##### 



Financial Highlights
 Massbank Corp . and Subsidiaries
 Selected Consolidated Financial Data
 (In
thousands)
At
December 31,
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Balance Sheet Data:Total assets
    
    $
    898,679
    
    
    $
    976,168
    
    
    $
    1,010,733
    
    
    $
    1,009,367
    
    
    $
    971,317Mortgage loans
    
    
    215,904
    
    
    
    226,197
    
    
    
    241,886
    
    
    
    302,788
    
    
    
    296,469Other loans
    
    
    9,826
    
    
    
    10,001
    
    
    
    11,120
    
    
    
    16,011
    
    
    
    34,548Allowance for loan losses
    
    
    1,253
    
    
    
    1,307
    
    
    
    1,554
    
    
    
    2,271
    
    
    
    2,494Allowance for loan losses on
off-balance sheet credit exposures
    
    
    517
    
    
    
    588
    
    
    
    626
    
    
    
    384
    
    
    
    149Investments(1)
    
    
    637,576
    
    
    
    704,611
    
    
    
    722,079
    
    
    
    669,875
    
    
    
    618,545Deposits
    
    
    784,728
    
    
    
    849,465
    
    
    
    882,508
    
    
    
    883,928
    
    
    
    849,684Stockholders equity
    
    
    105,264
    
    
    
    110,015
    
    
    
    110,927
    
    
    
    117,285
    
    
    
    114,904
 (In
thousands)
Years
ended December 31,
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Operating Data:Interest and dividend income
    
    $
    36,801
    
    
    $
    33,581
    
    
    $
    38,137
    
    
    $
    47,103
    
    
    $
    55,117Interest expense
    
    
    15,141
    
    
    
    12,729
    
    
    
    15,854
    
    
    
    22,701
    
    
    
    32,391Net interest income
    
    
    21,660
    
    
    
    20,852
    
    
    
    22,283
    
    
    
    24,402
    
    
    
    22,726Provision (credit) for loan losses
    
    
    (53
    )
    
    
    (242
    )
    
    
    (502
    )
    
    
    
    
    
    
    40Gains on securities, net
    
    
    679
    
    
    
    1,229
    
    
    
    639
    
    
    
    1,718
    
    
    
    4,363Other non-interest income
    
    
    1,185
    
    
    
    1,257
    
    
    
    1,283
    
    
    
    1,205
    
    
    
    1,450Non-interest expense
    
    
    12,461
    
    
    
    12,302
    
    
    
    12,615
    
    
    
    12,037
    
    
    
    11,721Income before income taxes
    
    
    11,116
    
    
    
    11,278
    
    
    
    12,092
    
    
    
    15,288
    
    
    
    16,778Income tax expense
    
    
    3,793
    
    
    
    3,898
    
    
    
    4,229
    
    
    
    5,474
    
    
    
    6,019Net income
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    7,863
    
    
    $
    9,814
    
    
    $
    10,759
 Years
ended
December31,
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Other Data:Yield on average interest-earning assets
    
    
    4.07
    %
    
    
    3.52
    %
    
    
    3.87
    %
    
    
    4.85
    %
    
    
    5.88
    %Cost of average interest-bearing liabilities
    
    
    1.85
    
    
    
    1.48
    
    
    
    1.78
    
    
    
    2.61
    
    
    
    3.87Interest rate spread
    
    
    2.22
    
    
    
    2.04
    
    
    
    2.09
    
    
    
    2.24
    
    
    
    2.01Net interest margin
    
    
    2.40
    
    
    
    2.19
    
    
    
    2.26
    
    
    
    2.52
    
    
    
    2.43Non-interest expense to average assets
    
    
    1.34
    
    
    
    1.26
    
    
    
    1.25
    
    
    
    1.21
    
    
    
    1.23Efficiency ratio(2)
    
    
    52.6
    
    
    
    51.5
    
    
    
    49.9
    
    
    
    43.9
    
    
    
    41.1Return on assets (net income/average assets)
    
    
    0.79
    
    
    
    0.75
    
    
    
    0.78
    
    
    
    0.99
    
    
    
    1.13Return on equity (net income/average
stockholders equity)
    
    
    6.84
    
    
    
    6.71
    
    
    
    7.08
    
    
    
    8.39
    
    
    
    9.53Percent non-performing loans to total loans
    
    
    0.11
    
    
    
    0.03
    
    
    
    0.09
    
    
    
    0.13
    
    
    
    0.19Percent non-performing assets to total assets
    
    
    0.03
    
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.04
    
    
    
    0.07Stockholders equity to assets, at year-end
    
    
    11.71
    
    
    
    11.27
    
    
    
    10.97
    
    
    
    11.62
    
    
    
    11.83Book value per share, at year-end(3)
    
    $
    24.32
    
    
    $
    25.11
    
    
    $
    25.17
    
    
    $
    25.45
    
    
    $
    24.34Market price
 close, at year-end(3)
    
    
    33.00
    
    
    
    37.45
    
    
    
    43.01
    
    
    
    28.30
    
    
    
    23.867Earnings per share:(3)Basic
    
    
    1.68
    
    
    
    1.67
    
    
    
    1.77
    
    
    
    2.09
    
    
    
    2.30Diluted
    
    
    1.66
    
    
    
    1.64
    
    
    
    1.73
    
    
    
    2.04
    
    
    
    2.24Cash dividends paid per share(3)
    
    
    1.05
    
    
    
    1.00
    
    
    
    0.92
    
    
    
    0.88
    
    
    
    0.84Dividend payout ratio
    
    
    63
    %
    
    
    60
    %
    
    
    52
    %
    
    
    42
    %
    
    
    37
    %
 
 (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.(3)
    
    All share information presented has been adjusted to reflect the 3-for-2 split
of the Companys common stock effective April 19, 2002. 1




---



##### 



Managements Discussion and Analysis of  Financial Condition and Results of Operations
 General
   Massbank Massbank
   Forward Looking Statement Disclosure
 Massbank Massbank
 Massbank Massbank
 Massbank
 9




---



##### 



Critical Accounting Policies
   Provisions Credit for loan losses
    Investment Securities other than Temporarily Impaired
     10




---



##### 



Financial Overview
 Comparison of the years and
 Massbank Massbank
 Massbank
    Years ended December 31, 2005 Compared to 2004:
 (In thousands) years ended December 31,
    
    2005
    
    
    2004
    
    
    CHANGEIncome Statement DataInterest and dividend income:Mortgage and other loans
    
    $
    12,792
    
    
    $
    14,247
    
    
    $
    (1,455
    )Mortgage-backed securities
    
    
    7,217
    
    
    
    6,571
    
    
    
    646Federal funds sold
    
    
    6,116
    
    
    
    2,438
    
    
    
    3,678Other securities and investments
    
    
    10,676
    
    
    
    10,325
    
    
    
    351Total interest and dividend income
    
    
    36,801
    
    
    
    33,581
    
    
    
    3,220Total interest expense
    
    
    15,141
    
    
    
    12,729
    
    
    
    (2,412
    )Net interest income
    
    
    21,660
    
    
    
    20,852
    
    
    
    808Provision (credit) for loan losses
    
    
    (53
    )
    
    
    (242
    )
    
    
    (189
    )Gains on securities, net
    
    
    679
    
    
    
    1,229
    
    
    
    (550
    )Other non-interest income
    
    
    1,185
    
    
    
    1,257
    
    
    
    (72
    )Non-interest expense
    
    
    12,461
    
    
    
    12,302
    
    
    
    (159
    )Income tax expense
    
    
    3,793
    
    
    
    3,898
    
    
    
    105Net income
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    (57
    )Diluted earnings per share (in dollars):
    
    $
    1.66
    
    
    $
    1.64
    
    
    $
    0.02
 (In thousands) Years ended December 31,
    
    2005
    
    
    2004
    
    
    CHANGEAverage Balance Sheet DataEarning assets:Mortgage and other loans
    
    $
    230,070
    
    
    $
    243,351
    
    
    $
    (13,281
    )Mortgage-backed securities
    
    
    134,839
    
    
    
    115,847
    
    
    
    18,992Federal funds sold
    
    
    192,154
    
    
    
    186,615
    
    
    
    5,539Other securities and investments
    
    
    347,583
    
    
    
    409,454
    
    
    
    (61,871
    )Total average earning assets
    
    $
    904,646
    
    
    $
    955,267
    
    
    $
    (50,621
    )Total average deposits
    
    $
    816,577
    
    
    $
    862,691
    
    
    $
    (46,114
    )
 11




---



##### 




    
    The increase in net interest income of $808 thousand due primarily to the higher yield on
Federal funds sold and the resulting increase in interest income on Federal funds.
    
    The credit to the provision for loan losses that was $189 thousand less than the
prior year.
    
    The decrease in net securities gains of $550 thousand.
    
    The decrease in other non-interest income of $72 thousand.
    
    The increase in non-interest expense of $159 thousand.
    
    The decrease in income tax expense of $105 thousand due to lower income before taxes and a
reduction in the Companys effective income tax rate.
 Condensed Consolidated Balance Sheets
 (In thousands) At December 31,
    
    2005
    
    
    2004
    
    
    CHANGEShort-term investments
    
    $
    167,787
    
    
    $
    194,250
    
    
    $
    (26,463
    )Interest-bearing deposits in banks
    
    
    898
    
    
    
    2,718
    
    
    
    (1,820
    )Securities available for sale, at market value
    
    
    453,472
    
    
    
    443,753
    
    
    
    9,719Securities held to maturity, at amortized cost
    
    
    6,137
    
    
    
    4,877
    
    
    
    1,260Trading securities, at market value
    
    
    9,282
    
    
    
    59,013
    
    
    
    (49,731
    )Total investments
    
    
    637,576
    
    
    
    704,611
    
    
    
    (67,035
    )Total loans
    
    
    225,730
    
    
    
    236,198
    
    
    
    (10,468
    )Allowance for loan losses
    
    
    (1,253
    )
    
    
    (1,307
    )
    
    
    54Net loans
    
    
    224,477
    
    
    
    234,891
    
    
    
    (10,414
    )Other assets
    
    
    36,626
    
    
    
    36,666
    
    
    
    (40
    )Total assets
    
    $
    898,679
    
    
    $
    976,168
    
    
    $
    (77,489
    )Total deposits
    
    $
    784,728
    
    
    $
    849,465
    
    
    $
    (64,737
    )Escrow deposits of borrowers
    
    
    1,059
    
    
    
    1,074
    
    
    
    (15
    )Other liabilities
    
    
    7,628
    
    
    
    15,614
    
    
    
    (7,986
    )Total liabilities
    
    
    793,415
    
    
    
    866,153
    
    
    
    (72,738
    )Total stockholders equity
    
    
    105,264
    
    
    
    110,015
    
    
    
    (4,751
    )Total liabilities and stockholders equity
    
    $
    898,679
    
    
    $
    976,168
    
    
    $
    (77,489
    )
 Financial Condition
   Investments
 Massbank Massbank
 12




---



##### 



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




---



##### 



Results of Operations
 Comparison of
the
years 2005
and 2004
 Net Interest Income
 Massbank
         14




---



##### 



Provisions (Credit) For Loan Losses
  Non-Interest Income
  Non-Interest Expense
  Income Tax Expense
 Massbank
 15




---



##### 



Financial overview
 Comparison
of
the
years 2004
and 2003
    Years ended december 31, 2004 compared to 2003:
 (In
thousands)
Years
ended
December 31,
    
    2004
    
    
    2003
    
    
    CHANGEIncome Statement DataInterest and dividend income:Mortgage and other loans
    
    $
    14,247
    
    
    $
    18,516
    
    
    $
    (4,269
    )Mortgage-backed securities
    
    
    6,571
    
    
    
    8,250
    
    
    
    (1,679
    )Federal funds sold
    
    
    2,438
    
    
    
    2,266
    
    
    
    172Other securities and investments
    
    
    10,325
    
    
    
    9,105
    
    
    
    1,220Total interest and dividend income
    
    
    33,581
    
    
    
    38,137
    
    
    
    (4,556
    )Total interest expense
    
    
    12,729
    
    
    
    15,854
    
    
    
    3,125Net interest income
    
    
    20,852
    
    
    
    22,283
    
    
    
    (1,431
    )Provision (credit) for loan losses
    
    
    (242
    )
    
    
    (502
    )
    
    
    (260
    )Gains on securities, net
    
    
    1,229
    
    
    
    639
    
    
    
    590Other non-interest income
    
    
    1,257
    
    
    
    1,283
    
    
    
    (26
    )Non-interest expense
    
    
    12,302
    
    
    
    12,615
    
    
    
    313Income tax expense
    
    
    3,898
    
    
    
    4,229
    
    
    
    331Net income
    
    $
    7,380
    
    
    $
    7,863
    
    
    $
    (483
    )Diluted earnings per share (in dollars):
    
    $
    1.64
    
    
    $
    1.73
    
    
    $
    (0.09
    )
 (In
thousands)
Years
ended
December 31,
    
    2004
    
    
    2003
    
    
    CHANGEAverage Balance Sheet DataEarning assets:Mortgage and other loans
    
    $
    243,351
    
    
    $
    284,001
    
    
    $
    (40,650
    )Mortgage-backed securities
    
    
    115,847
    
    
    
    133,037
    
    
    
    (17,190
    )Federal funds sold
    
    
    186,615
    
    
    
    209,463
    
    
    
    (22,848
    )Other securities and investments
    
    
    409,454
    
    
    
    361,354
    
    
    
    48,100Total average earning assets
    
    $
    955,267
    
    
    $
    987,855
    
    
    $
    (32,588
    )Total average deposits
    
    $
    862,691
    
    
    $
    892,329
    
    
    $
    (29,638
    )
 16




---



##### 




    
    Reduction in net interest income of $1.4 million due essentially to a decline in
yield and a decline in the size of the Banks loan and mortgage-backed securities portfolios
due to the significant refinancing and prepayment activity experienced in 2003 and to a
lesser extent in 2004.
    
    A negative provision for loan losses that was $260 thousand less than the prior
year. The negative provision is due to a reduction in the size of the loan portfolio and a
low level of problem loans.
    
    An increase in net securities gains of $590 thousand.
    
