##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




---

Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2002                                             
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission File Number 0-15137



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MASSBANK Corp.

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area code:

(781) 662-0100


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, par value $1.00 per
share


(Title of Class)


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

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

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant, based on the closing
price for the registrants common stock on March 13,
2003 as reported by NASDAQ, was $114,698,114.

As of March 13, 2003, there were 4,540,176
shares of the registrants common stock outstanding.



---

Documents Incorporated By Reference

Portions of MASSBANK Corp.s 2002 Annual
Report to Stockholders are incorporated by reference in
Parts I, II, III and IV of this Form 10-K.
Portions of the Definitive Notice of Annual Meeting and Proxy
Statement for the 2003 Annual Meeting of Stockholders are
incorporated by reference into Part III of this
Form 10-K.



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TABLE OF CONTENTS



|                                         |                                                                                                          |  |  |  |  |  |  | 
|---------------------------------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                  
|                                         | Item 1. Business                                                                                        
|DEPOSITS                                
|                                         | Item 2. Properties                                                                                      
|                                         | Item 3. Legal Proceedings                                                                               
|                                         | Item 4. Submission of Matters to a Vote of Security Holders                                             
|PART II                                 
|                                         | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                           
|                                         | Item 6. Selected Financial Data                                                                         
|                                         | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations           
|                                         | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                     
|                                         | Item 8. Financial Statements and Supplementary Data                                                     
|                                         | Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure
|PART III                                
|                                         | Item 10. Directors and Executive Officers of the Registrant                                             
|                                         | Item 11. Executive Compensation                                                                         
|                                         | Item 12. Security Ownership of Certain Beneficial Owners and Management                                 
|                                         | Item 13. Certain Relationships and Related Transactions                                                 
|PART IV                                 
|                                         | Item 14. Controls and Procedures                                                                        
|                                         | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                                
|SIGNATURES                              
|CERTIFICATIONS                          
|CERTIFICATIONS                          
|Ex-13 Portions of Annual Report         
|Ex-21 Subsidiaries of the Registrant    
|Ex-23 Consent of Independent Accountants
|Ex-99.1 Certification of CEO            
|Ex-99.2 Certification of CFO            



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Forward-Looking Statement Disclosure

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



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | Unexpected fluctuations in market interest rates                                                                   
|
| |  | Unexpected fluctuations in the market for
    equities, bonds, federal funds and other financial instruments       
|
| |  | An increase in the level of non-performing assets                                                                  
|
| |  | An increase in competitive pricing pressures
    within the Companys market which may result in the
    following:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | An increase in the Companys cost of funds                                  
|
| |  | Changes in volume of loan originations                                      
|
| |  | Limit the ability of the Company to attract and
    retain banking customers



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

Internet Access

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

2



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##### Table of Contents






PART I






|        |         
|------- | --------
|Item 1. | Business

Business of MASSBANK Corp.

General

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

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

The principal sources of revenues for MASSBANK
Corp. are dividends from the Bank and, to a lesser extent,
interest income received from its interest-bearing bank
deposits. These revenues are used primarily for the payment of
dividends to stockholders and for the repurchase of stock
pursuant to the Companys stock repurchase program.
MASSBANK Corp.s assets at December 31, 2002 were
represented by its investment in the Bank of
$111.6 million, interest-bearing bank deposits of
$6.4 million and other assets of $0.4 million. The
Companys total liabilities equaled $1.2 million at
December 31, 2002. See Note 17 to the Consolidated
Financial Statements for Parent Company only financial
information. At December 31, 2002, MASSBANK Corp. on a
consolidated basis had total assets of $1.009 billion,
deposits of $883.9 million, and stockholders equity
of $117.3 million which represents 11.6% of total assets.
Book value per share at December 31, 2002 stood at $25.45,
up from $24.34 at year-end 2001.

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

Competition

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

Employees

MASSBANK Corp. does not employ any persons other
than its management which also serves as management of, and is
paid by, the Bank. See Item 10  Directors
and Executive Officers of the Registrant. MASSBANK Corp.
utilizes the support staff of the Bank from time to time and
does not pay any separate salaries or expenses in connection
therewith.

3



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Dividends

MASSBANK Corp. paid total cash dividends of $0.88
per share in 2002 compared to $0.84 per share in 2001. The
Companys dividend payout ratios (cash dividends paid
divided by net income) for 2002 and 2001 were 42% and 37%,
respectively.

Stock Repurchase Program

During 2002, the Company continued its program of
share repurchases by repurchasing 243,448 shares of its common
stock pursuant to its stock repurchase program. In January 2003
the Companys Board of Directors extended for another year
the stock repurchase program that it authorized in January 2002.
Additionally, the Board approved an increase of 200,000 in the
number of shares of the Companys common stock authorized
for repurchase in the current program, bringing the total shares
available for repurchase to 278,758 shares.

3-For-2 Stock Split

The Companys common stock was split
three-for-two on April 19, 2002. All share information
presented in this Form 10-K, 2002 Annual Report to
Stockholders and Definitive Notice of Annual Meeting and Proxy
Statement for the 2003 Annual Meeting of Stockholders, has been
adjusted to reflect the stock split.

Business of MASSBANK

General

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

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

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

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

4



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Market Area

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

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

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

Lending Activities

The Banks net loan portfolio totaled
$316.1 million at December 31, 2002.

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

|                          |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |        |         |         | 
|------------------------- | --------------------------------------- | --------------------------- | -------------------- | ----- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | 
|                          |                                         |                            
|                          |                                         | At December 31,            
|                          |                                         |                            
|                          |                                         | 2002                        |                      | 2001  |         | 2000    |        | 1999   |         | 1998   
|                          |                                         |                             |                      |       |         |         |        |        |         |        
|                          |                                         |                            
|                          |                                         | (In thousands)             
|Mortgage loans:           |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |       
|                          | Residential:                            |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |        |        
|                          |                                         | Conventional                |                      | $     | 300,528 |         |        | $      | 293,764 |         |        | $      | 269,859 |         |        | $      | 286,429 |         |        | $      | 280,681 |        
|                          |                                         | FHA and VA                  |                      |       | 133     |         |        |        | 259     |         |        |        | 471     |         |        |        | 740     |         |        |        | 1,181   |        
|                          | Commercial                              |                             |                      | 2,348 |         |         |        | 2,641  |         |         |        | 3,117  |         |         |        | 2,471  |         |         |        | 2,257  |        
|                          | Construction                            |                             |                      | 654   |         |         |        | 993    |         |         |        | 683    |         |         |        | 232    |         |         |        | 730    |        
|                          |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |       
|                          |                                         |                             | Total mortgage loans |       |         | 303,663 |        |        |         | 297,657 |        |        |         | 274,130 |        |        |         | 289,872 |        |        |         | 284,849 | 
|                          | Premium on loans                        |                             |                      | 20    |         |         |        | 51     |         |         |        | 105    |         |         |        | 159    |         |         |        | 259    |        
|                          | Deferred mortgage loan origination fees |                             |                      | (895  | )       |         |        | (1,239 | )       |         |        | (1,284 | )       |         |        | (1,451 | )       |         |        | (1,454 | )      
|                          |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |       
|                          |                                         |                             | Mortgage loans, net  |       |         | 302,788 |        |        |         | 296,469 |        |        |         | 272,951 |        |        |         | 288,580 |        |        |         | 283,654 | 
|                          |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |       
|Other loans:              |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |       
|                          | Consumer:                               |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |        |        
|                          |                                         | Installment                 |                      |       | 798     |         |        |        | 1,178   |         |        |        | 1,829   |         |        |        | 1,418   |         |        |        | 1,547   |        
|                          |                                         | Guaranteed education        |                      |       | 3,293   |         |        |        | 4,937   |         |        |        | 6,266   |         |        |        | 7,037   |         |        |        | 7,967   |        
|                          |                                         | Other secured               |                      |       | 515     |         |        |        | 873     |         |        |        | 1,169   |         |        |        | 1,318   |         |        |        | 1,366   |        
|                          |                                         | Home equity lines of credit |                      |       | 11,102  |         |        |        | 12,271  |         |        |        | 12,624  |         |        |        | 11,737  |         |        |        | 10,159  |        
|                          |                                         | Unsecured lines of credit   |                      |       | 187     |         |        |        | 201     |         |        |        | 224     |         |        |        | 225     |         |        |        | 235     |        
|                          |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |       
|                          |                                         |                             | Total consumer loans |       |         | 15,895  |        |        |         | 19,460  |        |        |         | 22,112  |        |        |         | 21,735  |        |        |         | 21,274  | 
|                          | Commercial                              |                             |                      | 116   |         |         |        | 15,088 |         |         |        | 15,084 |         |         |        | 15,050 |         |         |        | 61     |        
|                          |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |       
|                          |                                         |                             | Total other loans    |       |         | 16,011  |        |        |         | 34,548  |        |        |         | 37,196  |        |        |         | 36,785  |        |        |         | 21,335  | 
|                          |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |       
|                          |                                         |                             | Total loans          |       |         | 318,799 |        |        |         | 331,017 |        |        |         | 310,147 |        |        |         | 325,365 |        |        |         | 304,989 | 
|Allowance for loan losses |                                         |                             | (2,655               | )     |         |         | (2,643 | )      |         |         | (2,594 | )      |         |         | (2,555 | )      |         |         | (2,450 | )     
|                          |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |       
|                          |                                         |                             | Net loans            |       | $       | 316,144 |        |        | $       | 328,374 |        |        | $       | 307,553 |        |        | $       | 322,810 |        |        | $       | 302,539 | 
|                          |                                         |                             |                      |       |         |         |        |        |         |         |        |        |         |         |        |        |         |         |        |       

