operative Bank acquisition                --             --            105
Provision for loan losses                            140            193            260
Recoveries of loans previously charged-off            41             26             59
---------------------------------------------------------------------------------------
     Total                                         2,631          2,553          2,661
---------------------------------------------------------------------------------------
LESS CHARGE-OFFS:
   Mortgage loans                                    (62)           (81)          (221)
   Other loans                                       (14)           (22)          (106)
---------------------------------------------------------------------------------------
Balance at end of year                           $ 2,555        $ 2,450        $ 2,334
=======================================================================================
</TABLE>

     The following table shows the allocation of the allowance for loan losses
     by category of loans at December 31, 1999, 1998 and 1997.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31,          1999                    1998                    1997
----------------------------------------------------------------------------------------------------
                                          PERCENTAGE              PERCENTAGE              PERCENTAGE
                                            OF LOANS                OF LOANS                OF LOANS
                                AMOUNT      TO TOTAL     AMOUNT     TO TOTAL     AMOUNT     TO TOTAL
----------------------------------------------------------------------------------------------------
<S>                             <C>       <C>            <C>      <C>            <C>      <C>
MORTGAGE LOANS:
   Residential                   $1,535        88%       $1,786        92%       $1,544        90%
   Commercial                         7         1             2         1            12         1
Consumer loans                      215         7           153         7           160         9
Commercial loans                    301         4            25        --            --        --
Unallocated                         497        --           484        --           618        --
----------------------------------------------------------------------------------------------------
       Total                     $2,555       100%       $2,450       100%       $2,334       100%
====================================================================================================
</TABLE>

7.   NON-PERFORMING ASSETS

     The following schedule summarizes non-performing assets at the dates shown:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31,                         1999          1998        1997
---------------------------------------------------------------------------------------
<S>                                                   <C>          <C>         <C>
Total nonaccrual loans                                $ 795        $ 1,004     $ 1,771
Total real estate acquired through foreclosure           62             86          --
---------------------------------------------------------------------------------------
     Total non-performing assets                      $ 857        $ 1,090     $ 1,771
=======================================================================================
Percent of non-performing loans to total loans         0.24%          0.33%       0.65%
Percent of non-performing assets to total assets       0.09%          0.12%       0.19%
</TABLE>

     The reduction in interest income associated with nonaccrual loans is as
     follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31,                                 1999      1998       1997
-------------------------------------------------------------------------------------------------
<S>                                                                      <C>       <C>       <C>
Interest income that would have been recorded under original terms       $64       $84       $163
Interest income actually recorded                                         51        61         97
-------------------------------------------------------------------------------------------------
Reduction in interest income                                             $13       $23       $ 66
=================================================================================================
</TABLE>

      During 1999, 1998 and 1997 the Company had no impaired loans.


                                                                              39
<PAGE>   28
8.   FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

     The Bank is party to financial instruments with off-balance sheet risk in
     the normal course of business to meet the financing needs of its customers
     and to reduce its own exposure to fluctuations in interest rates. These
     financial instruments include commitments to extend credit and involve, to
     varying degrees, elements of credit risk in excess of the amount recognized
     in the consolidated balance sheet. The contract or notional amounts reflect
     the extent of involvement the Bank has in particular classes of these
     instruments. The Bank's exposure to credit loss in the event of
     nonperformance by the other party to the financial instrument is
     represented by the contractual or notional amount of those instruments. The
     Bank uses the same credit policies in making commitments and conditional
     obligations as it does for on-balance sheet instruments.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                               CONTRACT OR NOTIONAL AMOUNT
(IN THOUSANDS) AT DECEMBER 31,                                                       1999          1998
----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>
Financial instruments whose contract amounts represent credit risk:
   Commitments to originate residential mortgage loans                            $ 2,829       $ 7,941
   Unadvanced portions of construction loans                                           65           281
   Unused credit lines, including unused portions of equity lines of credit        31,693        29,163
==========================================================================================================
</TABLE>

     Commitments to extend credit are agreements to lend to a customer as long
     as there is no violation of any condition established in the contract.
     Commitments generally have fixed expiration dates or other termination
     clauses and may require payment of a fee by the customer. Since many of the
     commitments are expected to expire without being drawn upon, the total
     commitment amounts do not necessarily represent future cash requirements.
     The Bank evaluates each customer's credit-worthiness on a case-by-case
     basis. The amount of collateral obtained, if any, is based on management's
     credit evaluation of the borrower.

9.   PREMISES AND EQUIPMENT

     A summary of premises and equipment and their estimated useful lives used
     for depreciation purposes is as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                                                                  ESTIMATED
                                                                                 USEFUL LIFE
(IN THOUSANDS) AT DECEMBER 31,                          1999          1998        (IN YEARS)
--------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>          <C>
Premises:
   Land                                               $ 1,227       $ 1,227            --
   Buildings                                            3,637         3,637        25--45
   Building and leasehold improvements                  2,030         1,937          1-20
Equipment                                               3,889         3,606          1-30
--------------------------------------------------------------------------------------------
                                                       10,783        10,407
Less: accumulated depreciation and amortization         6,656         6,087
--------------------------------------------------------------------------------------------
    Total premises and equipment, net                 $ 4,127       $ 4,320
============================================================================================
</TABLE>

     The Bank is obligated under a number of noncancelable operating leases for
     various banking offices. These operating leases expire at various dates
     through 2006 with options for renewal. Rental expenses for the years ended
     December 31, 1999, 1998 and 1997 amounted to $521 thousand, $518 thousand
     and $522 thousand, respectively.

          The minimum rental commitments, with initial or remaining terms of one
     year or more exclusive of operating costs and real estate taxes to be paid
     by the Bank under these leases, as of December 31, 1999, are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
      (IN THOUSANDS) YEARS ENDING DECEMBER 31,                  PAYMENTS
--------------------------------------------------------------------------------
<S>                                                             <C>
      2000                                                          $264
      2001                                                           258
      2002                                                           166
      2003                                                           109
      2004                                                            39
      Later years                                                     59
--------------------------------------------------------------------------------
          Total                                                     $895
================================================================================
</TABLE>


40
<PAGE>   29
10.  DEPOSITS

     Deposits are summarized as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31,                                   1999                        1998
---------------------------------------------------------------------------------------------------------
                                                         AMOUNT        RATE           AMOUNT        RATE
---------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>          <C>             <C>
Demand and NOW:
   NOW accounts                                        $  48,422       0.98%        $  52,324       1.16%
   Demand accounts                                        24,516         --            23,849         --
---------------------------------------------------------------------------------------------------------
     Total demand and NOW                                 72,938       0.65            76,173       0.80
---------------------------------------------------------------------------------------------------------
Savings:
   Regular savings and special notice accounts           333,535       3.45           326,192       3.46
   Money market accounts                                  19,555       2.97            21,857       2.99
---------------------------------------------------------------------------------------------------------
     Total savings                                       353,090       3.42           348,049       3.43
---------------------------------------------------------------------------------------------------------
Time certificates:
   Fixed rate certificates                               302,423       4.98           318,491       5.23
   Variable rate certificates                             90,093       6.56            82,033       5.88
---------------------------------------------------------------------------------------------------------
     Total time certificates                             392,516       5.35           400,524       5.36
---------------------------------------------------------------------------------------------------------
Deposit acquisition premium, net of amortization            (487)        --              (715)        --
---------------------------------------------------------------------------------------------------------
     Total deposits                                    $ 818,057       4.10%        $ 824,031       4.13%
=========================================================================================================
</TABLE>

