##### 



Financial Highlights
 Massbank Corp. and SubsidiariesSelected Consolidated Financial Data
 (In thousands) At December 31,
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Balance Sheet Data:Total assets
    
    $
    801,799
    
    
    $
    843,522
    
    
    $
    898,679
    
    
    $
    976,168
    
    
    $
    1,010,733Mortgage loans
    
    
    181,945
    
    
    
    199,253
    
    
    
    215,904
    
    
    
    226,197
    
    
    
    241,886Other loans
    
    
    9,622
    
    
    
    9,674
    
    
    
    9,826
    
    
    
    10,001
    
    
    
    11,120Allowance for loan losses
    
    
    1,369
    
    
    
    1,382
    
    
    
    1,253
    
    
    
    1,307
    
    
    
    1,554Allowance for loan losses on
off-balance sheet credit exposures
    
    
    345
    
    
    
    345
    
    
    
    517
    
    
    
    588
    
    
    
    626Investments(1)
    
    
    585,352
    
    
    
    590,196
    
    
    
    637,151
    
    
    
    704,186
    
    
    
    721,654Deposits
    
    
    682,561
    
    
    
    723,332
    
    
    
    784,728
    
    
    
    849,465
    
    
    
    882,508Stockholders equity
    
    
    108,961
    
    
    
    106,885
    
    
    
    105,264
    
    
    
    110,015
    
    
    
    110,927
 (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Operating Data:Interest and dividend income
    
    $
    39,782
    
    
    $
    39,939
    
    
    $
    36,801
    
    
    $
    33,581
    
    
    $
    38,137Interest expense
    
    
    21,013
    
    
    
    18,951
    
    
    
    15,141
    
    
    
    12,729
    
    
    
    15,854Net interest income
    
    
    18,769
    
    
    
    20,988
    
    
    
    21,660
    
    
    
    20,852
    
    
    
    22,283Provision (credit) for loan losses
    
    
    (10
    )
    
    
    123
    
    
    
    (53
    )
    
    
    (242
    )
    
    
    (502
    )Gains on securities, net
    
    
    4,381
    
    
    
    797
    
    
    
    679
    
    
    
    1,229
    
    
    
    639Other non-interest income
    
    
    1,517
    
    
    
    1,408
    
    
    
    1,238
    
    
    
    1,307
    
    
    
    1,335Non-interest expense
    
    
    12,792
    
    
    
    12,360
    
    
    
    12,514
    
    
    
    12,352
    
    
    
    12,667Income before income taxes
    
    
    11,885
    
    
    
    10,710
    
    
    
    11,116
    
    
    
    11,278
    
    
    
    12,092Income tax expense
    
    
    4,154
    
    
    
    3,683
    
    
    
    3,793
    
    
    
    3,898
    
    
    
    4,229Net income
    
    $
    7,731
    
    
    $
    7,027
    
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    7,863
 Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Other Data:Yield on average interest-earning assets
    
    
    5.04
    %
    
    
    4.80
    %
    
    
    4.07
    %
    
    
    3.52
    %
    
    
    3.87
    %Cost of average interest-bearing liabilities
    
    
    2.99
    
    
    
    2.53
    
    
    
    1.85
    
    
    
    1.48
    
    
    
    1.78Interest rate spread
    
    
    2.05
    
    
    
    2.27
    
    
    
    2.22
    
    
    
    2.04
    
    
    
    2.09Net interest margin
    
    
    2.38
    
    
    
    2.53
    
    
    
    2.40
    
    
    
    2.19
    
    
    
    2.26Non-interest expense to average assets
    
    
    1.57
    
    
    
    1.44
    
    
    
    1.35
    
    
    
    1.26
    
    
    
    1.26Efficiency ratio(2)
    
    
    51.7
    
    
    
    53.7
    
    
    
    52.7
    
    
    
    51.6
    
    
    
    50.0Return on assets (net income/average assets)
    
    
    0.95
    
    
    
    0.82
    
    
    
    0.79
    
    
    
    0.75
    
    
    
    0.78Return on equity (net income/average
stockholders equity)
    
    
    7.23
    
    
    
    6.74
    
    
    
    6.84
    
    
    
    6.71
    
    
    
    7.08Percent non-performing loans to total loans
    
    
    0.10
    
    
    
    0.07
    
    
    
    0.11
    
    
    
    0.03
    
    
    
    0.09Percent non-performing assets to total assets
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.03
    
    
    
    0.01
    
    
    
    0.02Stockholders equity to total assets, at year-end
    
    
    13.59
    
    
    
    12.67
    
    
    
    11.71
    
    
    
    11.27
    
    
    
    10.97Book value per share, at year-end
    
    $
    25.69
    
    
    $
    24.76
    
    
    $
    24.32
    
    
    $
    25.11
    
    
    $
    25.17Market price  close, at year-end
    
    
    36.42
    
    
    
    32.89
    
    
    
    33.00
    
    
    
    37.45
    
    
    
    43.01Earnings per share:Basic
    
    
    1.80
    
    
    
    1.62
    
    
    
    1.68
    
    
    
    1.67
    
    
    
    1.77Diluted
    
    
    1.78
    
    
    
    1.61
    
    
    
    1.66
    
    
    
    1.64
    
    
    
    1.73Cash dividends paid per share
    
    
    1.13
    
    
    
    1.09
    
    
    
    1.05
    
    
    
    1.00
    
    
    
    0.92Dividend payout ratio
    
    
    63
    %
    
    
    67
    %
    
    
    63
    %
    
    
    60
    %
    
    
    52
    %
 
 (1)
    
    Consist of securities held to maturity and available for sale,
trading securities, short-term investments, term Federal funds sold and interest-bearing deposits in banks.(2)
    
    Determined by dividing non-interest expense (including the provision (credit)
for loan losses) by fully taxable equivalent net interest income plus non-interest income.




---



##### 



Managements Discussion and Analysis ofFinancial Condition and Results of Operations
 General
   Massbank Massbank
   Forward-Looking Statement Disclosure
 Massbank Massbank
 Massbank Massbank




---



##### 



Critical Accounting Policies
 U S
  Provisions (Credit) for Loan losses
    Investment Securities other than Temporarily Impaired




---



##### 



Financial Overview
 Comparison of the years 2007 and 2006
 Massbank Massbank U S
 Massbank U S
    
    
    The decrease in net interest income of $2.219 million due primarily to a decrease in net interest
margin and average earning assets.
    
    The credit for loan losses of $10 thousand versus a provision for loan losses of $123 thousand the prior year.
    
    The increase in net securities gains of $3.584 million.
    
    The increase in other non-interest income of $109 thousand.
    
    The increase in non-interest expense of $432 thousand.
    
    The increase in income tax expense of $471 thousand due to higher income before taxes and an
increase in the Companys effective income tax rate.
 Years ended December 31, 2007 compared to 2006:(In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    changeIncome Statement DataInterest and dividend income:Mortgage and other loans
    
    $
    11,081
    
    
    $
    12,070
    
    
    $
    (989
    )Mortgage-backed securities
    
    
    7,210
    
    
    
    7,592
    
    
    
    (382
    )Federal funds sold
    
    
    8,494
    
    
    
    7,731
    
    
    
    763Other securities and investments
    
    
    12,997
    
    
    
    12,546
    
    
    
    451Total interest and dividend income
    
    
    39,782
    
    
    
    39,939
    
    
    
    (157
    )Total interest expense
    
    
    21,013
    
    
    
    18,951
    
    
    
    (2,062
    )Net interest income
    
    
    18,769
    
    
    
    20,988
    
    
    
    (2,219
    )Provision (credit) for loan losses
    
    
    (10
    )
    
    
    123
    
    
    
    133Gains on securities, net
    
    
    4,381
    
    
    
    797
    
    
    
    3,584Other non-interest income
    
    
    1,517
    
    
    
    1,408
    
    
    
    109Non-interest expense
    
    
    12,792
    
    
    
    12,360
    
    
    
    (432
    )Income tax expense
    
    
    4,154
    
    
    
    3,683
    
    
    
    (471
    )Net income
    
    $
    7,731
    
    
    $
    7,027
    
    
    $
    704Diluted earnings per share (in dollars):
    
    $
    1.78
    
    
    $
    1.61
    
    
    $
    0.17
 (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    changeAverage Balance Sheet DataTotal average earning assets
    
    $
    790,904
    
    
    $
    833,842
    
    
    $
    (42,938
    )Total average deposits
    
    $
    703,023
    
    
    $
    750,437
    
    
    $
    (47,414
    )




---



##### 



Financial Condition
   Condensed Consolidated Balance Sheets
 (In thousands) at December 31,
    
    2007
    
    
    2006
    
    
    CHANGEShort-term investments
    
    $
    150,978
    
    
    $
    139,240
    
    
    $
    11,738Term Federal funds sold
    
    
    91,000
    
    
    
    41,000
    
    
    
    50,000Securities available for sale, at fair value
    
    
    128,710
    
    
    
    402,629
    
    
    
    (273,919
    )Securities held to maturity, at amortized cost
    
    
    8,098
    
    
    
    5,396
    
    
    
    2,702Trading securities, at fair value
    
    
    206,566
    
    
    
    1,931
    
    
    
    204,635Total investments
    
    
    585,352
    
    
    
    590,196
    
    
    
    (4,844
    )Total loans
    
    
    191,567
    
    
    
    208,927
    
    
    
    (17,360
    )Allowance for loan losses
    
    
    (1,369
    )
    
    
    (1,382
    )
    
    
    13Net loans
    
    
    190,198
    
    
    
    207,545
    
    
    
    (17,347
    )Other assets
    
    
    26,249
    
    
    
    45,781
    
    
    
    (19,532
    )Total assets
    
    $
    801,799
    
    
    $
    843,522
    
    
    $
    (41,723
    )Total deposits
    
    $
    682,561
    
    
    $
    723,332
    
    
    $
    (40,771
    )Escrow deposits of borrowers
    
    
    968
    
    
    
    1,006
    
    
    
    (38
    )Other liabilities
    
    
    9,309
    
    
    
    12,299
    
    
    
    (2,990
    )Total liabilities
    
    
    692,838
    
    
    
    736,637
    
    
    
    (43,799
    )Total stockholders equity
    
    
    108,961
    
    
    
    106,885
    
    
    
    2,076Total liabilities and stockholders equity
    
    $
    801,799
    
    
    $
    843,522
    
    
    $
    (41,723
    )
 Investments
 Massbank
 12




---



##### 



Loans
 Massbank
 Non-Performing Assets
  Deposits
 Massbank
   Stockholders Equity
   13




---



##### 



Results of Operations  Comparison of the years 2007 and 2006
 Net Interest Income
 Massbank U S Massbank
 FTE
 Massbank
 A U S
  AFS SFAS U S
 U S
 AFS
  14




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##### 



Provisions for Loan Losses
    Non-Interest Income
    15




---



##### 



Non-Interest Expense
    Income Tax Expense
 Massbank
 Financial Overview
 Comparison of the years 2006 and 2005
 Massbank Massbank U S
 Massbank U S
 CD
   
    
    The decrease in net interest income of $672 thousand due primarily to a decrease in average earning
assets.
    
    The provision for loan losses of $123 thousand versus a credit for loan losses of $53 thousand the
prior year.
    
    The increase in net securities gains of $118 thousand.
    
    The increase in other non-interest income of $170 thousand.
    
    The decrease in non-interest expense of $154 thousand.
    
    The decrease in income tax expense of $110 thousand due to lower income before taxes
partially offset by an increase in the Companys effective income tax rate.
 16




---



##### 



Years ended December 31, 2006 compared to 2005:(In thousands) Years ended December 31,
    
    2006
    
    
    2005
    
    
    changeIncome Statement DataInterest and dividend income:Mortgage and other loans
    
    $
    12,070
    
    
    $
    12,792
    
    
    $
    (722
    )Mortgage-backed securities
    
    
    7,592
    
    
    
    7,217
    
    
    
    375Federal funds sold
    
    
    7,731
    
    
    
    6,116
    
    
    
    1,615Other securities and investments
    
    
    12,546
    
    
    
    10,676
    
    
    
    1,870Total interest and dividend income
    
    
    39,939
    
    
    
    36,801
    
    
    
    3,138Total interest expense
    
    
    18,951
    
    
    
    15,141
    
    
    
    (3,810
    )Net interest income
    
    
    20,988
    
    
    
    21,660
    
    
    
    (672
    )Provision (credit) for loan losses
    
    
    123
    
    
    
    (53
    )
    
    
    (176
    )Gains on securities, net
    
    
    797
    
    
    
    679
    
    
    
    118Other non-interest income
    
    
    1,408
    
    
    
    1,238
    
    
    
    170Non-interest expense
    
    
    12,360
    
    
    
    12,514
    
    
    
    154Income tax expense
    
    
    3,683
    
    
    
    3,793
    
    
    
    110Net income
    
    $
    7,027
    
    
    $
    7,323
    
    
    $
    (296
    )Diluted earnings per share (in dollars):
    
    $
    1.61
    
    
    $
    1.66
    
    
    $
    (0.05
    )
 (In thousands) Years ended December 31,
    
    2006
    
    
    2005
    
    
    changeAverage Balance Sheet DataTotal average earning assets
    
    $
    833,842
    
    
    $
    904,646
    
    
    $
    (70,804
    )Total average deposits
    
    $
    750,437
    
    
    $
    816,577
    
    
    $
    (66,140
    )
 Financial Condition
   Condensed Consolidated Balance Sheets
 (In thousands) at December 31,
    
    2006
    
    
    2005
    
    
    changeShort-term investments
    
    $
    139,240
    
    
    $
    167,787
    
    
    $
    (28,547
    )Interest-bearing deposits in banks
    
    
    
    
    
    
    898
    
    
    
    (898
    )Term Federal funds sold
    
    
    41,000
    
    
    
    
    
    
    
    41,000Securities available for sale, at fair value
    
    
    402,629
    
    
    
    453,047
    
    
    
    (50,418
    )Securities held to maturity, at amortized cost
    
    
    5,396
    
    
    
    6,137
    
    
    
    (741
    )Trading securities, at fair value
    
    
    1,931
    
    
    
    9,282
    
    
    
    (7,351
    )Total investments
    
    
    590,196
    
    
    
    637,151
    
    
    
    (46,955
    )Total loans
    
    
    208,927
    
    
    
    225,730
    
    
    
    (16,803
    )Allowance for loan losses
    
    
    (1,382
    )
    
    
    (1,253
    )
    
    
    (129
    )Net loans
    
    
    207,545
    
    
    
    224,477
    
    
    
    (16,932
    )Other assets
    
    
    45,781
    
    
    
    37,051
    
    
    
    8,730Total assets
    
    $
    843,522
    
    
    $
    898,679
    
    
    $
    (55,157
    )Total deposits
    
    $
    723,332
    
    
    $
    784,728
    
    
    $
    (61,396
    )Escrow deposits of borrowers
    
    
    1,006
    
    
    
    1,059
    
    
    
    (53
    )Other liabilities
    
    
    12,299
    
    
    
    7,628
    
    
    
    4,671Total liabilities
    
    
    736,637
    
    
    
    793,415
    
    
    
    (56,778
    )Total stockholders equity
    
    
    106,885
    
    
    
    105,264
    
    
    
    1,621Total liabilities and stockholders equity
    
    $
    843,522
    
    
    $
    898,679
    
    
    $
    (55,157
    )
 17




---



##### 



Investments
 Massbank Massbank
 Loans
 Massbank
 Non-Performing Assets
  Deposits
 Massbank
   Stockholders Equity
    18




