10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2003
OR

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

For the transition period from______________to____________

Commission File Number 0-15137

MASSBANK Corp.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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

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

TABLE OF CONTENTS

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

3

Forward-Looking Statement Disclosure.

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

- The strength of the local economy and the U.S. economy in general;

- Unexpected fluctuations in market interest rates;

- Unexpected fluctuations in the market for equities, bonds, federal funds and other financial instruments;

- An increase in the level of non-performing assets;

- An increase in competitive pricing pressures within the Company’s market which may result in the following:

• An increase in the Company’s cost of funds;

• A decrease in loan originations;

• A decrease in deposits; and

• Limit the ability of the Company to attract and retain banking customers;

- Adverse legislative or regulatory developments;

- Adverse impacts resulting from the continuing war on terrorism;

- An increase in other employee-related costs; and

- The impact of deflation or inflation, and other factors described in the Company’s annual report.

Internet Access

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

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PART I

Item 1. Business

Business of MASSBANK Corp.

General

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

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

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

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

Competition

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

5

Employees

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

Dividends

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

Stock Repurchase Program

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

6

Business of MASSBANK

General

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

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

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

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

7

Market Area

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

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

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

Lending Activities

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

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

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

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

8

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

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

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

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

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

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

9

Mortgage Lending (continued)

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

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

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

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

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

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

10

Mortgage Lending (continued)

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

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

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

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

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

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

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

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

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

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Real Estate Acquired through Foreclosure.

     Real estate acquired through foreclosure is comprised of foreclosed properties where the Bank has actually received title and loans determined to be substantially repossessed. Real estate loans that are substantially repossessed include only those loans for which the Bank has taken possession of the collateral but has not completed legal foreclosure proceedings. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Real estate acquired through foreclosure is recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received, less estimated costs to sell the property following foreclosure. Operating expenses and any subsequent provisions to reduce the carrying value to fair value are charged to current period earnings. Gains and losses upon disposition are reflected in earnings as realized. At year-end 2003, MASSBANK had no real estate acquired through foreclosure.

Non-Performing Assets

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

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

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

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

12

Allowance for Loan Losses.

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

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

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

13

Investment Activities

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

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

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

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

     Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in market conditions, interest rates, prepayment risk, the need to increase regulatory capital and other factors. The Company records investments securities available for sale at aggregate market value with the net unrealized holding gains or losses reported, net of tax effect, as a separate component of stockholders’ equity until realized. As of December 31, 2003, stockholders’ equity included approximately $4.0 million, representing the net unrealized gains on securities available for sale, less applicable income taxes.

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

14

Investment Activities (continued)

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

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

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

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

15

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

Investment Portfolio

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

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

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

16

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

Debt Securities Available for Sale

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

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

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

17

Deposits and Other Sources of Funds

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

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

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

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

18

DEPOSITS

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

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

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

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

19

Investment Management and Trust Services

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

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

Competition

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

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

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

20

Supervision and Regulation of the Company and its Subsidiary

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

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

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

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

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

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

21

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

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

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

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

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

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

22

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

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

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

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

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

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

23

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

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

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

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

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

24

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

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

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

25

Employees

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

Subsidiaries

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

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

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

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

Executive Officers of the Registrant

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

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

26

Executive Officers of the Registrant (continued)

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

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

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

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

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

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

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

27

Item 2. Properties

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

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

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

Item 3. Legal Proceedings

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

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

     None during the fourth quarter of 2003.

28

PART II

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

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

Item 6. Selected Financial Data

     The information contained under the caption “MASSBANK Corp. and Subsidiaries — Selected Consolidated Financial Data” in the Registrant’s 2003 Annual Report to Stockholders is incorporated herein by reference.

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

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

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

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

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

     None.

29

Item 9A. Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting.

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

30

PART III

Item 10. Directors and Executive Officers of the Registrant

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

Item 11. Executive Compensation

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

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

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

Item 13. Certain Relationships and Related Transactions

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

Item 14. Principal Accountant Fees and Services

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

PART IV

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

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

(a)1. Financial Statements

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

31

(a)1. Financial Statements (continued)

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

               2. Financial Statement Schedules

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

               3. Exhibits

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

32

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

33

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

34

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

35

Signatures

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

MASSBANK CORP.

/s/Gerard H. Brandi

Gerard H. Brandi

Chairman, President and Chief Executive Officer

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

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

36

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

37 EX-10.2.3 3 b49847mbexv10w2w3.txt EX-10.2.3 AMENDED EMPLOYEES STOCK OWNERSHIP PLAN EXHIBIT 10.23 MASSBANK EMPLOYEES' STOCK OWNERSHIP PLAN AND TRUST AGREEMENT AMENDED AND RESTATED AS OF NOVEMBER 1, 2001 TABLE OF CONTENTS

Page ---- ARTICLE I - THE TRUST.............................................................................................3 1.01 Continuation of Trust...........................................................................3 1.02 Interpretation of Trust Agreement...............................................................3 1.03 Exclusive Benefit...............................................................................3 ARTICLE II - DEFINITIONS..........................................................................................5 2.01 "Account".......................................................................................5 2.02 "Affiliated Company"............................................................................5 2.03 "Agreement".....................................................................................5 2.04 "Allocation Date"...............................................................................5 2.05 "Beneficiary"...................................................................................5 2.06 "Board".........................................................................................5 2.07 "Committee".....................................................................................5 2.08 "Company".......................................................................................6 2.09 "Compensation"..................................................................................6 2.10 "Computation Period"............................................................................6 2.11 "Dividend Account"..............................................................................7 2.12 "Effective Date"................................................................................7 2.13 "Employee"......................................................................................7 2.14 "Entry Date"....................................................................................7 2.15 "Hour of Service"...............................................................................7 2.16 "Limitation Year"...............................................................................9 2.17 "Member"........................................................................................9 2.18 "One-Year Break in Service".....................................................................9 2.19 "Plan"..........................................................................................9 2.20 "Plan Year".....................................................................................9 2.21 "Stock".........................................................................................9 2.22 "Trust"........................................................................................10 2.23 "Trustee"......................................................................................10 2.24 "Year of Eligibility Service"..................................................................10 2.25 "Year of Vesting Service"......................................................................10 ARTICLE III - MEMBERSHIP.........................................................................................11 3.01 Eligibility for Membership.....................................................................11 3.02 Determination of Eligibility by the Committee..................................................11 3.03 Duration of Membership.........................................................................11 3.04 Unpaid Leaves of Absence.......................................................................11 ARTICLE IV - CONTRIBUTIONS.......................................................................................13 4.01 Company Contribution...........................................................................13 4.02 Payment of Contributions.......................................................................13 4.03 Reversion of Certain Contributions.............................................................13 4.04 Member's Contributions.........................................................................14

(i) ARTICLE V - MEMBERS' ACCOUNTS....................................................................................15 5.01 Maintenance of Accounts........................................................................15 5.02 Compensation Schedule..........................................................................16 5.03 Allocation of Company Contributions............................................................16 5.04 Allocation of Forfeitures......................................................................16 5.05 Valuation of Assets Other than Stock...........................................................17 5.06 Allocation of Trust Assets Other than Stock....................................................17 5.07 Dividends on Stock.............................................................................18 5.08 Distributions and Forfeitures..................................................................19 5.09 Limitations on Allocations.....................................................................19 ARTICLE VI - BENEFITS............................................................................................23 6.01 Restrictions on Payments and Distributions.....................................................23 6.02 Retirement.....................................................................................23 6.03 Disability Retirement..........................................................................23 6.04 Death Benefits.................................................................................24 6.05 Termination of Employment Prior to Retirement or Death.........................................26 6.06 Reemployment...................................................................................27 6.07 Manner and Timing of Distributions.............................................................28 6.08 Discharge of Trustee's Obligations to Make Payment.............................................31 6.09 Special Distribution from Account and Dividend Account.........................................32 ARTICLE VII - AMENDMENT AND TERMINATION..........................................................................34 7.01 Right to Amend or Terminate....................................................................34 7.02 Amendment for Tax Exemption....................................................................34 7.03 Liquidation of Trust in Event of Termination...................................................34 7.04 Termination of Plan and Trust..................................................................35 ARTICLE VIII - ADMINISTRATION OF THE PLAN........................................................................36 8.01 Named Fiduciaries..............................................................................36 8.02 Appointment of Committee.......................................................................36 8.03 Powers of Committee............................................................................37 8.04 Action by Committee............................................................................37 8.05 Discretionary Action...........................................................................37 8.06 Evidence on Which Committee May Act............................................................38 8.07 Employment of Agents...........................................................................38 8.08 Compensation and Expense of Committee..........................................................39 8.09 Indemnification................................................................................39 8.10 Claims Procedure...............................................................................39 ARTICLE IX - THE TRUSTEE.........................................................................................43 9.01 Powers of Trustee..............................................................................43 9.02 Investments....................................................................................43 9.03 Method of Holding and Selling Securities.......................................................44 9.04 Exercise of Voting Rights......................................................................44 9.05 Reliance on Trustee as Owner...................................................................45 9.06 Liquidation of Assets..........................................................................45 (ii)

9.07 Direction by Committee.........................................................................45 9.08 Records and Accounting.........................................................................46 9.09 Payment of Taxes...............................................................................47 9.10 Trustee's Compensation and Expenses............................................................48 9.11 Resignation or Removal of Trustee..............................................................48 9.12 Tender Offer or Exchange Offer.................................................................49 9.13 Indemnification of Trustee.....................................................................49 ARTICLE X - THE COMPANY..........................................................................................51 10.01 Powers of the Bank.............................................................................51 10.02 No Contract of Employment......................................................................51 10.03 Liability of Company...........................................................................51 10.04 Action by Company..............................................................................51 10.05 Successor to Business of Company...............................................................52 10.06 Dissolution of the Company.....................................................................52 ARTICLE XI - ESOP LOANS..........................................................................................53 11.01 ESOP Loan......................................................................................53 11.02 Use of ESOP Loan Proceeds......................................................................53 11.03 Terms and Conditions...........................................................................53 11.04 Collateral for ESOP Loan.......................................................................54 11.05 Suspense Accounts..............................................................................54 ARTICLE XII - TOP-HEAVY PROVISIONS...............................................................................56 12.01 Article Controls...............................................................................56 12.02 Definitions....................................................................................56 12.03 Top-Heavy Status...............................................................................59 12.04 Minimum Benefit................................................................................60 12.05 Adjustment to Combined Limitation..............................................................60 12.06 Minimum Vesting................................................................................61 12.07 Restriction on Compensation....................................................................61 12.08 Termination of Top-Heavy Status................................................................61 ARTICLE XIII - ADDITIONAL PARTICIPATING COMPANIES................................................................62 13.01 Participation..................................................................................62 13.02 Effective Date.................................................................................62 13.03 Administration.................................................................................62 13.04 Termination....................................................................................62 13.05 Allocation of Forfeitures......................................................................62 13.06 Contributions..................................................................................63 ARTICLE XIV - MISCELLANEOUS......................................................................................64 14.01 Spendthrift Provision..........................................................................64 14.02 Appointment of Person to Receive Payment.......................................................64 14.03 Construction...................................................................................64 14.04 Impossibility of Performance...................................................................65 14.05 Definition of Words............................................................................65

(iii)

14.06 Titles.........................................................................................65 14.07 Merger or Consolidation........................................................................65 14.08 Execution of Agreement.........................................................................65 14.09 Special Provisions for Certain Leased Employees................................................66 14.10 USERRA.........................................................................................66 14.11 Correction Methods.............................................................................66 14.12 Writings.......................................................................................67 ARTICLE XV - DIRECT ROLLOVERS....................................................................................68 15.01 Application of this Article....................................................................68 15.02 Definitions....................................................................................68 ARTICLE XVI - MINIMUM DISTRIBUTION REQUIREMENTS..................................................................70 16.01 General Rules..................................................................................70 16.02 Time and Manner of Distribution................................................................70 16.03 Required Minimum Distributions During Member's Lifetime........................................71 16.04 Required Minimum Distributions After Member's Death............................................72 16.05 Definitions....................................................................................72