     The maturity distribution and related rate structure of the Bank's time
     certificates at December 31, 1999 follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31,                                 1999
--------------------------------------------------------------------------------
                                                                         AVERAGE
                                                    AMOUNT         INTEREST RATE
--------------------------------------------------------------------------------
<S>                                               <C>              <C>
Due within 3 months                               $101,126                 5.06%
Due within 3 - 6 months                             88,156                 5.08
Due within 6 - 12 months                            76,848                 5.27
Due within 1 - 2 years                              84,527                 5.60
Due within 2 - 3 years                              39,264                 6.28
Due within 3 - 5 years                               2,152                 5.10
Thereafter                                             443                 5.12
--------------------------------------------------------------------------------
    Total                                         $392,516                 5.35%
================================================================================
</TABLE>

     At December 31, the Bank had individual time certificates of deposit of
     $100 thousand or more maturing as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31,                       1999                  1998
--------------------------------------------------------------------------------
<S>                                               <C>                   <C>
Due within 3 months                               $19,152               $24,283
Due within 3 - 6 months                            12,615                13,338
Due within 6 - 12 months                           16,393                15,511
Due within 1 - 2 years                             15,309                16,997
Due within 2 - 3 years                              9,760                 6,759
Due within 3 - 5 years                                223                   100
Thereafter                                            270                   --
--------------------------------------------------------------------------------
    Total                                         $73,722               $76,988
================================================================================
</TABLE>


                                                                              41
<PAGE>   30
11.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
     requires that the Bank disclose estimated fair values for its financial
     instruments. Fair value estimates, methods, and assumptions are set forth
     below for the Bank's financial instruments.

     CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS AND ACCRUED INTEREST
     RECEIVABLE

     The carrying amounts for these financial instruments approximate fair value
     because of the short-term nature of these financial instruments.

     INTEREST-BEARING DEPOSITS IN BANKS AND TERM FEDERAL FUNDS SOLD

     The carrying amounts of the interest-bearing deposits in banks and term
     federal funds sold reported in the balance sheet at December 31, 1999 and
     1998 approximate fair value.

     SECURITIES

     The fair value of investment securities is estimated based on bid prices
     published in financial newspapers or bid quotations received from
     securities dealers.

          Statement 107 specifies that fair values should be calculated based on
     the value of one unit without regard to any premium or discount that may
     result from concentrations of ownership of a financial instrument, possible
     tax ramifications, or estimated transaction costs.

          The carrying amount and estimated fair values of the Company's
     investment securities are as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31,                1999                          1998
-----------------------------------------------------------------------------------------
                                    CARRYING     CALCULATED       CARRYING     CALCULATED
                                      AMOUNT     FAIR VALUE         AMOUNT     FAIR VALUE
-----------------------------------------------------------------------------------------
<S>                                 <C>          <C>              <C>          <C>
Securities held to maturity         $    230       $    230       $    354       $    354
Securities available for sale        457,502        457,502        418,126        418,126
Trading securities                     6,042          6,042         30,793         30,793
-----------------------------------------------------------------------------------------
     Total securities               $463,774       $463,774       $449,273       $449,273
=========================================================================================
</TABLE>

     LOANS

     Fair values are estimated for portfolios of loans with similar financial
     characteristics. Loans are segregated by type such as residential mortgage,
     commercial real estate, consumer and commercial.

          The fair values of residential and commercial real estate, and certain
     consumer loans are calculated by discounting scheduled cash flows through
     the estimated maturity using estimated market discount rates that reflect
     the credit and interest rate risk inherent in the loan. The estimate of
     maturity is based on the Bank's historical experience with repayments for
     each loan classification, modified, as required, by an estimate of the
     effect of current economic and lending conditions. For variable rate
     commercial loans and certain variable rate consumer loans, including home
     equity lines of credit, carrying value approximates fair value. Assumptions
     regarding credit risk, cash flows, and discount rates are judgmentally
     determined using available market information.

          The following table presents information for loans:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31,                   1999                            1998
-----------------------------------------------------------------------------------------------
                                       CARRYING      CALCULATED        CARRYING      CALCULATED
                                         AMOUNT      FAIR VALUE          AMOUNT      FAIR VALUE
-----------------------------------------------------------------------------------------------
<S>                                   <C>            <C>              <C>            <C>
Real estate:
   Residential:
     Variable                         $  38,844        $ 38,259       $  42,617        $ 43,142
     Fixed                              247,273         243,483         238,787         245,858
   Commercial:
     Variable                             2,463           2,454           2,243           2,267
     Fixed                                   --              --               7               7
Consumer                                 21,735          21,899          21,274          21,503
Commercial                               15,050          15,050              61              61
-----------------------------------------------------------------------------------------------
     Total loans                        325,365         321,145         304,989         312,838
Less: allowance for loan losses          (2,555)             --          (2,450)             --
-----------------------------------------------------------------------------------------------
     Net loans                        $ 322,810        $321,145       $ 302,539        $312,838
===============================================================================================
</TABLE>


42
<PAGE>   31
11.  FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

     DEPOSITS

     Under Statement 107, the fair value of deposits with no stated maturity,
     such as demand deposits, NOW accounts, regular savings and special notice
     accounts, and money market accounts, is equal to the amount payable on
     demand as of December 31, 1999 and 1998. The fair value of certificates of
     deposit is based on the discounted value of contractual cash flows. The
     discount rate is estimated using the rates currently offered for deposits
     of similar remaining maturities.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AT DECEMBER 31,                                    1999                            1998
----------------------------------------------------------------------------------------------------------------
                                                        CARRYING       ESTIMATED         CARRYING      ESTIMATED
                                                          AMOUNT      FAIR VALUE           AMOUNT     FAIR VALUE
----------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>              <C>            <C>
Demand accounts                                        $  24,516        $ 24,516       $  23,849        $ 23,849
NOW accounts                                              48,422          48,422          52,324          52,324
Regular savings and special notice accounts              333,535         333,535         326,192         326,192
Money market accounts                                     19,555          19,555          21,857          21,857
Time certificates                                        392,516         392,158         400,524         402,040
Deposit acquisition premium, net of amortization            (487)             --            (715)             --
----------------------------------------------------------------------------------------------------------------
     Total deposits                                      818,057         818,186         824,031         826,262
Escrow deposits of borrowers                               1,477           1,477           1,438           1,438
----------------------------------------------------------------------------------------------------------------
     Total                                             $ 819,534        $819,663       $ 825,469        $827,700
</TABLE>

     The fair value estimates and the carrying amounts above do not include the
     benefit that results from the low-cost funding provided by the deposit
     liabilities compared to the cost of borrowing funds in the market.