    A decrease in non-interest expense of $313 thousand primarily attributable to a
reduction in the number of bank employees.
    
    A decrease in income tax expense of $331 thousand due to lower income before taxes
and a reduction in the Companys effective income tax rate.
 Condensed Consolidated Balance Sheets
 (In
Thousands)
At
December 31,
    
    2004
    
    
    2003
    
    
    CHANGEShort-term investments
    
    $
    194,250
    
    
    $
    214,532
    
    
    $
    (20,282
    )Interest-bearing deposits in banks
    
    
    2,718
    
    
    
    5,685
    
    
    
    (2,967
    )Securities available for sale, at market value
    
    
    443,753
    
    
    
    429,229
    
    
    
    14,524Securities held to maturity, at amortized cost
    
    
    4,877
    
    
    
    
    
    
    
    4,877Trading securities, at market value
    
    
    59,013
    
    
    
    72,633
    
    
    
    (13,620
    )Total investments
    
    
    704,611
    
    
    
    722,079
    
    
    
    (17,468
    )Total loans
    
    
    236,198
    
    
    
    253,006
    
    
    
    (16,808
    )Allowance for loan losses
    
    
    (1,307
    )
    
    
    (1,554
    )
    
    
    247Net loans
    
    
    234,891
    
    
    
    251,452
    
    
    
    (16,561
    )Other assets
    
    
    36,666
    
    
    
    37,202
    
    
    
    (536
    )Total assets
    
    $
    976,168
    
    
    $
    1,010,733
    
    
    $
    (34,565
    )Total deposits
    
    $
    849,465
    
    
    $
    882,508
    
    
    $
    (33,043
    )Escrow deposits of borrowers
    
    
    1,074
    
    
    
    1,139
    
    
    
    (65
    )Other liabilities
    
    
    15,614
    
    
    
    16,159
    
    
    
    (545
    )Total liabilities
    
    
    866,153
    
    
    
    899,806
    
    
    
    (33,653
    )Total stockholders equity
    
    
    110,015
    
    
    
    110,927
    
    
    
    (912
    )Total liabilities and stockholders equity
    
    $
    976,168
    
    
    $
    1,010,733
    
    
    $
    (34,565
    )
 Financial Condition
  Investments
  17




---



##### 



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




---



##### 



Results of Operations
 Comparison of the years 2004 and 2003
 Net Interest Income
 Massbank
         Provisions (Credit) for Loan Losses
  19




---



##### 



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
    
    $
    1,231
    
    
    $
    303
    
    
    $
    444
    
    
    $
    264
    
    
    $
    220Data processing service obligations(1)
    
    
    316
    
    
    
    316
    
    
    
    
    
    
    
    
    
    
    
    Pension benefit obligations
    
    
    142
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    Supplemental retirement benefit obligations
    
    
    67
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    1,756
    
    
    $
    828
    
    
    $
    444
    
    
    $
    264
    
    
    $
    220Other commitments:Commitments to originate residential
mortgage loans
    
    $
    1,257
    
    
    $
    1,257
    
    
    $
    
    
    
    $
    
    
    
    $
    Unused lines of credit
    
    
    31,413
    
    
    
    355
    
    
    
    6,136
    
    
    
    3,742
    
    
    
    21,180Other loan commitments
    
    
    2,981
    
    
    
    530
    
    
    
    2,400
    
    
    
    45
    
    
    
    6Total other commitments(2)
    
    $
    35,651
    
    
    $
    2,142
    
    
    $
    8,536
    
    
    $
    3,787
    
    
    $
    21,186
 (1)
    
    The fees charged by our data processing service provider fluctuate based on the
number of deposit and loan accounts serviced and therefore have been estimated.(2)
    
    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. 21




---



##### 



Liquidity and Capital Resources
    Asset and Liability Management
  22




---



##### 



Interest Rate Risk
          23




---



##### 



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)
    
    $
    19,269
    
    
    $
    9,289
    
    
    $
    17,882
    
    
    $
    91,307
    
    
    $
    87,983
    
    
    $
    225,730Short-term investments:Federal funds sold
    
    
    167,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167,785Other
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Interest-bearing deposits in banks
    
    
    262
    
    
    
    
    
    
    
    636
    
    
    
    
    
    
    
    
    
    
    
    898Securities available for sale(3)
    
    
    51,353
    
    
    
    33,515
    
    
    
    71,211
    
    
    
    243,579
    
    
    
    53,814
    
    
    
    453,472Securities held to maturity
    
    
    75
    
    
    
    75
    
    
    
    150
    
    
    
    1,260
    
    
    
    4,577
    
    
    
    6,137Trading securities
    
    
    9,282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,282Total interest-earning assets
    
    $
    248,028
    
    
    $
    42,879
    
    
    $
    89,879
    
    
    $
    336,146
    
    
    $
    146,374
    
    
    $
    863,306Interest-bearing liabilities:Deposits(1) (2) (4)
    
    $
    545,122
    
    
    $
    54,958
    
    
    $
    63,118
    
    
    $
    94,899
    
    
    $
    364
    
    
    $
    758,461Total interest-bearing liabilities
    
    $
    545,122
    
    
    $
    54,958
    
    
    $
    63,118
    
    
    $
    94,899
    
    
    $
    364
    
    
    $
    758,461GAP for period
    
    $
    (297,094
    )
    
    $
    (12,079
    )
    
    $
    26,761
    
    
    $
    241,247
    
    
    $
    146,010
    
    
    $
    104,845Cumulative GAP  December 31, 2005
    
    $
    (297,094
    )
    
    $
    (309,173
    )
    
    $
    (282,412
    )
    
    $
    (41,165
    )
    
    $
    104,845Cumulative GAP as a percent of total assets
    
    
    (33.1
    )%
    
    
    (34.4
    )%
    
    
    (31.4
    )%
    
    
    (4.6
    )%
    
    
    11.7
    %Cumulative GAP  December 31, 2004
    
    $
    (395,062
    )
    
    $
    (341,327
    )
    
    $
    (301,431
    )
    
    $
    36,757
    
    
    $
    118,932
 (1)
    
    Excludes non-interest bearing
demand accounts of $27,326.(2)
    
    Includes escrow deposits of
borrowers of $1,059.(3)
    
    Loans and mortgage-backed securities reflect regular amortization of principal and
prepayment estimates. Callable U.S. Government agency securities of $189,276 thousand are shown in
the period they are expected to be called or reprice, otherwise they are shown based on their
maturity date. It is assumed that a security will be called if the coupon rate on the security
exceeded market interest rates at year-end 2005.(4)
    
    It is assumed that the Banks Savings and NOW account rates will be increased within
3 months or less. 24




---



##### 



Interest
Rate
Risk (continued)
  Expected Maturity DateAt
December 31, 2005
 Fair Value(In thousands)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    Total
    
    
    at 12/31/05Interest sensitive assets:Fixed rate securities(5)
    
    $
    103,968
    
    
    $
    63,610
    
    
    $
    68,918
    
    
    $
    26,152
    
    
    $
    21,651
    
    
    $
    150,222
    
    
    $
    434,521
    
    
    $
    429,326Average interest rate(1)
    
    
    3.04
    %
    
    
    3.28
    %
    
    
    3.61
    %
    
    
    4.50
    %
    
    
    4.83
    %
    
    
    5.26
    %
    
    
    4.11
    %Variable rate securities(2) (5)
    
    
    8,788
    
    
    
    
    
    
    
    4,000
    
    
    
    9,000
    
    
    
    4,000
    
    
    
    4,125
    
    
    
    29,913
    
    
    
    30,168Average interest rate(1)
    
    
    3.35
    %
    
    
    
    
    
    
    3.00
    %
    
    
    3.17
    %
    
    
    4.88
    %
    
    
    4.62
    %
    
    
    3.63
    %Trading securities(6)
    
    
    9,282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,282
    
    
    
    9,282Average interest rate
    
    
    4.18
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.18
    %Fixed rate loans
    
    
    2,317
    
    
    
    981
    
    
    
    3,017
    
    
    
    2,558
    
    
    
    2,779
    
    
    
    180,845
    
    
    
    192,497
    
    
    
    188,315Average interest rate
    
    
    4.80
    %
    
    
    6.71
    %
    
    
    3.67
    %
    
    
    6.40
    %
    
    
    5.92
    %
    
    
    5.32
    %
    
    
    5.35
    %Variable rate loans
    
    
    11,355
    
    
    
    2,551
    
    
    
    3,180
    
    
    
    4,533
    
    
    
    2,560
    
    
    
    9,054
    
    
    
    33,233
    
    
    
    32,299Average interest rate
    
    
    6.87
    %
    
    
    5.61
    %
    
    
    5.44
    %
    
    
    5.12
    %
    
    
    5.98
    %
    
    
    5.48
    %
    
    
    5.95
    %Other fixed rate assets(4)
    
    
    15,898
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,898
    
    
    
    15,898Average interest rate
    
    
    2.53
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.53
    %Other variable rate assets(3)
    
    
    152,787
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152,787
    
    
    
    152,787Average interest rate
    
    
    3.93
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.93
    %Total interest sensitive assets
    
    $
    304,395
    
    
    $
    67,142
    
    
    $
    79,115
    
    
    $
    42,243
    
    
    $
    30,990
    
    
    $
    344,246
    
    
    $
    868,131
    
    
    $
    858,075Interest
sensitive liabilities:Savings and money market
deposit accounts
    
    $
    441,541
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    441,541
    
    
    $
    441,541Average interest rate
    
    
    1.75
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.75
    %Fixed rate certificates of deposit
    
    
    144,749
    
    
    
    41,709
    
    
    
    7,376
    
    
    
    2,935
    
    
    
    610
    
    
    
    364
    
    
    
    197,743
    
    
    
    196,561Average interest rate
    
    
    3.11
    %
    
    
    3.35
    %
    
    
    3.49
    %
    
    
    3.84
    %
    
    
    3.67
    %
    
    
    3.86
    %
    
    
    3.19
    %Variable rate certificates of deposit
    
    
    20,925
    
    
    
    24,720
    
    
    
    4,738
    
    
    
    12,811
    
    
    
    
    
    
    
    
    
    
    
    63,194
    
    
    
    63,194Average interest rate
    
    
    4.81
    %
    
    
    4.73
    %
    
    
    4.91
    %
    
    
    4.91
    %
    
    
    
    
    
    
    
    
    
    
    4.80
    %NOW accounts
    
    
    54,924
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,924
    
    
    
    54,924Average interest rate
    
    
    0.37
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.37
    %Escrow deposits of borrowers
    
    
    1,059
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,059
    
    
    
    1,059Average interest rate
    
    
    0.75
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.75
    %Total interest sensitive liabilities
    
    $
    663,198
    
    
    $
    66,429
    
    
    $
    12,114
    
    
    $
    15,746
    
    
    $
    610
    
    
    $
    364
    
    
    $
    758,461
    
    
    $
    757,279
 
 (1)
    
    Securities rates presented are
on a tax equivalent basis.(2)
    
    Includes equity securities.(3)
    
    Consist of Federal funds sold (overnight), money market funds and
interest-bearing bank money market accounts.(4)
    
    Consist of
interest-bearing deposits in banks and term Federal funds sold.(5)
    
    Securities presented are at
amortized cost.(6)
    
    Securities presented are at market value.  Other
Market
Risks
  25




---



##### 



Average Balance Sheets
 (In
thousands)
Years
ended
December 31,
    
        
2005
    
    2004
    
    
    2003Interest
    
    
    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
    
    $
    192,154
    
    
    $
    6,116
    
    
    
    3.18
    %
    
    $
    186,615
    
    
    $
    2,438
    
    
    
    1.31
    %
    
    $
    209,463
    
    
    $
    2,266
    
    
    
    1.08
    %Short-term investments(4)
    
    
    1,653
    
    
    
    53
    
    
    
    3.21
    
    
    
    15,870
    
    
    
    239
    
    
    
    1.51
    
    
    
    29,672
    
    
    
    435
    
    
    
    1.47Securities available for sale:Investment securities(2)
    
    
    313,708
    
    
    
    9,923
    
    
    
    3.16
    
    
    
    324,239
    
    
    
    9,002
    
    
    
    2.78
    
    
    
    259,148
    
    
    
    7,638
    
    
    
    2.95Mortgage-backed securities(2)
    
    
    129,850
    
    
    
    6,961
    
    
    
    5.36
    
    
    
    112,445
    
    
    
    6,398
    
    
    
    5.69
    
    
    
    133,037
    
    
    
    8,250
    
    
    
    6.20Mortgage-backed securities
held to maturity
    
    
    4,989
    
    
    
    256
    
    
    
    5.13
    
    
    
    3,402
    
    
    
    173
    
    
    
    5.09
    
    
    
    
    
    
    
    
    
    
    
    Trading securities
    
    
    32,222
    
    
    
    772
    
    
    
    2.40
    
    
    
    69,345
    
    
    
    1,145
    
    
    
    1.65
    
    
    
    72,534
    
    
    
    1,113
    
    
    
    1.53Mortgage loans(3)
    
    
    220,020
    
    
    
    12,111
    
    
    
    5.50
    
    
    
    232,709
    
    
    
    13,578
    
    
    
    5.83
    
    
    
    270,826
    
    
    
    17,682
    
    
    
    6.53Other loans(3)
    
    
    10,050
    
    
    
    681
    
    
    
    6.78
    
    
    
    10,642
    
    
    
    669
    
    
    
    6.29
    
    
    
    13,175
    
    
    
    834
    
    
    
    6.33Total earning assets
    
    
    904,646
    
    
    
    36,873
    
    
    
    4.07
    %
    
    
    955,267
    
    
    
    33,642
    
    
    
    3.52
    %
    
    
    987,855
    
    
    
    38,218
    
    
    
    3.87
    %Allowance for
loan losses
    
    
    (1,266
    )
    
    
    
    
    
    
    
    
    
    
    (1,460
    )
    
    
    
    
    
    
    
    
    
    
    (2,388
    )Total earning assets
less allowance for
loan losses
    
    
    903,380
    
    
    
    
    
    
    
    
    
    
    
    953,807
    
    
    
    
    
    
    
    
    
    
    
    985,467Other assets
    
    
    25,174
    
    
    