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##### Table of Contents



The following table shows the maturity
distribution and interest rate sensitivity of the Banks
loan portfolio at December 31, 2002:

|                |                           |                                 |     |            |       |           |       |           |        |       |       |        |        |  |        |         |         |  |        |         |         | 
|--------------- | ------------------------- | ------------------------------- | --- | ---------- | ----- | --------- | ----- | --------- | ------ | ----- | ----- | ------ | ------ |  | ------ | ------- | ------- |  | ------ | ------- | ------- | 
|                |                           |                                
|                |                           | Maturity/ Scheduled Payments(1)
|                |                           |                                
|                |                           | Within                          |     | One to     |       | Five to   |       | After     |        |      
|                |                           | One Year                        |     | Five Years |       | Ten Years |       | Ten Years |        | Total
|                |                           |                                 |     |            |       |           |       |           |        |      
|                |                           |                                
|                |                           | (In thousands)                 
|Mortgage loans: |                           |                                 |     |            |       |           |       |           |        |       |       |        |        |  |        |         |         |  |        |        
|                | Residential               |                                 | $   | 755        |       |           | $     | 11,007    |        |       | $     | 70,485 |        |  | $      | 217,550 |         |  | $      | 299,797 |        
|                | Commercial & construction |                                 |     | 456        |       |           |       | 130       |        |       |       | 268    |        |  |        | 2,137   |         |  |        | 2,991   |        
|                |                           |                                 |     |            |       |           |       |           |        |       |       |        |        |  |        |         |         |  |        |        
|                |                           | Total mortgage loans            |     |            | 1,211 |           |       |           | 11,137 |       |       |        | 70,753 |  |        |         | 219,687 |  |        |         | 302,788 | 
|Other loans     |                           |                                 | 615 |            |       |           | 1,777 |           |        |       | 2,504 |        |        |  | 11,115 |         |         |  | 16,011 |        
|                |                           |                                 |     |            |       |           |       |           |        |       |       |        |        |  |        |         |         |  |        |        
|                |                           | Total loans                     |     | $          | 1,826 |           |       | $         | 12,914 |       |       | $      | 73,257 |  |        | $       | 230,802 |  |        | $       | 318,799 | 
|                |                           |                                 |     |            |       |           |       |           |        |       |       |        |        |  |        |         |         |  |        |        



---



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

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

|                |                           |                          |     |            |         |       |        |        |        |  |        |         |         | 
|--------------- | ------------------------- | ------------------------ | --- | ---------- | ------- | ----- | ------ | ------ | ------ |  | ------ | ------- | ------- | 
|                |                           |                         
|                |                           | Total Due After One Year
|                |                           |                         
|                |                           | Fixed                    |     | Adjustable |         |      
|                |                           | Rate                     |     | Rate       |         | Total
|                |                           |                          |     |            |         |      
|                |                           |                         
|                |                           | (In thousands)          
|Mortgage loans: |                           |                          |     |            |         |       |        |        |        |  |        |        
|                | Residential               |                          | $   | 267,508    |         |       | $      | 31,534 |        |  | $      | 299,042 |        
|                | Commercial & construction |                          |     | 485        |         |       |        | 2,050  |        |  |        | 2,535   |        
|                |                           |                          |     |            |         |       |        |        |        |  |        |        
|                |                           | Total mortgage loans     |     |            | 267,993 |       |        |        | 33,584 |  |        |         | 301,577 | 
|Other loans     |                           |                          | 816 |            |         |       | 14,580 |        |        |  | 15,396 |        
|                |                           |                          |     |            |         |       |        |        |        |  |        |        
|                |                           | Total loans              |     | $          | 268,809 |       |        | $      | 48,164 |  |        | $       | 316,973 | 
|                |                           |                          |     |            |         |       |        |        |        |  |        |        

Mortgage Lending.The Bank believes that the repayment periods of long-term first
mortgage loans, the general resistance of the public in our
market area to variable rate mortgage instruments and the highly
competitive nature of the mortgage industry require a prudent
approach to mortgage lending. Consequently, as part of its
policy of generally attempting to match the maturities of its
assets and its liabilities, the Bank has kept its mortgage loan
portfolio to a level at which the Bank believes there is an
acceptable risk-to-reward ratio in light of opportunities in the
market-place and its long-term objectives. The Banks net
loan portfolio represented approximately 31.3% and 33.8% of the
Companys total assets at December 31, 2002, and 2001,
respectively. The Bank realizes that this low level of loans
with respect to assets in relation to the securities portfolio
results in a reduction in yield; however, the Bank believes that
this reduction would be more than offset in risk and loss
associated with lending during periods of economic decline. In
todays economic climate, there is a tremendous amount of
competition for mortgages in the Banks area. The Bank, in
spite of the competition, originated over $100 million in
loans for the second consecutive year. In 2002, the Bank
originated $104.6 million in loans compared to
$103.2 million the prior year. Much of this volume was due
to the historically low interest rate environment in 2002 and
2001 which resulted in heavy mortgage refinancing activity for
the Bank. This also resulted in significant loan payoffs.
Consequently, the Banks mortgage loan portfolio grew by
only $6.3 million in 2002. As a result, the Bank was not
able to grow the total loan portfolio in 2002. The Banks
total loan portfolio at December 31, 2002 declined to
$318.8 million from $331.0 million at December 31
of the prior year.

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

Substantially all of the real estate loans
originated by the Bank during 2002 were secured by real estate
located in the Banks primary lending area, reflecting the
Banks commitment to serve the credit needs of the local
communities in which it operates banking offices.

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

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

At December 31, 2002, 1-4 family residential
mortgage loans totaled $299.8 million, or 94.0% of the
total loan portfolio, compared to $292.8 million, or 88.5%
of the total loan portfolio, at December 31, 2001.
Residential mortgage loan originations amounted to
$94.1 million in 2002, an increase from $91.0 million
in 2001. Much of this volume was due to mortgage refinancing.
Origination volumes are sensitive to interest rates and are
affected by the interest rate environment. The low interest rate
environment in 2002 and 2001 significantly increased the demand
for mortgage refinancings. As a result, the Bank was able to
originate in excess of $90.0 million in residential
mortgage loans for the second consecutive year.

The Bank also originates construction loans and
mortgage loans secured by commercial or investment property such
as multifamily housing, strip shopping centers, office buildings
and retail buildings. At December 31, 2002, commercial and
multifamily real estate mortgages and construction loans totaled
approximately $3.0 million, or 1.0% of the total loan
portfolio, compared to $3.6 million, or 1.1% of the total
loan portfolio, at December 31, 2001. In 2002, commercial
and multifamily real estate mortgage loan and construction loan
originations amounted to $0.7 million.

The total amount of first mortgage loans held by
the Bank at December 31, 2002 was $302.8 million as
indicated in the maturity distribution table appearing on page
seven. Of this amount, $33.7 million was subject to
interest rate adjustments. The remaining $269.1 million in
fixed rate mortgage loans represents 26.7% of the Companys
total assets.

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

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

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Other Loans.The
Bank makes a variety of consumer loans and had a consumer loan
portfolio of approximately $15.9 million at
December 31, 2002 representing 5.0% of the Banks
total loan portfolio. Of this amount $3.3 million or 1.0%
of the total loan portfolio are education loans guaranteed by
American Student Assistance Services Corporation.

The balance of the Banks consumer loan
portfolio consists of home equity lines of credit and consumer
loan contracts such as automobile loans, home improvement loans
and other secured and unsecured financings. These loans totaled
$12.6 million at December 31, 2002, representing 4.0%
of the Banks total loan portfolio.

At December 31, 2002, the Bank also had
$0.1 million in outstanding loans to commercial enterprises
not secured by real estate. This reflects a decrease from
December 31, 2001 due to the repayment of a
$15.0 million loan to a single borrower which we chose not
to renew due to the low interest rate.

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

The Bank issues commitments to prospective
borrowers to make loans subject to certain conditions for
generally up to 60 days. The interest rate applicable to
the committed loans is usually the rate in effect at the time a
rate lock fee is paid. At December 31, 2002, the Bank had
issued commitments on residential first mortgage loans totaling
$11,331,000, and had commitments to advance funds on
construction loans and unused credit lines, including unused
portions of home equity lines of credit, of $111,000 and
$40,929,000, respectively.

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

Real Estate Acquired through
Foreclosure.Real estate acquired
through foreclosure is comprised of foreclosed properties where
the Bank has actually received title and loans determined to be
substantially repossessed. Real estate loans that are
substantially repossessed include only those loans for which the
Bank has taken possession of the collateral but has not
completed legal foreclosure proceedings. Loan losses arising
from the acquisition of such properties are charged against the
allowance for loan losses. Real estate acquired through
foreclosure is recorded at the lower of the carrying value of
the loan or the fair value of the property constructively or
actually received, less estimated costs to sell the property
following foreclosure. Operating expenses and any subsequent
provisions to reduce the carrying value to fair value are
charged to current period earnings. Gains and losses upon
disposition are reflected in earnings as realized. At year-end
2002, MASSBANK had no real estate acquired through foreclosure.