     COMMITMENTS TO EXTEND CREDIT

     The fair value of commitments to extend credit is estimated using the fees
     currently charged to enter into similar agreements, taking into account the
     remaining terms of the agreements and the present creditworthiness of the
     counterparties. For fixed rate loan commitments, fair value also considers
     the difference between current levels of interest rates and the committed
     rates.

          The Bank estimates the fair value of the cost to terminate commitments
     to advance funds on construction loans and for residential mortgage loans
     in the pipeline at December 31, 1999 and 1998 to be immaterial. Unused
     credit lines, including unused portions of equity lines of credit, are at
     floating interest rates and therefore there is no fair value adjustment.

     LIMITATIONS

     Fair value estimates are made at a specific point in time, based on
     relevant market information and information about the financial instrument.
     These estimates do not reflect any premium or discount that could result
     from offering for sale at one time the Bank's entire holdings of a
     particular financial instrument. Because no active market exists for a
     portion of the Bank's financial instruments, fair value estimates are based
     on judgments regarding future expected loss experience, current economic
     conditions, risk characteristics of various financial instruments and other
     factors. These estimates are subjective in nature and involve uncertainties
     and matters of significant judgment and therefore cannot be determined with
     precision. Changes in assumptions could significantly affect the estimates.

          Fair value estimates are based on existing on and off-balance sheet
     financial instruments without attempting to estimate the value of
     anticipated future business and the value of assets and liabilities that
     are not considered financial instruments. For example, the Bank has a trust
     department that contributes fee income annually. The trust department is
     not considered a financial instrument, and its value has not been
     incorporated into the fair value estimates. Other significant assets and
     liabilities that are not considered financial assets or liabilities include
     deferred tax liabilities, premises and equipment and goodwill. In addition,
     the tax ramifications related to the realization of the unrealized gains
     and losses can have a significant effect on fair value estimates and have
     not been considered in any of the estimates.


                                                                              43
<PAGE>   32
12.  INCOME TAXES

     Income tax expense (benefit) was allocated as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31,           1999           1998           1997
---------------------------------------------------------------------------------------
<S>                                             <C>            <C>            <C>
Current income tax expense:
   Federal                                      $ 6,134        $ 5,565        $ 5,096
   State                                            574            771          1,034
---------------------------------------------------------------------------------------
     Total current tax expense                    6,708          6,336          6,130
---------------------------------------------------------------------------------------
Deferred income tax expense (benefit):
   Federal                                         (121)           110           (102)
   State                                            (40)            40            (26)
   Change in valuation reserve                       --             (4)            (4)
---------------------------------------------------------------------------------------
     Total deferred tax expense (benefit)          (161)           146           (132)
---------------------------------------------------------------------------------------
     Total income tax expense                   $ 6,547        $ 6,482        $ 5,998
=======================================================================================
</TABLE>

     Income tax expense attributable to income from operations for the years
     ended December 31, differed from the amounts computed by applying the
     federal income tax rate of 35 percent as a result of the following:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31,                           1999            1998            1997
-------------------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>             <C>
Computed "expected" income tax expense at statutory rate       $ 6,250         $ 6,089         $ 5,658
Increase (reduction) in income taxes resulting from:
   State and local income taxes, net of federal benefit            347             527             656
   Dividends received deduction                                    (79)            (87)            (95)
   Other                                                            29             (43)           (217)
   Change in valuation reserve                                      --              (4)             (4)
-------------------------------------------------------------------------------------------------------
Income tax expense                                             $ 6,547         $ 6,482         $ 5,998
-------------------------------------------------------------------------------------------------------
Effective income tax rate                                        36.66%          37.26%          37.10%
=======================================================================================================
</TABLE>


44
<PAGE>   33
12.  INCOME TAXES (continued)

     At December 31, 1999 and 1998, the Bank had gross deferred tax assets and
     gross deferred tax liabilities as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31,                  1999             1998
--------------------------------------------------------------------------------
<S>                                                     <C>              <C>
Deferred tax assets:
   Loan losses                                          $  609           $  431
   Deferred loan fees, net                                   8              100
   Deferred compensation and pension cost                  502              463
   Depreciation                                             14               33
   Purchase accounting                                     415              419
   Other                                                    41                6
--------------------------------------------------------------------------------
   Gross deferred tax asset                              1,589            1,452
--------------------------------------------------------------------------------
Deferred tax liabilities:
   Valuation of securities                               1,691            8,092
   Other unrealized securities gains                        93              102
   Other                                                     4               19
--------------------------------------------------------------------------------
   Gross deferred tax liability                          1,788            8,213
--------------------------------------------------------------------------------
Net deferred tax liability                              $  199           $6,761
================================================================================
</TABLE>

          Based on the Company's historical and current pretax earnings,
     management believes it is more likely than not that the Company will
     realize the gross deferred tax asset existing at December 31, 1999. The
     primary sources of recovery of the gross federal deferred tax asset are
     federal income taxes paid in 1999, 1998 and 1997 that are available for
     carryback and the expectation that the existing net deductible temporary
     differences will reverse during periods in which the Company generates net
     taxable income. Since there is no carryback provision for state income tax
     purposes, management believes the existing net deductible temporary
     differences which give rise to the gross deferred state income tax asset
     will reverse during periods in which the Company generates net taxable
     income. There can be no assurance, however, that the Company will generate
     any earnings or any specific level of continuing earnings.

          As a result of the Tax Reform Act of 1996, the special tax bad debt
     provisions were amended to eliminate the reserve method. However, the tax
     effect of the pre-1988 bad debt reserve amount of approximately $7.3
     million remains subject to recapture in the event that the Bank pays
     dividends in excess of its reserves and profits.

13.  EARNINGS PER SHARE

     The following is a calculation of earnings per share for the years
     indicated:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                              1999                          1998                          1997
----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA)              BASIC         DILUTED         BASIC         DILUTED         BASIC         DILUTED
----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>            <C>            <C>            <C>            <C>
Net income                                 $    11,311    $    11,311    $    10,914    $    10,914    $    10,167    $    10,167
Average shares outstanding                   3,408,280      3,408,280      3,571,298      3,571,298      3,575,962      3,575,962
Dilutive stock options                              --        104,321             --        147,825             --        138,653
Unallocated Employee Stock
      Ownership Plan ("ESOP") shares
       not committed to be released            (33,657)       (33,657)       (42,481)       (42,481)       (51,305)       (51,305)
----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding          3,374,623      3,478,944      3,528,817      3,676,642      3,524,657      3,663,310
Earnings per share (in dollars)            $      3.35    $      3.25    $      3.09    $      2.97    $      2.88    $      2.97
==================================================================================================================================
</TABLE>


                                                                              45
<PAGE>   34
14.  STOCKHOLDERS' EQUITY

     The Company may not declare or pay cash dividends on its shares of common
     stock if the effect thereof would cause its stockholders' equity to be
     reduced below or to otherwise violate legal or regulatory requirements.
     Substantially all of the Company's retained earnings are unrestricted at
     December 31, 1999.

