<PAGE>   1
                       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 (Fee Required)

                  For the fiscal year ended December 31, 1996
                                       OR
             / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

           For the transition period from______________to____________

                         Commission File Number 0-15137

                                 MASSBANK Corp.
             (Exact name of registrant as specified in its charter)

              Delaware                                    04-2930382
    (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                   Identification No.)
           123 HAVEN STREET
        Reading, Massachusetts                              01867
(Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: (617) 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.____

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price for the registrant's common stock on
March 14, 1997 as reported by NASDAQ, was $105,055,984.

     As of March 14, 1997, there were 2,685,714 shares of the registrant's
common stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's 1996 Annual Report to Stockholders are
incorporated by reference in Parts I, II, III and IV of this Form 10-K. Portions
of the Proxy Statement for the 1997 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.

<PAGE>   2

Note regarding forward-looking statements.

     The discussions set forth below and elsewhere herein contain certain
statements that may be considered forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. A number of important factors could
cause actual results to differ materially from those in the forward-looking
statements. Those factors include fluctuations in interest rates, inflation,
government regulations and economic conditions and competition in the geographic
and business areas in which the Company conducts its operations.

                                     PART I

Item 1. Business
                           Business of MASSBANK Corp.

General
     MASSBANK Corp. (the "Company") is a general business corporation
incorporated under the laws of the State of Delaware on August 11, 1986.
MASSBANK Corp. was organized for the purpose of becoming the holding company for
MASSBANK (the "Bank"). The Company is a one-bank holding company registered with
the 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.

     MASSBANK Corp.'s principal sources of revenues on an unconsolidated basis,
which are used for the payment of dividends to stockholders and other purposes,
are dividends from MASSBANK and, to a lesser extent, interest income received
from its interest-bearing bank deposits. MASSBANK Corp.'s assets on an
unconsolidated basis at December 31, 1996 were represented by its investment in
the Bank of $91.8 million and other assets of $1.4 million. The Company's
liabilities consisted of loan indebtedness of $0.9 million and other liabilities
of less than $0.1 million. The proceeds of the loan were used to fund stock
purchases through the Employee Stock Ownership Plan ("ESOP"). See Note 16 to the
Consolidated Financial Statements for parent company only financial information.
At December 31, 1996 MASSBANK Corp. on a consolidated basis had total assets of
$888.2 million, deposits of $788.4 million, and stockholders' equity of $92.2
million which represents 10.4% of total assets. Book value per share at December
31, 1996 was $34.34.

     The Company does not own or lease any real 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.

                                       2

<PAGE>   3

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.

Employees
     MASSBANK Corp. does not employ any persons; its management 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 does not pay any separate salaries or expenses in
connection therewith.

Dividends
     MASSBANK Corp. paid total cash dividends of $0.92 per share in 1996
compared to $0.73 per share in 1995 and $0.60 per share in 1994. The Company's
dividend payout ratios (cash dividends paid divided by net income) for 1996,
1995 and 1994 were 26%, 23% and 21%, respectively.

Stock Repurchase Program
     In July 1996, MASSBANK Corp. announced that its Board of Directors had
approved the repurchase of an additional 150,000 shares of its outstanding
common stock. Repurchases are expected to be made in the open market or in
private transactions over the next year. At December 31, 1996, the Company had
repurchased 11,346 of the 150,000 shares authorized by the Board.

Preferred Stock Purchase Rights
     In January 1990, the Board of Directors declared a dividend distribution of
one Preferred Stock Purchase Right for each outstanding share of MASSBANK Corp.
common stock. These Rights, which expire in January 2000, entitle their holders
to purchase from the Company one one-hundreth of a share (a "unit") of Series A
Junior Participating Cumulative Preferred Stock, par value $1.00 per share
("preferred stock") at a cash exercise price of $70.00 per unit, subject to
adjustment. The Rights will trade separately from the common stock and will
become exercisable when a person or group has acquired 15% or more of the
outstanding common stock, upon a tender offer that would result in a person or
group acquiring 15% or more of the outstanding common stock, or upon the
declaration by the Board of Directors that any person holding 10% or more of the
outstanding shares of common stock is an "adverse person".

     In the event a person or group acquires 15% or more of the outstanding
common stock or the Board of Directors declares a person an "adverse person",
each Right would entitle its holder (except if the holder is a person or group
described above) to receive upon exercise sufficient units of preferred stock to
equal a value of two times the exercise price of the Right. In the event the
Company is acquired in a merger or other business combination transaction or if
50% or more of the Company's assets or earning power is sold, each holder may
receive upon exercise common stock of the acquiring company having a market
value equal to two times the exercise price of the Right.

     The Rights are redeemable in whole, but not in part, by the Board of
Directors at a price of $.01 1/3 per Right any time before a person or group
acquires 15% or more of the outstanding common stock or the Board of Directors
declares a person an "adverse person".

                                       3

<PAGE>   4

                              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 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 fourteen full service banking offices in Reading,
Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury, Westford, Dracut
and Lowell, and originating residential and commercial real estate mortgages,
construction, and a variety of consumer loans. The Bank also 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'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 and the interest paid by the Bank on its deposits
and borrowed funds.

     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 accounts are insured by the Depositors Insurance Fund ("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.

                                       4

<PAGE>   5
Acquisitions

     On February 26, 1997, MASSBANK signed a definitive merger agreement to
purchase the Glendale Co-operative Bank ("Glendale") of Everett,
Massachusetts.  Under the agreement, MASSBANK would acquire all of the
outstanding shares of Glendale at a price of $28.00 per share.

     MASSBANK and Glendale simultaneously entered into a separate Stock Option
Agreement granting MASSBANK an option to purchase up to 19.9% of Glendale's
outstanding common stock at a price of $22.00 per share if any third party
should commence a tender or exchange offer for 25% or more of Glendale's common
stock and under certain other circumstances prior to consummation of the merger.
The transaction is valued at $7.38 million, assuming all of Glendale's 16,200
outstanding stock options are exercised prior to completion of the acquisition.

     The transaction is subject to approval by Glendale's shareholders, various
regulatory agencies and satisfaction of certain financial contingencies. Among
other conditions, Glendale's closing costs may not exceed a specified amount and
the Agreement requires Glendale to have tangible Stockholders' equity of a
specified amount on the closing date. It is anticipated that the transaction
will close in the third quarter of 1997. The transaction will be accounted for
as a purchase.

     Glendale Co-operative Bank is a Massachusetts chartered co-operative bank
founded in 1928 which operates from a single office in the city of Everett. At
January 31, 1997, Glendale reported total assets of $36.9 million, total
deposits of $30.8 million and total equity of $6.0 million.

     In February 1992, the Bank acquired approximately $336 million in federally
insured deposits and other liabilities and certain assets of The Central Savings
Bank of Lowell, Massachusetts from the FDIC for a bid price of $2.2 million. Net
loans acquired totaled $147.9 million. The Bank also acquired Central Savings'
trust department and safe deposit operations.

