##### 



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-K


|    |  |                                                                                     
|--- |  | ------------------------------------------------------------------------------------
|/x/ |  | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003
OR

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

For the transition period from______________to____________

Commission File Number 0-15137

MASSBANK Corp.

(Exact name of registrant as specified in its charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 04-2930382
(I.R.S. Employer
Identification No.)

|                                                                                 |  |                 
|-------------------------------------------------------------------------------- |  | ----------------
|123 HAVEN STREET
Reading, Massachusetts
(Address of principal executive offices) |  | 01867
(Zip Code)

Registrants telephone number, including area code: (781) 662-0100

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934.
Yes /x/   No /  /

As of February 29, 2004, there were 4,433,175 shares of the registrants
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of MASSBANK Corp.s 2003 Annual Report to Stockholders are
incorporated by reference in Parts I, II, III and IV of this Form 10-K.
Portions of the Definitive Notice of Annual Meeting and Proxy Statement for
the 2004 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Form 10-K.





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The aggregate market value of the registrants voting and non-voting
common
stock held by non-affiliates of the registrant, computed by reference to the
closing price per share of common stock on June 30, 2003, the last day of the
registrants most recently completed second fiscal quarter, as reported on the
NASDAQ National Market, was $142,860,215. Although directors and executive
Officers of the registrant were assumed to be affiliates of the registrant
for the purposes of this calculation, this classification is not to be
interpreted as an admission of such status.

2



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FORM 10-K
MASSBANK Corp.
For the Year Ended December 31, 2003

TABLE OF CONTENTS

|           |         |                                      |                                                                                                  |  |        |    |      |  | 
|---------- | ------- | ------------------------------------ | ------------------------------------------------------------------------------------------------ |  | ------ | -- | ---- |  | 
|           |         |                                      |                                                                                                  |  |        |    | Page
|           |         |                                      | Description                                                                                      |  | Number
|Part 1     |         |                                      |                                                                                                  |  |        |    |      | 
|           | Item 1  |                                      | Business                                                                                         |  |        | 5  |     
|           |         | Executive Officers of the Registrant |                                                                                                  |  | 26     |   
|           | Item 2  |                                      | Properties                                                                                       |  |        | 28 |     
|           | Item 3  |                                      | Legal Proceedings                                                                                |  |        | 28 |     
|           | Item 4  |                                      | Submission of Matters to a Vote of Security Holders                                              |  |        | 28 |     
|Part II    |         |                                      |                                                                                                  |  |        |    |      | 
|           | Item 5  |                                      | Market for the
Registrants Common Stock and Related Stockholder Matters                         |  |        | 29 |     
|           | Item 6  |                                      | Selected Financial Data                                                                          |  |        | 29 |     
|           | Item 7  |                                      | Managements
Discussion and Analysis of Financial Condition and Results of Operations            |  |        | 29 |     
|           | Item 7A |                                      | Quantitative and Qualitative Disclosures about Market Risk                                       |  |        | 29 |     
|           | Item 8  |                                      | Financial Statements and Supplementary Data                                                      |  |        | 29 |     
|           | Item 9  |                                      | Changes in and
Disagreements with Independent Accountants on Accounting and Financial Disclosure |  |        | 29 |     
|           | Item 9A |                                      | Disclosure Controls and Procedures                                                               |  |        | 30 |     
|Part III   |         |                                      |                                                                                                  |  |        |    |      | 
|           | Item 10 |                                      | Directors and Executive Officers of the Registrant                                               |  |        | 31 |     
|           | Item 11 |                                      | Executive Compensation                                                                           |  |        | 31 |     
|           | Item 12 |                                      | Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters   |  |        | 31 |     
|           | Item 13 |                                      | Certain Relationships and Related Transactions                                                   |  |        | 31 |     
|           | Item 14 |                                      | Principal Accountant Fees and Services                                                           |  |        |    |     
|Part IV    |         |                                      |                                                                                                  |  |        |    |      | 
|           | Item 15 |                                      | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                  |  |        | 31 |     
|Signatures |         |                                      |                                                                                                  |  |        |    | 36   | 

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Forward-Looking Statement Disclosure.

This Annual Report on Form 10-K may contain forward-looking information,
including information concerning the Companys expectations of future business
prospects. These forward-looking statements are made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995. The
Company may also make forward-looking statements in other documents filed with
the Securities and Exchange Commission (SEC), in its annual and quarterly
reports to stockholders, in press releases and other written materials, and in
oral statements made by the Companys officers, directors or employees. You
can identify forward-looking statements by the use of the words may, could,
should, believe, expect, anticipate, intend, estimate, assume,
will, would, and other expressions which predict or indicate future events
and trends and which do not relate to historical matters. These
forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause the Companys actual results or performance to be materially
different from the results and performance expressed or implied by the forward-
looking statements. Forward-looking statements include, but are not limited
to,
statements concerning the Companys belief, expectations or intentions
concerning the Companys future performance, the financial outlook of the
markets it serves and the performance and activities of its competitors. These
statements reflect the Companys current views, are based on numerous
assumptions and are subject to numerous risks and uncertainties, and other
factors including but not limited to the following:



| | - |  | The strength of the local economy and the U.S. economy in general;                                         
| | - |  | -----------------------------------------------------------------------------------------------------------
|
| | - |  | Unexpected fluctuations in market interest rates;                                                          
|
| | - |  | Unexpected fluctuations in the market for equities, bonds, federal
funds and other financial instruments;  
|
| | - |  | An increase in the level of non-performing assets;                                                         
|
| | - |  | An increase in competitive pricing pressures within the Companys
market which may result in the following:



| |  |  | An increase in the Companys cost of funds;                              
| | - |  | -------------------------------------------------------------------------
|
| |  |  | A decrease in loan originations;                                         
|
| |  |  | A decrease in deposits; and                                              
|
| |  |  | Limit the ability of the Company to attract and retain
banking customers;



| | - |  | Adverse legislative or regulatory developments;                                                  
| | - |  | -------------------------------------------------------------------------------------------------
|
| | - |  | Adverse impacts resulting from the continuing war on terrorism;                                  
|
| | - |  | An increase in other employee-related costs; and                                                 
|
| | - |  | The impact of deflation or inflation, and other factors described
in the Companys annual report.

Internet Access

The Company maintains a website at www.MASSBANK.com. The Company will
make
available free of charge on or through its website its annual reports on Form
10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (Exchange Act) as soon as
reasonably practicable following its filing of the same with the SEC. In
addition, the Companys code of ethics is posted on the Companys website.

4



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PART I

Item 1. Business

Business of MASSBANK Corp.

General

MASSBANK Corp. (sometimes referred to as the Company) is a general
business corporation incorporated under the laws of the State of Delaware on
August 11, 1986. MASSBANK Corp. was organized for the purpose of becoming the
holding company for MASSBANK (Bank). The Company is a one-bank holding company
registered with the Board of Governors of the Federal Reserve System (Federal
Reserve Board) under the Bank Holding Company Act of 1956, as amended. As of
and since December 2, 1986, the effective date of the reorganization whereby
MASSBANK Corp. became the holding company for the Bank, the Bank has been a
wholly owned subsidiary of MASSBANK Corp. The only office of MASSBANK Corp.,
and its principal place of business, is located at the main office of the Bank
at 123 Haven Street, Reading, Massachusetts 01867.

MASSBANK Corp. currently has no material assets other than its investment
in the Bank. The Companys primary business, therefore, is managing its
investment in the stock of the Bank. MASSBANK Corp. is classified by the
Commonwealth of Massachusetts as a securities corporation for tax purposes
which restricts its business to buying, selling, dealing in, or holding
securities on its own behalf. In the future, MASSBANK Corp. may become an
operating company or acquire banks or companies engaged in bank-related
activities. In addition, MASSBANK Corp. may elect to become a financial
holding company and to engage in activities permissible to financial holding
companies. See Supervision and Regulation of the Company and its
Subsidiaries.

The principal sources of revenues for MASSBANK Corp. are dividends from
the Bank and, to a lesser extent, interest income received from its interest-bearing bank deposits. These revenues are used primarily for the payment of
dividends to stockholders and for the repurchase of stock pursuant to the
Companys stock repurchase program. MASSBANK Corp.s assets at December 31,
2003 are represented by its investment in the Bank of $107.0 million, interest-bearing bank deposits of $3.7 million and other assets of $0.2 million. See
Note 17 to the Consolidated Financial Statements for Parent Company only
financial information. At December 31, 2003, MASSBANK Corp. on a consolidated
basis had total assets of $1.010 billion, deposits of $882.0 million, and
stockholders equity of $110.9 million which represents 10.98% of total assets.
Book value per share at December 31, 2003 stood at $25.17, compared to $25.45
at year-end 2002.

The Company does not own or lease any real estate or personal property.
Instead it intends to utilize during the immediate future the premises,
equipment and furniture of the Bank without the direct payment of rental fees
to the Bank.

Competition

The primary business of MASSBANK Corp. currently is the ongoing business
of the Bank. Therefore, the competitive conditions faced by MASSBANK Corp.
currently are the same as those faced by the Bank. See Business of MASSBANK
- Competition. In addition, many banks and financial institutions have
formed holding companies. It is likely that these holding companies will
attempt to acquire commercial banks, thrift institutions or companies engaged
in bank-related activities. MASSBANK Corp. would face competition in
undertaking any such acquisitions and in operating any such entity subsequent
to its acquisition.

5



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Employees

MASSBANK Corp. does not employ any persons other than its management
which also serves as management of, and is paid by, the Bank. See Item 10 
Directors and Executive Officers of the Registrant. MASSBANK Corp. utilizes
the support staff of the Bank from time to time and paid the Bank $12,000 in
2003 for the support.

Dividends

MASSBANK Corp. paid total cash dividends of $0.92 per share in 2003
compared to $0.88 per share in 2002. The Companys dividend payout ratios
(cash dividends paid divided by net income) for 2003 and 2002 were 52% and
42%, respectively.

Stock Repurchase Program

During 2003, the Company completed its program of share repurchases by
repurchasing 278,751 shares of its common stock pursuant to its stock
repurchase program. The share repurchases were completed at an average cost
per
share of $29.05 and a total cost of approximately $8,097,000. On January 15,
2004 the Companys Board of Directors approved a further repurchase program
authorizing the Company to repurchase up to 100,000 shares of its common stock
in the open market or in private transactions over the next twelve months.

6



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Business of MASSBANK

General

MASSBANK is a Massachusetts-chartered savings bank founded in 1872 as the
Melrose Savings Bank. In 1983, the Reading Savings Bank was merged with and
into the Melrose Savings Bank and the name of the resulting institution was
changed to MASSBANK for Savings. In 1986, the Bank converted from mutual to
stock form of ownership. In 1996, the name of the bank was changed from
MASSBANK for Savings to MASSBANK.

The Bank is primarily engaged in the business of attracting deposits from
the general public through its fifteen full service banking offices in
Reading, Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Stoneham,
Tewksbury, Westford and Wilmington, and originating residential and commercial
real estate mortgages, construction loans, commercial loans, and a variety of
consumer loans. The Bank invests a significant portion of its funds in U.S.
Treasury and Government agency securities, mortgage-backed securities, federal
funds sold, and other authorized investments. The Bank also invests a portion
of its funds in equity securities traded on a national securities exchange or
quoted on the NASDAQ System. The Banks earnings depend largely upon net
interest income, which is the difference between the interest and dividend
income derived by the Bank from its loans and investments (interest-earning
assets) and the interest paid by the Bank on its deposits (interest-bearing
liabilities). Net interest income is significantly affected by general
economic conditions, particularly changes in interest rates, competition,
government legislation and policies affecting fiscal affairs, monetary policies
of the Federal Reserve System, and the actions of the bank regulatory
authorities. Earnings results are also affected by the Companys provision for
loan losses; loan and investment activities, particularly residential mortgage
loan and mortgage-backed securities prepayment activity; changes in
non-interest
income, such as fee-based revenues and securities gains or losses; non-interest
expense; and income taxes.

The Banks deposits are insured to applicable limits by the Bank
Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (the
FDIC) and excess deposit balances are insured by the Depositors Insurance
Fund, Inc. (DIF), a private industry-sponsored deposit insurer.