(iv) MASSBANK EMPLOYEES' STOCK OWNERSHIP PLAN AND TRUST AGREEMENT The Trust Agreement dated the 16th day of April, 1986, creating the MASSBANK FOR SAVINGS Employee Stock Ownership Plan, as heretofore amended, is hereby amended and restated in its entirety as follows: W I T N E S S E T H T H A T: T: WHEREAS, the Company has changed its name from MASSBANK for Savings to MASSBANK; WHEREAS, the Company recognizes the contribution being made to the successful operation of its business by its employees and desires to reward such contribution by maintaining an employee benefit plan for its employees; WHEREAS, the Plan and Trust Agreement was last amended on June 6, 1997; WHEREAS, the Company desires to amend and restate this Trust Agreement further to, among other things, comply with the requirements of GUST; WHEREAS, the Company also desires to amend this Trust Agreement further to reflect certain provisions of EGTRRA which are intended as good faith compliance with the requirements of EGTRRA and guidance thereunder and shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this restatement; WHEREAS, the Company wishes to amend and restate the Plan effective as of November 1, 2001 (except as otherwise provided herein and except with respect to EGTRRA amendments which shall be effective October 1, 2002) to reflect the change in its corporate name, changes in tax laws, and to make certain other changes; NOW, THEREFORE, the parties hereto, each in consideration of the covenants, agreements and declarations of the other, mutually covenant, agree and declare as follows: 2 ARTICLE I - THE TRUST 1.01 Continuation of Trust. There is hereby continued the trust known as the "MASSBANK EMPLOYEES' STOCK OWNERSHIP TRUST." The Trustee shall receive any contributions paid to the Trust in cash or in other property, and all contributions so received, together with the income therefrom, shall be held, managed, and administered as a fund in trust pursuant to the terms of this Agreement. The Trustee hereby accepts the Trust created hereunder and agrees to perform the provisions of this Agreement on its part to be performed. 1.02 Interpretation of Trust Agreement. The Trust has been stablished and is continued for the purpose of providing retirement and other benefits to the Employees of the Company in the form of deferred stock bonuses and is established for the exclusive benefit of the eligible Employees and their Beneficiaries. The Plan is hereby designated as an employee stock ownership plan within the meaning of Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended (the "Code") and as such is designed to invest primarily in qualified employer securities. So far as possible, this Agreement shall be interpreted in a manner consistent with these purposes and with the intent of the Company that the Trust established hereunder shall satisfy those provisions of the Code and ERISA relating to exempt employees' trusts. 1.03 Exclusive Benefit. Except as expressly authorized in Sections 1.04 and 4.03, in no event shall the corpus or income of the Plan be paid or diverted to the Company or be used for any purpose other than the exclusive benefit of the Members or their Beneficiaries; provided, however, that neither the use of qualifying employer securities held by the Plan as a pledge, as collateral or otherwise, to secure any ESOP Loan pursuant to Article XI nor any subsequent loss of such securities in connection with a default of such loan nor the use of any assets of the Trust 3 to pay interest on or to repay such loan pursuant to Article XI shall constitute a violation of this provision. 4 ARTICLE II - DEFINITIONS Whenever used herein, unless the context clearly indicates otherwise, the following words shall have the following meanings: 2.01 "Account" means the account established and maintained for each Member pursuant to Article V. 2.02 "Affiliated Company" means (a) a corporation which, together with the Company, is a member of a controlled group of corporations (as defined in Section 414(b) of the Code), (b) a trade or business (whether or not incorporated) which is under common control (as defined in Section 414(c) of the Code) with the Company, (c) a corporation, partnership or other entity which, together with the Company, is a member of an affiliated service group (as defined in Section 414(m) of the Code) or (d) any other entity required to be aggregated with MASSBANK pursuant to regulations promulgated under Section 414(o) of the Code. For purposes of determining an Employee's Hours of Service, Years of Eligibility Service, Years of Vesting Service and the occurrence of a One-Year Break in Service, any period of employment with an Affiliated Company shall be deemed to be employment with the Company. 2.03 "Agreement" means this Agreement as the same may be amended from time to time. 2.04 "Allocation Date" means September 30 and any other date which the Committee in its sole discretion may select. 2.05 "Beneficiary" means the person or persons designated pursuant to the provisions of Section 6.04 of this Agreement to receive distribution of such Member's share upon his death. 2.06 "Board" means the board of directors of the Company in office from time to time. 2.07 "Committee" means the ESOP Committee constituted under Article VIII of this Agreement in office from time to time. 5 2.08 "Company" means MASSBANK, or any successor to all or a major portion of its business which adopts and continues the Plan and Trust pursuant to Section 10.05. 2.09 "Compensation" of a Member for any period includes salaries, wages, bonuses, overtime and all other forms of direct remuneration paid to such Member by the Company for such period and shall include all amounts which would have been paid to the Member as Compensation but for an election by such Member under Section 125 or 401(k) of the Code, and effective October 1, 1998, any elections by such Member under Section 132(f) of the Code, but excludes contributions or benefits under this Plan and the Savings Banks Employees Retirement Association Pension Plan and any compensation paid prior to his Entry Date. A Member's Compensation for any Limitation Year shall not be taken into account for any purpose of the Plan, to the extent that such Compensation exceeds $160,000 (as adjusted by the Commissioner for increases in the cost-of-living in accordance with Section 401(a)(17)(B) of the Code). The foregoing Compensation limit shall be increased to $200,000 effective October 1, 2002. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, beginning in such calendar year over which compensation is determined (determination period). If a determination period consists of fewer than 12 months, the annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. On or after November 1, 1997, any prior references in this Plan to the family aggregation rule shall cease to apply. 2.10 "Computation Period" for any Employee means each twelve consecutive month period beginning on the Employee's date of employment (or reemployment in the case of an 6 Employee who is reemployed after incurring one or more One-Year Breaks in Service) and any anniversary thereof. 2.11 "Dividend Account" means the account established and maintained for each Member pursuant to Article V for the purpose of holding dividends paid by MASSBANK Corp. with respect to allocated shares of Stock held in the Trust. This Dividend Account shall be fully vested and nonforfeitable at all times. 2.12 "Effective Date" means November 1, 2001 except as otherwise stated herein. The original effective date of the Plan is November 1, 1985. 2.13 "Employee" means any person who is employed by the Company as a common law employee at the time such person's services are rendered to the Company, has federal income tax withheld by the Company at such times, and who receives a Form W-2 from the Company in the ordinary course with respect to such service. An Employee's employment shall be deemed to have commenced on the date on which he first performs an Hour of Service as an Employee. An individual classified by the Company as performing service in a nonemployee capacity (including, but not limited to, an individual classified as an independent contractor, or consultant) shall not be considered an "Employee" for purposes of the Plan (regardless of the status of the individual for income tax withholding or other purposes) for any period during which he is so classified even if such classification is later changed for any reason. 2.14 "Entry Date" means the November 1, February 1, May 1 and August 1 of each Plan Year. Effective October 1, 2002, the term "Entry Date" means October 1, January 1, April 1 and July 1 of each Plan Year. 2.15 "Hour of Service" means: 7 (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Company or an Affiliated Company. These hours shall be credited to the Employee for the Computation Period or Periods in which duties are performed; (b) Each hour for which an Employee is paid, or entitled to payment, by the Company or an Affiliated Company on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty or other leave of absence; provided that no more than 501 Hours of Service shall be credited under this paragraph with respect to any single continuous period of absence for which no duties are performed. Hours under this paragraph shall be calculated and credited pursuant to Section 2530.200b-2(b) and (c) of the Department of Labor Regulations which are incorporated herein by this reference; (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Company or an Affiliated Company. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours shall be credited to the Employee for the Computation Period or Periods to which the award or agreement pertains rather than the Computation Period in which the award, agreement or payment is made; and (d) Each hour for which an Employee is credited pursuant to Section 3.04; (e) Solely for purposes of determining whether a One-Year Break in Service, as defined in Section 2.18, has occurred in a Computation Period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, eight (8) Hours of Service per day of such absence. For 8 purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence: (i) by reason of the pregnancy of the individual; (ii) by reason of the birth of the child of the individual; (iii) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual; or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement. The total number of hours treated as Hours of Service under this paragraph (e) by reason of any one such pregnancy or placement shall not exceed 501 hours. Hours of Service credited under this paragraph (e) shall be credited in the first Computation Period in which such crediting is necessary to prevent a One-Year Break in Service. 2.16 "Limitation Year" means the twelve consecutive month period ending on September 30 of each year; except that the Limitation Year ending September 30, 1987 shall only cover an eleven consecutive month period. 2.17 "Member" means any Employee who is eligible to participate in the Plan as determined under Article III of this Agreement. 2.18 "One-Year Break in Service" means any Computation Period during which an Employee has not completed or been credited with more than 500 Hours of Service. 2.19 "Plan" means the "MASSBANK EMPLOYEES' STOCK OWNERSHIP PLAN" as set forth herein, and as it may be amended from time to time. The Plan was previously named the "MASSBANK for Savings Employee Stock Ownership Plan." 2.20 "Plan Year" means the fiscal year of the Trust, being the twelve consecutive month period ending on September 30 of each year, except that the Plan Year ending September 30, 2002 shall only cover an eleven consecutive month period. 2.21 "Stock" means shares of the voting common stock of MASSBANK Corp. 9 2.22 "Trust" means the Trust fund created by this Agreement and held by the Trustee hereunder, including all income, profits and increments thereon. 2.23 "Trustee" means the trustee herein named and any duly appointed successor trustee or trustees. 2.24 "Year of Eligibility Service" for any Employee means each Computation Period during which the Employee is credited with at least 1,000 Hours of Service. All Years of Eligibility Service shall be included in determining an Employee's eligibility to participate in the Plan. 2.25 "Year of Vesting Service" for any Employee means each Computation Period during which such Employee is credited with at least 1,000 Hours of Service. With respect to Years of Vesting Service (including Years of Vesting Service with Reading Savings Bank) credited to an Employee prior to the original Effective Date, only the lesser of five (5) or fifty percent (50%) of such prior Years of Vesting Service shall be included in determining an Employee's vested percentage under Section 6.05. 10 ARTICLE III - MEMBERSHIP 3.01 Eligibility for Membership. Each Employee who was a Member on October 31, 2001 shall remain a Member on November 1, 2001. Each other Employee, including each future Employee, shall become a Member under the Plan on the Entry Date coincident with or next following the date on which he completes one (1) Year of Eligibility Service. On and after July 1, 2002, each Employee shall become a Member under the Plan on the Entry Date coincident with or next following the date on which he attains age 21 and completes one (1) Year of Eligibility Service. 3.02 Determination of Eligibility by the Committee. The determination of an Employee's eligibility for membership under the Plan shall be made by the Committee from the Company's records, and the Committee's decisions on these matters shall be conclusive and binding upon all persons. 3.03 Duration of Membership. A Member shall continue as an active Member until his employment with the Company is terminated and, except as otherwise provided in Article V, shall cease to be an active Member entitled to share in contributions hereunder immediately upon such termination of employment. A former active Member shall once again become an active Member on the date on which he again becomes an Employee of the Company. 3.04 Unpaid Leaves of Absence. In the case of an Employee who leaves the Company to enter the armed services of the United States of America and who returns to its employ at or before the expiration of ninety (90) days after the date on which he is first entitled to be released from active duty in the armed services (or at such later date as the Company may approve or as may be required by law) or an Employee who, with the approval of the Company and without pay, is absent from work on account of sickness, temporary disability, temporary layoff, jury duty, vacation or for any other similar reason, shall be credited by the Committee with the 11 number of Hours of Service obtained by multiplying the number of hours in his regular work week immediately prior to the date such absence began by the duration (in weeks) of the absence. For purposes of granting leaves of absence and determining the number of credited hours, Employees in similar circumstances shall be treated alike in accordance with the standards set forth in Section 8.05. Nothing herein contained shall restrain the Company's right to terminate the employment of any Employee, whether or not during a leave of absence. 12 ARTICLE IV - CONTRIBUTIONS 4.01 Company Contribution. For each Plan Year, the Company shall contribute to the Trust that amount of cash and/or that number of shares of Stock as may be voted by the Board as a regular contribution to the Trust. The amount of the Company contributions to the Trust for any Plan Year, when added to any contributions made with respect to that Plan Year under any other qualified plan to which the Company contributes, shall not exceed the maximum amount deductible for Federal income tax purposes for the Company's fiscal year beginning in the Plan Year with respect to which such contributions are made. Notwithstanding the foregoing, if the Plan borrows money to acquire shares of Stock, the Company may contribute cash to the Plan at such times and in such amounts as are necessary to enable the Plan to meet its obligations under any such loan. In the event that any contribution made by the Company is in excess of the maximum amount deductible for Federal income tax purposes for the Company's fiscal year beginning in the Plan Year, such excess contribution shall be carried over to a subsequent fiscal year of the Company when it can be deducted from the Company's income. 4.02 Payment of Contributions. The contributions made by the Company to the Trust for each Plan Year shall be paid into the Trust at such time or times as the Company determines but not later than the time required by law in order for the Company to obtain a deduction of the amount of such payment for Federal income tax purposes. 4.03 Reversion of Certain Contributions. Except as otherwise expressly provided in Section 4.01, all contributions made by the Company pursuant to Sections 4.01 shall be made upon the condition that such contributions are fully deductible for Federal income tax purposes. In the event that any such deduction is disallowed in whole or in part, then the Company may direct the Trustee to return such contribution (to the extent disallowed) to the Company at any time within the twelve (12) month period commencing on the date of disallowance. In the event 13 the Company shall make a contribution hereunder on the basis of a mistake of fact, the Company may direct the Trustee to return such contribution to the Company at any time within the twelve (12) month period commencing on the date of contribution. 4.04 Member's Contributions. Contributions by Members shall not be permitted. 14 ARTICLE V - MEMBERS' ACCOUNTS 5.01 Maintenance of Accounts. At the direction of the Committee, the Trustee shall maintain a book Account for each Member for the purpose of recording his interest in the Trust. The Account of each Member shall be credited as of each Allocation Date with such Member's share of Company contributions, his share of any forfeitures, and his share of the net increase or decrease in the Trust assets by reason of any changes in the value of the Trust assets other than Stock, any earnings on the Trust assets, and any expenses charged against the Trust. Each Member's Account shall be in two parts (Part A and Part B). Part A shall consist of that number of shares representing the Member's share of the Stock (other than Stock held in a suspense account pursuant to Article XI) held by the Trust, and Part B shall consist of that number of dollars representing the Member's share of the other assets of the Trust. In maintaining the Accounts of Members and the parts thereof, the Committee shall direct the Trustee to adopt such accounting methods or make such equitable adjustments as the Committee determines to be necessary or appropriate as long as such methods or adjustments are consistent with the standards set forth in this Agreement. The Committee shall direct the Trustee to maintain adequate records of the cost basis of all shares of Stock allocated to each Member's Account. In the event that Trust assets other than Stock are used to acquire Stock, the Committee shall direct the Trustee to debit Part B of the Account of each Member and to credit the acquired Stock to Part A of the Account of each Member in proportion to such Member's share of the assets so used. In the event Stock is disposed of in return for such other assets, the Committee shall direct the Trustee to debit Part A of the Account of each Member and to credit the acquired assets to Part B of the Account of each Member in proportion to such Member's share of the disposed Stock. Notwithstanding the foregoing, the Committee shall direct the Trustee to maintain a Dividend Account for each Member to which shall be allocated each Member's share of 15 dividends paid by MASSBANK Corp. on and after August 1, 2002 with respect to allocated shares of Stock held in the Trust. 5.02 Compensation Schedule. As soon as practicable after the end of each Limitation Year, the Company shall deliver to the Trustee a schedule showing the name of each Member (a) who was an Employee on the last day of the Limitation Year and who was credited with at least 1,000 Hours of Service during such Limitation Year, or (b) who retired, became disabled or died (within the meaning of Section 6.02 to 6.04) during such Limitation Year, and opposite the name of each such Member the amount of Compensation paid to him during such Limitation Year. The schedule shall also contain such other information as the Trustee may reasonably require for the proper administration of the Plan and Trust. 5.03 Allocation of Company Contributions. Upon receiving the total regular and supplemental contributions made by the Company for the Limitation Year and the schedule required to be furnished to the Trustee pursuant to Section 5.02, and after the Account balances of the Members have been adjusted as provided in Section 5.06 and forfeitures determined and allocated under Section 5.04, the Trustee shall allocate a portion of the sum of Company contributions to the Account of each Member listed on said schedule, which amount shall bear the same ratio to the sum of Company contributions as the Compensation of each Member shown on said schedule bears to the total Compensation listed for all such Members. 5.04 Allocation of Forfeitures. Any amounts forfeited by Members pursuant to Section 6.05(d) shall be allocated, as of the end of each Limitation Year, to the Accounts of Members who are entitled to share in the Company contributions for such Limitation Year on the same basis as that described in Section 5.03 for the allocation of the Company contributions to the Trust. 16 5.05 Valuation of Assets Other than Stock. As of each Allocation Date, the Trustee shall determine the total net worth of the Trust assets (other than Stock) by evaluating all of such assets and its liabilities (other than liabilities covered by Article XI) as of that date, but excluding from the assets (a) the amount of the contributions made by the Company with respect to the period which includes said Allocation Date, and (b) any dividends on allocated shares of Stock which accrued after the preceding Allocation Date ("Current Dividends"). In determining the net worth of such Trust assets, the Trustee shall value such Trust assets at their fair market value and shall determine the fair market value of assets with no readily ascertainable market value on any reasonable basis it deems appropriate. There shall be included as of the Allocation Date, without implied limitation, income on hand, income accrued, dividends payable but not paid, and uninvested cash, whether income or principal; and there shall be deducted as of the Allocation Date, without implied limitation, liabilities accrued (other than liabilities covered by Article XI). A determination by the Trustee of the fair market value of any of the Trust assets, or of the net worth of said Trust assets, shall be conclusive and binding upon all persons. 5.06 Allocation of Trust Assets Other than Stock. The net worth of such Trust assets as determined on each Allocation Date pursuant to Section 5.05 shall be compared with the total of all amounts standing to the credit of Part B of the Accounts all Members of the Plan, as of such Allocation Date, excluding from Part B of the Accounts of said Members any Current Dividends and any amounts credited from the contributions of the Company with respect to the period ending with said Allocation Date. The excess or deficiency of such net worth as so compared with the total Part B account balances of the Accounts of all Members shall be credited or charged to Part B of the Accounts of all such Members in the proportion that each such Part B account balance bears to the total of all such Part B account balances. After the 17 adjustments described above, Current Dividends, if any, shall be credited to the Part B of the Account of each Member in the same proportion as the number of shares of Stock credited to Part A of his Account, exclusive of Stock credited from the contributions of the Company with respect to the period ending with said Allocation Date, bears to the total number of such shares credited to Part A of the Accounts of all Members. Notwithstanding the foregoing, effective August 1, 2002, Current Dividends shall be credited to the Dividend Account of each Member. Prior to the time that the Current Dividends are reinvested in shares of Stock or distributed in cash to Members, they shall be invested in a short-term money market vehicle or other similar cash equivalents. 5.07 Dividends on Stock. At the sole discretion of the Company, dividends on allocated shares of Stock held under the Trust on the record date may be (a) paid in cash directly to the Members, (b) paid to the Trustee and distributed in cash to the Members no later than 90 days after the close of the Plan Year in which paid, or (c) paid to the Trustee and allocated to the Members' Accounts as provided in Section 5.06. Effective October 1, 2002, Members may elect to receive the Current Dividends allocated to their Dividend Accounts in cash within 90 days after the close of the Plan Year in which paid, or reinvested in shares of Stock. A Member who fails to make an affirmative dividend election shall be deemed to have elected to reinvest the Current Dividends in shares of Stock. If any dividend on allocated shares of Stock is to be distributed in cash to the Members, the Committee shall direct the Trustee to follow the provisions of Section 5.06 in determining the amount of cash which is to be distributed to each Member. Dividends on unallocated shares of Stock held under the Trust on the record date shall be paid to the Trustee and applied towards payments on an ESOP Loan described in Article XI. 18 5.08 Distributions and Forfeitures. Whenever the Trustee shall make any distribution to or in behalf of a Member in accordance with the provisions of Article VI, such Member's Accounts shall be charged with the amount of such distribution. Whenever a Member shall forfeit all or any portion of the amount standing to the credit of his Accounts in accordance with the provisions of Section 6.05, such Member's Accounts shall be charged with the amount of such forfeiture. In the event that a Member forfeits a portion of his Accounts pursuant to Section 6.05(d), such forfeiture shall be made with respect to the various types of assets in his Accounts on the following basis: (a) such forfeiture shall first be made with respect to assets other than Stock, if any; (b) to the extent that such forfeiture exceeds the amount of assets available under (a), it shall next be made with respect to Stock, if any, which had not been released to the Member's Accounts from a Suspense Account established pursuant to Article XI; and (c) to the extent that such forfeiture exceeds the amount of assets available under (a) and (b), it shall be made with respect to any other Stock credited to the Member's Accounts. 5.09 Limitations on Allocations. Notwithstanding anything hereinabove to the contrary, the amount credited to the Account of any Member for any Limitation Year pursuant to Section 5.03 (dealing with Company contributions), or this Section 5.09 or as a forfeiture pursuant to Section 5.04 shall be reduced to the extent that such amount would cause 19 (a) the amount of such Member's nondeductible contributions under any other qualified plan maintained by the Company or any affiliate (within the meaning of Sections 414(b), (c), (m) and (o) of the Code and subject to Section 415(h) thereof), plus (b) the Company contributions and the forfeitures credited to the accounts of such Member under the Plan and any other defined contribution plan maintained by the Company or any affiliate (within the meaning of Sections 414(b), (c), (m) and (o) of the Code and subject to Section 415(h) thereof) for such Limitation Year to exceed the lesser of (A) $30,000 ($40,000 on and after October 1, 2002) as adjusted pursuant to Section 415(d) of the Code, or (B) twenty-five percent (25%) (100% on and after October 1, 2002) of such Member's compensation (within the meaning of Section 415 of the Code and the regulations promulgated thereunder) from the Company and each such affiliate for such Limitation Year. Any reductions required pursuant to the foregoing limitations shall be made first with respect to the Member's voluntary contributions made under such other qualified plan, and such reductions shall be returned to the Member. If an additional reduction must be made with respect to amounts allocated under this Plan, such reduction shall be made against the Company contributions and forfeitures allocated to the Member's Account. The amount of such reduction shall be allocated and credited pursuant to the procedures outlined in Section 5.04 above as of the end of the Limitation Year to the Accounts of remaining Members exclusive of any other Member for whom a reduction in the Company contributions and forfeitures for such Limitation Year has been required pursuant to this Section 5.09. Any amount which cannot be allocated pursuant to the preceding sentence shall be held unallocated by the Trustee and shall be treated 20 as if it were a forfeiture to be allocated pursuant to Section 5.04 with respect to the succeeding Limitation Year. Notwithstanding the foregoing, if no more than one-third (1/3) of the Company contributions for any Limitation Year are allocated to the group of Members consisting of Highly Compensated Employees (within the meaning of Section 414(q) of the Code), Company contributions applied to the repayment of interest on such ESOP Loan (as defined in Article XI) and forfeitures of Stock acquired with the proceeds of such loan allocated to a Member's Account shall be disregarded in determining the maximum amount that can be allocated to his Account under this Section 5.11. In addition, prior to October 1, 2000, the sum for each Limitation Year of such Member's defined benefit plan fraction and his defined contribution plan fraction to exceed 1.0. As used in the preceding sentence, "defined benefit fraction" means for any Limitation Year a fraction determined at the close of such year, the numerator of which is the projected annual benefit of the Member under the Company's defined benefit plan or any other defined benefit plan maintained by an affiliate and the denominator of which is the lesser of (1) 1.25 multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for such year, or (2) 1.40 multiplied by the limitation in effect under Section 415(b)(1)(B) of the Code for such year, and "defined contribution plan fraction" means for any Limitation Year a fraction determined at the close of such year, the numerator of which is the sum of the annual additions to the Member's accounts under this Plan and under any other defined contribution plan maintained by the Company or an affiliate and the denominator of which is the sum of the lesser of the following amounts determined for such year and all prior years of service with the Company: (i) 1.25 multiplied by the dollar limitation in effect under Section 415(c)(1)(A) of the Code for such year, 21 or (ii) 1.40 multiplied by twenty-five percent (25%) of the Member's compensation for such year. Any reduction required by this paragraph shall be made in the defined benefit plan. For Limitation Years beginning on or after October 1, 2000, the provisions of Section 415(e) of the Code shall cease to apply. On and after the Limitations Year beginning on or after October 1, 1998, the definition of "compensation" as used in subsection (B) above shall include any elective contribution to a Section 401(k) plan or amounts deferred by the Member pursuant to Section 125 or 132(f) of the Code. 22 ARTICLE VI - BENEFITS 6.01 Restrictions on Payments and Distributions. No shares of Stock or other property of the Trust shall be paid out or distributed by the Trustee except (a) for the purchase or other acquisition of Stock or other appropriate investments, (b) for defraying the expenses, including taxes, if any, of administering the Trust as elsewhere provided herein, (c) for the repayment of loans or indebtedness or satisfaction of obligations incurred in connection with loans made to the Trust or indebtedness incurred by it, (d) for the purpose of making distributions to or for the benefit of Members in accordance with the provisions of this Article VI, or (e) for the return of Company contributions pursuant to Sections 4.03. All benefits payable under the Plan shall be paid or provided for solely from the Trust, and the Company, Committee and Trustee assume no liability or responsibility therefor. 6.02 Retirement. Upon retirement of a Member, which shall be deemed to mean any termination of his employment with the Company at or after (a) his attainment of age sixty-five (65), or (b) his attainment of age sixty (60) and completion of five (5) Years of Vesting Service, for a reason other than the death of such Member, the Committee shall direct the Trustee to distribute, in accordance with the provisions of Section 6.07, the full amount standing to the credit of such Member's Account and Dividend Account. A Member shall become fully vested in his Account upon the earlier of his attainment of age sixty-five (65), or his attainment of age sixty (60) and completion of five (5) Years of Vesting Service. 6.03 Disability Retirement. If a physician appointed or approved by the Committee shall determine that a Member is unable to continue in the employ of the Company by reason of illness or mental or physical incapacity, the Committee shall direct the Trustee to distribute, in accordance with the provisions of Section 6.07, the full amount standing to the credit of such Member's Account and Dividend Account. The determination of such a physician as to whether 23 a Member has become ill or incapacitated so as to become unable to continue in the employ of the Company shall be conclusive and binding upon all persons. 6.04 Death Benefits. (a) Upon the death of any Member who has a surviving spouse, the Committee shall direct the Trustee to distribute the full amount standing to the credit of such Member's Account and Dividend Account to the Member's surviving spouse, unless the exception provided by paragraph (b) of this Section 6.04 applies. (b) The requirement of paragraph (a) of this Section 6.04 shall not apply if (i) the Member elects to designate a Beneficiary other than his spouse and (A) his spouse consents to such election in a writing that acknowledges the effect of the election, (B) such election designates a Beneficiary which may not be changed without the consent of the spouse (or the consent of the spouse expressly permits designations by the Member without any requirement of further consent by the spouse), and (C) the spouse's consent acknowledges the effect of the election and is witnessed by a notary public or a representative of the Plan, or (ii) it is established to the satisfaction of the Committee that the consent of the surviving spouse could not have been obtained because there is no spouse, because the spouse cannot be located, or because of other circumstances prescribed by regulations under Section 417(a)(2) of the Code. A former spouse shall be treated as a surviving spouse to the extent benefits must be paid to such former spouse upon the Member's death pursuant to a qualified domestic relations order (as defined in Section 414(p) of the Code), except that no consent shall be required from such former spouse with respect to the designation of a Beneficiary to receive benefits not subject to said order. 24 (c) If, and only if, a Member is permitted under this Section 6.04 to designate a Beneficiary other than his surviving spouse, then such Member's Account and Dividend Account shall be distributed in accordance with this paragraph (c) of Section 6.04. Such a Member shall have the right to designate one or more Beneficiaries, including contingent Beneficiaries, entitled to receive the amount payable in behalf of such Member under the provisions of this Plan in the event of death. Such designation shall be made in writing in such manner as the Committee shall determine. A Member may change such designation from time to time, and may revoke such designation, provided, however, that any subsequent designation must meet the requirements of this Section 6.04. Upon the death of any Member, the Committee shall distribute, for the benefit of such Member's Beneficiaries and in accordance with the provisions of Section 6.07, the full amount standing to the credit of the Member's Account. If a Member dies without having designated a Beneficiary, or if none of the designated Beneficiaries survives the Member, or if the Committee is in doubt as to the effective status of a Beneficiary designation, all amounts payable in behalf of the Member shall be distributed to: (a) his spouse, (b) his natural and adopted children, per stirpes, (c) his parents, in equal shares, (d) his brothers and sisters, in equal share, (e) his executors and administrators. The amount payable shall be paid to the first-named person surviving the Member or class with one or more persons surviving the Member, in the order named, to the exclusion of all subsequently-named persons and classes. If a Beneficiary entitled to receive any amount payable on behalf of a Member under the Plan dies prior to having received the entire amount, the 25 undistributed balance, together with any accumulated interest thereon, shall be distributed to the estate of such Beneficiary in accordance with Section 6.07. 6.05 Termination of Employment Prior to Retirement or Death. (a) If a Member's employment with the Company is terminated under circumstances other than as provided in Sections 6.02 through 6.04, such Member shall be entitled to a benefit equal to the amount standing to the credit of his Dividend Account and a percentage of the amount standing to the credit of his Account, which percentage shall be based upon his Years of Vesting Service and determined in accordance with the following table:

Years of Percentage Vesting Service of Account --------------- ---------- Less than 1 0% 1 10% 2 20% 3 30% 4 40% 5 60% 6 80% 7 100%