                                       5

<PAGE>   6
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 14
branch offices located on a broad arc stretching from Melrose and Medford 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, Lowell, Medford, Melrose, Reading, Stoneham, Tewksbury,
Westford and Wilmington.

Lending Activities
     The Bank's net loan portfolio totaled $247.4 million at December 31, 1996.
<TABLE>
The following table sets forth information concerning the Bank's loan portfolio
by type of loan at the dates shown:
<CAPTION>
-------------------------------------------------------------------------------------------
(In thousands) At December 31,          1996        1995       1994       1993       1992
-------------------------------------------------------------------------------------------
<S>                                   <C>        <C>        <C>        <C>        <C>     
Mortgage loans:                                                                            
  Residential:                                                                             
    Conventional                      $216,832   $209,408   $207,772   $204,096   $201,331
    FHA and VA                           2,515      3,244      4,158      5,166      6,985
  Commercial                             4,121      6,975      8,155      9,654     10,878
  Construction                           1,388      1,516        603        474        355
-------------------------------------------------------------------------------------------
      Total mortgage loans             224,856    221,143    220,688    219,390    219,549
  Add: premium on loans                    325        388        452        813        912
  Less: deferred mortgage loan 
         origination fees               (1,042)      (928)      (871)      (856)      (529)
-------------------------------------------------------------------------------------------
      Mortgage loans, net              224,139    220,603    220,269    219,347    219,932
-------------------------------------------------------------------------------------------
Other loans:                                                                                
  Consumer:                                                                                 
    Installment                          1,967      1,988      1,972      2,474      4,259
    Guaranteed education                 9,729     10,420     10,152      9,131      8,237
    Other secured                        1,611      2,012      2,598      1,735      2,406
    Home equity lines of credit         11,316     13,144     14,674     15,744     18,440
    Unsecured                              271        265        269        277        333
-------------------------------------------------------------------------------------------
      Total consumer loans              24,894     27,829     29,665     29,361     33,675
  Commercial                               628        753        882        338        149
-------------------------------------------------------------------------------------------
      Total other loans                 25,522     28,582     30,547     29,699     33,824
-------------------------------------------------------------------------------------------
      Total loans                      249,661    249,185    250,816    249,046    253,756
Less: Allowance for loan losses         (2,237)    (2,529)    (2,566)    (2,261)    (2,056)
-------------------------------------------------------------------------------------------
      Net loans                       $247,424   $246,656   $248,250   $246,785   $251,700
-------------------------------------------------------------------------------------------
</TABLE>


                                       6

<PAGE>   7
<TABLE>
     The following table shows the maturity distribution and interest rate
sensitivity of the Bank's loan portfolio at December 31, 1996:
<CAPTION>
                                             Maturity/Scheduled Payments (1)

                                Within       One to      Five to       After
(In thousands)                 one year    five years   ten years    ten years       Total
-------------------------------------------------------------------------------------------
<S>                              <C>          <C>         <C>         <C>          <C>     
Mortgage loans:
  Residential                    $  831       $5,484      $47,906     $164,426     $218,647
  Commercial & construction       1,571        1,051        1,761        1,109        5,492
-------------------------------------------------------------------------------------------
    Total mortgage loans          2,402        6,535       49,667      165,535      224,139
Other loans                       2,059        3,215        8,605       11,643       25,522
-------------------------------------------------------------------------------------------
    Total loans                  $4,461       $9,750      $58,272     $177,178     $249,661
-------------------------------------------------------------------------------------------
<FN>
(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.
</TABLE>

<TABLE>
     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:
<CAPTION>

                                                     Total Due After One Year 

                                                    Fixed           Adjustable
(In thousands)                                      Rate              Rate          Total
-------------------------------------------------------------------------------------------
<S>                                                <C>               <C>           <C>     
Mortgage loans:
  Residential                                      $169,136          $48,680       $217,816
  Commercial & construction                             819            3,102          3,921
-------------------------------------------------------------------------------------------
    Total mortgage loans                            169,955           51,782        221,737
Other loans                                           2,419           21,044         23,463
-------------------------------------------------------------------------------------------
    Total loans                                    $172,374          $72,826       $245,200
-------------------------------------------------------------------------------------------
</TABLE>


     Mortgage Lending. The Bank believes that the repayment periods of long-
term first mortgage loans, the general resistance of the public 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, over several years, has kept its mortgage loan portfolio
to a level at which the Bank believed there was an acceptable risk- to-reward
ratio in light of opportunities in the marketplace and the Bank's long-term
objectives. The Bank's net loan portfolio represented approximately 27.9% and
28.9% of the Company's total assets at December 31, 1996, and 1995,
respectively. The Bank realizes that this low level of loans with respect to
assets in relation to the securities portfolio results in a reduction in yield;
however, the Bank believes that this reduction would be more than offset in risk
and loss associated with lending during periods of economic decline. In today's
economic climate, the Bank would prefer a more even mix of loans and securities.
However, there remains a tremendous amount of competition for mortgages in the
Bank's area, and developing a quality loan portfolio takes time. The Bank
anticipates that its loan portfolio will grow slowly over the next few years.

                                       7

<PAGE>   8
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 refinancing for existing customers. In addition to actively
soliciting loan referrals, 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
1996 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 retains the 10, 12, 15 or 20 year fixed rate mortgages and adjustable rate
mortgages it originates for its own portfolio. All long-term (25 or 30 year)
fixed rate residential mortgages are generally sold in the secondary market.
Adjustable-rate mortgage loans ("ARMs") have rates that are re-set at either 1,
3, 5 or 10 year intervals and provide a margin over various mortgage indices.

     In the last few years, the Bank has also instituted new loan programs which
have been well received by customers. The first program features a 5/1 and 7/1
year ARM product with 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 7/1 ARM. This program is designed for
first-time home buyers meeting certain income and property location
restrictions. In late 1996, the Bank introduced the "Home Town Advantage"
mortgage program which is beginning to produce some good results. This new
program offers homebuyers a (0.125) percent discount on their mortgage rate if
they purchase residential property located in one of the communities where the
bank operates a banking office.

     At December 31, 1996, 1-4 family residential mortgage loans totaled $218.6
million, or 87.6% of the total loan portfolio, compared to $212.1 million, or
85.1% of the total loan portfolio, at December 31, 1995. Residential mortgage
loan originations amounted to $41.9 million during 1996, an increase of 37.8%
from $30.4 million in 1995. Origination volumes are sensitive to interest rates
and are affected by the interest rate environment. The higher interest rates
existing during most of 1995 significantly curtailed loan originations activity
for that year. In 1996, loan originations were stronger due to a more favorable
interest rate environment.

     The Bank also originates mortgage loans secured by commercial or investment
property such as multifamily housing, strip shopping centers, office buildings
and retail buildings. At December 31, 1996, commercial and multifamily real
estate mortgages and construction loans totaled approximately $5.5 million, or
2.2% of the total loan portfolio, compared to $8.5 million, or 3.4% of the total
loan portfolio, at December 31, 1995. In 1996, commercial and multifamily real
estate mortgage loan originations amounted to $0.5 million. There were no such
real estate mortgages originated in 1995.