    
    
    
    
    
    
    
    
    25,541
    
    
    
    
    
    
    
    
    
    
    
    22,410Total assets
    
    $
    928,554
    
    
    
    
    
    
    
    
    
    
    $
    979,348
    
    
    
    
    
    
    
    
    
    
    $
    1,007,877Liabilities:Deposits:Demand and NOW
    
    $
    85,326
    
    
    
    187
    
    
    
    0.22
    %
    
    $
    85,066
    
    
    
    171
    
    
    
    0.20
    %
    
    $
    83,583
    
    
    
    247
    
    
    
    0.30
    %Savings
    
    
    499,772
    
    
    
    7,949
    
    
    
    1.59
    
    
    
    585,239
    
    
    
    8,563
    
    
    
    1.46
    
    
    
    595,464
    
    
    
    11,032
    
    
    
    1.85Time certificates of deposit
    
    
    231,479
    
    
    
    7,005
    
    
    
    3.03
    
    
    
    192,386
    
    
    
    3,995
    
    
    
    2.08
    
    
    
    213,282
    
    
    
    4,575
    
    
    
    2.15Total deposits
    
    
    816,577
    
    
    
    15,141
    
    
    
    1.85
    %
    
    
    862,691
    
    
    
    12,729
    
    
    
    1.48
    %
    
    
    892,329
    
    
    
    15,854
    
    
    
    1.78
    %Other liabilities
    
    
    4,984
    
    
    
    
    
    
    
    
    
    
    
    6,660
    
    
    
    
    
    
    
    
    
    
    
    4,474Total liabilities
    
    
    821,561
    
    
    
    
    
    
    
    
    
    
    
    869,351
    
    
    
    
    
    
    
    
    
    
    
    896,803Stockholders Equity
    
    
    106,993
    
    
    
    
    
    
    
    
    
    
    
    109,997
    
    
    
    
    
    
    
    
    
    
    
    111,074Total liabilities and
stockholders equity
    
    $
    928,554
    
    
    
    
    
    
    
    
    
    
    $
    979,348
    
    
    
    
    
    
    
    
    
    
    $
    1,007,877Net interest income (tax-
equivalent basis)
    
    
    
    
    
    
    21,732
    
    
    
    
    
    
    
    
    
    
    
    20,913
    
    
    
    
    
    
    
    
    
    
    
    22,364Less adjustment of tax-
exempt interest income
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    81Net interest income
    
    
    
    
    
    $
    21,660
    
    
    
    
    
    
    
    
    
    
    $
    20,852
    
    
    
    
    
    
    
    
    
    
    $
    22,283Interest rate spread (5)
    
    
    
    
    
    
    
    
    
    
    2.22
    %
    
    
    
    
    
    
    
    
    
    
    2.04
    %
    
    
    
    
    
    
    
    
    
    
    2.09
    %Net interest margin(6)
    
    
    
    
    
    
    
    
    
    
    2.40
    %
    
    
    
    
    
    
    
    
    
    
    2.19
    %
    
    
    
    
    
    
    
    
    
    
    2.26
    %
 
 (1)
    
    Income on equity securities is included on a tax equivalent basis.(2)
    
    Averages balances include net unrealized gains 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. 26




---



##### 



Rate/Volume
Analysis
  2005 Compared to 2004
    
    2004 Compared to 2003(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
    
    $
    75
    
    
    $
    3,603
    
    
    $
    3,678
    
    
    $
    (265
    )
    
    $
    437
    
    
    $
    172Short-term investments
    
    
    (321
    )
    
    
    135
    
    
    
    (186
    )
    
    
    (208
    )
    
    
    12
    
    
    
    (196
    )Investment securities
    
    
    (298
    )
    
    
    1,220
    
    
    
    922
    
    
    
    1,813
    
    
    
    (429
    )
    
    
    1,384Mortgage-backed securities
    
    
    1,032
    
    
    
    (386
    )
    
    
    646
    
    
    
    (1,011
    )
    
    
    (668
    )
    
    
    (1,679
    )Trading securities
    
    
    (759
    )
    
    
    374
    
    
    
    (385
    )
    
    
    (50
    )
    
    
    82
    
    
    
    32Mortgage loans
    
    
    (720
    )
    
    
    (747
    )
    
    
    (1,467
    )
    
    
    (2,338
    )
    
    
    (1,766
    )
    
    
    (4,104
    )Other loans
    
    
    (38
    )
    
    
    50
    
    
    
    12
    
    
    
    (159
    )
    
    
    (6
    )
    
    
    (165
    )Total interest and dividend income
    
    
    (1,029
    )
    
    
    4,249
    
    
    
    3,220
    
    
    
    (2,218
    )
    
    
    (2,338
    )
    
    
    (4,556
    )Interest expense:Deposits:Demand and NOW
    
    
    1
    
    
    
    15
    
    
    
    16
    
    
    
    4
    
    
    
    (80
    )
    
    
    (76
    )Savings
    
    
    (1,319
    )
    
    
    705
    
    
    
    (614
    )
    
    
    (186
    )
    
    
    (2,283
    )
    
    
    (2,469
    )Time certificates of deposit
    
    
    926
    
    
    
    2,084
    
    
    
    3,010
    
    
    
    (437
    )
    
    
    (143
    )
    
    
    (580
    )Total interest expense
    
    
    (392
    )
    
    
    2,804
    
    
    
    2,412
    
    
    
    (619
    )
    
    
    (2,506
    )
    
    
    (3,125
    )Net interest income
    
    $
    (637
    )
    
    $
    1,445
    
    
    $
    808
    
    
    $
    (1,599
    )
    
    $
    168
    
    
    $
    (1,431
    )
 Impact
of
Inflation
and
Changing
Prices
 Massbank
 27




---



##### 



Recent
Accounting
Pronouncements
 Accounting
Changes
and
Error
Corrections
 Massbank Massbank
 Share-Based
Payments
 Massbank Massbank
 28




---



##### 



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
 Sr. Vice President, Treasurer and CFO
 29




---



##### 



report of independent registered public accounting firm
 
 The Board of Directors and Stockholders
 Massbank Corp.:
 Massbank Massbank Internal
Control  Integrated Framework Massbank Massbank
   30




---



##### 



report of independent registered public accounting firm (continued)
  Massbank Massbank Internal Control  Integrated Framework Massbank Internal Control
 Integrated Framework
 -s- signatureCertified Public Accountants, Inc.
 Boston, Massachusetts
March 8, 2006
 31




---



##### 



Massbank Corp. and Subsidiaries
 Consolidated Balance Sheets
 (In thousands except share data) At December 31,
    
    2005
    
    
    2004Assets:Cash and due from banks
    
    $
    9,590
    
    
    $
    9,829Short-term investments (Note 2)
    
    
    167,787
    
    
    
    194,250Total cash and cash equivalents
    
    
    177,377
    
    
    
    204,079Interest-bearing deposits in banks
    
    
    898
    
    
    
    2,718Securities available for sale, at market value
(amortized cost of $458,297 in 2005 and $440,835 in 2004) (Note 3)
    
    
    453,472
    
    
    
    443,753Securities held to maturity, at amortized cost
(market value of $6,022 in 2005 and $4,883 in 2004) (Note 3)
    
    
    6,137
    
    
    
    4,877Trading securities, at market value (Note 4)
    
    
    9,282
    
    
    
    59,013Loans (Notes 5 and 7):Mortgage loans
    
    
    215,904
    
    
    
    226,197Other loans
    
    
    9,826
    
    
    
    10,001Total loans
    
    
    225,730
    
    
    
    236,198Allowance for loan losses (Note 6)
    
    
    (1,253
    )
    
    
    (1,307
    )Net loans
    
    
    224,477
    
    
    
    234,891Premises and equipment (Note 9)
    
    
    6,525
    
    
    
    6,464Accrued interest receivable
    
    
    3,898
    
    
    
    3,416Goodwill
    
    
    1,090
    
    
    
    1,090Income tax receivable, net
    
    
    
    
    
    
    164Deferred income tax asset, net (Note 12)
    
    
    3,240
    
    
    
    588Other assets
    
    
    12,283
    
    
    
    15,115Total assets
    
    $
    898,679
    
    
    $
    976,168Liabilities and Stockholders Equity:Deposits (Note 10):Demand and NOW
    
    $
    82,250
    
    
    $
    87,653Savings
    
    
    441,541
    
    
    
    561,313Time certificates of deposit
    
    
    260,937
    
    
    
    200,499Total deposits
    
    
    784,728
    
    
    
    849,465Escrow deposits of borrowers
    
    
    1,059
    
    
    
    1,074Accrued income taxes, net
    
    
    35
    
    
    
    Allowance for loan losses on off-balance
sheet credit exposures
    
    
    517
    
    
    
    588Other liabilities
    
    
    7,076
    
    
    
    15,026Total liabilities
    
    
    793,415
    
    
    
    866,153Commitments and contingent liabilities (Notes 8 and 9)Stockholders equity (Notes 12, 14, 15 and 16):Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, par value $1.00 per share; 10,000,000 shares
authorized, 7,811,680 and 7,736,430 shares issued, respectively
    
    
    7,812
    
    
    
    7,736Additional paid-in capital
    
    
    57,067
    
    
    
    55,313Retained earnings
    
    
    104,743
    
    
    
    102,003169,622
    
    
    
    165,052Treasury stock at cost, 3,483,163 and 3,354,703 shares, respectively
    
    
    (61,281
    )
    
    
    (56,794
    )Accumulated other comprehensive income (loss)
    
    
    (3,077
    )
    
    
    1,757Shares held in rabbi trust at cost, 15,644 and 25,804 shares, respectively (Note 15)
    
    
    (351
    )
    
    
    (553
    )Deferred compensation obligation
    
    
    351
    
    
    
    553Total stockholders equity
    
    
    105,264
    
    
    
    110,015Total liabilities and stockholders equity
    
    $
    898,679
    
    
    $
    976,168
 See accompanying notes to consolidated financial statements.
 32




---



##### 



Massbank Corp. and Subsidiaries
 Consolidated Statements Of Income
 (In thousands except share data) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Interest and dividend income:Mortgage loans
    
    $
    12,111
    
    
    $
    13,578
    
    
    $
    17,682Other loans
    
    
    681
    
    
    
    669
    
    
    
    834Securities available for sale:Mortgage-backed securities
    
    
    6,961
    
    
    
    6,398
    
    
    
    8,250Other securities
    
    
    9,863
    
    
    
    8,941
    
    
    
    7,557Mortgage-backed securities held to maturity
    
    
    256
    
    
    
    173
    
    
    
    Trading securities
    
    
    760
    
    
    
    1,145
    
    
    
    1,113Federal funds sold
    
    
    6,116
    
    
    
    2,438
    
    
    
    2,266Other investments
    
    
    53
    
    
    
    239
    
    
    
    435Total interest and dividend income
    
    
    36,801
    
    
    
    33,581
    
    
    
    38,137Interest expense:Deposits:NOW
    
    
    187
    
    
    
    171
    
    
    
    247Savings
    
    
    7,949
    
    
    
    8,563
    
    
    
    11,032Time certificates of deposit
    
    
    7,005
    
    
    
    3,995
    
    
    
    4,575Total interest expense
    
    
    15,141
    
    
    
    12,729
    
    
    
    15,854Net interest income
    
    
    21,660
    
    
    
    20,852
    
    
    
    22,283Provision (credit) for loan losses(Note 6)
    
    
    (53
    )
    
    
    (242
    )
    
    
    (502
    )Net interest income after provision (credit) for loan losses
    
    
    21,713
    
    
    
    21,094
    
    
    
    22,785Non-interest income:Deposit account service fees
    
    
    393
    
    
    
    448
    
    
    
    494Gains on securities available for sale, net
    
    
    515
    
    
    
    1,361
    
    
    
    558Gains (losses) on trading securities, net
    
    
    164
    
    
    
    (132
    )
    
    
    81Deferred compensation plan income
    
    
    84
    
    
    
    108
    
    
    
    162Other
    
    
    708
    
    
    
    701
    
    
    
    627Total non-interest income
    
    
    1,864
    
    
    
    2,486
    
    
    
    1,922Non-interest expense:Salaries and employee benefits
    
    
    7,463
    
    
    
    7,261
    
    
    
    7,457Deferred compensation plan expense
    
    
    172
    
    
    
    167
    
    
    
    235Occupancy and equipment
    
    
    2,212
    
    
    
    2,169
    
    
    
    2,248Data processing
    
    
    540
    
    
    
    521
    
    
    
    528Professional services
    
    
    485
    
    
    
    631
    
    
    
    394Advertising and marketing
    
    
    155
    
    
    
    110
    
    
    
    154Deposit insurance
    
    
    145
    
    
    
    160
    
    
    
    177Other
    
    
    1,289
    
    
    
    1,283
    
    
    
    1,422Total non-interest expense
    
    
    12,461
    
    
    
    12,302
    
    
    
    12,615Income before income taxes
    
    
    11,116
    
    
    
    11,278
    
    
    
    12,092Income tax expense(Note 12)
    
    
    3,793
    
    
    
    3,898
    
    
    
    4,229Net income
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    7,863Weighted average common shares outstanding:Basic
    
    
    4,365,932
    
    
    
    4,408,293
    
    
    
    4,439,394Diluted
    
    
    4,422,529
    
    
    
    4,501,537
    
    
    
    4,544,594Earnings per share(in dollars):Basic
    
    $
    1.68
    
    
    $
    1.67
    
    
    $
    1.77Diluted
    
    
    1.66
    
    
    
    1.64
    
    
    
    1.73
 See accompanying notes to consolidated financial statements.
 33




---



##### 



Massbank Corp. and SubsidiariesConsolidated Statements of
Cash Flows
 (In
thousands) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    7,863Adjustments to reconcile net income to net cash (used in) provided
by operating activities:Depreciation and amortization
    
    
    642
    
    
    
    676
    
    
    
    721Loan interest capitalized
    
    
    (9
    )
    
    
    (8
    )
    
    
    (12
    )(Increase) decrease in accrued interest receivable
    
    
    (482
    )
    
    
    438
    
    
    
    72(Decrease) increase in other liabilities
    
    
    (22
    )
    
    
    276
    
    
    