---



##### 



Results of Operations
 Comparison of the years 2006 and 2005
 Net Interest Income
 Massbank U S
 FTE Massbank
   AFS
 AFS
     19




---



##### 



Provisions (Credit) for Loan Losses
    Non-Interest Income
   Non-Interest Expense
     Income Tax Expense
  20




---



##### 



Contractual Obligations
  Payments Due or Commitments Expiring  by PeriodLess than
    
    
    One to
    
    
    Four to More than(In thousands)
    
    Total
    
    
    one year
    
    
    three years
    
    
    five years
    
    
    five yearsContractual cash obligations:Operating lease obligations
    
    $
    2,596
    
    
    $
    319
    
    
    $
    459
    
    
    $
    376
    
    
    $
    1,442Deposits with stated maturity dates
    
    
    303,552
    
    
    
    219,254
    
    
    
    76,063
    
    
    
    7,572
    
    
    
    663Total contractual cash obligations
    
    $
    306,148
    
    
    $
    219,573
    
    
    $
    76,522
    
    
    $
    7,948
    
    
    $
    2,105Other commitments:Commitments to originate residentialmortgage loans
    
    $
    2,514
    
    
    $
    2,514
    
    
    $
    
    
    
    $
    
    
    
    $
    Unused lines of credit
    
    
    25,897
    
    
    
    4,330
    
    
    
    3,296
    
    
    
    9,233
    
    
    
    9,038Other loan commitments
    
    
    2,457
    
    
    
    287
    
    
    
    1,692
    
    
    
    49
    
    
    
    429Total other commitments(1)
    
    $
    30,868
    
    
    $
    7,131
    
    
    $
    4,988
    
    
    $
    9,282
    
    
    $
    9,467
 (1)
    
    Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. These commitments
generally have fixed expiration dates. The total commitment amounts do not necessarily represent future cash requirements since
many of the commitments may
expire without being drawn upon.
 Liquidity and Capital Resources
    21




---



##### 



Asset and Liability Management
  Interest Rate Risk
          22




---



##### 



Interest Rate Risk (continued)
    Interest Sensitivity Periods3 Months
    
    
    3 to 6
    
    
    6 Months
    
    
    1 to 5
    
    
    Over(In thousands)
    
    or Less
    
    
    Months
    
    
    to 1 Year
    
    
    Years
    
    
    5 Years
    
    
    TotalInterest-earning assets:Loans(3)
    
    $
    13,507
    
    
    $
    5,721
    
    
    $
    11,258
    
    
    $
    95,920
    
    
    $
    65,161
    
    
    $
    191,567Short-term investments:Federal funds sold
    
    
    74,455
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,455Money market investment fund
    
    
    69,520
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,520Interest-bearing bank money market accounts
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Term Federal funds sold
    
    
    88,000
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,000Securities available for sale(3)(5)
    
    
    11,205
    
    
    
    8,153
    
    
    
    15,670
    
    
    
    78,478
    
    
    
    13,699
    
    
    
    127,205Securities held to maturity
    
    
    30
    
    
    
    31
    
    
    
    61
    
    
    
    486
    
    
    
    7,490
    
    
    
    8,098Trading securities
    
    
    206,566
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206,566Total interest-earning assets
    
    $
    463,286
    
    
    $
    23,905
    
    
    $
    26,989
    
    
    $
    174,884
    
    
    $
    86,350
    
    
    $
    775,414Interest-bearing liabilities:Deposits(1) (2) (4)
    
    $
    507,661
    
    
    $
    64,409
    
    
    $
    52,686
    
    
    $
    34,022
    
    
    $
    664
    
    
    $
    659,442Total interest-bearing liabilities
    
    $
    507,661
    
    
    $
    64,409
    
    
    $
    52,686
    
    
    $
    34,022
    
    
    $
    664
    
    
    $
    659,442GAP for period
    
    $
    (44,375
    )
    
    $
    (40,504
    )
    
    $
    (25,697
    )
    
    $
    140,862
    
    
    $
    85,686
    
    
    $
    115,972Cumulative GAPDecember 31, 2007
    
    $
    (44,375
    )
    
    $
    (84,879
    )
    
    $
    (110,576
    )
    
    $
    30,286
    
    
    $
    115,972Cumulative GAP as a percent of total assets
    
    
    (5.5
    )%
    
    
    (10.6
    )%
    
    
    (13.8
    )%
    
    
    3.8
    %
    
    
    14.5
    %Cumulative GAPDecember 31, 2006
    
    $
    (275,365
    )
    
    $
    (292,591
    )
    
    $
    (296,046
    )
    
    $
    (25,173
    )
    
    $
    106,764
 (1)
    
    Excludes non-interest bearing demand accounts of $24.087 million.(2)
    
    Includes escrow deposits of borrowers of $968 thousand.(3)
    
    Loans and mortgage-backed securities reflect regular amortization of principal and
prepayment estimates.(4)
    
    It is assumed that the Banks Savings and NOW account rates will be changed within 3
months or less.(5)
    
    Excludes net unrealized gains on securities available for sale of $1.505 million.
 23




---



##### 



Interest Rate Risk (continued)
  Expected Maturity DateAt December 31, 2007Fair Value(In thousands)
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    Thereafter
    
    
    Total
    
    
    at 12/31/07Interest sensitive assets:Fixed rate securities(4)
    
    $
    31,469
    
    
    $
    27,272
    
    
    $
    21,387
    
    
    $
    17,387
    
    
    $
    12,919
    
    
    $
    21,248
    
    
    $
    131,682
    
    
    $
    132,650Average interest rate(1)
    
    
    5.34
    %
    
    
    5.36
    %
    
    
    5.38
    %
    
    
    5.50
    %
    
    
    5.51
    %
    
    
    5.06
    %
    
    
    5.34
    %Equity securities(4)
    
    
    3,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,621
    
    
    
    4,180Average interest rate(1)
    
    
    3.51
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.51
    %Trading securities(5)
    
    
    206,566
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206,566
    
    
    
    206,566Average interest rate
    
    
    4.31
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.31
    %Fixed rate loans
    
    
    529
    
    
    
    827
    
    
    
    1,008
    
    
    
    2,851
    
    
    
    5,787
    
    
    
    142,255
    
    
    
    153,257
    
    
    
    149,255Average interest rate
    
    
    6.23
    %
    
    
    6.58
    %
    
    
    6.05
    %
    
    
    5.87
    %
    
    
    5.74
    %
    
    
    5.01
    %
    
    
    5.07
    %Variable rate loans
    
    
    10,646
    
    
    
    4,873
    
    
    
    3,172
    
    
    
    2,919
    
    
    
    1,616
    
    
    
    15,084
    
    
    
    38,310
    
    
    
    37,982Average interest rate
    
    
    6.67
    %
    
    
    5.83
    %
    
    
    8.48
    %
    
    
    7.00
    %
    
    
    6.34
    %
    
    
    5.72
    %
    
    
    6.20
    %Other fixed rate assets(3)
    
    
    98,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,000
    
    
    
    98,000Average interest rate
    
    
    4.76
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.76
    %Other variable rate assets(2)
    
    
    143,978
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143,978
    
    
    
    143,978Average interest rate
    
    
    4.07
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.07
    %Total interest sensitive assets
    
    $
    494,809
    
    
    $
    32,972
    
    
    $
    25,567
    
    
    $
    23,157
    
    
    $
    20,322
    
    
    $
    178,587
    
    
    $
    775,414
    
    
    $
    772,611Interest sensitive liabilities:Savings and money market
deposit accounts
    
    $
    307,322
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    307,322
    
    
    $
    307,322Average interest rate
    
    
    2.11
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.11
    %Fixed rate certificates of deposit
    
    
    198,176
    
    
    
    27,723
    
    
    
    5,070
    
    
    
    1,026
    
    
    
    204
    
    
    
    663
    
    
    
    232,862
    
    
    
    233,789Average interest rate
    
    
    4.57
    %
    
    
    4.50
    %
    
    
    4.43
    %
    
    
    4.32
    %
    
    
    4.48
    %
    
    
    4.74
    %
    
    
    4.56
    %Variable rate certificates of deposit
    
    
    21,077
    
    
    
    29,852
    
    
    
    13,418
    
    
    
    6,343
    
    
    
    
    
    
    
    
    
    
    
    70,690
    
    
    
    70,690Average interest rate
    
    
    3.81
    %
    
    
    3.89
    %
    
    
    4.09
    %
    
    
    4.09
    %
    
    
    
    
    
    
    
    
    
    
    3.92
    %NOW accounts
    
    
    47,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,600
    
    
    
    47,600Average interest rate
    
    
    0.55
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.55
    %Escrow deposits of borrowers
    
    
    968
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    968
    
    
    
    968Average interest rate
    
    
    0.75
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.75
    %Total interest sensitive
liabilities
    
    $
    575,143
    
    
    $
    57,575
    
    
    $
    18,488
    
    
    $
    7,369
    
    
    $
    204
    
    
    $
    663
    
    
    $
    659,442
    
    
    $
    660,369
 (1)
    
    Securities rates presented are on a tax equivalent basis.(2)
    
    Consist of Federal funds sold (overnight), money market investment funds and
interest-bearing bank money market accounts.(3)
    
    Consist of term Federal funds sold.(4)
    
    Securities presented are at amortized cost.(5)
    
    Securities presented are at fair value.
  Other Market Risks
  24




---



##### 



Average Balance Sheets
 (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense(1)
    
    
    Rate
    
    
    Balance
    
    
    Expense(1)
    
    
    Rate
    
    
    Balance
    
    
    Expense(1)
    
    
    RateAssets:Earning assets:Federal funds sold
    
    $
    163,224
    
    
    $
    8,494
    
    
    
    5.20
    %
    
    $
    155,556
    
    
    $
    7,731
    
    
    
    4.97
    %
    
    $
    192,154
    
    
    $
    6,116
    
    
    
    3.18
    %Short-term investments(4)
    
    
    49,660
    
    
    
    2,467
    
    
    
    4.97
    
    
    
    5,691
    
    
    
    289
    
    
    
    5.08
    
    
    
    1,653
    
    
    
    53
    
    
    
    3.21Securities available for sale:Investment securities(2)
    
    
    6,891
    
    
    
    258
    
    
    
    3.74
    
    
    
    308,716
    
    
    
    12,124
    
    
    
    3.93
    
    
    
    313,708
    
    
    
    9,923
    
    
    
    3.16Mortgage-backed securities(2)
    
    
    127,920
    
    
    
    6,856
    
    
    
    5.36
    
    
    
    135,267
    
    
    
    7,293
    
    
    
    5.39
    
    
    
    129,850
    
    
    
    6,961
    
    
    
    5.36Mortgage-backed securities
held to maturity
    
    
    6,547
    
    
    
    353
    
    
    
    5.39
    
    
    
    5,695
    
    
    
    299
    
    
    
    5.25
    
    
    
    4,989
    
    
    
    256
    
    
    
    5.13Trading securities
    
    
    237,990
    
    
    
    10,336
    
    
    
    4.34
    
    
    
    5,657
    
    
    
    201
    
    
    
    3.55
    
    
    
    32,222
    
    
    
    772
    
    
    
    2.40Mortgage loans(3)
    
    
    188,933
    
    
    
    10,313
    
    
    
    5.46
    
    
    
    207,650
    
    
    
    11,305
    
    
    
    5.44
    
    
    
    220,020
    
    
    
    12,111
    
    
    
    5.50Other loans(3)
    
    
    9,739
    
    
    
    768
    
    
    
    7.89
    
    
    
    9,610
    
    
    
    765
    
    
    
    7.96
    
    
    
    10,050
    
    
    
    681
    
    
    
    6.78Total earning assets
    
    
    790,904
    
    
    
    39,845
    
    
    
    5.04
    %
    
    
    833,842
    
    
    
    40,007
    
    
    
    4.80
    %
    
    
    904,646
    
    
    
    36,873
    
    
    
    4.07
    %Allowance for
loan losses
    
    
    (1,376
    )
    
    
    
    
    
    
    
    
    
    
    (1,299
    )
    
    
    
    
    
    
    
    
    
    
    (1,266
    )Total earning assets
less allowance for
loan losses
    
    
    789,528
    
    
    
    
    
    
    
    
    
    
    
    832,543
    
    
    
    
    
    
    
    
    
    
    
    903,380Other assets
    
    
    25,568
    
    
    
    
    
    
    
    
    
    
    
    26,655
    
    
    
    
    
    
    
    
    
    
    
    25,174Total assets
    
    $
    815,096
    
    
    
    
    
    
    
    
    
    
    $
    859,198
    
    
    
    
    
    
    
    
    
    
    $
    928,554Liabilities:Deposits:Demand and NOW
    
    $
    73,917
    
    
    $
    262
    
    
    
    0.35
    %
    
    $
    80,188
    
    
    $
    228
    
    
    
    0.28
    %
    
    $
    85,326
    
    
    
    $187
    
    
    
    0.22
    %Savings
    
    
    323,132
    
    
    
    6,395
    
    
    
    1.98
    
    
    
    389,260
    
    
    
    7,043
    
    
    
    1.81
    
    
    
    499,772
    
    
    
    7,949
    
    
    
    1.59Time certificates of deposit
    
    
    305,974
    
    
    
    14,352
    
    
    
    4.69
    
    
    
    280,989
    
    
    
    11,680
    
    
    
    4.16
    
    
    
    231,479
    
    
    
    7,005
    
    
    
    3.03Total deposits
    
    
    703,023
    
    
    
    21,009
    
    
    
    2.99
    
    
    
    750,437
    
    
    
    18,951
    
    
    
    2.53
    
    
    
    816,577
    
    
    
    15,141
    
    
    
    1.85Borrowed Funds
    
    
    82
    
    
    
    4
    
    
    
    5.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total deposits and
borrowed funds
    
    
    703,105
    
    
    
    21,013
    
    
    
    2.99%
    
    
    
    750,437
    
    
    
    18,951
    
    
    
    2.53
    %
    
    
    816,577
    
    
    
    15,141
    
    
    
    1.85
    %Other liabilities
    
    
    5,057
    
    
    
    
    
    
    
    
    
    
    
    4,434
    
    
    
    
    
    
    
    
    
    
    
    4,984Total liabilities
    
    
    708,162
    
    
    
    
    
    
    
    
    
    
    
    754,871
    
    
    
    
    
    
    
    
    
    
    
    821,561Stockholders Equity
    
    
    106,934
    
    
    
    
    
    
    
    
    
    
    
    104,327
    
    
    
    
    
    
    
    
    
    
    
    106,993Total liabilities and
stockholders equity
    
    $
    815,096
    
    
    
    
    
    
    
    
    
    
    $
    859,198
    
    
    
    
    
    
    
    
    
    
    $
    928,554Net interest income
(tax-equivalent basis)
    
    
    
    
    
    
    18,832
    
    
    
    
    
    
    
    
    
    
    
    21,056
    
    
    
    
    
    
    
    
    
    
    
    21,732Less adjustment of tax-exempt
interest income
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    72Net interest income
    
    
    
    
    
    $
    18,769
    
    
    
    
    
    
    
    
    
    
    $
    20,988
    
    
    
    
    
    
    
    
    
    
    $
    21,660Interest rate spread(5)
    
    
    
    
    
    
    
    
    
    
    2.05
    %
    
    
    
    
    
    
    
    
    
    
    2.27
    %
    
    
    
    
    
    
    
    
    
    
    2.22
    %Net interest margin(6)
    
    
    
    
    
    
    
    
    
    
    2.38
    %
    
    
    
    
    
    
    
    
    
    
    2.53
    %
    
    
    
    
    
    
    
    
    