The Bank recognizes that loan and investment opportunities change over
time and that yields derived from such opportunities can vary significantly
even when the risks associated with those opportunities are comparable. By
developing a relatively liquid loan and investment portfolio, the Bank has
attempted to position itself so as to be able to take advantage of these
changing opportunities. Consequently, the Bank expects that the relative mix
of its loan and investment portfolios will change over time in response to
changing market conditions.

7



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Market Area

The Bank is headquartered in Reading, Massachusetts, which is located
approximately 15 miles north of Boston. The Banks market area includes a
significant portion of eastern Massachusetts and is served by a network of
15 branch offices located on a broad arc stretching from Medford and
Everett
in the south, Dracut in the north, and Westford in the west.

The Banks general market area consists of the municipalities in which it
operates banking offices and all of the contiguous cities and towns.

The Bank currently operates banking offices in the municipalities of
Chelmsford, Dracut, Everett, Lowell, Medford, Melrose, Reading, Stoneham,
Tewksbury, Westford and Wilmington.

Lending Activities

The Banks net loan portfolio totaled $251.5 million at December 31, 2003.

The following table sets forth information concerning the Banks loan
portfolio
by type of loan at the dates shown:

|                               |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         | 
|------------------------------ | --------------------------------------- | --------------------------- | -------------------- | ----- | ------- | ------- | ------ | ----- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | 
|(In thousands) At December 31, |                                         | 2003                        |                      | 2002  |         | 2001    |        | 2000  |         | 1999   
|                               |                                         |                             |                      |       |         |         |        |       |         |        
|Mortgage loans:                |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |       
|                               | Residential:                            |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |        
|                               |                                         | Conventional                |                      | $     | 240,443 |         |        | $     | 300,528 |         |        | $      | 293,764 |         |        | $      | 269,859 |         |        | $      | 286,429 |        
|                               |                                         | FHA and VA                  |                      |       | 84      |         |        |       | 133     |         |        |        | 259     |         |        |        | 471     |         |        |        | 740     |        
|                               | Commercial                              |                             |                      | 1,601 |         |         |        | 2,348 |         |         |        | 2,641  |         |         |        | 3,117  |         |         |        | 2,471  |        
|                               | Construction                            |                             |                      | 81    |         |         |        | 654   |         |         |        | 993    |         |         |        | 683    |         |         |        | 232    |        
|                               |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |         |        
|                               |                                         |                             | Total mortgage loans |       |         | 242,209 |        |       |         | 303,663 |        |        |         | 297,657 |        |        |         | 274,130 |        |        |         | 289,872 | 
|                               | Premium on loans                        |                             |                      | 10    |         |         |        | 20    |         |         |        | 51     |         |         |        | 105    |         |         |        | 159    |        
|                               | Deferred mortgage loan
origination fees |                             |                      | (333  | )       |         |        | (895  | )       |         |        | (1,239 | )       |         |        | (1,284 | )       |         |        | (1,451 | )      
|                               |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |         |        
|                               |                                         |                             | Mortgage loans, net  |       |         | 241,886 |        |       |         | 302,788 |        |        |         | 296,469 |        |        |         | 272,951 |        |        |         | 288,580 | 
|                               |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |         |        
|Other loans:                   |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |       
|                               | Consumer:                               |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |        
|                               |                                         | Installment                 |                      |       | 415     |         |        |       | 798     |         |        |        | 1,178   |         |        |        | 1,829   |         |        |        | 1,418   |        
|                               |                                         | Guaranteed education        |                      |       | 2,333   |         |        |       | 3,293   |         |        |        | 4,937   |         |        |        | 6,266   |         |        |        | 7,037   |        
|                               |                                         | Other secured               |                      |       | 518     |         |        |       | 515     |         |        |        | 873     |         |        |        | 1,169   |         |        |        | 1,318   |        
|                               |                                         | Home equity lines of credit |                      |       | 7,549   |         |        |       | 11,102  |         |        |        | 12,271  |         |        |        | 12,624  |         |        |        | 11,737  |        
|                               |                                         | Unsecured lines of credit   |                      |       | 166     |         |        |       | 187     |         |        |        | 201     |         |        |        | 224     |         |        |        | 225     |        
|                               |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |         |        
|                               |                                         |                             | Total consumer loans |       |         | 10,981  |        |       |         | 15,895  |        |        |         | 19,460  |        |        |         | 22,112  |        |        |         | 21,735  | 
|                               | Commercial                              |                             |                      | 139   |         |         |        | 116   |         |         |        | 15,088 |         |         |        | 15,084 |         |         |        | 15,050 |        
|                               |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |         |        
|                               |                                         |                             | Total other loans    |       |         | 11,120  |        |       |         | 16,011  |        |        |         | 34,548  |        |        |         | 37,196  |        |        |         | 36,785  | 
|                               |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |         |        
|                               |                                         |                             | Total loans          |       |         | 253,006 |        |       |         | 318,799 |        |        |         | 331,017 |        |        |         | 310,147 |        |        |         | 325,365 | 
|Allowance for loan losses (1)  |                                         |                             | (1,554               | )     |         |         | (2,271 | )     |         |         | (2,494 | )      |         |         | (2,594 | )      |         |         | (2,555 | )     
|                               |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |         |        
|                               |                                         |                             | Net loans            |       | $       | 251,452 |        |       | $       | 316,528 |        |        | $       | 328,523 |        |        | $       | 307,553 |        |        | $       | 322,810 | 
|                               |                                         |                             |                      |       |         |         |        |       |         |         |        |        |         |         |        |        |         |         |        |        |         |        



|(1) |  | The allowance for loan losses for 2002 and 2001 has been restated to
reflect the
reclassification of the allowance for loan losses on off-balance sheet
credit exposures
(shown separately on the balance sheet) and to facilitate comparison with
the current
fiscal year.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



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| |  | The following table shows the maturity distribution and interest
rate sensitivity of the Banks loan portfolio at December 31, 2003:
| |  | ------------------------------------------------------------------------------------------------------------------------------------

|                |                           |                      |     |            |       |           |       |                                 |        |       |       |        |        |  |       |         |         |  |        |         |         | 
|--------------- | ------------------------- | -------------------- | --- | ---------- | ----- | --------- | ----- | ------------------------------- | ------ | ----- | ----- | ------ | ------ |  | ----- | ------- | ------- |  | ------ | ------- | ------- | 
|                |                           |                      |     |            |       |           |       | Maturity/Scheduled Payments (1) |        |       |       |       
|                |                           |                      |     | Within     |       | One to    |       | Five to                         |        | After |       |        |        | 
|(In thousands)  |                           | one year             |     | five years |       | ten years |       | ten years                       |        | Total
|                |                           |                      |     |            |       |           |       |                                 |        |      
|Mortgage loans: |                           |                      |     |            |       |           |       |                                 |        |       |       |        |        |  |       |         |         |  |        |        
|                | Residential               |                      | $   | 767        |       |           | $     | 12,186                          |        |       | $     | 67,283 |        |  | $     | 159,975 |         |  | $      | 240,211 |        
|                | Commercial & construction |                      |     |           |       |           |       | 268                             |        |       |       | 113    |        |  |       | 1,294   |         |  |        | 1,675   |        
|                |                           |                      |     |            |       |           |       |                                 |        |       |       |        |        |  |       |         |         |  |        |         |        
|                |                           | Total mortgage loans |     |            | 767   |           |       |                                 | 12,454 |       |       |        | 67,396 |  |       |         | 161,269 |  |        |         | 241,886 | 
|Other loans     |                           |                      | 684 |            |       |           | 1,096 |                                 |        |       | 1,751 |        |        |  | 7,589 |         |         |  | 11,120 |        
|                |                           |                      |     |            |       |           |       |                                 |        |       |       |        |        |  |       |         |         |  |        |         |        
|                |                           | Total loans          |     | $          | 1,451 |           |       | $                               | 13,550 |       |       | $      | 69,147 |  |       | $       | 168,858 |  |        | $       | 253,006 | 
|                |                           |                      |     |            |       |           |       |                                 |        |       |       |        |        |  |       |         |         |  |        |         |        



|(1) |  | Loan amounts are accumulated as if the entire balance came due on the last
contractual payment date. Accordingly, the amounts do not reflect
proceeds
from contractual loan amortization or anticipated prepayments.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table shows the amounts, included in the table above, which
are due after one year and which have fixed or adjustable interest rates:

|                |                           |                      |     |                          |         |            |        |        |        |  |        |         |         | 
|--------------- | ------------------------- | -------------------- | --- | ------------------------ | ------- | ---------- | ------ | ------ | ------ |  | ------ | ------- | ------- | 
|                |                           |                      |     | Total Due After One Year |         |            |        |       
|                |                           |                      |     | Fixed                    |         | Adjustable |        |        |        | 
|(In thousands)  |                           | Rate                 |     | Rate                     |         | Total     
|                |                           |                      |     |                          |         |           
|Mortgage loans: |                           |                      |     |                          |         |            |        |        |        |  |        |        
|                | Residential               |                      | $   | 216,499                  |         |            | $      | 22,945 |        |  | $      | 239,444 |        
|                | Commercial & construction |                      |     | 81                       |         |            |        | 1,594  |        |  |        | 1,675   |        
|                |                           |                      |     |                          |         |            |        |        |        |  |        |         |        
|                |                           | Total mortgage loans |     |                          | 216,580 |            |        |        | 24,539 |  |        |         | 241,119 | 
|Other loans     |                           |                      | 378 |                          |         |            | 10,058 |        |        |  | 10,436 |        
|                |                           |                      |     |                          |         |            |        |        |        |  |        |         |        
|                |                           | Total loans          |     | $                        | 216,958 |            |        | $      | 34,597 |  |        | $       | 251,555 | 
|                |                           |                      |     |                          |         |            |        |        |        |  |        |         |        

Mortgage Lending. The Bank believes that the repayment periods of
long-term first
mortgage loans, the general resistance of the public in our market area to
variable rate
mortgage instruments and the highly competitive nature of the mortgage industry
require a
prudent approach to mortgage lending. Consequently, as part of its policy of
generally
attempting to match the maturities of its assets and its liabilities, the Bank
has attempted
to keep its mortgage loan portfolio to a level at which the Bank believes there
is an
acceptable risk-to-reward ratio in light of opportunities in the market-place
and its long-
term objectives. In 2003, however, the Banks mortgage loan portfolio
decreased $60.9
million or 20.1%. At December 31, 2003 the mortgage loan portfolio totaled
$241.9 million
compared to $302.8 million at December 31, 2002. The decrease in loans is due
to a year of
low interest rates that dramatically increased the number of refinances,
paydowns and
payoffs for the Bank. Although the Bank originated $75.2 million in mortgage
loans in 2003,
it saw its portfolio decline as a result of the extraordinary prepayment
activity.
Management believes that both refinancing of existing mortgages and new loan
originations
is likely to decline in 2004. In todays economic climate, there is a
tremendous amount
of competition for mortgages in the Banks area. Consequently, increasing the
size of the
loan portfolio will take time. In the meantime, short-term mortgage-backed
securities may
be used as substitutes for loans as certain of their financial characteristics
are very
similar to short-term mortgage loans. If rates increase in 2004 and the shape
of the yield
curve remains positive, the Bank will likely add mortgage-backed securities to
its portfolio.

9



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##### 



Mortgage Lending (continued)

Loan originations come from a number of sources, including referrals from
real estate brokers, walk-in customers, purchasers of property owned by
existing
customers and refinancings for existing customers. In addition to actively
soliciting loan applications, the Bank conducts an advertising and promotion
program, directed both toward the general public and real estate professionals
who might refer potential borrowers.

Substantially all of the real estate loans originated by the Bank during
2003 were secured by real estate located in the Banks primary lending area,
reflecting the Banks commitment to serve the credit needs of the local
communities in which it operates banking offices.

The Bank makes both conventional fixed and adjustable-rate loans on one-
to-four family residential properties for a term of ten to thirty years. The
Bank currently retains all of the mortgages it originates for its own
portfolio.
These are primarily 10, 12, 15 or 20 year fixed rate and adjustable rate
mortgages (ARMs). The few long-term (30 year) fixed rate mortgage loans that
the Bank originates from time to time are also added to the loan portfolio.
Adjustable rate mortgage loans have rates that are re-set at either 1, 3, 5, 7
or 10 year intervals and are indexed to various financial indices.