A Member absent from the employ of the Company on an absence with respect to which he is credited with Hours of Service pursuant to Section 3.04 shall not be considered to have terminated his employment for purposes of this Section. (b) The benefit determined in accordance with the provisions of this Section 6.05 shall never be adjusted or altered in any fashion on account of any Years of Vesting Service which the Member completes upon any reemployment with the Company, except as provided in Section 6.06. (c) The determination of the amount to which such Member is entitled in accordance with this Section 6.05 shall be made by the Committee and communicated to the 26 Trustee, and the Committee's determination shall be conclusive and binding upon all persons. Distribution of such benefit shall be made in accordance with the provisions of Section 6.07. (d) Any amounts standing to the credit of a Member's Account to which he is not entitled at the time of his termination of employment shall be forfeited by him upon the earlier of the payment of the full amount to which such Member is entitled under the Plan or the occurrence of five (5) consecutive One-Year Breaks in Service by such Member. For purposes of the preceding sentence, a terminated Member who is not entitled to receive any portion of his Account under the Plan shall be deemed to have received the entire amount to which he is entitled on the date his employment terminates and shall forfeit his entire Account as of that date. Amounts forfeited pursuant to this paragraph shall be allocated to the Accounts of remaining Members in accordance with the provisions of Section 5.04 as of the end of the Limitation Year in which termination of employment occurs. 6.06 Reemployment. If a terminated Member is reemployed by the Company, he shall again become a Member upon reemployment pursuant to Section 3.03. All future Company contributions on his behalf shall be credited to his Account, and all his prior Years of Vesting Service shall be restored for the purpose of calculating the vested portion of such Account. If such a terminated Member was not 100% vested under Section 6.05(a) at the time of his prior termination, the following special provisions shall apply: (a) If such a terminated Member is reemployed after incurring five (5) or more consecutive One-Year Breaks in Service, he shall have no right to the previously forfeited portion of his Account, and any undistributed vested portion of his Account shall be held in a separate (fully vested) account until such Member becomes 100% vested under Section 6.05(a) 27 whereupon such separate account shall be merged with the Account otherwise maintained for him. (b) If such a terminated Member is reemployed before incurring five (5) consecutive One-Year Breaks in Service, the full amount, if any, which was forfeited from his Account as a result of his prior termination shall be restored to his Account as of the last day of the Limitation Year which contains the date of reemployment. In order to effect the restoration of previously forfeited amounts to a Member's Account, the Committee shall have the authority to direct the Trustee to use any unallocated amounts for said purpose. In making such restoration, the Committee shall direct the Trustee to first utilize any available forfeitures, and then Company contributions. If such a terminated Member had previously received a distribution of all or any part of the vested portion of his Account, the vested portion of his Account shall thereafter be determined by (i) adding the amount previously distributed to his current account balance, (ii) multiplying the resulting sum by his current vesting percentage and (iii) subtracting from the resulting product the amount previously distributed. 6.07 Manner and Timing of Distributions. (a) Whenever a Member's Account and Dividend Account become distributable pursuant to Sections 6.02 through 6.05 hereof to such Member or his Beneficiary, distribution of said Accounts shall be made by the payment of the full amount distributable in one lump sum, in cash or in shares of Stock or partially in cash and partially in shares of Stock as selected by such Member or his Beneficiary in writing; provided, however, that the Committee shall direct the Trustee to distribute cash in lieu of fractional shares. Distributions shall generally be processed as of the end of each calendar quarter with respect to terminated Members (or Beneficiaries in the case of deceased Members) who have returned their distribution forms to the 28 Committee at least 15 days (or such shorter period permitted by the Committee) prior to the end of the calendar quarter. If cash is to be distributed in lieu of shares of Stock, the Trustee may either sell such shares at fair market value to MASSBANK Corp. or on the open market and distribute the cash proceeds (net of selling expenses) or utilize cash already held in the Trust. (b) Whenever during any Plan Year, the amount standing to the credit of a Member's Accounts become distributable pursuant to Sections 6.02 through 6.05, the Committee shall direct the Trustee to distribute the vested portion of the Member's Accounts within a reasonable time after such separation of service or death. Such distributions may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (i) the Committee clearly informs the Member that the Member has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (ii) the Member, after receiving the notice, affirmatively elects a distribution. (c) Notwithstanding any provision elsewhere herein to the contrary, in order to comply with Sections 401(a)(9), 401(a)(14), 411(a)(11), 414(p) and 417 of the Code, the following provisions shall apply: (i) If a Member's aggregate account balances to be distributed upon disability or severance under Section 6.03 or 6.05 are greater than $5,000 ($3,500 before July 1, 2002) , such Accounts shall not be distributed in whole or in part until the 29 Member attains age sixty-five (65), dies, or requests the distribution in writing, whichever is earliest. (ii) Distribution of benefits to a Member who attains age 70 1/2 after January 1, 2003 shall begin no later than the April 1 next following the calendar year in which such Member (A) attains age 70 1/2 or (B) terminates employment with the Company, whichever is later (the "Required Beginning Date"). Clause (B) shall not apply in the case of a Member who is a "Five Percent Owner" at any time during the Plan Year ending in the calendar year in which the Member attains age 70 1/2. If the Member becomes a Five Percent Owner during any subsequent Plan Year, the required distribution date shall be April 1 of the calendar year following such Plan Year. For purposes of this subsection, a Five Percent Owner is defined in Section 416(i)(1)(B)(i) of the Code. (iii) Distribution of benefits to a Member who attained age 70 1/2 before January 1, 2003 shall begin no later than the April 1 next following the calendar year in which such Member attains age 70 1/2; provided, effective as of January 1, 1996, a Member who is not a Five Percent Owner may elect to defer distribution of benefits until after his termination of employment with the Company. (iv) If a Member dies before his entire interest has been distributed to him as provided in this Article VI, his entire interest shall be distributed by December 31 of the year containing the fifth anniversary of the Member's death. Notwithstanding the foregoing, in the case of a Member who had begun distributions under Section 6.07(c)(ii) or (iii), upon the Member's death distributions shall be made at least as rapidly as they were being made to the Member. 30 (v) In no event (unless the Member otherwise consents in writing) shall the distribution of a Member's account begin later than the sixtieth (60th) day after the close of the Plan Year in which the later of the following events occurs: (A) the Member's sixty-fifth (65th) birthday; or (B) the tenth (10th) anniversary of the date on which the Member first became a Member; or (C) the Member's termination of employment with the Company. (vi) If, and to the extent that, any portion of a Member's Account is payable to a former spouse or dependent pursuant to a qualified domestic relations order within the meaning of Sections 401(a)(13)(B) and 414(p) of the Code, the provisions of said order shall govern the distribution thereof. Distribution may be made to the alternate payee under a qualified domestic relations order with respect to the Member prior to the time such Member's Account otherwise becomes distributable if such Member would have been entitled to receive such amount under this Article VI had he terminated employment with the Company. 6.08 Discharge of Trustee's Obligations to Make Payment. Whenever the Trustee is required to make any payment or payments to any person in accordance with the provisions of this Article VI or Article VII, the Committee shall notify the Trustee in writing of such person's last known address as it appears in the Company's records; and the obligation of the Trustee to make such payment or payments shall be fully discharged by mailing the same to the address specified by the Committee. 31 6.09 Special Distribution from Account and Dividend Account. (a) For the first Plan Year in which a Member attains age 55 and completes at least 10 years of Plan membership, and for the five (5) succeeding Plan Years, such Member may elect to receive an amount from his Account and Dividend Account not exceeding his Diversified Investment Amount determined as of the end of the Plan Year. Such election must be filed in writing with the Committee during the 90 day period immediately following the end of the Plan Year to which it relates. (b) For purposes of (a) above, a Member's Diversified Investment Amount for each Plan Year is equal to (i) 25% of the sum of (A) the portion of the Member's account balances as of the end of the Plan Year attributable to Stock acquired by the Plan after December 31, 1986, and (B) amounts previously distributed to the Member pursuant to this Section 6.09, minus (ii) amounts previously distributed to the Member pursuant to this Section 6.09. The portion of the Member's account balance attributable to Stock acquired by the Plan after December 31, 1986 shall be determined by multiplying the number of shares of Stock held in his Account and Dividend Account by a fraction the numerator of which is the number of shares of Stock acquired by the Plan after December 31, 1986 and allocated under the Plan to the Accounts and Dividend Accounts of all Members (not to exceed the number of shares held under the Plan as of the end of the Plan Year) and the denominator of which is the total number of shares of Stock allocated under the Plan to the Accounts and Dividend Accounts of all Members as of the end of the Plan Year. (c) Any distribution required to be made under this Section 6.09 shall be made no later than 180 days after the end of the Plan Year to which such distribution relates. 32 (d) Notwithstanding anything to the contrary above, 50% shall be substituted for 25% in (b)(i) above for the last Plan Year for which the Member may make an election under this Section 6.09. (e) Notwithstanding anything to the contrary above, if the fair market value (determined as of the date immediately preceding the first day a Member is eligible to make an election under (a) above) of the portion of a Member's account balance attributable to Stock acquired by the Plan after December 31, 1986 is $500 or less, then the provisions of this Section 6.09 shall not be applicable to such Member and he shall not be eligible to receive a distribution from his Account and Dividend Account pursuant to this Section 6.09. 33 ARTICLE VII - AMENDMENT AND TERMINATION 7.01 Right to Amend or Terminate. The Company reserves the right at any time and from time to time to amend this Agreement, or discontinue or terminate the Plan and Trust by delivering to the Trustee a copy of an amendment or appropriate Board's resolution of discontinuance or termination certified by an officer of the Company. In addition, the Committee may amend the claims procedures of Section 8.10 provided such amendment does not adversely affect the qualified status of the Plan under Code Section 401(a). Notwithstanding the foregoing, and except as provided in Section 7.02, neither the Company nor the Committee shall have any power to amend or terminate this Agreement in such manner as would cause or permit any of the Trust assets to be diverted to purposes other than for the exclusive benefit of the Employees of the Company or their Beneficiaries or would cause a reduction in the amount theretofore credited to any Member's Account and Dividend Account or would cause or permit any portion of the Trust assets to revert to or become the property of the Company; and provided further that the rights and responsibilities of the Trustee with respect to the Trust assets shall not be altered in any manner without its written consent. 7.02 Amendment for Tax Exemption. The Company reserves the right to amend this Agreement and the Plan and Trust hereunder in such manner as may be necessary or advisable so that said Trust may qualify and continue to qualify as an exempt employees' trust under the provisions of the Code as now in force or as it may hereafter be changed or amended; and any such amendment may be made retroactively. 7.03 Liquidation of Trust in Event of Termination. In the event of termination or partial termination (within the meaning of Section 411(d)(3) of the Code) of this Plan and Trust, or complete discontinuance of contributions thereto by the Company, the rights of all Members (or, in the case of a partial termination, the Members affected thereby) to amounts theretofore 34 credited to their accounts shall be fully vested and nonforfeitable. In the event of such termination, partial termination or discontinuance, the Trustee shall hold the assets of the Trust in accordance with the provisions of the Plan and distribute such assets from time to time to Members entitled thereto in accordance with such provisions; provided that the Committee in its discretion may direct the Trustee to apply the amount standing to the credit of an affected Member's Account and Dividend Account for his benefit, in accordance with Section 6.07, at any time after such termination, partial termination or discontinuance but prior to the time when such Member would otherwise become entitled thereto under the Plan. In the event that the Company shall terminate the Trust at any time prior to the complete distribution of all property held by the Trustee pursuant to such provisions, the Trustee shall (a) pay the liabilities, if any, of the Trust; (b) value the remaining assets of the Trust as of the date of termination and adjust the Accounts of the Members in accordance with Sections 5.05 and 5.06; and (c) distribute the assets of the Trust in Stock or partly in Stock and partly in cash to and among the Members in liquidation in proportion to the amounts standing to the credit of their respective Accounts and Dividend Accounts under the Trust as of the termination date. 7.04 Termination of Plan and Trust. This Agreement and the Plan and Trust hereunder shall in any event terminate whenever all property held by the Trustee shall have been distributed in accordance with the terms hereof. 35 ARTICLE VIII - ADMINISTRATION OF THE PLAN 8.01 Named Fiduciaries. The named fiduciaries with respect to the Plan shall be the Company, the Committee and the Trustee. The responsibilities of the named fiduciaries shall be allocated as provided herein, and each such fiduciary shall have only those responsibilities and obligations that are specifically imposed upon it by this Trust Agreement. It is intended that each of the named fiduciaries shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under the Plan and shall not be responsible for any act or omission of any other fiduciary. The Company and the Committee, as named fiduciaries, shall be entitled to delegate all or any part of their fiduciary responsibilities and obligations to any other person or entity. In the event of any such delegation, (a) the named fiduciary shall not be liable for any act or omission of the person to whom the responsibility has been delegated as long as the selection and retention of such person is prudent and (b) the person to whom the fiduciary powers and obligations are delegated shall be responsible only for the proper exercise of the powers, duties, responsibilities and obligations that have been specifically delegated to him. 8.02 Appointment of Committee. The Company shall appoint a Committee of three (3) or more persons, any or all of whom may be officers or Employees of the Company or any other individuals, to be known as an "ESOP Committee." The Committee is the Plan Administrator for all purposes of ERISA. The members of the Committee shall serve at the pleasure of and may be removed by the Company. Vacancies in the Committee arising by resignation, death, removal or otherwise shall be filled by the Company. The number of members of the Committee shall be as designated by the Company from time to time. The Trustee shall accept and may rely upon a certification by the Company as to the number and identity of the individuals comprising the Committee from time to time. 36 8.03 Powers of Committee. The Committee is hereby vested with all the discretionary powers and authority necessary in order to carry out its duties and responsibilities in connection with the administration of the Plan and Trust as herein provided, and is authorized to make such rules and regulations as it may deem necessary or desirable to carry out the provisions of the Plan and Trust. The Committee shall determine, in its sole discretion, any question arising in the administration, interpretation and application of the Plan and Trust, including, without limitation, any questions of fact and any questions submitted by the Trustee on a matter necessary for it properly to discharge its duties; and the decision of the Committee shall be conclusive and binding on all persons. 8.04 Action by Committee. The Committee shall act by a majority of its members at the time in office and such action may be taken by vote at a meeting or in writing without a meeting. The Committee may by such majority action authorize any one or more of its members, or any other person, to execute any direction or document or take any other action on behalf of the Committee, and in such event any one of the members of the Committee may certify in writing to the Trustee or any other person the taking of such action and the name or names of the persons so authorized, including himself. The execution of any direction, document, or certificate in behalf of the Committee by any of its members shall constitute his certification of his authority with respect thereto, and the Trustee or other person shall be protected in accepting and relying upon any such direction, document, or certificate and is released from inquiry into the authority of any of the members of the Committee. 8.05 Discretionary Action. Wherever under the provisions of this Plan the Committee is given any discretionary power or powers, such power or powers shall not be exercised in such 37 manner as to cause any discrimination in favor of or against any Employee or class of Employees. 8.06 Evidence on Which Committee May Act. In taking any action or determining any fact or question which may arise under this Plan and Trust, the Committee may, with respect to the affairs of any the Company or its Employees, rely upon any statement by the Company with respect thereto. In the event that any dispute may arise regarding the distribution of any sums or regarding any act to be performed by the Committee or the Trustee, the Committee may in its sole discretion direct that such distribution be retained or postponed or direct the postponement of the performance of such act until actual adjudication of such dispute shall have been made in a court of competent jurisdiction, or until the Company, the Committee or the Trustee shall have been indemnified against loss to the satisfaction of the Committee; provided, however, that in the event of any such dispute, the Committee may rely upon and act in accordance with any directions received from the Company. 8.07 Employment of Agents. The Committee may employ agents, including, but not limited to, custodians, accountants, consultants or attorneys, to exercise and perform such of the powers and duties of the Committee hereunder as the Committee may delegate to them, and otherwise to render such services to the Committee as the Committee may determine, and the Committee may enter into agreements setting forth the terms and conditions of such service. The compensation of such agents shall be an expense chargeable in accordance with Section 8.08. The Committee shall be fully protected in delegating any such power or duty to, or in acting upon the advice of, any such agent, in whole or in part, and except as may be required by Federal law, shall not be liable for any act or omission of any such agent, the Committee's only duty being to use reasonable care in the selection and retention of any such agent. 38 8.08 Compensation and Expense of Committee. The members of the Committee shall serve without compensation for services as such, but all expenses of the Committee, shall be paid by the Trust; provided, the Company, in its sole discretion, may elect to pay all or any portion of such expenses. Such expenses shall include any expenses incident to the functioning of the Trust, including but not limited to attorneys' fees and the compensation of other agents, accounting and clerical charges, expenses, if any, of being bonded as required by ERISA, and other costs of administering the Plan and Trust. 8.09 Indemnification. The Company shall indemnify and hold harmless each member of the Committee from and against any and all claims, losses, damages, expenses (including reasonable attorneys' fees approved by the Company), and liability (including any reasonable amounts paid in settlement with the Company's approval), arising from any act or omission of such member, except with respect to a matter as to which such member shall have been judicially determined (or determined by the majority vote of disinterested members of the Board in the event such matter shall have been compromised or settled) not to have acted in good faith in the reasonable belief that the action or omission of such member was in the best interest of the Members and Beneficiaries of the Trust. 8.10 Claims Procedure. (a) If a Member, Beneficiary, alternate payee, or their authorized representative (hereinafter the "Claimant") asserts a right to a benefit under the Plan which has not been received, the Claimant must file a claim for such benefit with the Committee on forms provided by the Committee. The Committee shall render its decision on the claim within 90 days after its receipt of the claim. 39 If special circumstances apply, the 90-day period may be extended by an additional 90 days; provided, written notice of the extension is provided to the Claimant during the initial 90-day period and such notice indicates the special circumstances requiring an extension of time and the date by which the Committee expects to render its decision on the claim. If the Committee wholly or partially denies the claim, the Committee shall provide written notice to the Claimant within the time limitations of the immediately preceding paragraph. Such notice shall set forth: (i) the specific reasons for the denial of the claim; (ii) specific reference to pertinent provisions of the Plan on which the denial is based; (iii) a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary; (iv) a description of the Plan's claims review procedures, and the time limitations applicable to such procedures; and (v) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA if the claim denial is appealed to the Committee and the Committee fully or partially denies the claim. (b) A Claimant whose application for benefits is denied may request a full and fair review of the decision denying the claim by filing, in accordance with such procedures as the Committee may establish, a written appeal which sets forth the documents, records and other information relating to the claim within 60 days after receipt of the notice of the denial from the Committee. In connection with such appeal and upon request by the Claimant, a Claimant may review (or receive free copies of) all documents, records or other information relevant to the 40 Claimant's claim for benefit, all in accordance with such procedures as the Committee may establish. If a Claimant fails to file an appeal within such 60-day period, he shall have no further right to appeal. (c) A decision on the appeal by the Committee shall include a review by the Committee that takes into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial claim determination. The Committee shall render its decision on the appeal not later than 60 days after the receipt by the Committee of the appeal. If special circumstances apply, the 60-day period may be extended by an additional 60 days; provided, written notice of the extension is provided to the Claimant during the initial 60-day period and such notice indicates the special circumstances requiring an extension of time and the date by which the Committee expects to render its decision on the claim on appeal. If the Committee wholly or partly denies the claim on appeal, the Committee shall provide written notice to the Claimant within the time limitations of the immediately preceding paragraph. Such notice shall set forth: (i) the specific reasons for the denial of the claim; (ii) specific reference to pertinent provisions of the Plan on which the denial is based; (iii) a statement of the Claimant's right to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits; and (iv) a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA. 41 (d) In no event may a claim for benefits be filed by a Claimant more than 120 days after the applicable "Notice Date," as defined in (i) through (iii) below. (i) In any case where benefits are paid to the Claimant as a lump sum, the Notice Date shall be the date of payment of the lump sum. (ii) In any case where the Committee (prior to the filing of a claim for benefits under this Section 8.10) determines that an individual is not entitled to benefits from the Plan and the Committee provides written notice to such individual of its determination, the Notice Date shall be the date of the individual's receipt of such notice. (iii) In any case where the Committee provides an individual, in connection with a distributable event under the Plan, a written statement of the vested account balance as of a specific date, the Notice Date shall be the latest date of the individual's receipt of such notice. In no event may any legal proceeding regarding entitlement to benefits or any aspect of benefits under the Plan be commenced later than the earliest of (i) two (2) years after the applicable Notice Date; or (ii) one (1) year after the date a Claimant receives a decision from the Committee regarding his appeal, or (iii) the latest date otherwise prescribed by applicable law. 42 ARTICLE IX - THE TRUSTEE 9.01 Powers of Trustee. It shall be the duty of the Trustee to hold and, subject to the provisions of this Article, to invest and reinvest the funds of the Trust and to make distributions therefrom in accordance with the written directions of the Committee. The Trustee shall have no responsibility for the correctness under the terms of the Plan of any written directions which it receives from the Committee and the Trustee will be fully protected in following the Committee's directions with respect to any matter relating to the administration of the Plan, including without limitation, the payment of benefits to Members or Beneficiaries, the allocation of contributions and forfeitures to Members' Accounts, and the charging of forfeitures to the Accounts of terminated Members. 9.02 Investments. The Trustee shall invest and reinvest the funds of the Trust (except those necessary to pay any expenses incurred by the Committee or the Trustee which are not paid by the Company) exclusively in shares of Stock. The Trustee shall, in investing and reinvesting the trust funds, comply with all the requirements of ERISA. The Trustee may purchase Stock from existing stockholders or from MASSBANK Corp. (regardless of whether such Stock is newly-issued Stock or Stock held in the treasury of MASSBANK Corp.) in a public offer, a private transaction or by subscription at a price not to exceed the fair market value of the Stock at the time such Stock is purchased. In making investments in shares of Stock pursuant to the preceding three sentences, the Trustee will act as a directed Trustee and will follow the directions of the Committee concerning the time, manner and price for purchasing or selling any such shares of Stock. To the extent permitted by applicable law and regulations, the Trustee may invest the funds of the Trust on an interim basis, in short-term fixed income securities including any pooled fund which it maintains and which is primarily invested in such securities, and in such event, the instrument establishing such pooled fund shall be deemed a part of this Plan. 43 9.03 Method of Holding and Selling Securities. The Trustee may keep any shares of Stock in the name of some other person, firm or corporation or in its own name without disclosing fiduciary capacity. The Trustee may sell at public auction or by private contract, redeem, or otherwise realize upon, any Stock held in the Trust and for such purposes may execute such instruments and writings and do such things as it shall deem proper. 9.04 Exercise of Voting Rights. (a) Except as otherwise provided in subsection (b), the Trustee is hereby authorized to vote upon the Stock and any other securities comprising the Trust or otherwise consent to or request any action on the part of the issuer of such securities, and to give general and special proxies or powers of attorney, with or without power of substitution, and to participate in reorganizations, recapitalizations, consolidations, mergers and similar transactions with respect to such securities; to deposit such securities (if any) in a voting trust, or with any protective or like committee, or with a Trustee, or with depositories designated thereby; and generally to exercise any of the powers of an owner with respect to such securities which the Trustee deems to be for the best interest of the Trust to exercise. (b) Each Member shall have the power to instruct the Trustee as to how the Stock (including any fractional shares) held in his Account and Dividend Account should be voted at all stockholders' meetings. The Trustee shall vote such Stock in accordance with such instructions. To facilitate such right, the Trustee, with the assistance of the Committee, shall deliver to each Member a copy of all proxies, notices and other information which MASSBANK Corp. distributes to its shareholders generally and the Committee shall establish such procedures for the collection of Members' instructions in the voting of such Stock and the timely transmission of such instructions to the Trustee as it shall determine to be appropriate. Any such 44 Stock with respect to which voting instructions have been sought but have not been timely received by the Trustee shall not be voted by the Trustee. Any Stock with respect to which the Trustee has the power to vote but which has not been allocated to the accounts of any Member shall be voted by the Trustee in the same proportion as the Trustee is directed to vote the Stock with respect to which instructions have been received up to twenty-four (24) hours before the commencement of the shareholders' meeting. Members do not acquire ownership of Stock held by the Trustee for their account unless and until the Trustee delivers to them in accordance with Article VI hereof, stock certificates which have been registered in their names on the stock books of MASSBANK Corp.. 9.05 Reliance on Trustee as Owner. No person dealing with the Trustee shall be required to take any notice of this Agreement, but all persons so dealing shall be protected in treating the Trustee as the absolute owner with full power of disposition of all Stock and other property comprising the Trust, and all persons dealing with the Trustee are released from inquiry into the decision or authority of the Trustee and from seeing to the application of monies, Stock, or other property paid or delivered to the Trustee. 9.06 Liquidation of Assets. In the event that cash is required by the Trustee to effect any action or distribution under this Trust, or to pay any expenses of this Trust, or for any other reason deemed sufficient by the Trustee consistent with any outstanding obligations of the Trust, the Trustee shall take such action as to the disposition of Stock or other property forming a part of the Trust as will provide the amount of cash necessary for such payments. 9.07 Direction by Committee. Whenever the Trustee is required or authorized to take any action hereunder pursuant to any written direction or determination of the Committee, such direction or determination shall be sufficient protection to the Trustee if contained in a writing 45 signed by any one or more of its members, or any other person, authorized to execute documents on behalf of the Committee pursuant to Section 8.04. By such writing the Committee may ratify, approve, or confirm any action taken by the Trustee, and upon such ratification, approval, or confirmation the Trustee shall be protected as though authorization or determination by the Committee has preceded such action. In the absence of direction by the Committee as to any matter provided in this Plan, the Trustee may in its discretion take such action as it deems fit and proper with respect thereto after reasonable attempts to secure Committee direction. The Trustee may deliver documents to the Committee by delivering the same to each member of the Committee or by mailing the same, postage prepaid, addressed to the Committee in care of the Company at its principal office. 9.08 Records and Accounting. The Trustee shall keep accurate and detailed records of its transactions hereunder and all its accounts, books and records relating thereto shall be open at all reasonable times to the inspection of the Committee and its authorized representatives. The Trustee shall render in writing, at least once each twelve (12) months and, in any event, within ninety (90) days after its removal or resignation as provided in Section 9.11, accounts of its transactions under this Agreement (including a statement of the assets of the Trust valued at current fair market value) to the Company and each member of the Committee, and the Committee may approve such accounts of the Trustee by an instrument in writing delivered to the Trustee. In the absence of the filing in writing with the Trustee by the Committee of exceptions or objections to any such account within sixty (60) days after the receipt by the Committee of any such account, the Committee shall be deemed to have approved such account; and in such case, or upon the written approval of the Committee of any such account, the Trustee shall be released, relieved and discharged with respect to all matters and things set forth in such 46 account. Except as may otherwise be required by applicable Federal law, no person interested in the Trust or otherwise other than the Company or the Committee may require an accounting or bring any action against the Trustee with respect to the Trust and its actions as Trustee. In any proceeding instituted by the Trustee, the Company and/or the Committee with respect to these accounts, only such Company, the Committee and the Trustee shall be the necessary parties. The Trustee shall from time to time make such other reports and furnish such other information concerning the Trust as the Committee may in writing reasonably request or as may be required by applicable Federal law. 9.09 Payment of Taxes. The Trustee shall upon direction of the Committee pay out of the Trust fund any and all taxes of any and all kinds, including without limitation property taxes and income taxes levied or assessed under existing or future laws upon or in respect of the Trust or any property forming a part thereof or the income therefrom subject to the terms of any agreements or contracts made with respect to trust investments which make other provision for such tax payments. The Trustee may assume that any taxes assessed on or in respect of the Trust or its income are lawfully assessed unless the Committee shall in writing advise the Trustee that in the opinion of counsel for the Company such taxes are or may be unlawfully assessed. In the event that the Committee shall so advise the Trustee, the Trustee will, if so requested in writing by the Committee, contest the validity of such taxes in any manner deemed appropriate by the Company or its counsel; or the Company may itself contest the validity of any such taxes in the name of the Trustee; and the Trustee agrees to execute all documents, instruments, claims and petitions necessary or advisable in the opinion of the Company or its counsel for the refund, abatement, reduction or elimination of any such taxes. 47 9.10 Trustee's Compensation and Expenses. The Trustee shall be paid such reasonable compensation as shall from time to time be agreed upon by the Company and the Trustee. The compensation of the Trustee and all reasonable expenses, including reasonable attorneys' fees, incurred by the Trustee in the administration of the Trust, shall be paid by the Trust; provided, the Company may, in its sole discretion, elect to pay all or any portion of such expenses. 9.11 Resignation or Removal of Trustee. Any Trustee acting hereunder may resign at any time upon thirty (30) days' written notice to the Company, and the Company may at any time remove any Trustee upon thirty (30) days' written notice to the Trustee; but the Company and the Trustee may by written instrument waive or modify such notice. If any Trustee shall resign, be removed or for any other reason cease to be Trustee, the Company shall appoint a successor Trustee or Trustees, and if no such successor Trustee is appointed, the Trustee may deliver the assets of the Trust to the Committee or the Company as successor Trustee. Subject to the foregoing provisions, any resignation or removal of the Trustee or appointment of a new Trustee shall be by instrument in writing and shall become effective on the date therein specified. Any successor Trustee shall have the same powers and duties as the succeeded Trustee, subject to such changes as the Company may then determine. The appointment of any successor Trustee or Trustees hereunder shall without any separate instrument or conveyance immediately vest title to the assets of the Trust in such successor Trustee or Trustees. Upon request of such successor Trustee or Trustees, the Company and the Trustee ceasing to act shall execute and deliver such instruments of conveyance and further assurance and do such other things as may reasonably be required for more fully and certainly vesting and confirming in such successor Trustee or Trustees all the right, title, and interest of the retiring Trustee in and to the Trust funds. 48 A successor Trustee will have no responsibility or liability for any act or omission in the administration of the Trust before the effective date of its appointment as successor Trustee. 9.12 Tender Offer or Exchange Offer. In the event of a tender offer or exchange offer by any person (including the Company or MASSBANK Corp.) for any or all shares of Stock held in the Trust, each Member shall have the right and shall be afforded the opportunity to direct in writing whether the Stock (including any fractional shares) allocable to his Account and Dividend Account shall be tendered or exchanged in response to such offer. The Trustee shall act with respect to such Stock in accordance with such written instructions. Any Stock held by the Trustee which is not yet allocable to any Member's Account and Dividend Account and any Stock with respect to which written instructions have been sought but have not been timely received by the Trustee shall be tendered or exchanged in the same proportion as the Stock which is allocable to the Members' Accounts and Dividend Accounts and with respect to which written instructions have been timely received is being tendered or exchanged. To facilitate the foregoing right of the Members, the Committee shall distribute or cause to be distributed to each Member substantially the same information as may be distributed to the stockholders of MASSBANK Corp. in connection with such offer and the Committee shall establish such procedures for the collection of Members' instructions with respect to such Stock and the timely transmission of such instructions to the Trustee as it shall determine to be appropriate. 9.13 Indemnification of Trustee. The Company shall indemnify and hold harmless the Trustee from any and all claims, losses, damages, expenses (including reasonable counsel fees approved by the Company, which approval will not reasonably be withheld) and liability (including any reasonable amounts paid in settlement with the Company's approval, which approval will not unreasonably be withheld), arising from any act or omission of the Trustee 49 which results from a direction given by the Committee or the Company or from the Trustee's acting or refraining from acting in accordance with the terms of this Agreement, except when the same is judicially determined to be due to the gross negligence or willful misconduct of the Trustee. 50 ARTICLE X - THE COMPANY 10.01 Powers of the Bank. The Company shall have the power to amend or terminate the Plan and Trust as provided in Article VII, to appoint and remove members of the Committee as provided in Article VIII, to appoint and remove the Trustee as provided in Article IX, and to do such other acts and things as are provided elsewhere herein. 10.02 No Contract of Employment. This Trust shall not be construed as creating any contract of employment between the Company and any Member, Employee or other person, and nothing herein contained shall give any person the right to be retained in the employ of the Company or otherwise restrain the Company's right to deal with its employees, including Members and Employees, and their hiring discharge, layoff, compensation, and all other conditions of employment in all respects as though this Trust did not exist. 10.03 Liability of Company. Subject to its agreement to indemnify the Committee as provided in Section 8.09 and except as otherwise provided by applicable Federal law, neither the Company nor any person acting on behalf of the Company shall be liable for any act or omission on the part of any member of the Committee or the Trustee, or for any act performed or the failure to perform any act by any person with respect to this Agreement, the Plan or Trust, the Company's only duty being to use reasonable care in the selection of the members of the Committee and the Trustee. 10.04 Action by Company. Whenever under the terms of this Agreement the Company is permitted or required to take any action, such action shall be taken by the Board or by any officer of the Company thereunto duly authorized, by the Board or otherwise. In such event, any such officer may certify to the Trustee or any person the taking of such action and the name and names of the officers so authorized, including himself. The execution of any direction, document or certificate on behalf of the Company by any of its officers shall constitute his 51 certification of his authority with respect thereto, and the Trustee or other person shall be protected in accepting and relying upon any such direction, document or certificate and are released from inquiry into the authority of any officer of the Company. 10.05 Successor to Business of Company. Unless this Plan and Trust be sooner terminated, a successor to the business of the Company, by whatever form or manner resulting, may continue the Plan and Trust by executing an appropriate supplemental agreement and such successor shall ipso facto succeed to all the rights, powers and duties of the Company hereunder. The employment of any Employee who has continued in the employ of such successor shall not be deemed to have been terminated or severed for any purposes hereunder by reason of such succession. 10.06 Dissolution of the Company. In the event that the Company is dissolved by reason of bankruptcy or insolvency or otherwise, without any provision being made for the continuation of this Plan and Trust by a successor to the business of the Company, the Plan and Trust hereunder shall terminate, and the Trustee shall proceed in the same manner as though the Plan and Trust were being terminated by the Company as provided in Section 7.03. 52 ARTICLE XI - ESOP LOANS 11.01 ESOP Loan. For purposes of this Article XI, an "ESOP Loan" means a loan made to the Trust by a party in interest (as that term is defined in Section 3(14) of ERISA) or a loan to the Trust which is guaranteed or otherwise secured by a party in interest and which, in either case, satisfies all of the requirements for an exempt loan under Section 408(b)(3) of ERISA and Section 4975(d)(3) of the Code and all applicable regulations thereunder (such statutes and regulations being collectively referred to herein as the "ESOP Rules"). 11.02 Use of ESOP Loan Proceeds. The Plan and Trust are designed to invest primarily in Stock and the Trustee is hereby authorized and directed to acquire shares of Stock to the extent such Stock is reasonably available. To effectuate this purpose, the Trustee is hereby authorized to enter into ESOP Loans and to apply the proceeds thereof to the acquisition of shares of Stock in accordance with Section 9.02 or to the repayment of such ESOP Loans or a prior ESOP Loan. All Stock acquired with the proceeds of an ESOP Loan shall while held by the Trustee be free from any put, call or other option, or any buy-sell or similar arrangement. Any actions by the Trustee under this Section will be at the direction of the Committee. 11.03 Terms and Conditions. Any such ESOP Loan shall be upon such terms and conditions, consistent with the ESOP Rules and this Article XI, as the Committee shall determine. Such terms and conditions shall, in addition to those terms and conditions required by the ESOP Rules, include the following: (a) the recourse of the lender against the Trust shall be limited to one or more of the following: (i) any collateral given for the ESOP Loan, (ii) Company contributions made subsequent to the date of the ESOP Loan, and (iii) earnings attributable to such collateral or the investment of such contributions; 53 (b) the aggregate of all payments under the ESOP Loan by the Trust shall not exceed the aggregate of items (ii) and (iii) under (a) above at the date of any such payment; (c) in the event of a default under an ESOP Loan, the value of Trust assets transferred to the lender shall not exceed the amount of the default, provided further that if the lender is a party in interest a transfer of Trust assets upon default shall be made only if, and to the extent of, the Trust's failure to meet the ESOP Loan's payment schedule; (d) the interest rate must not be in excess of a reasonable rate; (e) the ESOP Loan must be for a specific term and may not be payable at the demand of any person, except in the case of default. 11.04 Collateral for ESOP Loan. The Committee is hereby authorized to direct the Trustee to collateralize an ESOP Loan by giving a security interest in all or any portion of the Stock acquired with the proceeds of said Loan (or the proceeds of a previous ESOP Loan repaid by said Loan). No other Trust assets may be so used as collateral. In the event that Stock is used by the Trustee as collateral for an ESOP Loan, such Stock shall be released from such encumbrance at an annual rate which is geared to the rate of total repayment (principal plus interest) of the ESOP Loan or the rate of principal repayment of the ESOP Loan provided that all applicable requirements of the ESOP Rules shall be satisfied. 11.05 Suspense Accounts. All Stock acquired with the proceeds of an ESOP Loan shall be credited to a Suspense Account rather than allocated among the Members' Accounts. In the event there is more than one (1) ESOP Loan outstanding, two (2) or more Suspense Accounts shall be established as provided herein. If such Stock is being used as collateral, it shall be withdrawn from the Suspense Account at the same time and on the same basis as it is released from encumbrance. If such Stock is not used as collateral, it shall be withdrawn from the 54 Suspense Account as if it had been so used and was being released from encumbrance at a rate geared to the repayment of the principal portion of the ESOP Loan. If, during any Limitation Year, Stock is withdrawn from the Suspense Account, it shall be allocated among the Members' Accounts in accordance with the provisions of Section 5.03. No Member shall have any interest in, or rights with respect to, any Stock while it is held in a Suspense Account. In the event that any Stock held in a Suspense Account is sold, the proceeds may be used to repay the ESOP Loan to the extent permitted by applicable law, and any excess amount (including any shares of Stock released from encumbrance by reason of such repayment) shall be allocated among the Accounts and Dividend Accounts of all Members in proportion to the aggregate value (Part A plus Part B) of each such Member's Account and Dividend Account. 55 ARTICLE XII - TOP-HEAVY PROVISIONS 12.01 Article Controls. Any provisions of the Plan to the contrary notwithstanding, the provisions of this Article XII shall control the Plan to the extent required to cause the Plan to comply with the requirements imposed by Section 416 of the Code. 12.02 Definitions. Where the following words and phrases appear in this Article XII, they shall have the respective meanings set forth below, unless their context clearly indicates to the contrary: (a) Account Balance. As of any Valuation Date, the aggregate amount credited to an individual's account or accounts under the Plan and all other qualified defined contribution plans maintained by the Company or an Affiliated Company increased by (i) the aggregate distributions made to such individual from the Plan or any other such plan during a five (5) year period ending on the Determination Date, and (ii) the amount of any contributions due as of the Determination Date immediately following such Valuation Date. Effective October 1, 2002, the amount of Account balances of a Member as of the Determination Date shall be increased by the distributions made with respect to the Member under the Plan and any plan in the Aggregation Group during the one-year period ending on the Determination Date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been in the Aggregation Group. In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting "five-year period" for "one-year period." (b) Accrued Benefit. As of any Valuation Date, the present value of the cumulative accrued benefit (excluding the portion thereof which is attributable to rollover or transfer contributions made by or on behalf of such individual to such plan from another qualified plan sponsored by an entity other than the Company or an Affiliated Company, to 56 proportional subsidies, or to ancillary benefits) of an individual under an qualified defined benefit plan maintained by the Company or an Affiliated Company increased by (i) the aggregate distributions made to such individual from such plan within a five (5) year period ending on the Determination Date and (ii) the estimated benefit accrued by such individual between such Valuation Date and the Determination Date immediately following such Valuation Date. The Accrued Benefit of Non-Key Employees shall be determined under (A) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Company and Affiliated Company's, or (B) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under Section 411(b)(1)(C) of the Code. Effective October 1, 2002, the amount of Account balances of a Member as of the Determination Date shall be increased by the distributions made with respect to the Member under the Plan and any plan in the Aggregation Group during the one-year period ending on the Determination Date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been in the Aggregation Group. In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting "five-year period" for "one-year period." (c) Aggregation Group. The group of qualified plans (whether or not terminated) maintained by the Company and each Affiliated Company consisting of (i) each plan in which a Key Employee participates and each other plan which enables a plan in which a Key Employee participates to meet the requirements of Sections 401(a)(4) or 410 of the Code, or (ii) each plan in which a Key Employee participates, each other plan which enables a plan in which a Key Employee participates to meet the requirements of Sections 401(a)(4) or 410 of the Code, and any other plan which the Committee elects to include as a part of such group; 57 provided, however, that the Committee may not elect to include a plan if its inclusion would cause the group to fail the requirements of Sections 401(a)(4) and 410 of the Code. (d) Determination Date. For the first Plan Year of any plan, the last day of such Plan Year, and for each subsequent Plan Year of such plan, the last day of the preceding Plan Year. If two or more plans are being aggregated, they shall be aggregated by adding together the results for each plan as of the Determination Dates for such plans that fall within the same calendar year. (e) Former Key Employee. With respect to any Plan Year, any individual who was a Key Employee in a previous Plan Year but who is not a Key Employee with respect to such Plan Year. For purposes of this definition, a beneficiary (who would not otherwise be a Key Employee) of a deceased former Key Employee shall be deemed to be a Former Key Employee in substitution for such deceased Former Key Employee. (f) Highest Average Compensation. The highest annual average of the Compensation paid by the Company to an Employee during any five (5) consecutive Plan Years (excluding Plan Years prior to the first Plan Year the Plan was top-heavy and excluding Plan Years subsequent to the last Plan Year the Plan was top-heavy) or during all of such Plan Years during which the Employee received Compensation from the Company or an Affiliated Company if less than five (5). (g) Key Employee. With respect to any Plan Year, any employee (and any beneficiary of a deceased employee) of the Company or an Affiliated Company who is a "Key Employee" as determined in accordance with Section 416(i)(1) of the Code. (h) Non-Key Employee. With respect to any Plan Year, any employee of the Company or an Affiliated Company who is not a Key Employee. 58 (i) Plan Year. With respect to any plan, the annual accounting period used by such plan for annual reporting purposes. (j) Top-Heavy Service. Under the defined benefit plan, each year of benefit accrual service, excluding all such years accrued before November 1, 1984 and before the plan became top-heavy. (k) Valuation Date. With respect to any Plan Year, the most recent date within the twelve (12) month period ending on a Determination Date as of which the Trust fund established was valued and the net income (or loss) thereof allocated to Members' accounts. 12.03 Top-Heavy Status. The Plan shall be deemed to be top-heavy if, as of any Determination Date, (i) the sum (computed in accordance with Section 416(g) of the Code and the regulations promulgated thereunder) of the Account Balances of Key Employees under the Plan exceeds sixty percent (60%) of the sum of the Account Balances of all individuals (excluding Former Key Employees and individuals who have not performed any services for the Company or an Affiliated Company at any time during the five-year period ending on the Determination Date) under the Plan unless an Aggregation Group including the Plan is not top-heavy or (ii) an Aggregation Group including the Plan is top-heavy. An Aggregation Group shall be deemed to be top-heavy as of a Determination Date if the sum (computed in accordance with Section 416(g)(2)(B) of the Code and the regulations promulgated thereunder) of the Account Balances of the Key Employees under all defined contribution plans included in the Aggregation Group and the Accrued Benefit of all Key Employees under all defined benefit plans included in the Aggregation Group exceeds sixty percent (60%) of the sum of the Account Balances and the Accrued Benefit of all individuals (excluding the Account Balances and the Accrued Benefit of former Key Employees and individuals who have not performed any services 59 for the Company or an Affiliated Company at any time during the five-year period ending on the Determination Date) under such plans. The foregoing determination shall be made by the Committee. The accrued benefits and accounts of any individual who has not performed services for the Company or an Affiliation during the one-year period ending on the Determination Date shall not be taken into account. 12.04 Minimum Benefit. If the Plan is determined to be top-heavy for a Plan Year, then each Member who is a Non-Key Employee shall be entitled to a benefit in the Company's defined benefit plan equal to the lesser of (a) Two percent (2%) of such Member's Highest Average Compensation multiplied by the Member's years of To-Heavy Service; (b) Twenty percent (20%) of the Member's Highest Average Compensation. 12.05 Adjustment to Combined Limitation. In each Plan Year in which the Plan is determined to be top-heavy, the number "1.0" shall be substituted for the number "1.25" wherever it appears in Section 5.09; provided, however, that the foregoing shall not apply if (a) the minimum benefit provided to each Non-Key Employee who also participates in a top-heavy defined benefit plan in the Aggregation Group is at least the lesser of (i) three percent (3%) of the Member's Highest Average Compensation multiplied by the Member's years of Top-Heavy Service, and (b) thirty percent (30%) of the Member's Highest Average Compensation, and (c) the Plan would not be a top-heavy plan if "ninety percent (90%)" were substituted for "sixty percent (60%)" each place it appears in Section 12.03 above. Notwithstanding the foregoing, for Plan Years beginning after October 31, 2000, this Section 12.05 shall cease to apply. 60 12.06 Minimum Vesting. If the Plan determined to be top heavy for a Plan Year, the following minimum vesting schedule will automatically apply:

Years of Vesting Service Vested Percentage - --------------- ----------------- Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 years or more 100%

Such minimum vesting schedule applies to the entire Account Balance of each Member. In the event the Plan ceases to be top-heavy for any subsequent Plan Year, the vested percentage of any Member who terminated after the Plan has ceased to be top-heavy shall be determined in accordance with the vesting schedule in Section 6.05 except that (a) the vested percentage of a Member shall not be less than the vested percentage which the Member had achieved under the vesting schedule set forth above as of the last day of the last Plan Year for which the Plan was top-heavy and (b) the vested percentage of a Member who had been credited with three (3) or more Years of Vesting Service as of the last day of the last Plan Year for which the Plan was top-heavy shall always be determined under the vesting schedule set forth above. 12.07 Restriction on Compensation. If the Plan is determined to be top-heavy for a Plan Year, the amount of each Member's Compensation to be taken into account for such Plan Year for all purposes of the Plan shall not exceed $160,000 ($200,000 on and after October 1, 2002), as adjusted pursuant to Section 416(d) of the Code and the regulations thereunder. 12.08 Termination of Top-Heavy Status. Except as otherwise provided in Section 12.06, if the Plan has been top-heavy for one or more Plan Years and thereafter ceases to be top-heavy, the provisions of this Article XII shall cease to apply to the Plan effective as of the day following the Determination Date on which the Plan is determined to no longer be top-heavy. 61 ARTICLE XIII - ADDITIONAL PARTICIPATING COMPANIES 13.01 Participation. Any Affiliated Company may become a participating Company by vote of the board of directors of such Affiliated Company adopting the Plan and Trust as a plan and trust for the benefit of its employees. Any such additional participating employer is hereinafter referred to in this Article XIII as a "Participating Company." 13.02 Effective Date. The participation of any Participating Company shall take effect as of the date specified in its action to adopt the Plan and Trust. 13.03 Administration. Each Participating Company shall be deemed the "Company" with respect to its Employees and shall have and exercise all the rights, powers, and duties thereof with respect to the Plan as applied to itself and its Employees and that part of the Trust which represents the Accounts of Members employed by it. Subject to Sections 13.04 and 13.06, each Participating Company hereby authorizes MASSBANK to exercise on its behalf all such rights, powers, and duties, including amendment or termination of the Plan. 13.04 Termination. If the Plan shall be terminated by any one Participating Company, the Trust shall be valued pursuant to Section 5.07 and assets representing the Accounts of all Members employed by such Participating Company shall be segregated into a separate trust and held subject to the provisions of the Plan and Trust Agreement, and all rights, powers, and duties of the Company with respect to such separate trust shall be exercised by such Participating Company. 13.05 Allocation of Forfeitures. Whenever part or all of the Account of any Member shall be forfeited by him and reallocated among the Accounts of the remaining eligible Members pursuant to Sections 5.04 and 6.06(d), such amount shall be reallocated to the Accounts of all eligible Members, regardless of whether they are Employees of the Participating Company which last employed the former Member whose Account (or part thereof) is being forfeited. 62 13.06 Contributions. Each participating employer, including the Company and each Participating Company, shall make contributions hereunder, on behalf of its Employees, in accordance with Section 4.01, and as determined by such participating employer. All contributions made by a Participating Company with respect to any fiscal year of such Participating Company shall be made no later than the date specified in Section 4.02 and shall be allocated pursuant to the provisions of Section 5.03. 63 ARTICLE XIV - MISCELLANEOUS 14.01 Spendthrift Provision. Beneficial interests of Members or their Beneficiaries in the Trust shall not be assignable nor subject to attachment nor receivership, nor shall they pass to any trustee in bankruptcy or be reached or applied by any legal process for the payment of any obligations of any such person, except as otherwise provided under Section 401(a)(13) of the Code. 14.02 Appointment of Person to Receive Payment. Upon the appointment by a court having jurisdiction of a legal representative for a Member or Beneficiary, following a judicial determination that such Member or Beneficiary is of unsound mind, any payment or distribution hereunder shall thereafter be made to such legal representative. In the event any amount shall become payable hereunder to any person (or his Beneficiary or estate), and if after written notice from the Committee mailed to such person's last known address as shown on the Company's records, such person or his personal representative shall not have presented himself to the Committee or notified the Committee in writing of his address within one (1) year after the mailing of such notice, then the Committee shall in its discretion appoint one or more of the spouse or blood relatives of such person to receive such amount, including any amount thereafter becoming due to such person (or his estate), in the proportions determined by the Committee. Any action of the Committee hereunder shall be binding and conclusive upon all persons. 14.03 Construction. In any question of interpretation or other matter of doubt, the Trustee and the Company may rely upon the opinion of counsel for the Company or any other attorney-in-law designated by the Company with the approval of the Trustee. The provisions of this Agreement shall be construed, administered and enforced according to the laws of the United States and, to the extent permitted by such laws, by the laws of the Commonwealth of 64 Massachusetts. All contributions to the Trust shall be deemed to be made in the Commonwealth of Massachusetts. 14.04 Impossibility of Performance. In case it becomes impossible for the Company, the Committee or the Trustee to perform any act under this Plan and Trust, that act shall be performed which in the judgment of the Company, the Committee or the Trustee, respectively, will most nearly carry out the intent and purpose of this Plan and Trust. All parties to this Agreement or in any way interested in this Plan and Trust shall be bound by any acts performed under such condition. 14.05 Definition of Words. Feminine or neuter pronouns shall be substituted for those of the masculine form, and the plural shall be substituted for the singular, in any place or places herein where the context may require such substitution or substitutions. 14.06 Titles. The titles of articles and sections are included only for convenience and shall not be construed as a part of this Agreement or in any respect affecting or modifying its provisions. 14.07 Merger or Consolidation. In the event that this Plan is merged with or consolidated with any other plan, or the assets or liabilities accrued under this Plan are transferred to any other plan, each Member's benefit under such other plan shall be at least as great immediately after such merger, consolidation or transfer (if such plan were then to terminate) as the benefit to which he would have been entitled under this Plan immediately before such merger, consolidation or transfer (if the Plan were then to terminate). 14.08 Execution of Agreement. This Agreement may be executed in any number of counterparts and each fully executed counterpart shall be deemed an original. 65 14.09 Special Provisions for Certain Leased Employees. A "leased employee" shall receive credit for Hours of Service, Years of Eligibility Service and Years of Vesting Service for the entire period during which he is a leased employee of the Company or an Affiliated Company as if he were an Employee of the Company or an Affiliated Company; provided, however, that a leased employee shall not be an Employee eligible to participate in the Plan as long as he remains a leased employee. For purpose of this Section 14.09, the term "leased employee" means any person (a) who is not an Employee of the Company or an Affiliated Company and (b) who pursuant to an agreement between the Company or an Affiliated Company and any other person (a "leasing organization") has performed services for the Company or an Affiliated Company on a substantially full-time basis for a period of at least one (1) year and such services are performed under the primary direction or control by the Company or an Affiliated Company. Notwithstanding the foregoing, if leased employees constitute less than twenty percent (20%) of the Company's and Affiliated Company's nonhighly compensated work force within the meaning of Section 414(n)(5) of the Code, a person who is covered by a money purchase pension plan maintained by the leasing organization which provides a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, immediate participation and full and immediate vesting shall not be considered a "leased employee." 14.10 USERRA. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Section 414(u) of the Code. 14.11 Correction Methods. The Company may make any corrections under the Plan necessary to retain the qualified status of the Plan and Trust under Code Sections 401(a) and 66 501(a). Such corrections shall include, but not be limited to, any corrections described in the Internal Revenue Service's Employee Plans Compliance Resolution System. 14.12 Writings. Whenever under the terms of the Plan a Member, former Member, Beneficiary or alternate payee is required to make a claim, request, election or direction in writing, such claim, request, election or direction may be made in such other form allowable by the Committee on a nondiscriminatory basis. 67 ARTICLE XV - DIRECT ROLLOVERS 15.01 Application of this Article. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Article, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. 15.02 Definitions. Whenever used in this Article, the following words shall have the following meanings: (a) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and a hardship distribution. With respect to distributions made after December 31, 2001, any amount that is distributed on account of hardship shall not be eligible rollover distribution and the distributee may not elect to have any portion of such a distribution paid directly to an eligible retirement plan. (b) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, 68 or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. With respect to distributions after December 31, 2001, an eligible retirement plan shall also mean an annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from the Plan. The definition of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relation order, as defined in Section 414(p) of the Code. (c) Distributee: A distributee includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (d) Direct rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. 69 ARTICLE XVI - MINIMUM DISTRIBUTION REQUIREMENTS 16.01 General Rules. (a) Effective Date. The provisions of this Article will apply for purposes of determining required minimum distributions for calendar years beginning with the 2002 calendar year. (b) Coordination with Minimum Distribution Requirements Previously in Effect. If the total amount of 2002 required minimum distributions under the Plan made to the distributee prior to the execution date of this Plan restatement equals or exceeds the required minimum distributions determined under this Article, then no additional distributions will be required to be made for 2002 on or after such date to the distributee. If the total amount of 2002 required minimum distributions under the Plan made to the distributee prior to the execution date of this Plan restatement is less than the amount determined under this Article, then required minimum distributions for 2002 on and after such date will be determined so that the total amount of required minimum distributions for 2002 made to the distributee will be the amount determined under this Article. (c) Precedence. The requirements of this Article will take precedence over any inconsistent provisions of the Plan. (d) Requirements of Treasury Regulations Incorporated. All distributions required under this Article will be determined and made in accordance with the Treasury regulations under Section 401(a)(9) of the Internal Revenue Code. 16.02 Time and Manner of Distribution. (a) Required Beginning Date. The Member's entire interest will be distributed, or begin to be distributed, to the Member no later than the Member's Required Beginning Date. 70 (b) Death of Member Before Distributions Begin. If the Member dies before distributions begin, the Member's entire interest will be distributed as follows: (i) By December 31 of the calendar year containing the fifth anniversary of the Member's death. (ii) If the Member's surviving spouse is the Member's sole Designated Beneficiary and the surviving spouse dies after the Member but before distributions to the surviving spouse begin, this Section 16.02(b) will apply as if the surviving spouse were the Member. For purposes of this Section 16.02(b) and Section 16.04, unless Section 16.02(b)(ii) applies, distributions are considered to begin on the Member's Required Beginning Date. If Section 16.02(b)(ii) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under Section 16.02(b)(i). (c) Forms of Distribution. Unless the Member's interest is distributed in a single sum on or before the Required Beginning Date, as of the first Distribution Calendar Year distributions will be made in accordance with Sections 16.03 and 16.04 of this Article. 16.03 Required Minimum Distributions During Member's Lifetime. (a) Amount of Required Minimum Distribution for each Distribution Calendar Year. During the Member's lifetime, the minimum amount that will be distributed for each Distribution Calendar Year is the lesser of: (i) the quotient obtained by dividing the Member's account balance by the distribution period in the Uniform Lifetime Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations, using the Member's age as of the Member's birthday in the Distribution Calendar Year; or 71 (ii) if the Member's sole Designated Beneficiary for the Distribution Calendar Year is the Member's spouse, the quotient obtained by dividing the Member's account balance by the number in the Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations, using the Member's and spouse's attained ages as of the Member's and spouse's birthdays in the Distribution Calendar Year. (b) Lifetime Required Minimum Distributions Continue Through Year of Member's Death. Required minimum distributions will be determined under this Section 16.03 beginning with the first Distribution Calendar Year and up to and including the Distribution Calendar Year that includes the Member's date of death. 16.04 Required Minimum Distributions After Member's Death. If the Member dies on or after the date distributions begin, his remaining account balance shall be distributed to his Beneficiary in a lump sum as soon as practicable. 16.05 Definitions. (a) Designated Beneficiary. The individual who is designated as the Beneficiary under Section 6.04 of the Plan and is the designated beneficiary under Section 401(a)(9) of the Internal Revenue Code and Section 1.401(a)(9)-4, Q&A-1, of the Treasury regulations. (b) Distribution Calendar Year. A calendar year for which a minimum distribution is required. For distributions beginning before the Member's death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Member's Required Beginning Date. For distributions beginning after the Member's death, the first Distribution Calendar Year is the calendar year in which distributions 72 are required to begin under Section 16.02(b). The required minimum distribution for the Member's first Distribution Calendar Year will be made on or before the Member's Required Beginning Date. The required minimum distribution for other Distribution Calendar Years, including the required minimum distribution for the Distribution Calendar Year in which the Member's Required Beginning Date occurs, will be made on or before December 31 of that Distribution Calendar Year. (c) Life Expectancy. Life expectancy as computed by use of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury regulations. (d) Member's Account Balance. The account balance as of the last valuation date in the calendar year immediately preceding the Distribution Calendar Year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the Distribution Calendar Year if distributed or transferred in the valuation calendar year. (e) Required Beginning Date. The date specified in Section 6.07(c)(ii) of the Plan. 73 IN WITNESS WHEREOF these presents have been signed and sealed for and in behalf of the Company and the Trustee by their duly authorized officers this 14th day of August, 2002. MASSBANK By: /s/ Reginald E. Cormier _________________________________________ Title Sr. V.P., Treasurer & CFO EASTERN BANK, TRUSTEE By: /s/ John Henderson _________________________________________ Title Vice President 74 EX-13 4 b49847mbexv13.htm EX-13 PORTIONS OF THE ANNUAL REPORT