    
    2.40
    %
 (1)
    
    Income on equity securities is included on a tax equivalent basis.(2)
    
    Averages balances include net unrealized gains (losses) on securities available for
sale.(3)
    
    Loans on non-accrual status are included in average balances.(4)
    
    Short-term investments consist of interest-bearing deposits in banks and investments
in money market funds.(5)
    
    Interest rate spread represents the difference between the yield on earning assets
and the cost of the Companys deposits.(6)
    
    Net interest margin represents net interest income (tax equivalent basis) divided by
average interest-earning assets. 25




---



##### 



Rate/Volume Analysis
  2007 Compared to 2006
    
    
    2006 Compared to 2005(In thousands)
    
    Increase (Decrease)
    
    
    Increase (Decrease)Years ended December 31,
    
    Due to
    
    
    Due toVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalInterest and dividend income:Federal funds sold
    
    $
    390
    
    
    $
    373
    
    
    $
    763
    
    
    $
    (1,331
    )
    
    $
    2,946
    
    
    $
    1,615Short-term investments
    
    
    2,184
    
    
    
    (6
    )
    
    
    2,178
    
    
    
    191
    
    
    
    45
    
    
    
    236Investment securities
    
    
    (10,468
    )
    
    
    (1,387
    )
    
    
    (11,855
    )
    
    
    (159
    )
    
    
    2,358
    
    
    
    2,199Mortgage-backed securities
    
    
    (349
    )
    
    
    (33
    )
    
    
    (382
    )
    
    
    330
    
    
    
    45
    
    
    
    375Trading securities
    
    
    10,109
    
    
    
    19
    
    
    
    10,128
    
    
    
    (812
    )
    
    
    247
    
    
    
    (565
    )Mortgage loans
    
    
    (1,022
    )
    
    
    30
    
    
    
    (992
    )
    
    
    (675
    )
    
    
    (131
    )
    
    
    (806
    )Other loans
    
    
    10
    
    
    
    (7
    )
    
    
    3
    
    
    
    (31
    )
    
    
    115
    
    
    
    84Total interest and
dividend income
    
    
    854
    
    
    
    (1,011
    )
    
    
    (157
    )
    
    
    (2,487
    )
    
    
    5,625
    
    
    
    3,138Interest expense:Deposits:Demand and NOW
    
    
    (19
    )
    
    
    53
    
    
    
    34
    
    
    
    (12
    )
    
    
    53
    
    
    
    41Savings
    
    
    (1,269
    )
    
    
    621
    
    
    
    (648
    )
    
    
    (1,907
    )
    
    
    1,001
    
    
    
    (906
    )Time certificates of deposit
    
    
    1,093
    
    
    
    1,579
    
    
    
    2,672
    
    
    
    1,702
    
    
    
    2,973
    
    
    
    4,675Borrowed funds
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Total interest expense
    
    
    (191
    )
    
    
    2,253
    
    
    
    2,062
    
    
    
    (217
    )
    
    
    4,027
    
    
    
    3,810Net interest income
    
    $
    1,045
    
    
    $
    (3,264
    )
    
    $
    (2,219
    )
    
    $
    (2,270
    )
    
    $
    1,598
    
    
    $
    (672
    )
 Impact of Inflation and Changing Prices
 Massbank
 26




---



##### 



Recent Accounting Pronouncements
 Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109
   sfas no. 157, Fair Value Measurements
   Massbank
 sfas No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
   Massbank
 27




---



##### 



Massbank Corp
 Managements Annual Report on Internal Control Over Financial Reporting
 Massbank Massbank
 Massbank
  Massbank
 Managements Assessment of Internal Control Over Financial Reporting
 Massbank Massbank Massbank Massbank
 Chairman, President and CEO
 Senior Vice President, Treasurer and CFO
 28




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 The Board of Directors and Stockholders  Massbank Corp .:
 Massbank Massbank COSO Massbank
  A
  Massbank Massbank COSO
  
 Certified Public Accountants, Inc.
 Boston, Massachusetts  March 6, 2008
 29




---



##### 



Massbank Corp. and Subsidiaries
 Consolidated Balance Sheets
 (In
thousands except share data) At December 31,
    
    2007
    
    
    2006Assets:Cash and due from banks
    
    $
    6,126
    
    
    $
    8,650Short-term investments (Note 2)
    
    
    150,978
    
    
    
    139,240Total cash and cash equivalents
    
    
    157,104
    
    
    
    147,890Term Federal funds sold
    
    
    91,000
    
    
    
    41,000Trading securities, at fair value (Note 3)
    
    
    206,566
    
    
    
    1,931Securities available for sale, at fair value
(amortized cost of $127,205 in 2007 and $407,154 in 2006) (Note 4)
    
    
    128,710
    
    
    
    402,629Securities held to maturity, at amortized cost
(market value of $8,120 in 2007 and $5,276 in 2006) (Note 4)
    
    
    8,098
    
    
    
    5,396Loans (Notes 6 and 8):Mortgage loans
    
    
    181,945
    
    
    
    199,253Other loans
    
    
    9,622
    
    
    
    9,674Total loans
    
    
    191,567
    
    
    
    208,927Allowance for loan losses (Note 7)
    
    
    (1,369
    )
    
    
    (1,382
    )Net loans
    
    
    190,198
    
    
    
    207,545Real estate held for resale
    
    
    425
    
    
    
    425Accrued interest and income receivable
    
    
    4,061
    
    
    
    5,083Income tax receivable, net
    
    
    1
    
    
    
    88Deferred income tax asset, net (Note 13)
    
    
    661
    
    
    
    3,347Premises and equipment (Note 10)
    
    
    8,163
    
    
    
    7,085Goodwill
    
    
    1,090
    
    
    
    1,090Other assets
    
    
    5,722
    
    
    
    20,013Total assets
    
    $
    801,799
    
    
    $
    843,522Liabilities and Stockholders Equity:Deposits (Note 11):Demand and NOW
    
    $
    71,687
    
    
    $
    78,860Savings
    
    
    307,322
    
    
    
    344,808Time certificates of deposit
    
    
    303,552
    
    
    
    299,664Total deposits
    
    
    682,561
    
    
    
    723,332Escrow deposits of borrowers
    
    
    968
    
    
    
    1,006Allowance for loan losses on off-balance
sheet credit exposures
    
    
    345
    
    
    
    345Other liabilities
    
    
    8,964
    
    
    
    11,954Total liabilities
    
    
    692,838
    
    
    
    736,637Commitments and contingent liabilities (Notes 9 and 10)
Stockholders equity (Notes 13, 15, 16 and 17):Preferred stock, par value $1.00 per share; 2,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common stock, par value $1.00 per share; 10,000,000 shares
authorized, 7,880,642 and 7,850,317 shares issued in 2007 and
2006, respectively
    
    
    7,881
    
    
    
    7,850Additional paid-in capital
    
    
    58,773
    
    
    
    57,953Retained earnings
    
    
    107,674
    
    
    
    107,055174,328
    
    
    
    172,858Treasury stock, at cost, 3,638,863 and 3,532,663 shares in 2007
and 2006, respectively
    
    
    (66,597
    )
    
    
    (62,902
    )Accumulated other comprehensive income (loss)
    
    
    1,230
    
    
    
    (3,071
    )Shares held in rabbi trust at cost, 20,194 and 17,944 shares in
2007 and 2006, respectively
    
    
    (503
    )
    
    
    (426
    )Deferred compensation obligations
    
    
    503
    
    
    
    426Total stockholders equity
    
    
    108,961
    
    
    
    106,885Total liabilities and stockholders equity
    
    $
    801,799
    
    
    $
    843,522
 See accompanying notes to consolidated financial statements.
 30




---



##### 



Massbank Corp. and Subsidiaries
 Consolidated Statements of Income
 (In
thousands except share data) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Interest and dividend income:Mortgage loans
    
    $
    10,313
    
    
    $
    11,305
    
    
    $
    12,111Other loans
    
    
    768
    
    
    
    765
    
    
    
    681Securities available for sale:Mortgage-backed securities
    
    
    6,857
    
    
    
    7,293
    
    
    
    6,961Other securities
    
    
    207
    
    
    
    12,062
    
    
    
    9,863Mortgage-backed securities held to maturity
    
    
    353
    
    
    
    299
    
    
    
    256Trading securities
    
    
    10,323
    
    
    
    195
    
    
    
    760Federal funds sold
    
    
    8,494
    
    
    
    7,731
    
    
    
    6,116Other investments
    
    
    2,467
    
    
    
    289
    
    
    
    53Total interest and dividend income
    
    
    39,782
    
    
    
    39,939
    
    
    
    36,801Interest expense:Deposits:NOW
    
    
    262
    
    
    
    228
    
    
    
    187Savings
    
    
    6,395
    
    
    
    7,043
    
    
    
    7,949Time certificates of deposit
    
    
    14,352
    
    
    
    11,680
    
    
    
    7,005Borrowed funds
    
    
    4
    
    
    
    
    
    
    
    Total interest expense
    
    
    21,013
    
    
    
    18,951
    
    
    
    15,141Net interest income
    
    
    18,769
    
    
    
    20,988
    
    
    
    21,660Provision (credit) for loan losses(Note 7)
    
    
    (10
    )
    
    
    123
    
    
    
    (53
    )Net interest income after provision (credit)
for loan losses
    
    
    18,779
    
    
    
    20,865
    
    
    
    21,713Non-interest income:Deposit account service fees
    
    
    325
    
    
    
    343
    
    
    
    393Gains on securities available for sale, net
    
    
    272
    
    
    
    736
    
    
    
    515Gains on trading securities, net
    
    
    4,109
    
    
    
    61
    
    
    
    164Option fees
    
    
    375
    
    
    
    150
    
    
    
    Deferred compensation plan income
    
    
    58
    
    
    
    178
    
    
    
    84Other
    
    
    759
    
    
    
    737
    
    
    
    761Total non-interest income
    
    
    5,898
    
    
    
    2,205
    
    
    
    1,917Non-interest expense:Salaries and employee benefits
    
    
    7,699
    
    
    
    7,338
    
    
    
    7,463Deferred compensation plan expense
    
    
    264
    
    
    
    263
    
    
    
    172Occupancy and equipment
    
    
    2,094
    
    
    
    2,176
    
    
    
    2,212Data processing
    
    
    588
    
    
    
    583
    
    
    
    540Professional services
    
    
    612
    
    
    
    553
    
    
    
    485Advertising and marketing
    
    
    166
    
    
    
    139
    
    
    
    155Deposit insurance
    
    
    109
    
    
    
    126
    
    
    
    145Other
    
    
    1,260
    
    
    
    1,182
    
    
    
    1,342Total non-interest expense
    
    
    12,792
    
    
    
    12,360
    
    
    
    12,514Income before income tax expense
    
    
    11,885
    
    
    
    10,710
    
    
    
    11,116Income tax expense(Note 13)
    
    
    4,154
    
    
    
    3,683
    
    
    
    3,793Net income
    
    $
    7,731
    
    
    $
    7,027
    
    
    $
    7,323Weighted average common shares outstanding:Basic
    
    
    4,305,894
    
    
    
    4,325,879
    
    
    
    4,365,932Diluted
    
    
    4,333,789
    
    
    
    4,360,688
    
    
    
    4,422,529Earnings per share(in dollars):Basic
    
    $
    1.80
    
    
    $
    1.62
    
    
    $
    1.68Diluted
    
    
    1.78
    
    
    
    1.61
    
    
    
    1.66
 See accompanying notes to consolidated financial statements.
 31




---



##### 



Massbank Corp. and Subsidiaries
 Consolidated Statements of Cash Flows
 (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    7,731
    
    
    $
    7,027
    
    
    $
    7,323Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    535
    
    
    
    669
    
    
    
    642Share-based payment compensation
    
    
    89
    
    
    
    60
    
    
    
    Loan interest capitalized
    
    
    (6
    )
    
    
    (11
    )
    
    
    (9
    )(Increase) decrease in accrued interest and income
receivable
    
    
    1,022
    
    
    
    (1,185
    )
    
    
    (482
    )Increase (decrease) in other liabilities
    
    
    (3,000
    )
    
    
    554
    
    
    
    (22
    )(Increase) decrease in income tax receivable, net
    
    
    87
    
    
    
    (88
    )
    
    
    164Amortization of premiums (accretion of discounts)
on securities, net
    
    
    (37
    )
    
    
    (79
    )
    
    
    (48
    )Net trading securities activity:Proceeds from sales of debt securities
    
    
    13,984
    
    
    
    6,940
    
    
    
    18,926Proceeds from sales of equity securities
    
    
    29,229
    
    
    
    14,251
    
    
    
    5,508Proceeds from maturities and calls of debt securities
    
    
    171,755
    
    
    
    2,000
    
    
    
    50,002Purchases of debt securities
    
    
    (124,003
    )
    
    
    (984
    )
    
    
    (18,795
    )Purchases of equity securities
    
    
    (30,280
    )
    
    
    (14,768
    )
    
    
    (5,693
    )Principal repayments of securities
    
    
    35
    
    
    
    
    
    
    
    Amortization of premiums (accretion of discounts)
on securities, net
    
    
    10
    
    
    
    (27
    )
    
    
    (53
    )Gains on securities available for sale, net
    
    
    (272
    )
    
    
    (736
    )
    
    
    (515
    )Appreciation on donated equity securities
    
    
    
    
    
    
    5
    
    
    
    Gains on trading securities, net
    
    
    (4,109
    )
    
    
    (61
    )
    
    
    (164
    )Decrease in deferred mortgage loan origination fees,
net of amortization
    
    
    (17
    )
    
    
    (27
    )
    
    
    (113
    )(Decrease) increase in accrued income taxes, net
    
    
    
    
    
    
    (35
    )
    
    
    35Deferred income tax expense (benefit)
    
    
    2,263
    
    
    
    (56
    )
    
    
    250(Increase) decrease in other assets
    
    
    14,296
    
    
    
    (3,301
    )
    
    
    (5,088
    )Provision (credit) for loan losses
    
    
    (10
    )
    
    
    123
    
    
    
    (53
    )Provision (credit) for loan losses on off-balance
sheet credit exposures
    
    
    
    
    
    
    (172
    )
    
    
    (71
    )Gains on sales of premises and equipment
    
    
    
    
    
    
    (3
    )
    
    
    Net cash provided by operating activities
    
    
    79,302
    
    
    
    10,096
    
    
    
    51,744Cash flows from investing activities:Purchases of term Federal funds
    
    
    (335,000
    )
    
    
    (41,000
    )
    
    
    (15,000
    )Proceeds from maturities of term Federal funds
    
    
    285,000
    
    
    
    
    
    
    
    15,000Net decrease in interest-bearing bank deposits
    
    
    
    
    
    
    898
    
    
    
    1,820Proceeds from sales of investment securities available for
sale
    
    
    6,636
    
    
    
    20,405
    
    
    
    28,252Proceeds from maturities and redemption of investment
securities
held to maturity and available for sale
    
    
    
    
    
    
    122,250
    
    
    
    103,961Purchases of investment securities available for sale
    
    
    (3,070
    )
    
    
    (91,205
    )
    
    
    (132,546
    )Purchases of mortgage-backed securities available for sale
    
    
    (13,301
    )
    
    
    (25,943
    )
    
    
    (47,696
    )Purchases of mortgage-backed securities held to maturity
    
    
    (2,966
    )
    
    
    
    
    
    
    (1,581
    )Principal repayments of mortgage-backed securities
    
    
    25,465
    
    
    
    26,730
    
    
    
    31,450Principal repayments of securities available for sale
    
    
    
    
    