In addition to its traditional mortgage products, the Bank offers several
other loan programs which have been well received by customers. It offers ARM
programs featuring an initial fixed rate for 5 or 7 years and a 1 year
adjustable rate thereafter. A special first time home buyers program has also
been instituted featuring a discounted ARM. This program is designed for
first-
time home buyers meeting certain income and property location criteria.

At December 31, 2003, 1-4 family residential mortgage loans totaled $240.2
million, or 94.9% of the total loan portfolio, compared to $299.8 million, or
94.0% of the total loan portfolio, at December 31, 2002. Residential mortgage
loan originations decreased to $74.9 million in 2003, from $94.1 million in
2002. Much of this volume was due to mortgage refinancing. Origination
volumes
are sensitive to interest rates and are affected by the interest rate
environment. The low interest rate environment in 2003 significantly increased
the demand for mortgage refinancings, but also dramatically increased loan
paydowns and payoffs for the Bank. Although the Bank originated $74.9 million
in residential mortgage loans in 2003, it saw its residential mortgage loan
portfolio decline as a result of the extraordinary prepayment activity.

The Bank also originates construction loans and mortgage loans secured by
commercial or investment property. At December 31, 2003, commercial and
multifamily real estate mortgages and construction loans totaled approximately
$1.7 million, or 0.7% of the total loan portfolio, compared to $3.0 million, or
0.3% of the total loan portfolio, at December 31, 2002. In 2003 construction
loan originations amounted to $0.3 million. There were no commercial real
estate mortgage loan originations in 2003.

10



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Mortgage Lending (continued)

The total amount of first mortgage loans held by the Bank at December 31,
2003 was $241.9 million as indicated in the maturity distribution table
appearing on page seven. Of this amount, $24.5 million was subject to interest
rate adjustments. The remaining $217.3 million in fixed rate mortgage loans
represents 85.9% of the Companys total loans.

Fees received for originating loans and related direct incremental loan
origination costs are offset and the resulting net amount is deferred and
amortized over the life of the related loans.

The Bank also receives fees and charges relating to existing loans,
primarily late charges and prepayment penalties.

Other Loans. The Bank makes a variety of consumer loans and had a
consumer loan portfolio of approximately $11.0 million at December 31, 2003
representing 4.3% of the Banks total loan portfolio. Of this amount, $2.3
million or 0.9% of the total loan portfolio are education loans guaranteed by
the American Student Assistance Services Corporation.

The balance of the Banks consumer loan portfolio consists of home equity
lines of credit and consumer loan contracts such as automobile loans, home
improvement loans and other secured and unsecured financings. These loans
totaled $8.6 million at December 31, 2003, representing 3.4% of the Banks
total loan portfolio.

At December 31, 2003, the Bank also had $0.1 million in outstanding loans
to commercial enterprises not secured by real estate.

Loan Approval. The Banks loan approval process for all loans generally
includes a review of an applicants financial statements, credit history,
banking history and verification of income. For mortgage loans, the Bank
generally obtains an independent appraisal of the subject property. The Bank
has a formal lending policy approved by the Board of Directors of the Bank
which delegates levels of loan approval authority to Bank personnel. All
loans in excess of established limits require approval of the Banks Board of
Directors.

The Bank issues commitments to prospective borrowers to make loans
subject to certain conditions for generally up to 60 days. The interest rate
applicable to the committed loans is usually the rate in effect at the time
a rate lock fee is paid. At December 31, 2003, the Bank had issued commitments
on residential first mortgage loans totaling $3,300,000, and had commitments
to advance funds on construction loans and unused credit lines, including
unused
portions of home equity lines of credit, of $479,000 and $37,410,000,
respectively. In addition, the Bank had commitments to provide $3,951,000,
which represents its participating share of the funding for an affordable
housing project in Lowell, Massachusetts, and $45,000 in commitments to advance
funds for business development in downtown Lowell.

Loan Delinquencies. It is the Banks policy to manage its loan portfolio
so as to recognize problem loans at an early stage and thereby minimize loan
losses. Loans are considered delinquent when any payment of principal or
interest is one month or more past due. The Bank generally commences
collection
procedures, however, when accounts are 15 days past due. It is the Banks
practice to generally discontinue accrual of interest on all loans for which
payments are 90 days or more past due. Loans with delinquent payments 90 or
more days past due, as shown in the table on the following page, totaled
$230,000 at December 31, 2003, down from $420,000 at year-end 2002.

11



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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 and losses upon disposition are reflected in
earnings
as realized. At year-end 2003, MASSBANK had no real estate acquired
through
foreclosure.

Non-Performing Assets

The following table shows the composition of non-performing assets at the
dates shown:

|                                                 |                 |                                                |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |     |     |     | 
|------------------------------------------------ | --------------- | ---------------------------------------------- | --------------------------- | ------------ | --- | ---- | ---- | ---- | --- | ---- | ---- | --- | --- | --- | ---- | --- | --- | --- | ---- | --- | --- | --- | --- | 
|(In thousands) At December 31,                   |                 | 2003                                           |                             | 2002         |     | 2001 |      | 2000 |     | 1999
|                                                 |                 |                                                |                             |              |     |      |      |      |     |     
|Nonaccrual loans:                                |                 |                                                |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |    
|                                                 | Mortgage loans: |                                                |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |    
|                                                 |                 | Residential:                                   |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |     |    
|                                                 |                 |                                                |                             | Conventional |     | $    | 152  |      |     | $    | 269  |     |     | $   | 477  |     |     | $   | 386  |     |     | $   | 655 | 
|                                                 |                 |                                                |                             | FHA and VA   |     |      |     |      |     |      | 2    |     |     |     | 4    |     |     |     | 8    |     |     |     |    | 
|                                                 | Consumer        |                                                |                             | 78           |     |      |      | 149  |     |      |      | 163 |     |     |      | 171 |     |     |      | 140 |    
|                                                 |                 |                                                |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |     |     |     | 
|                                                 |                 | Total nonaccrual loans                         |                             |              | 230 |      |      |      | 420 |      |      |     | 644 |     |      |     | 565 |     |      |     | 795 |    
|                                                 |                 |                                                |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |     |     |     | 
|Real estate acquired through foreclosure:        |                 |                                                |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |    
|                                                 | Residential:    |                                                |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |    
|                                                 |                 | Conventional                                   |                             |              |    |      |      |      |    |      |      |     |    |     |      |     |    |     |      |     | 62  |    
|                                                 |                 |                                                |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |     |     |     | 
|                                                 |                 | Total real estate acquired through
foreclosure |                             |              |    |      |      |      |    |      |      |     |    |     |      |     |    |     |      |     | 62  |    
|                                                 |                 |                                                |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |     |     |     | 
|                                                 |                 |                                                | Total non-performing assets |              | $   | 230  |      |      | $   | 420  |      |     | $   | 644 |      |     | $   | 565 |      |     | $   | 857 |    
|                                                 |                 |                                                |                             |              |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |     |     |     | 
|Percent of non-performing loans to
total loans   |                 |                                                | 0.09                        | %            |     |      | 0.13 | %    |     |      | 0.19 | %   |     |     | 0.18 | %   |     |     | 0.24 | %  
|Percent of non-performing assets to
total assets |                 |                                                | 0.02                        | %            |     |      | 0.04 | %    |     |      | 0.07 | %   |     |     | 0.06 | %   |     |     | 0.09 | %  

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

|                                                                   |  |      |    |      |  |      |    |      |  |      |    |  |  |   |    |  |  |   |    | 
|------------------------------------------------------------------ |  | ---- | -- | ---- |  | ---- | -- | ---- |  | ---- | -- |  |  | - | -- |  |  | - | -- | 
|(In thousands) Years Ended December 31,                            |  | 2003 |    | 2002 |  | 2001 |    | 2000 |  | 1999
|                                                                   |  |      |    |      |  |      |    |      |  |     
|Interest income that would have been
recorded under original terms |  | $    | 17 |      |  | $    | 31 |      |  | $    | 60 |  |  | $ | 48 |  |  | $ | 64 | 
|Interest income actually recorded                                  |  |      | 20 |      |  |      | 27 |      |  |      | 37 |  |  |   | 36 |  |  |   | 51 | 
|                                                                   |  |      |    |      |  |      |    |      |  |      |    |  |  |   |    |  |  |   |    | 
|Reduction (increase) in interest income                            |  | $    | (3 | )    |  | $    | 4  |      |  | $    | 23 |  |  | $ | 12 |  |  | $ | 13 | 
|                                                                   |  |      |    |      |  |      |    |      |  |      |    |  |  |   |    |  |  |   |    | 

12



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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 the estimated loan loss exposure
inherent in the portfolio. Management uses a methodology to
systematically
measure the amount of estimated loan loss exposure inherent in the
portfolio
for purposes of establishing a sufficient allowance for loan losses. The
methodology includes three elements: an analysis of individual loans
deemed
to be impaired in accordance with the terms of Statement of Financial
Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan,
general
loss allocations for various loan types based on loss experience factors
and an
unallocated allowance which is maintained based on managements assessment
of
many factors including the risk characteristics of the portfolio,
concentrations of credit, current and anticipated economic conditions that
may
effect borrowers ability to pay, and trends in loan delinquencies and
charge-offs. Realized losses, net of recoveries, are charged directly to
the
allowance. While management uses the currently available information in
establishing the allowance for loan losses, adjustments to the allowance
may
be necessary if future economic conditions differ from the assumptions
used in
making the evaluation. In addition, various regulatory agencies, as an
integral
part of their examination process, periodically review the Banks
allowance for
loan losses. Such agencies may require the Bank to recognize additions to
the
allowance based on judgments different from those of management. In 2003,
the
Bank recorded a negative provision for loan losses of $502 thousand due to
the
high quality of loans in the portfolio and a large reduction in the size
of the
Banks loan portfolio.

The following table sets forth the activity in the allowance for loan
losses
during the years indicated:

|                                                                                 |                         |      |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |     |  
|-------------------------------------------------------------------------------- | ----------------------- | ---- | ----- | ---- | - | ---- | ----- | ---- | - | ---- | ----- | --- | - | - | ----- | --- | - | - | ----- | --- | -
|(In thousands) Years ended December 31,                                          |                         | 2003 |       | 2002 |   | 2001 |       | 2000 |   | 1999
|                                                                                 |                         |      |       |      |   |      |       |      |   |     
|Balance at beginning of year                                                     |                         | $    | 2,271 |      |   | $    | 2,494 |      |   | $    | 2,594 |     |   | $ | 2,555 |     |   | $ | 2,450 |    
|Provision for loan losses                                                        |                         |      | (502  | )    |   |      |      |      |   |      | 40    |     |   |   | 60    |     |   |   | 140   |    
|Transfer to allowance for loan losses on
off-balance sheet credit exposures      |                         |      | (226  | )    |   |      | (235  | )    |   |      | (149  | )   |   |   |      |     |   |   |      |    
|Charge-offs:                                                                     |                         |      |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    
|                                                                                 | Residential real estate |      |       |     |   |      |       |     |   |      |       |    |   |   |       |    |   |   |       | (62 | )
|                                                                                 | Consumer loans          |      |       | (4   | ) |      |       | (4   | ) |      |       | (22 | ) |   |       | (24 | ) |   |       | (14 | )
|Recoveries:                                                                      |                         |      |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    
|                                                                                 | Residential real estate |      |       |     |   |      |       | 6    |   |      |       | 25  |   |   |       | 2   |   |   |       | 39  |  
|                                                                                 | Commercial real estate  |      |       |     |   |      |       |     |   |      |       | 5   |   |   |       |    |   |   |       |    |  
|                                                                                 | Consumer loans          |      |       | 15   |   |      |       | 10   |   |      |       | 1   |   |   |       | 1   |   |   |       | 2   |  
|                                                                                 | Other Loans             |      |       |     |   |      |       |     |   |      |       |    |   |   |       |    |   |   |       |    |  
|                                                                                 |                         |      |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    
|Net recoveries (charge-offs)                                                     |                         |      | 11    |      |   |      | 12    |      |   |      | 9     |     |   |   | (21   | )   |   |   | (35   | )  
|                                                                                 |                         |      |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    
|Balance at end of year                                                           |                         | $    | 1,554 |      |   | $    | 2,271 |      |   | $    | 2,494 |     |   | $ | 2,594 |     |   | $ | 2,555 |    
|                                                                                 |                         |      |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    
|Net loan charge offs as a percent of
average loans outstanding during
the period |                         |      |      |      |   |      |      |      |   |      |      |     |   |   | 0.01  | %   |   |   | 0.01  | %  
|Allowance for loan losses as a percent
of total loans outstanding at year-end    |                         |      | 0.61  | %    |   |      | 0.83  | %    |   |      | 0.80  | %   |   |   | 0.84  | %   |   |   | 0.79  | %  
|Allowance for loan losses as a percent
of nonaccrual loans                       |                         |      | 675.7 | %    |   |      | 632.1 | %    |   |      | 10.4  | %   |   |   | 459.1 | %   |   |   | 321.4 | %  
|                                                                                 |                         |      |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    

13



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Investment Activities

The Bank believes that investment opportunities in United States
Government, corporate and other securities are at times more attractive than
the opportunities present in the loan market. As compared to loans, these
investments of the Bank are generally shorter-term and hence more liquid, are
subject to lower risk of loss, and present an opportunity for appreciation.
In addition, these investments often permit the Bank to better match the
maturities of its assets and its liabilities.