     The total amount of first mortgage loans held by the Bank at December 31,
1996 was $224.1 million as indicated in the maturity distribution table
appearing on the previous page. Of this amount, $53.3 million was subject to
interest rate adjustments. The remaining $170.8 million in fixed rate mortgage
loans represents 19.2% of the Company's total assets.

                                       8

<PAGE>   9
Mortgage Lending (continued)

     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 using the level-yield method.

     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 $24.9 million at December 31, 1996 representing
10.0% of the Bank's total loan portfolio. Of this amount $9.7 million or 3.9% of
the total loan portfolio are education loans made under the Massachusetts Higher
Education Assistance Corporation. The Bank may sell education loans in the
future.

     The balance of the Bank's consumer loan portfolio consists of home equity
lines of credit and installment consumer credit contracts such as automobile
loans, home improvement loans and other secured and unsecured financings. These
loans totaled $15.2 million at December 31, 1996, representing 6.1% of the
Bank's total loan portfolio.

     At December 31, 1996, the Bank had only $628 thousand 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 employment. 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 the application
fee is paid. At December 31, 1996, the Bank had issued commitments on
residential first mortgage loans totaling $4,264,000, and had commitments to
advance funds on construction loans and unused credit lines, including unused
portions of home equity lines of credit, of $332,000 and $19,546,000,
respectively.

     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 30 days 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 more than 90 days past due. Loans delinquent for 90 or more days,
as shown in the table on the following page, totaled $1,601,000 at December 31,
1996.

                                       9

<PAGE>   10
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. Real
estate acquired through foreclosure totaled $503,000 as of year-end 1996.


Non-Performing Assets
<TABLE>
     The following table shows the composition of non-performing assets at the
dates shown:
<CAPTION>
------------------------------------------------------------------------------------------------
(In thousands) At December 31,                      1996      1995      1994      1993      1992
------------------------------------------------------------------------------------------------
<S>                                               <C>       <C>       <C>       <C>       <C>   
Nonaccrual loans:
  Mortgage loans:
    Residential:
      Conventional                                $1,468    $2,016    $1,496    $1,048    $1,075
      FHA and VA                                      13        14        62        43        55
    Commercial                                        --        --       152        --       135
  Consumer                                           120       398       388       178       241
------------------------------------------------------------------------------------------------
    Total nonaccrual loans                         1,601     2,428     2,098     1,269     1,506
------------------------------------------------------------------------------------------------
Real estate acquired through foreclosure:
  Residential:
    Conventional                                     503       255       129       699       545
    Land development                                  --        --        --        --       360
------------------------------------------------------------------------------------------------
    Total real estate acquired through 
     foreclosure                                     503       255       129       699       905
------------------------------------------------------------------------------------------------
     Total non-performing assets                  $2,104    $2,683    $2,227    $1,968    $2,411
------------------------------------------------------------------------------------------------
Percent of non-performing loans to total loans     0.64%     0.97%     0.84%     0.51%     0.59%
Percent of non-performing assets to total assets   0.24%     0.31%     0.26%     0.23%     0.29%
</TABLE>

<TABLE>
     The reduction in interest income associated with nonaccrual loans is as follows:
<CAPTION>
------------------------------------------------------------------------------------------------
(In thousands) Years Ended December 31,            1996      1995      1994      1993     1992
------------------------------------------------------------------------------------------------
<S>                                                <C>       <C>       <C>       <C>      <C> 
  Interest income that would have been
    recorded under original terms                  $149      $204      $185      $105     $160
  Interest income actually recorded                  78        60        88        40     $ 80 
------------------------------------------------------------------------------------------------
  Reduction in interest income                     $ 71      $144      $ 97      $ 65     $ 80
------------------------------------------------------------------------------------------------
</TABLE>

                                       10
<PAGE>   11
Allowance for Loan Losses.
     The allowance for loan losses is increased by provisions charged to
operations based on management's assessment of many factors including the risk
characteristics of the portfolio, underlying collateral, current and anticipated
economic conditions that may affect the borrower's ability to pay, and trends in
loan delinquencies and charge-offs. Realized losses, net of recoveries, are
charged directly to the allowance. While management uses the information
available in establishing the allowance for losses, future adjustments to the
allowance may be necessary if economic conditions differ substantially 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 possible loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on judgments different from
those of management.

<TABLE>
The following table sets forth the activity in the allowance for loan losses
during the years indicated:
<CAPTION>
------------------------------------------------------------------------------------------------
(In thousands) Years ended December 31,            1996      1995      1994      1993      1992
------------------------------------------------------------------------------------------------
<S>                                              <C>       <C>       <C>       <C>       <C>   
Balance at beginning of year                     $2,529    $2,566    $2,261    $2,056    $  375
Central Savings acquisition                          --        --        --        --     1,100
Provision for loan losses                           160       170       705       671       884

Charge-offs:
                   Residential real estate         (480)     (124)     (339)     (305)     (262)
                   Commercial real estate            --        --        --      (135)       --
                   Consumer loans                   (25)      (30)      (24)      (17)      (20)
                   Other loans                      (37)      (95)      (63)      (31)      (24)

Recoveries:
                   Residential real estate           83        41        23        20         1
                   Consumer loans                     7         1         3         2         2
------------------------------------------------------------------------------------------------
Net charge-offs                                    (452)     (207)     (400)     (466)     (303)
------------------------------------------------------------------------------------------------
Balance at end of year                           $2,237    $2,529    $2,566    $2,261    $2,056 
------------------------------------------------------------------------------------------------
Net loan charge offs as a percent of average
  loans outstanding during the period              0.18%     0.08%     0.16%     0.19%     0.13%
Allowance for loan losses as a percent
  of total loans outstanding at year-end           0.90%     1.01%     1.02%     0.91%     0.81%
Allowance for loan losses as a percent
  of nonaccrual loans                             139.7%    104.2%    122.3%    178.2%    136.5%
------------------------------------------------------------------------------------------------
</TABLE>

                                       11

<PAGE>   12

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.

     At December 31, 1993, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 115 "Accounting for Certain Investments
in Debt and Equity Securities". Under this method, the Company records
investment securities available for sale at aggregate market value with the net
unrealized holding gains or losses reported, net of tax effect, as a separate
component of stockholders' equity until realized. As of December 31, 1996,
stockholders' equity included approximately $4.0 million, representing the net
unrealized gains on securities available for sale, less applicable income taxes.
Prior to December 31, 1993, the Company recorded its investment securities
available for sale at the lower of aggregate cost or market value with the net
unrealized losses reported in non-interest income as a component of "gains
(losses) on securities."

     In the fourth quarter of 1995, the Company adopted the Financial Accounting
Standards Board guidelines, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," issued on
November 15, 1995. Under these guidelines, the Company was allowed a one-time
opportunity to reassess the appropriateness of its FASB 115 investment
classifications and reclassify securities from the held to maturity category to
the available for sale category, or vice versa. As a result of this reassessment
and after thoughtful consideration, the Company reclassified all of its
mortgage-backed securities from the held to maturity category to the available
for sale category in accordance with the FASB guidelines. The total amortized
cost of the securities reclassified was $202.8 million. These securities had
total unrealized gains of $3.7 million on the date they were reclassified.