    
    2
    
    
    
    Donated equity securities
    
    
    
    
    
    
    5
    
    
    
    Loans originated
    
    
    (19,532
    )
    
    
    (21,736
    )
    
    
    (48,874
    )Loan principal payments received
    
    
    36,912
    
    
    
    38,583
    
    
    
    59,460Purchases of premises and equipment
    
    
    (1,613
    )
    
    
    (1,654
    )
    
    
    (700
    )Proceeds from sales of premises and equipment
    
    
    
    
    
    
    3Net cash provided by (used in) investing activities
    
    
    (21,469
    )
    
    
    27,338
    
    
    
    (6,454
    )
 (Continued)
 32




---



##### 



Massbank Corp. and Subsidiaries
 Consolidated Statements of Cash Flows  (Continued)
 (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Cash flows from financing activities:Net decrease in deposits
    
    
    (40,771
    )
    
    
    (61,396
    )
    
    
    (64,737
    )Decrease in escrow deposits of borrowers
    
    
    (38
    )
    
    
    (53
    )
    
    
    (15
    )Proceeds from borrowed funds
    
    
    10,000
    
    
    
    
    
    
    
    Repayments of borrowings
    
    
    (10,000
    )
    
    
    
    
    
    
    Payments to acquire treasury stock
    
    
    (3,695
    )
    
    
    (1,621
    )
    
    
    (4,487
    )Purchase of company stock for deferred compensation plan,
net of distributions
    
    
    (77
    )
    
    
    (75
    )
    
    
    (30
    )Increase in deferred compensation obligation
    
    
    77
    
    
    
    75
    
    
    
    30Options exercised, including tax benefit
    
    
    762
    
    
    
    864
    
    
    
    1,830Cash dividends paid on common stock
    
    
    (4,877
    )
    
    
    (4,715
    )
    
    
    (4,583
    )Net cash used in financing activities
    
    
    (48,619
    )
    
    
    (66,921
    )
    
    
    (71,992
    )Net increase (decrease) in cash and cash equivalents
    
    
    9,214
    
    
    
    (29,487
    )
    
    
    (26,702
    )Cash and cash equivalents at beginning of year
    
    
    147,890
    
    
    
    177,377
    
    
    
    204,079Cash and cash equivalents at end of year
    
    $
    157,104
    
    
    $
    147,890
    
    
    $
    177,377Supplemental cash flow disclosures:Cash transactions:Cash paid during the year for interest
    
    $
    21,132
    
    
    $
    18,950
    
    
    $
    15,203Cash paid during the year for taxes, net of refunds
    
    
    2,660
    
    
    
    3,745
    
    
    
    3,002Non-cash transactions:Transfer of securities from available for sale to trading
upon early adoption of SFAS No. 159
    
    $
    261,256
    
    
    $
    
    
    
    $
    Transfer of property from premises and equipment
to real estate held for resale
    
    
    
    
    
    
    425
    
    
    
    
 See accompanying notes to consolidated financial statements.
 33




---



##### 



Massbank Corp. and Subsidiaries
 Consolidated Statements of Changes in Stockholders Equity
 (In thousands except share data) Years ended December 31, 2007, 2006 and 2005Accumulated
    
    
    SharesAdditional
    
    
    
    
    
    
    
    
    
    
    other
    
    
    held in
    
    
    DeferredCommon
    
    
    paid-in
    
    
    Retained
    
    
    Treasury
    
    
    comprehensive
    
    
    Rabbi
    
    
    compensationstock
    
    
    capital
    
    
    earnings
    
    
    stock
    
    
    income (loss)
    
    
    Trust
    
    
    obligations
    
    
    TotalBalance at December 31, 2004
    
    $
    7,736
    
    
    $
    55,313
    
    
    $
    102,003
    
    
    $
    (56,794
    )
    
    $
    1,757
    
    
    $
    (553
    )
    
    $
    553
    
    
    $
    110,015Net Income
    
    
    
    
    
    
    
    
    
    
    7,323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,323Other comprehensive loss, net of tax:Unrealized losses on securities,
net of
reclassification adjustment (Note
1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,834
    )
    
    
    
    
    
    
    
    
    
    
    (4,834
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,489Cash dividends paid ($1.05 per share)
    
    
    
    
    
    
    
    
    
    
    (4,583
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,583
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,487
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,487
    )Purchase of company stock for
deferred compensation plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    30
    
    
    
    Distribution of company stock from
deferred compensation plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232
    
    
    
    (232
    )
    
    
    Exercise of stock options
    
    
    76
    
    
    
    1,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,488Tax benefit on stock options exercised
    
    
    
    
    
    
    342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    342Balance at December 31, 2005
    
    
    7,812
    
    
    
    57,067
    
    
    
    104,743
    
    
    
    (61,281
    )
    
    
    (3,077
    )
    
    
    (351
    )
    
    
    351
    
    
    
    105,264Net Income
    
    
    
    
    
    
    
    
    
    
    7,027
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,027Other comprehensive income, net of
tax:Unrealized gains on securities,
net of
reclassification adjustment (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    202Pension liability adjustment to
initially apply SFAS No. 158, net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (196
    )
    
    
    
    
    
    
    
    
    
    
    (196
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,033Share-based payment compensation
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60Cash dividends paid ($1.09 per share)
    
    
    
    
    
    
    
    
    
    
    (4,715
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,715
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,621
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,621
    )Purchase of company stock for
deferred compensation plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75
    )
    
    
    75
    
    
    
    Exercise of stock options
    
    
    38
    
    
    
    712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Tax benefit on stock options exercised
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114
 Balance at December 31, 2006
    
    
    7,850
    
    
    
    57,953
    
    
    
    107,055
    
    
    
    (62,902
    )
    
    
    (3,071
    )
    
    
    (426
    )
    
    
    426
    
    
    
    106,885Cumulative effect of adoption of the
fair value option, net of tax
    
    
    
    
    
    
    
    
    
    
    (2,235
    )
    
    
    
    
    
    
    2,235
    
    
    
    
    
    
    
    
    
    
    
    Net Income
    
    
    
    
    
    
    
    
    
    
    7,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,731Other comprehensive income, net of
tax:Unrealized gains on securities,
net of
reclassification adjustment (Note
1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,539
    
    
    
    
    
    
    
    
    
    
    
    1,539Unamortized gains, transition
obligation and past service costs
under employee pension plan, net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    527
    
    
    
    
    
    
    
    
    
    
    
    527Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,797Share-based payment compensation
    
    
    
    
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89Cash dividends paid ($1.13 per share)
    
    
    
    
    
    
    
    
    
    
    (4,877
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,877
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,695
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,695
    )Purchase of company stock for
deferred compensation plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77
    )
    
    
    77
    
    
    
    Exercise of stock options
    
    
    31
    
    
    
    670
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    701Tax benefit on stock options exercised
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61Balance at December 31, 2007
    
    $
    7,881
    
    
    $
    58,773
    
    
    $
    107,674
    
    
    $
    (66,597
    )
    
    $
    1,230
    
    
    $
    (503
    )
    
    $
    503
    
    
    $
    108,961
 See accompanying notes to consolidated financial statements.
 34




---



##### 



Massbank Corp. and Subsidiaries
 Notes to Consolidated Financial Statements
 Years ended December 31, 2007, 2006 and 2005
 1.
    
    Summary of Significant Accounting PoliciesMassbankCorp. (the Company) is a Delaware chartered holding company whose principal
subsidiary is Massbank(the Bank). The Bank operates fifteen full service banking
offices in Reading, Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury, Westford,
Dracut, Lowell and Everett, Massachusetts providing a variety of deposit, lending and trust
services. As a Massachusetts chartered savings bank whose deposits are insured by the Federal
Deposit Insurance Corporation (FDIC) and the Depositors Insurance Fund
(DIF), the activities of the Bank are subject to regulation, supervision and
examination by federal and state regulatory authorities, including, but not limited to the
FDIC, the Massachusetts Commissioner of Banks and the DIF. In addition, as a bank
holding company, the Company is subject to supervision, examination and regulation by the Board
of Governors of the Federal Reserve System.Basis of PresentationThe consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries Knabssam LLCand Massbankand its subsidiaries: Readibank
Properties, Inc., Readibank Investment Corporation and Melbank Investment Corporation.
 U S
  Investments in Debt and Equity Securities
 Under its investment policy, management determines the appropriate classification of securities
at the time of purchase. Those debt securities that the Company has the intent and the ability to
hold to maturity are classified as securities held to maturity and are carried at amortized
historical cost.
  trading securities.
  35




---



##### 



1.
    
    Summary of Significant Accounting Policies (continued)LoansLoans are reported at the principal amount outstanding, net of unearned fees. Loan origination
fees and related direct incremental loan origination costs are offset and the resulting net
amount is deferred and amortized over the life of the loan using the level-yield method.
   Allowance for Loan Losses and Allowance for Loan Losses on Off-Balance Sheet Credit Exposures
 The Company maintains an allowance for possible losses that are inherent in the Companys loan
portfolio. The allowance for loan losses is increased by provisions charged to operations based
on the estimated loan loss exposure inherent in the portfolio. Management uses a methodology to
systematically measure the amount of estimated loan loss exposure inherent in the portfolio for
purposes of establishing a sufficient allowance for loan losses. The methodology includes three
elements: an analysis of individual loans deemed to be impaired, general loss allocations for
various loan types based on historical loss experience factors and an unallocated allowance which
is maintained based on managements assessment of many factors including the risk characteristics
of the portfolio, concentrations of credit, current and anticipated economic conditions that may
affect borrowers ability to pay, and trends in loan delinquencies and charge-offs. Realized
losses, net of recoveries, are charged directly to the allowance. While management uses the
information available in establishing the allowance for loan losses, future adjustments to the
allowance may be necessary if economic conditions differ from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Banks allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on judgments different from those of
management.
  Premises and EquipmentLand is carried at cost. Premises, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization computed primarily by use of the straight-line method
over the estimated useful lives of the related assets or terms of the related leases.Real Estate Held for ResaleReal estate held for resale consists of a parcel of land owned by the Companys subsidiary,
Knabssam LLC that is not used for operational purposes. The land is carried at cost. The Company,
through its subsidiary, has granted a local developer an option to purchase the land. As
consideration for this option, the developer will make quarterly option payments to Knabssam LLC
until the option is either exercised and the closing transaction for the purchase occurs or the
option is allowed to lapse. If the developer does not exercise his option to purchase by the end
of April 2008, then his option right expires. As of February 15, 2008, the developer had not
obtained requisite local permits and approvals and may seek an extension of the Option Period.
 36




---



##### 



Impairment of the Long-lived Assets  Except GoodwillThe Company reviews long-lived assets for impairment at least annually or whenever events or
changes in business circumstances indicate that the remaining useful life may warrant revision or
that the carrying amount of the long-lived asset may not be fully recoverable. The Company performs
undiscounted cash flow analyses to determine if impairment exists. If impairment is determined to
exist, any related impairment loss is calculated based on the fair value. Impairment losses on
assets to be disposed of, if any, are based on the estimated proceeds to be received, less any cost
of disposal.
 Share-based PaymentEffective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123R) which requires the measurement and recognition of
compensation expense for all stock-based awards made to employees and directors, including stock
option grants, based on estimated fair values. SFAS 123(R) supersedes previous accounting under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for
periods beginning in fiscal year 2006.
    37




---



##### 



1.
    
    Summary of Significant Accounting Policies (continued)
 The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No.
123 in 2005.
 (In thousands except per share data) Years Ended December 31,
    
    2005Net income, as reported
    
    $
    7,323Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards,
net of related tax effects(1)
    
    
    (161
    )Pro forma net income
    
    $
    7,162Earnings per share:Basic  as reported
    
    $
    1.68Basic  pro forma
    
    
    1.64Diluted  as reported
    
    $
    1.66Diluted  pro forma
    
    
    1.62Weighted average fair value per share
    
    $
    8.11Expected term (years)
    
    7.3 yearsRisk-free interest rate
    
    
    3.97
    %Volatility
    
    
    21.2
    %Dividend yield
    
    
    2.8
    %
 
 (1)
    
    A Black-Scholes option pricing model was used to determine the fair values of the options granted. Goodwill ImpairmentThe Company adopted SFAS No. 142, Goodwill and Other Intangibles, effective January 1, 2002.
The Statement addresses the method of identifying and measuring goodwill and other intangible
assets acquired in a business combination, eliminates further amortization of goodwill, and
requires periodic impairment evaluations of goodwill. Impairment evaluations are required to
be performed annually and may be required more frequently if certain conditions indicating
potential impairment exists. In the event that the Company were to determine that its goodwill
were impaired, the recognition of an impairment charge would have an adverse impact on its
results of operations in the period that the impairment occurred and on its financial
position.Pension PlanThe Bank accounts for pension benefits on the net periodic pension cost method for financial
reporting purposes. This method recognizes the compensation cost of an employees pension
benefit over that employees approximate service period. Pension costs are funded in the year
of accrual using the aggregate cost method.Earnings Per Common ShareBasic EPS is computed by dividing net income by the weighted average number of shares of common
stock outstanding during the year. Diluted EPS reflects the effect on the weighted average
shares outstanding of the number of additional shares outstanding if dilutive stock options
were converted into common stock using the treasury stock method.
   (In thousands) Years Ended December 31,
    
    2007
    
    
    2006
    
    
    2005Basic shares
    
    
    4,306
    
    
    
    4,326
    
    
    
    4,366Dilutive impact of stock options
    
    
    28
    
    
    
    35
    
    
    
    57Diluted shares
    
    
    4,334
    
    
    
    4,361
    
    
    
    4,423
 38




---



##### 



1. Summary of Significant Accounting Policies (continued)
 Comprehensive Income (Loss)
   (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Unrealized holding gains (losses) on available for
sale securities and when issued securities contracts
arising during period
    
    $
    2,771
    
    
    $
    1,028
    
    
    $
    (7,221
    )Less: reclassification
adjustment for gains realized in income
    
    
    272
    
    
    
    736
    
    
    
    515Net unrealized gains (losses)
    
    
    2,499
    
    
    
    292
    
    
    
    (7,736
    )Tax (expense) or benefit
    
    
    (960
    )
    
    
    (90
    )
    
    
    2,902Net unrealized gains (losses), net of tax
    
    
    1,539
    
    
    
    202
    
    
    
    (4,834
    )Pension liability adjustment to apply SFAS No. 158
    
    
    906
    
    
    
    (337
    )
    
    
    Tax (expense) or benefit
    
    
    (379
    )
    
    
    141
    
    
    
    Pension liability adjustment, net of tax
    
    
    527
    
    
    
    (196
    )
    
    
    Other comprehensive income (loss)
    
    $
    2,066
    
    
    $
    6
    
    
    $
    (4,834
    )
 Cash and Cash Equivalents
   Income Taxes
  2. Short-Term Investments
  (In thousands)At December 31,
    
    2007
    
    
    2006Federal funds sold (overnight)
    
    $
    74,455
    
    
    $
    117,104Term Federal funds sold
    
    
    7,000
    
    
    
    Money market investment funds
    
    
    69,520
    
    
    
    22,133Interest-bearing bank money market accounts
    
    
    3
    
    
    
    3Total short-term investments
    
    $
    150,978
    
    
    $
    139,240
  39




---



##### 



3. Trading Securities
  (In thousands) At December 31,
    
    2007
    
    
    2006Fair
    
    
    FairValue
    
    
    ValueU.S. Treasury obligations
    
    $
    1,997
    
    
    $
    U.S Government agency obligations
    
    
    201,172
    
    
    