    11,038(Increase) decrease in income tax receivable, net
    
    
    164
    
    
    
    161
    
    
    
    (126
    )Amortization of premiums (accretion of discounts)
on securities, net
    
    
    (48
    )
    
    
    566
    
    
    
    613Net trading securities activity
    
    
    49,895
    
    
    
    13,488
    
    
    
    (36,303
    )Gains on securities available for sale, net
    
    
    (515
    )
    
    
    (1,361
    )
    
    
    (567
    )Valuation writedowns of equity securities available for sale
    
    
    
    
    
    
    
    
    
    
    9(Gains) losses on trading securities, net
    
    
    (164
    )
    
    
    132
    
    
    
    (81
    )Decrease in deferred mortgage loan origination fees,
net of amortization
    
    
    (113
    )
    
    
    (231
    )
    
    
    (562
    )Increase in accrued income taxes, net
    
    
    35
    
    
    
    
    
    
    
    Deferred income tax expense
    
    
    250
    
    
    
    28
    
    
    
    236(Increase) decrease in other assets
    
    
    (5,088
    )
    
    
    847
    
    
    
    (12,443
    )Provision (credit) for loan losses
    
    
    (53
    )
    
    
    (242
    )
    
    
    (502
    )Provision (credit) for loan losses on off-balance
sheet credit exposures
    
    
    (71
    )
    
    
    (38
    )
    
    
    16Transfer from allowance for loan losses
    
    
    
    
    
    
    
    
    
    
    (226
    )Transfer to allowance for loan losses on
off-balance sheet credit exposures
    
    
    
    
    
    
    
    
    
    
    226Gains on sales of premises and equipment
    
    
    
    
    
    
    (4
    )
    
    
    Net cash (used in) provided by operating activities
    
    
    51,744
    
    
    
    22,108
    
    
    
    (30,028
    )Cash flows from investing activities:Purchases of term federal funds
    
    
    (15,000
    )
    
    
    
    
    
    
    (15,000
    )Proceeds from maturities of term federal funds
    
    
    15,000
    
    
    
    
    
    
    
    15,000Net (increase) decrease in interest-bearing bank deposits
    
    
    1,820
    
    
    
    2,967
    
    
    
    (831
    )Proceeds from sales of investment securities available for sale
    
    
    28,252
    
    
    
    28,942
    
    
    
    36,810Proceeds from maturities and redemption of investment securities
held to maturity and available for sale
    
    
    103,961
    
    
    
    207,509
    
    
    
    175,000Purchases of investment securities available for sale
    
    
    (132,546
    )
    
    
    (225,318
    )
    
    
    (355,995
    )Purchases of mortgage-backed securities available for sale
    
    
    (47,696
    )
    
    
    (63,922
    )
    
    
    (9,937
    )Purchases of mortgage-backed securities held to maturity
    
    
    (1,581
    )
    
    
    (4,925
    )
    
    
    Principal repayments of mortgage-backed securities
    
    
    31,450
    
    
    
    35,671
    
    
    
    97,916Principal repayments of securities available for sale
    
    
    
    
    
    
    1
    
    
    
    2Loans originated
    
    
    (48,874
    )
    
    
    (60,332
    )
    
    
    (82,598
    )Loan principal payments received
    
    
    59,460
    
    
    
    77,369
    
    
    
    148,966Purchases of premises and equipment
    
    
    (700
    )
    
    
    (193
    )
    
    
    (859
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    4
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (6,454
    )
    
    
    (2,227
    )
    
    
    8,474
 (Continued)
 34




---



##### 



Massbank Corp. and SubsidiariesConsolidated Statements of
Cash Flows (Continued)
 (In
thousands) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Cash flows from financing activities:Net decrease in deposits
    
    
    (64,737
    )
    
    
    (33,043
    )
    
    
    (1,420
    )Decrease in escrow deposits of borrowers
    
    
    (15
    )
    
    
    (65
    )
    
    
    (248
    )Payments to acquire treasury stock
    
    
    (4,487
    )
    
    
    (2,617
    )
    
    
    (8,097
    )Purchase of company stock for deferred compensation plan,
net of distributions
    
    
    (30
    )
    
    
    (38
    )
    
    
    (38
    )Increase in deferred compensation obligation
    
    
    30
    
    
    
    38
    
    
    
    38Options exercised, including tax benefit
    
    
    1,830
    
    
    
    944
    
    
    
    1,675Cash dividends paid on common stock
    
    
    (4,583
    )
    
    
    (4,415
    )
    
    
    (4,068
    )Net cash used in financing activities
    
    
    (71,992
    )
    
    
    (39,196
    )
    
    
    (12,158
    )Net decrease in cash and cash equivalents
    
    
    (26,702
    )
    
    
    (19,315
    )
    
    
    (33,712
    )Cash and cash equivalents at beginning of year
    
    
    204,079
    
    
    
    223,394
    
    
    
    257,106Cash and cash equivalents at end of year
    
    $
    177,377
    
    
    $
    204,079
    
    
    $
    223,394Supplemental cash flow disclosures:Cash transactions:Cash paid during the year for interest
    
    $
    15,203
    
    
    $
    12,769
    
    
    $
    15,922Cash paid during the year for taxes, net of refunds
    
    
    3,002
    
    
    
    3,401
    
    
    
    3,608
 See accompanying notes to consolidated financial statements.
 35




---



##### 



Massbank Corp. and Subsidiaries  Consolidated Statements of Changes in Stockholders Equity
 (In
thousands except share data) Years ended December 31, 2005, 2004
and 2003
 Accumulated
    
    
    SharesAdditional
    
    
    
    
    
    
    
    
    
    
    other
    
    
    held in
    
    
    DeferredCommon
    
    
    paid-in
    
    
    Retained
    
    
    Treasury
    
    
    comprehensive
    
    
    Rabbi
    
    
    compensationstock
    
    
    capital
    
    
    earnings
    
    
    stock
    
    
    income
    
    
    Trust
    
    
    obligation
    
    
    TotalBalance at December 31, 2002
    
    $
    7,610
    
    
    $
    52,820
    
    
    $
    95,243
    
    
    $
    (46,080
    )
    
    $
    7,692
    
    
    $
    (477
    )
    
    $
    477
    
    
    $
    117,285Net Income
    
    
    
    
    
    
    
    
    
    
    7,863
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,863Other comprehensive loss, net of tax:Unrealized losses on securities, net of
reclassification adjustment (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,731
    )
    
    
    
    
    
    
    
    
    
    
    (3,731
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,132Cash dividends paid ($0.92 per share)
    
    
    
    
    
    
    
    
    
    
    (4,068
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,068
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,097
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,097
    )Purchase of company stock for
deferred compensation plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    38
    
    
    
    Exercise of stock options
    
    
    78
    
    
    
    1,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,164Tax benefit on stock options exercised
    
    
    
    
    
    
    511
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    511Balance at December 31, 2003
    
    
    7,688
    
    
    
    54,417
    
    
    
    99,038
    
    
    
    (54,177
    )
    
    
    3,961
    
    
    
    (515
    )
    
    
    515
    
    
    
    110,927Net Income
    
    
    
    
    
    
    
    
    
    
    7,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,380Other comprehensive loss, net of tax:Unrealized losses on securities, net of
reclassification adjustment (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,204
    )
    
    
    
    
    
    
    
    
    
    
    (2,204
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,176Cash dividends paid ($1.00 per share)
    
    
    
    
    
    
    
    
    
    
    (4,415
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,415
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,617
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,617
    )Purchase of company stock for
deferred compensation plan,
net of distributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    38
    
    
    
    Exercise of stock options
    
    
    48
    
    
    
    588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    636Tax benefit on stock options exercised
    
    
    
    
    
    
    308
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    308Balance 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
    
    
    $
    105,264
 See accompanying notes to consolidated financial statements.
 36




---



##### 



Massbank Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years ended December 31, 2005, 2004 and 2003
 1.
    
    Summary of
Significant Accounting PoliciesMassbank Corp. (the Company) is a Delaware chartered holding company whose
principal subsidiary is Massbank (the Bank). The Bank operates fifteen full service
banking offices in Reading, Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury,
Westford, Dracut, Lowell and Everett, 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 subsidiary Massbank and its subsidiaries: Readibank Properties, Inc.,
Readibank Investment Corporation and Melbank Investment Corporation.
   Investments in Debt and Equity Securities
   trading securities.
  37




---



##### 



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
   38




---



##### 



Premises
and Equipment
  Impairment
of the Long-lived Assets  Except Goodwill
  Stock
Option Plan
  Massbank )
 39




---



##### 



1.
    
    Summary of
Significant Accounting Policies (continued)
 (In
thousands except per share data) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Net income, as reported
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    7,863Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (161
    )
    
    
    (170
    )
    
    
    (74
    )Pro forma net income
    
    $
    7,162
    
    
    $
    7,210
    
    
    $
    7,789Earnings per share:Basic  as reported
    
    $
    1.68
    
    
    $
    1.67
    
    
    $
    1.77Basic  pro forma
    
    
    1.64
    
    
    
    1.64
    
    
    
    1.75Diluted  as reported
    
    $
    1.66
    
    
    $
    1.64
    
    
    $
    1.73Diluted  pro forma
    
    
    1.62
    
    
    
    1.60
    
    
    
    1.71Weighted average fair value
    
    $
    8.11
    
    
    $
    9.55
    
    
    $
    5.44Expected life
    
    7.3 years
    
    
    7.3 years
    
    
    7.3 yearsRisk-free interest rate
    
    
    3.97
    %
    
    
    3.49
    %
    
    
    3.55
    %Expected volatility
    
    
    21.2
    %
    
    
    21.9
    %
    
    
    21.8
    %Expected dividend yield
    
    
    2.8
    %
    
    
    2.3
    %
    
    
    3.2
    %
 Goodwill
Impairment
  Pension
Plan
  Earnings
Per Common Share
    (In
thousands) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Basic shares
    
    
    4,366
    
    
    
    4,408
    
    
    
    4,439Dilutive impact of stock options
    
    
    57
    
    
    
    94
    
    
    
    106Diluted shares
    
    
    4,423
    
    
    
    4,502
    
    
    
    4,545
 40




---



##### 



1.
    
    Summary of Significant Accounting Policies (continued)Comprehensive
IncomeAccounting principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Although certain changes in assets and liabilities, such as
unrealized gains and losses on available for sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
  (In
thousands) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Unrealized holding losses on available for sale securities
and when issued securities contracts arising during period
    
    $
    (7,221
    )
    
    $
    (2,242
    )
    
    $
    (5,298
    )Less: reclassification adjustment for gains realized in income
    
    
    515
    
    
    
    1,361
    
    
    
    558Net unrealized losses
    
    
    (7,736
    )
    
    
    (3,603
    )
    
    
    (5,856
    )Tax benefit
    
    
    2,902
    
    
    
    1,399
    
    
    
    2,125Other comprehensive loss
    
    $
    (4,834
    )
    
    $
    (2,204
    )
    
    $
    (3,731
    )
 Cash
and Cash Equivalents
   Income TaxesThe Bank recognizes income taxes under the asset and liability method. Under this method,
deferred tax assets and liabilities are established for the temporary differences between the
accounting basis and the tax basis of the Banks assets and liabilities at enacted tax rates
expected to be in effect when the amounts related to such temporary differences are realized or
settled. The Banks deferred tax asset is reviewed and adjustments to such asset are recognized
as deferred income tax expense or benefit based upon managements judgment relating to the
realizability of such asset. Based on the Banks historical and current pre-tax earnings,
management believes it is more likely than not that the Bank will realize its existing gross
deferred tax asset.2.
    
    Short-Term InvestmentsShort-term investments consist of the following:
 (In thousands) At December 31,
    
    2005
    
    
    2004Federal funds sold (overnight)
    
    $
    152,785
    
    
    $
    193,728Term Federal funds sold
    
    
    15,000
    
    
    
    Money market investment fund
    
    
    
    
    
    
    302Interest-bearing bank money market accounts
    
    
    2
    
    
    
    220Total short-term investments
    
    $
    167,787
    
    
    $
    194,250
  41




---



##### 



3.
    
    Investment SecuritiesThe amortized cost and market value of investment securities follows:
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Market(In thousands) At December 31, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities held to maturity:Mortgage-backed securities:Federal National Mortgage Association
    
    $
    6,137
    
    
    $
    
    
    
    $
    (115
    )
    
    $
    6,022Total
    
    $
    6,137
    
    
    $
    
    
    
    $
    (115
    )
    
    $
    6,022Securities available for sale:Debt securities:U.S. Treasury obligations
    
    $
    77,051
    
    
    $
    
    
    
    $
    (935
    )
    
    $
    76,116U.S. Government agency obligations
    
    
    239,024
    
    
    
    10
    
    
    
    (4,497
    )
    
    
    234,537Total
    
    
    316,075
    
    
    
    10
    
    
    
    (5,432
    )
    
    
    310,653Mortgage-backed securities:Government National Mortgage Association
    
    
    3,262
    
    
    
    89
    
    
    
    
    
    
    
    3,351Federal Home Loan Mortgage Corporation
    
    
    128,942
    
    
    
    1,003
    
    
    
    (1,058
    )
    
    
    128,887Federal National Mortgage Association
    
    
    3,138
    
    
    
    2
    
    
    
    (37
    )
    
    
    3,103Collateralized mortgage obligations
    
    
    92
    
    
    
    
    
    
    
    (1
    )
    
    
    91Total mortgage-backed securities
    
    
    135,434
    
    
    
    1,094
    
    
    
    (1,096
    )
    
    
    135,432Total debt securities
    
    
    451,509
    
    
    
    1,104
    
    
    
    (6,528
    )
    
    
    446,085Equity securities
    
    
    6,788
    
    
    
    722
    
    
    
    (123
    )
    
    
    7,387Total securities available for sale
    
    
    458,297
    
    
    $
    1,826
    
    
    $
    (6,651
    )
    
    $
    453,472Net unrealized losses on securities
available for sale
    
    
    (4,825
    )Total securities available for sale, net
    
    
    453,472Total investment securities, net
    
    $
    459,609
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Market(In thousands) at December 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities held to maturity:Mortgage-backed securities:Federal National Mortgage Association
    
    $
    4,877
    
    
    $
    6
    
    
    $
    
    
    
    $
    4,883Total
    
    $
    4,877
    
    
    $
    6
    
    
    $
    
    
    
    $
    4,883Securities available for sale:Debt securities:U.S. Treasury obligations
    
    $
    125,491
    
    
    $
    126
    
    
    $
    (520
    )
    
    $
    125,097U.S. Government agency obligations
    
    
    190,032
    
    
    
    81
    
    
    
    (1,594
    )
    
    
    188,519Total
    
    
    315,523
    
    
    
    207
    
    
    
    (2,114
    )
    
    
    313,616Mortgage-backed securities:Government National Mortgage Association
    
    
    5,622
    
    
    
    297
    
    
    
    
    
    
    
    5,919Federal Home Loan Mortgage Corporation
    
    
    112,929
    
    
    
    3,694
    
    
    
    (66
    )
    
    
    116,557Federal National Mortgage Association
    
    
    94
    
    
    
    4
    
    
    
    
    
    
    
    98Collateralized mortgage obligations
    
    
    133
    
    
    
    2
    
    
    
    
    
    
    
    135Total mortgage-backed securities
    
    
    118,778
    
    
    
    3,997
    
    
    
    (66
    )
    
    
    122,709Total debt securities
    
    
    434,301
    
    
    
    4,204
    
    
    
    (2,180
    )
    
    
    436,325Equity securities
    
    
    6,534
    
    
    
    933
    
    
    
    (39
    )
    
    
    7,428Total securities available for sale
    
    
    440,835
    
    
    $
    5,137
    
    
    $
    (2,219
    )
    
    $
    443,753Net unrealized gains on securities
available for sale
    
    
    2,918Total securities available for sale, net
    
    
    443,753Total investment securities, net
    
    $
    448,630
 42




---



##### 



3.
    