8



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##### Table of Contents



Non-Performing Assets

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

|                                                 |                 |                                                |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |       |     | 
|------------------------------------------------ | --------------- | ---------------------------------------------- | ------------ | ---- | --- | ---- | ---- | ---- | --- | ---- | ---- | --- | --- | --- | ---- | --- | --- | --- | ---- | --- | ----- | --- | 
|                                                 |                 |                                               
|                                                 |                 | At December 31,                               
|                                                 |                 |                                               
|                                                 |                 | 2002                                           |              | 2001 |     | 2000 |      | 1999 |     | 1998
|                                                 |                 |                                                |              |      |     |      |      |      |     |     
|                                                 |                 |                                               
|                                                 |                 | (In thousands)                                
|Nonaccrual loans:                                |                 |                                                |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |    
|                                                 | Mortgage loans: |                                                |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |      
|                                                 |                 | Residential:                                   |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |       |    
|                                                 |                 |                                                | Conventional |      | $   | 269  |      |      | $   | 477  |      |     | $   | 386 |      |     | $   | 655 |      |     | $     | 845 | 
|                                                 |                 |                                                | FHA and VA   |      |     | 2    |      |      |     | 4    |      |     |     | 8   |      |     |     |    |      |     |       |    | 
|                                                 | Consumer        |                                                |              | 149  |     |      |      | 163  |     |      |      | 171 |     |     |      | 140 |     |     |      | 159 |      
|                                                 |                 |                                                |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |    
|                                                 |                 | Total nonaccrual loans                         |              |      | 420 |      |      |      | 644 |      |      |     | 565 |     |      |     | 795 |     |      |     | 1,004 |    
|                                                 |                 |                                                |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |    
|Real estate acquired through foreclosure:        |                 |                                                |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |    
|                                                 | Residential:    |                                                |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |     |      
|                                                 |                 | Conventional                                   |              |      |    |      |      |      |    |      |      |     |    |     |      |     | 62  |     |      |     | 86    |    
|                                                 |                 |                                                |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |    
|                                                 |                 | Total real estate acquired through foreclosure |              |      |    |      |      |      |    |      |      |     |    |     |      |     | 62  |     |      |     | 86    |    
|                                                 |                 |                                                |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |    
|                                                 |                 | Total non-performing assets                    |              | $    | 420 |      |      | $    | 644 |      |      | $   | 565 |     |      | $   | 857 |     |      | $   | 1,090 |    
|                                                 |                 |                                                |              |      |     |      |      |      |     |      |      |     |     |     |      |     |     |     |      |    
|Percent of non-performing loans to total loans   |                 |                                                | 0.13         | %    |     |      | 0.19 | %    |     |      | 0.18 | %   |     |     | 0.24 | %   |     |     | 0.33 | %  
|Percent of non-performing assets to total assets |                 |                                                | 0.04         | %    |     |      | 0.07 | %    |     |      | 0.06 | %   |     |     | 0.09 | %   |     |     | 0.12 | %  

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

|                                                                       |  |                          |    |      |  |      |    |      |  |      |    |  |  |   |    |  |  |   |    | 
|---------------------------------------------------------------------- |  | ------------------------ | -- | ---- |  | ---- | -- | ---- |  | ---- | -- |  |  | - | -- |  |  | - | -- | 
|                                                                       |  |                         
|                                                                       |  | Years Ended December 31,
|                                                                       |  |                         
|                                                                       |  | 2002                     |    | 2001 |  | 2000 |    | 1999 |  | 1998
|                                                                       |  |                          |    |      |  |      |    |      |  |     
|                                                                       |  |                         
|                                                                       |  | (In thousands)          
|Interest income that would have been recorded
    under original terms |  | $                        | 31 |      |  | $    | 60 |      |  | $    | 48 |  |  | $ | 64 |  |  | $ | 84 | 
|Interest income actually recorded                                      |  |                          | 27 |      |  |      | 37 |      |  |      | 36 |  |  |   | 51 |  |  |   | 61 | 
|                                                                       |  |                          |    |      |  |      |    |      |  |      |    |  |  |   |    |  |  |   |    | 
|Reduction in interest income                                           |  | $                        | 4  |      |  | $    | 23 |      |  | $    | 12 |  |  | $ | 13 |  |  | $ | 23 | 
|                                                                       |  |                          |    |      |  |      |    |      |  |      |    |  |  |   |    |  |  |   |    | 

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

9



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

|                                                                                     |                         |                          |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |     |  
|------------------------------------------------------------------------------------ | ----------------------- | ------------------------ | ----- | ---- | - | ---- | ----- | ---- | - | ---- | ----- | --- | - | - | ----- | --- | - | - | ----- | --- | -
|                                                                                     |                         |                         
|                                                                                     |                         | Years Ended December 31,
|                                                                                     |                         |                         
|                                                                                     |                         | 2002                     |       | 2001 |   | 2000 |       | 1999 |   | 1998
|                                                                                     |                         |                          |       |      |   |      |       |      |   |     
|                                                                                     |                         |                         
|                                                                                     |                         | (In thousands)          
|Balance at beginning of year                                                         |                         | $                        | 2,643 |      |   | $    | 2,594 |      |   | $    | 2,555 |     |   | $ | 2,450 |     |   | $ | 2,334 |    
|Provision for loan losses                                                            |                         |                          |      |      |   |      | 40    |      |   |      | 60    |     |   |   | 140   |     |   |   | 193   |    
|Charge-offs:                                                                         |                         |                          |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    
|                                                                                     | Residential real estate |                          |       |     |   |      |       |     |   |      |       |    |   |   |       | (62 | ) |   |       | (81 | )
|                                                                                     | Consumer loans          |                          |       | (4   | ) |      |       | (22  | ) |      |       | (24 | ) |   |       | (14 | ) |   |       | (22 | )
|Recoveries:                                                                          |                         |                          |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    
|                                                                                     | Residential real estate |                          |       | 6    |   |      |       | 25   |   |      |       | 2   |   |   |       | 39  |   |   |       | 17  |  
|                                                                                     | Commercial real estate  |                          |       |     |   |      |       | 5    |   |      |       |    |   |   |       |    |   |   |       |    |  
|                                                                                     | Consumer loans          |                          |       | 10   |   |      |       | 1    |   |      |       | 1   |   |   |       | 2   |   |   |       | 6   |  
|                                                                                     | Other Loans             |                          |       |     |   |      |       |     |   |      |       |    |   |   |       |    |   |   |       | 3   |  
|                                                                                     |                         |                          |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    
|Net recoveries (charge-offs)                                                         |                         |                          | 12    |      |   |      | 9     |      |   |      | (21   | )   |   |   | (35   | )   |   |   | (77   | )  
|                                                                                     |                         |                          |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    
|Balance at end of year                                                               |                         | $                        | 2,655 |      |   | $    | 2,643 |      |   | $    | 2,594 |     |   | $ | 2,555 |     |   | $ | 2,450 |    
|                                                                                     |                         |                          |       |      |   |      |       |      |   |      |       |     |   |   |       |     |   |   |       |    
|Net loan charge offs as a percent of average
    loans outstanding during the period |                         |                          |      |      |   |      |      |      |   |      | 0.01  | %   |   |   | 0.01  | %   |   |   | 0.03  | %  
|Allowance for loan losses as a percent of total
    loans outstanding at year-end    |                         |                          | 0.83  | %    |   |      | 0.80  | %    |   |      | 0.84  | %   |   |   | 0.79  | %   |   |   | 0.80  | %  
|Allowance for loan losses as a percent of
    nonaccrual loans                       |                         |                          | 632.1 | %    |   |      | 410.4 | %    |   |      | 459.1 | %   |   |   | 321.4 | %   |   |   | 244.0 | %  

Investment Activities

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

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

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

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

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Securities held for indefinite periods of time
and not intended to be held to maturity are classified as
available for sale. Securities held for indefinite periods of
time include securities that management intends to use as part
of its asset/ liability management strategy and that may be sold
in response to changes in market conditions, interest rates,
changes in prepayment risk, the need to increase regulatory
capital and other factors. Income on debt securities available
for sale is accrued and included in interest and dividend income.

The specific identification method is used to
determine realized gains or losses on sales of securities
available for sale which are also reported in non-interest
income under the caption gains on securities available for
sale, net.

Whenever a debt or equity security is deemed to
be other than temporarily impaired due to a
fundamental deterioration in its financial condition as
determined by managements analysis, it is written down to
its current fair market value. If due to general market
conditions an investment security declines in price by a
certain percentage from its cost for more than a specified
period of time, it is written down to its current fair market
value.

Investments classified as trading securities are
stated at market with unrealized gains or losses included in
earnings. Income on trading securities is accrued and included
in interest and dividend income. All of the Companys
mortgage-backed securities are currently classified as available
for sale. At times of low loan demand, short-term
mortgage-backed securities may be used as substitutes for loans
as certain of their financial characteristics are very similar
to short-term mortgage loans.

At December 31, 2002, the Companys
investments, which consist of securities available for sale
(including mortgage-backed securities), trading securities,
short-term investments (including federal funds sold) and
interest-bearing deposits in banks totaled $669.9 million,
representing 66.4% of the Companys total assets.

11



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##### Table of Contents



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

Investment Portfolio

|                                  |                                                               |                          |        |         |         |      |        |         |         |  |       |         |         | 
|--------------------------------- | ------------------------------------------------------------- | ------------------------ | ------ | ------- | ------- | ---- | ------ | ------- | ------- |  | ----- | ------- | ------- | 
|                                  |                                                               |                         
|                                  |                                                               | At December 31,         
|                                  |                                                               |                         
|                                  |                                                               | 2002                     |        | 2001    |         | 2000
|                                  |                                                               |                          |        |         |         |     
|                                  |                                                               |                         
|                                  |                                                               | (In thousands)          
|Federal funds sold:               |                                                               |                          |        |         |         |      |        |         |         |  |       |        
|                                  | Overnight federal funds                                       |                          | $      | 221,586 |         |      | $      | 204,294 |         |  | $     | 112,711 |        
|                                  | Term federal funds                                            |                          |        |        |         |      |        |        |         |  |       | 30,000  |        
|                                  |                                                               |                          |        |         |         |      |        |         |         |  |       |        
|                                  |                                                               | Total federal funds sold |        |         | 221,586 |      |        |         | 204,294 |  |       |         | 142,711 | 
|Money market funds                |                                                               |                          | 27,077 |         |         |      | 32,088 |         |         |  | 131   |        
|Interest-bearing deposits in bank |                                                               |                          | 4,941  |         |         |      | 6,490  |         |         |  | 1,678 |        
|                                  |                                                               |                          |        |         |         |      |        |         |         |  |       |        
|                                  | Total federal funds sold and other
    short-term investments |                          | $      | 253,604 |         |      | $      | 242,872 |         |  | $     | 144,520 |        
|Percent of total assets           |                                                               |                          | 25.1   | %       |         |      | 25.0   | %       |         |  | 15.4  | %      