    Marketable equity securities
    
    
    3,393
    
    
    
    1,926Investments in mutual funds
    
    
    4
    
    
    
    5Total trading securities
    
    $
    206,566
    
    
    $
    1,931
  (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Realized
    
    
    Realized
    
    
    RealizedGains
    
    
    Losses
    
    
    Gains
    
    
    Losses
    
    
    Gains
    
    
    LossesU.S. Treasury obligations
    
    $
    5
    
    
    $
    (37
    )
    
    $
    
    
    
    $
    (29
    )
    
    $
    1
    
    
    $
    (119
    )U.S Government agency obligations
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Marketable equity securities
    
    
    486
    
    
    
    (122
    )
    
    
    224
    
    
    
    
    
    
    
    99
    
    
    
    (3
    )Total realized gains (losses)
    
    $
    504
    
    
    $
    (159
    )
    
    $
    224
    
    
    $
    (29
    )
    
    $
    100
    
    
    $
    (122
    )
  40




---



##### 



4. Investment Securities
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(In thousands) At December 31, 2007
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities held to maturity:Mortgage-backed securities:Federal National Mortgage Association
    
    $
    8,098
    
    
    $
    83
    
    
    $
    (61
    )
    
    $
    8,120Total
    
    $
    8,098
    
    
    $
    83
    
    
    $
    (61
    )
    
    $
    8,120Securities available for sale:Debt securities:Mortgage-backed securities:Government National Mortgage Association
    
    $
    591
    
    
    $
    9
    
    
    $
    
    
    
    $
    600Federal Home Loan Mortgage Corporation
    
    
    121,087
    
    
    
    1,204
    
    
    
    (279
    )
    
    
    122,012Federal National Mortgage Association
    
    
    1,847
    
    
    
    12
    
    
    
    
    
    
    
    1,859Collateralized mortgage obligations
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    59Total mortgage-backed securities
    
    
    123,584
    
    
    
    1,225
    
    
    
    (279
    )
    
    
    124,530Total debt securities
    
    
    123,584
    
    
    
    1,225
    
    
    
    (279
    )
    
    
    124,530Equity securities
    
    
    3,621
    
    
    
    690
    
    
    
    (131
    )
    
    
    4,180Total securities available for sale
    
    
    127,205
    
    
    $
    1,915
    
    
    $
    (410
    )
    
    $
    128,710Net unrealized gains on securities
available for sale
    
    
    1,505Total securities available for sale, net
    
    
    128,710Total investment securities, net
    
    $
    136,808
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(In thousands) At December 31, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities held to maturity:Mortgage-backed securities:Federal National Mortgage Association
    
    $
    5,396
    
    
    $
    
    
    
    $
    (120
    )
    
    $
    5,276Total
    
    $
    5,396
    
    
    $
    
    
    
    $
    (120
    )
    
    $
    5,276Securities available for sale:Debt securities:U.S. Treasury obligations
    
    $
    22,018
    
    
    $
    
    
    
    $
    (309
    )
    
    $
    21,709U.S. Government agency obligations
    
    
    242,775
    
    
    
    10
    
    
    
    (3,238
    )
    
    
    239,547Total
    
    
    264,793
    
    
    
    10
    
    
    
    (3,547
    )
    
    
    261,256Mortgage-backed securities:Government National Mortgage Association
    
    
    1,554
    
    
    
    19
    
    
    
    
    
    
    
    1,573Federal Home Loan Mortgage Corporation
    
    
    131,399
    
    
    
    602
    
    
    
    (1,555
    )
    
    
    130,446Federal National Mortgage Association
    
    
    2,418
    
    
    
    
    
    
    
    (40
    )
    
    
    2,378Collateralized mortgage obligations
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    74Total mortgage-backed securities
    
    
    135,445
    
    
    
    621
    
    
    
    (1,595
    )
    
    
    134,471Total debt securities
    
    
    400,238
    
    
    
    631
    
    
    
    (5,142
    )
    
    
    395,727Equity securities
    
    
    6,916
    
    
    
    589
    
    
    
    (603
    )
    
    
    6,902Total securities available for sale
    
    
    407,154
    
    
    $
    1,220
    
    
    $
    (5,745
    )
    
    $
    402,629Net unrealized losses on securities
available for sale
    
    
    (4,525
    )Total securities available for sale, net
    
    
    402,629Total investment securities, net
    
    $
    408,025
 41




---



##### 



4. Investment Securities (continued)
  (In thousands) At December 31,
    
    2007
    
    2006
    
    2005Realized
    
    Realized
    
    RealizedGains
    
    
    Losses
    
    
    Gains
    
    
    Losses
    
    
    Gains
    
    
    LossesSales:U.S. Treasury obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (104
    )
    
    $
    29
    
    
    $
    (55
    )Marketable equity securities
    
    
    781
    
    
    
    (509
    )
    
    
    1,083
    
    
    
    (248
    )
    
    
    761
    
    
    
    (220
    )Securities donated to MassbankCharitable Foundation:Marketable equity securities
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Total realized gains (losses)
    
    $
    781
    
    
    $
    (509
    )
    
    $
    1,088
    
    
    $
    (352
    )
    
    $
    790
    
    
    $
    (275
    )
    (In thousands) At December 31,
    
    2007
    
    
    2006Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueInvestment securities held to maturity:Mortgage-backed securities:Maturing after 15 years
    
    $
    8,098
    
    
    $
    8,120
    
    
    $
    5,396
    
    
    $
    5,276Total debt securities held to maturity
    
    $
    8,098
    
    
    $
    8,120
    
    
    $
    5,396
    
    
    $
    5,276Investment securities available for sale:U.S. Treasury obligations:Maturing within 1 year
    
    $
    
    
    
    $
    
    
    
    $
    14,019
    
    
    $
    13,911Maturing after 1 year but within 5 years
    
    
    
    
    
    
    
    
    
    
    7,999
    
    
    
    7,798Total
    
    
    
    
    
    
    
    
    
    
    22,018
    
    
    
    21,709U.S. Government agency obligations:Maturing within 1 year
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    74,594Maturing after 1 year but within 5 years
    
    
    
    
    
    
    
    
    
    
    150,745
    
    
    
    148,246Maturing after 5 years but within 10 years
    
    
    
    
    
    
    
    
    
    
    15,995
    
    
    
    15,706Maturing after 10 years but within 15 years
    
    
    
    
    
    
    
    
    
    
    1,035
    
    
    
    1,001Total
    
    
    
    
    
    
    
    
    
    
    242,775
    
    
    
    239,547Mortgage-backed securities:Maturing within 1 year
    
    
    156
    
    
    
    156
    
    
    
    100
    
    
    
    101Maturing after 1 year but within 5 years
    
    
    5,662
    
    
    
    5,831
    
    
    
    7,508
    
    
    
    7,666Maturing after 5 years but within 10 years
    
    
    19,936
    
    
    
    20,264
    
    
    
    17,155
    
    
    
    17,473Maturing after 10 years but within 15 years
    
    
    97,830
    
    
    
    98,279
    
    
    
    110,608
    
    
    
    109,157Maturing after 15 years
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    74Total
    
    
    123,584
    
    
    
    124,530
    
    
    
    135,445
    
    
    
    134,471Total debt securities available for sale
    
    
    123,584
    
    
    
    124,530
    
    
    
    400,238
    
    
    
    395,727Net unrealized gains (losses) on debt securities
available for sale
    
    
    946
    
    
    
    
    
    
    
    (4,511
    )
    
    
    Total debt securities available for sale,
net carrying value
    
    $
    124,530
    
    
    $
    124,530
    
    
    $
    395,727
    
    
    $
    395,727
   42




---



##### 



4. Investment Securities (continued)
  (In thousands) At December 31, 2007
    
    Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDescription of Securities
    
    Fair value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesDebt securities available for sale and held to maturity:Mortgage-backed securities
    
    $
    
    
    
    $
    
    
    
    $
    34,711
    
    
    $
    (340
    )
    
    $
    34,711
    
    
    $
    (340
    )Total debt securities
    
    
    
    
    
    
    
    
    
    
    34,711
    
    
    
    (340
    )
    
    
    34,711
    
    
    
    (340
    )Equity securities
    
    
    949
    
    
    
    (131
    )
    
    
    
    
    
    
    
    
    
    
    949
    
    
    
    (131
    )Total temporarily impaired securities
    
    $
    949
    
    
    $
    (131
    )
    
    $
    34,711
    
    
    $
    (340
    )
    
    $
    35,660
    
    
    $
    (471
    )
   (In Thousands) At December 31, 2006
    
    Less than 12 months
    
    
    12 months or longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDescription of Securities
    
    Fair value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesDebt securities available for sale and held to maturity:U.S. Treasury obligations
    
    $
    
    
    
    $
    
    
    
    $
    21,709
    
    
    $
    (309
    )
    
    $
    21,709
    
    
    $
    (309
    )U.S. Government agency obligations
    
    
    48,670
    
    
    
    (79
    )
    
    
    178,832
    
    
    
    (3,159
    )
    
    
    227,502
    
    
    
    (3,238
    )Mortgage-backed securities
    
    
    38,135
    
    
    
    (203
    )
    
    
    68,953
    
    
    
    (1,512
    )
    
    
    107,088
    
    
    
    (1,715
    )Total debt securities
    
    
    86,805
    
    
    
    (282
    )
    
    
    269,494
    
    
    
    (4,980
    )
    
    
    356,299
    
    
    
    (5,262
    )Equity securities
    
    
    3,292
    
    
    
    (603
    )
    
    
    
    
    
    
    
    
    
    
    3,292
    
    
    
    (603
    )Total temporarily impaired securities
    
    $
    90,097
    
    
    $
    (885
    )
    
    $
    269,494
    
    
    $
    (4,980
    )
    
    $
    359,591
    
    
    $
    (5,865
    )
  43




---



##### 



5. Fair Value Measurements
    Changes in Fair Valuesfor 12-Month PeriodEnded December 31, 2007For Items Measured atFair Value Measurements at
    
    
    
    
    
    
    Fair Value Pursuant toDecember 31, 2007 Using
    
    
    
    
    
    
    Election of Fair Value OptionSignificantAssets
    
    
    Quoted Prices in
    
    
    Other
    
    
    Significant
    
    
    Other
    
    
    Total ChangesMeasured at
    
    
    Active Markets
    
    
    Observable
    
    
    Unobservable
    
    
    Gains
    
    
    in Fair ValuesFair Value
    
    
    for Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    and
    
    
    Included in(In thousands)
    
    at 12/31/07
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    (Losses)
    
    
    Period EarningsTrading securities
    
    $
    206,566
    
    
    $
    206,566
    
    
    $
    
    
    
    $
    
    
    
    $
    345
    
    
    $
    3,764Securities available for sale
    
    
    128,710
    
    
    
    4,180
    
    
    
    124,530
    
    
    
    
    
    
    
    272
    
    
    
    
  Balance Sheet 01/01/07
    
    
    Balance Sheet
    
    
    Balance Sheet 01/01/07(In thousands)
    
    prior to Adoption
    
    
    Adjustment Pretax
    
    
    after Adoption of FVOSecurities available for sale, at amortized cost
    
    $
    407,154
    
    
    $
    (264,793
    )
    
    $
    142,361Net unrealized losses on securities available for sale
    
    
    (4,525
    )
    
    
    3,537
    
    
    
    (988
    )Securities available for sale, at fair value
    
    
    402,629
    
    
    
    (261,256
    )
    
    
    141,373Trading securities at fair value
    
    
    1,931
    
    
    
    261,256
    
    
    
    263,187$
    404,560
    
    
    $
    
    
    
    $
    404,560Pretax cumulative effect of adoption of fair value option
    
    
    
    
    
    $
    (3,537
    )Deferred tax asset
    
    
    
    
    
    
    1,302Cumulative effect of adoption of fair value option, net of tax
(charge to retained earnings)
    
    
    
    
    
    $
    (2,235
    )
  Balance Sheet 01/01/07
    
    
    Adjustment of FVO
    
    
    Balance Sheet 01/01/07(In thousands) Stockholders Equity
    
    prior to Adoption
    
    
    (net of tax)
    
    
    after Adoption of FVOCommon stock
    
    $
    7,850
    
    
    $
    
    
    
    $
    7,850Additional paid-in-capital
    
    
    57,953
    
    
    
    
    
    
    
    57,953Retained earnings
    
    
    107,055
    
    
    
    (2,235
    )
    
    
    104,820Treasury stock
    
    
    (62,902
    )
    
    
    
    
    
    
    (62,902
    )Accumulated other comprehensive loss
    
    
    (3,071
    )
    
    
    2,235
    
    
    
    (836
    )Shares held in rabbi trust
    
    
    (426
    )
    
    
    
    
    
    
    (426
    )Deferred compensation obligation
    
    
    426
    
    
    
    
    
    
    
    426Total Stockholders Equity
    
    $
    106,885
    
    
    $
    
    
    
    $
    106,885
 44




---



##### 



6. Loans
   (In thousands) At December 31,
    
    2007
    
    
    2006Mortgage loans:Residential:Conventional:Fixed rate
    
    $
    150,481
    
    
    $
    169,036Variable rate
    
    
    24,789
    
    
    
    23,941FHA and VA
    
    
    5
    
    
    
    13Construction
    
    
    1,114
    
    
    
    1,217Commercial:Fixed rate
    
    
    342
    
    
    
    367Variable rate
    
    
    4,450
    
    
    
    4,076Construction
    
    
    708
    
    
    
    563Total mortgage loans
    
    
    181,889
    
    
    
    199,213Premium on loans
    
    
    1
    
    
    
    2Deferred mortgage loan origination costs, net
    
    
    55
    
    
    
    38Mortgage loans, net
    
    
    181,945
    
    
    
    199,253Other loans:Consumer:Second mortgage loans
    
    
    1,231
    
    
    
    751Installment
    
    
    287
    
    
    
    211Guaranteed education
    
    
    427
    
    
    
    635Other secured
    
    
    374
    
    
    
    408Home equity lines of credit
    
    
    7,052
    
    
    
    7,460Unsecured
    
    
    125
    
    
    
    128Total consumer loans
    
    
    9,496
    
    
    
    9,593Commercial
    
    
    126
    
    
    
    81Total other loans
    
    
    9,622
    
    
    
    9,674Total loans
    
    $
    191,567
    
    
    $
    208,927
  (In thousands)Balance at December 31, 2006
    
    $
    1,403Additions
    
    
    358Repayments
    
    
    (533
    )Balance at December 31, 2007
    
    $
    1,228
 45




---



##### 



7. Allowance for Loan Losses
  (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Balance at beginning of year
    
    $
    1,382
    
    
    $
    1,253
    
    
    $
    1,307Provision (credit) for loan losses
    
    
    (10
    )
    
    
    123
    
    
    
    (53
    )Recoveries of loans previously
charged-off
    
    
    
    
    
    
    19
    
    
    
    Total
    
    
    1,372
    
    
    
    1,395
    
    
    
    1,254Charge-offs:Mortgage loans
    
    
    
    
    
    
    
    
    
    
    Other loans
    
    
    (3
    )
    
    
    (13
    )
    
    
    (1
    )Balance at end of year
    
    $
    1,369
    
    
    $
    1,382
    
    
    $
    1,253
  (In thousands) At December 31,
    
    2007
    
    
    2006
    
    
    2005Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentageof Loans
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    of LoansAmount
    
    
    to Total
    
    
    Amount
    
    
    to Total
    
    
    Amount
    
    
    to TotalMortgage loans:Residential
    
    $
    756
    
    
    
    92
    %
    
    $
    795
    
    
    
    93
    %
    
    $
    770
    
    
    