    Investment Securities (continued)During the years ended December 31, 2005, 2004 and 2003, the Company realized gains and
losses on sales and recorded other-than-temporary impairment writedowns of securities available
for sale as follows:
 2005
    
    
    2004
    
    
    2003Realized
    
    
    Realized
    
    
    Realized(In
thousands) At December 31,
    
    Gains
    
    
    Losses
    
    
    Gains
    
    
    Losses
    
    
    Gains
    
    
    LossesSales:U.S. Treasury obligations
    
    $
    29
    
    
    $
    (55
    )
    
    $
    35
    
    
    $
    (68
    )
    
    $
    309
    
    
    $
    Marketable equity securities
    
    
    761
    
    
    
    (220
    )
    
    
    1,720
    
    
    
    (326
    )
    
    
    1,303
    
    
    
    (1,045
    )Other-than-temporary impairment writedowns:Marketable equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Total realized gains (losses)
    
    $
    790
    
    
    $
    (275
    )
    
    $
    1,755
    
    
    $
    (394
    )
    
    $
    1,612
    
    
    $
    (1,054
    )
    2005
    
    
    2004Amortized
    
    
    Market
    
    
    Amortized
    
    
    Market(In thousands) At December 31,
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    ValueInvestment securities available for sale:U.S. Treasury obligations:Maturing within 1 year
    
    $
    50,950
    
    
    $
    50,595
    
    
    $
    77,895
    
    
    $
    77,794Maturing after 1 year but within 5 years
    
    
    26,101
    
    
    
    25,521
    
    
    
    45,633
    
    
    
    45,306Maturing after 5 years but within 10 years
    
    
    
    
    
    
    
    
    
    
    1,963
    
    
    
    1,997Total
    
    
    77,051
    
    
    
    76,116
    
    
    
    125,491
    
    
    
    125,097U.S. Government agency obligations:Maturing within 1 year
    
    
    45,999
    
    
    
    45,612
    
    
    
    10,010
    
    
    
    9,954Maturing after 1 year but within 5 years
    
    
    171,992
    
    
    
    168,254
    
    
    
    155,987
    
    
    
    154,607Maturing after 5 years but within 10 years
    
    
    19,996
    
    
    
    19,665
    
    
    
    23,995
    
    
    
    23,918Maturing after 10 years but within 15 years
    
    
    1,037
    
    
    
    1,006
    
    
    
    40
    
    
    
    40Total
    
    
    239,024
    
    
    
    234,537
    
    
    
    190,032
    
    
    
    188,519Mortgage-backed securities:Maturing within 1 year
    
    
    19
    
    
    
    20
    
    
    
    7
    
    
    
    7Maturing after 1 year but within 5 years
    
    
    7,238
    
    
    
    7,451
    
    
    
    7,988
    
    
    
    8,408Maturing after 5 years but within 10 years
    
    
    22,333
    
    
    
    22,955
    
    
    
    28,829
    
    
    
    30,595Maturing after 10 years but within 15 years
    
    
    105,779
    
    
    
    104,940
    
    
    
    81,755
    
    
    
    83,495Maturing after 15 years
    
    
    65
    
    
    
    66
    
    
    
    199
    
    
    
    204Total
    
    
    135,434
    
    
    
    135,432
    
    
    
    118,778
    
    
    
    122,709Total debt securities available for sale
    
    
    451,509
    
    
    
    446,085
    
    
    
    434,301
    
    
    
    436,325Net unrealized gains (losses) on debt securities
available for sale
    
    
    (5,424
    )
    
    
    
    
    
    
    2,024
    
    
    
    Total debt securities available for sale,
net carrying value
    
    $
    446,085
    
    
    $
    446,085
    
    
    $
    436,325
    
    
    $
    436,325
   43




---



##### 



3. Investment Securities (continued)
  (In thousands) At December 31, 2005
    

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
    
    $
    42,489
    
    
    $
    (279
    )
    
    $
    32,625
    
    
    $
    (656
    )
    
    $
    75,114
    
    
    $
    (935
    )U.S. Government agency obligations
    
    
    107,529
    
    
    
    (1,458
    )
    
    
    120,960
    
    
    
    (3,039
    )
    
    
    228,489
    
    
    
    (4,497
    )Mortgage-backed securities
    
    
    96,160
    
    
    
    (1,084
    )
    
    
    3,050
    
    
    
    (127
    )
    
    
    99,210
    
    
    
    (1,211
    )Total debt securities
    
    
    246,178
    
    
    
    (2,821
    )
    
    
    156,635
    
    
    
    (3,822
    )
    
    
    402,813
    
    
    
    (6,643
    )Equity securities
    
    
    1,856
    
    
    
    (117
    )
    
    
    59
    
    
    
    (6
    )
    
    
    1,915
    
    
    
    (123
    )Total temporarily impaired securities
    
    $
    248,034
    
    
    $
    (2,938
    )
    
    $
    156,694
    
    
    $
    (3,828
    )
    
    $
    404,728
    
    
    $
    (6,766
    )
   (In thousands) At December 31, 2004
    

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
    
    $
    81,077
    
    
    $
    (520
    )
    
    $
    
    
    
    $
    
    
    
    $
    81,077
    
    
    $
    (520
    )U.S. Government agency obligations
    
    
    116,846
    
    
    
    (1,152
    )
    
    
    21,557
    
    
    
    (442
    )
    
    
    138,403
    
    
    
    (1,594
    )Mortgage-backed securities
    
    
    7,619
    
    
    
    (66
    )
    
    
    
    
    
    
    
    
    
    
    7,619
    
    
    
    (66
    )Total debt securities
    
    
    205,542
    
    
    
    (1,738
    )
    
    
    21,557
    
    
    
    (442
    )
    
    
    227,099
    
    
    
    (2,180
    )Equity securities
    
    
    594
    
    
    
    (39
    )
    
    
    
    
    
    
    
    
    
    
    594
    
    
    
    (39
    )Total temporarily impaired securities
    
    $
    206,136
    
    
    $
    (1,777
    )
    
    $
    21,557
    
    
    $
    (442
    )
    
    $
    227,693
    
    
    $
    (2,219
    )
    44




---



##### 



3.
Investment
Securities (continued)
  (In
thousands) At December 31,
    

2005
    
    
    2004Amortized
    
    
    Market
    
    
    Amortized
    
    
    MarketBased on Scheduled Maturity
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    ValueInvestment securities available for saleU.S. Government agency obligations:Maturing within 1 year
    
    $
    19,999
    
    
    $
    19,775
    
    
    $
    4,000
    
    
    $
    3,969Maturing after 1 but within 2 years
    
    
    47,000
    
    
    
    46,122
    
    
    
    28,998
    
    
    
    28,682Maturing after 2 but within 3 years
    
    
    51,000
    
    
    
    49,758
    
    
    
    40,000
    
    
    
    39,697Maturing after 3 but within 4 years
    
    
    32,000
    
    
    
    31,299
    
    
    
    40,000
    
    
    
    39,666Maturing after 4 but within 5 years
    
    
    22,000
    
    
    
    21,688
    
    
    
    23,000
    
    
    
    22,909Maturing after 5 but within 10 years
    
    
    19,996
    
    
    
    19,665
    
    
    
    23,995
    
    
    
    23,918Maturing after 10 but within 15 years
    
    
    1,000
    
    
    
    969
    
    
    
    
    
    
    
    Total
    
    $
    192,995
    
    
    $
    189,276
    
    
    $
    159,993
    
    
    $
    158,841
 Amortized
    
    
    Market
    
    
    Amortized
    
    
    MarketBased on Next Call Date
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    ValueInvestment securities available for saleU.S. Government agency obligations:Callable within 1 year
    
    $
    182,995
    
    
    $
    179,365
    
    
    $
    151,993
    
    
    $
    150,857Callable after 1 but within 2 years
    
    
    7,000
    
    
    
    6,945
    
    
    
    8,000
    
    
    
    7,984Callable after 2 but within 3 years
    
    
    3,000
    
    
    
    2,966
    
    
    
    
    
    
    
    Total
    
    $
    192,995
    
    
    $
    189,276
    
    
    $
    159,993
    
    
    $
    158,841
 4.
Trading Securities
  (In
thousands) At December 31,
    
    2005
    
    
    2004Market
    
    
    MarketValue
    
    
    ValueU.S. Treasury obligations
    
    $
    7,896
    
    
    $
    57,878Marketable equity securities
    
    
    1,382
    
    
    
    1,131Investments in mutual funds
    
    
    4
    
    
    
    4Total trading securities
    
    $
    9,282
    
    
    $
    59,013
  (In
thousands)  Years ended
December 31,
    

2005
    
    
    2004
    
    
    2003Realized
    
    
    Realized
    
    
    RealizedGains
    
    
    Losses
    
    
    Gains
    
    
    Losses
    
    
    Gains
    
    
    LossesU.S. Treasury obligations
    
    $
    1
    
    
    $
    (119
    )
    
    $
    101
    
    
    $
    (40
    )
    
    $
    145
    
    
    $
    (262
    )Marketable equity securities
    
    
    99
    
    
    
    (3
    )
    
    
    72
    
    
    
    (19
    )
    
    
    88
    
    
    
    Total realized gains (losses)
    
    $
    100
    
    
    $
    (122
    )
    
    $
    173
    
    
    $
    (59
    )
    
    $
    233
    
    
    $
    (262
    )
  45




---



##### 



5.
Loans
    (In
thousands) At December 31,
    
    2005
    
    
    2004Mortgage loans:Residential:Conventional:Fixed rate
    
    $
    189,736
    
    
    $
    203,010Variable rate
    
    
    22,948
    
    
    
    21,532FHA and VA
    
    
    27
    
    
    
    45Commercial:Fixed rate
    
    
    191
    
    
    
    Variable rate
    
    
    2,144
    
    
    
    1,623Construction
    
    
    845
    
    
    
    84Total mortgage loans
    
    
    215,891
    
    
    
    226,294Premium on loans
    
    
    2
    
    
    
    5Deferred mortgage loan origination costs (fees), net
    
    
    11
    
    
    
    (102
    )Mortgage loans, net
    
    
    215,904
    
    
    
    226,197Other loans:Consumer:Installment
    
    
    245
    
    
    
    327Guaranteed education
    
    
    1,094
    
    
    
    1,616Other secured
    
    
    499
    
    
    
    504Home equity lines of credit
    
    
    7,722
    
    
    
    7,284Unsecured
    
    
    148
    
    
    
    161Total consumer loans
    
    
    9,708
    
    
    
    9,892Commercial
    
    
    118
    
    
    
    109Total other loans
    
    
    9,826
    
    
    
    10,001Total loans
    
    $
    225,730
    
    
    $
    236,198
  (In thousands)Balance at December 31, 2004
    
    $
    1,775Additions
    
    
    376Repayments
    
    
    (662
    )Balance at December 31, 2005
    
    $
    1,489
 46




---



##### 



6.
    
    Allowance for Loan LossesAn analysis of the activity in the allowance for loan losses is as follows:
 (In
thousands) Years
ended December 31,
    
    2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    1,307
    
    
    $
    1,554
    
    
    $
    2,271Provision (credit) for loan losses
    
    
    (53
    )
    
    
    (242
    )
    
    
    (502
    )Transfer to allowance for loan losses on
off-balance sheet credit exposures
    
    
    
    
    
    
    
    
    
    
    (226
    )Recoveries of loans previously charged-off
    
    
    
    
    
    
    
    
    
    
    15Total
    
    
    1,254
    
    
    
    1,312
    
    
    
    1,558Charge-offs:Mortgage loans
    
    
    
    
    
    
    
    
    
    
    Other loans
    
    
    (1
    )
    
    
    (5
    )
    
    
    (4
    )Balance at end of year
    
    $
    1,253
    
    
    $
    1,307
    
    
    $
    1,554
 The following table shows the allocation of the allowance for loan losses by category of loans at
December 31, 2005, 2004 and 2003.
 (In thousands) At December 31,
    

2005
    
    
    2004
    
    
    2003Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    Percentageof Loans
    
    
    
    
    
    
    of Loans
    
    
    
    
    
    
    of LoansAmount
    
    
    to Total
    
    
    Amount
    
    
    to Total
    
    
    Amount
    
    
    to TotalMortgage loans:Residential
    
    $
    770
    
    
    
    95
    %
    
    $
    767
    
    
    
    95
    %
    
    $
    934
    
    
    
    95
    %Commercial
    
    
    111
    
    
    
    1
    
    
    
    79
    
    
    
    1
    
    
    
    76
    
    
    
    1Consumer loans
    
    
    139
    
    
    
    4
    
    
    
    154
    
    
    
    4
    
    
    
    185
    
    
    
    4Commercial loans
    
    
    46
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    48
    
    
    
    Unallocated
    
    
    187
    
    
    
    
    
    
    
    261
    
    
    
    
    
    
    
    311
    
    
    
    Total
    
    $
    1,253
    
    
    
    100
    %
    
    $
    1,307
    
    
    
    100
    %
    
    $
    1,554
    
    
    
    100
    %
 An integral component of the Companys risk management process is to ensure the proper allocation
of the allowance for loan losses based upon an analysis of risk characteristics, demonstrated
losses and other factors. The unallocated component of the allowance for loan losses represents
managements view that there are probable losses that have been incurred within the portfolio but
have not yet been specifically identified. The unallocated portion of the allowance for loan
losses is based on managements assessment of many factors including the risk characteristics of
the loan portfolio, concentrations of credit, current and anticipated economic conditions that
may affect borrowers ability to pay, and trends in loan delinquencies and charge-offs. The
unallocated portion of the allowance for loan losses may change periodically after evaluating
factors impacting assumptions utilized in the calculation of the allocated portion of the
allowance for loan losses. 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.
 7.
    