The Banks investment portfolio is managed by its officers in accordance
with an investment policy approved by the Banks Board of Directors. The
objectives of that policy are to provide a level of liquidity, earnings and
diversification consistent with the exercise of prudent investment judgment.
The policy authorizes the senior management of the Bank to make and execute
investment decisions and requires that those persons report all investment
transactions to the Banks Board of Directors at each of its regular meetings.
In addition, management is required to report all gains or losses on all
securities transactions at each meeting of the Banks Board of Directors.
Purchases and sales of securities by the Bank are generally required to be
made on a competitive basis and all investments must be permitted by
applicable law.

The Bank invests in a wide variety of securities and obligations,
including: Federal funds sold (which are sold only to institutions included on
the Banks internally-prepared approved list of adequately capitalized
institutions); commercial paper and bankers acceptances; United States
Treasury and Government agency obligations; United States agency guaranteed
and other mortgage-backed securities; investment grade corporate debt
securities (generally limited to those rated A or better by Standard &
Poors); mutual funds; and equity securities traded on a national securities
exchange or quoted on the NASDAQ System.

Under the investment policy management determines the appropriate
classification of securities at the time of purchase. Those debt securities
that the Company has the intent and the ability to hold to maturity are
classified as securities held to maturity and are carried at amortized
historical cost. There were no securities held to maturity in either 2003 or
2002.

Those securities held for indefinite periods of time and not intended to
be held to maturity are classified as available for sale. Securities held for
indefinite periods of time include securities that management intends to use
as part of its asset/liability management strategy and that may be sold in
response to changes in market conditions, interest rates, prepayment risk, the
need to increase regulatory capital and other factors. The Company records
investments 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,
2003, stockholders equity included approximately $4.0 million, representing
the net unrealized gains on securities available for sale, less applicable
income taxes.

Securities that are bought and held principally for the purpose of sale in
the near term are classified as trading securities. Trading generally reflects
active and frequent buying and selling, and trading securities are generally
used with the objective of generating profits on short-term differences in
price
caused by market volatility. Investments classified as trading securities are
stated at market value with unrealized gains and losses included in earnings.

14



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##### 



Investment Activities (continued)

Income on debt securities available for sale is accrued and included in
interest and dividend income.

The specific identification method is used to determine realized gains or
losses on sales of securities available for sale which are also reported in
non-interest income under the caption gains on securities available for sale,
net. When a security suffers a loss in value which is considered other than
temporary, such loss is recognized by a charge to earnings.

All of the Companys mortgage-backed securities are currently classified
as
available for sale. At times of low loan demand, short-term mortgage-backed
securities may be used as substitutes for loans as certain of their financial
characteristics are very similar to short-term mortgage loans.

At December 31, 2003, the Companys investments, which consist of
securities available for sale (including mortgage-backed securities), trading
securities, short-term investments (including federal funds sold) and
interest-bearing deposits in banks totaled $722.1 million, representing 71.5%
of the Companys total assets.

15



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##### 



The following table sets forth the composition of the Companys investment
portfolio as of the dates indicated:

Investment Portfolio

|                                    |                         |                                                                 |        |         |         |      |        |         |         |   |        |         |         |  
|----------------------------------- | ----------------------- | --------------------------------------------------------------- | ------ | ------- | ------- | ---- | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|(In thousands) At December 31,      |                         | 2003                                                            |        | 2002    |         | 2001
|                                    |                         |                                                                 |        |         |         |     
|Federal funds sold:                 |                         |                                                                 |        |         |         |      |        |         |         |   |        |        
|                                    | Overnight federal funds |                                                                 | $      | 145,684 |         |      | $      | 221,586 |         |   | $      | 204,294 |        
|                                    | Term federal funds      |                                                                 |        | 45,000  |         |      |        |        |         |   |        |        |        
|                                    |                         |                                                                 |        |         |         |      |        |         |         |   |        |         |        
|                                    |                         | Total federal funds sold                                        |        |         | 190,684 |      |        |         | 221,586 |   |        |         | 204,294 |  
|Money market investment funds       |                         |                                                                 | 23,337 |         |         |      | 27,077 |         |         |   | 32,088 |        
|Interest-bearing deposits in banks: |                         |                                                                 |        |         |         |      |        |         |         |   |        |        
|                                    | Money market accounts   |                                                                 |        | 511     |         |      |        | 87      |         |   |        | 1,049   |        
|                                    | Certificates of deposit |                                                                 |        | 5,685   |         |      |        | 4,854   |         |   |        | 5,441   |        
|                                    |                         |                                                                 |        |         |         |      |        |         |         |   |        |         |        
|                                    |                         | Total short-term investments and
interest-bearing bank deposits |        | $       | 220,217 |      |        | $       | 253,604 |   |        | $       | 242,872 |  
|                                    |                         |                                                                 |        |         |         |      |        |         |         |   |        |         |        
|                                    |                         | Percent of total assets                                         |        |         | 21.8    | %    |        |         | 25.1    | % |        |         | 25.0    | %
|                                    |                         |                                                                 |        |         |         |      |        |         |         |   |        |         |        

|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |         |         |  
|---------------------------------------------- | ---------------------------------- | ----------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|(In thousands) At December 31,                 |                                    | 2003                                |         | 2002    |         | 2001
|                                               |                                    |                                     |         |         |         |     
|Securities available for sale: (a)(b)          |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|                                               | U.S. Treasury obligations          |                                     | $       | 123,642 |         |      | $       | 103,246 |         |   | $       | 80,883  |        
|                                               | U.S. Government agency obligations |                                     |         | 198,463 |         |      |         | 73,838  |         |   |         | 10,253  |        
|                                               | Equity securities                  |                                     |         | 11,466  |         |      |         | 13,833  |         |   |         | 16,417  |        
|                                               | Mortgage-backed securities         |                                     |         | 95,658  |         |      |         | 189,105 |         |   |         | 265,031 |        
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |         |        
|                                               |                                    | Total securities available for sale |         |         | 429,229 |      |         |         | 380,022 |   |         |         | 372,584 |  
|Trading securities: (a)                        |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|                                               | U.S. Treasury obligations          |                                     |         | 72,408  |         |      |         | 36,228  |         |   |         | 3,086   |        
|                                               | Equity securities                  |                                     |         | 222     |         |      |         | 19      |         |   |         |        |        
|                                               | Investments in mutual funds        |                                     |         | 3       |         |      |         | 2       |         |   |         | 3       |        
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |         |        
|                                               |                                    | Total trading securities            |         |         | 72,633  |      |         |         | 36,249  |   |         |         | 3,089   |  
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |         |        
|                                               |                                    | Total securities                    |         | $       | 501,862 |      |         | $       | 416,271 |   |         | $       | 375,673 |  
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |         |        
|                                               |                                    | Percent of total assets             |         |         | 49.7    | %    |         |         | 41.3    | % |         |         | 38.7    | %
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |         |        
|Total investments                              |                                    | $                                   | 722,079 |         |         | $    | 669,875 |         |         | $ | 618,545 |        
|Total investments as a percent of total assets |                                    |                                     | 71.5    | %       |         |      | 66.4    | %       |         |   | 63.7    | %      
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |         |        



|(a) |  | At market value.                                                                                                                                                                             
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The market value of callable securities included in securities
available for
sale at December 31, 2003, 2002 and 2001, totaled $192.4 million, $73.8
million
and $10.1 million, respectively.

16



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##### 



The following table presents the amortized cost of debt securities
available for
sale at December 31, 2003 maturing within stated periods with the weighted
average
interest yield from securities falling within the range of maturities:

Debt Securities Available for Sale

|                                      |        |             |          |                 |            |                |           |         |   |  |      |        |   |  |   |         |  
|------------------------------------- | ------ | ----------- | -------- | --------------- | ---------- | -------------- | --------- | ------- | - |  | ---- | ------ | - |  | - | ------- | -
|                                      |        |             |          |                 |            |                | U.S.      |         |   |  |      |        |   |  |  
|                                      |        |             | U.S.     |                 | Government |                | Mortgage- |         |   |  |     
|                                      |        |             | Treasury |                 | agency     |                | backed    |         |   |  |     
|(Dollars in thousands)                |        | obligations |          | obligations (2) |            | securities (1) |           | Total  
|                                      |        |             |          |                 |            |                |           |        
|Maturing within 1 year                |        |             |          |                 |            |                |           |         |   |  |      |        |   |  |   |        
|                                      | Amount |             | $        | 53,281          |            |                | $         |        |   |  | $    | 40     |   |  | $ | 53,321  |  
|                                      | Yield  |             |          | 2.64            | %          |                |           |        |   |  |      | 8.65   | % |  |   | 2.64    | %
|Maturing after 1
but within 5 years   |        |             |          |                 |            |                |           |         |   |  |      |        |   |  |   |        
|                                      | Amount |             |          | 62,449          |            |                |           | 175,015 |   |  |      | 5,160  |   |  |   | 242,624 |  
|                                      | Yield  |             |          | 2.39            | %          |                |           | 2.96    | % |  |      | 6.88   | % |  |   | 2.90    | %
|Maturing after 5
but within 10 years  |        |             |          |                 |            |                |           |         |   |  |      |        |   |  |   |        
|                                      | Amount |             |          | 7,122           |            |                |           | 22,000  |   |  |      | 34,065 |   |  |   | 63,237  |  
|                                      | Yield  |             |          | 4.06            | %          |                |           | 3.53    | % |  |      | 6.79   | % |  |   | 5.35    | %
|Maturing after 10
but within 15 years |        |             |          |                 |            |                |           |         |   |  |      |        |   |  |   |        
|                                      | Amount |             |          |                |            |                |           | 2,042   |   |  |      | 50,825 |   |  |   | 52,867  |  
|                                      | Yield  |             |          |                |            |                |           | 5.95    | % |  |      | 6.27   | % |  |   | 6.26    | %
|Maturing after 15 years               |        |             |          |                 |            |                |           |         |   |  |      |        |   |  |   |        
|                                      | Amount |             |          |                |            |                |           |         |   |  |      | 271    |   |  |   | 271     |  
|                                      | Yield  |             |          |                |            |                |           |         |   |  |      | 6.27   | % |  |   | 6.27    | %
|                                      |        |             |          |                 |            |                |           |         |   |  |      |        |   |  |   |         |  
|Total                                 |        |             |          |                 |            |                |           |         |   |  |      |        |   |  |   |        
|                                      | Amount |             | $        | 122,902         |            |                | $         | 199,057 |   |  | $    | 90,361 |   |  | $ | 412,320 |  
|                                      | Yield  |             |          | 2.60            | %          |                |           | 3.05    | % |  |      | 6.50   | % |  |   | 3.67    | %
|                                      |        |             |          |                 |            |                |           |         |   |  |      |        |   |  |   |         |  
|Average life in years                 |        |             | 1.95     |                 |            |                | 4.02      |         |   |  |      |        |   |  |   |        
|Average contractual
maturity in years |        |             |          |                 |            |                |           |         |   |  | 9.76 |        |   |  |   |        



|(1) |  | Mortgage-backed securities are shown based on contractual maturities.
Actual maturities will differ from contractual maturities due to scheduled
amortization and prepayments.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The amortized cost of callable securities included in securities available
for sale
totaled $193.0 million as of December 31, 2003.                                           

At December 31, 2003, the Company did not have an investment in any
issuer (other than securities of the U.S. Government and Government Agencies)
in excess of 10% of stockholders equity.