    95
    %Commercial
    
    
    369
    
    
    
    3
    
    
    
    324
    
    
    
    2
    
    
    
    111
    
    
    
    1Consumer loans
    
    
    87
    
    
    
    5
    
    
    
    98
    
    
    
    5
    
    
    
    139
    
    
    
    4Commercial loans
    
    
    63
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    46
    
    
    
    Unallocated
    
    
    94
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    187
    
    
    
    Total
    
    $
    1,369
    
    
    
    100
    %
    
    $
    1,382
    
    
    
    100
    %
    
    $
    1,253
    
    
    
    100
    %
  8. Non-performing Assets
  (In thousands) At December 31,
    
    2007
    
    
    2006
    
    
    2005Total nonaccrual loans
    
    $
    199
    
    
    $
    137
    
    
    $
    257Total non-performing assets
    
    $
    199
    
    
    $
    137
    
    
    $
    257Percent of non-performing loans to total loans
    
    
    0.10
    %
    
    
    0.07
    %
    
    
    0.11
    %Percent of non-performing assets to total assets
    
    
    0.02
    %
    
    
    0.02
    %
    
    
    0.03
    %
 46




---



##### 



8. Non-performing Assets (continued)
  (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Interest income that would have been recorded under original terms
    
    $
    14
    
    
    $
    8
    
    
    $
    16Interest income actually recorded
    
    
    3
    
    
    
    5
    
    
    
    9Reduction in interest income
    
    $
    11
    
    
    $
    3
    
    
    $
    7
  9. Financial Instruments with Off-Balance Sheet Risk
  Contract or Notional Amount(In thousands) At December 31,
    
    2007
    
    
    2006Financial instruments whose contract amounts represent credit risk:Commitments to originate residential mortgage loans
    
    $
    2,514
    
    
    $
    1,206Unadvanced portions of construction loans
    
    
    261
    
    
    
    217Unused credit lines, including unused portions of equity lines of credit
    
    
    25,897
    
    
    
    28,779Other loan commitments
    
    
    2,196
    
    
    
    2,337
  10. Premises and Equipment
  EstimatedUseful Life(In thousands) At December 31,
    
    2007
    
    
    2006
    
    
    (In Years)Premises:Land
    
    $
    1,967
    
    
    $
    1,967
    
    
    
    Buildings
    
    
    8,751
    
    
    
    7,438
    
    
    
    25-45Building and leasehold improvements
    
    
    2,906
    
    
    
    2,862
    
    
    
    2-30Equipment
    
    
    5,847
    
    
    
    5,591
    
    
    
    1-1519,471
    
    
    
    17,858Less: accumulated depreciation and amortization
    
    
    11,308
    
    
    
    10,773Total premises and equipment, net
    
    $
    8,163
    
    
    $
    7,085
  47




---



##### 



10.
    
    Premises and Equipment (continued)The minimum rental commitments, with initial or remaining terms of one year or more exclusive of
operating costs and real estate taxes to be paid by the Bank under these leases, as of December
31, 2007, are as follows:
 (In thousands) Years ending December 31,
    
    Payments2008
    
    $
    3192009
    
    
    2422010
    
    
    2172011
    
    
    2172012
    
    
    159Later years
    
    
    1,442Total
    
    $
    2,596
 11.
    
    DepositsDeposits are summarized as follows:
 (In thousands) At December 31,
    
    2007
    
    
    2006Average
    
    
    
    
    
    
    AverageAmount
    
    
    Interest Rate
    
    
    Amount
    
    
    Interest RateDemand and NOW:NOW accounts
    
    $
    47,600
    
    
    
    0.55
    %
    
    $
    51,856
    
    
    
    0.53
    %Demand accounts
    
    
    24,087
    
    
    
    
    
    
    
    27,004
    
    
    
    Total demand and NOW
    
    
    71,687
    
    
    
    0.37
    
    
    
    78,860
    
    
    
    0.35Savings:Savings accounts
    
    
    298,409
    
    
    
    2.11
    
    
    
    335,142
    
    
    
    1.96Money market accounts
    
    
    8,913
    
    
    
    2.12
    
    
    
    9,666
    
    
    
    1.99Total savings
    
    
    307,322
    
    
    
    2.11
    
    
    
    344,808
    
    
    
    1.96Time certificates of deposit:Fixed rate certificates
    
    
    232,862
    
    
    
    4.56
    
    
    
    230,710
    
    
    
    4.38Variable rate certificates
    
    
    70,690
    
    
    
    3.92
    
    
    
    68,954
    
    
    
    5.57Total time certificates
of deposit
    
    
    303,552
    
    
    
    4.41
    
    
    
    299,664
    
    
    
    4.65Total deposits
    
    $
    682,561
    
    
    
    2.95
    %
    
    $
    723,332
    
    
    
    2.90
    %
  (In thousands) At December 31,
    
    2007AverageAmount
    
    
    Interest RateDue within 3 months
    
    $
    82,742
    
    
    
    4.63
    %Due within 36 months
    
    
    66,600
    
    
    
    4.41Due within 612 months
    
    
    69,912
    
    
    
    4.41Due within 12 years
    
    
    57,575
    
    
    
    4.18Due within 23 years
    
    
    18,488
    
    
    
    4.18Due within 35 years
    
    
    7,572
    
    
    
    4.13Thereafter
    
    
    663
    
    
    
    4.74Total
    
    $
    303,552
    
    
    
    4.41
    %




---



##### 



11.
    
    Deposits (continued)At December 31, 2007 and 2006, the Bank had individual time certificates of deposit of $100
thousand or more maturing as follows:
 (In thousands) At December 31,
    
    2007
    
    
    2006Due within 3 months
    
    $
    37,049
    
    
    $
    33,060Due within 36 months
    
    
    25,307
    
    
    
    21,323Due within 612 months
    
    
    24,397
    
    
    
    26,980Due within 12 years
    
    
    22,277
    
    
    
    22,322Due within 23 years
    
    
    6,249
    
    
    
    10,050Due within 35 years
    
    
    4,015
    
    
    
    5,021Thereafter
    
    
    346
    
    
    
    155Total
    
    $
    119,640
    
    
    $
    118,911
 12.
    
    Fair Value of Financial InstrumentsThe Bank is required to disclose estimated fair values for its financial instruments. Fair value
estimates, methods, and assumptions are set forth below for the Banks financial instruments.Cash and Due from Banks, Short-Term Investments and Accrued Interest and Income ReceivableThe carrying amounts for these financial instruments approximate fair value because of the
short-term nature of these financial instruments.Term Federal Funds SoldThe carrying amounts of the term Federal funds sold reported in the balance sheet at December
31, 2007 and 2006 approximate fair value.SecuritiesThe fair value of investment securities is based principally on quoted market prices and dealer
quotes.
   (In thousands) At December 31,
    
    2007
    
    
    2006Carrying
    
    
    Calculated
    
    
    Carrying
    
    
    CalculatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueSecurities available for sale
    
    $
    128,710
    
    
    $
    128,710
    
    
    $
    402,629
    
    
    $
    402,629Securities held to maturity
    
    
    8,098
    
    
    
    8,120
    
    
    
    5,396
    
    
    
    5,276Trading securities
    
    
    206,566
    
    
    
    206,566
    
    
    
    1,931
    
    
    
    1,931Total securities
    
    $
    343,374
    
    
    $
    343,396
    
    
    $
    409,956
    
    
    $
    409,836




---



##### 



12.
    
    Fair Value of Financial Instruments (continued)LoansFair values are estimated for portfolios of loans with similar financial characteristics. Loans
are segregated by type such as residential mortgage, commercial real estate, consumer and
commercial.
   (In thousands) At December 31,
    



    2007
    
    
    2006Carrying
    
    
    
    
    
    
    Calculated
    
    
    Carrying
    
    
    CalculatedAmount
    
    
    
    
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueReal estate:Residential:Variable
    
    $
    25,913
    
    
    
    
    
    
    $
    25,591
    
    
    $
    25,168
    
    
    $
    24,171Fixed
    
    
    150,566
    
    
    
    
    
    
    
    146,583
    
    
    
    169,112
    
    
    
    163,378Commercial:Fixed
    
    
    343
    
    
    
    
    
    
    
    320
    
    
    
    367
    
    
    
    347Variable
    
    
    5,123
    
    
    
    
    
    
    
    5,087
    
    
    
    4,606
    
    
    
    4,445Consumer
    
    
    9,496
    
    
    
    
    
    
    
    9,543
    
    
    
    9,593
    
    
    
    9,569Commercial
    
    
    126
    
    
    
    
    
    
    
    113
    
    
    
    81
    
    
    
    68Total loans
    
    
    191,567
    
    
    
    
    
    
    
    187,237
    
    
    
    208,927
    
    
    
    201,978Allowance for loan losses
    
    
    (1,369
    )
    
    
    
    
    
    
    
    
    
    
    (1,382
    )
    
    
    Net loans
    
    $
    190,198
    
    
    
    
    
    
    $
    187,237
    
    
    $
    207,545
    
    
    $
    201,978
 Deposits




---



##### 



12. Fair Value of Financial Instruments (continued)
 (In thousands) At December 31,
    
    2007
    
    
    2006Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueDemand accounts
    
    $
    24,087
    
    
    $
    24,087
    
    
    $
    27,004
    
    
    $
    27,004NOW accounts
    
    
    47,600
    
    
    
    47,600
    
    
    
    51,856
    
    
    
    51,856Savings accounts
    
    
    298,409
    
    
    
    298,409
    
    
    
    335,142
    
    
    
    335,142Money market accounts
    
    
    8,913
    
    
    
    8,913
    
    
    
    9,666
    
    
    
    9,666Time certificates of deposit
    
    
    303,552
    
    
    
    304,479
    
    
    
    299,664
    
    
    
    299,302Total deposits
    
    
    682,561
    
    
    
    683,488
    
    
    
    723,332
    
    
    
    722,970Escrow deposits of borrowers
    
    
    968
    
    
    
    968
    
    
    
    1,006
    
    
    
    1,006Total
    
    $
    683,529
    
    
    $
    684,456
    
    
    $
    724,338
    
    
    $
    723,976
  Commitments to Extend Credit
   Limitations
   13. Income Taxes
  (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Current income tax expense:Federal
    
    $
    2,620
    
    
    $
    3,507
    
    
    $
    3,430State
    
    
    188
    
    
    
    232
    
    
    
    113Total current tax expense
    
    
    2,808
    
    
    
    3,739
    
    
    
    3,543Deferred income tax (benefit) expense:Federal
    
    
    1,237
    
    
    
    (44
    )
    
    
    186State
    
    
    109
    
    
    
    (12
    )
    
    
    64Total deferred tax (benefit) expense:
    
    
    1,346
    
    
    
    (56
    )
    
    
    250Total income tax expense
    
    $
    4,154
    
    
    $
    3,683
    
    
    $
    3,793
 51




---



##### 



13. Income Taxes (continued)
  (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Computed expected income tax expense at statutory rate
    
    $
    4,160
    
    
    $
    3,749
    
    
    $
    3,891Increase (reduction) in income taxes resulting from:Reduction in federal income tax rate
    
    
    (75
    )
    
    
    (100
    )
    
    
    (91
    )State and local income taxes, net of federal benefit
    
    
    193
    
    
    
    143
    
    
    
    115Dividends received deduction
    
    
    (37
    )
    
    
    (40
    )
    
    
    (42
    )Dividends paid to ESOP deduction
    
    
    (74
    )
    
    
    (70
    )
    
    
    (72
    )Other
    
    
    (13
    )
    
    
    1
    
    
    
    (8
    )Income tax expense
    
    $
    4,154
    
    
    $
    3,683
    
    
    $
    3,793Effective income tax rate
    
    
    34.95
    %
    
    
    34.39
    %
    
    
    34.12
    %
  (In thousands) Years ended December 31,
    
    2007
    
    
    2006Deferred tax assets:Unrealized losses on securities available for sale
    
    $
    
    
    
    $
    1,656Loan losses
    
    
    717
    
    
    
    722Deferred compensation and pension cost
    
    
    600
    
    
    
    889Depreciation
    
    
    129
    
    
    
    166Purchase accounting
    
    
    
    
    
    
    11Deferred loan fees, net
    
    
    4
    
    
    
    3Other
    
    
    28
    
    
    
    19Gross deferred tax asset
    
    
    1,478
    
    
    
    3,466Deferred tax liabilities:Unrealized gains on securities available for sale
    
    
    607
    
    
    
    Other unrealized securities gains
    
    
    203
    
    
    
    111Other
    
    
    7
    
    
    
    8Gross deferred tax liability
    
    
    817
    
    
    
    119Net deferred tax asset
    
    $
    661
    
    
    $
    3,347
   14. Earnings per Share
  Years Ended December 31,
    
    2007
    
    
    2006
    
    
    2005(In thousands except share data)
    
    Basic
    
    
    Diluted
    
    
    Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income
    
    $
    7,731
    
    
    $
    7,731
    
    
    $
    7,027
    
    
    $
    7,027
    
    
    $
    7,323
    
    
    $
    7,323Average shares outstanding
    
    
    4,305,894
    
    
    
    4,305,894
    
    
    
    4,325,879
    
    
    
    4,325,879
    
    
    
    4,365,932
    
    
    
    4,365,932Dilutive stock options
    
    
    
    
    
    
    27,895
    
    
    
    
    
    
    
    34,809
    
    
    
    
    
    
    
    56,597Weighted average shares outstanding
    
    
    4,305,894
    
    
    
    4,333,789
    
    
    
    4,325,879
    
    
    
    4,360,688
    
    
    
    4,365,932
    
    
    
    4,422,529Earnings per share (in dollars)
    
    $
    1.80
    
    
    $
    1.78
    
    
    $
    1.62
    
    
    $
    1.61
    
    
    $
    1.68
    
    
    $
    1.66
 52




---



##### 



15. Stockholders Equity
  FDIC FDIC FDIC FDIC I CAMELS I FDIC I II I II
 Massbank
 FDIC I I
 For Capital
    
    
    To Be Well(In thousands) At December 31, 2007
    
    Actual
    
    
    Adequacy Purposes
    
    
    Capitalized(1)Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTier I Capital (to Average Assets):Massbank Corp. (consolidated)
    
    $
    106,641
    
    
    
    13.37
    %
    
    $
    23,921
    
    
    
    3.00
    %
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    102,042
    
    
    
    12.80
    
    
    
    23,908
    
    
    
    3.00
    
    
    $
    39,846
    
    
    
    5.00
    %Tier I Capital (to Risk-Weighted
Assets):MassbankCorp. (consolidated)
    
    
    106,641
    
    
    
    34.31
    
    
    
    12,432
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    102,042
    
    
    
    32.89
    
    
    
    12,410
    
    
    
    4.00
    
    
    
    18,615
    
    
    
    6.00
    %Total Capital (to Risk-Weighted
Assets):MassbankCorp. (consolidated)
    
    
    108,607
    
    
    
    34.94
    
    
    
    24,864
    
    
    
    8.00
    
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    104,008
    
    
    
    33.52
    
    
    
    24,820
    
    
    
    8.00
    
    
    
    31,025
    
    
    
    10.00
    %
 (In thousands)
    
    
    
    
    
    
    
    
    
    For Capital
    
    
    To Be WellAt December 31, 2006
    
    Actual
    
    
    Adequacy Purposes
    
    
    Capitalized(1)Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTier I Capital (to Average Assets):Massbank Corp. (consolidated)
    
    $
    108,852
    
    
    
    12.78
    %
    
    $
    25,547
    
    
    
    3.00
    %
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    103,245
    
    
    
    12.39
    
    
    
    24,992
    
    
    
    3.00
    
    
    $
    41,653
    
    
    
    5.00
    %Tier I Capital (to Risk-Weighted Assets):Massbank Corp. (consolidated)
    
    
    108,852
    
    
    
    36.58
    
    
    
    11,901
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    103,245
    
    
    
    34.77
    
    
    
    11,876
    
    
    
    4.00
    
    
    
    17,815
    
    
    
    6.00Total Capital (to Risk-Weighted Assets):Massbank Corp. (consolidated)
    
    
    110,579
    
    
    
    37.17
    
    
    
    23,803
    
    
    
    8.00
    
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    104,972
    
    
    
    35.35
    
    
    
    23,753
    
    
    
    8.00
    
    
    
    29,691
    
    
    
    10.00
 1)
    
    This column presents the minimum amounts and ratios that a financial institution must have to be categorized as well capitalized.
 53




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##### 



16.
    