          The Bank is a Federal Deposit Insurance Corporation insured
     institution subject to the FDIC regulatory capital requirements. The FDIC
     regulations require all FDIC insured institutions to maintain minimum
     levels of Tier I capital. Highly rated banks (i.e., those with a composite
     rating of 1 under the CAMELS rating system) are required to maintain a
     minimum leverage ratio of Tier I capital to total average assets of at
     least 3.00%. An additional 100 to 200 basis points are required for all but
     these most highly rated institutions. The Bank is also required to maintain
     a minimum level of risk-based capital. Under the new risk-based capital
     standards, FDIC insured institutions must maintain a Tier I capital to
     risk-weighted assets ratio of 4.00% and are generally expected to meet a
     minimum total qualifying capital to risk-weighted assets ratio of 8.00%.
     The new risk-based capital guidelines take into consideration risk factors,
     as defined by the regulators, associated with various categories of assets,
     both on and off the balance sheet. Under the guidelines, capital strength
     is measured in two tiers which are used in conjunction with risk adjusted
     assets to determine the risk-based capital ratios. Tier II capital
     components include supplemental capital components such as qualifying
     allowance for loan losses, qualifying subordinated debt and up to 45
     percent of the pretax net unrealized holding gains on certain available for
     sale equity securities. Tier I capital plus the Tier II capital components
     are referred to as total qualifying capital.

          The capital ratios of the Company and its principal subsidiary
     "MASSBANK" set forth below currently exceed the minimum ratios for "well
     capitalized" banks as defined by federal regulators.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)                                                             FOR CAPITAL          TO BE WELL
AT DECEMBER 31, 1999                                   ACTUAL           ADEQUACY PURPOSES      CAPITALIZED(1)
--------------------------------------------------------------------------------------------------------------
                                                 AMOUNT       RATIO     AMOUNT      RATIO    AMOUNT      RATIO
--------------------------------------------------------------------------------------------------------------
<S>                                             <C>          <C>       <C>          <C>     <C>         <C>
TIER I CAPITAL (TO AVERAGE ASSETS):
MASSBANK Corp. (consolidated)                   $ 97,738     10.54%    $ 27,811     3.00%        N/A       --
MASSBANK (the "Bank")                             97,177     10.48       27,811     3.00    $ 46,352     5.00%

TIER I CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated)                     97,738     31.10       12,569     4.00         N/A       --
MASSBANK (the "Bank")                             97,177     30.93       12,567     4.00      18,850     6.00

TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated)                    104,173     33.15       25,138     8.00         N/A       --
MASSBANK (the "Bank")                            103,612     32.98       25,133     8.00      31,417    10.00
=============================================================================================================
</TABLE>

     (1)  This column presents the minimum amounts and ratios that a financial
          institution must have to be categorized as adequately capitalized.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)                                                             FOR CAPITAL           TO BE WELL
AT DECEMBER 31, 1998                                   ACTUAL           ADEQUACY PURPOSES      CAPITALIZED(1)
--------------------------------------------------------------------------------------------------------------
                                                 AMOUNT      RATIO      AMOUNT      RATIO     AMOUNT     RATIO
--------------------------------------------------------------------------------------------------------------
<S>                                             <C>          <C>       <C>          <C>      <C>    <C>
TIER I CAPITAL (TO AVERAGE ASSETS):
MASSBANK Corp. (consolidated)                   $ 96,696     10.61%    $ 27,349     3.00%         N/A      --
MASSBANK (the "Bank")                             94,305     10.34       27,349     3.00     $ 45,583    5.00%

TIER I CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated)                     96,696     32.40       11,936     4.00          N/A      --
MASSBANK (the "Bank")                             94,305     31.59       11,939     4.00       17,909    6.00

TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
MASSBANK Corp. (consolidated)                    103,883     34.81       23,872     8.00          N/A      --
MASSBANK (the "Bank")                            101,492     34.00       23,878     8.00       29,848   10.00
=============================================================================================================
</TABLE>

     (1)  This column presents the minimum amounts and ratios that a financial
          institution must have to be categorized as adequately capitalized.


46
<PAGE>   35
15.  EMPLOYEE BENEFITS

     PENSION PLAN

     The Bank sponsors a noncontributory defined benefit pension plan that
     covers all employees who meet specified age and length of service
     requirements, which is administered by the Savings Banks Employees
     Retirement Association ("SBERA"). The plan provides for benefits to be paid
     to eligible employees at retirement based primarily upon their years of
     service with the Bank and compensation levels near retirement.
     Contributions to the plan reflect benefits attributed to employees' service
     to date, as well as services expected to be earned in the future. Pension
     plan assets consist principally of government and agency securities, equity
     securities (primarily common stocks) and short-term investments.

          The following table sets forth the plan's funded status and amounts
     recognized in the Company's consolidated financial statements for the plan
     years ended October 31, 1999, 1998, and 1997, the plan's latest valuation
     dates:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31,                           1999           1998           1997
-------------------------------------------------------------------------------------------------------
<S>                                                              <C>            <C>            <C>
Actuarial present value of vested benefits                       $ 4,690        $ 4,442        $ 4,028
Total accumulated benefit obligation                               4,724          4,481          4,063
Change in benefit obligation:
   Projected benefit obligation at beginning of year             $ 5,788        $ 4,990        $ 4,287
   Service cost                                                      440            443            367
   Interest cost                                                     375            362            321
   Actuarial loss (gain)                                            (463)           283            221
   Benefits paid                                                    (234)          (290)          (206)
-------------------------------------------------------------------------------------------------------
   Projected benefit obligation at end of year                   $ 5,906        $ 5,788        $ 4,990
-------------------------------------------------------------------------------------------------------
Change in plan assets:
   Fair value of plan assets at beginning of year                $ 6,243        $ 5,810        $ 5,090
   Actual return on plan assets                                    1,166            469            926
   Employer contribution                                              --            254             --
   Benefits paid                                                    (234)          (290)          (206)
-------------------------------------------------------------------------------------------------------
   Fair value of plan assets at end of year                      $ 7,175        $ 6,243        $ 5,810
-------------------------------------------------------------------------------------------------------
   Excess of plan assets over projected benefit obligation       $ 1,269        $   455        $   820
=======================================================================================================
</TABLE>

     Certain changes in the items shown are not recognized as they occur, but
     are amortized systematically over subsequent periods. Unrecognized amounts
     to be amortized and the amounts included in the consolidated balance sheets
     are shown below:

<TABLE>
<S>                                                              <C>            <C>            <C>
Unrecognized net actuarial gain                                  $1,535         $   487        $   886
Transition asset                                                    169             190            211
Accrued benefit cost                                               (435)           (222)          (277)
-------------------------------------------------------------------------------------------------------
Excess of plan assets over projected benefit obligation          $1,269         $   455        $   820
=======================================================================================================
</TABLE>

      Assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows:


<TABLE>
<S>                                                              <C>             <C>            <C>
   Discount rate                                                  7.75%           6.75%          7.25%
   Rate of compensation increase                                  4.50%           4.50%          4.50%
Assumptions used to develop the
net periodic benefit cost data were:
   Discount rate                                                  6.75%           7.25%          7.50%
   Expected return on plan assets                                 8.00%           8.00%          8.00%
   Rate of compensation increase                                  4.00%           4.50%          4.50%
Components of net periodic benefit cost:
   Service cost                                                  $ 440           $ 443          $ 367
   Interest cost                                                   375             362            322
   Expected return on plan assets                                 (499)           (465)          (407)
   Transition obligation                                           (21)            (21)           (21)
   Recognized net actuarial (gain) loss                            (82)           (119)           (84)
-------------------------------------------------------------------------------------------------------
   Net periodic benefit cost                                     $ 213           $ 200          $ 177
=======================================================================================================
</TABLE>


                                                                              47
<PAGE>   36
15.  EMPLOYEE BENEFITS (continued)

     PROFIT SHARING AND INCENTIVE COMPENSATION BONUS PLANS

     The Bank's Profit Sharing and Incentive Compensation Bonus Plans provide
     for payments to employees under certain circumstances based upon a year-end
     measurement of the Company's net income and attainment of individual goals
     and objectives by certain key officers. Payments of $426 thousand, $399
     thousand and $417 thousand were awarded under the plan in 1999, 1998 and
     1997, respectively.

     EMPLOYEE STOCK OWNERSHIP PLAN

     The Bank has an Employees' Stock Ownership Plan ("ESOP") for the benefit of
     each employee who has completed at least 1,000 hours of service with the
     Company in the previous twelve months. Under the plan, the ESOP has
     borrowed funds from a third party bank to invest in the Company's common
     stock. As this obligation will be liquidated primarily through future
     contributions to the ESOP by the Bank, the obligation is reflected as a
     liability of the Company and a reduction of stockholders' equity on the
     consolidated balance sheet. As of December 31, 1999 and 1998, such
     outstanding liabilities totaled $468 thousand and $625 thousand,
     respectively.

          Shares of the Company's common stock purchased with the loan proceeds
     are held in a suspense account. As the loan is repaid, a proportionate
     number of shares are released for allocation to plan participants. The
     shares are allocated to plan participants annually, on a pro rata basis,
     based on compensation.

          The ESOP acquired unallocated shares in 1986 when the plan was first
     established and more recently in 1993. At December 31, 1999, the ESOP held
     26,400 unallocated shares and 129,763 shares which have been allocated to
     participants. The fair value of the unallocated shares at December 31, 1999
     was approximately $779 thousand.

          Dividends on unallocated shares are used to offset a portion of the
     interest paid on the ESOP loan. Dividends on allocated shares held by the
     ESOP are allocated to plan participants proportionately based on the number
     of shares in the participant's allocated account.

          Total compensation and interest expense applicable to the ESOP
     amounted to $366 thousand, $462 thousand and $398 thousand for the years
     ended December 31, 1999, 1998 and 1997, respectively.

     EMPLOYEE AGREEMENTS

     The Bank has entered into employment agreements with certain executive
     officers which provide that the officer will receive a minimum amount of
     annual compensation from the Bank for a specified period. The agreements
     also provide for the continued payment of compensation to the officer for a
     specified period after termination under certain circumstances, including
     if the officer's termination follows a "change of control," generally
     defined to mean a person or group attaining ownership of 25% or more of the
     shares of the Company.

     EXECUTIVE SUPPLEMENTAL RETIREMENT AGREEMENTS

     The Bank maintains executive supplemental retirement agreements for certain
     executive officers. These agreements provide retirement benefits designed
     to supplement benefits available through the Bank's retirement plan for
     employees. Total expenses for benefits payable under the agreements
     amounted to $139 thousand, $105 thousand and $132 thousand in 1999, 1998
     and 1997, respectively.

     STOCK OPTION PLAN

     Effective May 28, 1986, the Board of Directors of the Bank adopted a stock
     option plan for the benefit of its officers and other employees. In
     January, 1991, the plan was amended to authorize the grant of options to
     non-employee Directors of the Company. All but 5 of the 690,000 shares
     reserved for issuance under the plan were issued. On April 19, 1994,
     shareholders approved and the Bank adopted the Company's 1994 Stock
     Incentive Plan. The total number of shares of common stock that can be
     issued under this plan is 360,000 shares. Both incentive stock options and
     non-qualified stock options may be granted under the plans. As of December
     31, 1999, there were 152,010.7 non-qualified stock options and 211,306.6
     incentive stock options granted and outstanding to purchase shares under
     the plans. The maximum option term is ten years. Further stock options may
     be granted pursuant to the 1994 Stock Incentive Plan and will generally
     have an exercise price equal to, or in excess of, the fair market value of
     a share of common stock of the Company on the date the option is granted.


48
<PAGE>   37
15.  EMPLOYEE BENEFITS (continued)

     A summary of the status of the Company's fixed stock option plan as of
     December 31, 1999, 1998 and 1997, and changes during the years ended on
     those dates is presented below:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                       1999                      1998                      1997
---------------------------------------------------------------------------------------------------------------
                                                    WEIGHTED                 WEIGHTED                  WEIGHTED
                                        SHARES      AVERAGE        SHARES     AVERAGE       SHARES      AVERAGE
                                         UNDER     EXERCISE         UNDER    EXERCISE        UNDER     EXERCISE
FIXED OPTIONS                           OPTION        PRICE        OPTION       PRICE       OPTION        PRICE
---------------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>          <C>          <C>         <C>           <C>
Outstanding at beginning of year     347,917.3      $ 20.62       360,200     $ 17.65    347,166.7      $ 15.46
Granted                                 40,000        37.50        35,250       44.25     48,333.3        30.09
Exercised                              (23,100)       15.17       (47,532)      15.59      (35,300)       13.19
Forfeited                               (1,500)       40.88          (0.7)      30.09           --           --
---------------------------------------------------------------------------------------------------------------
Outstanding at end of year           363,317.3      $ 22.74     347,917.3     $ 20.62      360,200      $ 17.65
---------------------------------------------------------------------------------------------------------------
Options exercisable at year-end      363,317.3                  347,917.3                  360,200
===============================================================================================================
</TABLE>