17



---



##### 



Deposits and Other Sources of Funds

General. Deposits have been the Banks primary source of funds for
making investments and loans. In addition to deposits, the Banks other major
sources of funds are derived from amortization and prepayment of loans and
mortgage-backed securities, from sales, calls or maturities of investment
securities, and from operations. Deposit flows can vary significantly and are
influenced by prevailing interest rates, money market conditions, economic
conditions and competition. The Bank can respond to changing market conditions
and competition through the pricing of its deposit accounts. Management can
attempt to control the level of its deposits to a significant degree through
its pricing policies. Another important factor in attracting deposits is
convenience. In addition to the Banks fifteen conveniently located banking
offices, customers can access accounts through the Banks Automated Teller
Machine (ATM) network. The Bank is a member of the Transaxion (TX), NYCE and
CIRRUS System, Inc. (CIRRUS) networks which allow access to ATMs in over
100,000 locations worldwide. Additionally, MASSBANK has joined with over
400 other financial institutions to form the SUM Program. This program allows
MASSBANK customers to access over 2,800 SUM ATMs throughout the Northeast and
Midwest without having to pay an access or surcharge fee.

Deposits. A substantial amount of the Banks deposits are derived from
customers who live or work within the Banks market area. The Bank does not
solicit deposits through any outside agents. The Banks deposits at
December 31, 2003 consist of regular, silver and smart savings accounts,
holiday
club savings accounts, NOW and Super NOW accounts, regular and business
checking
accounts, money market deposit accounts, IRA and Keogh accounts, and term
deposit accounts.

Deposits decreased by $1.9 million or 0.2% to $882.0 million at
December 31, 2003, from $883.9 million at year-end 2002. Management believes
that increased competition for deposits in the latter part of 2003 and more
attractive returns in equity securities were the principal reasons for deposit
outflows.

Borrowed Funds. From time to time the Bank has obtained funds through
repurchase agreements with its customers and federal funds purchased. The
Bank also has the ability, although it has never exercised it, to borrow from
the Federal Reserve Bank and The Depositors Insurance Fund, Inc. The Bank did
not have any borrowed funds in 2003 or 2002.

18



---



##### 



DEPOSITS

The following table shows the composition of the deposits as of the dates
indicated:

|                                                 |                                             |                                    |   |         |         |          |   |         |        |          |   |         |         |          |   |       |        |   |     |         |         |  |   |       |        |  
|------------------------------------------------ | ------------------------------------------- | ---------------------------------- | - | ------- | ------- | -------- | - | ------- | ------ | -------- | - | ------- | ------- | -------- | - | ----- | ------ | - | --- | ------- | ------- |  | - | ----- | ------ | -
|(In thousands) at December 31,                   |                                             | 2003                               |   | 2002    |         | 2001    
|                                                 |                                             |                                    |   |         |         |         
|                                                 |                                             |                                    |   |         |         |          |   | Percent |        |          |   |         |         | Percent  |   |       |        |   |     | Percent
|                                                 |                                             |                                    |   |         |         |          |   | of      |        |          |   |         |         | of       |   |       |        |   |     | of     
|                                                 |                                             |                                    |   | Amount  |         | Deposits |   | Amount  |        | Deposits |   | Amount  |         | Deposits
|Demand and NOW                                   |                                             |                                    |   |         |         |          |   |         |        |          |   |         |         |          |   |       |        |   |     |         |         |  |   |      
|                                                 | NOW                                         |                                    | $ | 56,108  |         |          |   | 6.36    |        |          | $ | 57,293  |         |          |   | 6.48  | %      |   | $   | 53,476  |         |  |   | 6.29  | %     
|                                                 | Demand accounts
(non interest-bearing)      |                                    |   | 28,464  |         |          |   | 3.23    |        |          |   | 28,034  |         |          |   | 3.17  |        |   |     | 28,667  |         |  |   | 3.37  |       
|                                                 |                                             |                                    |   |         |         |          |   |         |        |          |   |         |         |          |   |       |        |   |     |         |         |  |   |      
|                                                 |                                             | Total demand and NOW               |   |         | 84,572  |          |   |         | 9.59   |          |   |         | 85,327  |          |   |       | 9.65   |   |     |         | 82,143  |  |   |       | 9.66   |  
|Savings:                                         |                                             |                                    |   |         |         |          |   |         |        |          |   |         |         |          |   |       |        |   |     |         |         |  |   |      
|                                                 | Regular savings and
special notice accounts |                                    |   | 595,575 |         |          |   | 67.52   |        |          |   | 535,122 |         |          |   | 60.54 |        |   |     | 368,631 |         |  |   | 43.39 |       
|                                                 | Money market accounts                       |                                    |   | 12,256  |         |          |   | 1.39    |        |          |   | 13,825  |         |          |   | 1.57  |        |   |     | 15,329  |         |  |   | 1.80  |       
|                                                 |                                             |                                    |   |         |         |          |   |         |        |          |   |         |         |          |   |       |        |   |     |         |         |  |   |      
|                                                 |                                             | Total savings                      |   |         | 607,831 |          |   |         | 68.91  |          |   |         | 548,947 |          |   |       | 62.11  |   |     |         | 383,960 |  |   |       | 45.19  |  
|Time certificates of deposit:                    |                                             |                                    |   |         |         |          |   |         |        |          |   |         |         |          |   |       |        |   |     |         |         |  |   |      
|                                                 | Fixed rate certificates                     |                                    |   | 129,210 |         |          |   | 14.65   |        |          |   | 170,527 |         |          |   | 19.29 |        |   |     | 287,773 |         |  |   | 33.87 |       
|                                                 | Variable rate certificates                  |                                    |   | 60,411  |         |          |   | 6.85    |        |          |   | 79,127  |         |          |   | 8.95  |        |   |     | 95,837  |         |  |   | 11.28 |       
|                                                 |                                             |                                    |   |         |         |          |   |         |        |          |   |         |         |          |   |       |        |   |     |         |         |  |   |      
|                                                 |                                             | Total time certificates
of deposit |   |         | 189,621 |          |   |         | 21.50  |          |   |         | 249,654 |          |   |       | 28.24  |   |     |         | 383,610 |  |   |       | 45.15  | %
|Deposit acquisition premium, net of amortization |                                             |                                    |  |         |         |          |  |         |        |          |  |         |         |          |  |       |        |   | (29 | )       |         |  |  |      
|                                                 |                                             |                                    |   |         |         |          |   |         |        |          |   |         |         |          |   |       |        |   |     |         |         |  |   |      
|                                                 |                                             | Total deposits                     |   | $       | 882,024 |          |   |         | 100.00 | %        |   | $       | 883,928 |          |   |       | 100.00 | % |     | $       | 849,684 |  |   |       | 100.00 | %

In the following table the average amount of deposits and average rate is
shown for each of the years as indicated.

|                                            |  |         |         |         |  |         |      |         |  |         |         |         |  |  |      |   |  |   |         |  |  |  |      |  
|------------------------------------------- |  | ------- | ------- | ------- |  | ------- | ---- | ------- |  | ------- | ------- | ------- |  |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|(In thousands) Years Ended December 31,     |  | 2003    |         | 2002    |  | 2001   
|                                            |  |         |         |         |  |        
|                                            |  | Average |         | Average |  | Average |      | Average |  | Average |         | Average
|                                            |  | Balance |         | Rate    |  | Balance |      | Rate    |  | Balance |         | Rate   
|NOW accounts                                |  | $       | 55,150  |         |  |         | 0.45 | %       |  | $       | 54,570  |         |  |  | 0.66 | % |  | $ | 51,689  |  |  |  | 0.89 | %
|Demand (non interest-bearing)
accounts      |  |         | 27,483  |         |  |         |     |         |  |         | 27,329  |         |  |  |     |   |  |   | 28,070  |  |  |  |     |  
|Escrow deposits of borrowers                |  |         | 950     |         |  |         | 0.16 |         |  |         | 1,065   |         |  |  | 0.40 |   |  |   | 1,089   |  |  |  | 0.19 |  
|Money market accounts                       |  |         | 13,466  |         |  |         | 0.63 |         |  |         | 14,959  |         |  |  | 1.41 |   |  |   | 16,402  |  |  |  | 2.44 |  
|Regular savings and
special notice accounts |  |         | 581,998 |         |  |         | 1.88 |         |  |         | 456,775 |         |  |  | 2.62 |   |  |   | 337,220 |  |  |  | 3.29 |  
|Time certificates of deposit                |  |         | 213,282 |         |  |         | 2.15 |         |  |         | 315,987 |         |  |  | 3.22 |   |  |   | 402,155 |  |  |  | 5.08 |  
|                                            |  |         |         |         |  |         |      |         |  |         |         |         |  |  |      |   |  |   |         |  |  |  |      |  
|                                            |  | $       | 892,329 |         |  |         | 1.78 | %       |  | $       | 870,685 |         |  |  | 2.61 | % |  | $ | 836,625 |  |  |  | 3.87 | %

19



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##### 



Investment Management and Trust Services

The Banks Trust and Investment Services Division offers a variety of
investment, trust and estate planning services and also serves as trustee,
executor, and executors agent for bank customers.

As of December 31, 2003 the Trust Division had approximately $26.3
million (market value) of assets in custody and under management.

Competition

The Bank faces substantial competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from
other thrift institutions, commercial banks, credit unions and mortgage
banking companies. The Bank competes for loans principally on the basis of
interest rates and loan fees, the types of loans originated and the quality of
services provided to borrowers.

In attracting deposits, the Banks primary competitors are other thrift
institutions, commercial banks, mutual funds and credit unions located in its
market area. The Banks attraction and retention of deposits depends on its
ability to provide investment opportunities that satisfy the requirements of
customers with respect to rate of return, liquidity, risk and other factors.
The Bank attracts a significant amount of deposits through its branch offices
primarily from the communities in which those branch offices are located. The
Bank competes for these deposits by offering competitive rates, convenient
branch and ATM locations and convenient business hours.

The Bank also faces substantial competition from the bank consolidations
that are taking place in the industry. The giant mega-bank mergers, including
the Bank of America merging with FleetBoston, our largest competitor in
Massachusetts, are creating pricing pressures for both loans and deposits.

20



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##### 



Supervision and Regulation of the Company and its Subsidiary

The business in which the Company and its subsidiary are engaged is
subject to extensive supervision, regulation and examination by various bank
regulatory authorities and other governmental agencies. State and federal
banking laws have as their principal objective either the maintenance of the
safety and soundness of financial institutions and the federal deposit
insurance
system or the protection of consumers or classes of consumers, and depositors
in
particular, rather than the specific protection of stockholders of a bank or
its
parent company.

Set forth below is a brief description of certain laws and regulations
that
relate to the regulation of the Company. To the extent the following material
describes statutory or regulatory provisions, it is qualified in its entirety
by
reference to the particular statute or regulation.

Regulation of the Company. As a registered bank holding company, we are
subject
to regulation under the Bank Holding Company Act of 1956, as amended, (BHCA)
and to inspection, examination and supervision by the Board of Governors of the
Federal Reserve System, (FRB). The Company is also subject to laws of the
Commonwealth of Massachusetts and the jurisdiction of the Massachusetts Board
of Bank Incorporation (BBI) and the Massachusetts Commissioner of Banks
(Commissioner). The Company is incorporated in the State of Delaware and is
therefore also subject to Delaware corporation law.

The FRB has the authority to issue orders to bank holding companies to cease
and
desist from unsound banking practices and violations of conditions imposed by,
or violations of agreements with, the FRB. The FRB is also empowered to assess
civil money penalties against companies or individuals who violate the BHCA or
orders or regulations thereunder, to order termination of non-banking
activities
of non-banking subsidiaries of bank holding companies, and to order termination
of ownership and control of a non-banking subsidiary by a bank holding company.
Under the BHCA, the Company may not generally engage in activities or acquire
more than 5% of any class of voting securities of any company engaged in
activities other than banking or activities that are closely related to
banking.
However, if the Company elects to be treated as a financial holding company,
the
Company may engage in activities that are financial in nature or incidental or
complimentary to such financial activities, as determined by the FRB and the
Secretary of the Department of the Treasury. The Company has not elected
financial holding company status. Under certain circumstances, the Company may
be required to give notice to or seek approval of the FRB before engaging in
activities other than banking.