    Employee Benefits
 Pension PlanThe Bank sponsors a noncontributory defined benefit pension plan that covers all employees who
meet specified age and length of service requirements, which is administered by the Savings
Banks Employees Retirement Association (SBERA). The Plan provides for benefits to be paid to
eligible employees at retirement based primarily upon their years of service with the Bank and
compensation levels near retirement. Contributions to the Plan reflect benefits attributed to
employees service to date, as well as service expected to be earned in the future. Pension
plan assets consist principally of equity securities; mutual funds  bonds, mutual funds 
equities, and all assets mutual funds; and money market funds and cash.
  (In thousands) Years ended December 31,
    
    2007
    
    
    2006Accumulated benefit obligation
    
    $
    9,185
    
    
    $
    8,837Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    10,662
    
    
    $
    9,994Service cost
    
    
    472
    
    
    
    413Interest cost
    
    
    613
    
    
    
    575Actuarial loss (gain)
    
    
    (534
    )
    
    
    326Benefits paid
    
    
    (398
    )
    
    
    (646
    )Benefit obligation at end of year
    
    $
    10,815
    
    
    $
    10,662Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    9,181
    
    
    $
    8,443Actual return on plan assets
    
    
    1,091
    
    
    
    1,242Employer contribution
    
    
    347
    
    
    
    141Benefits paid
    
    
    (398
    )
    
    
    (646
    )Other
    
    
    6
    
    
    
    1Fair value of plan assets at end of year
    
    $
    10,227
    
    
    $
    9,181Funded status
    
    $
    (588
    )
    
    $
    (1,481
    )
   (In thousands) Years ended December 31,
    
    2007
    
    
    2006Net actuarial gain (loss)
    
    $
    920
    
    
    $
    (260
    )Prior service cost
    
    
    7
    
    
    
    (98
    )Transition assets
    
    
    (21
    )
    
    
    21906
    
    
    
    (337
    )Deferred tax (expense) benefit
    
    
    (379
    )
    
    
    141Other comprehensive income (loss), net of tax
    
    $
    527
    
    
    $
    (196
    )
 54




---



##### 



16.
    
    Employee Benefits (continued)
 Amounts recognized as a component of accumulated other comprehensive income (loss) as of
year-end 2007 that have not
been recognized as a component of net periodic pension cost of the Companys defined benefit
pension plan are presented
in the
following table. The Company expects to recognize approximately $16 thousand of the actuarial
gains (net of prior service cost) reported in the following table as of December 31, 2007 as a
component of net periodic pension cost during 2008.
 (In thousands) Years ended December 31,
    
    2007
    
    
    2006Net actuarial gain (loss)
    
    $
    660
    
    
    $
    (260
    )Prior service cost
    
    
    (91
    )
    
    
    (98
    )Transition assets
    
    
    
    
    
    
    21569
    
    
    
    (337
    )Deferred tax (expense) benefit
    
    
    (238
    )
    
    
    141Accumulated other comprehensive income (loss), net of tax
    
    $
    331
    
    
    $
    (196
    )
  (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Discount rate
    
    
    6.00
    %
    
    
    5.75
    %
    
    
    5.75
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Assumptions used to develop the net periodic
benefit cost data were:Discount rate
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    5.75
    %Expected return on plan assets
    
    
    7.75
    %
    
    
    7.75
    %
    
    
    7.75
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Components of net periodic pension expense:Service cost
    
    $
    472
    
    
    $
    413
    
    
    $
    459Interest cost
    
    
    613
    
    
    
    575
    
    
    
    546Expected return on plan assets
    
    
    (712
    )
    
    
    (654
    )
    
    
    (607
    )Amortization of transition obligation
    
    
    (21
    )
    
    
    (21
    )
    
    
    (21
    )Amortization of prior service cost
    
    
    8
    
    
    
    7Amortization of unrecognized net actuarial loss
    
    
    
    
    
    
    6
    
    
    
    48Net periodic pension expense
    
    $
    360
    
    
    $
    326
    
    
    $
    432
  Years ended October 31,
    
    2007
    
    
    2006Asset Category:Fixed Income
Securities (including money
market funds)
    
    
    39.2
    %
    
    
    36.5
    %Domestic Equity Securities
    
    
    44.8
    
    
    
    48.5International Equity
Securities
    
    
    16.0
    
    
    
    15.0100.0
    %
    
    
    100.0
    %
   Massbank SBERA SBERA SBERA A
 55




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##### 



16.
    
    Employee Benefits (continued)
 The Bank expects to make benefit payments for the plan years ending October 31, as follows:
 (In thousands) Years ending October 31,
    
    Payments
    
    
    
    
    Payments2008
    
    $
    1,659
    
    
    2014
    
    
    2,3332009
    
    
    563
    
    
    2015
    
    
    8172010
    
    
    604
    
    
    2016
    
    
    7112011
    
    
    1,739
    
    
    2017
    
    
    1,3362012
    
    
    700
    
    
    2018
    
    
    7062013
    
    
    1,357
 Profit Sharing and Incentive Compensation Bonus Plans
   Employee Stock Ownership Plan
      Employee Agreements
  Executive Supplemental Retirement Agreements
  56




---



##### 



16.
    
    Employee Benefits (continued)
 Directors Deferred Compensation PlanIn 1988, the Company established a deferred compensation plan for its directors. The plan
allows the Companys directors to defer receipt of all or a portion of their compensation
until: (1) their attaining the age of 72, or (2) their termination as a director of the
Company. In 2000, the plan was amended to allow the directors compensation to be invested in
Company stock held in an irrevocable trust. At December 31, 2007, the trust held 20,194 shares
of MassbankCorp. common stock. The shares are considered outstanding in the
computation of earnings per share and book value per share.Stock Option PlanEffective April 20, 2004, the Board of Directors adopted and the shareholders approved the
Corporations 2004 Stock Option and Incentive Plan (the 2004 Plan). This new plan replaced
the Corporations 1994 Stock Incentive Plan, which expired in January 2004. The 2004 Plan
provides for awards of incentive stock options, non-qualified stock options, stock
appreciation rights, a limited number of restricted stock awards and cash replacement awards.
The total number of shares of common stock that can be issued under this plan is 400,000
shares, subject to adjustment for stock splits, stock dividends and similar events. Of this
amount, no more than 100,000 shares of common stock may be issued as awards of restricted
stock under the 2004 Plan. Under the 2004 Plan, the Corporation may not grant stock options
with an exercise price less than 100% of the fair market value of the Corporations common
stock on the date of grant. The maximum option term is ten years.
 SFAS R
  A
 Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedShares
    
    
    Average
    
    
    Shares
    
    
    Average
    
    
    Shares
    
    
    AverageUnder
    
    
    Exercise
    
    
    Under
    
    
    Exercise
    
    
    Under
    
    
    ExerciseFixed Options
    
    Option
    
    
    Price
    
    
    Option
    
    
    Price
    
    
    Option
    
    
    PriceOutstanding at beginning
of year
    
    
    244,850
    
    
    $
    28.83
    
    
    
    251,637
    
    
    $
    26.95
    
    
    
    300,087
    
    
    $
    24.35Granted
    
    
    35,000
    
    
    
    32.62
    
    
    
    35,500
    
    
    
    32.79
    
    
    
    32,850
    
    
    
    37.15Exercised
    
    
    (30,325
    )
    
    
    23.11
    
    
    
    (38,637
    )
    
    
    19.41
    
    
    
    (75,250
    )
    
    
    19.76Forfeited
    
    
    (2,150
    )
    
    
    36.95
    
    
    
    (3,650
    )
    
    
    37.47
    
    
    
    (6,050
    )
    
    
    42.42Outstanding at end of year
    
    
    247,375
    
    
    $
    30.00
    
    
    
    244,850
    
    
    $
    28.83
    
    
    
    251,637
    
    
    $
    26.95Options exercisable at
year-end
    
    
    185,875
    
    
    
    
    
    
    
    210,600
    
    
    
    
    
    
    
    251,637
  At December 31, 2007
    
    Options Oustanding
    
    
    Options ExercisableWeighted Avg.
    
    
    Weighted Avg.
    
    
    
    
    
    
    Weighted Avg.Range of
    
    Number
    
    
    Remaining
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$19.00 to $20.67
    
    
    45,375
    
    
    2.3 years
    
    $
    19.62
    
    
    
    45,375
    
    
    $
    19.6225.00 to $27.63
    
    
    47,250
    
    
    2.1 years
    
    
    26.09
    
    
    
    47,250
    
    
    
    26.0928.44 to $29.60
    
    
    33,500
    
    
    2.1 years
    
    
    29.04
    
    
    
    33,500
    
    
    
    29.0432.50 to $32.92
    
    
    68,250
    
    
    8.5 years
    
    
    32.70
    
    
    
    6,750
    
    
    
    32.7936.70 to $42.90
    
    
    53,000
    
    
    5.9 years
    
    
    39.50
    
    
    
    53,000
    
    
    
    39.50$19.00 to $42.90
    
    
    247,375
    
    
    4.7 years
    
    $
    30.00
    
    
    
    185,875
    
    
    $
    29.11
 57




---



##### 



16.
    
    Employee Benefits (continued)
 The Company estimates the fair value of stock option grants using the Black-Scholes valuation
model. Expected volatilities are based on a combination of implied and historical volatilities
of the Companys common stock; the expected life represents the weighted average period of
time that options granted are expected to be outstanding giving consideration to vesting
schedules and the Companys historical exercise patterns; and the risk-free interest rate is
based on the U.S. Treasury yield curve in effect at the time of grant for periods
corresponding with the expected life of the option. The following table presents the key input
assumptions for the Black-Scholes valuation model:
 Years ended December 31,
    
    2007
    
    
    2006Weighted average fair value per share
    
    $
    6.67
    
    
    $
    6.58Expected term (years)
    
    7.3 years
    
    
    7.3 yearsRisk free interest rate
    
    
    4.73
    %
    
    
    4.31
    %Dividend Yield
    
    
    3.47
    %
    
    
    3.29
    %Volatility
    
    
    21.3
    %
    
    
    21.5
    %
    17.
    
    Shareholder Rights Plan
 The Company has in effect a Shareholder Rights Plan, pursuant to which the Board of Directors
authorized the issuance of one preferred stock purchase right for each share of common stock
of the Company outstanding. Under the Plan, the Rights automatically become part of and trade
with the Companys shares of common stock. Although the Rights are not exercisable initially,
they become exercisable if a person becomes an acquiring person by acquiring 11% or more of
the Companys common stock or if a person commences a tender offer that could result in that
person owning 11% or more of the common stock of MassbankCorp. In the event that a
person becomes an acquiring person, each holder of a Right (other than the acquiring person)
would be entitled to acquire such number of shares of preferred stock which are equivalent to
MassbankCorp. common stock
having a value of twice the exercise price of the Right. The exercise price of a Right
initially shall be $136.00 per one one-thousandth of a share of the Companys preferred stock.
If MassbankCorp. is acquired in a merger or other business combination transaction
after any such event, each holder of a Right would be entitled to purchase, at the
then-current exercise price, shares of the acquiring companys common stock having a value of
twice the exercise price of the Right. The Rights will expire on January 19, 2010, but may be
redeemed at the option of the Board of Directors for $0.01 per Right at any time prior to the
time at which any person becomes an acquiring person or until the expiration date of the
Shareholder Rights Plan.
 58




---



##### 



18.
    
    Parent Company Financial Statements
 The following are the condensed financial statements for MassbankCorp. (the Parent Company) only:
 Balance Sheets
 (In thousands except share data) At December 31,
    
    2007
    
    
    2006Assets:Cash and cash equivalents
    
    $
    3,800
    
    
    $
    5,087Investment in subsidiaries
    
    
    105,094
    
    
    
    101,789Income tax receivable, net
    
    
    43
    
    
    
    155Deferred income tax asset, net
    
    
    45
    
    
    
    32Other assets
    
    
    1
    
    
    
    1Total assets
    
    $
    108,983
    
    
    $
    107,064Liabilities:Other liabilities
    
    $
    22
    
    
    $
    179Total liabilities
    
    
    22
    
    
    
    179Stockholders Equity(Notes 13, 15, 16 and 17):Preferred stock, par value $1.00 per
share; 2,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, par value $1.00 per share; 10,000,000 shares
authorized, 7,880,642 and 7,850,317 shares issued in 2007 and 2006, respectively
    
    
    7,881
    
    
    
    7,850Additional paid-in capital
    
    
    58,773
    
    
    
    57,953Retained earnings
    
    
    107,674
    
    
    
    107,055174,328
    
    
    
    172,858Treasury stock at cost, 3,638,863 and 3,532,663 shares in 2007 and 2006,
respectively
    
    
    (66,597
    )
    
    
    (62,902
    )Accumulated other comprehensive income (loss)
    
    
    1,230
    
    
    
    (3,071
    )Shares held in rabbi trust at cost
3,604 and 3,004 shares in 2007 and 2006, respectively
    
    
    (104
    )
    
    
    (84
    )Deferred compensation obligations
    
    
    104
    
    
    
    84Total stockholders equity
    
    
    108,961
    
    
    
    106,885Total liabilities and stockholders equity
    
    $
    108,983
    
    
    $
    107,064
 Statements of Income
 (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Income:Dividends received from subsidiaries
    
    $
    6,700
    
    
    $
    7,055
    
    
    $
    7,000Interest and dividend income
    
    
    
    
    
    
    14
    
    
    
    31Total interest and dividend income
    
    
    6,700
    
    
    
    7,069
    
    
    
    7,031Non-interest expense
    
    
    242
    
    
    
    186
    
    
    
    170Income before income taxes
    
    
    6,458
    
    
    
    6,883
    
    
    
    6,861Income tax benefit
    
    
    144
    
    
    
    110
    
    
    
    99Income before equity in undistributed earnings of subsidiaries
    
    
    6,602
    
    
    
    6,993
    
    
    
    6,960Equity in undistributed earnings of subsidiaries
    
    
    1,129
    
    
    
    34
    
    
    
    363Net income
    
    $
    7,731
    
    
    $
    7,027
    
    
    $
    7,323
  59




---



##### 



18. Parent Company Financial Statements (continued)
 Statements of Cash Flows
 (In thousands) Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    7,731
    
    
    $
    7,027
    
    
    $
    7,323Adjustments to reconcile net income to net cash provided by
operating activities:Equity in undistributed earnings of subsidiaries
    
    
    (1,129
    )
    
    
    (34
    )
    
    
    (363
    )Dividend from subsidiary in the form of land
    
    
    
    
    
    
    (480
    )
    
    
    Increase in current income tax receivable, net
    
    
    112
    
    
    
    55
    
    
    