|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |         |         |  
|---------------------------------------------- | ---------------------------------- | ----------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                               |                                    |                                    
|                                               |                                    | At December 31,                    
|                                               |                                    |                                    
|                                               |                                    | 2002                                |         | 2001    |         | 2000
|                                               |                                    |                                     |         |         |         |     
|                                               |                                    |                                    
|                                               |                                    | (In thousands)                     
|Securities held to maturity:(a)                |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|                                               | Other bonds and obligations        |                                     | $       |        |         |      | $       |        |         |   | $       | 230     |        
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|                                               |                                    | Total securities held to maturity   |         |         |        |      |         |         |        |   |         |         | 230     |  
|Securities available for sale:(b)(c)           |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|                                               | U.S. Treasury obligations          |                                     |         | 103,246 |         |      |         | 80,883  |         |   |         | 126,456 |        
|                                               | U.S. Government agency obligations |                                     |         | 73,838  |         |      |         | 10,253  |         |   |         | 9,133   |        
|                                               | Equity securities                  |                                     |         | 13,833  |         |      |         | 16,417  |         |   |         | 19,750  |        
|                                               | Mortgage-backed securities         |                                     |         | 189,105 |         |      |         | 265,031 |         |   |         | 287,213 |        
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|                                               |                                    | Total securities available for sale |         |         | 380,022 |      |         |         | 372,584 |   |         |         | 442,552 |  
|Trading securities:(b)                         |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|                                               | U.S. Treasury obligations          |                                     |         | 36,228  |         |      |         | 3,086   |         |   |         | 19,791  |        
|                                               | Equity Securities                  |                                     |         | 19      |         |      |         |        |         |   |         |        |        
|                                               | Investments in mutual funds        |                                     |         | 2       |         |      |         | 3       |         |   |         | 3       |        
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|                                               |                                    | Total trading securities            |         |         | 36,249  |      |         |         | 3,089   |   |         |         | 19,794  |  
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|                                               |                                    | Total securities                    |         | $       | 416,271 |      |         | $       | 375,673 |   |         | $       | 462,576 |  
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|                                               |                                    | Percent of total assets             |         |         | 41.3    | %    |         |         | 38.7    | % |         |         | 49.3    | %
|                                               |                                    |                                     |         |         |         |      |         |         |         |   |         |        
|Total investments                              |                                    | $                                   | 669,875 |         |         | $    | 618,545 |         |         | $ | 607,096 |        
|Total investments as a percent of total assets |                                    |                                     | 66.4    | %       |         |      | 63.7    | %       |         |   | 64.7    | %      



---



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

12



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##### Table of Contents



The following table presents the amortized cost
of debt securities available for sale at December 31, 2002
maturing within stated periods with the weighted average
interest yield from securities falling within the range of
maturities:

Debt Securities Available for Sale

|                                      |        |                        |      |                 |   |               |      |        |   |  |       |         |   |  |   |         |  
|------------------------------------- | ------ | ---------------------- | ---- | --------------- | - | ------------- | ---- | ------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                      |        | U. S.                  |      | U.S. Government |   | Mortgage-     |      |       
|                                      |        | Treasury               |      | Agency          |   | Backed        |      |       
|                                      |        | Obligations            |      | Obligations(2)  |   | Securities(1) |      | Total 
|                                      |        |                        |      |                 |   |               |      |       
|                                      |        |                       
|                                      |        | (Dollars in thousands)
|Maturing within 1 year                |        |                        |      |                 |   |               |      |        |   |  |       |         |   |  |   |        
|                                      | Amount |                        | $    | 29,996          |   |               | $    | 10,000 |   |  | $     | 35      |   |  | $ | 40,031  |  
|                                      | Yield  |                        |      | 3.81            | % |               |      | 1.85   | % |  |       | 8.83    | % |  |   | 3.32    | %
|Maturing after 1 but within 5 years   |        |                        |      |                 |   |               |      |        |   |  |       |         |   |  |   |        
|                                      | Amount |                        |      | 71,021          |   |               |      | 59,000 |   |  |       | 4,469   |   |  |   | 134,490 |  
|                                      | Yield  |                        |      | 3.11            | % |               |      | 3.66   | % |  |       | 7.56    | % |  |   | 3.50    | %
|Maturing after 5 but within 10 years  |        |                        |      |                 |   |               |      |        |   |  |       |         |   |  |   |        
|                                      | Amount |                        |      |                |   |               |      | 4,000  |   |  |       | 70,525  |   |  |   | 70,525  |  
|                                      | Yield  |                        |      |                |   |               |      | 5.93   | % |  |       | 6.74    | % |  |   | 6.74    | %
|Maturing after 10 but within 15 years |        |                        |      |                 |   |               |      |        |   |  |       |         |   |  |   |        
|                                      | Amount |                        |      |                |   |               |      |        |   |  |       | 102,104 |   |  |   | 102,104 |  
|                                      | Yield  |                        |      |                |   |               |      |        |   |  |       | 6.53    | % |  |   | 6.53    | %
|Maturing after 15 years               |        |                        |      |                 |   |               |      |        |   |  |       |         |   |  |   |        
|                                      | Amount |                        |      |                |   |               |      | 44     |   |  |       | 889     |   |  |   | 933     |  
|                                      | Yield  |                        |      |                |   |               |      | 4.28   | % |  |       | 5.03    | % |  |   | 4.99    | %
|                                      |        |                        |      |                 |   |               |      |        |   |  |       |         |   |  |   |        
|Total                                 |        |                        |      |                 |   |               |      |        |   |  |       |         |   |  |   |        
|                                      | Amount |                        | $    | 101,017         |   |               | $    | 73,044 |   |  | $     | 178,022 |   |  | $ | 352,083 |  
|                                      | Yield  |                        |      | 3.32            | % |               |      | 3.54   | % |  |       | 6.65    | % |  |   | 5.05    | %
|                                      |        |                        |      |                 |   |               |      |        |   |  |       |         |   |  |   |        
|Average life in years                 |        |                        | 1.58 |                 |   |               | 3.06 |        |   |  |       |         |   |  |   |        
|Average contractual maturity in years |        |                        |      |                 |   |               |      |        |   |  | 10.57 |         |   |  |   |        



---



|    |                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mortgage-backed securities are based on
    contractual maturities. Actual maturities will differ from
    contractual maturities due to scheduled amortization and
    prepayments.
|   
|(2) | The amortized cost of callable securities
    included in securities available for sale totaled
    $73.0 million as of December 31, 2002.                                          

At December 31, 2002, the Company did not
have an investment in any issuer (other than securities of the
U.S. Government and Government Agencies) in excess of 10%
of stockholders equity.

Deposits and Other Sources of Funds

General.Deposits
have been the Banks primary source of funds for making
investments and loans. In addition to deposits, the Banks
other major sources of funds are derived from amortization and
prepayment of loans and mortgage-backed securities, from sales,
calls or maturities of investment securities, and from
operations. Deposit flows can vary significantly and are
influenced by prevailing interest rates, money market
conditions, economic conditions and competition. The Bank can
respond to changing market conditions and competition through
the pricing of its deposit accounts. Management can attempt to
control the level of its deposits to a significant degree
through its pricing policies. Another important factor in
attracting deposits is convenience. In addition to the
Banks fifteen conveniently located banking offices,
customers can access accounts through the Banks Automated
Teller Machine (ATM) network. The Bank is a member
of the Transaxion (TX), NYCE and CIRRUS
System, Inc. (CIRRUS) networks which allow access to

13



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##### Table of Contents



ATMs in over 100,000 locations worldwide.
Additionally, MASSBANK has joined with over 400 other financial
institutions to form the SUM Program. This program allows
MASSBANK customers to access over 2,800 SUM ATMs
throughout the Northeast and Midwest without having to pay an
access or surcharge fee.


Deposits.A
substantial amount of the Banks deposits are derived from
customers who live or work within the Banks market area.
The Bank does not solicit deposits through any outside agents.
The Banks deposits at December 31, 2002 consist of
regular, silver and smart savings accounts, holiday club savings
accounts, NOW and Super NOW accounts, regular and business
checking accounts, money market deposit accounts, IRA and Keogh
accounts, and term deposit accounts.

Deposits increased by $34.2 million or 4.0%
to $883.9 million at December 31, 2002, from
$849.7 million at year-end 2001.

Borrowed Funds.From
time to time the Bank has obtained funds through repurchase
agreements with its customers and federal funds purchased. The
Bank also has the ability, although it has never exercised it,
to borrow from the Federal Reserve Bank and The Depositors
Insurance Fund, Inc. The Bank did not have any borrowed funds in
2002 or 2001.