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. (Riegle-Neal), Riegle-Neal permits adequately capitalized and adequately managed bank
holding companies, as determined by the FRB, to acquire banks in any state
subject to certain concentration limits and other conditions. Riegle-Neal also
generally authorizes the interstate merger of banks. In addition, among other
things, Riegle-Neal permits banks to establish new branches on an interstate
basis provided that the law of the host state specifically authorizes such
action. However, as a bank holding company, we are required to obtain prior
FRB
approval before acquiring more than 5% of a class of voting securities, or
substantially all of the assets of a bank holding company, bank or savings
association.

Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring control of a bank holding company, such as
the Company, unless the FRB has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the FRB, the
acquisition of 10% or more of a class of voting securities of a bank holding
company with a class of securities registered under Section 12 of the
Securities
Exchange Act of 1934, as amended, would, under the circumstances set forth in
the presumption, constitute acquisition of control of the bank holding company.

21



---



##### 



Supervision and Regulation of the Company and its Subsidiary
(continued)

In addition, a company is required to obtain the approval of the FRB under the
BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding
company) or more of any class of outstanding voting securities of a bank
holding
company, or otherwise obtaining control or a controlling influence over that
bank holding company. Massachusetts law also imposes certain limitations on
the ability of persons and entities to acquire control of banking institutions
and their parent companies.

Bank Holding Company Dividends. The FRB has authority to prohibit bank holding
companies from paying dividends if such payment is deemed to be an unsafe or
unsound practice. The FRB has indicated generally that it may be an unsafe or
unsound practice for bank holding companies to pay dividends unless the bank
holding companys net income over the preceding year is sufficient to fund the
dividends and the expected rate of earnings retention is consistent with the
organizations capital needs, asset quality and overall financial condition.
In addition, Delaware corporate law includes limitations on a corporations
payment of dividends if such dividends exceed the corporations surplus or
current net profits. The Company depends upon dividends received from its
subsidiary bank to fund its activities, including the payment of dividends.
As described below, the Federal Deposit Insurance Corporation (FDIC) may
regulate the amount of dividends payable by the subsidiary bank. The inability
of the bank to pay the dividend may have an adverse effect on the Company.

Regulation of the Bank. The Companys subsidiary bank (Bank) is subject to
regulation, supervision and examination by the Massachusetts Division of Banks
(Division) and the FDIC.

Insurance of Accounts and FDIC Regulation. The Bank pays deposit insurance
premiums to the FDIC based on an assessment rate established by the FDIC for
Bank Insurance Fund-member institutions. The FDIC has established a risk-based
premium system under which the FDIC classifies institutions based on their
capital ratios and on other relevant factors and generally assesses higher
rates
on those institutions that tend to pose greater risks to the federal deposit
insurance funds. The Federal Deposit Insurance Act (FDIA) does not require
the FDIC to charge all banks deposit insurance premiums when the ratio of
deposit insurance reserves to insured deposits is maintained above specified
levels. However, as a result of general economic conditions and recent bank
failures, it is possible that the ratio of deposit insurance reserves to
insured
deposits could fall below the minimum ratio that FDIA requires, which would
result in the FDIC setting deposit insurance assessment rates sufficient to
increase deposit insurance reserves to the required ratio. We cannot predict
whether the FDIC will be required to increase deposit insurance assessments
above their current levels.

Bank Holding Company Support of Subsidiary Banks. Under FRB policy, a bank
holding company is expected to act as a source of financial and managerial
strength to each of its subsidiary banks and to commit resources to their
support. This support may be required at times when the bank holding company
may not have the resources to provide it. Similarly, under the cross-guarantee
provisions of FDIA, the FDIC can hold any FDIC-insured depository institution
liable for any loss suffered or anticipated by the FDIC in connection with (1)
the default of a commonly controlled FDIC-insured depository institution; or
(2) any assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default. Our subsidiary bank is an FDIC-insured depository institution.

22



---



##### 



Supervision and Regulation of the Company and its Subsidiary
(continued)

Regulatory Capital Requirements. The FRB and the FDIC have issued
substantially

similar risk-based and leverage capital guidelines applicable to United States
banking organizations. In addition, these regulatory agencies may from time to
time require that a banking organization maintain capital above the minimum
levels, whether because of its financial condition or actual or anticipated
growth.

The FRB risk-based guidelines define a three-tier capital framework. Tier 1
capital includes common shareholders equity and qualifying preferred stock,
less goodwill and other adjustments. Tier 2 capital consists of preferred
stock
not qualifying as Tier 1 capital, mandatory convertible debt, limited amounts
of
subordinated debt, other qualifying term debt and the allowance for credit
losses up to 1.25 percent of risk-weighted assets. Tier 3 capital includes
subordinated debt that is unsecured, fully paid, has an original maturity of at
least two years, is not redeemable before maturity without prior approval by
the FRB and includes a lock-in clause precluding payment of either interest or
principal if the payment would cause the issuing banks risk-based capital
ratio
to fall or remain below the required minimum. The sum of Tier 1 and Tier 2
capital less investments in unconsolidated subsidiaries represents qualifying
total capital. Risk-based capital ratios are calculated by dividing Tier 1 and
total capital by risk-weighted assets. Assets and off-balance sheet exposures
are assigned to one of four categories of risk-weights, based primarily on
relative credit risk. The minimum Tier 1 capital ratio is four percent and the
minimum total capital ratio is eight percent. The Companys tier 1 capital (to
risk-weighted assets) calculation equals 34.56%.

The leverage ratio is determined by dividing Tier 1 capital by adjusted average
total assets. Although the stated minimum ratio is 100 to 200 basis points
above three percent, banking organizations are required to maintain a ratio of
at least five percent to be classified as well capitalized. The Companys
leverage ratio is 10.57%.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
among other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires
the federal bank regulatory agencies to implement systems for prompt
corrective
action for insured depository institutions that do not meet minimum capital
requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to
meet the capital guidelines could also subject a banking institution to capital
raising requirements. An undercapitalized bank must develop a capital
restoration plan and its parent holding company must guarantee that banks
compliance with the plan. The liability of the parent holding company under
any
such guarantee is limited to the lesser of five percent of the banks assets at
the time it became undercapitalized or the amount needed to comply with the
plan. Furthermore, in the event of the bankruptcy of the parent holding
company, such guarantee would take priority over the parents general unsecured
creditors. In addition, FDICIA requires the various regulatory agencies to
prescribe certain non-capital standards for safety and soundness relating
generally to operations and management, asset quality and executive
compensation
and permits regulatory action against a financial institution that does not
meet
such standards.

23



---



##### 



Supervision and Regulation of the Company and its Subsidiary
(continued)

The various regulatory agencies have adopted substantially similar regulations
that define the five capital categories identified by FDICIA, using the total
risk-based capital, Tier 1 risk-based capital and leverage capital ratios as
the relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered under-
capitalized. Under the regulations, a well capitalized institution must have
a Tier 1 risk-based capital ratio of at least six percent, a total risk-based
capital ratio of a least ten percent and a leverage ratio of at least five
percent and not be subject to a capital directive order. Regulators also must
take into consideration (a) concentrations of credit risk; (b) interest rate
risk (when the interest rate sensitivity of an institutions assets does not
match the sensitivity of its liabilities or its off-balance-sheet position);
and (c) risks from non-traditional activities, as well as an institutions
ability to manage those risks, when determining the adequacy of an
institutions
capital. This evaluation will be made as a part of the institutions regular
safety and soundness examination. In addition, the Company, and any Bank with
significant trading activity, must incorporate a measure for market risk in
their regulatory capital calculations.

Limitations on Bank Dividends. The FDIC has the authority to use its
enforcement powers to prohibit a bank from paying dividends if, in its opinion,
the payment of dividends would constitute an unsafe or unsound practice.
Federal law also prohibits the payment of dividends by a bank that will result
in the bank failing to meet its applicable capital requirements on a pro forma
basis.

Customer Information Security. The FDIC and other bank regulatory agencies
have
adopted final guidelines for establishing standards for safeguarding nonpublic
personal information about customers that implement provisions of the Gramm-
Leach Bliley Act (1999) (GLBA), which establishes a comprehensive framework
to permit affiliations among commercial banks, insurance companies, securities
firms, and other financial service providers by revising and expanding the
BHCA framework. Specifically, the Information Security Guidelines established
by the GLBA require each financial institution, under the supervision and
ongoing oversight of its Board of Directors or an appropriate committee
thereof,
to develop, implement and maintain a comprehensive written information security
program designed to ensure the security and confidentiality of customer
information, to protect against anticipated threats or hazards to the security
or integrity of such information; and to protect against unauthorized access to
or use of such information that could result in substantial harm or
inconvenience to any customer.

Privacy. The GLBA requires financial institutions to implement policies and
procedures regarding the disclosure of nonpublic personal information about
consumers to nonaffiliated third parties. In general, the statute requires
financial institutions to explain to consumers their policies and procedures
regarding the disclosure of such nonpublic personal information, and, unless
otherwise required or permitted by law, financial institutions are prohibited
from disclosing such information except as provided in their policies and
procedures.

24



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##### 



Supervision and Regulation of the Company and its Subsidiary
(continued)

USA Patriot Act. The USA Patriot Act of 2001, designed to deny terrorists and
others the ability to obtain anonymous access to the U.S. financial system, has
significant implications for depository institutions, broker-dealers and other
businesses involved in the transfer of money. The USA Patriot Act, together
with the implementing regulations of various federal regulatory agencies, have
caused financial institutions, including banks, to adopt and implement
additional, or amend existing, policies and procedures with respect to, among
other things, anti-money laundering compliance, suspicious activity and
currency
transaction reporting, customer identity verification and customer risk
analysis. The statute and its underlying regulations also permit information
sharing for counter-terrorist purposes between federal law enforcement agencies
and financial institutions, as well as among financial institutions, subject to
certain conditions, and require the FRB (and other federal banking agencies) to
evaluate the effectiveness of an applicant in combating money laundering
activities when considering applications filed under Section 3 of the BHCA or
under the Bank Merger Act. Management believes that the Company is in
compliance with all the requirements prescribed by the USA Patriot Act and all
applicable final implementing regulations.

The Community Reinvestment Act. The Community Reinvestment Act (CRA) requires
lenders to identify the communities served by the institutions offices and
other deposit taking facilities and to make loans and investments and provide
services that meet the credit needs of these communities. Regulatory agencies
examine each of the banks and rate such institutions compliance with CRA as
Outstanding, Satisfactory, Needs to Improve, or Substantial
Noncompliance. Failure of an institution to receive at least a Satisfactory
rating could inhibit such institution or its holding company from undertaking
certain activities, including engaging in activities newly permitted as a
financial holding company under the GLBA and acquisitions of other financial
institutions. The FRB must take into account the record of performance of
banks
in meeting the credit needs of the entire community served, including low-and
moderate-income neighborhoods. The Bank has achieved a rating of Satisfactory
on their last examination. The Commonwealth of Massachusetts also has enacted
substantially similar community reinvestment requirements.

25



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##### 



Employees

MASSBANK Corp. utilizes the support staff of the Bank from time to time
for which a $12,000 fee was paid to the Bank in 2003. No separate compensation
is being paid to the executive officers of MASSBANK Corp., all of whom are
executive officers of the Bank and receive compensation as such. As of
December 31, 2003, the Bank had 132 full-time employees (including 32 officers)
and 53 part-time employees (including 1 officer). None of the Banks employees
is represented by a collective bargaining group, and management believes that
its employee relations are good. The Bank provides its employees with formal
training in product knowledge, sales techniques, mortgage origination, fair
lending, privacy and various other bank related functions and topics. In
addition, each supervisor at the Bank receives management training before
assuming his or her supervisory duties and periodically thereafter. The Bank
maintains a comprehensive employee benefits program for qualified employees
that
includes a qualified pension plan, an Employee Stock Ownership Plan (ESOP),
health and dental insurance, life and long-term disability insurance and
tuition assistance.

Subsidiaries

The Bank has three wholly owned subsidiaries: Readibank Investment
Corporation, Melbank Investment Corporation, and Readibank Properties, Inc.

Readibank Investment Corporation and Melbank Investment Corporation were
established for the purpose of managing portions of the Banks investment
portfolio. They are classified by the Commonwealth of Massachusetts as
securities corporations for tax purposes which restricts their business to
buying, selling, dealing in, or holding securities on their own behalf. As
securities corporations they are currently taxed at a lower rate than the Bank.
Legislative proposals have recently been discussed which may impact this
favorable tax treatment.