    (23
    )Increase in deferred income tax asset, net
    
    
    (13
    )
    
    
    (7
    )
    
    
    (4
    )Decrease (increase) in other assets
    
    
    
    
    
    
    (1
    )
    
    
    29Increase (decrease) in other liabilities
    
    
    (157
    )
    
    
    167
    
    
    
    (1
    )Decrease (increase) in amount due from subsidiaries
    
    
    
    
    
    
    
    
    
    
    196Share-based payment compensation
    
    
    12
    
    
    
    5
    
    
    
    Net cash provided by operating activities
    
    
    6,556
    
    
    
    6,732
    
    
    
    7,157Cash flow from financing activities:Payments to acquire treasury stock
    
    
    (3,695
    )
    
    
    (1,621
    )
    
    
    (4,487
    )Purchase of company stock for deferred compensation plan,
net of distributions
    
    
    (20
    )
    
    
    (17
    )
    
    
    (8
    )Increase in deferred compensation obligation
    
    
    20
    
    
    
    17
    
    
    
    8Options exercised, including tax benefits
    
    
    729
    
    
    
    785
    
    
    
    1,572Dividends paid on common stock
    
    
    (4,877
    )
    
    
    (4,715
    )
    
    
    (4,583
    )Net cash used in financing activities
    
    
    (7,843
    )
    
    
    (5,551
    )
    
    
    (7,498
    )Net increase (decrease) in cash and cash equivalents
    
    
    (1,287
    )
    
    
    1,181
    
    
    
    (341
    )Cash and cash equivalents at beginning of year
    
    
    5,087
    
    
    
    3,906
    
    
    
    4,247Cash and cash equivalents at end of year
    
    $
    3,800
    
    
    $
    5,087
    
    
    $
    3,906
   19. Ten-Year Statistical Summary (Unaudited)
 (In thousands except per share data)Years ended December 31,
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000
    
    
    1999
    
    
    1998Net income
    
    $
    7,731
    
    
    $
    7,027
    
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    7,863
    
    
    $
    9,814
    
    
    $
    10,759
    
    
    $
    11,111
    
    
    $
    11,311
    
    
    $
    10,914Diluted earnings per share
    
    
    1.78
    
    
    
    1.61
    
    
    
    1.66
    
    
    
    1.64
    
    
    
    1.73
    
    
    
    2.04
    
    
    
    2.24
    
    
    
    2.25
    
    
    
    2.17
    
    
    
    1.98Cash dividends paid per share
    
    
    1.13
    
    
    
    1.09
    
    
    
    1.05
    
    
    
    1.00
    
    
    
    0.92
    
    
    
    0.88
    
    
    
    0.84
    
    
    
    0.79
    
    
    
    0.74
    
    
    
    0.68Book value per share, at year-end
    
    
    25.69
    
    
    
    24.76
    
    
    
    24.32
    
    
    
    25.11
    
    
    
    25.17
    
    
    
    25.45
    
    
    
    24.34
    
    
    
    22.83
    
    
    
    20.43
    
    
    
    21.05Return on average assets
    
    
    0.95
    %
    
    
    0.82
    %
    
    
    0.79
    %
    
    
    0.75
    %
    
    
    0.78
    %
    
    
    0.99
    %
    
    
    1.13
    %
    
    
    1.20
    %
    
    
    1.20
    %
    
    
    1.17
    %Return on average equity
    
    
    7.23
    %
    
    
    6.74
    %
    
    
    6.84
    %
    
    
    6.71
    %
    
    
    7.08
    %
    
    
    8.39
    %
    
    
    9.53
    %
    
    
    10.93
    %
    
    
    10.66
    %
    
    
    10.05
    %
 60




---



##### 



20. Quarterly Data (Unaudited)
 Years ended December 31,
    
    2007
    
    
    2006(In thousands except
    
    4th
    
    
    3rd
    
    
    2nd
    
    
    1st
    
    
    4th
    
    
    3rd
    
    
    2nd
    
    
    1stper share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterInterest and dividend income
    
    $
    9,734
    
    
    $
    10,013
    
    
    $
    10,056
    
    
    $
    9,979
    
    
    $
    10,085
    
    
    $
    10,052
    
    
    $
    10,001
    
    
    $
    9,801Interest expense
    
    
    5,165
    
    
    
    5,368
    
    
    
    5,292
    
    
    
    5,188
    
    
    
    5,106
    
    
    
    4,872
    
    
    
    4,613
    
    
    
    4,360Net interest income
    
    
    4,569
    
    
    
    4,645
    
    
    
    4,764
    
    
    
    4,791
    
    
    
    4,979
    
    
    
    5,180
    
    
    
    5,388
    
    
    
    5,441Provision (credit) for loan losses
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (9
    )
    
    
    82
    
    
    
    50
    
    
    
    Net interest income after provision
(credit) for loan losses
    
    
    4,569
    
    
    
    4,645
    
    
    
    4,774
    
    
    
    4,791
    
    
    
    4,988
    
    
    
    5,098
    
    
    
    5,338
    
    
    
    5,441Gains (losses) on securities, net
    
    
    1,148
    
    
    
    2,105
    
    
    
    (6
    )
    
    
    1,134
    
    
    
    259
    
    
    
    168
    
    
    
    119
    
    
    
    251Other non-interest income
    
    
    369
    
    
    
    331
    
    
    
    461
    
    
    
    356
    
    
    
    477
    
    
    
    292
    
    
    
    279
    
    
    
    360Non-interest expense
    
    
    2,841
    
    
    
    3,760
    
    
    
    3,091
    
    
    
    3,100
    
    
    
    3,053
    
    
    
    2,942
    
    
    
    3,058
    
    
    
    3,307Income before income taxes
    
    
    3,245
    
    
    
    3,321
    
    
    
    2,138
    
    
    
    3,181
    
    
    
    2,671
    
    
    
    2,616
    
    
    
    2,678
    
    
    
    2,745Income tax expense
    
    
    1,143
    
    
    
    1,195
    
    
    
    716
    
    
    
    1,100
    
    
    
    940
    
    
    
    885
    
    
    
    923
    
    
    
    935Net income
    
    $
    2,102
    
    
    $
    2,126
    
    
    $
    1,422
    
    
    $
    2,081
    
    
    $
    1,731
    
    
    $
    1,731
    
    
    $
    1,755
    
    
    $
    1,810Earnings per share
(in dollars):(1)Basic
    
    $
    0.49
    
    
    $
    0.49
    
    
    $
    0.33
    
    
    $
    0.48
    
    
    $
    0.40
    
    
    $
    0.40
    
    
    $
    0.41
    
    
    $
    0.42Diluted
    
    
    0.49
    
    
    
    0.49
    
    
    
    0.33
    
    
    
    0.48
    
    
    
    0.40
    
    
    
    0.40
    
    
    
    0.40
    
    
    
    0.41Weighted average common shares
outstanding:(1)Basic
    
    
    4,257
    
    
    
    4,300
    
    
    
    4,332
    
    
    
    4,336
    
    
    
    4,320
    
    
    
    4,315
    
    
    
    4,329
    
    
    
    4,340Diluted
    
    
    4,289
    
    
    
    4,328
    
    
    
    4,357
    
    
    
    4,361
    
    
    
    4,353
    
    
    
    4,349
    
    
    
    4,364
    
    
    
    4,377
 
 (1)
    
    Computation of earnings per share is further described in Note 1. Massbank Corp. and Subsidiaries Stockholder Data
 Years ended December 31, 2007 and 2006
 Massbank
  CashPrice per Share
    
    
    DividendsHigh
    
    
    Low
    
    
    DeclaredYear ended December 31,
    
    2007Fourth Quarter
    
    $
    37.26
    
    
    $
    36.00
    
    
    $
    0.29Third Quarter
    
    
    37.44
    
    
    
    32.95
    
    
    
    0.28Second Quarter
    
    
    33.40
    
    
    
    32.66
    
    
    
    0.28First Quarter
    
    
    33.25
    
    
    
    32.60
    
    
    
    0.28Year ended December 31,
    
    2006Fourth Quarter
    
    $
    33.63
    
    
    $
    32.33
    
    
    $
    0.28Third Quarter
    
    
    33.94
    
    
    
    32.44
    
    
    
    0.27Second Quarter
    
    
    33.29
    
    
    
    32.32
    
    
    
    0.27First Quarter
    
    
    34.692
    
    
    
    31.77
    
    
    
    0.27
 61




---



##### 



Five-Year Stock Performance Graph
 Massbank
 
 Comparative 5 Year Cumulative Total Return (Years ended December 31,)2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007MassbankCorp.
    
    $
    100.00
    
    
    $
    156.30
    
    
    $
    139.85
    
    
    $
    127.13
    
    
    $
    130.94
    
    
    $
    149.88NASDAQ Bank Index
    
    $
    100.00
    
    
    $
    133.03
    
    
    $
    151.18
    
    
    $
    148.26
    
    
    $
    168.72
    
    
    $
    135.16S&P 500 Index
    
    $
    100.00
    
    
    $
    128.67
    
    
    $
    142.65
    
    
    $
    149.65
    
    
    $
    173.26
    
    
    $
    182.78
 Comparative Massbank Corp. Stock Performance Data Refer to page 7 of this report for performance graphs.
 Comparative Cumulative Return Totals (Years ended December 31,)
 Comparative 1 Year Cumulative Total Return
 2006
    
    
    3/31/07
    
    
    6/30/07
    
    
    9/30/07
    
    
    2007MassbankCorp.
    
    $
    100.00
    
    
    $
    100.58
    
    
    $
    103.30
    
    
    $
    115.36
    
    
    $
    114.46NASDAQ Bank Index
    
    $
    100.00
    
    
    $
    96.09
    
    
    $
    93.37
    
    
    $
    90.10
    
    
    $
    80.10
 Comparative 3 Year Cumulative Total Return
 2004
    
    
    2005
    
    
    2006
    
    
    2007Massbank Corp.
    
    $
    100.00
    
    
    $
    90.90
    
    
    $
    93.63
    
    
    $
    107.17NASDAQ Bank Index
    
    $
    100.00
    
    
    $
    98.07
    
    
    $
    111.61
    
    
    $
    89.40
 Comparative 5 Year Cumulative Total Return
 2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007Massbank Corp.
    
    $
    100.00
    
    
    $
    156.30
    
    
    $
    139.85
    
    
    $
    127.13
    
    
    $
    130.94
    
    
    $
    149.88NASDAQ Bank Index
    
    $
    100.00
    
    
    $
    133.03
    
    
    $
    151.18
    
    
    $
    148.26
    
    
    $
    168.72
    
    
    $
    135.16
 Comparative 7 Year Cumulative Total Return
 2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007Massbank Corp.
    
    $
    100.00
    
    
    $
    126.95
    
    
    $
    155.06
    
    
    $
    242.35
    
    
    $
    216.85
    
    
    $
    197.12
    
    
    $
    203.04
    
    
    $
    232.41NASDAQ Bank Index
    
    $
    100.00
    
    
    $
    112.68
    
    
    $
    120.50
    
    
    $
    160.29
    
    
    $
    182.16
    
    
    $
    178.65
    
    
    $
    203.31
    
    
    $
    162.86
 21 Year Cumulative Total Return Refer to front cover for performance graph.
 1986
    
    
    1987
    
    
    1988
    
    
    1989
    
    
    1990
    
    
    1991
    
    
    1992
    
    
    1993
    
    
    1994
    
    
    1995
    
    
    1996Massbank Corp.
    
    $
    100.00
    
    
    $
    97.77
    
    
    $
    135.83
    
    
    $
    125.83
    
    
    $
    96.07
    
    
    $
    124.94
    
    
    $
    244.95
    
    
    $
    265.98
    
    
    $
    265.39
    
    
    $
    378.67
    
    
    $
    467.501997
    
    
    1998
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007Massbank Corp.
    
    $
    798.01
    
    
    $
    670.98
    
    
    $
    521.65
    
    
    $
    539.01
    
    
    $
    684.25
    
    
    $
    835.76
    
    
    $
    1,306.26
    
    
    $
    1,168.83
    
    
    $
    1,062.52
    
    
    $
    1,094.39
    
    
    $
    1,252.68
 62




---



##### 



Officers and Directors  Massbank Corp.
 Officers
 Chairman, President and
Chief Executive Officer
 Senior Vice President, Treasurer
and Chief Financial Officer
 Secretary
 Assistant Secretary
 Board of Directors
 *
    
    Gerard H. BrandiChairman, President andChief Executive Officer,MassbankCorp.
 *
    
    Allan S. BufferdTreasurer Emeritus,Massachusetts Institute of TechnologyKathleen M. CamilliPresident,Camilli Economics, LLC
 *
    
    Stephen W. CarrRetired Partner and Attorney,Goodwin Procter LLP
 
    
    Alexander S. CostelloTeacher, Brooks School
 Attorney and Principal,
Latham, Latham & Lamond, P.C.
 *
    
    Stephen E. MarshallRetired, C.H. Cleaves InsuranceAgency, Inc.
 
    
    * Paul J. McCarthyExecutive Vice President,Jobs for Massachusetts, Inc.
 
    
    Nalin M. MistryConsulting Engineer andGeneral Contractor, Mistry Associates, Inc.,NM Construction Corporationand MAI Associates, Inc.
 *
    
    Nancy L. PettinelliExecutive Director,Visiting Nurse Associationof Greater Lowell, Inc.
 
    
    William F. Rucci, Jr.Certified Public Accountant and Partner,Rucci, Bardaro & Barrett, PC
   
 *
    
    Member, Executive Committee
    
    Member, Audit Committee Officers and Directors  Massbank
 Officers
 Chairman, President and
Chief Executive Officer
 Senior Vice President, Lending
 Senior Vice President,
Community Banking and
Chief Operating Officer
 Senior Vice President, Treasurer
and Chief Financial Officer
 Vice President, Operations
 Vice President and
Senior Trust Officer
 Vice President and
Senior Trust Officer
 Vice President and Director,
Information Technology
 Loan Origination Officer
 Assistant Treasurer
 Assistant Treasurer
 Collections Officer
 Director, Human Resources
 Assistant Treasurer
 Assistant Treasurer
 Security/Assistant BSA Officer
 Trust Operations Officer and
Executive Administrator
 Assistant Treasurer
 Assistant Treasurer
 Assistant Vice President
 Mortgage Origination Officer
 Assistant Vice President
 Assistant Controller
 Assistant Vice President,
Loan Operations
 Assistant Treasurer
 Director of Audit
 Assistant Vice President,
Marketing
 Assistant Treasurer
 Assistant Treasurer
 Assistant Treasurer
 Assistant Treasurer
 Controller
 Assistant Treasurer
 Information Technology Officer
 Assistant Treasurer
 Assistant Treasurer
 Assistant Vice President,
Operations
 Board of Directors
  * Chairman
 *
 * Clerk
 *
 *
  *
   
 *
 63




---



##### 



Corporate Information
 Massbank
 Savings and Mortgage
24-Hour-Rate Lines
 
 Trademark
 Massbank
 Form 10-K
 Massbank
 Dividend Reinvestment and
Stock Purchase Plan
 Massbank
 Transfer Agent
 
 Independent Registered
Publice Accounting Firm
 
 Legal Counsel
   Massbank Branch Offices
 Massbank of Reading*
 *Main Office
 Massbank of Chelmsford
 
 
 Massbank of Dracut
 
 Massbank of Everett
 Massbank of Lowell
 
 
 Massbank of Medford
 
 Massbank of Melrose
 Massbank of Stoneham
 
 Massbank of Tewksbury
 
 Massbank of Westford
 
 Massbank of Wilmington
   64