    Non-performing AssetsThe following schedule summarizes non-performing assets at the dates shown:
 (In thousands) At December 31,
    
    2005
    
    
    2004
    
    
    2003Total nonaccrual loans
    
    $
    257
    
    
    $
    74
    
    
    $
    230Total non-performing assets
    
    $
    257
    
    
    $
    74
    
    
    $
    230Percent of non-performing loans to total loans
    
    
    0.11
    %
    
    
    0.03
    %
    
    
    0.09
    %Percent of non-performing assets to total assets
    
    
    0.03
    %
    
    
    0.01
    %
    
    
    0.02
    %
 47




---



##### 



7.
    
    Non-performing Assets (continued)The reduction in interest income associated with nonaccrual loans is as follows:
 (In thousands) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Interest income that would have been recorded under original terms
    
    $
    16
    
    
    $
    4
    
    
    $
    17Interest income actually recorded
    
    
    9
    
    
    
    1
    
    
    
    20Reduction (increase) in interest income
    
    $
    7
    
    
    $
    3
    
    
    $
    (3
    )
 During 2005, 2004 and 2003 the Company had no impaired loans.8.
    
    Financial Instruments with Off-Balance Sheet RiskThe Bank is party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments to extend credit
and involve, to varying degrees, elements of credit risk in excess of the amount recognized in
the consolidated balance sheet. The contract or notional amounts reflect the extent of
involvement the Bank has in particular classes of these instruments. The Banks exposure to
credit loss in the event of nonperformance by the other party to the financial instrument is
represented by the contractual or notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for on-balance sheet
instruments.
 Contract
or Notional Amount(In thousands) At December 31,
    
    2005
    
    
    2004Financial instruments whose contract amounts represent credit risk:Commitments to originate residential mortgage loans
    
    $
    1,257
    
    
    $
    3,811Unadvanced portions of construction loans
    
    
    530
    
    
    
    89Unused credit lines, including unused portions of equity lines of credit
    
    
    31,413
    
    
    
    33,909Other loan commitments
    
    
    2,451
    
    
    
    4,026
 Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee by the customer.
Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each
customers credit-worthiness on a case-by-case basis. The amount of collateral obtained, if any,
is based on managements credit evaluation of the borrower.9.
    
    Premises and EquipmentA summary of premises and equipment and their estimated useful lives used for depreciation
purposes is as follows:
 EstimatedUseful Life(In thousands) At December 31,
    
    2005
    
    
    2004
    
    
    (In years)Premises:Land
    
    $
    2,392
    
    
    $
    2,392
    
    
    
    Buildings
    
    
    6,204
    
    
    
    6,003
    
    
    
    25-45Building and leasehold improvements
    
    
    2,723
    
    
    
    2,527
    
    
    
    2-30Equipment
    
    
    5,309
    
    
    
    5,139
    
    
    
    1-1516,628
    
    
    
    16,061Less: accumulated depreciation and amortization
    
    
    10,103
    
    
    
    9,597Total premises and equipment, net
    
    $
    6,525
    
    
    $
    6,464
 The Bank is obligated under a number of noncancelable operating leases for various banking offices.
These operating leases expire at various dates through 2014 with options for renewal. Rent expense
for the years ended December 31, 2005, 2004 and 2003 amounted to $298 thousand, $294 thousand, and
$274 thousand, respectively.
 48




---



##### 



9.
    
    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, 2005, are as follows:
 (In thousands) Years ending December 31,
    
    Payments2006
    
    $
    3032007
    
    
    2222008
    
    
    2222009
    
    
    1452010
    
    
    119Later years
    
    
    220Total
    
    $
    1,231
 10.
    
    DepositsDeposits are summarized as follows:
 (In
thousands) At December 31,
    

2005
    
    2004Amount
    
    
    Rate
    
    
    Amount
    
    
    RateDemand and NOW:NOW accounts
    
    $
    54,924
    
    
    
    0.37
    %
    
    $
    58,991
    
    
    
    0.33
    %Demand accounts
    
    
    27,326
    
    
    
    
    
    
    
    28,662
    
    
    
    Total demand and NOW
    
    
    82,250
    
    
    
    0.25
    
    
    
    87,653
    
    
    
    0.22Savings:Savings accounts
    
    
    430,771
    
    
    
    1.75
    
    
    
    549,657
    
    
    
    1.52Money market accounts
    
    
    10,770
    
    
    
    1.73
    
    
    
    11,656
    
    
    
    0.97Total savings
    
    
    441,541
    
    
    
    1.75
    
    
    
    561,313
    
    
    
    1.51Time certificates of deposit:Fixed rate certificates
    
    
    197,743
    
    
    
    3.19
    
    
    
    145,249
    
    
    
    2.29Variable rate certificates
    
    
    63,194
    
    
    
    4.80
    
    
    
    55,250
    
    
    
    3.06Total time certificates of deposit
    
    
    260,937
    
    
    
    3.58
    
    
    
    200,499
    
    
    
    2.51Total deposits
    
    $
    784,728
    
    
    
    2.20
    %
    
    $
    849,465
    
    
    
    1.61
    %
  (In
thousands) At December 31,
    

2005AverageAmount
    
    
    Interest RateDue within 3 months
    
    $
    47,598
    
    
    
    3.04
    %Due within 36 months
    
    
    54,958
    
    
    
    3.28Due within 612 months
    
    
    63,118
    
    
    
    3.57Due within 12 years
    
    
    66,429
    
    
    
    3.86Due within 23 years
    
    
    12,114
    
    
    
    4.04Due within 35 years
    
    
    16,356
    
    
    
    4.67Thereafter
    
    
    364
    
    
    
    3.86Total
    
    $
    260,937
    
    
    
    3.58
    %
 49




---



##### 



10.
    
    Deposits (continued)At December 31, 2005 and 2004, the Bank had individual time certificates of deposit of
$100 thousand or more maturing as follows:
 (In thousands) At December 31,
    
    2005
    
    
    2004Due within 3 months
    
    $
    17,824
    
    
    $
    8,662Due within 36 months
    
    
    21,777
    
    
    
    7,380Due within 612 months
    
    
    22,174
    
    
    
    10,010Due within 12 years
    
    
    21,363
    
    
    
    17,219Due within 23 years
    
    
    3,381
    
    
    
    9,538Due within 35 years
    
    
    7,736
    
    
    
    3,589Thereafter
    
    
    200
    
    
    
    302Total
    
    $
    94,455
    
    
    $
    56,700
 11.
    
    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 ReceivableThe carrying amounts for these financial instruments approximate fair value because of
the short-term nature of these financial instruments.Interest-Bearing
Deposits in BanksThe carrying amounts of the interest-bearing deposits in banks reported in the balance
sheet at December 31, 2005 and 2004 approximate fair value.SecuritiesThe fair value of investment securities is based principally on quoted market prices and
dealer quotes.
   (In
thousands) At December 31,
    

2005
    
    2004Carrying
    
    
    Calculated
    
    
    Carrying
    
    
    CalculatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueSecurities available for sale
    
    $
    453,472
    
    
    $
    453,472
    
    
    $
    443,753
    
    
    $
    443,753Securities held to maturity
    
    
    6,137
    
    
    
    6,022
    
    
    
    4,877
    
    
    
    4,883Trading securities
    
    
    9,282
    
    
    
    9,282
    
    
    
    59,013
    
    
    
    59,013Total securities
    
    $
    468,891
    
    
    $
    468,776
    
    
    $
    507,643
    
    
    $
    507,649
 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.
  50




---



##### 



11.
    
    Fair Value of
Financial Instruments (continued)The following table presents information for loans:
 (In
thousands) At December 31,
    

2005
    
    2004Carrying
    
    
    Calculated
    
    
    Carrying
    
    
    CalculatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueReal estate:Residential:Variable
    
    $
    23,113
    
    
    $
    22,202
    
    
    $
    21,529
    
    
    $
    21,059Fixed
    
    
    190,471
    
    
    
    186,377
    
    
    
    203,054
    
    
    
    205,432Commercial:Fixed
    
    
    192
    
    
    
    175
    
    
    
    
    
    
    
    Variable
    
    
    2,128
    
    
    
    2,057
    
    
    
    1,614
    
    
    
    1,593Consumer
    
    
    9,708
    
    
    
    9,709
    
    
    
    9,892
    
    
    
    9,871Commercial
    
    
    118
    
    
    
    94
    
    
    
    109
    
    
    
    91Total loans
    
    
    225,730
    
    
    
    220,614
    
    
    
    236,198
    
    
    
    238,046Allowance for loan losses
    
    
    (1,253
    )
    
    
    
    
    
    
    (1,307
    )
    
    
    Net loans
    
    $
    224,477
    
    
    $
    220,614
    
    
    $
    234,891
    
    
    $
    238,046
 DepositsThe fair value of deposits with no stated maturity, such as demand deposits, NOW accounts,
savings accounts, and money market accounts for purposes of this disclosure, is equal to the amount
payable on demand as of December 31, 2005 and 2004. The fair value of certificates of deposit is
based on the discounted value of contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining maturities.
 (In
thousands) At December 31,
    

2005
    
    
    2004Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueDemand accounts
    
    $
    27,326
    
    
    $
    27,326
    
    
    $
    28,662
    
    
    $
    28,662NOW accounts
    
    
    54,924
    
    
    
    54,924
    
    
    
    58,991
    
    
    
    58,991Savings accounts
    
    
    430,771
    
    
    
    430,771
    
    
    
    549,657
    
    
    
    549,657Money market accounts
    
    
    10,770
    
    
    
    10,770
    
    
    
    11,656
    
    
    
    11,656Time certificates of deposit
    
    
    260,937
    
    
    
    259,755
    
    
    
    200,499
    
    
    
    200,274Total deposits
    
    
    784,728
    
    
    
    783,546
    
    
    
    849,465
    
    
    
    849,240Escrow deposits of borrowers
    
    
    1,059
    
    
    
    1,059
    
    
    
    1,074
    
    
    
    1,074Total
    
    $
    785,787
    
    
    $
    784,605
    
    
    $
    850,539
    
    
    $
    850,314
 The fair value estimates and the carrying amounts above do not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing
funds in the market.Commitments to Extend
CreditThe fair value of commitments to extend credit is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates and the committed rates.
  51




---



##### 



11.
    
    Fair Value of
Financial Instruments (continued)LimitationsFair value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the Banks entire
holdings of a particular financial instrument. Because no active market exists for a portion of
the Banks financial instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.Fair value estimates are determined without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered financial
instruments. For example, the Bank has a trust department that contributes fee income annually.
The trust department is not considered a financial instrument, and its value has not been
incorporated into the fair value estimates. Other significant assets and liabilities that are
not considered financial assets or liabilities include deferred income tax asset, premises and
equipment and goodwill. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates.12.
    
    Income TaxesIncome tax expense was allocated as follows:
 (In thousands) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Current income tax expense:Federal
    
    $
    3,430
    
    
    $
    3,606
    
    
    $
    3,702State
    
    
    113
    
    
    
    264
    
    
    
    291Total current tax expense
    
    
    3,543
    
    
    
    3,870
    
    
    
    3,993Deferred income tax expenseFederal
    
    
    186
    
    
    
    23
    
    
    
    175State
    
    
    64
    
    
    
    5
    
    
    
    61Total deferred tax expense
    
    
    250
    
    
    
    28
    
    
    
    236Total income tax expense
    
    $
    3,793
    
    
    $
    3,898
    
    
    $
    4,229
 Income tax expense attributable to income from operations for the years ended December 31, differed
from the amounts computed by applying the federal income tax rate of 35 percent as a result of the
following:
 (In thousands) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Computed expected income tax expense at statutory rate
    
    $
    3,891
    
    
    $
    3,947
    
    
    $
    4,232Increase (reduction) in income taxes resulting from:Reduction in federal income tax rate
    
    
    (91
    )
    
    
    (98
    )
    
    
    (97
    )State and local income taxes, net of federal benefit
    
    
    115
    
    
    
    175
    
    
    
    229Dividends received deduction
    
    
    (42
    )
    
    
    (40
    )
    
    
    (54
    )Dividends paid to ESOP deduction
    
    
    (72
    )
    
    
    (73
    )
    
    
    (67
    )Other
    
    
    (8
    )
    
    
    (13
    )
    
    
    (14
    )Income tax expense
    
    $
    3,793
    
    
    $
    3,898
    
    
    $
    4,229Effective income tax rate
    
    
    34.12
    %
    
    
    34.56
    %
    
    
    34.97
    %
 52




---



##### 



12.
    