Assets of Readibank Investment Corporation and Melbank Investment
Corporation totaled $161.7 million and $161.4 million, respectively, at
December 31, 2003.

Readibank Properties, Inc. was incorporated primarily for the purpose of
real estate development projects. These projects were completed many years ago
and this subsidiary is currently inactive. Its assets totaled $619 thousand at
December 31, 2003, consisting primarily of an inter-company receivable from the
Bank.

Executive Officers of the Registrant

The executive officers of the Company and the Bank and the age of each
officer as of February 29, 2004 are as follows:

|                    |  |     |    |        |  |                                                                                                      
|------------------- |  | --- | -- | ------ |  | -----------------------------------------------------------------------------------------------------
|Name                |  | Age |    | Office
|Gerard H. Brandi    |  |     | 55 |        |  | Chairman of the Board of Directors,
President and Chief Executive
Officer of the Company and the Bank
|                    |  |     |    |        |  |                                                                                                      
|David F. Carroll    |  |     | 56 |        |  | Vice President of the Bank                                                                           
|                    |  |     |    |        |  |                                                                                                      
|Reginald E. Cormier |  |     | 56 |        |  | Senior Vice President, Treasurer and
Chief Financial Officer of the
Company and the Bank             
|                    |  |     |    |        |  |                                                                                                      
|Thomas J. Queeney   |  |     | 41 |        |  | Vice President and Senior Trust
Officer of the Bank                                                  

26



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##### 



Executive Officers of the Registrant (continued)

|                   |  |     |    |        |  |                                                                         
|------------------ |  | --- | -- | ------ |  | ------------------------------------------------------------------------
|Name               |  | Age |    | Office
|Donald R. Washburn |  |     | 60 |        |  | Senior Vice President of the Bank                                       
|                   |  |     |    |        |  |                                                                         
|Donna H. West      |  |     | 58 |        |  | Senior Vice President of the Bank
and Assistant Secretary of the
Company

Gerard H. Brandi. Mr. Brandi has served in various capacities with
MASSBANK since he joined the Bank in 1975 as Vice President of the Lending
Division. He served as Senior Vice President from 1978 to 1981, Executive
Vice President and Senior Lending Officer from 1981 to 1983, and Executive
Vice President and Treasurer from 1983 to 1986. Mr. Brandi was named
President of the Company and the Bank in 1986, Chief Executive Officer in 1992
and Chairman in 1993.

David F. Carroll. Mr. Carroll has been employed by the Bank since 1983
and has been Vice President of Operations since 1984. He served as Vice
President of the Lending Division for a year before becoming Vice President of
Operations.

Reginald E. Cormier. Mr. Cormier joined the Bank as Treasurer in
September, 1987 and served in this capacity until his promotion to Vice
President, Treasurer and Chief Financial Officer in January, 1995. In
December 1999, he was promoted to Senior Vice President, Treasurer and Chief
Financial Officer.

Thomas J. Queeney. Mr. Queeney joined the Bank in 1986 as a Management
Trainee in Loan Origination. He became an Assistant Manager in 1987 and was
promoted to Assistant Treasurer in 1988. He then served as a Marketing and
Investor Relations Representative until his promotion to Loan Servicing
Manager in 1990. In 1992, he was promoted to Loan Officer and Commercial
Lending Manager. He was promoted to Assistant Vice President, Lending in
1997, where he served until his promotion to AVP/Trust Administrator in July
of 1998. In January of 1999, he was promoted to Vice President and Senior
Trust Officer.

Donald R. Washburn. Mr. Washburn joined the Bank in 1973 as a Loan
Officer. He became an Assistant Vice President in January, 1977 and a Vice
President in the Lending Division in June, 1980. Mr. Washburn served as Vice
President of the Operations Division from February, 1983 to January, 1984, as
Vice President of the Community Banking Division from January, 1984 to
January, 1986 and as Vice President of the Lending Division from January, 1986
until his promotion to Senior Vice President of the Lending Division in June,
1994.

Donna H. West. Mrs. West has been employed by the Bank since 1979 and
has served as Vice President of the Community Banking Division since October,
1987. Starting at the Bank as an Assistant Branch Manager in 1979, Mrs. West
became a Branch Manager in 1981, an Assistant Treasurer and Branch Manager in
1982, an Assistant Treasurer and Regional Branch Administrator in 1984 and an
Assistant Vice President and Regional Branch Administrator in 1986. She
served in this capacity until her October, 1987 promotion to Vice President of
the Community Banking Division. In June, 1994, Mrs. West was promoted to
Senior Vice President of the Community Banking Division.

27



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##### 



Item 2. Properties

The main office of MASSBANK Corp. and MASSBANK is located at 123 Haven
Street, Reading, Massachusetts. Additionally, the Bank has fourteen branches
and three operations facilities. The Bank owns its main office, three
operations facilities and nine of its branches. All of the remaining branches
and other facilities are leased under various leases. At December 31, 2003,
management believes that the Banks existing facilities are adequate for the
conduct of its business.

The following table sets forth certain information relating to the Banks
existing facilities.

|                       |  |                                       |  |                                                  |  |            |   |         |      |  |   |  |      |  |  | 
|---------------------- |  | ------------------------------------- |  | ------------------------------------------------ |  | ---------- | - | ------- | ---- |  | - |  | ---- |  |  | 
|                       |  |                                       |  | Owned                                            |  | Lease      |   | Renewal
|                       |  |                                       |  | or                                               |  | Expiration |   | Option 
|Location               |  | Leased                                |  | Date                                             |  | Through   
|MAIN OFFICE:           |  | 123 Haven Street, Reading, MA         |  | Owned                                            |  |            |  |         |      |  |  | 
|BRANCH OFFICES:        |  | 291 Chelmsford Street, Chelmsford, MA |  | Owned                                            |  |            |  |         |      |  |  | 
|                       |  |                                       |  | 17 North Road, Chelmsford, MA                    |  | Owned      |   |         |     |  |   |  |     | 
|                       |  |                                       |  | 45 Broadway Road, Dracut, MA                     |  | Leased     |   |         | 2012 |  |   |  | 2022 | 
|                       |  |                                       |  | 738 Broadway, Everett, MA                        |  | Owned      |   |         |     |  |   |  |     | 
|                       |  |                                       |  | 50 Central Street, Lowell, MA                    |  | Owned      |   |         |     |  |   |  |     | 
|                       |  |                                       |  | 755 Lakeview Avenue, Lowell, MA                  |  | Owned      |   |         |     |  |   |  |     | 
|                       |  |                                       |  | 4110 Mystic Valley Pkwy, Medford, MA             |  | Leased     |   |         | 2004 |  |   |  |     | 
|                       |  |                                       |  | 476 Main Street, Melrose, MA                     |  | Owned      |   |         |     |  |   |  |     | 
|                       |  |                                       |  | 27 Melrose Street, Towers Plaza,
Melrose, MA     |  | Leased     |   |         | 2004 |  |   |  | 2014 | 
|                       |  |                                       |  | 240 Main Street, Stoneham, MA                    |  | Leased     |   |         | 2003 |  |   |  |     | 
|                       |  |                                       |  | 1800 Main Street, Tewksbury, MA                  |  | Owned      |   |         |     |  |   |  |     | 
|                       |  |                                       |  | 203 Littleton Road, Westford, MA                 |  | Owned      |   |         |     |  |   |  |     | 
|                       |  |                                       |  | 370 Main Street, Wilmington, MA                  |  | Owned      |   |         |     |  |   |  |     | 
|                       |  |                                       |  | 219 Lowell Street, Luccis Plaza,
Wilmington, MA |  | Leased     |   |         | 2006 |  |   |  |     | 
|OPERATIONS FACILITIES: |  | 159 Haven Street, Reading, MA         |  | Owned                                            |  |            |  |         |      |  |  | 
|                       |  |                                       |  | 169 Haven Street, Reading, MA                    |  | Owned      |   |         |     |  |   |  |     | 
|                       |  |                                       |  | 11 North Road, Chelmsford, MA                    |  | Owned      |   |         |     |  |   |  |     | 

Item 3. Legal Proceedings

From time to time, MASSBANK Corp. and/or the Bank are involved as a
plaintiff or defendant in various legal actions incident to their business.
As of December 31, 2003, none of these actions individually or in the aggregate
is believed by management to be material to the financial condition of MASSBANK
Corp. or the Bank.

Item 4. Submission of Matters to a Vote of Security Holders

None during the fourth quarter of 2003.

28



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##### 



PART II

Item 5. Market for Registrants Common Stock and Related Stockholder Matters

The information contained under the caption MASSBANK Corp. and
Subsidiaries Stockholder Data in the Registrants 2003 Annual Report to
Stockholders is incorporated herein by reference.

Item 6. Selected Financial Data

The information contained under the caption MASSBANK Corp. and
Subsidiaries  Selected Consolidated Financial Data in the Registrants 2003
Annual Report to Stockholders is incorporated herein by reference.

This selected consolidated financial data should be read in conjunction
with the consolidated statements and related notes thereto appearing in the
Registrants 2003 Annual Report to Stockholders which are incorporated herein
by reference.

Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations

The information contained under the caption Managements Discussion and
Analysis of Financial Condition and Results of Operations in the Registrants
2003 Annual Report to Stockholders is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information contained under the captions Asset and Liability
Management, Interest Rate Risk and Other Market Risks included in
Managements Discussion and Analysis of Financial Condition and Results of
Operations section of the Registrants 2003 Annual Report to Stockholders is
incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

The Registrants consolidated financial statements and notes thereto,
together with the report of KPMG LLP, contained in the Registrants 2003 Annual
Report to Stockholders are incorporated herein by reference. The unaudited
quarterly financial data set forth on page 56 of such Annual Report is
incorporated herein by reference.

Item 9. Changes in and Disagreements with Independent Accountants on
Accounting and Financial Disclosure

None.

29



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##### 



Item 9A. Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934
(Exchange Act), the Company carried out an evaluation under the supervision and
with the participation of the Companys management, including the Companys
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure controls and procedures as
of the end of the period covered by this report. Based upon their evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective to ensure that
material information relating to the Company required to be disclosed by us in
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. In designing and evaluating the
disclosure
controls and procedures, the Companys management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurances of achieving the desired control objectives, and
management necessarily was required to apply its judgment in designing and
evaluating the controls and procedures. The Company currently is in the
process
of further reviewing and documenting its disclosure controls and procedures,
and its internal control over financial reporting, and may from time to time
make changes aimed at enhancing their effectiveness and to ensure that our
systems evolve with our business.

Changes in Internal Control Over Financial Reporting.

There were no changes in our internal control over financial reporting
during the fourth quarter of fiscal year 2003 that have materially affected,
or that are reasonably likely to materially affect, our internal controls over
financial reporting.

30



---



##### 



PART III

Item 10. Directors and Executive Officers of the Registrant

The information appearing under the caption Election of Directors
and Compliance with Section 16(A) of the Exchange Act in the Registrants
definitive proxy statement relating to its 2004 Annual Meeting of Stockholders
is incorporated herein by reference. Information required by this item
concerning the Executive Officers of the Registrant is contained in Part I of
this Form 10-K.

Item 11. Executive Compensation

The information appearing under the caption Executive Compensation
in the Registrants definitive proxy statement relating to its 2004 Annual
Meeting of Stockholders is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information appearing under the captions Election of Directors,
Principal Stockholders and Approval of the 2004 Stock Option and Incentive
Plan  Equity Compensation Plan Information in the Registrants definitive
proxy statement
relating to its 2004 Annual Meeting of Stockholders is incorporated herein by
reference.