DEPOSITS

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

|                                                 |                                             |                                    |   |          |         |        |   |          |        |        |     |          |         |  |   |       |        |   |      |         |         |  |      |       |        |  
|------------------------------------------------ | ------------------------------------------- | ---------------------------------- | - | -------- | ------- | ------ | - | -------- | ------ | ------ | --- | -------- | ------- |  | - | ----- | ------ | - | ---- | ------- | ------- |  | ---- | ----- | ------ | -
|                                                 |                                             |                                   
|                                                 |                                             | At December 31,                   
|                                                 |                                             |                                   
|                                                 |                                             |                                    |   |          |         |       
|                                                 |                                             | 2002                               |   | 2001     |         | 2000  
|                                                 |                                             |                                    |   |          |         |       
|                                                 |                                             |                                    |   | Percent  |         |        |   | Percent  |        |        |     | Percent 
|                                                 |                                             |                                    |   | of       |         |        |   | of       |        |        |     | of      
|                                                 |                                             | Amount                             |   | Deposits |         | Amount |   | Deposits |        | Amount |     | Deposits
|                                                 |                                             |                                    |   |          |         |        |   |          |        |        |     |         
|                                                 |                                             |                                   
|                                                 |                                             | (In thousands)                    
|Demand and NOW                                   |                                             |                                    |   |          |         |        |   |          |        |        |     |          |         |  |   |       |        |   |      |         |         |  |      |      
|                                                 | NOW                                         |                                    | $ | 57,293   |         |        |   | 6.48     | %      |        | $   | 53,476   |         |  |   | 6.29  | %      |   | $    | 51,390  |         |  |      | 6.24  | %     
|                                                 | Demand accounts (non interest-bearing)      |                                    |   | 28,034   |         |        |   | 3.17     |        |        |     | 28,667   |         |  |   | 3.37  |        |   |      | 28,562  |         |  |      | 3.47  |       
|                                                 |                                             |                                    |   |          |         |        |   |          |        |        |     |          |         |  |   |       |        |   |      |         |         |  |      |      
|                                                 |                                             | Total demand and NOW               |   |          | 85,327  |        |   |          | 9.65   |        |     |          | 82,143  |  |   |       | 9.66   |   |      |         | 79,952  |  |      |       | 9.71   |  
|Savings:                                         |                                             |                                    |   |          |         |        |   |          |        |        |     |          |         |  |   |       |        |   |      |         |         |  |      |      
|                                                 | Regular savings and special notice accounts |                                    |   | 535,122  |         |        |   | 60.54    |        |        |     | 368,631  |         |  |   | 43.39 |        |   |      | 317,926 |         |  |      | 38.60 |       
|                                                 | Money market accounts                       |                                    |   | 13,825   |         |        |   | 1.57     |        |        |     | 15,329   |         |  |   | 1.80  |        |   |      | 17,022  |         |  |      | 2.07  |       
|                                                 |                                             |                                    |   |          |         |        |   |          |        |        |     |          |         |  |   |       |        |   |      |         |         |  |      |      
|                                                 |                                             | Total savings                      |   |          | 548,947 |        |   |          | 62.11  |        |     |          | 383,960 |  |   |       | 45.19  |   |      |         | 334,948 |  |      |       | 40.67  |  
|Time Certificates of deposit:                    |                                             |                                    |   |          |         |        |   |          |        |        |     |          |         |  |   |       |        |   |      |         |         |  |      |      
|                                                 | Fixed rate certificates                     |                                    |   | 170,527  |         |        |   | 19.29    |        |        |     | 287,773  |         |  |   | 33.87 |        |   |      | 309,245 |         |  |      | 37.54 |       
|                                                 | Variable rate certificates                  |                                    |   | 79,127   |         |        |   | 8.95     |        |        |     | 95,837   |         |  |   | 11.28 |        |   |      | 99,736  |         |  |      | 12.11 |       
|                                                 |                                             |                                    |   |          |         |        |   |          |        |        |     |          |         |  |   |       |        |   |      |         |         |  |      |      
|                                                 |                                             | Total time certificates of deposit |   |          | 249,654 |        |   |          | 28.24  |        |     |          | 383,610 |  |   |       | 45.15  | % |      |         | 408,981 |  |      |       | 49.65  |  
|Deposit acquisition premium, net of amortization |                                             |                                    |  |          |         |        |  |          |        |        | (29 | )        |         |  |  |       |        |   | (256 | )       |         |  | (.03 | )    
|                                                 |                                             |                                    |   |          |         |        |   |          |        |        |     |          |         |  |   |       |        |   |      |         |         |  |      |      
|                                                 |                                             | Total deposits                     |   | $        | 883,928 |        |   |          | 100.00 | %      |     | $        | 849,684 |  |   |       | 100.00 | % |      | $       | 823,625 |  |      |       | 100.00 | %

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##### Table of Contents



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

|                                            |  |                          |         |         |  |         |      |         |  |         |         |         |  |  |      |   |  |   |         |  |  |  |      |  
|------------------------------------------- |  | ------------------------ | ------- | ------- |  | ------- | ---- | ------- |  | ------- | ------- | ------- |  |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|                                            |  |                         
|                                            |  | Years Ended December 31,
|                                            |  |                         
|                                            |  |                          |         |         |  |        
|                                            |  | 2002                     |         | 2001    |  | 2000   
|                                            |  |                          |         |         |  |        
|                                            |  | Average                  |         | Average |  | Average |      | Average |  | Average |         | Average
|                                            |  | Balance                  |         | Rate    |  | Balance |      | Rate    |  | Balance |         | Rate   
|                                            |  |                          |         |         |  |         |      |         |  |         |         |        
|                                            |  |                         
|                                            |  | (In thousands)          
|NOW accounts                                |  | $                        | 54,570  |         |  |         | 0.66 | %       |  | $       | 51,689  |         |  |  | 0.89 | % |  | $ | 49,860  |  |  |  | 0.97 | %
|Demand (non interest-bearing) accounts      |  |                          | 27,329  |         |  |         |     |         |  |         | 28,070  |         |  |  |     |   |  |   | 24,945  |  |  |  |     |  
|Escrow deposits of borrowers                |  |                          | 1,065   |         |  |         | 0.40 |         |  |         | 1,089   |         |  |  | 0.19 |   |  |   | 1,151   |  |  |  | 0.21 |  
|Money market accounts                       |  |                          | 14,959  |         |  |         | 1.41 |         |  |         | 16,402  |         |  |  | 2.44 |   |  |   | 17,941  |  |  |  | 2.97 |  
|Regular savings and special notice accounts |  |                          | 456,775 |         |  |         | 2.62 |         |  |         | 337,220 |         |  |  | 3.29 |   |  |   | 325,138 |  |  |  | 3.44 |  
|Time certificates of deposit                |  |                          | 315,987 |         |  |         | 3.22 |         |  |         | 402,155 |         |  |  | 5.08 |   |  |   | 399,554 |  |  |  | 5.81 |  
|                                            |  |                          |         |         |  |         |      |         |  |         |         |         |  |  |      |   |  |   |         |  |  |  |      |  
|                                            |  | $                        | 870,685 |         |  |         | 2.61 | %       |  | $       | 836,625 |         |  |  | 3.87 | % |  | $ | 818,589 |  |  |  | 4.32 | %

Investment Management and Trust
Services

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

As of December 31, 2002 the Trust Division
had approximately $24.7 million (market value) of assets in
custody and under management.

Competition

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

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

Supervision and Regulation of the Company and
its Subsidiaries

The Company and the Bank are in a heavily
regulated industry. As a Delaware business corporation, the
Company is subject to all of the federal and state laws and
regulations that apply to corporations generally, including the
federal and state securities laws and the Delaware Business
Corporation Law. In addition, as a company that owns and
controls a bank, the Company is regulated as a bank holding
company, is subject to supervision, examination and regulation
by the Federal Reserve Board under the federal Bank Holding
Company Act of 1956, as amended (the BHC Act), and
is subject to statutes, regulations and policies administered by
the Federal Reserve Board relating to, among other things,
mergers, acquisitions and changes in controlling ownership,
non-bank activities and subsidiaries, capital adequacy, the
receipt and payment of dividends, and the provision of financial
and managerial support to its subsidiary bank. In addition, the
Company is subject to certain state law restrictions
administered by the Massachusetts Division of Banks (the
Division), relating to, among other things, the
acquisition of additional banking institutions and the conduct
of nonbank activities.

15



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As a Massachusetts-chartered savings bank whose
deposits are insured by the FDIC (and, with respect
to any deposits in excess of FDIC limits, by the DIF), the Bank
is subject to regulation, supervision and examination by federal
and state regulatory authorities, including the FDIC and the
Division. The Bank is also subject to certain requirements
established by the Federal Reserve Board. This framework of
federal and state banking supervision and regulation is
administered primarily for the benefit of borrowers, depositors
and the respective deposit insurance funds and not for the
benefit of the Bank, the Company or its stockholders.

The Bank is subject to extensive federal and
state statutes, regulations, policies and standards regarding
virtually all aspects of its operations, including capital
adequacy, reserves, liquidity, payment of dividends,
transactions with affiliates, loans to officers, directors,
principal shareholders and their related interests, mergers,
acquisitions and changes in controlling ownership,
establishment, relocation and closure of branch banking offices,
community reinvestment, equal credit opportunity, credit
reporting, real estate settlement procedures, funds
availability, disclosure to consumers, consumer privacy,
financial accounting and reporting and record-keeping. In the
event the Bank failed to maintain adequate capital or otherwise
failed to operate in accordance with applicable federal and
Massachusetts statutes, regulations or policies, the FDIC and
the Division have authority to place the Bank in receivership or
conservatorship or impose other sanctions, including but not
limited to restrictions on dividend or other payments by the
Bank to the Company, termination of the Banks deposit
insurance, restrictions on the Banks growth, issuance of
orders to cease and desist from or to take specified actions,
assessment of money penalties, and removal of officers or
directors.

The Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) establishes five
categories of banking institutions  in descending
order of capital adequacy: well-capitalized,
adequately capitalized,
undercapitalized, significantly
undercapitalized, and critically
undercapitalized  and imposes certain
restrictions and requires federal bank regulatory agencies to
take prompt corrective action with respect to banks
that are in one of the three undercapitalized
categories. As of December 31, 2002, the Bank was
well capitalized as defined under the prompt
corrective action guidelines issued pursuant to FDICIA. For a
discussion of the Banks capital adequacy, see Note 14
to the Companys Consolidated Financial Statements, on
page 46.

FDICIA establishes a system of risk-based deposit
insurance assessments that takes a banks capital level and
supervisory risk characteristics into account in calculating the
amount of its federal deposit insurance assessment. In addition,
FDICIA places certain restrictions on the equity investments and
other principal activities of all state-chartered
banks, including the Bank. FDICIA further requires the FDIC and
other federal bank regulatory agencies to establish regulatory
safety and soundness standards to govern various
aspects of bank operations including internal controls,
information systems and audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth,
executive compensation, asset quality, earnings and stock
valuation, as the agencies consider appropriate. The FDIC may
require a bank that is not in compliance with safety and
soundness standards promulgated under FDICIA to submit and
implement a written plan to achieve compliance within a
specified time period and may impose sanctions on a bank that
fails to submit and implement an acceptable plan when required.
At December 31, 2002, the Banks operations were in
substantial compliance with all applicable safety and soundness
standards promulgated under FDICIA.