Exhibit 13

MASSBANK CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS) AT DECEMBER 31,		2003		2002		2001		2000		1999
Balance Sheet Data:
	Total assets	$	1,010,249	$	1,009,367	$	971,317	$	938,702	$	924,716
	Mortgage loans		241,886		302,788		296,469		272,951		288,580
	Other loans		11,120		16,011		34,548		37,196		36,785
	Allowance for loan losses		1,554		2,271		2,494		2,594		2,555
	Allowance for loan losses on off-balance sheet credit exposures		626		384		149		—		—
	Investments(1)		722,079		669,875		618,545		607,096		578,543
	Deposits		882,024		883,928		849,684		823,625		818,057
	Stockholders’ equity		110,927		117,285		114,904		108,243		101,479

(IN THOUSANDS) YEARS ENDED DECEMBER 31 ,		2003			2002		2001		2000		1999
Operating Data:
	Interest and dividend income	$	38,137		$	47,103	$	55,117	$	60,280	$	58,206
	Interest expense		15,854			22,701		32,391		35,397		33,204
	Net interest income		22,283			24,402		22,726		24,883		25,002
	Provision for loan losses		(502	)		—		40		60		140
	Gains on securities, net		639			1,718		4,363		3,525		4,033
	Other non-interest income		1,283			1,205		1,450		1,463		1,529
	Non- interest expense		12,615			12,037		11,721		12,513		12,566
	Income before income taxes		12,092			15,288		16,778		17,298		17,858
	Income tax expense		4,229			5,474		6,019		6,187		6,547
	Net income	$	7,863		$	9,814	$	10,759	$	11,111	$	11,311

YEARS ENDED DECEMBER 31 ,			2003			2002			2001			2000			1999
Other Data:
	Yield on average interest-earning assets			3.87	%		4.85	%		5.88	%		6.67	%		6.32	%
	Cost of average interest-bearing liabilities			1.78			2.61			3.87			4.32			4.02
	Interest rate spread			2.09			2.24			2.01			2.35			2.30
	Net interest margin			2.26			2.52			2.43			2.76			2.72
	Non-interest expense to average assets(3)			1.25			1.21			1.23			1.35			1.34
	Efficiency ratio(2)(3)			49.9			43.9			41.1			41.9			41.4
	Return on assets (net income/average assets)			0.78			0.99			1.13			1.20			1.20
	Return on equity (net income/average stockholders’ equity)			7.08			8.39			9.53			10.93			10.66
	Percent non -performing loans to total loans			0.09			0.13			0.19			0.18			0.24
	Percent non -performing assets to total assets			0.02			0.04			0.07			0.06			0.09
	Stockholders’ equity to assets, at year-end			10.98			11.62			11.83			11.53			10.97
	Book value per share, at year-end(4)		$	25.17		$	25.45		$	24.34		$	22.83		$	20.43
	Market price – close, at year-end(4)			43.01			28.30			23.867			19.50			19.667
	Earnings per share:(4)
		Basic		1.77			2.09			2.30			2.30			2.23
		Diluted		1.73			2.04			2.24			2.25			2.17
	Cash dividends paid per share(4)			0.92			0.88			0.84			0.79			0.74
	Dividend payout ratio			52	%		42	%		37	%		34	%		33	%

(1)	Consist of securities held to maturity and available for sale, trading securities, short-term investments, term federal funds sold and interest-bearing deposits in banks.
(2)	Determined by dividing non-interest expense (including the provision for loan losses) by fully taxable equivalent net interest income plus non-interest income.
(3)	Includes non-recurring non-interest expense of $363 thousand in 2000 related to the successful litigation to protect the Company’s principal trademark.
(4)	All share information presented has been adjusted to reflect the 3-for-2 split of the Company’s common stock effective April 19, 2002.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following discussion should be read in conjunction with the consolidated financial statements and related notes included in this report. Certain amounts reported for prior years have been reclassified to conform to the 2003 presentation.

     The preparation of consolidated financial statements requires management to make estimates and assumptions, in the application of certain of its accounting policies, about the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues and expenses. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policies considered significant in this respect are the determination of the allowance for loan losses and allowance for loan losses on off-balance sheet credit exposures, and the determination of investment securities considered other than temporarily impaired. These significant accounting policies are discussed in the Provision for Loan Losses and Off-Balance Sheet Credit Exposures, and Investment Securities Other Than Temporarily Impaired sections of this discussion and analysis and in Note 1 of the “Notes to Consolidated Financial Statements.”

     The financial condition and results of operations of MASSBANK Corp. (the “Company”) essentially reflect the operations of its subsidiary, MASSBANK (the “Bank”).

     The Bank’s principal business has historically consisted of offering savings and other deposits to the general public and using the funds from these deposits to primarily make loans secured by residential real estate and consumer loans, and make investments in debt and equity securities. Most residential mortgage loans granted by the Bank are for terms of 10, 12, 15 or 20 years and are generally low credit risk loans. The Bank’s debt securities portfolio consists primarily of U.S. Treasury and Government agency securities and Government agency mortgage-backed securities.

     The Company’s consolidated net income depends largely upon net interest income, which is the difference between interest and dividend income from loans and investments (“interest-earning assets”), and interest expense on deposits (interest-bearing liabilities). Net interest income is significantly affected by general economic conditions, particularly changes in interest rates, competition, government legislation and policies affecting fiscal affairs, monetary policies of the Federal Reserve System, and the actions of the bank regulatory authorities. Earnings results are also affected by the Company’s provision for loan losses; loan and investment activities, particularly residential mortgage loan and mortgage-backed securities prepayment activity; changes in non-interest income, such as fee-based revenues and securities gains or losses; non-interest expense; and income taxes.

FORWARD-LOOKING STATEMENT DISCLOSURE

This annual report 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. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results or performance to be materially different from the results and performance expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements concerning the Company’s belief, expectations or intentions concerning the Company’s future performance, the financial outlook of the markets it serves and the performance and activities of its competitors. These statements reflect the Company’s current views, are based on numerous assumptions and are subject to numerous risks and uncertainties, including unexpected fluctuations in market interest rates, unexpected fluctuations in the markets for equities, bonds, federal funds and other financial instruments, an increase in the level of nonperforming assets, an increase in competitive pricing pressures within the Company’s market, adverse legislative or regulatory developments, adverse impacts resulting from the continuing war on terrorism, an increase in other employee-related costs, the impact of deflation or inflation, and other factors described in this report.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. As such, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet dates and the reported amounts of income and expense during the reporting periods. Actual amounts could differ from such estimates.

     The Company believes that the following accounting policies are among the most critical because they involve significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.

PROVISION FOR LOAN LOSSES AND OFF BALANCE SHEET CREDIT EXPOSURES

The provision for loan losses represents a charge against current earnings and an addition to the allowance for loan losses. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired, general loss allocations for various types of loans based on loss experience factors and an unallocated allowance. The unallocated allowance is maintained based on management’s assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may affect borrowers’ ability to pay, and trends in loan delinquencies and charge-offs. Any significant change in these assumptions and conditions could result in higher than estimated loan losses that could adversely affect the Company’s earnings results. 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 judgements different from those of management. This could also adversely affect the Company’s earnings results.

     The provision for loan losses on off-balance sheet credit exposures represents a charge against current earnings (reported in other non-interest expense) and an addition to the allowance for loan losses on off-balance sheet credit exposures. In determining the amount to provide for off-balance sheet credit exposures, the key factor is the adequacy of the balance of the allowance. The allowance is maintained based on expected drawdowns of committed loans and their loss experience factors and management’s assessment of various other factors including current and anticipated economic conditions that may affect the borrowers’ ability to pay, and trends in loan delinquencies and charge-offs.

INVESTMENT SECURITIES OTHER THAN TEMPORARILY IMPAIRED

Management judgment is involved in the evaluation of declines in value of individual investment securities held by the Company. Declines that are deemed other than temporary are recognized in the income statement through write-downs in the recorded value of the affected securities. Management considers many factors in their analysis, including industry analyst reports, sector credit ratings, volatility in market price and other relevant information, such as the financial condition, earnings capacity and near term prospects of the company in which MASSBANK has invested and the length of time and extent to which market value has been less than cost. 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. U.S. Treasury Securities and other securities backed by the U.S. Government are never considered impaired due to a fundamental deterioration in financial condition.

     If “due to general market conditions” an investment security declines in price from its cost basis by 25% or more for more than a year, between 30% and 40% for more than nine months, between 40% and 50% for more than six months or over 50% for more than ninety days, the security is considered “other than temporarily impaired” and it is written down to its current fair market value and the loss is recognized. U.S. Treasury and Government Agency securities fluctuate in value based on changes in market interest rates and other factors, however, they can be redeemed at par value if held to maturity and therefore, if their maturity date is less than one year into the future regardless of their market value they are considered only temporarily impaired. Any unfavorable change in general market conditions could cause an increase in the Company’s impairment write downs of investment securities. This would have an adverse effect on the Company’s earnings results. Other than temporary impairment write downs of investment securities in 2003 and 2002 totaled $9 thousand and $67 thousand, respectively. There were no other than temporary impairment write downs of investment securities in 2001.

FINANCIAL OVERVIEW

massbank Corp.’s earnings for 2003 were $7.9 million, or $1.73 per diluted share, compared to $9.8 million, or $2.04 per diluted share, in 2002. Basic earnings per share for 2003 were $1.77 compared to $2.09 in the prior year. Return on assets and return on equity were 0.78% and 7.08%, respectively, in 2003, compared to 0.99% and 8.39%, respectively, in 2002.

     Decreases in earnings and operating ratios were mainly due to the historically low market interest rate environment this past year which resulted in significant mortgage-backed securities and residential mortgage loan prepayment activity, and a Federal Reserve Bank monetary policy that reduced the Federal Funds rate to 1% for most of 2003, due to concerns about the slowdown in the U.S. economy. The Company’s earnings and operating ratios were also affected by the decline in net gains on equity securities in 2003.

years ended december 31, 2003 compared to 2002:

(IN THOUSANDS) YEARS ENDED DECEMBER 31,		2003			2002		VARIANCE
Income Statement Data
Interest and dividend income:
	Mortgage loans	$	17,682		$	20,819	$	(3,137	)
	Mortgage-backed securities		8,250			14,683		(6,433	)
	Federal funds sold		2,266			2,974		(708	)
	Other		9,939			8,627		1,312
Total interest and dividend income			38,137			47,103		(8,966	)
Total interest expense			15,854			22,701		6,847
Net interest income			22,283			24,402		(2,119	)
Provision for loan losses			(502	)		—		502
Gains on securities, net			639			1,718		(1,079	)
Other non-interest income			1,283			1,205		78
Non-interest expense			12,615			12,037		(578	)
Taxes			4,229			5,474		1,245
Net income		$	7,863		$	9,814	$	(1,951	)
Diluted earnings per share (in dollars):		$	1.73		$	2.04	$	(0.31	)

(IN THOUSANDS) YEARS ENDED DECEMBER 31,		2003		2002		VARIANCE
Average Balance Sheet Data
Earning assets:
	Mortgage loans	$	270,826	$	308,710	$	(37,884	)
	Mortgage-backed securities		133,037		233,627		(100,590	)
	Federal funds sold		209,463		183,968		25,495
	Other		374,529		246,877		127,652
Total earning assets		$	987,855	$	973,182	$	14,673
Total deposits		$	892,329	$	870,685	$	21,644

Earnings results for 2003 included the following that are more fully discussed in other sections of this discussion and analysis:

• Reduction in net interest income of $2.1 million due essentially to the extraordinary prepayment activity on mortgage- backed securities and residential mortgages that significantly reduced interest income on these (higher yielding) earning assets and a reduction in interest income on Federal funds sold due to a lower Federal funds rate.

• Negative provision for loan losses in the amount of $502 thousand due to the quality of loans in the portfolio and a decrease in the Bank’s loan portfolio.

• A reduction in net securities gains taken during the year in the amount of $1.1 million.

• An increase in non-interest expense in the amount of $0.6 million primarily attributable to broad based salary increases of $106 thousand, an increase in health and other benefit costs for employees of $51 thousand, an increase of $237 in deferred compensation expense related to the Bank’s supplemental retirement plan for certain executive officers that is offset by a corresponding increase in other non-interest income and an increase of $250 thousand in occupancy and equipment expense.

• A reduction in income tax expense of $1.2 million due to lower income before income taxes and a reduction in the Company’s effective income tax rate.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS) AT DECEMBER 31,	2003			2002			VARIANCE
Short-term investments	$	214,532		$	248,750		$	(34,218	)
Interest -bearing deposits in banks		5,685			4,854			831
Securities available for sale, at market value		429,229			380,022			49,207
Trading securities, at market value		72,633			36,249			36,384
Total investments		722,079			669,875			52,204
Total loans		253,006			318,799			(65,793	)
Allowance for loan losses		(1,554	)		(2,271	)		717
Net loans		251,452			316,528			(65,076	)
Other assets		36,718			22,964			13,754
Total assets	$	1,010,249		$	1,009,367		$	882
Total deposits	$	882,024		$	883,928		$	(1,904	)
Escrow deposits of borrowers		1,139			1,387			(248	)
Other liabilities		16,159			6,767			9,392
Total liabilities		899,322			892,082			7,240
Total stockholders’ equity		110,927			117,285			(6,358	)
Total liabilities and stockholders’ equity	$	1,010,249		$	1,009,367		$	882

FINANCIAL CONDITION

The Company’s total assets were $1.010 billion at December 31, 2003 compared to $1.009 billion at December 31, 2002 reflecting virtually no asset growth in 2003. This was due to a decrease in stockholders’ equity and deposits declining slightly this past year.

INVESTMENTS

At December 31, 2003 the Company’s investment portfolio, consisting of securities available for sale and trading, short-term investments and interest-bearing bank deposits totaled $722.1 million or 71.5% of total assets, an increase of $52.2 million or 7.8%, compared to $669.9 million representing 66.4% of total assets at December 31, 2002. The increase in investments was essentially due to an increase of $36.4 million in trading securities consisting primarily of U.S. Treasury obligations, and an increase of $49.2 million in securities available for sale, partially offset by a reduction in short-term investments. The mix of available for sale securities in 2003, as in 2002, continued to shift from a large concentration of mortgage-backed securities to U.S. Treasury and Government agency securities, including callable government agency securities totaling $192.4 million at year-end 2003. The bank’s mortgage-backed securities portfolio declined by $93.4 million in 2003, from $189-1 million at year-end 2002 to $95.7 million at year-end 2003. The decrease in mortgage-backed-securities (MBS) results from significant prepayment activity in 2003. In addition, because of the historically low interest rate environment in 2003 and the anticipation of higher rates in 2004, the bank only purchased $9.9 million in MBS in 2003. Instead, the Bank increased its holdings of callable agency securities in order to help improve its net interest spread. If rates increase in 2004 and the shape of the yield curve remains positive, the Bank will likely add mortgage-backed securities to its portfolio. This could lead to improvements in net interest margin.

LOANS

The loan portfolio, net of allowance for loan losses, decreased $65.1 million or 20.6% in 2003. At December 31, 2003 the loan portfolio, net of allowance for loan losses, totaled $251.5 million representing 24.9% of total assets compared to $316.5 million representing 31.4% of total assets at December 31, 2002. The decrease in loans is due to a year of low interest rates that dramatically increased the number of refinances, pay downs and payoffs for the Bank. Although the Bank originated $82.6 million in loans in 2003, it saw its loan portfolio decline as a result of the extraordinary prepayment activity. Management believes that both the refinancing of existing mortgages and new loan originations are likely to decline in 2004.

     The Bank’s loan portfolio consists predominately of residential mortgages. Residential mortgage loans amounted to $240.3 million at December 31, 2003, representing 95% of the loan portfolio. At year-end 2003, 90.4% and 9.6% of the Company’s residential mortgage loans were fixed rate and variable rate loans, respectively. See Note 5 of Notes to Consolidated Financial Statements for a table setting forth the composition of the loan portfolio at year-end 2003 and 2002.

NON-PERFORMING ASSETS

Non-accrual loans, generally those loans that are 90 days or more delinquent, declined to $230 thousand at December 31, 2003 from $420 thousand at December 31, 2002. This represents 0.09% of total loans at December 31, 2003. The Bank had no real estate acquired through foreclosure at year-end 2003.

DEPOSITS

Deposits have traditionally been the Bank’s primary source of funds for lending and investment activities. MASSBANK attracts deposits within its primary market area by offering a variety of deposit instruments including demand and NOW accounts, money market accounts, different types of savings accounts, certificates of deposit and retirement savings plans. Deposit flows vary significantly and are influenced by prevailing interest rates, market conditions, economic conditions and competition. The Bank’s management attempts to manage its deposits through selective pricing and marketing.

     Total deposits at December 31, 2003 amounted to $882.0 million, reflecting a decrease of $1.9 million from the prior year total of $883.9 million. Deposits in 2003 remained essentially unchanged from the prior year. Increased competition for deposits in the latter part of 2003 and more attractive returns on equity securities were the principal reasons for deposit outflows.

     Savings deposits continued to increase in 2003 as in the prior year, increasing $58.9 million or 10.7% year-over-year, to $607.8 million from $548.9 million at year-end 2002. Conversely, certificates of deposit decreased by $60.0 million or 24.0% to $189.6 million as customers continued the trend of shifting their deposits upon maturity from certificates of deposit to savings accounts seeking liquidity in this low interest rate environment. Demand and NOW account deposits amounted to $84.6 million at December 31, 2003 compared to $85.3 million at December 31, 2002. For information concerning deposit balances at year-end 2003 and 2002, their average cost and the maturity distribution and related rate structure of the Bank’s time certificates of deposit, see Note 10 of Notes to Consolidated Financial Statements.

STOCKHOLDERS’ EQUITY

Total stockholders’ equity decreased $6.4 million to $110.9 million at December 31, 2003, representing a book value of $25.17, from $117.3 million representing a book value of $25.45 at December 31, 2002.

     The decrease in stockholders’ equity was essentially the result of the Company’s repurchase of 278,751 shares of treasury stock in 2003 at a cost of $8.1 million, the payment of dividends to stockholders of $4.1 million and the decrease in other comprehensive income of $3.7 million due primarily to the decline in market value of the Bank’s debt securities portfolio. This was partially offset by the net income for the year of $79 million and the payments and related tax benefits received from the exercise of stock options by the Company’s officers and directors of $1.7 million.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS 2003 AND 2002

NET INTEREST INCOME

Net interest income is the primary source of MASSBANK’S operating income. The level of net interest income is affected by the volume and mix of average interest-earning assets and interest-bearing liabilities, market interest rates and other factors.

     Net interest income on a fully taxable equivalent (FTE) basis totaled $22.4 million in 2003 compared to $24.5 million in 2002. This decrease was primarily attributable to a decrease in net interest margin partially offset by growth in average earning assets. The Company’s net interest margin for the year ended December 31, 2003 decreased to 2.26% from 2.52% in the prior year. Average earning assets increased $14.7 million or 1.5% to $987.9 million in 2003, from $973.2 million in 2002. The tables on pages 26 and 27 set forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the years indicated. Information is provided for each category of interest-earning assets and interest-bearing liabilities, on changes due to (1) changes in volume and (2) changes in interest rates.

INTEREST AND DIVIDEND INCOME

Interest and dividend income on a fully taxable equivalent basis totaled $38.2 million for the year ended December 31, 2003, compared to $47.2 million for the year ended December 31, 2002. The decrease in interest and dividend income was the result of a decline in yield on average earning assets partially offset by the increased interest income from higher average earning assets. The yield on average earning assets dropped 98 basis points to 3.87% in 2003 from 4.85% the prior year. The average earning assets of the Company increased $14.7 million in 2003.

     The yield on earning assets has declined for three consecutive years due to declining market interest rates, including the Federal Funds rate that is currently at 1%, and the change in the mix of the Company’s average earning assets. The interest income from the Bank’s mortgage-backed securities (MBS) and loans declined significantly in 2003 from the prior year as a result of extraordinary prepayment activity in the historically low interest rate environment of 2003. With respect to the MBS portfolio, the Bank only added $9.9 million in MBS to the portfolio in 2003 because of low market interest rates. Additionally, because the Bank maintained a significant portion of its earning assets in Federal funds sold in 2003, the decrease in Federal funds rate also contributed to a reduction in interest income this past year.

     As shown in the rate/volume analysis table on page 27, the decline in yield on average earning assets in 2003 resulted in decreased interest and dividend income of $3.6 million from 2002 levels. The total effect of the change in mix of the Company’s average earning assets on interest and dividend income in 2003, partially offset by the effect of higher average earning assets was a $5.4 million decrease from 2002. This resulted in a net decrease in interest and dividend income of $9.0 million compared to the prior year.

INTEREST EXPENSE

Total interest expense decreased $6.8 million or 30.2% to $15.9 million for the year ended December 31, 2003 from $22.7 million for the year ended December 31, 2002. The decrease in interest expense is due primarily to the lower interest rate environment in 2003 and the continued shift in the deposit mix from certificate of deposit accounts to savings accounts. (This trend is expected to start to reverse if market interest rates rise). This resulted in a decrease in the Company’s average cost of funds, from 2.61% in 2002 to 1.78% in 2003. The decrease in average cost of funds was partially offset by an increase in interest expense resulting from an increase in the Company’s average deposits. Average deposits in 2003 increased $21.6 million or 2.5% to $892.3 million, from $870.7 million in the prior year.

     As shown in the rate/volume analysis table on page 27, the effect on total interest expense from changes in interest-bearing deposit rates was a decrease of $6.8 million from 2002 levels. The total effect of higher average deposits on interest expense was mitigated by the change in mix of the Company’s average deposits resulting in essentially no change in interest expense due to volume when compared to 2002.