                                       12

<PAGE>   13
Investment Activities (continued)

     Under the investment policy management determines the appropriate
classification of securities at the time of purchase. Those securities that the
Company has the intent and the ability to hold to maturity are classified as
securities held to maturity and are carried at amortized historical cost.

     Those securities held for indefinite periods of time and not intended to be
held to maturity are classified as available for sale. Securities held for
indefinite periods of time include securities that management intends to use as
part of its asset/liability management strategy and that may be sold in response
to changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital and other similar factors. 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 and losses on
sales of securities available for sale which are also reported in non-interest
income under the caption "gains (losses) on securities." When a security suffers
a loss in value which is considered other than temporary, such loss is
recognized by a charge to earnings.

     Investments classified as trading securities are stated at market with
unrealized gains or losses included in earnings. Income on debt trading
securities is accrued and included in interest and dividend income. All of the
Company's mortgage-backed securities are currently classified as available for
sale. Prior to the fourth quarter of 1995, mortgage-backed securities were
classified as securities held to maturity and stated at cost, which was adjusted
for amortization of premiums and accretion of discounts by crediting or charging
interest and dividend income over the life of the related securities using a
method which approximated the level yield method. 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, 1996, the Company's investments, which consists of
securities held to maturity, securities available for sale (including
mortgage-backed securities), trading securities, short-term investments, term
federal funds sold and interest-bearing deposits in banks totaled $622.6
million, representing 70.1% of the Company's total assets.

                                       13

<PAGE>   14
<TABLE>
     The following table sets forth the composition of the Company's investment
portfolio as of the dates indicated:
<CAPTION>

                                   Investment Portfolio

------------------------------------------------------------------------------------------------
(In thousands) At December 31,                         1996             1995             1994
------------------------------------------------------------------------------------------------
<S>                                                <C>              <C>              <C>     
  Federal funds sold:
    Overnight federal funds                        $109,902         $100,245         $ 22,551
    Term federal funds                               10,000           15,000               --
------------------------------------------------------------------------------------------------
      Total federal funds sold                      119,902          115,245           22,551
  Money market funds                                 24,408            7,260               --
  Interest-bearing deposits in bank                   1,751              941               --
------------------------------------------------------------------------------------------------
      Total federal funds sold and other
        short-term investments                     $146,061         $123,446         $ 22,551
------------------------------------------------------------------------------------------------
      Percent of total assets                          16.4%            14.4%             2.7%
------------------------------------------------------------------------------------------------
(In thousands) At December 31,                         1996             1995             1994
------------------------------------------------------------------------------------------------
Securities held to maturity: (a)
    Other bonds and obligations                         160         $    402         $    567
    Mortgage-backed securities                           --               --          172,263
    Other securities                                     --               --               --
------------------------------------------------------------------------------------------------
      Total securities held to maturity                 160              402          172,830

Securities available for sale: (b)
    U.S. Treasury obligations                       140,706          212,115          242,787
    U.S. Government agency obligations                7,877           14,172            6,043 
    Other bonds and obligations                       1,000            2,004            1,914 
    Marketable equity securities                     15,574           11,290            6,900  
    Mortgage-backed securities                      306,595          216,520               --
------------------------------------------------------------------------------------------------
      Total securities available for sale           471,752          456,101          257,644

Trading securities: (b)
    U.S. Treasury obligations                            --               --          112,166
    Investments in mutual funds                       4,672            6,819            3,444
------------------------------------------------------------------------------------------------
      Total trading securities                        4,672            6,819          115,610
------------------------------------------------------------------------------------------------
      Total securities                             $476,584         $463,322         $546,084
------------------------------------------------------------------------------------------------
      Percent of total assets                          53.7%            54.2%            64.7%
------------------------------------------------------------------------------------------------
Total investments                                  $622,645         $586,768         $568,635
Total investments as a percent of total assets         70.1%            68.7%            67.4%
------------------------------------------------------------------------------------------------
<FN>
(a)  At amortized cost.
(b)  At market value.
</TABLE>


                                      14
<PAGE>   15

<TABLE>
     The following tables present the carrying value of debt securities held to
maturity and available for sale at December 31, 1996 maturing within stated
periods with the weighted average interest yield from securities falling within
the range of maturities:
<CAPTION>

                        Debt Securities Held to Maturity

                                                           Other
                                                           bonds                     
                                                           and                       
(Dollars in thousands)                                     obligations (1)      Total
-----------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>  
Maturing after 5 years
but within 10 years
  Amount                                                   $ 111               $ 111
  Yield                                                     9.15%               9.15%
Maturing after 10 years
but within 15 years
  Amount                                                      49                  49
  Yield                                                    10.29%              10.29%
-----------------------------------------------------------------------------------------
Total
  Amount                                                   $ 160               $ 160
  Yield                                                     9.50%               9.50%

Average life in years                                       9.65                9.65 

                       Debt Securities Available for Sale
<CAPTION>

                                            U.S.           Other          Mortgage-            
                             U. S.          Government     bonds          backed
                             Treasury       agency         and            securities (2)
(Dollars in thousands)       obligations    obligations    obligations                  Total
------------------------------------------------------------------------------------------------
<S>                           <C>            <C>          <C>             <C>          <C>     
Maturing within 1 year
  Amount                      $ 55,820       $   --       $1,000          $     --     $ 56,820
  Yield                           6.92%                     6.35%                          6.91%
Maturing after 1
but within 5 years
  Amount                        80,390        6,899           --             2,408       89,697
  Yield                           6.74%        6.47%                          7.99%        6.75%
Maturing after 5
but within 10 years
  Amount                         2,987        1,000           --            15,975       19,962
  Yield                           6.47%        6.76%                          8.51%        8.12%
Maturing after 10                                                                               
but within 15 years                                                                             
  Amount                            --           --           --           287,364      287,364 
  Yield                                                                       6.92%        6.92%
------------------------------------------------------------------------------------------------
Total
  Amount                      $139,197       $7,899       $1,000          $305,747     $453,843
  Yield                           6.80%        6.51%        6.35%             7.01%        6.94%
------------------------------------------------------------------------------------------------
Average life in years             1.65         3.81         0.04                                
Average contractual                                                                             
 maturity in years                                                           12.84             
</TABLE>


                                      15
<PAGE>   16
(1)  Yields on tax exempt obligations have been computed on a tax equivalent
     basis.

(2)  Mortgage-backed securities are shown at their contractual maturity, but 
     are expected to have shorter lives due to scheduled payments and 
     prepayments.

     At December 31, 1996, the Company did not have an investment in any issuer
(other than securities of the U.S. government) in excess of 10% of stockholders
equity.


Asset/Liability Management

     Due to the volatility of interest rates, managing interest rate risk is
important in determining the profitability of the Company.