The Riegle-Neal Interstate Bank and Branching Act
of 1994 and applicable Massachusetts legislation permit
interstate branching, mergers and bank acquisitions by
Massachusetts bank holding companies and banks and permit
out-of-state bank holding companies and banks to expand their
banking operations into Massachusetts by merger, acquisition or
de novo branching subject to certain regulatory approval
requirements and other limitations.

The Gramm-Leach-Bliley Act repeals provisions of
the Glass-Steagall Act: Section 20, which restricted the
affiliation of banks with firms engaged principally
in specified securities activities; and Section 32, which
restricted officer, director, or employee interlocks between a
bank and any company or person primarily engaged in
specified securities activities. Moreover, the general effect of
the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by
revising and expanding the BHCA framework to permit a

16



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holding company system, such as the Company, to
engage in a full range of financial activities through a new
entity known as a financial holding company. Financial
activities is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking
and additional activities that the Federal Reserve Board in
consultation with the Secretary of the Treasury, determines to
be financial in nature, incidental to such financial activities,
or complementary activities that do not pose a substantial risk
to the safety and soundness of depository institutions or the
financial system generally. In sum, the Gramm-Leach-Bliley Act
permits bank holding companies that qualify and elect to be
treated as a financial holding company to engage in a
significantly broader range of financial activities than the
activities described above that are not so treated.


Generally, the Gramm-Leach-Bliley Act and its
implementing regulations:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | repeal historical restrictions on, and eliminates
    many federal and state law barriers to, affiliations among
    banks, securities firms, insurance companies, and other
    financial service providers;                                                                                                                                                                                                     
|
| |  | permit investment in non-financial enterprises,
    subject to significant operational, holding period and other
    restrictions;                                                                                                                                                                                                                                                                                
|
| |  | provide a uniform framework for the functional
    regulation of the activities of banks, savings institutions, and
    their holding companies;                                                                                                                                                                                                                                                                  
|
| |  | broaden the activities that may be conducted by
    national banks (and derivatively state banks), banking
    subsidiaries of bank holding companies, and their financial
    subsidiaries;                                                                                                                                                                                                                      
|
| |  | require all financial institutions to provide
    notice of their privacy policies at specified times to their
    retail customers and customers of their financial products or
    services, and permit retail customers and consumers, under
    certain circumstances, to prohibit financial institutions from
    sharing certain nonpublic information pertaining to them by
    opting out of such sharing.
|
| |  | establish guidelines for safeguarding the
    security, confidentiality and integrity of customer information.                                                                                                                                                                                                                                                                                                    
|
| |  | adopt a number of provisions related to the
    capitalization, membership, corporate governance, and other
    measures designed to modernize the Federal Home Loan Bank system;                                                                                                                                                                                                                                 
|
| |  | modify the laws governing the implementation of
    the Community Reinvestment Act of 1977; and                                                                                                                                                                                                                                                                                                                   
|
| |  | address a variety of other legal and regulatory
    issues affecting both day-to-day operations and long-term
    activities of financial institutions.                                                                                                                                                                                                                                                           

In order to elect to become a financial holding
company and engage in the new activities, a bank holding
company, such as the Company, must meet certain tests and file
an election form with the Federal Reserve Board which generally
is acted on within thirty days. To qualify, all of a bank
holding companys subsidiary banks must be well-capitalized
and well-managed, as measured by regulatory guidelines. In
addition, to engage in the new activities each of the bank
holding companys banks must have been rated
satisfactory or better in its most recent federal
Community Reinvestment Act evaluation. Furthermore, a bank
holding company that elects to be treated as a financial holding
company may face significant consequences if any of its banks
fail to maintain the required capital and management ratings,
including entering into an agreement with the Federal Reserve
Board which imposes limitations on its operations and may even
require divestitures. Such possible ramifications may limit the
ability of a bank subsidiary to significantly expand or acquire
less than well-capitalized and well-managed institutions. To
date, the Company has not elected to become a financial holding
company.

Section 24 of the Federal Deposit Insurance
Act (FDIA) generally limits the activities as
principal and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national
banks. In 1999, the FDIC substantially revised its regulations
implementing Section 24 to ease the ability of state banks
to engage in certain activities not permissible for national
banks, and to expedite FDIC review of bank applications and
notice to engage in such activities. In response to a
Massachusetts law enacted in 1996, in 1997 and 1999, the
Division finalized rules that generally give Massachusetts
banks, and their subsidiaries, many powers equivalent to those
of national banks. The Division also has adopted regulations and
procedures

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expediting the approval process for
well-capitalized banks to establish branches or to engage in
certain activities.


Further, the Gramm-Leach-Bliley Act, which
includes new sections of the National Bank Act and the FDIA
governing the establishment and operation of financial
subsidiaries, permits national banks and state banks, to the
extent permitted under state law, to engage in certain new
activities which are permissible for subsidiaries of a financial
holding company. In addition, it expressly preserves the ability
of national banks and state banks to retain all existing
subsidiaries. In order to form a financial subsidiary, a
national bank or state bank must be well-capitalized, and such
banks would be subject to certain capital deduction, risk
management and affiliate transaction rules. Also, the FDIC has
issued final rules governing the establishment of financial
subsidiaries by insured state nonmember banks. The final rules
restate the FDICs position that activities that a national
bank could only engage in through a financial subsidiary, such
as securities underwriting, only may be conducted in a financial
subsidiary by a state nonmember bank. However, activities that a
national bank could not engage in through a financial
subsidiary, such as real estate development or investment, will
continue to be governed by the FDICs standard activities
rules. Moreover, to mirror the Federal Reserve Boards
actions with respect to state member banks, the final rules
provide that a state bank subsidiary that engages only in
activities that the bank could engage in directly (regardless of
the nature of the activities) will not be deemed a financial
subsidiary.

The Federal Change in Bank Control Act prohibits
a person or group of persons from acquiring control
of a bank holding company unless the Federal Reserve Board has
been given at least 60 days to review the proposal. Under a
rebuttable presumption established by the Federal Reserve Board,
the acquisition of 10% or more of a class of voting stock of a
bank holding company, such as the Company, with a class of
securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended would, under the circumstances
set forth in the presumption, constitute the acquisition of
control.

In addition, any company, as that term is broadly
defined in the statute, would be required to obtain the approval
of the Federal Reserve Board before acquiring 25% (5% in the
case of an acquirer that is a bank holding company) or more, or
such lesser percentage of the Companys outstanding common
stock as the Federal Reserve Board deems to constitute control
over the Company.

The Federal Reserve Board, the FDIC and other
bank regulatory agencies have adopted final guidelines (the
Guidelines) for safeguarding confidential customer
information. The Guidelines require each financial institution,
under the supervision and ongoing oversight of its Board of
Directors, to create a comprehensive written information
security program designed to ensure the security and
confidentiality of customer information, protect against any
anticipated threats or hazards to the security or integrity of
such information, and protect against unauthorized access to or
use of such information that could result in substantial harm or
inconvenience to any customer.

The Graham-Leach-Bliley Act requires financial
institutions to implement policies and procedures regarding the
disclosure of nonpublic personal information about consumers to
nonaffiliated third parties. In general, the statute requires
the Company and the Bank to explain to consumers its policies
and procedures regarding the disclosure of such nonpublic
personal information, and, except as otherwise required by law,
the Company and the Bank are prohibited from disclosing such
information except as provided in its policies and procedures.

The USA Patriot Act of 2001 (the Patriot
Act), designed to deny terrorists and others the ability
to obtain anonymous access to the United States financial
system, has significant implications for depository
institutions, brokers, dealers and other businesses involved in
the transfer of money. The Patriot Act mandates or will require
financial institutions to implement additional policies and
procedures with respect to, or additional measures designed to
address, any or all of the following matters, among others:
money laundering, suspicious activities, currency transaction
reporting, and currency crimes.

From time to time the U.S. Congress and the
Massachusetts Legislature adopt legislation and the federal and
state bank regulatory agencies issue regulations and policies
that may significantly affect the operations of the Bank and the
Company. No assurance can be given as to whether or when such
additional legislation,

18



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##### Table of Contents



regulations or policies may be adopted or as to
the effect any such legislation, regulations or policies may
have on the Company or the Bank.


Employees

MASSBANK Corp. utilizes the support staff of the
Bank from time to time without the payment of any fees. No
separate compensation is being paid to the executive officers of
MASSBANK Corp., all of whom are executive officers of the Bank
and receive compensation as such. As of December 31, 2002,
the Bank had 130 full-time employees (including 31 officers) and
61 part-time employees (including 1 officer). None of the
Banks employees is represented by a collective bargaining
group, and management believes that its employee relations are
good. The Bank provides its employees with formal training in
product knowledge, sales techniques, fair lending, and
motivation. In addition, each supervisor at the Bank receives
management training before assuming his or her supervisory
duties and periodically thereafter. The Bank maintains a
comprehensive employee benefits program for qualified employees
that includes a qualified pension plan, an Employee Stock
Ownership Plan (ESOP), health and dental insurance, life and
long-term disability insurance and tuition assistance.

Subsidiaries

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

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

Assets of Readibank Investment Corporation and
Melbank Investment Corporation totaled $154.4 million and
$154.0 million, respectively, at December 31, 2002.

Readibank Properties, Inc. incorporated primarily
for the purpose of real estate development, had total assets of
$619 thousand at December 31, 2002.