PROVISION FOR LOAN LOSSES

In 2003, the Bank recorded a negative provision for loan losses of $502 thousand due to the quality of loans in the portfolio and a decrease in the Bank’s loan portfolio. This compares to a zero provision for loan losses in the prior year. The Bank’s loan portfolio decreased $65.8 million or 20.6% from $318.8 million at December 31, 2002 to $253.0 million at December 31, 2003. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for the purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired, general loss allocations for various loan types based on loss experience factors, and an unallocated allowance which is maintained based on management’s assessment of many factors including the risk characteristics of the

portfolio, concentrations of credit, current and anticipated economic conditions that may affect the borrowers’ ability to pay, and trends in loan delinquencies and charge-offs. At December 31, 2003, the allowance for loan losses was $1.6 million representing 0.61% of total loans and 676% of non-accrual loans. Non-accrual loans totaled $230 thousand at December 31, 2003, down from $420 thousand a year earlier. The Bank recorded $11 thousand in net loan recoveries in 2003 compared to $12 thousand in 2002.

     The Bank also maintains an allowance for loan losses on off-balance sheet credit exposures (shown separately on the balance sheet) that totaled $626 thousand at December 31, 2003. This compares to $384 thousand at December 31, 2002.

NON-INTEREST INCOME

Non-interest income consists of gains or losses on securities, deposit account service fees and other non-interest income. Non-interest income for the year ended December 31, 2003 decreased $1.0 million or 34.2% to $1.9 million, from $2.9 million for the year ended December 31, 2002. The decrease is due primarily to a decrease in net gains on securities available for sale and trading of $1.1 million, from $1.7 million in 2002 to $0.6 million in 2003. Net securities gains in 2003 were comprised of $0.3 million in net gains on equity securities and $0.3 million in net gains on debt securities. This compares to net gains on equity securities of $1.2 million and net gains on debt securities of $0.5 million in 2002. Management, consistent with many analysts, is cautious concerning its outlook regarding the likely performance of the equity markets over the next several years, expecting only moderate returns in the near term.

     Deposit account service fees and other non-interest income combined increased $78 thousand to $1.3 million in 2003 from $1.2 million the prior year.

NON-INTEREST EXPENSE

Non-interest expense totaled $12.6 million for the twelve months ended December 31, 2003 compared to $12.0 million for the prior year, an increase of $578 thousand or 4.8%. Salaries and employee benefits, the largest component of non-interest expense, increased $394 thousand or 5.4% to $7.7 million in 2003 from $7.3 million in 2002. The increase in salaries and employee benefits is primarily the result of broad based salary increases of $106 thousand and an increase in health and other benefit costs for employees of $51 thousand. Also reflected is an increase of $237 thousand in deferred compensation expense related to the Bank’s supplemental retirement plan for certain executive officers. This expense, however, is essentially offset by a corresponding increase in other non-interest income. Occupancy and equipment expense increased $250 thousand to $2.2 million in 2003 due to an increase in depreciation expense of $123 thousand and increases in a variety of other occupancy and equipment related costs. Additionally, the Company’s data processing, advertising and marketing, deposit insurance and other expenses combined totaled $2.7 million in 2003 reflecting a decrease of $66 thousand compared to the prior year.

INCOME TAX EXPENSE

For the years ended December 31, 2003 and 2002, income tax expense amounted to $4.2 million and $5.5 million, respectively. The decrease in income tax expense is primarily due to lower income before taxes and a decrease in the Company’s effective income tax rate. The Company’s effective income tax rate for the year ended December 31, 2003 was 34.98%, down from 35.81% for the year ended December 31, 2002.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS 2002 AND 2001

MASSBANK Corp. reported consolidated net income of $9-8 million or $2.04 in diluted earnings per share in 2002 compared to net income of $10.8 million or $2.24 in diluted earnings per share in 2001. Basic earnings per share for 2002 were $2.09 compared to $2.30 in the prior year. The net income for the year ended December 31, 2002 represents a return on assets of 0.99% and a return on equity of 8.39%, compared to 1.13% and 9.53%, respectively, for the year ended December 31, 2001.

     The Company’s net income in 2002 compared to 2001 primarily reflects an improvement of $1.7 million in net interest income after provision for loan losses offset by a decline in securities gains of $2.6 million. Earnings results for 2002 also reflect a decrease in other non-interest income of $245 thousand, an increase in non-interest expense of $316 thousand and a reduction in income tax expense of $545 thousand.

NET INTEREST INCOME

Net interest income on a. fully taxable equivalent basis totaled $24.5 million in 2002 compared to $22.8 million in 2001. This increase was primarily attributable to an improvement in net interest margin and asset growth. The Company’s net interest margin for the year ended December 31, 2002 increased to 2.52% from 2.43% in the prior year. Average earning assets increased $35.1 million or 3.7% to $973.2 million in 2002, from $938.1 million in 2001.

     The tables on pages 26 and 27 set forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes due to (1) changes in volume and (2) changes in interest rates.

INTEREST AND DIVIDEND INCOME

Interest and dividend income on a fully taxable equivalent basis totaled $47.2 million for the year ended December 31, 2002, compared to $55.2 million for the year ended December 31, 2001. The decrease in interest and dividend income was the result of a decline in yield on average earning assets partially offset by the increased interest income from higher average earning assets. The yield on average earning assets dropped 103 basis points to 4.85% in 2002 from 5.88% the prior year, due primarily to a decline in market interest rates in 2002. The average total earning assets of the Company increased $35.1 million in 2002.

     As shown in the rate/volume analysis table on page 27, the decline in yield on average earning assets in 2002 resulted in decreased interest and divided income of $8.4 million from 2001 levels. Conversely, the total effect of higher average earning assets and a change in mix of the Company’s average earning assets on interest and dividend income in 2002 was a $0.4 million increase from 2001. This resulted in a net decrease in interest and dividend income of $8.0 million compared to the prior year.

INTEREST EXPENSE

Total interest expense decreased $9.7 million or 29.9% to $22.7 million for the year ended December 31, 2002 from $32.4 million for the year ended December 31, 2001. The decrease in interest expense is due primarily to the lower interest rate environment in 2002 and a shift in the deposit mix from certificate of deposit accounts to savings accounts. This resulted in a decrease in the Company’s average cost of funds, from 3.87% in 2001 to 2.61% in 2002. The decrease in the Company’s average cost of funds was partially offset by an increase in interest expense resulting from an increase in the Company’s average deposits. Average deposits in 2002 increased $34.1 million or 4.1% to $870.7 million, from $836.6 million in the prior year.

     As shown in the rate/volume analysis table on page 27, the effect on total interest expense from changes in interest-bearing deposit rates was a decrease of $9.3 million from 2001 levels. Additionally, the total effect of higher average deposits and change in deposit mix on interest expense in 2002 was a decrease of $0.4 million from the prior year. This resulted in a net decrease in total interest expense of $9.7 million compared to 2001.

PROVISION FOR LOAN LOSSES

The provision for loan losses represents a charge against current earnings and an addition to the allowance for loan losses. There was no provision for loan losses in 2002 compared to a provision for loan losses of $40 thousand in 2001. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for the purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired, general loss allocations for various loan types based on loss experience factors, and an unallocated allowance which is maintained based on management’s assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may affect borrowers’ ability to pay, and trends in loan delinquencies and charge-offs. At December 31, 2002, the allowance for loan losses was $2.3 million representing 0.71% of total loans and 541% of non-accrual loans. Non-accrual loans totaled $420 thousand at December 31, 2002, down from $644 thousand a year earlier. The bank recorded $12 thousand in net loan recoveries in 2002 compared to $9 thousand in 2001.

NON-INTEREST INCOME

Non-interest income consists of gains or losses on securities, deposit account service fees and other non-interest income.

Non-interest income for the year ended December 31, 2002 decreased $2.9 million or approximately 50% to $2.9 million, from $5.8 million for the year ended December 31, 2001. The decrease is due primarily to a decrease in net gains on securities available for sale and trading of approximately $2.7 million, from $4.4 million in 2001 to $1.7 million in 2002. Net securities gains in 2002 were comprised of $1.2 million in net gains on equity securities and $0.5 million in net gains on debt securities. This compares to net gains on equity securities of $4.2 million and net gains on debt securities of $0.2 million in

2001. The decline in net gains on equity securities is primarily attributable to the decline in equity securities prices in 2002. Management believes that the equity markets will provide more moderate returns in the near future. This is expected to result in lower realized equity securities gains in 2003.

     Deposit account service fees and other non-interest income combined declined $245 thousand to $1.2 million for the year ended December 31, 2002 from $1.5 million the prior year.

NON-INTEREST EXPENSE

Non-interest expense totaled $12.0 million for the twelve months ended December 31, 2002 compared to $11.7 million for the prior year, an increase of $316 thousand or 2.7%. Salaries and employee benefits, the largest component of non-interest expense, increased $575 thousand or 8.6% to $7.3 million in 2002 from $6.7 million in 2001. The increase in salaries and employee benefits is primarily the result of increases in pension and health insurance costs as well as general salary increases, partially offset by a reduction in bonus payments awarded to employees in 2002. The expense for professional services increased $100 thousand or 23.5% in 2002 due primarily to higher legal fees. The Company’s amortization of intangibles decreased $298 thousand in 2002 compared to the prior year. This expense decreased for two reasons: 1) the deposit acquisition premium that the Bank recorded in 1992 in connection with its acquisition of the deposits and certain assets of the former Central Savings Bank of Lowell was fully amortized as of February 2002, and 2) the Company no longer amortizes the goodwill on its balance sheet but reviews it for impairment periodically in accordance with Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.” The Company’s occupancy and equipment, data processing, advertising and marketing, deposit insurance and other expenses combined totaled $4.2 million in 2002 reflecting a decrease of $61 thousand compared to the prior year.

INCOME TAX EXPENSE

The Company recorded income tax expense of $5.5 million in 2002, a decrease of $545 thousand compared to the prior year. The decrease in income tax expense is primarily due to lower income before taxes and a decline in the Company’s effective income tax rate. The Company’s effective income tax rate for the year ended December 31, 2002 was 35.81%, down from 35.87% for the year ended December 31, 2001.

CONTRACTUAL OBLIGATIONS

The Company’s contractual cash obligations and commitments to extend credit as of December 31, 2003 are as follows:

			PAYMENTS DUE OR COMMITMENTS EXPIRING – BY PERIOD
					Less than		One to		Four to		More than
(IN THOUSANDS)			Total		one year		three years		five years		five years
Contractual cash obligations:
	Operating lease obligations		$	924	$	176	$	245	$	186	$	317
	Data processing service obligations(1)			276		276		—		—		—
	Pension benefit obligations			367		367		—		—		—
	Supplemental retirement benefit obligations			5		52		—		—		—
		Total contractual cash obligations	$	1,619	$	871	$	245	$	186	$	317
Other commitments:
	Commitments to originate residential mortgage loans		$	3,300	$	3,300	$	—	$	—	$	—
	Unused lines of credit			37,410		263		1,183		7,691		28,273
	Other loan commitments			4,475		549		—		3,926		—
		Total other commitments(2)	$	45,185	$	4,112	$	1,183	$	11,617	$	28,273

(1)	The fees charged by our data processing service provider fluctuate based on the number of deposit and loan accounts serviced and therefore have been estimated.
(2)	Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates. The total commitment amounts do not necessarily represent future cash requirements since many of the commitments may expire without being drawn upon.

LIQUIDITY AND CAPITAL RESOURCES

The Bank must maintain a sufficient level of cash and assets which can readily be converted into cash in order to meet cash outflows from normal depositor requirements and loan demands. The Bank’s primary sources of funds are deposits, loan and mortgage-backed securities amortization and prepayments, sales, calls or maturities of investment securities and income on earning assets. In addition to loan payments and maturing investment securities, which are relatively predictable sources of funds, the Bank maintains a high percentage of its assets invested in federal funds sold and money market funds, which can readily be converted into cash, and United States Treasury and Government agency securities, which can be sold or pledged to raise funds. At December 31, 2003, the Bank had $214.5 million or 21.2% of total assets and $394.5 million or 39.1% of total assets invested, respectively, in federal funds sold and money market funds, and United States obligations.

     The Bank is a Federal Deposit Insurance Corporation insured institution subject to the FDIC regulatory capital requirements. The FDIC regulations require all FDIC insured institutions to maintain minimum levels of Tier I capital. Highly rated banks (i.e., those with a composite rating of 1 under the CAMELS rating system) are required to maintain a minimum leverage ratio of Tier I capital to total average assets of at least 3.00%. An additional 100 to 200 basis points are required for all but these most highly rated institutions. The Bank is also required to maintain a minimum level of risk-based capital. Under the risk-based capital standards, FDIC insured institutions must maintain a Tier I capital to risk-weighted assets ratio of 4.00% and are generally expected to meet a minimum total qualifying capital to risk-weighted assets ratio of 8.00%. The risk-based capital guidelines take into consideration risk factors, as defined by the regulators, associated with various categories of assets, both on and off the balance sheet. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk adjusted assets to determine the risk-based capital ratios. Tier II capital components include supplemental capital components such as qualifying allowance for loan losses, qualifying subordinated debt and up to 45 percent of the pretax net unrealized holding gains on certain available for sale equity securities. Tier I capital plus the Tier II capital components are referred to as total qualifying capital.

     The capital ratios of the Bank and the Company currently exceed the minimum regulatory requirements. At December 31, 2003, the Bank had a leverage Tier I capital to average assets ratio of 10.17%, a Tier I capital to risk-weighted assets ratio of 33.29% and a total capital to risk-weighted assets ratio of 34.13%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to average assets of 10.57%, Tier I capital to risk-weighted assets of 34.56% and total capital to risk-weighted assets of 35.40% at December 31, 2003.

ASSET AND LIABILITY MANAGEMENT

The goal of asset/liability management is to ensure that liquidity, capital and market risk are prudently managed. Asset/ liability management is governed by policies reviewed and approved annually by the Bank’s Board of Directors (the “Board”). The Board establishes policy limits for long-term interest rate risk assumption and delegates responsibility for monitoring and measuring the Company’s exposure to interest rate risk to the Risk Management and Asset/Liability Committee (the“Committee”). The Committee which is comprised of members of the Company’s Board of Directors, members of senior management and the Bank’s comptroller, generally meets four times a year to review the economic environment and the volume, mix and maturity of the Company’s assets and liabilities.

INTEREST RATE RISK

The primary goal of interest-rate risk management is to control the Company’s exposure to interest rate risk both within limits approved by the Board and within narrower guidelines approved by the Risk Management and Asset/Liability Committee. These limits and guidelines reflect the Company’s tolerance for interest rate risk over both short-term and long-term time horizons. The Company monitors its interest rate exposures using a variety of financial tools, including income simulation models. These models, produced quarterly, estimate the effect that instantaneous and permanent “market interest rate shocks” of +/-100, 200 and 300 basis points would have on the Company’s net interest income, with no effect given to any steps that management might take to counter the effect of these interest rate movements. These results are compared to a flat interest rate scenario and a consensus forecast that represents the most likely future course of interest rates. The Company also produces a GAP analysis quarterly, reflecting the known or assumed maturity, repricing and other cash flow characteristics of the Company’s interest-earning assets and interest-bearing liabilities.

     Interest rate risk materializes in two forms, market value risk and reinvestment risk.

     Financial instruments calling for future cash flows show market value increases or decreases when rates change. Management monitors the potential change in market value of the Company’s debt securities assuming an immediate (parallel) shift in interest rates of up to 200 basis points up or down. Results are calculated using industry standard modeling analytics and securities data from Bloomberg. The Company uses the results to review the potential changes in market value resulting from immediate rate shifts and to manage the effect of market value changes on the Company’s capital position.

     Reinvestment risk occurs when an asset and the liability funding the asset do not reprice and/or mature at the same time. The difference or mismatch with respect to repricing frequency and/or maturity is a risk to net interest income.

     Complicating management’s efforts to control the Company’s exposure to interest rate risk is the fundamental uncertainty of the maturity, repricing and/or runoff characteristics of a significant portion of the Company’s assets and liabilities. This uncertainty often reflects optional features embedded in these financial instruments. The most important optional features are embedded in the Company’s deposits, loans, mortgage-backed securities and callable U.S. Government agency securities.

     For example, many of the Company’s interest-bearing deposit products (e.g., savings, money market deposit accounts and NOW accounts) have no contractual maturity. Customers have the right to withdraw funds from these deposit accounts freely. Deposit balances may therefore run off unexpectedly due to changes in competitive or market conditions. In addition, when market interest rates rise, customers with time certificates of deposit (“CDs”) often pay a penalty to redeem their CDs and reinvest at higher rates. Given the uncertainties surrounding deposit runoff and repricing, the interest rate sensitivity of the Company’s liabilities cannot be determined precisely.

     Similarly, customers have the right to prepay loans, particularly residential mortgage loans, usually without penalty. As a result, the Company’s mortgage based assets (i.e., mortgage loans and mortgage-backed securities) are subject to prepayment risk. This risk tends to increase when interest rates fall due to the benefits of refinancing. Since the future prepayment behavior of the Company’s customers is uncertain, the interest rate sensitivity of mortgage based assets cannot be determined exactly. Additionally, some of the Company’s callable U.S. Government agency securities may be called prior to maturity. As a result, the interest rate sensitivity of these investment securities cannot be determined precisely.

     Management monitors and adjusts the difference between the Company’s interest-earning assets and interest-bearing liabilities repricing within various time frames (“GAP position”).

     GAP analysis provides a static view of the maturity and repricing characteristics of the Company’s balance sheet positions. The interest rate GAP is prepared by scheduling all interest-earning assets and interest-bearing liabilities according to scheduled or anticipated repricing or maturity. The GAP analysis identifies the difference between an institution’s assets and liabilities that will react to a change in market rates. GAP analysis theory postulates that if the GAP is positive and rates increase, the institution’s net interest spread will increase as more assets than liabilities react to the rate change. If the GAP is negative, more liabilities than assets will react to a change in market rates. If rates rise, the institution’s net interest spread will fall as more liabilities react to market rates than assets. If rates fall and the GAP is positive, the institution’s net interest spread will decrease as more assets than liabilities react to the rate change. If the GAP is negative and rates fall, the institution’s net interest spread will improve as more liabilities react to market rates than assets.

INTEREST RATE RISK (continued)

In 2003, the Company maintained a significant portion of its assets in short-term investments because it anticipated a rise in interest rates the latter part of the year and wanted to take advantage of increases in interest rates to enhance its long-term profitability. However, interest rates did not increase as anticipated. As a result, the Company saw its net interest spread decline.

     The Company has historically managed its interest rate GAP primarily by lengthening or shortening the maturity structure of its securities portfolio, by continually modifying the composition of its securities portfolio and by selectively pricing and marketing its various deposit products. In anticipation of a rise in interest rates in 2004 and the current level of the Bank’s savings deposits, the Company has shortened the maturity structure and mix of its investments. Additionally, in January 2004, the Bank lowered the interest rate paid on some of its savings and NOW deposit products. As a result, the Company’s one-year cumulative GAP position was converted from asset sensitive to liability sensitive at year-end 2003. However, once the repricing of the savings and NOW deposits takes place, the Company’s one-year cumulative GAP position will become asset sensitive again.

     The following table presents the amounts of interest-earning assets and interest-bearing liabilities at December 31, 2003 that are assumed to mature or reprice during the periods indicated. The table also summarizes the Company’s GAP position at December 31, 2003. As of this date, the Company’s one-year cumulative GAP position was negative $68.8 million, representing approximately 6.8% of total assets compared to a positive GAP of $325.8 million or 32.3% of total assets at December 31, 2002. The cumulative GAP-asset ratio measures the direction and extent of imbalance between an institution’s assets and liabilities repricing through the end of a particular period.

			INTEREST SENSITIVITY PERIODS
			3 Months			3 to 6			6 Months			1 to 5			Over
(IN THOUSANDS)			or Less			Months			to 1 Year			Years			5 Years			Total
Interest-earning assets:
Loans(3)			$	28,997		$	17,605		$	34,138		$	152,771		$	19,495		$	253,006
Short-term investments:
	Federal funds sold			190,684			—			—			—			—			190,684
	Investment in money market funds			23,848			—			—			—			—			23,848
Interest-bearing deposits in banks				969			827			2,623			1,266			—			5,685
Securities available for sale(3)				84,152			47,913			56,186			214,803			26,175			429,229
Trading securities				72,633			—			—			—			—			72,633
		Total interest-earning assets	$	401,283		$	66,345		$	92,947		$	368,840		$	45,670		$	975,085
Interest-bearing liabilities:
Deposits(1)(2)(4)			$	563,799		$	29,645		$	35,967		$	31,985		$	193,303		$	854,699
		Total interest-bearing liabilities	$	563,799		$	29,645		$	35,967		$	31,985		$	193,303		$	854,699
GAP for period			$	(162,516	)	$	36,700		$	56,980		$	336,855		$	(147,633	)	$	120,386
Cumulative GAP - December 31, 2003			$	(162,516	)	$	(125,816	)	$	(68,836	)	$	268,019		$	120,386
Cumulative GAP as a percent of total assets				(16.1	)%		(12.5	)%		(6.8	)%		26.5	%		11.9	%
Cumulative GAP - December 31, 2002			$	250,522		$	267,467		$	325,767		$	628,706		$	131,393

(1)	Excludes non-interest bearing demand accounts of $28,464.
(2)	Includes escrow deposits of borrowers of $1,139.
(3)	Loans and mortgage-backed securities reflect regular amortization of principal and prepayment estimates. Callable U.S. Government agency securities of $192,414 thousand are shown in the period they are expected to be called or reprice, otherwise they are shown based on their maturity date. It is assumed that a security will be called if the coupon rate on the security exceeded market interest rates at year-end 2003.
(4)	Savings and NOW accounts that reprice in January 2004 are reflected in the “3 months or less” period. All other savings and NOW, except club accounts are shown in the “over 5 years” period. Club accounts are shown in the “6 months to 1 year” period.

INTEREST RATE RISK (continued)

The following table shows the Company’s financial instruments that are sensitive to changes in interest rates, categorized by initial call date or expected maturity, and the instruments’ fair values as of December 31, 2003.

EXPECTED MATURITY DATE
AT DECEMBER 31, 2003

																								Fair Value
(IN THOUSANDS)			2004			2005			2006			2007			2008			Thereafter			Total			at 12/31/03
Interest sensitive assets:
Fixed rate securities(5)			$	148,059		$	60,400		$	51,228		$	44,025		$	50,943		$	21,426		$	376,081		$	381,630
	Average interest rate(1)			3.75	%		3.68	%		3.42	%		3.85	%		3.82	%		4.63	%		3.76	%
Variable rate securities(2)(3)				20,555			4,000			4,000			4,000			7,993			6,246			46,794			47,599
	Average interest rate(1)			2.46	%		3.00	%		3.00	%		2.00	%		2.20	%		2.28	%		2.44	%
Trading securities(6)				72,633			—			—			—			—			—			72,633			72,633
	Average interest rate			1.36	%		—			—			—			—			—			1.36	%
Fixed rate loans				62,913			52,563			36,950			26,345			22,020			17,576			218,367			221,975
	Average interest rate			5.89	%		5.89	%		5.92	%		6.01	%		6.00	%		5.96	%		5.90	%
Variable rate loans				2,343			2,165			2,066			1,950			1,779			24,336			34,639			34,722
	Average interest rate			5.86	%		5.81	%		5.82	%		5.61	%		5.76	%		6.09	%		6.00	%
Other fixed rate assets(4)				4,419			1,266			—			—			—			—			5,685			5,685
	Average interest rate			2.63	%		3.56	%		—			—			—			—			2.84	%
Other variable rate assets(3)				214,532			—			—			—			—			—			214,532			214,532
	Average interest rate			0.88	%		—			—			—			—			—			0.88	%
		Total interest sensitive assets	$	525,454		$	120,394		$	94,244		$	76,320		$	82,735		$	69,584		$	968,731		$	978,776
Interest sensitive liabilities:
Savings and money market deposit accounts			$	2,099		$	1,961		$	1,838		$	1,728		$	1,630		$	598,575		$	607,831		$	607,831
	Average interest rate			0.90	%		0.94	%		0.97	%		1.00	%		1.03	%		1.63	%		1.62	%
Fixed rate certificates of deposit				95,151			22,589			7,000			1,361			1,035			2,074			129,210			130,244
	Average interest rate			1.75	%		2.44	%		2.71	%		3.59	%		3.40	%		4.02	%		2.00	%
Variable rate certificates of deposit				16,608			23,644			13,036			7,123			—			—			60,411			60,411
	Average interest rate			1.61	%		1.65	%		1.76	%		1.76	%		—			—			1.68	%
NOW accounts				—			—			—			—			—			56,108			56,108			56,108
	Average interest rate			—			—			—			—			—			0.37	%		0.37	%
Escrow deposits of borrowers				1,139			—			—			—			—			—			1,139			1,139
	Average interest rate			0.25	%		—			—			—			—			—			0.25	%
		Total interest sensitive liabilities	$	114,997		$	48,194		$	21,874		$	10,212		$	2,665		$	656,757		$	854,699		$	855,733

(1)	Securities rates presented are on a tax equivalent basis.
(2)	Includes equity securities.
(3)	Consist of Federal funds sold, money market funds and interest-bearing deposits in banks.
(4)	Consist of interest-bearing deposits in banks.
(5)	Securities presented are at amortized cost.
(6)	Securities presented are at market value.