     Interest rate risk arises from the difference in aggregate balances and
repricing dates of interest-earning assets compared to interest-bearing
liabilities. These differences, or repricing "gaps", provide an indication of
the extent to which net interest income is vulnerable to interest rate
fluctuations in future periods.

     The Company attempts to manage the net repricing gaps to maintain what it
believes to be the most appropriate balance between earnings and exposure to
interest rate fluctuations. It attempts to manage its interest rate gap
primarily by lengthening or shortening the maturity structure of the Company's
portfolio of securities and other investments.

     The Company closely monitors its one year "gap" position. One year "gap" is
the difference between the amount of assets and liabilities repricing over the
next twelve months. An institution with more assets maturing in one year than
liabilities could experience a decline in net interest income if interest rates
declined. Conversely, an institution with more liabilities repricing in one year
than assets could experience a decline in net interest income if rates rose. At
December 31, 1996, the one-year cumulative gap position was negative at $36.5
million, or approximately 4.1% of total assets.

     The table on the following page sets forth the Company's repricing "gaps"
both in terms of dollar volume and as a percentage of total assets.

                                       16

<PAGE>   17
<TABLE>
     The following table details the projected amounts of the Company's
interest-sensitive assets and liabilities at December 31, 1996 that are
scheduled or assumed to mature or reprice during the time periods indicated. All
earning assets shown are at amortized cost, exclusive of the effects of SFAS No.
115, with the exception of trading securities which are stated at market.
<CAPTION>
         Interest Rate Sensitivity Gap Analysis - At December 31, 1996

                                     0 - 3     3 - 6      6 - 12    1 - 3     Over 3           
(In thousands)                       Months    Months     Months    Years     Years     Total 
---------------------------------------------------------------------------------------------
<S>                                <C>       <C>       <C>       <C>       <C>       <C>
Interest sensitive assets:
  Mortgage loans (1)               $  9,040  $  9,595  $ 22,281  $ 74,374  $108,849  $224,139
  Other loans                        21,637        35     1,432       805     1,613    25,522
---------------------------------------------------------------------------------------------
  Total loans                        30,677     9,630    23,713    75,179   110,462   249,661
  Securities held to maturity            49        --        --       111        --       160
  Securities available for sale:
    mortgage-backed securities (2)    8,950     9,233    19,023    75,106   193,435   305,747
    other                            24,009    17,988    25,837    68,424    22,852   159,110
  Trading securities                  4,672        --        --        --        --     4,672
  Short term investments            134,310        --        --        --        --   134,310
  Term federal funds sold                --    10,000        --        --        --    10,000
  Interest bearing deposits in banks     --        --     1,008       743        --     1,751
---------------------------------------------------------------------------------------------
  Total interest sensitive assets   202,667    46,851    69,581   219,563   326,749   865,411
  Non-interest earning assets            --        --        --        --    22,826    22,826
---------------------------------------------------------------------------------------------
  Total Assets                     $202,667  $ 46,851  $ 69,581  $219,563  $349,575  $888,237

Interest sensitive liabilities:
  NOW accounts (4)                 $     --  $     --  $     --  $     --  $ 45,352  $ 45,352
  Smart Savings accounts             68,969        --        --        --        --    68,969
  Regular savings and
    special notice accounts (3)(4)    5,000     5,000    10,000    32,000   212,865   264,865
  Money market accounts              23,824        --        --        --        --    23,824
  Time certificates of deposit       89,757    67,602    84,180   124,587     3,013   369,139
  Escrow deposits of borrowers        1,271        --        --        --        --     1,271
---------------------------------------------------------------------------------------------
Total interest sensitive 
  liabilities                       188,821    72,602    94,180   156,587   261,230   773,420
    Non-interest bearing liabilities     --        --        --        --    22,567    22,567
    Stockholders' equity                 --        --        --        --    92,250    92,250
---------------------------------------------------------------------------------------------
Total liabilities and 
    Stockholder's equity           $188,821  $ 72,602  $ 94,180  $156,587  $376,047  $888,237

Period Repricing Difference 
   (Period Gap)                      13,846   (25,751)  (24,599)   62,976    65,519    91,991
Cumulative Repricing Difference
   (Cumulative Gap)                  13,846   (11,905)  (36,504)   26,472    91,991          
Cumulative Gap as a
   Percentage of Total Assets           1.6%     -1.3%     -4.1%      3.0%     10.4%
---------------------------------------------------------------------------------------------
</TABLE>
                                       17


<PAGE>   18

(1)  Fixed rate mortgage loan amounts are accumulated as if the entire balance
     came due on the last contractual payment date and adjustable rate mortgage
     loan amounts are accumulated as if the entire balance came due on the
     repricing date. Mortagage amortization, based on regularly scheduled 
     principal payments, is reflected along with an adjustment for prepayments,
     which is based on historical prepayment information.

(2)  The mortgage-backed securities allocation reflects expected cash flows,
     including anticipated prepayments.

(3)  Based on a historical analysis of runoff of regular savings and special
     notice accounts (SNAs) at various levels at which short term rates exceed
     savings rates. This analysis anticipates moderate increases in short-term
     rates during 1997.

(4)  Any future changes to the interest rates paid on these accounts is at the
     sole discretion of management.

     The interest rate sensitivity of the Company's assets and liabilities
illustrated in the table above would vary significantly if different assumptions
were used or if actual experience differed from that indicated by such
assumptions.

                                       18

<PAGE>   19
Deposits and Other Sources of Funds

     General. Deposits have been the primary source of funds of the Bank 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 or maturities of 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 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 fourteen conveniently located banking offices, customers can access
accounts through the Bank's ATM network. The Bank is a member of the Transaxion
("TX"), New York Cash Exchange ("NYCE") and CIRRUS System, Inc. ("CIRRUS")
networks which allow access to ATMs in over 100,000 locations worldwide.

     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 consist of
regular, silver and smart savings accounts, special notice accounts, NOW and
Super NOW accounts, business checking accounts, money market deposit accounts,
IRA and Keogh accounts, and term deposit accounts.

     The Bank's deposits increased by $34.7 million or 4.6% during the twelve
months ended December 31, 1996, from $753.7 million at year end 1995 to $788.4
million at the end of 1996. These were favorable results considering the
performance of the stock market and mutual funds which were both fierce
competitors for the savers' dollars in 1996. The growth in deposits is primarily
attributable to an increase in the Bank's time certificates of deposit which
increased by $37.1 million during the past year. The Bank's strategy, in 1996,
was to attract more long term deposits from the general public. By selectively
increasing certain time certificate of deposit (CD) rates the Bank was
successful in increasing its CD deposits with maturities in excess of one year
by $29.8 million, representing approximately 86% of its total deposit growth in
1996.

     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 Company did not have any borrowed funds in 1996 or 1995. Borrowed funds
averaged $159,000 during the year ended December 31, 1994. The highest month end
balance of the Company's total borrowings during the year ended December 31,
1994 was $228,000.