Item 13. Certain Relationships and Related Transactions

The information contained in Note 5 of the Consolidated Financial
Statements under the caption Loans in the Registrants 2003 Annual Report
to Stockholders is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information required by this item appears in the definitive proxy
statement filed pursuant to Regulation 14A for the 2003 Annual Meeting of our
stockholder and is incorporated by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

The following financial statements and financial statement schedules
are contained herein or are incorporated herein by reference:

(a)1. Financial Statements

|                                                                                  |  |                   |       | 
|--------------------------------------------------------------------------------- |  | ----------------- | ----- | 
|                                                                                  |  | Reference to 2003
|                                                                                  |  | Annual Report    
|                                                                                  |  | to Stockholders  
|                                                                                  |  | (Pages)          
|Independent Auditors Report                                                      |  |                   | 28    | 
|Consolidated Balance Sheets at December 31,
2003 and 2002                         |  |                   | 29    | 
|Consolidated Statements of Income for the three
years ended December 31, 2003     |  |                   | 30    | 
|Consolidated Statements of Cash Flows for the three
years ended December 31, 2003 |  |                   | 31-32 | 

31



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##### 



(a)1. Financial Statements (continued)

|                                                                                                       |  |                   |       | 
|------------------------------------------------------------------------------------------------------ |  | ----------------- | ----- | 
|                                                                                                       |  | Reference to 2003
|                                                                                                       |  | Annual Report    
|                                                                                                       |  | to Stockholders  
|                                                                                                       |  | (Pages)          
|Consolidated Statements of Changes in Stockholders
Equity for the three years ended December 31,
2003 |  |                   | 33    | 
|Notes to Consolidated Financial Statements                                                             |  |                   | 34-56 | 

2. Financial Statement Schedules

All schedules are omitted as the required information is either not
applicable or is included in the consolidated financial statements or related
notes.

3. Exhibits

|            |  |                                                                                                                                                                                                                                                          
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                   
|3.1         |  | Restated Certificate of Incorporation of the
Registrant  incorporated by reference to Exhibit
3.1 of the Registrants Form S-4 Registration
Statement (Reg. No. 33-7916).                                                                               
|            |  |                                                                                                                                                                                                                                                          
|3.2         |  | By-Laws of the Registrant  incorporated by reference to
Exhibit 3 of the Registrants Form 10-Q for the quarter
ended September 30, 1991.                                                                                                               
|            |  |                                                                                                                                                                                                                                                          
|4.1         |  | Shareholder Rights Agreement dated as of January 18, 2000,
between the Company and The First National Bank of Boston,
as Rights Agent  incorporated herein by reference to the
Exhibit to the Companys Report on Form 8-K dated as of
January 20, 2000.
|            |  |                                                                                                                                                                                                                                                          
|10.1        |  | MASSBANK Corp. 1986 Stock Option Plan, as amended -
incorporated by reference to Exhibit 28.1 to the
Registrants Form S-8 Registration Statement
(Reg. No. 33-11949).                                                                                   
|            |  |                                                                                                                                                                                                                                                          
|10.1.2      |  | Amendment to MASSBANK Corp. 1986 Stock Option Plan dated
April 19, 1991  incorporated by reference to Exhibit
10.1.2 to the Registrants annual report on Form 10-K for
the year ended December 31, 1992.                                               
|            |  |                                                                                                                                                                                                                                                          
|10.1.3      |  | MASSBANK Corp. 1994 Stock Incentive Plan  incorporated
by reference to Exhibit 10.1 to the Registrants Form S-8
Registration Statement (Reg. No. 33-82110).                                                                                            
|            |  |                                                                                                                                                                                                                                                          
|10.1.4      |  | Amendment to MASSBANK Corp. 1994 Stock Incentive Plan
dated April 21, 1998  incorporated by reference to
Exhibit 10.1.4 to the Registrants annual report on Form
10-K for the year ended December 31, 1997.                                            
|            |  |                                                                                                                                                                                                                                                          
|10.2        |  | MASSBANK for Savings Employees Stock Ownership Plan
and Trust Agreement  incorporated by reference to
Exhibit 10.2 of the Registrants Form S-4 Registration
Statement (Reg. No. 33-7916).                                                             
|            |  |                                                                                                                                                                                                                                                          
|10.2.1      |  | Amendments to the MASSBANK for Savings Employees Stock
Ownership Plan and Trust Agreement  incorporated by
reference to Exhibit 10.2.1 to the Registrants annual
report on Form 10-K for the year ended December 31, 1993.                            

32



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##### 



|            |  |                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                   
|10.2.2      |  | Amendments to the MASSBANK for Savings Employees Stock
Ownership Plan and Trust Agreement  incorporated by
reference to Exhibit 10.2.2 to the Registrants annual
report on Form 10-K for the year ended December 31, 1997.            
|            |  |                                                                                                                                                                                                                                          
|10.2.3      |  | Amended and Restated MASSBANK Employees Stock Ownership
Plan and Trust Agreement.                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                          
|10.3.16     |  | Amended and Restated Employment Agreement with Gerard H.
Brandi dated as of October 28, 2002  incorporated by
reference to exhibit 10.3.16 to the Registrants quarterly
report on Form 10-Q for the period ended September 30,
2002.   
|            |  |                                                                                                                                                                                                                                          
|10.3.17     |  | Amended and Restated Employment Agreement with David F.
Carroll dated as of October 28, 2002  incorporated by
reference to exhibit 10.3.17 to the Registrants quarterly
report on Form 10-Q for the period ended September 30,
2002.   
|            |  |                                                                                                                                                                                                                                          
|10.3.18     |  | Amended and Restated Employment Agreement with Reginald E.
Cormier dated as of October 28, 2002  incorporated by
reference to exhibit 10.3.18 to the Registrants quarterly
report on Form 10-Q for the period ended September 30,
2002.
|            |  |                                                                                                                                                                                                                                          
|10.3.19     |  | Amended and Restated Employment Agreement with Donald R.
Washburn dated as of October 28, 2002  incorporated by
reference to exhibit 10.3.19 to the Registrants quarterly
report on Form 10-Q for the period ended September 30,
2002. 
|            |  |                                                                                                                                                                                                                                          
|10.3.20     |  | Amended and Restated Employment Agreement with Donna H.
West dated as of October 28, 2002  incorporated by
reference to exhibit 10.3.20 to the Registrants quarterly
report on Form 10-Q for the period ended September 30,
2002.      
|            |  |                                                                                                                                                                                                                                          
|10.3.21     |  | Form of Employment Agreement with Thomas J. Queeney dated
as of October 28, 2002  incorporated by reference to
exhibit 10.3.21 to the Registrants quarterly report on
Form 10-Q for the period ended September 30, 2002.               
|            |  |                                                                                                                                                                                                                                          
|10.4        |  | Form of Executive Supplemental Retirement Agreement, as
amended, with Gerard H. Brandi  incorporated by reference
to Exhibit 10.4 of Registrants annual report on Form 10-K
for the year ended December 31, 1986.                      
|            |  |                                                                                                                                                                                                                                          
|10.4.1      |  | Amendments to the Executive Supplemental Retirement
Agreement with Gerard H. Brandi are incorporated by
reference to Exhibit 10.4.1 of the Registrants annual
report on Form 10-K for the year ended December 31, 1996.                 
|            |  |                                                                                                                                                                                                                                          
|10.5        |  | Amended Deferred Compensation Plan for Directors of
MASSBANK Corp. adopted March 8, 2000  incorporated by
reference to Exhibit 10.5 of the Registrants annual
report on Form 10-K for the year ended December 31, 2000.                

33



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##### 



|            |  |                                                                                                                                                                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                  
|10.6        |  | Deferred Compensation Program for Bank employees dated
November 14, 1994  incorporated by reference to Exhibit
10.6 of the Registrants annual report on Form 10-K for
the year ended December 31, 2001.                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                         
|11          |  | The computation of per share earnings can be readily
determined from the material contained in the Annual
Report on Form 10-K for the fiscal year ended December 31,
2003.                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                         
|12          |  | Statement re: Computation of Ratios  Not applicable as
MASSBANK Corp. does not have any debt securities
registered under Section 12 of the Securities Exchange Act
of 1934.                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                         
|13          |  | 2003 Annual Report to Stockholders  except for those
portions of the 2003 Annual Report to Stockholders which
are expressly incorporated by reference in this report,
such 2003 Annual Report to Stockholders is furnished for
the information of the SEC and is not to be deemed filed
with the SEC.
|            |  |                                                                                                                                                                                                                                                                                                         
|21          |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                         
|23          |  | Independent Accountants Consent.                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                         
|31.1        |  | Certification dated March 4, 2004, by the Chief Executive
Officer of the Company pursuant to Rule 13a-14(a) and
Rule 15d-14(a).                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                         
|31.2        |  | Certification dated March 4, 2004, by the Chief Financial
Officer of the Company pursuant to Rule 13a-14(a) and
Rule 15d-14(a).                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                         
|32.1        |  | Certification dated March 4, 2004, by the Chief Executive
Officer of the Company pursuant to 18 U.S.C. Section 1350
(as adopted by Section 906 of the Sarbanes-Oxley Act of
2002).                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                         
|32.2        |  | Certification dated March 4, 2004, by the Chief Financial
Officer of the Company pursuant to 18 U.S.C. Section 1350
(as adopted by Section 906 of the Sarbanes-Oxley Act of
2002).                                                                                                                      

34



---



##### 



|            |  |                                                                                                                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                      
|(b)         |  | Reports on Form 8-K                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                             
|            |  | The Company has filed current reports on Form 8-K
as follows, each of which contains information that was
furnished pursuant to Item 9 or Item 12 of Form 8-K, and
therefore is not deemed to have been filed for purposes
of Section 18 of the Securities Exchange Act of 1934,
as amended:
|            |  |                                                                                                                                                                                                                                                                                             
|            |  | A filing was made on October 27, 2003 of a press release
reporting the Companys third quarter 2003 earnings
results.                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                             
|            |  | A filing was made on January 23, 2004 of a press release
reporting the Companys fourth quarter 2003 earnings
results.                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                             
|(c)         |  | Exhibits to this Form 10-K are attached or
incorporated by reference as stated in the
Index to Exhibits.                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                             
|(d)         |  | Not applicable.                                                                                                                                                                                                                                                                             

35



---



##### 



Signatures

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

| |  |                                                
| |  | -----------------------------------------------
| |  | MASSBANK CORP.                                 
| |  |                                                
| |  | /s/Gerard H. Brandi                            
| |  | Gerard H. Brandi                               
| |  | Chairman, President and Chief Executive Officer

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

|                         |  |                                  |  |               
|------------------------ |  | -------------------------------- |  | --------------
|/s/Gerard H. Brandi      |  | Chairman, President,             |  |               
|Gerard H. Brandi         |  | Chief Executive Officer and      |  |               
|                         |  | Director                         |  | March 10, 2004
|                         |  |                                  |  |               
|/s/Reginald E. Cormier   |  | Senior Vice President, Treasurer |  |               
|Reginald E. Cormier      |  | and Chief Financial Officer      |  |               
|                         |  | (Principal Financial and         |  |               
|                         |  | Accounting Officer)              |  | March 10, 2004
|                         |  |                                  |  |               
|/s/Mathias B. Bedell     |  | Director                         |  | March 10, 2004
|Mathias B. Bedell        |  |                                  |  |               
|                         |  |                                  |  |               
|/s/Allan S. Bufferd      |  | Director                         |  | March 8, 2004 
|Allan S. Bufferd         |  |                                  |  |               
|                         |  |                                  |  |               
|/s/Kathleen M. Camilli   |  | Director                         |  | March 8, 2004 
|Kathleen M. Camilli      |  |                                  |  |               
|                         |  |                                  |  |               
|/s/Peter W. Carr         |  | Director                         |  | March 5, 2004 
|Peter W. Carr            |  |                                  |  |               
|                         |  |                                  |  |               
|/s/Alexander S. Costello |  | Director                         |  | March 4, 2004 
|Alexander S. Costello    |  |                                  |  |               
|                         |  |                                  |  |               

36



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##### 



|                        |  |          |  |               
|----------------------- |  | -------- |  | --------------
|/s/Robert S. Cummings   |  | Director |  | March 10, 2004
|Robert S. Cummings      |  |          |  |               
|                        |  |          |  |               
|/s/Leonard Lapidus      |  | Director |  | March 8, 2004 
|Leonard Lapidus         |  |          |  |               
|                        |  |          |  |               
|/s/Stephen E. Marshall  |  | Director |  | March 10, 2004
|Stephen E. Marshall     |  |          |  |               
|                        |  |          |  |               
|/s/Nancy L. Pettinelli  |  | Director |  | March 8, 2004 
|Nancy L. Pettinelli     |  |          |  |               
|                        |  |          |  |               
|/s/Herbert G. Schurian  |  | Director |  | March 4, 2004 
|Herbert G. Schurian     |  |          |  |               
|                        |  |          |  |               
|/s/Donald B. Stackhouse |  | Director |  | March 10, 2004
|Donald B. Stackhouse    |  |          |  |               

37