     The following table summarizes information about fixed stock options
     outstanding and exercisable at December 31, 1999:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1999                        OPTIONS OUTSTANDING                         OPTIONS EXERCISABLE
--------------------------------------------------------------------------------------------------------------------
                                               WEIGHTED AVG.     WEIGHTED AVG.                         WEIGHTED AVG.
RANGE OF                        NUMBER             REMAINING          EXERCISE          NUMBER            EXERCISE
EXERCISE PRICES            OUTSTANDING      CONTRACTUAL LIFE             PRICE     EXERCISABLE                PRICE
--------------------------------------------------------------------------------------------------------------------
<S>                        <C>              <C>                  <C>               <C>                 <C>
$6.88 to $10.75                 50,350             1.6 YEARS           $ 8.75           50,350               $ 8.75
16.00 to $17.34                154,134             3.7 YEARS            16.62          154,134                16.62
18.28 to $19.88                  3,666.7           5.5 YEARS            19.44            3,666.7              19.44
23.25 to $30.09                 81,416.6           6.6 YEARS            26.92           81,416.6              26.92
37.50 to $44.25                 73,750             8.6 YEARS            40.66           73,750                40.66
--------------------------------------------------------------------------------------------------------------------
$6.88 to $44.25                363,317.3           5.1 YEARS           $22.74          363,317.3             $22.74
====================================================================================================================
</TABLE>

     As discussed in Note 1, the Company has adopted SFAS No. 123 but continues
     to account for its stock option plan using the intrinsic value based method
     prescribed by APB Opinion No. 25. Accordingly, no compensation cost for
     this plan has been recognized in the Consolidated Statements of Income for
     1999.

          In determining the pro forma disclosures required by SFAS No. 123, the
     fair value of each option grant is estimated on the date of grant using the
     Black-Scholes option-pricing model. The following table presents pro forma
     net income and earnings per share assuming the stock option plan was
     accounted for using the fair value method prescribed by SFAS No. 123, the
     weighted average assumptions used and the grant date fair value of options
     granted in 1999, 1998 and 1997:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31,       1999           1998           1997
---------------------------------------------------------------------------------------------------------
<S>                                              <C>             <C>             <C>            <C>
Net income                                       As reported     $  11,311       $ 10,914       $ 10,167
                                                   Pro forma        11,095         10,743          9,916
---------------------------------------------------------------------------------------------------------
Basic earnings per share                         As reported     $    3.35       $   3.09       $   2.88
                                                   Pro forma          3.29           3.04           2.81
---------------------------------------------------------------------------------------------------------
Diluted earnings per share                       As reported     $    3.25       $   2.97       $   2.77
                                                   Pro forma          3.19           2.92           2.70
---------------------------------------------------------------------------------------------------------
Weighted average fair value                                      $    9.01       $   8.23       $   8.84
Expected life                                                    7.3 YEARS      7.3 years      7.4 years
Risk-free interest rate                                               4.80%          5.53%          6.47%
Expected volatility                                                   23.0%          23.0%          22.0%
Expected dividend yield                                                2.9%           2.7%           2.3%
=========================================================================================================
</TABLE>


                                                                              49
<PAGE>   38
16.  SHAREHOLDER RIGHTS AGREEMENT

     In January, 1990, the Board of Directors adopted a Shareholders Rights
     Plan. Under the Plan, the Rights automatically become part of and trade
     with the Company's shares of common stock. Although the Rights are not
     exercisable initially, they become exercisable upon the occurrence of one
     of three triggering events as specified in the Plan. In the event they
     become exercisable, each holder of a Right would then be entitled to buy a
     unit consisting of one one-hundredth of a share of the Company's preferred
     stock at an exercise price of $70. The provisions of the Rights Plan,
     including the time periods set forth therein, generally may be extended or
     amended by the Board of Directors. The Rights will expire January 16, 2000,
     but they may be redeemed at the option of the Board of Directors for $0.01
     per Right until ten days after a person becomes a 15% shareholder of
     MASSBANK Corp. or until certain other triggering events have occurred.

          Since the Company's Shareholder Rights Plan expires on January 16,
     2000 management intends to adopt a new Shareholder Rights Plan on January
     18, 2000 to replace the existing Plan.

17.  PARENT COMPANY FINANCIAL STATEMENTS

     The following are the condensed financial statements for MASSBANK Corp.
     (the "Parent Company") only:

BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31,                                                 1999             1998
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>              <C>
ASSETS:
   Cash                                                                                       $       2        $       1
   Interest-bearing deposits in banks                                                               706            2,324
   Investment in subsidiaries                                                                   101,386          108,724
   Due from subsidiaries                                                                            104               45
   Other assets                                                                                      70               53
------------------------------------------------------------------------------------------------------------------------
        Total assets                                                                          $ 102,268        $ 111,147
========================================================================================================================
LIABILITIES:
   Employee stock ownership plan liability (Note 15)                                          $     468        $     625
   Other liabilities                                                                                321               33
------------------------------------------------------------------------------------------------------------------------
        Total liabilities                                                                           789              658
========================================================================================================================
STOCKHOLDERS' EQUITY (Notes 12, 14, 15 and 16):
   Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued              --               --
   Common stock, par value $1.00 per share; 10,000,000 shares                                        --               --
     authorized, 7,407,432 and 7,384,332 shares issued, respectively                              7,407            7,384
   Additional paid-in capital                                                                    60,591           60,003
   Retained earnings                                                                             85,873           78,308
------------------------------------------------------------------------------------------------------------------------
                                                                                                153,871          145,695
   Treasury stock at cost, 4,096,189 and 3,885,222 shares, respectively                         (53,890)         (46,272)
   Accumulated other comprehensive income (Note 1)                                                1,966           11,691
   Common stock acquired by ESOP (Note 15)                                                         (468)            (625)
------------------------------------------------------------------------------------------------------------------------
        Total stockholders' equity                                                              101,479          110,489
------------------------------------------------------------------------------------------------------------------------
        Total liabilities and stockholders' equity                                            $ 102,268        $ 111,147
========================================================================================================================
</TABLE>


50
<PAGE>   39
17.  PARENT COMPANY FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
STATEMENTS OF INCOME
----------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31,                          1999          1998          1997
----------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>           <C>
INCOME:
   Dividends received from subsidiaries                         $ 9,200       $ 6,400       $ 6,400
   Interest and dividend income                                      23            96            56
----------------------------------------------------------------------------------------------------
        Total interest and dividend income                        9,223         6,496         6,456
NON-INTEREST EXPENSE                                                 92            99           118
----------------------------------------------------------------------------------------------------
        Income before income taxes                                9,131         6,397         6,338
INCOME TAX BENEFIT                                                   53            28            40
----------------------------------------------------------------------------------------------------
        Income before equity in undistributed earnings of
          subsidiaries                                            9,184         6,425         6,378
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES                  2,127         4,489         3,789
----------------------------------------------------------------------------------------------------
        Net income                                              $11,311       $10,914       $10,167
====================================================================================================
</TABLE>

     The Parent Company only Statements of Changes in Stockholders' Equity are
     identical to the consolidated statements and therefore are not presented
     here.