                                      19
<PAGE>   20
                                    DEPOSITS

<TABLE>
     The following table shows the composition of the deposits as of the dates
indicated:
<CAPTION>
(In thousands) at December 31,             1996                   1995               1994
------------------------------------------------------------------------------------------------
                                               Percent              Percent              Percent
                                                 of                   of                   of
                                     Amount   Deposits    Amount   Deposits    Amount   Deposits
<S>                                  <C>       <C>        <C>       <C>        <C>       <C>    
Demand and NOW
  NOW                                $ 45,352    5.75%    $ 51,197    6.79%    $ 53,428    7.03%
  Demand accounts 
   (non interest-bearing)              17,382    2.21       15,216    2.02       14,068    1.85
                                     --------  ------     --------  ------     --------  ------ 
    Total demand and NOW               62,734    7.96       66,413    8.81       67,496    8.88

Savings:
  Regular savings and 
    special notice accounts           333,834   42.35      330,230   43.82      430,143   56.62
  Money market accounts                23,824    3.02       26,368    3.50       28,258    3.72
                                     --------  ------     --------  ------     --------  ------ 
    Total savings                     357,658   45.37      356,598   47.32      458,401   60.34

Time Certificates of deposit:
  Fixed rate certificates             303,722   38.52      274,684   36.45      187,319   24.66
  Variable rate certificates           65,417    8.30       57,373    7.61       48,102    6.33
                                     --------  ------     --------  ------     --------  ------ 
    Total time certificates 
      of deposit                      369,139   46.82      332,057   44.06      235,421   30.99
                                      
Deposit acquisition premium,
  net of amortization                  (1,181)   (.15)      (1,411)   (.19)      (1,642)   (.21)
                                     --------  ------     --------  ------     --------  ------ 

    Total deposits                   $788,350  100.00%    $753,657  100.00%    $759,676  100.00%

</TABLE>

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


(In thousands) Years Ended December 31,     1996                 1995                1994
------------------------------------------------------------------------------------------------

                                     Average   Average    Average   Average    Average   Average
                                     Balance    Rate      Balance     Rate     Balance     Rate
<S>                                  <C>       <C>        <C>        <C>       <C>         <C>  
NOW accounts                         $ 47,977  1.20%      $ 51,301   1.27%     $ 52,884    1.29%
Demand (non interest-bearing) 
   accounts                            15,992    --         13,645     --        13,166      --
Money market accounts                  25,205  3.20         28,052   3.29        31,795    2.70
Regular savings and  
   special notice accounts            332,851  3.44        359,397   3.59       482,220    3.34
Time certificates of deposit          352,385  5.74        300,141   5.78       186,222    4.57
                                     --------  ----       --------   ----      --------    ---- 
                                     $774,410  4.27%      $752,536   4.11%     $766,287    3.41%
</TABLE>

                                       20

<PAGE>   21
Investment Management and Trust Services

     In 1992, the Bank acquired a trust division as part of its Central Savings
Bank acquisition. The 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, 1996 the Trust Division had approximately $26.5 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 depend 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
branches and ATM locations and convenient business hours.

                                       21


<PAGE>   22
Supervision and Regulation

     The Bank is in a heavily regulated industry. As a Massachusetts- chartered
savings bank whose deposits are insured by the FDIC and The Depositors Insurance
Fund, the Bank is subject to regulation, supervision and examination by federal
and state regulatory authorities, including, but not limited to the FDIC, the
Massachusetts Commissioner of Banks and The Depositors Insurance Fund. This
Federal and State regulation is for the benefit of borrowers, depositors and the
respective deposit insurance funds and is not for the benefit of the Bank, the
Company or its stockholders.

     The Bank is subject to extensive federal and state statutes, regulations,
policies and standards regarding virtually all aspects of its operations,
including capital adequacy, reserves, liquidity, payment of dividends,
transactions with affiliates, loans to officers, directors, principal
shareholders and their related interests, mergers, acquisitions and changes in
controlling ownership, establishment, relocation and closure of branch banking
offices, community reinvestment, fair lending, fair credit reporting, real
estate settlement procedures, funds availability, disclosure to consumers and
financial accounting, reporting and recordkeeping. In the event the Bank did not
operate in accordance with FDIC statutes, regulations or policies, the FDIC has
authority to terminate insurance of the Bank's deposit accounts and the FDIC and
the Commissioner of Banks have authority to impose other sanctions for such
non-compliance. For a discussion of the Bank's capital adequacy, see Note 13 of
Notes to Consolidated Financial Statements appearing in the Company's 1996
Annual Report to Stockholders, which is incorporated herein by reference.

     In addition, as a bank holding company, the Company is subject to
supervision, examination and regulation by the Board of Governors of the Federal
Reserve System and is subject to statutes, regulations and policies relating to,
among other things, mergers, acquisitions and changes in controlling ownerships,
non-bank activities and subsidiaries, capital adequacy, the payment of
dividends, the tying of the sale or pricing of products or services of bank and
nonbank subsidiaries, and the provision of financial and managerial support of
its subsidiary bank.

                                       22

<PAGE>   23
Federal Deposit Insurance Corporation Improvement Act of 1991

     The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") made significant changes in federal laws governing depository
institutions and the FDIC. Among other changes, FDICIA requires federal bank
regulatory agencies to take "prompt corrective action" with respect to banks
that do not meet applicable regulatory capital requirements. In addition, FDICIA
prohibits state chartered banks from engaging, as principals, in activities such
as equity investments and insurance underwriting, which are not permissible for
national banks, unless the FDIC has determined that the activity would pose no
significant risk to the Bank Insurance Fund and the state bank is in compliance
with applicable capital standards. An insured state bank, such as MASSBANK, may
to the extent permitted by the FDIC, acquire and retain ownership of common or
preferred stock listed on a national securities exchange, provided that the
insured state bank made or maintained an investment in such securities during
the period beginning on September 30, 1990 and ending on November 26, 1991,
which MASSBANK did, and provided further that the aggregate amount of the
investment does not exceed 100 percent of the Bank's capital. At December 31,
1996, the Bank had marketable equity securities with a market value of
approximately $15.6 million, representing 17.1% of the Bank's equity capital. In
addition, FDICIA limits the aggregate amount a bank may lend to its directors,
executive officers and principal shareholders and their related interests,
prohibits depository institutions that are not well capitalized from accepting
brokered deposits without an express waiver from the FDIC, requires uniform
disclosures to consumers of the terms of bank deposit accounts, and requires
banks to give regulators and bank customers advance notice of branch closings.
FDICIA also establishes a system of risk-based deposit insurance assessments
that takes a bank's capital level and supervisory risk characteristics into
account in calculating the amount of its federal deposit insurance assessment.

     FDICIA imposes new annual audit and reporting requirements on banking
organizations with more than $500 million in total assets. Finally, the FDICIA
requires the FDIC and the other Federal bank regulatory agencies to issue
regulatory standards to govern various aspects of bank operations including real
estate lending, executive compensation, loan documentation, credit underwriting,
interest rate risk exposure, and asset growth.