     The Company uses certain assumptions to estimate fair values and expected maturities. For interest-sensitive assets, except callable government agency securities, expected maturities are based upon contractual maturity, and projected repayments and prepayments of principal. For callable government agency securities expected maturities are based upon the next call date for those securities expected to be called, otherwise, the securities are shown at their expected maturity date. For interest-sensitive deposit liabilities, maturities are based on contractual maturity and estimated deposit runoff based on the Bank’s own historical experience. The actual maturity of the Company’s financial instruments could vary significantly from what has been presented in the above table if actual experience differs from the assumptions used.

OTHER MARKET RISKS

The Company’s investment securities portfolio includes equity securities with a market value of approximately $11.5 million at December 31, 2003. The net unrealized gains on these securities totaled $0.9 million at year-end 2003. Movements in equity prices may effect the amount of securities gains or losses which the Company realizes from the sale of these securities and thus may have an impact on earnings.

AVERAGE BALANCE SHEETS

(IN THOUSANDS) YEARS ENDED DECEMBER 31,			2003								2002
						Interest		Average						Interest		Average
			Average			Income/		Yield/			Average			Income/		Yield/
			Balance			Expense(1)		Rate			Balance			Expense(1)		Rate
Assets:
Earning assets:
	Federal funds sold		$	209,463		$	2,266		1.08	%	$	183,968		$	2,974		1.62	%
	Short-term investments(4)			29,672			435		1.47			31,063			671		2.16
	Investment securities(2)			259,148			7,638		2.95			158,978			5,815		3.66
	Mortgage-backed securities(2)			133,037			8,250		6.20			233,627			14,863		6.36
	Trading securities			72,534			1,113		1.53			31,814			685		2.15
	Mortgage loans(3)			270,826			17,682		6.53			308,710			20,819		6.74
	Other loans(3)			13,175			834		6.33			25,022			1,362		5.44
		Total earning assets		987,855			38,218		3.87	%		973,182			47,189		4.85	%
Allowance for loan losses				(2,388	)							(2,644	)
		Total earning assets less allowance for loan losses		985,467								970,538
Other assets				22,410								22,410
		Total assets	$	1,007,877							$	992,948
Liabilities:
Deposits:
	Demand and NOW		$	83,583			247		0.30	%	$	82,964			366		0.44	%
	Savings			595,464			11,032		1.85			471,734			12,161		2.58
	Time certificates of deposit			213,282			4,575		2.15			315,987			10,174		3.22
		Total deposits		892,329			15,854		1.78	%		870,685			22,701		2.61	%
Other liabilities				4,474								5,225
		Total liabilities		896,803								875,910
Stockholders’ Equity				111,074								117,038
		Total liabilities and stockholders’ equity	$	1,007,877							$	992,948
Net interest income (tax-equivalent basis)							22,364								24,488
Less adjustment of tax-exempt interest income							81								86
Net interest income						$	22,283							$	24,402
Interest rate spread(5)									2.09	%							2.24	%
Net interest margin(6)									2.26	%							2.52	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

(IN THOUSANDS) YEARS ENDED DECEMBER 31,			2001
						Interest		Average
			Average			Income/		Yield/
			Balance			Expense(1)		Rate
Assets:
Earning assets:
	Federal funds sold		$	196,041		$	7,444		3.80	%
	Short-term investments(4)			30,215			1,217		4.03
	Investment securities(2)			106,478			5,596		5.26
	Mortgage-backed securities(2)			284,932			18,847		6.61
	Trading securities			2,984			158		5.29
	Mortgage loans(3)			281,492			19,631		6.97
	Other loans(3)			35,964			2,315		6.44
		Total earning assets		938,106			55,208		5.88	%
Allowance for loan losses				(2,612	)
		Total earning assets less allowance for loan losses		935,494
Other assets				20,518
		Total assets	$	956,012
Liabilities:
Deposits:
	Demand and NOW		$	80,848			461		0.57	%
	Savings			353,622			11,495		3.25
	Time certificates of deposit			402,155			20,435		5.08
		Total deposits		836,625			32,391		3.87	%
Other liabilities				6,545
		Total liabilities		843,170
Stockholders’ Equity				112,842
		Total liabilities and stockholders’ equity	$	956,012
Net interest income (tax-equivalent basis)							22,817
Less adjustment of tax-exempt interest income							91
Net interest income						$	22,726
Interest rate spread(5)									2.01	%
Net interest margin(6)									2.43	%

⁽¹⁾ Income on equity securities and municipal bonds is included on a tax equivalent basis.

⁽²⁾ Averages balances include net unrealized gains on securities available for sale.

⁽³⁾ Loans on non-accrual status are included in average balances.

⁽⁴⁾ Short-term investments consist of interest-bearing deposits in banks and investments in money market funds.

⁽⁵⁾ Interest rate spread represents the difference between the yield on earning assets and the cost of the Company’s deposits.

⁽⁶⁾ Nef interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.

RATE/VOLUME ANALYSIS

The following table presents, for the years indicated, the changes in interest and dividend income and the changes in interest expense attributable to changes in interest rates and changes in the volume of earning assets and interest-bearing liabilities. A change attributable to both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.

				2003 COMPARED TO 2002									2002 COMPARED TO 2001
(IN THOUSAND)				INCREASE (DECREASE)									INCREASE DECREASE)
YEAR ENDED DECEMBER 31,				DUE TO									DUE TO
				Volume			Rate			Total			Volume			Rate			Total
Interest and dividend income:
	Federal funds sold			$	372		$	(1,080	)	$	(708	)	$	(433	)	$	(4,037	)	$	(4,470	)
	Short-term investments				(29	)		(207	)		(236	)		33			(579	)		(546	)
	Investment securities				3,081			(1,253	)		1,828			2,205			(1,981	)		224
	Mortgage-backed securities				(6,247	)		(366	)		(6,613	)		(3,287	)		(697	)		(3,984	)
	Trading securities				671			(243	)		428			673			(146	)		527
	Mortgage loans				(2,490	)		(647	)		(3,137	)		1,851			(663	)		1,188
	Other loans				(723	)		195			(528	)		(632	)		(321	)		(953	)
			Total interest and dividend income		(5,365	)		(3,601	)		(8,966	)		410			(8,424	)		(8,014	)
Interest expense:
	Deposits:
		Demand and NOW			3			(122	)		(119	)		12			(107	)		(95	)
		Savings			2,757			(3,886	)		(1,129	)		3,349			(2,683	)		666
		Time certificates of deposit			(2,762	)		(2,837	)		(5,599	)		(3,787	)		(6,474	)		(10,261	)
			Total interest expense		(2	)		(6,845	)		(6,847	)		(426	)		(9,264	)		(9,690	)
Net interest income				$	(5,363	)	$	3,244		$	(2,119	)	$	836		$	840		$	1,676

IMPACT OF INFLATION AND CHANGING PRICES

MASSBANK Corp. s financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time, due to the fact that substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services.

RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING FOR STOCK-BASED COMPENSATION – TRANSITION AND DISCLOSURE

In December 2002, SPAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” was issued and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SPAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The statement was effective for massbank Corp. beginning with the fiscal period ended December 31, 2002. Because the Company has continued its accounting for stock-based compensation using the intrinsic-value based method of accounting, the adoption of SPAS No. 148 did not have a material impact on the company’s results of operation or financial position.

EMPLOYERS’ DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS

In December 2003, the Financial Accounting Standards Board (“EASE”) issued SPAS No. 132 (revised), “Employers’ Disclosures about Pensions and Other Postretirement Benefits an amendment of FASB Statements 87, 88 and 106.” This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements 87, 88 and 106. This Statement retains the disclosure requirements contained in FASB 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement 132 about the type of plan assets, investment strategy, measurement date, plan obligations, and cash flows as well as the components of the net periodic benefit cost recognized in interim periods. Interim reports issued by public companies must now include these new or expanded disclosures about their postretirement benefit plans. This Statement is effective for fiscal years ending after December 15, 2003. The adoption of SFAS 132 (revised) did not have a material impact on the Company’s financial condition or results of operations.

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders
MASSBANK Corp.:

We have audited the accompanying consolidated balance sheets of Massbank Corp. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Massbank Corp. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

Boston, Massachusetts
January 15, 2004

MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31,			2003			2002
Assets:
Cash and due from banks			$	8,378		$	8,356
Short-term investments (Note 2)				214,532			248,750
		Total cash and cash equivalents		222,910			257,106
Interest-bearing deposits in banks				5,685			4,854
Securities available for sale, at market value (amortized cost of $422,875 in 2003 and $367,650 in 2002) (Note 3)				429,229			380,022
Trading securities, at market value (Note 4)				72,633			36,249
Loans (Notes 5, 7 and 11):
	Mortgage loans			241,886			302,788
	Other loans			11,120			16,011
		Total loans		253,006			318,799
	Allowance for loan losses (Note 6)			(1,554	)		(2,271	)
		Net loans		251,452			316,528
Premises and equipment (Note 9)				6,943			6,795
Accrued interest receivable				3,854			3,926
Goodwill (Note 1)				1,090			1,090
Income tax receivable, net				325			199
Other assets				16,128			2,598
		Total assets	$	1,010,249		$	1,009,367
Liabilities and Stockholders’ Equity:
Deposits (Notes 10 and 11):
	Demand and NOW		$	84,572		$	85,327
	Savings			607,831			548,947
	Time certificates of deposit			189,621			249,654
		Total deposits		882,024			883,928
Escrow deposits of borrowers				1,139			1,387
Deferred income taxes (Note 12)				783			2,671
Allowance for loan losses on off-balance sheet credit exposures (Note 6)				626			384
Other liabilities				14,750			3,712
		Total liabilities		899,322			892,082
Commitments and contingent liabilities (Notes 8 and 9)				—			—
Stockholders’ equity (Notes 12, 14, 15 and 16):
	Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued			—			—
	Common stock, par value $1.00 per share; 10,000,000 shares authorized, 7,688,333 and 7,610,195 shares issued, respectively			7,688			7,610
	Additional paid-in capital			54,417			52,820
	Retained earnings			99,038			95,243
				161,143			155,673
	Treasury stock at cost, 3,280,880 and 3,002,129 shares, respectively			(54,177	)		(46,080	)
	Accumulated other comprehensive income (Note 1)			3,961			7,692
	Shares held in rabbi trust at cost, 25,200 and 24,000 shares, respectively (Note 15)			(515	)		(477	)
	Deferred compensation obligation			515			477
		Total stockholders’ equity		110,927			117,285
		Total liabilities and stockholders’ equity	$	1,010,249		$	1,009,367

See accompanying notes to consolidated financial statements.

MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31,				2003			2002		2001
Interest and dividend income:
	Mortgage loans			$	17,682		$	20,819	$	19,631
	Other loans				834			1,362		2,315
	Securities available for sale:
		Mortgage-backed securities			8,250			14,863		18,847
		Other securities			7,557			5,729		5,502
	Trading securities				1,113			685		158
	Federal funds sold				2,266			2,974		7,444
	Other investments				435			671		1,220
			Total interest and dividend income		38,137			47,103		55,117
Interest expense:
	Deposits:
		NOW			247			366		461
		Savings			11,032			12,161		11,495
		Time certificates of deposit			4,575			10,174		20,435
			Total interest expense		15,854			22,701		32,391
			Net interest income		22,283			24,402		22,726
Provision for loan losses (Note 6)					(502	)		—		40
			Net interest income after provision for loan losses		22,785			24,402		22,686
Non-interest income:
	Deposit account service fees				494			567		638
	Gains on securities available for sale, net				558			1,566		4,263
	Gains on trading securities, net				81			152		100
	Other				789			638		812
			Total non-interest income		1,922			2,923		5,813
Non-interest expense:
	Salaries and employee benefits				7,692			7,298		6,723
	Occupancy and equipment				2,248			1,998		2,056
	Data processing				528			528		494
	Professional services				394			526		426
	Advertising and marketing				154			168		192
	Amortization of intangibles				—			29		327
	Deposit insurance				177			182		173
	Other				1,422			1,308		1,330
			Total non-interest expense		12,615			12,037		11,721
			Income before income taxes		12,092			15,288		16,778
Income tax expense (Note 12)					4,229			5,474		6,019
			Net income	$	7,863		$	9,814	$	10,759
Weighted average common shares outstanding:
	Basic				4,439,394			4,697,826		4,685,873
	Diluted				4,544,594			4,822,501		4,809,665
Earnings per share (in dollars):
	Basic			$	1.77		$	2.09	$	2.30
	Diluted				1.73			2.04		2.24

See accompanying notes to consolidated financial statements.

MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS) YEARS ENDED DECEMBER 31,					2003			2002			2001
Cash flows from operating activities:
	Net income				$	7,863		$	9,814		$	10,759
		Adjustments to reconcile net income to net cash (used in) provided by operating activities:
			Depreciation and amortization			721			658			892
			Loan interest capitalized			(12	)		(33	)		(37	)
			Tax benefit resulting from stock options exercised			511			599			238
			Amortization of ESOP shares committed to be released			—			202			151
			Tax benefit resulting from dividends paid on unallocated shares held by the ESOP			—			4			7
			Decrease in accrued interest receivable			72			24			1,805
			Increase in other liabilities			11,038			966			29
			(Increase) decrease in income tax receivable, net			(126	)		9			76
			Amortization of premiums (accretion of discounts) on securities, net			613			450			(643	)
			Net trading securities activity			(36,303	)		(33,008	)		17,389
			Gains on securities available for sale, net			(567	)		(1,633	)		(4,263	)
			Valuation writedowns of equity securities available for sale			9			67			—
			Gains on trading securities, net			(81	)		(152	)		(100	)
			Decrease in deferred mortgage loan origination fees, net of amortization			(562	)		(344	)		(44	)
			Deferred income tax expense (benefit)			236			(219	)		(195	)
			(Increase) decrease in other assets			(12,443	)		(42	)		1,035
			Provision for loan losses			(502	)		—			40
			Provision for loan losses on off-balance sheet credit exposures			16			—			—
			Transfer from allowance for loan losses			(226	)		(235	)		(149	)
			Transfer to allowance for loan losses on off-balance sheet credit exposures			226			235			149
			Gains on sales of premises and equipment			—			—			(4	)
			(Decrease) increase in escrow deposits of borrowers			(248	)		(16	)		16
				Net cash (used in) provided by operating activities		(29,765	)		(22,654	)		27,151
Cash flows from investing activities:
		Purchases of term federal funds				(15,000	)		—			(10,000	)
		Proceeds from maturities of term federal funds				15,000			—			40,000
		Net (increase) decrease in interest-bearing bank deposits				(831	)		587			(3,766	)
		Proceeds from sales of investment securities available for sale				36,810			50,158			32,819
		Proceeds from maturities and redemption of investment securities held to maturity and available for sale				175,000			76,500			87,230
		Purchases of investment securities available for sale				(355,995	)		(209,923	)		(72,548	)
		Purchases of mortgage-backed securities				(9,937	)		(19,977	)		(54,143	)
		Principal repayments of mortgage-backed securities				97,916			99,266			81,231
		Principal repayments of securities available for sale				2			90			4
		Loans originated				(82,598	)		(104,631	)		(103,246	)
		Loan principal payments received				148,966			117,207			82,412
		Purchases of premises and equipment				(859	)		(465	)		(3,507	)
		Proceeds from sale of premises and equipment				—			—			4
			Net cash provided by investing activities			8,474			8,812			76,490

(Continued)

MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)

(IN THOUSANDS) YEARS ENDED DECEMBER 31,			2003			2002			2001
Cash flows from financing activities:
	Net (decrease) increase in deposits			(1,904	)		34,215			25,832
	Payments to acquire treasury stock			(8,097	)		(7,230	)		(1,989	)
	Purchase of company stock for deferred compensation plan			(38	)		(55	)		(56	)
	Increase in deferred compensation obligation			38			55			56
	Issuance of common stock under stock option plan			1,164			1,726			803
	Cash dividends paid on common stock			(4,068	)		(4,139	)		(3,935	)
		Net cash (used in) provided by financing activities		(12,905	)		24,572			20,711
		Net (decrease) increase in cash and cash equivalents		(34,196	)		10,730			124,352
Cash and cash equivalents at beginning of year				257,106			246,376			122,024
Cash and cash equivalents at end of year			$	222,910		$	257,106		$	246,376
Supplemental cash flow disclosures:
Cash transactions:
	Cash paid during the year for interest		$	15,922		$	22,765		$	35,484
	Cash paid during the year for taxes, net of refunds			3,608			5,080			5,898

See accompanying notes to consolidated financial statements.

MASSBANK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(IN THOUSANDS EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

														Accumulated
					Additional									other
			Common		paid-in			Retained			Treasury			comprehensive
			stock		capital			earnings			stock			income
Balance at December 31, 2000			$	7,448	$	61,308		$	93,165		$	(59,338	)	$	5,972
	Net Income			—		—			10,759			—			—
	Other comprehensive income, net of tax:
		Unrealized gains on securities, net of reclassification adjustment (Note 1)		—		—			—			—			471
	Comprehensive income			—		—			—			—			—
	Cash dividends paid ($0.84 per share)			—		—			(3,935	)		—			—
	Tax benefit resulting from dividends paid on unallocated shares held by the ESOP			—		—			7			—			—
	Net decrease in liability to ESOP			—		—			—			—			—
	Amortization of ESOP shares committed to be released			—		151			—			—			—
	Purchase of treasury stock			—		—			—			(1,989	)		—
	Purchase of company stock for deferred compensation plan			—		—			—			—			—
	Exercise of stock options and related tax benefits			47		994			—			—			—
Balance at December 31, 2001				7,495		62,453			99,996			(61,327	)		6,443
	Net Income			—		—			9,814			—			—
	Other comprehensive income, net of tax:
		Unrealized gains on securities, net of reclassification adjustment (Note 1)		—		—			—			—			1,249
	Comprehensive income			—		—			—			—			—
		Cash dividends paid ($0.88 per share)		—		—			(4,139	)		—			—
	Tax benefit resulting from dividends paid on unallocated shares held by the ESOP			—		—			4			—			—
	Net decrease in liability to ESOP			—		—			—			—			—
	Amortization of ESOP shares committed to be released			—		202			—			—			—
	Purchase of treasury stock			—		—			—			(7,230	)		—
	Purchase of company stock for deferred compensation plan			—		—			—			—			—
	Exercise of stock options and related tax benefits			115		2,210			—			—			—
	Transfer resulting from three-for-two stock split			—		(12,045	)		(10,432	)		22,477			—
Balance at December 31, 2002				7,610		52,820			95,243			(46,080	)		7,692
	Net Income			—		—			7,863			—			—
	Other comprehensive income, net of tax:
		Unrealized gains on securities, net of reclassification adjustment (Note 1)		—		—			—			—			(3,731	)
	Comprehensive income			—		—			—			—			—
		Cash dividends paid ($0.92 per share)		—		—			(4,068	)		—			—
	Purchase of treasury stock			—		—			—			(8,097	)		—
	Purchase of company stock for deferred compensation plan			—		—			—			—			—
	Exercise of stock options and related tax benefits			78		1,597			—			—			—
Balance at December 31, 2003			$	7,688	$	54,417		$	99,038		$	(54,177	)	$	3,961

[Additional columns below]

[Continued from above table, first column(s) repeated]

			Shares					Common
			held in			Deferred		stock
			Rabbi			compensation		acquired
			Trust			obligation		by ESOP			Total
Balance at December 31, 2000			$	(366	)	$	366	$	(312	)	$	108,243
	Net Income			—			—		—			10,759
	Other comprehensive income, net of tax:
		Unrealized gains on securities, net of reclassification adjustment (Note 1)		—			—		—			471
	Comprehensive income			—			—		—			11,230
	Cash dividends paid ($0.84 per share)			—			—		—			(3,935	)
	Tax benefit resulting from dividends paid on unallocated shares held by the ESOP			—			—		—			7
	Net decrease in liability to ESOP			—			—		156			156
	Amortization of ESOP shares committed to be released			—			—		—			151
	Purchase of treasury stock			—			—		—			(1,989	)
	Purchase of company stock for deferred compensation plan			(56	)		56		—			—
	Exercise of stock options and related tax benefits			—			—		—			1,041
Balance at December 31, 2001				(422	)		422		(156	)		114,904
	Net Income			—			—		—			9,814
	Other comprehensive income, net of tax:
		Unrealized gains on securities, net of reclassification adjustment (Note 1)		—			—		—			1,249
	Comprehensive income			—			—		—			11,063
		Cash dividends paid ($0.88 per share)		—			—		—			(4,139	)
	Tax benefit resulting from dividends paid on unallocated shares held by the ESOP			—			—		—			4
	Net decrease in liability to ESOP			—			—		156			156
	Amortization of ESOP shares committed to be released			—			—		—			202
	Purchase of treasury stock			—			—		—			(7,230	)
	Purchase of company stock for deferred compensation plan			(55	)		55		—			—
	Exercise of stock options and related tax benefits			—			—		—			2,325
	Transfer resulting from three-for-two stock split			—			—		—			—
Balance at December 31, 2002				(477	)		477		—			117,285
	Net Income			—			—		—			7,863
	Other comprehensive income, net of tax:
		Unrealized gains on securities, net of reclassification adjustment (Note 1)		—			—		—			(3,731	)
	Comprehensive income			—			—		—			4,132
		Cash dividends paid ($0.92 per share)		—			—		—			(4,068	)
	Purchase of treasury stock			—			—		—			(8,097	)
	Purchase of company stock for deferred compensation plan			(38	)		38		—			—
	Exercise of stock options and related tax benefits			—			—		—			1,675
Balance at December 31, 2003			$	(515	)	$	515	$	—		$	110,927

See accompanying notes to consolidated financial statements.

MASSBANK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MASSBANK Corp. (the “Company”) is a Delaware chartered holding company whose principal subsidiary is MASSBANK (the “Bank”). The Bank operates fifteen full service banking offices in Reading, Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury, Westford, Dracut, Lowell and Everett, Massachusetts providing a variety of deposit, lending and trust services. As a Massachusetts chartered savings bank whose deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) and the Depositors Insurance Fund (“DIF”), the activities of the Bank are subject to regulation, supervision and examination by federal and state regulatory authorities, including, but not limited to the FDIC, the Massachusetts Commissioner of Banks and the DIF. In addition, as a bank holding company, the Company is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary MASSBANK and its subsidiaries: Readibank Properties, Inc., Readibank Investment Corporation and Melbank Investment Corporation.
The Company has one reportable operating segment. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and income and expenses for the period. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, the allowance for loan losses on off-balance sheet credit exposures and other than temporary declines in value of investment securities requiring impairment write downs due to general market conditions or other factors.
Certain amounts in the prior years’ consolidated financial statements were reclassified to facilitate comparison with the current fiscal year.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Under its investment policy, management determines the appropriate classification of securities at the time of purchase. Those debt securities that the Company has the intent and the ability to hold to maturity are classified as securities held to maturity and are carried at amortized historical cost. There were no securities held to maturity in either 2003 or 2002.
Those securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in market conditions, interest rates, prepayment risk, the need to increase regulatory capital and other factors. The Company records investment securities available for sale at aggregate market value with the net unrealized holding gains or losses reported, net of tax effect, as a separate component of stockholders’ equity until realized. As of December 31, 2003, stockholders’ equity included approximately $4.0 million, representing the net unrealized gains on securities available for sale, less applicable income taxes.
Securities that are bought and held principally for the purpose of sale in the near term are classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price caused by market volatility. Investments classified as trading securities are stated at market value with unrealized gains and losses included in earnings.
Income on debt securities is accrued and included in interest and dividend income. The specific identification method is used to determine realized gains or losses on sales of securities available for sale which are also reported in non-interest income under the caption “gains on securities available for sale, net.” When a security suffers a loss in value which is considered other than temporary, such loss is recognized by a charge to earnings.