Executive Officers of the Registrant

The executive officers of the Company and the
Bank and the age of each officer as of March 4, 2003 are as
follows:

|                    |  |     |    |        |  |                                                                                                          
|------------------- |  | --- | -- | ------ |  | ---------------------------------------------------------------------------------------------------------
|Name                |  | Age |    | Office
|                    |  |     |    |       
|Gerard H. Brandi    |  |     | 54 |        |  | Chairman of the Board of Directors, President and
    Chief Executive Officer of the Company and the Bank
|David F. Carroll    |  |     | 55 |        |  | Vice President of the Bank                                                                               
|Reginald E. Cormier |  |     | 55 |        |  | Senior Vice President, Treasurer and Chief
    Financial Officer of the Company and the Bank             
|Thomas J. Queeney   |  |     | 40 |        |  | Vice President and Senior Trust Officer of the
    Bank                                                  
|Donald R. Washburn  |  |     | 59 |        |  | Senior Vice President of the Bank                                                                        
|Donna H. West       |  |     | 57 |        |  | Senior Vice President of the Bank and Assistant
    Secretary of the Company                             

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

19



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##### Table of Contents



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

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

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

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

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

20



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##### Table of Contents






Item 2.Properties

The main office of MASSBANK Corp. and MASSBANK is
located at 123 Haven Street, Reading, Massachusetts.
Additionally, the Bank has fourteen branches and three
operations facilities. The Bank owns its main office, three
operations facilities and nine of its branches. All of the
remaining branches and other facilities are leased under various
leases. At December 31, 2002, management believes that the
Banks existing facilities are adequate for the conduct of
its business.

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

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




Item 3.Legal
Proceedings

From time to time, MASSBANK Corp. and/or the Bank
are involved as a plaintiff or defendant in various legal
actions incident to their business. As of December 31,
2002, none of these actions individually or in the aggregate is
believed by management to be material to the financial condition
of MASSBANK Corp. or the Bank.




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

None.

21



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##### Table of Contents






PART II




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

The information contained under the caption
MASSBANK Corp. and Subsidiaries Stockholder Data in
the Registrants 2002 Annual Report to Stockholders is
incorporated herein by reference.

Equity Compensation Plan Information

The following table provides information as of
December 31, 2002 regarding shares of common stock of the
Company that may be issued under its existing equity
compensation plans, including the Companys 1994 Stock
Incentive Plan (the 1994 Plan) and the
Companys 1986 Stock Option Plan (the 1986
Plan).

Equity Compensation Plan Information

|                                                               |       |                      |         |                     |  |                  |       |       |  |  |         |         | 
|-------------------------------------------------------------- | ----- | -------------------- | ------- | ------------------- |  | ---------------- | ----- | ----- |  |  | ------- | ------- | 
|                                                               |       |                      |         |                     |  | Number of       
|                                                               |       |                      |         |                     |  | Securities      
|                                                               |       |                      |         |                     |  | Remaining       
|                                                               |       |                      |         |                     |  | Available for   
|                                                               |       |                      |         |                     |  | Future Issuance 
|                                                               |       | Number of            |         |                     |  | Under Equity    
|                                                               |       | Securities to be     |         | Weighted Average    |  | Compensation    
|                                                               |       | Issued Upon          |         | Exercise Price of   |  | Plans (excluding
|                                                               |       | Exercise of          |         | Outstanding Options |  | securities      
|                                                               |       | Outstanding Options, |         | Warrants and        |  | referenced in   
|Plan Category                                                  |       | Warrants and Rights  |         | Rights              |  | column (a)      
|                                                               |       |                      |         |                     |  |                 
|                                                               |       | (a)                  |         | (b)                 |  | (c)             
|Equity compensation plans approved by security
    holders(1)  |       |                      | 400,451 | (2)                 |  | $                | 19.31 | (2)   |  |  | 146,107 |        
|Equity compensation plans not approved by
    security holders |       |                      |        |                     |  |                  |      |       |  |  |        |        
|                                                               |       |                      |         |                     |  |                  |       |       |  |  |         |        
|                                                               | Total |                      |         | 400,451             |  |                  | $     | 19.31 |  |  |         | 146,107 | 
|                                                               |       |                      |         |                     |  |                  |       |       |  |  |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of the 1994 Plan and the 1986 Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | Includes 24,329 shares deemed subject to issue
    under the 1994 Plan to satisfy the Companys obligations
    under a Director Deferred Compensation Plan. The Company has
    established a so called Rabbi Trust for the benefit
    of directors under a director deferred compensation plan. This
    plan allows directors to defer their cash director fees and
    receive upon retirement that number of shares of the
    companys common stock which they would have owned if they
    had not deferred those fees and instead invested them in the
    companys stock. The trustee of the trust regularly
    purchases shares of the companys stock in the open market
    with fees deferred by the participants. The Trust is currently
    obligated to issue 24,329 shares to directors under this Plan.




Item 6.Selected
Financial Data

The information contained under the caption
MASSBANK Corp. and Subsidiaries  Selected
Consolidated Financial Data in the Registrants 2002
Annual Report to Stockholders is incorporated herein by
reference.

This selected consolidated financial data should
be read in conjunction with the consolidated statements and
related notes thereto appearing in the Registrants 2002
Annual Report to Stockholders which are incorporated herein by
reference.






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

The information contained under the caption
Managements Discussion and Analysis of Financial
Condition and Results of Operations in the
Registrants 2002 Annual Report to Stockholders is
incorporated herein by reference.

22



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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

The information contained under the captions
Asset and Liability Management, Interest Rate
Risk and Other Market Risks included in
Managements Discussion and Analysis of Financial Condition
and Results of Operations section of the Registrants 2002
Annual Report to Stockholders is incorporated herein by
reference.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The Registrants consolidated financial
statements and notes thereto, together with the report of KPMG
LLP, contained in the Registrants 2002 Annual Report to
Stockholders are incorporated herein by reference. The unaudited
quarterly financial data set forth on page 52 of such
Annual Report is incorporated herein by reference.






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

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information appearing under the caption
Election of Directors and Compliance with
Section 16(A) of the Exchange Act in the
Registrants definitive proxy statement relating to its
2003 Annual Meeting of Stockholders is incorporated herein by
reference. Information required by this item concerning the
Executive Officers of the Registrant is contained in Part I
of this Form 10-K.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information appearing under the caption
Executive Compensation in the Registrants
definitive proxy statement relating to its 2003 Annual Meeting
of Stockholders is incorporated herein by reference.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information appearing under the captions
Election of Directors and Principal
Stockholders in the Registrants definitive proxy
statement relating to its 2003 Annual Meeting of Stockholders is
incorporated herein by reference.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information contained in Note 5 of the
Consolidated Financial Statements under the caption
Loans in the Registrants 2002 Annual Report to
Stockholders is incorporated herein by reference.

23



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##### Table of Contents






PART IV






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Evaluation of disclosure controls and
procedures.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As required by Rule 13a-15 under the
    Exchange Act, within the 90 days prior to the date of this
    report, the Company carried out an evaluation under the
    supervision and with the participation of its management,
    including its Chief Executive Officer and Chief Financial
    Officer, of the effectiveness of the design and operation of the
    Companys disclosure controls and procedures. In designing
    and evaluating the Companys disclosure controls and
    procedures, the Company and its management recognize that any
    controls and procedures, no matter how well designed and
    operated, can provide only a reasonable assurance to achieving
    the desired control objectives, and management necessarily was
    required to apply its judgment in evaluating and implementing
    possible controls and procedures. Based upon that evaluation,
    the Chief Executive Officer and Chief Financial Officer
    concluded that they believe the Companys disclosure
    controls and procedures are reasonably effective to ensure that
    information required to be disclosed by the Company in the
    reports it files or submits under the Exchange Act is recorded,
    processed, summarized and reported, within the time periods
    specified in the SECs rules and forms. In accordance with
    the rules regarding disclosure and control procedures, the
    Company intends to continue to review and document its
    disclosure controls and procedures, including its internal
    controls and procedures for financial reporting, and may from
    time to time make changes aimed at enhancing their effectiveness
    and to ensure that its systems evolve with its business.

(b) Changes in internal controls.



| |     
| | ----
| | None




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

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

(a)1.     Financial
Statements

|                                                                                                               |  |                   |       | 
|-------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----- | 
|                                                                                                               |  | Reference to 2002
|                                                                                                               |  | Annual Report to 
|                                                                                                               |  | Stockholders     
|                                                                                                               |  | (Pages)          
|                                                                                                               |  |                  
|Independent Auditors Report                                                                                   |  |                   | 25    | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                                  |  |                   | 26    | 
|Consolidated Statements of Income for the three
    years ended December 31, 2002                              |  |                   | 27    | 
|Consolidated Statements of Cash Flows for the
    three years ended December 31, 2002                          |  |                   | 28-29 | 
|Consolidated Statements of Changes in
    Stockholders Equity for the three years ended
    December 31, 2002 |  |                   | 30    | 
|Notes to Consolidated Financial Statements                                                                     |  |                   | 31-52 | 