     From time to time the U.S. Congress and the Massachusetts Legislature adopt
legislation and the Federal and State bank regulatory agencies issue regulations
and policies that may significantly affect the operations of the Bank and the
Company. No assurance can be given as to whether additional legislation will be
enacted or whether additional regulations or policies will be issued or as to
the effect any such legislation, regulations or policies may have on the Bank or
the Company.

                                       23


<PAGE>   24
Employees

     MASSBANK Corp. utilizes the support staff of the Bank from time to time
without the payment of any fees. 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, 1996, the Bank had 149
full-time employees, including 29 officers, and 61 part-time employees. 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, fair
lending, and motivation. 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 benefit
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 four wholly-owned subsidiaries: Readibank Investment
Corporation, Melbank Investment Corporation, Readibank Equipment 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. Assets of Readibank Investment Corporation and Melbank Investment
Corporation totaled $38.3 million and $60.5 million, at December 31, 1996,
respectively.

     Readibank Equipment Corporation is an office equipment and furniture lessor
whose sole lessee is the Bank. Assets of Readibank Equipment Corporation totaled
$218 thousand at December 31, 1996.

     Readibank Properties, Inc. incorporated primarily for the purpose of real
estate development, had total assets of $636 thousand at December 31, 1996.

Executive Officers of the Registrant

     The executive officers of the Company and the Bank and the age of each
officer as of February 28, 1997 are as follows:

Name                           Age        Office

Gerard H. Brandi               48         Chairman of the Board of Directors,
                                          President and Chief Executive
                                          Officer of the Company and the Bank

Raymond A. Brearey             60         Vice President of the Bank

David F. Carroll               49         Vice President of the Bank

Reginald E. Cormier            49         Vice President, Treasurer and Chief
                                          Financial Officer of the Company and
                                          the Bank

Donald R. Washburn             53         Senior Vice President of the Bank

Donna H. West                  51         Senior Vice President of the Bank
                                          and Assistant Secretary of the
                                          Company

                                       24

<PAGE>   25

     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.

     Raymond A. Brearey. Mr. Brearey is Vice President and Senior Trust Officer
of the Bank. Prior to joining the Bank in 1992, Mr. Brearey was a Senior Trust
Officer of the Malden Trust Company in Malden, Massachusetts.

     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 has served in this capacity until his promotion to Vice President,
Treasurer and Chief Financial Officer in January, 1995.

     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 Retail 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 Retail 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 Retail
Banking Division. In June, 1994, Mrs. West was promoted to Senior Vice President
of the Retail Banking Division.

                                       25

<PAGE>   26


Item 2. Properties

     The main office of MASSBANK Corp. and MASSBANK is located at 123 Haven
Street, Reading, Massachusetts. Additionally, the Bank has thirteen branches and
three operations facilities. The Bank owns its main office, two operations
facilities and six of its branches. All of the remaining branches and other
facilities are leased under various leases. At December 31, 1996, management
believes that the Bank's existing facilities are adequate for the conduct of its
business.

<TABLE>
     The following table sets forth certain information relating to the Bank's
existing facilities.
<CAPTION>
                                                      Owned     Lease       Renewal
                                                        or    Expiration    Option
Location                                              Leased    Date        Through
<S>            <C>                                     <C>      <C>          <C>                           
MAIN OFFICE:   123 Haven Street, Reading, MA           Owned    ----         ----
BRANCH         476 Main Street, Melrose, MA            Owned    ----         ----
 OFFICES:       27 Melrose Street, Towers Plaza,                            
                   Melrose, MA                         Leased   2004         2014
               370 Main Street, Wilmington, MA         Owned    ----         ----
               219 Lowell Street, Lucci's Plaza,                            
                   Wilmington, MA                      Leased   2006         ----
               240 Main Street, Stoneham, MA           Leased   1998         2003
              4110 Mystic Valley Pkwy, Medford, MA     Leased   2001         ----
               296 Chelmsford Street, Chelmsford, MA   Leased   1998         ----
                17 North Road, Chelmsford, MA          Leased   1999         (1) 
                45 Broadway Road, Dracut, MA           Leased   2002         ----
                50 Central Street, Lowell, MA          Owned    ----         ----
               755 Lakeview Avenue, Lowell, MA         Owned    ----         ----
              1800 Main Street, Tewksbury, MA          Owned    ----         ----
               203 Littleton Road, Westford, MA        Owned    ----         ----
OPERATIONS                                                                  
 FACILITIES:   159 Haven Street, Reading, MA           Owned    ----         ----
               169 Haven Street, Reading, MA           Owned    ----         ----
                11 North Road, Chelmsford, MA          Leased   1999         (1) 
<FN>
                                                                          
(1) Bank has option to purchase in year 2000.                           
</TABLE>

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, 1996, 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.

                                       26

<PAGE>   27
                                    PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

     The information contained under the caption "MASSBANK Corp. and
Subsidiaries Stockholder Data" in the Registrant's 1996 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 1996
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 1996 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
1996 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 Peat Marwick LLP, contained in the Registrant's
1996 Annual Report to Stockholders are incorporated herein by reference. The
unaudited quarterly financial data set forth on page 49 of such Annual Report is
incorporated herein by reference.

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

        None



                                    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 1997 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 1997 Annual Meeting of
Stockholders is incorporated herein by reference.

                                       27

<PAGE>   28
Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information appearing under the captions "Election of Directors" and
"Principal Stockholders" in the Registrant's definitive proxy statement relating
to its 1997 Annual Meeting of Stockholders is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

     The information contained in Note 5 of the Financial Statements under the
caption "Loans" in the Registrant's 1996 Annual Report to Stockholders is
incorporated herein by reference.


                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
     The following financial statements and financial statement schedules are
contained herein or are incorporated herein by reference:
<CAPTION>
(a)1. Financial Statements
                                                              Reference to 1996
                                                                Annual Report
                                                               to Stockholders
                                                                   (Pages)
<S>                                                               <C>
Independent Auditors' Report                                         21
Consolidated balance sheets at December 31,
  1996 and 1995                                                      22
Consolidated statements of income for the three
  years ended December 31, 1996                                      23
Consolidated statements of cash flows for the three
  years ended December 31, 1996                                   24-25
Consolidated statements of changes in stockholders'
  equity for the three years ended December 31,
  1996                                                               26
Notes to consolidated financial statements                        27-49
</TABLE>

     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.



                                      28
<PAGE>   29
     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 16, 1990, between the Company and The First
                      National Bank of Boston, as Rights Agent - incorporated
                      herein by reference to the Exhibit to the Company's
                      Current Report on Form 8-K dated as of January 16, 1990.

      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).

      10.2            MASSBANK for Savings Employees' Stock Ownership Plan
                      and Trust Agreement - incorporated by reference to
                      Exhibit 10.2 of the Registrant's Form S-4 Registration
                      Statement (Reg. No. 33-7916).

    10.2.1            Amendments to the MASSBANK for Savings Employee's Stock
                      Ownership Plan and Trust Agreement - incorporated by
                      reference to Exhibit 10.2.1 to the Registrant's annual
                      report on Form 10-K for the year ended December 31, 1993.