<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) YEARS ENDED DECEMBER 31,                                1999            1998            1997
--------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                        $ 11,311        $ 10,914        $ 10,167
   Adjustments to reconcile net income to net cash provided by
     operating activities:
        Equity in undistributed earnings of subsidiaries               (2,127)         (4,489)         (3,789)
        (Decrease) increase in accrued income taxes payable               (17)             25             (59)
        Deferred income tax benefit                                        --              (1)             (4)
        Increase in other liabilities                                     288               4              13
        Increase in amount due from subsidiaries                          (59)            (45)             --
        Decrease in amount due to subsidiaries                             --              --              (3)
--------------------------------------------------------------------------------------------------------------
          Net cash provided by operating activities                     9,396           6,408           6,325
--------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
   Payments to acquire treasury stock                                  (7,618)         (4,703)         (1,665)
   Issuance of common stock under stock option plan                       351             741             467
   Tax benefit resulting from stock options exercised                      --              66              --
   Dividends paid on common stock                                      (3,759)         (3,605)         (3,124)
   Tax benefit resulting from dividends paid on unallocated
     shares held by the ESOP                                               13              15              15
--------------------------------------------------------------------------------------------------------------
          Net cash used in financing activities                       (11,013)         (7,486)         (4,307)
--------------------------------------------------------------------------------------------------------------
          Net change in cash and cash equivalents                      (1,617)         (1,078)          2,018
Cash and cash equivalents at beginning of year                          2,325           3,403           1,385
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                             $    708        $  2,325        $  3,403
==============================================================================================================
</TABLE>

     During the years ended December 31, 1999, 1998 and 1997, the Company made
     cash payments for income taxes of $16 thousand, $24 thousand and $16
     thousand, respectively, and no payments for interest.

          In addition, the Company made cash payments to the state of Delaware
     for franchise taxes in the amount of $38 thousand, $29 thousand and $42
     thousand during the years ended December 31, 1999, 1998 and 1997,
     respectively.


                                                                              51
<PAGE>   40
18.  TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,                1999      1998      1997        1996     1995        1994     1993     1992        1991
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>       <C>       <C>          <C>      <C>         <C>      <C>      <C>         <C>
Net income                            $11,311   $10,914   $10,167      $9,427   $8,759      $8,185   $6,695   $4,677      $2,250
Basic earnings per share                 3.35      3.09      2.88        2.65     2.43        2.19     1.71     1.22        0.59
Cash dividends declared per share        1.11      1.02      0.88 1/2    0.69     0.54 3/4    0.45     0.34     0.26 1/2    0.22 3/4
Book value per share, at year end       30.65     31.58     29.06       25.75    24.84       20.09    20.46    18.37       17.54
Return on average assets                 1.20%     1.17%     1.12%       1.08%    1.04%       0.96%    0.79%    0.61%       0.60%
Return on average realized equity(1)    11.35%    11.08%    11.11%      11.01%   10.81%      10.62%    8.98%    6.79%       3.39%
====================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,                 1990
-----------------------------------------------
<S>                                     <C>
Net income                              $  725
Basic earnings per share                  0.16
Cash dividends declared per share         0.22
Book value per share, at year end        16.20
Return on average assets                  0.23%
Return on average realized equity(1)      1.03%
===============================================
</TABLE>

     (1)  Excludes average net unrealized gains or losses on securities
          available for sale.

19.  QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                                   1999                                    1998
-----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT                          4TH       3RD       2ND       1ST       4TH       3RD       2ND       1ST
PER SHARE DATA)                           QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER
-----------------------------------------------------------------------------------------------------------------------
<S>                                       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Interest and dividend income              $14,758   $14,730   $14,345   $14,373   $14,721   $14,995   $15,025   $15,093
Interest expense                            8,365     8,391     8,215     8,233     8,534     8,703     8,562     8,521
-----------------------------------------------------------------------------------------------------------------------
Net interest income                         6,393     6,339     6,130     6,140     6,187     6,292     6,463     6,572
Provision for loan losses                      15        15        60        50        88        15        45        45
-----------------------------------------------------------------------------------------------------------------------
Net interest income after
   provision for loan losses                6,378     6,324     6,070     6,090     6,099     6,277     6,418     6,527
Non-interest income                         1,154     1,089     1,578     1,741     1,447       796     1,101     1,246
Non-interest expense                        3,210     3,066     3,122     3,168     3,269     2,871     3,119     3,256
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes                  4,322     4,347     4,526     4,663     4,277     4,202     4,400     4,517
Income tax expense                          1,573     1,564     1,660     1,750     1,598     1,507     1,694     1,683
-----------------------------------------------------------------------------------------------------------------------
     Net income                           $ 2,749   $ 2,783   $ 2,866   $ 2,913   $ 2,679   $ 2,695   $ 2,706   $ 2,834
-----------------------------------------------------------------------------------------------------------------------
Earnings per share (in dollars):(1)
   Basic                                  $  0.83   $  0.83   $  0.85   $  0.84   $  0.77   $  0.76   $  0.76   $  0.80
   Diluted                                   0.81      0.80      0.82      0.82      0.74      0.73      0.73      0.77
-----------------------------------------------------------------------------------------------------------------------
Weighted average common
   shares outstanding:(1)
   Basic                                    3,318     3,352     3,380     3,451     3,487     3,548     3,546     3,535
   Diluted                                  3,389     3,466     3,496     3,567     3,610     3,692     3,709     3,697
=======================================================================================================================
</TABLE>

     (1)  Computation of earnings per share is further described in Note 1.


52
<PAGE>   41
     MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA
     YEARS ENDED DECEMBER 31, 1999 AND 1998

     MASSBANK Corp.'s common stock is currently traded on the Nasdaq Stock
     Market under the symbol "MASB." At December 31, 1999 there were 3,311,243
     shares outstanding and 871 shareholders of record. Shareholders of record
     do not reflect the number of persons or entities who hold their stock in
     nominee or "street" name.

          The following table includes the quarterly ranges of high and low
     sales prices for the common stock, as reported by Nasdaq, and dividends
     declared per share for the periods indicated.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                           PRICE PER SHARE                                     CASH
                               -------------------------------------------                DIVIDENDS
                               HIGH                                LOW                     DECLARED
<S>                            <C>              <C>               <C>                     <C>
---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,                         1999
---------------------------------------------------------------------------------------------------
Fourth Quarter                 35 1/4                             29 1/2                     $0.285
Third Quarter                  38                                 35 11/16                    0.285
Second Quarter                 38 1/4                             36 3/4                       0.27
First Quarter                  39 1/2                             37                           0.27
---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,                         1998
---------------------------------------------------------------------------------------------------
Fourth Quarter                 40 1/2                             29 1/2                     $ 0.27
Third Quarter                  50 3/4                             38 3/4                       0.25
Second Quarter                 54 1/4                             47 1/2                       0.25
First Quarter                  51 1/4                             43 3/4                       0.25
---------------------------------------------------------------------------------------------------
</TABLE>