2.     Financial
Statement Schedules



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

24



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##### Table of Contents



3.     Exhibits

|            |    |                        |  |                                                                                                                                                                                                                                                                              
|----------- | -- | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description of Exhibit
|            |    |                       
|            | 3  | .1                     |  | Restated Certificate of Incorporation of the
    Registrant  incorporated by reference to
    Exhibit 3.1 of the Registrants Form S-4
    Registration Statement (Reg. No. 33-7916).                                                                                       
|            | 3  | .2                     |  | By-Laws of the Registrant 
    incorporated by reference to Exhibit 3 of the
    Registrants Form 10-Q for the quarter ended
    September 30, 1991.                                                                                                                       
|            | 4  | .1                     |  | Shareholder Rights Agreement dated as of
    January 18, 2000, between the Company and The First
    National Bank of Boston, as Rights Agent 
    incorporated herein by reference to the Exhibit to the
    Companys Report on Form 8-K dated as of
    January 20, 2000.
|            | 10 | .1                     |  | MASSBANK Corp. 1986 Stock Option Plan, as
    amended  incorporated by reference to
    Exhibit 28.1 to the Registrants Form S-8
    Registration Statement (Reg. No. 33-11949).                                                                                           
|            | 10 | .1.2                   |  | Amendment to MASSBANK Corp. 1986 Stock Option
    Plan dated April 19, 1991  incorporated by
    reference to Exhibit 10.1.2 to the Registrants annual
    report on Form 10-K for the year ended December 31,
    1992.                                                   
|            | 10 | .1.3                   |  | MASSBANK Corp. 1994 Stock Incentive
    Plan  incorporated by reference to Exhibit 10.1
    to the Registrants Form S-8 Registration Statement
    (Reg. No. 33-82110).                                                                                                    
|            | 10 | .1.4                   |  | Amendment to MASSBANK Corp. 1994 Stock Incentive
    Plan dated April 21, 1998  incorporated by
    reference to Exhibit 10.1.4 to the Registrants annual
    report on Form 10-K for the year ended December 31,
    1997.                                                
|            | 10 | .2                     |  | MASSBANK for Savings Employees Stock
    Ownership Plan and Trust Agreement  incorporated by
    reference to Exhibit 10.2 of the Registrants
    Form S-4 Registration Statement (Reg. No. 33-7916).                                                                     
|            | 10 | .2.1                   |  | Amendments to the MASSBANK for Savings
    Employees Stock Ownership Plan and Trust
    Agreement  incorporated by reference to
    Exhibit 10.2.1 to the Registrants annual report on
    Form 10-K for the year ended December 31, 1993.                                
|            | 10 | .2.2                   |  | Amendments to the MASSBANK for Savings
    Employees Stock Ownership Plan and Trust
    Agreement  incorporated by reference to
    Exhibit 10.2.2 to the Registrants annual report on
    Form 10-K for the year ended December 31, 1997.                                
|            | 10 | .3.16                  |  | Amended and Restated Employment Agreement with
    Gerard H. Brandi dated as of October 28, 2002 
    incorporated by reference to exhibit 10.3.16 to the
    Registrants quarterly report on Form 10-Q for the
    period ended September 30, 2002.                       
|            | 10 | .3.17                  |  | Amended and Restated Employment Agreement with
    David F. Carroll dated as of October 28, 2002 
    incorporated by reference to exhibit 10.3.17 to the
    Registrants quarterly report on Form 10-Q for the
    period ended September 30, 2002.                       
|            | 10 | .3.18                  |  | Amended and Restated Employment Agreement with
    Reginald E. Cormier dated as of October 28,
    2002  incorporated by reference to
    exhibit 10.3.18 to the Registrants quarterly report
    on Form 10-Q for the period ended September 30, 2002.                    
|            | 10 | .3.19                  |  | Amended and Restated Employment Agreement with
    Donald R. Washburn dated as of October 28, 2002 
    incorporated by reference to exhibit 10.3.19 to the
    Registrants quarterly report on Form 10-Q for the
    period ended September 30, 2002.                     
|            | 10 | .3.20                  |  | Amended and Restated Employment Agreement with
    Donna H. West dated as of October 28, 2002 
    incorporated by reference to exhibit 10.3.20 to the
    Registrants quarterly report on Form 10-Q for the
    period ended September 30, 2002.                          
|            | 10 | .3.21                  |  | Form of Employment Agreement with Thomas J.
    Queeney dated as of October 28, 2002 
    incorporated by reference to exhibit 10.3.21 to the
    Registrants quarterly report on Form 10-Q for the
    period ended September 30, 2002.                                   
|            | 10 | .4                     |  | Form of Executive Supplemental Retirement
    Agreement, as amended, with Gerard H. Brandi 
    incorporated by reference to Exhibit 10.4 of
    Registrants annual report on Form 10-K for the year
    ended December 31, 1986.                                          

25



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##### Table of Contents



|            |    |                        |  |                                                                                                                                                                                                                                                                                                                             
|----------- | -- | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description of Exhibit
|            |    |                       
|            | 10 | .4.1                   |  | Amendments to the Executive Supplemental
    Retirement Agreement with Gerard H. Brandi are incorporated by
    reference to Exhibit 10.4.1 of the Registrants annual
    report on Form 10-K for the year ended December 31,
    1996.                                                                                    
|            | 10 | .5                     |  | Amended Deferred Compensation Plan for Directors
    of MASSBANK Corp. adopted March 8, 2000 
    incorporated by reference to Exhibit 10.5 of the
    Registrants annual report on Form 10-K for the year
    ended December 31, 2000.                                                                                   
|            | 10 | .6                     |  | Deferred Compensation Program for Bank employees
    dated November 14, 1994 incorporated by reference to
    Exhibit 10.6 of the Registrants annual report on
    Form 10-K for the year ended December 31, 2001.                                                                                                         
|            | 11 |                        |  | The computation of per share earnings can be
    readily determined from the material contained in the Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2002.                                                                                                                                      
|            | 12 |                        |  | Statement re: Computation of Ratios 
    Not applicable as MASSBANK Corp. does not have any debt
    securities registered under Section 12 of the Securities
    Exchange Act of 1934.                                                                                                                                    
|            | 13 |                        |  | 2002 Annual Report to Stockholders 
    except for those portions of the 2002 Annual Report to
    Stockholders which are expressly incorporated by reference in
    this report, such 2002 Annual Report to Stockholders is
    furnished for the information of the SEC and is not to be deemed
    filed with the SEC.
|            | 21 |                        |  | Subsidiaries of the Registrant  A list
    of subsidiaries of the Registrant is attached hereto as
    Exhibit 21 to this Annual Report.                                                                                                                                                                                   
|            | 23 |                        |  | Independent Accountants Consent.                                                                                                                                                                                                                                                                                           
|            |    | (b)                    |  | Reports on Form 8-K
    No reports on Form 8-K have been filed during the last
    quarter of the period covered by this Form 10-K.                                                                                                                                                                                         
|            |    | (c)                    |  | Exhibits to this Form 10-K are attached or
    incorporated by reference as stated in the Index to Exhibits.                                                                                                                                                                                                                
|            |    | (d)                    |  | Not applicable.                                                                                                                                                                                                                                                                                                             
|            | 99 | .1                     |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 is attached
    hereto as Exhibit 99.1 to this Annual Report.                                                                                                     
|            | 99 | .2                     |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 is attached
    hereto as Exhibit 99.2 to this Annual Report.                                                                                                     

26



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##### Table of Contents






SIGNATURES

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



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

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

|                                               |  |                                                                                                               |  |               
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | --------------
|                                              
|/s/ GERARD H. BRANDIGerard H. Brandi           |  | Chairman, President, Chief Executive Officer and
    Director                                                 |  | March 24, 2003
|                                              
|/s/ REGINALD E. CORMIERReginald E. Cormier     |  | Senior Vice President, Treasurer and Chief
    Financial Officer (Principal Financial and Accounting Officer) |  | March 24, 2003
|                                              
|/s/ MATHIAS B. BEDELLMathias B. Bedell         |  | Director                                                                                                      |  | March 24, 2003
|                                              
|/s/ ALLAN S. BUFFERDAllan S. Bufferd           |  | Director                                                                                                      |  | March 24, 2003
|                                              
|/s/ PETER W. CARRPeter W. Carr                 |  | Director                                                                                                      |  | March 24, 2003
|                                              
|/s/ ALEXANDER S. COSTELLOAlexander S. Costello |  | Director                                                                                                      |  | March 24, 2003
|                                              
|/s/ ROBERT S. CUMMINGSRobert S. Cummings       |  | Director                                                                                                      |  | March 24, 2003
|                                              
|/s/ LEONARD LAPIDUSLeonard Lapidus             |  | Director                                                                                                      |  | March 24, 2003
|                                              
|/s/ STEPHEN E. MARSHALLStephen E. Marshall     |  | Director                                                                                                      |  | March 24, 2003
|                                              
|/s/ NANCY L. PETTINELLINancy L. Pettinelli     |  | Director                                                                                                      |  | March 24, 2003
|                                              
|/s/ HERBERT G. SCHURIANHerbert G. Schurian     |  | Director                                                                                                      |  | March 24, 2003
|                                              
|/s/ DONALD B. STACKHOUSEDonald B. Stackhouse   |  | Director                                                                                                      |  | March 24, 2003

27



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##### Table of Contents






CERTIFICATIONS

I, Gerard H. Brandi certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on
    Form 10-K of MASSBANK Corp.                                                                                                                                                                                                                                                                       
|
| | 2. Based on my knowledge, this annual report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report;                   
|
| | 4. The registrants other certifying
    officers, and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                      



| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| |  | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| |  | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying
    officers and I have disclosed, based on our most recent
    evaluation, to the registrants auditors and the audit
    committee of registrants board of directors:



| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| |  | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying
    officers and I have indicated in this annual report whether
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                                    
| | -----------------------------------
| | /s/ GERARD H. BRANDI               
| |                                    
| | Gerard H. Brandi, President and CEO
| | (principal executive officer)      

Date: March 24, 2003

28



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##### Table of Contents






CERTIFICATIONS

I, Reginald E. Cormier certify that:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on
    Form 10-K of MASSBANK Corp.                                                                                                                                                                                                                                                                       
|
| | 2. Based on my knowledge, this annual report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report;                   
|
| | 4. The registrants other certifying
    officers, and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                      



| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| |  | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| |  | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying
    officers and I have disclosed, based on our most recent
    evaluation, to the registrants auditors and the audit
    committee of registrants board of directors:



| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| |  | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying
    officers and I have indicated in this annual report whether
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                                                  
| | -------------------------------------------------
| | /s/ REGINALD E. CORMIER                          
| |                                                  
| | Reginald E. Cormier, Sr. V.P.,Treasurer
    & CFO
| | (principal financial officer)                    

Date: March 24, 2003

29