      10.3            Form of Employment Agreement, as amended, with Gerard H.
                      Brandi - incorporated by reference to Exhibit 10.3 of 
                      the Registrant's annual report on Form 10-K for the year
                      ended December 31, 1986 and Exhibit 10.3.1 of the
                      Registrant's annual report on Form 10-K for the year 
                      ended December 31, 1989.

    10.3.2            Amendment to the Employment Agreement with Gerard H. 
                      Brandi - incorporated by reference to Exhibit 10.3.2 of
                      the Registrant's annual report on Form 10-K for the year
                      ended December 31, 1990.

    10.3.3            Second amendment dated as of February 1, 1993 to the
                      Employment Agreement with Gerard H. Brandi - incorporated
                      by reference to Exhibit 10.3.3. to the Registrant's 
                      annual report on Form 10-K for the year ended 
                      December 31, 1992.

                                       29

<PAGE>   30
  Exhibit No.         Description of Exhibit


     10.3.4           Form of Employment Agreement with Raymond A. Brearey 
                      dated June 22, 1992 - incorporated by reference to 
                      Exhibit 10.3.4 to the Registrant's annual report on 
                      Form 10-K for the year ended December 31, 1992.

     10.3.5           First amendment dated as of February 1, 1993 to the
                      Employment Agreement with Raymond A. Brearey - 
                      incorporated by reference to Exhibit 10.3.5 to the
                      Registrant's annual report on Form 10-K for the year 
                      ended December 31, 1992.

     10.3.6           Second amendment dated as of February 1, 1993 to the
                      Employment Agreement with Raymond A. Brearey - 
                      incorporated by reference to Exhibit 10.3.6 to the
                      Registrant's annual report on Form 10-K for the year
                      ended December 31, 1992.

     10.3.7           Form of Employment Agreement with David F. Carroll dated
                      as of February 1, 1993 - incorporated by reference to 
                      Exhibit 10.3.7 to the Registrant's annual report on Form
                      10-K for the year ended December 31, 1992.

     10.3.8           Form of Employment Agreement with Reginald E. Cormier 
                      dated as of February 1, 1993 - incorporated by reference
                      to Exhibit 10.3.8 to the Registrant's annual report on 
                      Form 10-K for the year ended December 31, 1992.

     10.3.9           Form of Employment Agreement with Donald R. Washburn 
                      dated as of February 1, 1993 - incorporated by reference
                      to Exhibit 10.3.9 to the Registrant's annual report on 
                      Form 10-K for the year ended December 31, 1992.

    10.3.10           Form of Employment Agreement with Donna H. West dated
                      as of February 1, 1993 - incorporated by reference to 
                      Exhibit 10.3.10 to the Registrant's annual report on 
                      Form 10-K for the year ended December 31, 1992.

    10.3.11           Executive Severance Agreement with Gerard H. Brandi 
                      dated as of January 18, 1994 - incorporated by reference 
                      to exhibit 10.3.11 to the Registrant's annual report on
                      Form 10-K for the year ended December 31, 1993.

    10.3.12           Executive Severance Agreement with David F. Carroll 
                      dated as of December 23, 1993 - incorporated by reference
                      to exhibit 10.3.12 to the Registrant's annual report on 
                      Form 10-K for the year ended December 31, 1993.

    10.3.13           Executive Severance Agreement with Reginald E. Cormier 
                      dated as of December 23, 1993 - incorporated by reference 
                      to exhibit 10.3.13 to the Registrant's annual report on 
                      Form 10-K for the year ended December 31, 1993.

    10.3.14           Executive Severance Agreement with Donald R. Washburn 
                      dated as of December 23, 1993 - incorporated by reference
                      to exhibit 10.3.14 to the Registrant's annual report on 
                      Form 10-K for the year ended December 31, 1993.

                                       30

<PAGE>   31

  Exhibit No.         Description of Exhibit

    10.3.15           Executive Severance Agreement with Donna H. West dated 
                      as of December 23, 1993 - incorporated by reference to 
                      exhibit 10.3.15 to the Registrant's annual report on 
                      Form 10-K for the year ended December 31, 1993.

       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 attached hereto as
                      Exhibit 10.4.1 to this Annual Report on Form 10-K.

       11.1           Computation of Per Share Earnings - Computation of 
                      primary and fully diluted earnings per share is
                      attached hereto as Exhibit 11.1 to this Annual Report
                      on Form 10-K.

         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           1996 Annual Report to Stockholders - except for those
                      portions of the 1996 Annual Report to Stockholders which
                      are expressly incorporated by reference in this report,
                      such 1996 Annual Report to Stockholders is furnished for
                      the information of the SEC and is not to be deemed 
                      "filed" with the SEC.

         22           Subsidiaries of the Registrant - incorporated by 
                      reference to Exhibit 22 of the Registrant's Form S-4
                      Registration Statement (Reg. No. 33-7916).

         23           Consent of Independent Auditors.

        (b)           Reports on Form 8-K
                      No reports on Form 8-K have been filed during 
                      the last quarter of the period covered by this 
                      Form 10-K.

        (c)           Exhibits to this Form 10-K are attached or
                      incorporated by reference as stated in the
                      Index to Exhibits.

        (d)           Not applicable.


                                       31

<PAGE>   32


                                   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,
--------------------------     Chief Executive Officer and  
Gerard H. Brandi               Director                         March 24, 1997
                                                                --------------


/s/Reginald E. Cormier         Vice President, Treasurer  
--------------------------     and Chief Financial Officer
Reginald E. Cormier            (Principal Financial and 
                               Accounting Officer)              March 24, 1997
                                                                --------------


/s/Samuel Altschuler           Director                         March 19, 1997
--------------------------                                      --------------
Samuel Altschuler



/s/Mathias B. Bedell           Director                                       
--------------------------
Mathias B. Bedell



/s/Allan S. Bufferd            Director                         March 24, 1997
--------------------------                                      --------------
Allan S. Bufferd



                               Director                                       
--------------------------
Peter W. Carr



/s/Alexander S. Costello       Director                         March 24, 1997
--------------------------                                      --------------
Alexander S. Costello


                                       32

<PAGE>   33


/s/Robert S. Cummings          Director                         March 20, 1997
--------------------------                                      --------------
Robert S. Cummings



/s/Louise A. Hickey            Director                         March 20, 1997
--------------------------                                      --------------
Louise A. Hickey



                               Director                                       
--------------------------                                   
Leonard Lapidus



/s/Stephen E. Marshall         Director                         March 21, 1997
--------------------------                                      --------------
Stephen E. Marshall



/s/Arthur W. McPherson         Director                         March 19, 1997
--------------------------                                      --------------
Arthur W. McPherson



/s/Herbert G. Schurian          Director                        March 19, 1997
--------------------------                                      --------------
Herbert G. Schurian



/s/Donald B. Stackhouse         Director                        March 19, 1997
--------------------------                                      --------------
Donald B. Stackhouse




                                       33