    Income Taxes
(continued)At December 31, 2005 and 2004, the Bank had gross deferred tax assets and gross deferred
tax liabilities as follows:
 (In thousands) Years ended December 31,
    
    2005
    
    
    2004Deferred tax assets:Unrealized losses on securities available for sale
    
    $
    1,746
    
    
    $
    Loan losses
    
    
    740
    
    
    
    792Deferred compensation and pension cost
    
    
    672
    
    
    
    745Depreciation
    
    
    147
    
    
    
    37Purchase accounting
    
    
    95
    
    
    
    179Deferred loan fees, net
    
    
    4
    
    
    
    11Other
    
    
    11
    
    
    
    95Gross deferred tax asset
    
    
    3,415
    
    
    
    1,859Deferred tax liabilities:Unrealized gains on securities available for sale
    
    
    
    
    
    
    1,156Other unrealized securities gains
    
    
    167
    
    
    
    106Other
    
    
    8
    
    
    
    9Gross deferred tax liability
    
    
    175
    
    
    
    1,271Net deferred tax asset
    
    $
    3,240
    
    
    $
    588
 Based on the Companys historical and current pretax earnings, management believes it is
more likely than not that the Company will realize the gross deferred tax asset existing at
December 31, 2005. The primary sources of recovery of the gross federal deferred tax asset are
federal income taxes paid in 2005, 2004 and 2003 that are available for carryback and the
expectation that the existing net deductible temporary differences will reverse during periods
in which the Company generates net taxable income. Since there is no carryback provision for
state income tax purposes, management believes the existing net deductible temporary differences
which give rise to the gross deferred state income tax asset will reverse during periods in
which the Company generates net taxable income. There can be no assurance, however, that the
Company will generate any earnings or any specific level of continuing earnings.As a result of the Tax Reform Act of 1996, the special tax bad debt provisions were amended
to eliminate the reserve method. However, the tax effect of the pre-1988 bad debt reserve amount
of approximately $7.3 million remains subject to recapture in the event that the Bank pays
dividends in excess of its reserves and profits.13.
    
    Earnings per ShareThe following is a calculation of earnings per share for the years indicated:
 Years Ended December 31,
    
    2005
    
    
    2004
    
    
    2003(In thousands except share data)
    
    Basic
    
    
    Diluted
    
    
    Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income
    
    $
    7,323
    
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    7,380
    
    
    $
    7,863
    
    
    $
    7,863Average shares outstanding
    
    
    4,365,932
    
    
    
    4,365,932
    
    
    
    4,408,293
    
    
    
    4,408,293
    
    
    
    4,439,394
    
    
    
    4,439,394Dilutive stock options
    
    
    
    
    
    
    56,597
    
    
    
    
    
    
    
    93,244
    
    
    
    
    
    
    
    105,200Weighted average shares outstanding
    
    
    4,365,932
    
    
    
    4,422,529
    
    
    
    4,408,293
    
    
    
    4,501,537
    
    
    
    4,439,394
    
    
    
    4,544,594Earnings per share (in dollars)
    
    $
    1.68
    
    
    $
    1.66
    
    
    $
    1.67
    
    
    $
    1.64
    
    
    $
    1.77
    
    
    $
    1.73
 53




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##### 



14.
    
    Stockholders Equity
   Massbank
  (In thousands)
    
    
    
    
    
    
    
    
    
    For Capital
    
    To Be WellAt
December 31, 2005
    
    Actual
    
    Adequacy Purposes
    
    Capitalized(1)Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTier I Capital (to Average Assets):Massbank Corp. (consolidated)
    
    $
    107,251
    
    
    
    11.94
    %
    
    $
    26,942
    
    
    
    3.00
    %
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    103,122
    
    
    
    11.48
    
    
    
    26,940
    
    
    
    3.00
    
    
    $
    44,900
    
    
    
    5.00
    %Tier I Capital (to Risk-Weighted Assets):Massbank Corp. (consolidated)
    
    
    107,251
    
    
    
    39.03
    
    
    
    10,990
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    103,122
    
    
    
    37.54
    
    
    
    10,989
    
    
    
    4.00
    
    
    
    16,372
    
    
    
    6.00Total Capital (to Risk-Weighted Assets):Massbank Corp. (consolidated)
    
    
    109,290
    
    
    
    39.78
    
    
    
    21,981
    
    
    
    8.00
    
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    105,161
    
    
    
    38.28
    
    
    
    21,978
    
    
    
    8.00
    
    
    
    27,287
    
    
    
    10.00
 (1)This column presents the minimum amounts and ratios that a financial institution must have to be categorized as well capitalized.
 (In thousands)
    
    
    
    
    
    
    
    
    
    For Capital
    
    To Be WellAt December 31, 2004
    
    Actual
    
    Adequacy Purposes
    
    Capitalized(1)Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTier I Capital (to Average Assets):Massbank Corp. (consolidated)
    
    $
    107,168
    
    
    
    11.15
    %
    
    $
    28,829
    
    
    
    3.00
    %
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    102,501
    
    
    
    10.67
    
    
    
    28,828
    
    
    
    3.00
    
    
    $
    48,047
    
    
    
    5.00
    %Tier I Capital (to Risk-Weighted Assets):Massbank Corp. (consolidated)
    
    
    107,168
    
    
    
    39.16
    
    
    
    10,947
    
    
    
    4.00
    
    
    
    N/A
    
    
    
    Massbank (the Bank)
    
    
    102,501
    
    
    
    37.48
    
    
    
    10,938
    
    
    
    4.00
    
    
    
    16,408
    
    
    
    6.00Total Capital (to Risk-Weighted Assets):Massbank Corp. (consolidated)
    
    
    109,464
    
    
    
    40.00
    
    
    
    21,893
    
    
    
    8.00
    
    
    
    N/A
    
    
    
    Massbank(the Bank)
    
    
    104,797
    
    
    
    38.32
    
    
    
    21,877
    
    
    
    8.00
    
    
    
    27,346
    
    
    
    10.00
 (1)This column presents the minimum amounts and ratios that a financial institution must have to be categorized as well capitalized.
 54




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##### 



15. Employee Benefits
 Pension plan
 The Bank sponsors a noncontributory defined benefit pension plan that covers all
employees who meet specified age and length of service requirements, which is administered by
the Savings Banks Employees Retirement Association (SBERA). The plan provides for benefits to
be paid to eligible employees at retirement based primarily upon their years of service with the
Bank and compensation levels near retirement. Contributions to the plan reflect benefits
attributed to employees service to date, as well as 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,
    
    2005
    
    
    2004
    
    
    2003Actuarial present value of vested benefits
    
    $
    7,753
    
    
    $
    7,260
    
    
    $
    6,548Total accumulated benefit obligation
    
    
    7,842
    
    
    
    7,280
    
    
    
    6,617Change in benefit obligation:Projected benefit obligation at beginning of year
    
    $
    9,488
    
    
    $
    8,389
    
    
    $
    7,645Service cost
    
    
    459
    
    
    
    430
    
    
    
    386Interest cost
    
    
    546
    
    
    
    524
    
    
    
    516Actuarial loss (gain)
    
    
    (52
    )
    
    
    456
    
    
    
    91Benefits paid
    
    
    (447
    )
    
    
    (311
    )
    
    
    (249
    )Projected benefit obligation at end of year
    
    $
    9,994
    
    
    $
    9,488
    
    
    $
    8,389Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    7,834
    
    
    $
    7,038
    
    
    $
    5,963Actual return on plan assets
    
    
    691
    
    
    
    740
    
    
    
    902Employer contribution
    
    
    364
    
    
    
    367
    
    
    
    420Benefits paid
    
    
    (447
    )
    
    
    (311
    )
    
    
    (249
    )Other
    
    
    1
    
    
    
    
    
    
    
    2Fair value of plan assets at end of year
    
    $
    8,443
    
    
    $
    7,834
    
    
    $
    7,038Deficiency of plan assets over projected benefit obligation
    
    $
    (1,551
    )
    
    $
    (1,654
    )
    
    $
    (1,351
    )Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods.Unrecognized amounts to be amortized and the amounts included in the consolidated balance sheets are shown below:Unrecognized net actuarial loss
    
    $
    (528
    )
    
    $
    (712
    )
    
    $
    (459
    )Transition asset
    
    
    42
    
    
    
    64
    
    
    
    84Past service cost
    
    
    (106
    )
    
    
    (114
    )
    
    
    (121
    )Accrued benefit cost
    
    
    (959
    )
    
    
    (892
    )
    
    
    (855
    )Deficiency of plan assets over projected benefit obligation
    
    $
    (1,551
    )
    
    $
    (1,654
    )
    
    $
    (1,351
    )Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows:Discount rate
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    6.25
    %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
    %
    
    
    6.25
    %
    
    
    6.75
    %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
    
    $
    459
    
    
    $
    430
    
    
    $
    385Interest cost
    
    
    546
    
    
    
    524
    
    
    
    516Expected return on plan assets
    
    
    (607
    )
    
    
    (545
    )
    
    
    (462
    )Transition obligation
    
    
    (21
    )
    
    
    (21
    )
    
    
    (21
    )Past service cost
    
    
    7
    
    
    
    7
    
    
    
    7Recognized net actuarial (gain) loss
    
    
    48
    
    
    
    8
    
    
    
    107Net periodic pension expense
    
    $
    432
    
    
    $
    403
    
    
    $
    532
 55




---



##### 



15. Employee Benefits (continued)
 The approximate composition of pension plan assets as of the end of the plan years ended
October 31, 2005 and 2004 is as follows:
 Years ended October 31,
    
    2005
    
    2004Asset Category:Fixed Income Securities (including money market funds)
    
    
    35.1
    %
    
    
    34.2
    %Domestic Equity Securities
    
    
    50.5
    
    
    
    51.5International Equity Securities
    
    
    14.4
    
    
    
    14.3100.0
    %
    
    
    100.0
    %
 The expected long-term rate of return on plan assets is based on prevailing yields on high quality
fixed income investments increased by a premium of 3%  5% for equity investments.
  Massbank
 The Bank expects to make benefit payments for the plan years ending October 31, as follows:
 (In thousands)Years ending October 31,
    
    Payments
    
    
    
    
    
    
    Payments2006
    
    $
    639
    
    
    
    2012
    
    
    
    1,0872007
    
    
    721
    
    
    
    2013
    
    
    
    1,2092008
    
    
    432
    
    
    
    2014
    
    
    
    1,9892009
    
    
    1,671
    
    
    
    2015
    
    
    
    1,0662010
    
    
    526
    
    
    
    2016
    
    
    
    7732011
    
    
    1,419
 Profit Sharing and Incentive Compensation Bonus Plans
 The Banks Profit Sharing and Incentive Compensation Bonus Plans provide for payments to
employees under certain circumstances based upon a year-end measurement of the Companys net income
and attainment of individual goals and objectives by certain key officers. There were no profit
sharing or incentive compensation bonus distributions in 2005 and 2004 because the criteria for
making such distributions were not met.
 The Board of Directors approved a holiday distribution to all officers, excluding the CEO, and
non-officer employees in 2005 and 2004 in the amount of $76 thousand and $47 thousand,
respectively.
 Employee Stock Ownership Plan
 The Bank has an Employees Stock Ownership Plan (ESOP) for the benefit of each employee
who has completed at least 1,000 hours of service with the Company in the previous twelve months.
     56




---



##### 



15.
    
    Employee Benefits (continued)Employee AgreementsThe Bank has entered into employment agreements with certain executive officers which
provide that the officer will receive a minimum amount of annual compensation from the Bank for
a specified period. The agreements also provide for the continued payment of compensation to
the officer for a specified period after termination under certain circumstances, including if
the officers termination follows a change of control, generally defined to mean a person or
group attaining ownership of 25% or more of the shares of the Company.Executive Supplemental Retirement AgreementsThe Bank maintains executive supplemental retirement agreements for certain executive
officers. These agreements provide retirement benefits designed to supplement benefits
available through the Banks retirement plan for employees. The Company made contributions of
$55 thousand, $52 thousand and $50 thousand to a rabbi trust for the benefits payable under the
agreements in 2005, 2004 and 2003.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, 2005, the trust held 15,644 shares
of Massbank Corp. 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.
   Years
ended December 31,
    

2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedShares
    
    
    Average
    
    
    Shares
    
    
    Average
    
    
    Shares
    
    
    AverageUnder
    
    
    Exercise
    
    
    Under
    
    
    Exercise
    
    
    Under
    
    
    ExerciseFixed Options
    
    Option
    
    
    Price
    
    
    Option
    
    
    Price
    
    
    Option
    
    
    PriceOutstanding at beginning of year
    
    
    300,087
    
    
    $
    24.35
    
    
    
    318,334
    
    
    $
    20.94
    
    
    
    376,122
    
    
    $
    19.27Granted
    
    
    32,850
    
    
    
    37.15
    
    
    
    30,250
    
    
    
    42.76
    
    
    
    22,600
    
    
    
    28.56Exercised
    
    
    (75,250
    )
    
    
    19.76
    
    
    
    (48,097
    )
    
    
    13.22
    
    
    
    (78,138
    )
    
    
    14.90Forfeited
    
    
    (6,050
    )
    
    
    42.42
    
    
    
    (400
    )
    
    
    42.90
    
    
    
    (2,250
    )
    
    
    29.50Outstanding at end of year
    
    
    251,637
    
    
    $
    26.95
    
    
    
    300,087
    
    
    $
    24.35
    
    
    
    318,334
    
    
    $
    20.94Options exercisable at year-end
    
    
    251,637
    
    
    
    
    
    
    
    300,087
    
    
    
    
    
    
    
    318,334
  At December 31, 2005
    

Options Outstanding
    
    

Options ExercisableWeighted Avg.
    
    
    Weighted Avg.
    
    
    
    
    
    
    Weighted Avg.Range of
    
    Number
    
    
    Remaining
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$15.50 to $16.38
    
    
    17,487
    
    
    0.1 years
    
    $
    15.58
    
    
    
    17,487
    
    
    $
    15.5819.00 to $20.67
    
    
    79,625
    
    
    3.1 years
    
    
    19.80
    
    
    
    79,625
    
    
    
    19.8025.00 to $27.63
    
    
    51,375
    
    
    4.2 years
    
    
    26.08
    
    
    
    51,375
    
    
    
    26.0828.44 to $29.60
    
    
    46,600
    
    
    3.8 years
    
    
    29.13
    
    
    
    46,600
    
    
    
    29.1336.70 to $42.90
    
    
    56,550
    
    
    8.1 years
    
    
    39.54
    
    
    
    56,550
    
    
    
    39.54$15.50 to $42.90
    
    
    251,637
    
    
    4.3 years
    
    $
    26.95
    
    
    
    251,637
    
    
    $
    26.95
 57




---



##### 



16.
    