                                                                              53
<PAGE>   42
MASSBANK BRANCH OFFICES d/b/a


MASSBANK of Reading*

123 Haven Street
Reading, MA 01867
(781) 942-8188
(978) 446-9200

MASSBANK of Chelmsford

296 Chelmsford Street
Eastgate Plaza
Chelmsford, MA 01824
(978) 256-3751

17 North Road
Chelmsford, MA 01824
(978) 256-3733

MASSBANK of Dracut

45 Broadway Road
Dracut, MA 01826
(978) 441-0040

MASSBANK of Everett

738 Broadway
Everett, MA 02149
(617) 387-5115

MASSBANK of Lowell

50 Central Street
Lowell, MA 01852
(978) 446-9200

755 Lakeview Avenue
Lowell, MA 01850
(978) 446-9216

MASSBANK of Medford

4110 Mystic Valley Parkway
Wellington Circle Plaza
Medford, MA 02155
(781) 395-4899

MASSBANK of Melrose

476 Main Street
Melrose, MA 02176
(781) 662-0100

27 Melrose Street
Towers Plaza
Melrose, MA 02176
(781) 662-0165

MASSBANK of Stoneham

240 Main Street
Stoneham, MA 02180
(781) 662-0177

MASSBANK of Tewksbury

1800 Main Street
Tewksbury, MA 01876
(978) 851-0300

MASSBANK of Westford

203 Littleton Road
Westford, MA 01886
(978) 692-3467

MASSBANK of Wilmington

370 Main Street
Wilmington, MA 01887
(978) 658-4000

219 Lowell Street
Lucci's Plaza
Wilmington, MA 01887
(978) 658-5775


*Main Office


54
<PAGE>   43
CORPORATE INFORMATION

MASSBANK Corp.

123 Haven Street
Reading, MA 01867
(781) 662-0100
(978) 446-9200
FAX (781) 942-1022

Savings and Mortgage
24-Hour-Rate Lines

(781) 662-0154
(978) 446-9285

Notice of Shareholders' Meeting

The Annual Meeting of the
Shareholders of MASSBANK Corp.
will be held at 10:00 A.M.
on Tuesday, April 18, 2000 at the
Sheraton Ferncroft Resort
50 Ferncroft Road
Danvers, MA 01923

Trademark

MASSBANK and its logo are
registered trademarks of
the Company

Form 10-K

Shareholders may obtain without
charge a copy of the Company's
1999 Form 10-K. Written requests
should be addressed to:
Shareholder Services
MASSBANK Corp.
159 Haven Street
Reading, MA 01867

Dividend Reinvestment and
Stock Purchase Plan

Shareholders may obtain a brochure
containing a detailed description of
the plan by writing to:
Shareholder Services
MASSBANK Corp.
159 Haven Street
Reading, MA 01867

Transfer Agent

EquiServe
Boston EquiServe Division
Shareholder Services
P.O. Box 644
Boston, MA 02102-0644

Independent Auditors

KPMG LLP
99 High Street
Boston, MA 02110

Legal Counsel

Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109

Reports on Effectiveness
of Internal Control Structure
Over Financial Reporting

Shareholders may obtain without
charge a copy of Management's
and the Independent Auditors'
1999 Reports on the Effectiveness
of the Company's Internal Control
Structure Over Financial Reporting.
Written requests should be addressed to:
Shareholder Services
MASSBANK Corp.
159 Haven Street
Reading, MA 01867


                                                                              55
<PAGE>   44
  OFFICERS AND DIRECTORS
  MASSBANK CORP.


  OFFICERS

  Gerard H. Brandi
  Chairman, President and
  Chief Executive Officer

  Reginald E. Cormier
  Senior Vice President, Treasurer and
  Chief Financial Officer

  Robert S. Cummings
  Secretary

  Donna H. West
  Assistant Secretary

  BOARD OF DIRECTORS

  Samuel Altschuler
  Retired, Sanmina Corp.

 *Mathias B. Bedell
  Retired, Bedell Brothers Insurance
  Agency, Inc.

 *Gerard H. Brandi
  Chairman, President and
  Chief Executive Officer,
  MASSBANK Corp.

  Allan S. Bufferd
  Treasurer,
  Massachusetts Institute of Technology

 +Peter W. Carr
  Retired, Guilford Transportation
  Industries

 +Alexander S. Costello
  Editorial Page Editor,
  Lowell Sun Publishing Co., Inc.

 *Robert S. Cummings
  Senior Counsel,
  Nixon Peabody LLP

  Leonard Lapidus
  Banking and Bank Regulation
  Consultant

 *Stephen E. Marshall
  President, C.H. Cleaves Insurance
  Agency, Inc.

  Nancy L. Pettinelli
  Executive Director,
  Visiting Nurse Association

+*Herbert G. Schurian
  Certified Public Accountant

 *Dr. Donald B. Stackhouse
  Dentist

 *Member, Executive Committee
 +Member, Audit Committee


OFFICERS AND DIRECTORS
MASSBANK

OFFICERS

Gerard H. Brandi
Chairman, President and
Chief Executive Officer

Donald R. Washburn
Senior Vice President, Lending

Donna H. West
Senior Vice President,
Community Banking

Reginald E. Cormier
Senior Vice President, Treasurer
and Chief Financial Officer

David F. Carroll
Vice President, Operations

Richard J. Flannigan
Vice President and
President

Thomas J. Queeney
Vice President and
Senior Trust Officer

Janet L. Daniels
Director of Audit and
Compliance

Aunali Dohadwala
Director of Information
Technology

Gerard F. Frechette
Director of Human Resources

Marilyn H. Abbott
Assistant Treasurer

Andrea S. Bradford
Assistant Vice President

Gregory W. Bowe
Assistant Vice President

Ernest G. Campbell, Jr.
Collections and Security Officer

Marianne J. Carpenter
Assistant Treasurer

Charles F. Coupe
Information Officer

Keri L. DeRosa
Mortgage Origination Officer

Karen L. Flammia
Assistant Vice President

Melissa J. Flanagan
Assistant Treasurer

Rachael E. Garneau
Assistant Treasurer

Brian W. Hurley
Assistant Vice President

Kenneth A. Masson
Assistant Vice President

Elkin Z. Montoya
Mortgage Origination Officer

Karen L. O'Rourke
Assistant Treasurer

Mindy S. Peloquin
Assistant Treasurer

Renald A. Robillard
Assistant Treasurer

Lisa A. Sawyer
Assistant Treasurer

Alice B. Sweeney
Assistant Comptroller

Richard A. Tatarczuk
Assistant Vice President
and Comptroller

Francis J. Walsh
Operations Officer

Margaret E. White
Assistant Treasurer

Patricia A. Witts
Assistant Treasurer

Michael J. Woods
Assistant Vice President


BOARD OF DIRECTORS AND EXECUTIVE COMMITTEE

Mathias B. Bedell
Gerard H. Brandi, Chairman
Robert S. Cummings, Clerk
Stephen E. Marshall
Herbert G. Schurian
Dr. Donald B. Stackhouse
Donna H. West


56