    Shareholder Rights PlanThe 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 Massbank Corp. 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 Massbank Corp. 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 Massbank Corp. 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.17.
    
    Parent Company Financial StatementsThe following are the condensed financial statements for Massbank Corp. (the
Parent Company) only:
 Balance Sheets(In
thousands except share data) At December 31,
    
    2005
    
    
    2004Assets:Cash
    
    $
    12
    
    
    $
    18Interest-bearing deposits in banks
    
    
    3,894
    
    
    
    4,229Total cash and cash equivalents
    
    
    3,906
    
    
    
    4,247Investment in subsidiaries
    
    
    101,135
    
    
    
    105,348Due from subsidiaries
    
    
    
    
    
    
    196Income tax receivable, net
    
    
    210
    
    
    
    187Deferred income tax asset, net
    
    
    25
    
    
    
    21Other assets
    
    
    
    
    
    
    29Total assets
    
    $
    105,276
    
    
    $
    110,028Liabilities:Other liabilities
    
    $
    12
    
    
    $
    13Total liabilities
    
    
    12
    
    
    
    13Stockholders Equity(Notes 12, 14, 15 and 16):Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issuedCommon stock, par value $1.00 per share; 10,000,000 shares
authorized, 7,811,680 and 7,736,430 shares issued, respectively
    
    
    7,812
    
    
    
    7,736Additional paid-in capital
    
    
    57,067
    
    
    
    55,313Retained earnings
    
    
    104,743
    
    
    
    102,003169,622
    
    
    
    165,052Treasury stock at cost, 3,483,163 and 3,354,703 shares, respectively
    
    
    (61,281
    )
    
    
    (56,794
    )Accumulated other comprehensive income (loss)
    
    
    (3,077
    )
    
    
    1,757Shares held in rabbi trust at cost
2,479 and 2,254 shares, respectively
    
    
    (67
    )
    
    
    (59
    )Deferred compensation obligation
    
    
    67
    
    
    
    59Total stockholders equity
    
    
    105,264
    
    
    
    110,015Total liabilities and stockholders equity
    
    $
    105,276
    
    
    $
    110,028
 58




---



##### 



17. Parent
Company Financial Statements (continued)
 Statements of Income(In
thousands) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Income:Dividends received from subsidiaries
    
    $
    7,000
    
    
    $
    7,100
    
    
    $
    9,300Interest and dividend income
    
    
    31
    
    
    
    18
    
    
    
    15Total interest and dividend income
    
    
    7,031
    
    
    
    7,118
    
    
    
    9,315Non-interest expense
    
    
    170
    
    
    
    179
    
    
    
    166Income before income taxes
    
    
    6,861
    
    
    
    6,939
    
    
    
    9,149Income tax benefit
    
    
    99
    
    
    
    108
    
    
    
    93Income before equity in undistributed earnings (loss) of
subsidiaries
    
    
    6,960
    
    
    
    7,047
    
    
    
    9,242Equity in undistributed earnings (loss) of subsidiaries
    
    
    363
    
    
    
    333
    
    
    
    (1,379
    )Net income
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    7,863
  Statements of Cash Flows(In
thousands) Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    7,863Adjustments to reconcile net income to net cash provided by
operating activities:Equity in undistributed (earnings) loss of subsidiaries
    
    
    (363
    )
    
    
    (333
    )
    
    
    1,379Decrease (increase) in current income tax receivable, net
    
    
    (23
    )
    
    
    22
    
    
    
    151Decrease (increase) in deferred income tax asset, net
    
    
    (4
    )
    
    
    7
    
    
    
    (6
    )Decrease (increase) in other assets
    
    
    29
    
    
    
    (28
    )
    
    
    Decrease in other liabilities
    
    
    (1
    )
    
    
    (4
    )
    
    
    (1,095
    )Decrease (increase) in amount due from subsidiaries
    
    
    196
    
    
    
    (196
    )
    
    
    Decrease in amount due to subsidiaries
    
    
    
    
    
    
    
    
    
    
    (42
    )Net cash provided by operating activities
    
    
    7,157
    
    
    
    6,848
    
    
    
    8,250Cash flow from financing activities:Payments to acquire treasury stock
    
    
    (4,487
    )
    
    
    (2,617
    )
    
    
    (8,097
    )Purchase of company stock for deferred compensation plan,
net of distributions
    
    
    8
    
    
    
    13
    
    
    
    (13
    )(Decrease) increase in deferred compensation obligation
    
    
    (8
    )
    
    
    (13
    )
    
    
    13Options exercised, including tax benefits
    
    
    1,572
    
    
    
    684
    
    
    
    1,253Dividends paid on common stock
    
    
    (4,583
    )
    
    
    (4,415
    )
    
    
    (4,068
    )Net cash used in financing activities
    
    
    (7,498
    )
    
    
    (6,348
    )
    
    
    (10,912
    )Net increase (decrease) in cash and cash equivalents
    
    
    (341
    )
    
    
    500
    
    
    
    (2,662
    )Cash and cash equivalents at beginning of year
    
    
    4,247
    
    
    
    3,747
    
    
    
    6,409Cash and cash equivalents at end of year
    
    $
    3,906
    
    
    $
    4,247
    
    
    $
    3,747
   59




---



##### 



18.
    
    Ten-Year Statistical Summary (Unaudited)
 (In thousands except per share data)years
ended december 31,
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000
    
    
    1999
    
    
    1998
    
    
    1997
    
    
    1996Net income
    
    $
    7,323
    
    
    $
    7,380
    
    
    $
    7,863
    
    
    $
    9,814
    
    
    $
    10,759
    
    
    $
    11,111
    
    
    $
    11,311
    
    
    $
    10,914
    
    
    $
    10,167
    
    
    $
    9,427Diluted earnings per share
    
    
    1.66
    
    
    
    1.64
    
    
    
    1.73
    
    
    
    2.04
    
    
    
    2.24
    
    
    
    2.25
    
    
    
    2.17
    
    
    
    1.98
    
    
    
    1.85
    
    
    
    1.72Cash dividends paid per share
    
    
    1.05
    
    
    
    1.00
    
    
    
    0.92
    
    
    
    0.88
    
    
    
    0.84
    
    
    
    0.79
    
    
    
    0.74
    
    
    
    0.68
    
    
    
    0.59
    
    
    
    0.46Book value per share, at year-end
    
    
    24.32
    
    
    
    25.11
    
    
    
    25.17
    
    
    
    25.45
    
    
    
    24.34
    
    
    
    22.83
    
    
    
    20.43
    
    
    
    21.05
    
    
    
    19.38
    
    
    
    17.17Return on average assets
    
    
    0.79
    %
    
    
    0.75
    %
    
    
    0.78
    %
    
    
    0.99
    %
    
    
    1.13
    %
    
    
    1.20
    %
    
    
    1.20
    %
    
    
    1.17
    %
    
    
    1.12
    %
    
    
    1.08
    %Return on average equity
    
    
    6.84
    %
    
    
    6.71
    %
    
    
    7.08
    %
    
    
    8.39
    %
    
    
    9.53
    %
    
    
    10.93
    %
    
    
    10.66
    %
    
    
    10.05
    %
    
    
    10.51
    %
    
    
    10.65
    %
 19.
Quarterly Data (Unaudited)
 years
ended december 31,
    
    2005
    
    
    2004(In thousands except
    
    4th
    
    
    3rd
    
    
    2nd
    
    
    1st
    
    
    4th
    
    
    3rd
    
    
    2nd
    
    
    1stper share data )
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterInterest and dividend income
    
    $
    89,621
    
    
    $
    89,346
    
    
    $
    89,069
    
    
    $
    88,765
    
    
    $
    88,679
    
    
    $
    88,436
    
    
    $
    88,121
    
    
    $
    88,345Interest expense
    
    
    4,128
    
    
    
    3,878
    
    
    
    3,674
    
    
    
    3,461
    
    
    
    3,304
    
    
    
    3,225
    
    
    
    3,096
    
    
    
    3,104Net interest income
    
    
    5,493
    
    
    
    5,468
    
    
    
    5,395
    
    
    
    5,304
    
    
    
    5,375
    
    
    
    5,211
    
    
    
    5,025
    
    
    
    5,241Provision (credit) for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    (55
    )
    
    
    (74
    )
    
    
    (51
    )
    
    
    (62
    )Net interest income after
provision (credit) for loan losses
    
    
    5,493
    
    
    
    5,468
    
    
    
    5,395
    
    
    
    5,357
    
    
    
    5,430
    
    
    
    5,285
    
    
    
    5,076
    
    
    
    5,303Gains (losses) on securities, net
    
    
    253
    
    
    
    238
    
    
    
    244
    
    
    
    (56
    )
    
    
    287
    
    
    
    182
    
    
    
    186
    
    
    
    574Other non-interest income
    
    
    275
    
    
    
    316
    
    
    
    341
    
    
    
    253
    
    
    
    361
    
    
    
    267
    
    
    
    342
    
    
    
    287Non-interest expense
    
    
    3,082
    
    
    
    3,176
    
    
    
    3,172
    
    
    
    3,031
    
    
    
    3,200
    
    
    
    2,978
    
    
    
    2,964
    
    
    
    3,160Income before income taxes
    
    
    2,939
    
    
    
    2,846
    
    
    
    2,808
    
    
    
    2,523
    
    
    
    2,878
    
    
    
    2,756
    
    
    
    2,640
    
    
    
    3,004Income tax expense
    
    
    1,051
    
    
    
    962
    
    
    
    951
    
    
    
    829
    
    
    
    992
    
    
    
    945
    
    
    
    906
    
    
    
    1,055Net income
    
    $
    81,888
    
    
    $
    81,884
    
    
    $
    81,857
    
    
    $
    81,694
    
    
    $
    81,886
    
    
    $
    81,811
    
    
    $
    81,734
    
    
    $
    81,949Earnings per share (in dollars):(1)Basic
    
    $
    0.44
    
    
    $
    0.43
    
    
    $
    0.42
    
    
    $
    0.39
    
    
    $
    0.43
    
    
    $
    0.41
    
    
    $
    0.39
    
    
    $
    0.44Diluted
    
    
    0.43
    
    
    
    0.43
    
    
    
    0.42
    
    
    
    0.38
    
    
    
    0.42
    
    
    
    0.40
    
    
    
    0.39
    
    
    
    0.43Weighted
average common shares outstanding:(1)Basic
    
    
    4,332
    
    
    
    4,343
    
    
    
    4,390
    
    
    
    4,400
    
    
    
    4,392
    
    
    
    4,398
    
    
    
    4,416
    
    
    
    4,427Diluted
    
    
    4,371
    
    
    
    4,398
    
    
    
    4,452
    
    
    
    4,470
    
    
    
    4,477
    
    
    
    4,483
    
    
    
    4,502
    
    
    
    4,545
 (1)
    
    Computation of earnings per share is further described in Note 1. 60




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##### 



Massbank Corp. and Subsidiaries Stockholder Data  Years ended December 31, 2005 and 2004
 Massbank
  Price per Share
    
    CashDividendsHigh
    
    Low
    
    DeclaredYear ended December 31,
    
    2005Fourth Quarter
    
    $
    33.48
    
    
    $
    28.567
    
    
    $
    0.27Third Quarter
    
    
    35.12
    
    
    
    33.13
    
    
    
    0.26Second Quarter
    
    
    37.84
    
    
    
    34.25
    
    
    
    0.26First Quarter
    
    
    38.52
    
    
    
    36.94
    
    
    
    0.26Year ended December 31,
    
    2004Fourth Quarter
    
    $
    38.41
    
    
    $
    36.50
    
    
    $
    0.25Third Quarter
    
    
    37.39
    
    
    
    34.25
    
    
    
    0.25Second Quarter
    
    
    41.99
    
    
    
    32.05
    
    
    
    0.25First Quarter
    
    
    43.48
    
    
    
    38.79
    
    
    
    0.25
 61




---



##### 



Massbank Branch Offices
 Massbank of Reading*        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
 
 
 
  62




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##### 



Corporate Information
 Massbank        Savings and Mortgage
24-Hour-Rate Lines      Notice of Shareholders Meeting
 Massbank
 Trademark   Massbank
 Form 10-K
 Massbank
 Dividend Reinvestment and
Stock Purchase Plan       Massbank
 Transfer Agent
 
 Independent Registered
Public Accounting Firm
 
 Legal Counsel
 
 63




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##### 



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
 Retired, Bedell Brothers Insurance
    Agency, Inc.
 Chairman, President and
    Chief Executive Officer,
    Massbank Corp.
 Treasurer,
    Massachusetts Institute of Technology
 President
    Camilli Economics, LLC
 Teacher, Brooks School
 Attorney, Principal
    Latham, Latham & Lamond, P.C.
 Retired, C.H. Cleaves Insurance
    Agency, Inc.
 Executive Director,
    Visiting Nurse Association
 Certified Public Accountant, Partner
    Rucci, Bardaro & Barrett, PC
 Retired, Dental Health Concepts
 
 Officers and Directors  Massbank
 Officers
 Chairman, President and
Chief Executive Officer
 Senior Vice President, Lending
 Senior Vice President,
Community Banking
 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,
Information Technology
 Loan Origination Officer
 Assistant Treasurer
 Assistant Treasurer
 Assistant Vice President
 Collections Officer
 Assistant Vice President
 Trust Operations Officer and
Executive Administrator
 Assistant Treasurer
 Assistant Vice President
 Mortgage Origination Officer
 Assistant Vice President
 Assistant Controller
 Assistant Vice President,
Loan Operations
 Security/BSA Officer
 Director of Human Resources
 Director of Audit
 Assistant Vice President,
Marketing
 Assistant Treasurer
 Controller
 Assistant Treasurer
 Assistant Treasurer
 Assistant Treasurer
 Assistant Treasurer
 Assistant Vice President,
Operations
 Board of Directors and  Executive Committee
 Chairman   Clerk
 64