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS
Loans are reported at the principal amount outstanding, net of unearned fees. Loan origination fees and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the loan using the level-yield method.
The Bank generally does not accrue interest on loans which are 90 days or more past due. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed from income and all amortization of deferred loan fees is discontinued. Interest received on nonaccrual loans is either applied against principal or reported as income according to management’s judgment as to the collectibility of principal. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.
Impairment on loans for which it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement are measured on a discounted cash flow method, or at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. However, impairment must be measured based on the fair value of the collateral if it is determined that foreclosure is probable. Impaired loans consist of all nonaccrual commercial loans.
ALLOWANCE FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES ON OFF-BALANCE SHEET CREDIT EXPOSURES
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, 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 affect borrowers’ ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the information available in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management.
The Company also maintains an allowance for probable losses on its outstanding loan commitments. The allowance for loan losses on off-balance sheet credit exposures (shown separately on the balance sheet) is maintained based on expected drawdowns of committed loans and their loss experience factors and management’s assessment of various other factors including current and anticipated economic conditions that may effect the borrowers’ ability to pay, and trends in loan delinquencies and charge-offs.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization computed primarily by use of the straight-line method over the estimated useful lives of the related assets or terms of the related leases.
STOCK OPTION PLAN
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation,” an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding awards in each period.

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31,		2003			2002			2001
Net income, as reported		$	7,863		$	9,814		$	10,759
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(74	)		(75	)		(90	)
Pro forma net income		$	7,789		$	9,739		$	10,669
Earnings per share:
	Basic – as reported	$	1.77		$	2.09		$	2.30
	Basic – pro forma		1.75			2.07			2.28
	Diluted – as reported	$	1.73		$	2.04		$	2.24
	Diluted – pro forma		1.71			2.02			2.22
Weighted average fair value		$	5.44		$	5.76		$	6.98
Expected life		7.3 years			7.2 years			7.4 years
Risk-free interest rate			3.55	%		4.62	%		4.66	%
Expected volatility			21.8	%		21.3	%		22.5	%
Expected dividend yield			3.2	%		3.3	%		3.1	%

GOODWILL IMPAIRMENT

The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles, effective January 1, 2002. The statement addresses the method of identifying and measuring goodwill and other intangible assets acquired in a business combination, eliminates further amortization of goodwill, and requires periodic impairment evaluations of goodwill. Impairment evaluations are required to be performed annually and may be required more frequently if certain conditions indicating potential impairment exists. In the event that the Company were to determine that its goodwill were impaired, the recognition of an impairment charge could have an adverse impact on its results of operations in the period that the impairment occurred or on its financial position.

PENSION PLAN

The Bank accounts for pension benefits on the net periodic pension cost method for financial reporting purposes. This method recognizes the compensation cost of an employee’s pension benefit over that employee’s approximate service period. Pension costs are funded in the year of accrual using the aggregate cost method.

EARNINGS PER COMMON SHARE

Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year reduced by the weighted average number of unallocated shares held by the Employee Stock Ownership Plan (“ESOP”). There were no unallocated shares held by the ESOP in 2003. Diluted EPS reflects the effect on the weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method.

     The treasury shares acquired in connection with the Company’s directors deferred compensation plan are considered outstanding in the computation of earnings per share and book value per share.

     A reconciliation of the weighted average shares outstanding for the years ended December 31, 2003, 2002 and 2001 follows:

(IN THOUSANDS) YEARS ENDED DECEMBER 31,	2003		2002		2001
Basic shares(1)		4,439		4,698		4,686
Dilutive impact of stock options(1)		106		125		124
Diluted shares(1)		4,545		4,823		4,810

⁽¹⁾ All share information presented has been adjusted to reflect the 3-for-2 split of the Company’s common stock effective April 19, 2002.

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
COMPREHENSIVE INCOME
Comprehensive income is defined as “the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.” It includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. The term “comprehensive income” describes the total of all components of comprehensive income including net income.
The Company’s other comprehensive income and related tax effect for the years ended December 31, 2003 and 2002 is as follows:

(IN THOUSANDS) YEARS ENDED DECEMBER 31,		2003									2002
					Tax			Net-					Tax			Net-
		Before -Tax			(Expense)			of-Tax			Before-Tax		(Expense)			of-Tax
		Amount			or Benefit			Amount			Amount		or Benefit			Amount
Unrealized gains (losses) on securities:
	Unrealized holding gains (losses) arising during period	$	(5,298	)	$	1,892		$	(3,406	)	$	3,429	$	(1,266	)	$	2,163
	Less: reclassification adjustment for gains realized in net income		558			(233	)		325			1,566		(652	)		914
	Net unrealized gains (losses)		(5,856	)		2,125			(3,731	)		1,863		(614	)		1,249
	Other comprehensive income (loss)	$	(5,856	)	$	2,125		$	(3,731	)	$	1,863	$	(614	)	$	1,249

CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents consist of cash and due from banks, and short-term investments with original maturities of less than 90 days.
As a regulated financial institution, the Bank is required to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston. The amount of this reserve requirement, included in “Cash and Due from Banks,” was $5.6 million at December 31, 2003 and 2002, respectively.
INCOME TAXES
The Bank recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Bank’s assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. The Bank’s deferred tax asset is reviewed and adjustments to such asset are recognized as deferred income tax expense or benefit based upon management’s judgment relating to the realizability of such asset. Based on the Bank’s historical and current pretax earnings, management believes it is more likely than not that the Bank will realize its existing gross deferred tax asset.
2.	SHORT-TERM INVESTMENTS
	Short-term investments consist of the following:

(IN THOUSANDS) AT DECEMBER 31,	2003		2002
Federal funds sold	$	190,684	$	221,586
Money market investment fund		23,337		27,077
Interest-bearing bank money market accounts		511		87
Total short-term investments	$	214,532	$	248,750

The investments above are stated at cost which approximates market value.

3.	INVESTMENT SECURITIES
The amortized cost and market value of investment securities follows:

							Gross		Gross
					Amortized		Unrealized		Unrealized			Market
(IN THOUSANDS) AT DECEMBER 31, 2003					Cost		Gains		Losses			Value
Securities available for sale:
		Debt securities:
			U.S. Treasury obligations		$	122,902	$	900	$	(160	)	$	123,642
			U.S. Government agency obligations			199,057		531		(1,125	)		198,463
				Total		321,959		1,431		(1,285	)		322,105
			Mortgage-backed securities:
				Government National Mortgage Association		9,002		617		—			9,619
				Federal Home Loan Mortgage Corporation		80,957		4,669		—			85,626
				Federal National Mortgage Association		198		8		—			206
				Collateralized mortgage obligations		204		3		—			207
				Total mortgage-backed securities		90,361		5,297		—			95,658
				Total debt securities		412,320		6,728		(1,285	)		417,763
	Equity securities					10,555		1,177		(266	)		11,466
				Total securities available for sale		422,875	$	7,905	$	(1,551	)	$	429,229
	Net unrealized gains on securities available for sale					6,354
				Total securities available for sale, net		429,229
				Total investment securities, net	$	429,229

The amortized cost and market value of investment securities follows:

						Gross		Gross
						Unrealized		Unrealized			Market
(IN THOUSANDS) AT DECEMBER 31, 2002				Amortized Cost		Gains		Losses			Value
Securities available for sale:
	Debt securities:
		U.S. Treasury obligations		$	101,017	$	2,229	$	—		$	103,246
		U.S. Government agency obligations			73,044		794		—			73,838
			Total		174,061		3,023		—			177,084
		Mortgage-backed securities:
			Government National Mortgage Association		15,613		1,178		—			16,791
			Federal Home Loan Mortgage Corporation		161,167		9,857		—			171,024
			Federal National Mortgage Association		788		34		—			822
			Collateralized mortgage obligations		454		14		—			468
			Total mortgage-backed securities		178,022		11,083		—			189,105
			Total debt securities		352,083		14,106		—			366,189
		Equity securities			15,567		383		(2,117	)		13,833
			Total securities available for sale		367,650	$	14,489	$	(2,117	)	$	380,022
		Net unrealized gains on securities available for sale			12,372
			Total securities available for sale, net		380,022
			Total investment securities, net	$	380,022

3.	INVESTMENT SECURITIES (continued)
During the years ended December 31, 2003, 2002 and 2001, the Company realized gains and losses on sales and recorded other-than-temporary impairment writedowns of securities available for sale as follows:

(IN THOUSANDS) AT DECEMBER 31,		2003					2002					2001
		Realized					Realized					Realized
		Gains		Losses			Gains		Losses			Gains		Losses
Sales:
	U.S. Treasury obligations	$	309	$	—		$	363	$	—		$	135	$	—
	Marketable equity securities		258					4,721		(3,451	)		5,160		(1,032	)
Other-than-temporary impairment writedowns:
	Marketable equity securities		—		(9	)		—		(67	)		—		—
	Total realized gains (losses)	$	567	$	(9	)	$	5,084	$	(3,518	)	$	5,295	$	(1,032	)

Proceeds from sales of debt securities available for sale during 2003, 2002 and 2001 were $26.0 million, $35.0 million and $20.6 million, respectively. Proceeds from sales of equity securities available for sale during 2003, 2002 and 2001, were $11.4 million, $14.6 million and $14.2 million, respectively.

     There were no sales of investment securities held-to-maturity during 2003, 2002 and 2001.

The amortized cost and market value of debt securities available for sale by contractual maturity are as follows:

(IN THOUSANDS) AT DECEMBER 31,				2003				2002
				Amortized		Market		Amortized		Market
				Cost		Value		Cost		Value
Investment securities available for sale:
	U.S. Treasury obligations:
		Maturing within 1 year		$	53,281	$	53,583	$	29,996	$	30,443
		Maturing after 1 year but within 5 years			62,449		62,891		71,021		72,803
		Maturing after 5 years but within 10 years			7,172		7,168		—		—
			Total		122,902		123,642		101,017		103,246
	U.S. Government agency obligations:
		Maturing within 1 year			—		—		10,000		10,000
		Maturing after 1 year but within 5 years			175,015		174,691		59,000		59,719
		Maturing after 5 years but within 10 years			22,000		21,708		4,000		4,075
		Maturing after 10 years but within 15 years			2,042		2,064		44		44
			Total		199,057		198,463		73,044		73,838
	Mortgage-backed securities:
		Maturing within 1 year			40		41		35		35
		Maturing after 1 year but within 5 years			5,160		5,481		4,469		4,771
		Maturing after 5 years but within 10 years			34,065		36,328		70,525		75,376
		Maturing after 10 years but within 15 years			50,825		53,531		102,104		108,003
		Maturing after 15 years			271		277		889		920
			Total		90,361		95,658		178,022		189,105
			Total debt securities available for sale		412,320		417,763		352,083		366,189
	Net unrealized gains on debt securities available for sale				5,443		—		14,106		—
			Total debt securities available for sale, net carrying value	$	417,763	$	417,763	$	366,189	$	366,189

Maturities of mortgage-backed securities are shown at final contractual maturity but are expected to have shorter lives because borrowers have the right to prepay obligations without prepayment penalties.

     Included in U.S. Government agency obligations are investments that can be called prior to final maturity with an amortized cost of $193.0 million and a market value of $192.4 million at December 31, 2003 and an amortized cost of $73.0 million and a market value of $73.8 million at December 31, 2002.

3. INVESTMENT SECURITIES (continued)

The fair value and unrealized losses of temporarily impaired investments aggregated by category of investments is as follows:

(IN THOUSANDS) AT DECEMBER 31, 2003		LESS THAN 12 MONTHS					12 MONTHS OR LONGER					TOTAL
				Unrealized					Unrealized					Unrealized
Description of Securities		Fair value		Losses			Fair Value		Losses			Fair Value		Losses
Debt securities:
	U.S. Treasury obligations	$	30,350	$	(160	)	$	—	$	—		$	30,350	$	(160	)
	U.S. Government agency obligations		98,867		(1,125	)		—		—			98,867		(1,125	)
	Total debt securities		129,217		(1,285	)		—		—			129,217		(1,285	)
Equity securities			1,436		(164	)		2,622		(102	)		4,058		(266	)
	Total temporarily impaired securities	$	130,653	$	(1,449	)	$	2,622	$	(102	)	$	133,275	$	(1,551	)

At December 31, 2003 the Company had thirty-one U.S. Treasury and Government agency securities and eight equity securities investment positions that had been in a loss position for less than twelve months that it considered temporarily impaired. This is due to the volatility of market interest rates and the price volatility of equity securities. U.S. Treasury and Government agency securities fluctuate in value based on changes in market interest rates and other factors, however, they can be redeemed at par value if held to maturity and therefore if their maturity date is less than one year into the future regardless of their market value they are considered only temporarily impaired.

     At December 31, 2003 the Company had three equity investment positions that had been in a continuous unrealized loss position for twelve or more months that it considered temporarily impaired. The total unrealized losses on these three securities were $77 thousand, $22 thousand and $3 thousand, respectively, representing a 4.2%, 3.8% and 0.9% loss in value, respectively.

     Management considers industry analyst reports, sector credit ratings, volatility in market price and other relevant information, such as the financial condition, earnings capacity and near term prospects of the company, in determining whether an equity security’s impairment is due to a fundamental deterioration in its financial condition or due to general market conditions. If the impairment is due to a fundamental deterioration in its financial condition as determined by the Company’s analysis, it is written down to its current fair market value and the loss is recognized. If the impairment is due to general market conditions and the equity security declines in price from its cost basis by more than 25% for more than a year, between 30% and 40% for more than nine months, between 40% and 50% for more than six months or over 50% for more than ninety days, the stock is considered “other than temporarily impaired” and it is written down to its current fair market value and the loss is recognized.

The amortized cost and market value of U.S. Government agency securities available for sale that can be called prior to maturity by scheduled maturity and next call dates are as follows:

(IN THOUSANDS) AT DECEMBER 31,				2003				2002
				Amortized		Market		Amortized		Market
Based on Scheduled Maturity				Cost		Value		Cost		Value
Investment securities available for sale
	U.S. Government agency obligations:
		Maturing within 1 year		$	—	$	—	$	10,000	$	10,000
		Maturing after 1 but within 2 years			13,000		13,011		6,000		6,030
		Maturing after 2 but within 3 years			43,998		44,048		22,000		22,127
		Maturing after 3 but within 4 years			42,000		41,990		21,000		21,231
		Maturing after 4 but within 5 years			69,992		69,636		10,000		10,332
		Maturing after 5 but within 10 years			22,000		21,708		4,000		4,074
		Maturing after 10 but within 15 years			2,000		2,021		—		—
			Total	$	192,990	$	192,414	$	73,000	$	73,794

				Amortized		Market		Amortized		Market
Based on Next Call Dates				Cost		Value		Cost		Value
Investment securities available for sale
	U.S. Government agency obligations:
		Callable within 1 year		$	178,990	$	178,287	$	63,000	$	63,346
		Callable after 1 but within 2 years			10,000		10,124		6,000		6,232
		Callable after 2 but within 3 years			4,000		4,003		4,000		4,216
			Total	$	192,990	$	192,414	$	73,000	$	73,794

4. TRADING SECURITIES

     The carrying amount and market value of trading securities are as follows:

(IN THOUSANDS) AT DECEMBER 31,		2003				2002
		Carrying		Market		Carrying		Market
		Amount		Value		Amount		Value
U.S. Treasury obligations		$	72,408	$	72,408	$	36,228	$	36,228
Marketable equity securities			2223		2223		19		19
Investments in mutual funds			3		3		2		2
	Total trading securities	$	72,633	$	72,633	$	36,249	$	36,249

During the years ended December 31, 2003, 2002 and 2001, the Company realized gains and losses on sales of trading securities as follows:

(IN THOUSANDS) YEARS ENDED DECEMBER 31,		2003					2002					2001
		Realized					Realized					Realized
		Gains		Losses			Gains		Losses			Gains		Losses
U.S. Treasury obligations		$	145	$	(262	)	$	77	$	(50	)	$	32	$	—
Marketable equity securities			88		—			30		—			104		(28	)
	Total realized gains (losses)	$	233	$	(262	)	$	107	$	(50	)	$	136	$	(28	)

Proceeds from sales of trading securities during 2003, 2002 and 2001 were $72.9 million, $49.5 million and $27.3 million, respectively. Mark-to-market adjustments included in income in 2003, 2002 and 2001 were $110 thousand, $95 thousand and $(8) thousand, respectively.

5. LOANS

The Bank’s lending activities are conducted principally in the local communities in which it operates banking offices, and to a lesser extent, in selected areas of Massachusetts and southern New Hampshire.

     The Bank offers single family and multi-family residential mortgage loans and a variety of consumer loans. The Bank also offers mortgage loans secured by commercial or investment property such as apartment buildings and commercial or corporate facilities; loans for the construction of residential homes, multi-family properties and for land development; and business loans for other commercial purposes. Most loans granted by the Bank are either collateralized by real estate or guaranteed by federal or local governmental authorities. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the borrowers’ geographic areas. The ability of commercial real estate and commercial loan borrowers to honor their repayment commitments is generally dependent on the economic health of the real estate sector in the borrowers’ geographic areas and the overall economy. The composition of the Bank’s loan portfolio is summarized as follows:

(IN THOUSANDS) AT DECEMBER 31,					2003			2002
Mortgage loans:
	Residential:
		Conventional:
			Fixed rate		$	217,487		$	268,984
			Variable rate			22,956			31,544
		FHA and VA				84			133
	Commercial					1,601			2,348
	Construction					81			654
				Total mortgage loans		242,209			303,663
Premium on loans						10			20
Deferred mortgage loan origination fees						(333	)		(895	)
				Mortgage loans, net		241,886			302,788
Other loans:
	Consumer:
		Installment				415			798
		Guaranteed education				2,333			3,293
		Other secured				518			515
		Home equity lines of credit				7,549			11,102
		Unsecured				166			187
				Total consumer loans		10,981			15,895
	Commercial					139			116
				Total other loans		11,120			16,011
				Total loans	$	253,006		$	318,799

In the ordinary course of business, the Bank makes loans to its directors, officers and their associates and affiliated companies (“related parties”) at substantially the same terms as those prevailing at the time of origination for comparable transactions with unrelated borrowers. An analysis of total related party loans for the year ended December 31, 2003 follows:

(IN THOUSANDS)
Balance at December 31, 2002	$	800
Additions		1,353
Repayments		(567	)
Balance at December 31, 2003	$	1,586

6. ALLOWANCE FOR LOAN LOSSES ⁽¹⁾

An analysis of the activity in the allowance for loan losses is as follows:

(IN THOUSANDS) YEARS ENDED DECEMBER 31,			2003			2002			2001
Balance at beginning of year			$	2,271		$	2,494		$	2,594
Provision for loan losses				(502	)		—			40
Transfer to allowance for loan losses on off-balance sheet credit exposures				(226	)		(235	)		(149	)
Recoveries of loans previously charged-off				15			16			31
		Total		1,558			2,275			2,516
Charge-offs:
	Mortgage loans			—			—			—
	Other loans			(4	)		(4	)		(22	)
Balance at end of year			$	1,554		$	2,271		$	2,494

⁽¹⁾ The prior years’ allowance for loan losses have been restated to reflect the reclassification of the allowance for loan losses on off-balance sheet crecdit exposures (shown separately on the balance sheet) and to facilitate comparison with the current fiscal year.

The following table shows the allocation of the allowance for loan losses by category of loans at December 31, 2003, 2002 and 2001.

(IN THOUSANDS) AT DECEMBER 31,			2003					2002					2001
					Percentage					Percentage					Percentage
					of Loans					of Loans					of Loans
			Amount		to Total			Amount		to Total			Amount		to Total
Mortgage loans:
	Residential		$	934		95	%	$	1,309		94	%	$	958		89	%
	Commercial			76		1			9		1			8		1
Consumer loans				185		4			198		5			140		6
Commercial loans				48		—			69		—			346		4
Unallocated				311		—			686		—			1,042		—
		Total	$	1,554		100	%	$	2,271		100	%	$	2,494		100	%

An integral component of the Company’s risk management process is to ensure the proper allocation of the allowance for loan losses based upon an analysis of risk characteristics, demonstrated losses and other factors. The unallocated component of the allowance for loan losses represents management’s view that there are probable losses that have been incurred within the portfolio but have not yet been specifically identified. The unallocated portion of the allowance for loan losses is based on management’s assessment of many factors including the risk characteristics of the loan portfolio, concentrations of credit, current and anticipated economic conditions that may affect borrowers’ ability to pay, and trends in loan delinquencies and charge-offs. The unallocated portion of the allowance for loan losses may change periodically after evaluating factors impacting assumptions utilized in the calculation of the allocated portion of the allowance for loan losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management.

7. NON-PERFORMING ASSETS

     The following schedule summarizes non-performing assets at the dates shown:

(IN THOUSANDS) AT DECEMBER 31,		2003			2002			2001
Total nonaccrual loans		$	230		$	420		$	644
Total real estate acquired through foreclosure			—			—			—
	Total non-performing assets	$	230		$	420		$	644
Percent of non-performing loans to total loans			0.09	%		0.13	%		0.19	%
Percent of non-performing assets to total assets			0.02	%		0.04	%		0.07	%

7. NON-PERFORMING ASSETS (continued)

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

(IN THOUSANDS) YEARS ENDED DECEMBER 31,	2003			2002		2001
Interest income that would have been recorded under original terms	$	17		$	31	$	60
Interest income actually recorded		20			27		37
Reduction (increase) in interest income	$	(3	)	$	4	$	23

     During 2003, 2002 and 2001 the Company had no impaired loans.

8.     FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts reflect the extent of involvement the Bank has in particular classes of these instruments. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

		CONTRACT OR NOTIONAL AMOUNT
(IN THOUSANDS) AT DECEMBER 31,		2003		2002
Financial instruments whose contract amounts represent credit risk:
	Commitments to originate residential mortgage loans	$	3,300	$	11,331
	Unadvanced portions of construction loans		479		111
	Unused credit lines, including unused portions of equity lines of credit		37,410		40,929
	Other loan commitments		3,996		—

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower.

     At December 31, 2002 the Bank also had commitments to purchase when-issued investment securities in the amount of $4.0 million.

9. PREMISES AND EQUIPMENT

     A summary of premises and equipment and their estimated useful lives used for depreciation purposes is as follows:

							ESTIMATED
							USEFUL LIFE
(IN THOUSANDS) AT DECEMBER 31,			2003		2002		(IN YEARS)
Premises:
	Land		$	2,392	$	2,227		—
	Buildings			5,917		5,824		25-45
	Building and leasehold improvements			5,069		2,396		2-30
Equipment				2,487		4,564		3-15
				15,865		15,011
Less: accumulated depreciation and amortization				8,922		8,216
		Total premises and equipment, net	$	6,943	$	6,795

The Bank is obligated under a number of noncancelable operating leases for various banking offices. These operating leases expire at various dates through 2012 with options for renewal. Rental expenses for the years ended December 31, 2003, 2002 and 2001 amounted to $274 thousand, $277 thousand, and $391 thousand, respectively.

9.     PREMISES AND EQUIPMENT (continued)

     The minimum rental commitments, with initial or remaining terms of one year or more exclusive of operating costs and real estate taxes to be paid by the Bank under these leases, as of December 31, 2003, are as follows:

(IN THOUSANDS) YEARS ENDING DECEMBER 31,	PAYMENTS
2004	$	176
2005		125
2006		120
2007		93
2008		93
LATER YEARS		317
Total	$	924

10.  DEPOSITS

     Deposits are summarized as follows:

(IN THOUSANDS) AT DECEMBER 31,			2003					2002
			Amount		Rate			Amount		Rate
Demand and NOW:
	NOW accounts		$	56,108		0.37	%	$	57,293		0.65	%
	Demand accounts			28,464		—			28,034		—
		Total demand and NOW		84,572		0.24			85,327		0.43
Savings:
	Regular savings and special notice accounts			595,575		1.64			535,122		2.28
	Money market accounts			12,256		0.45			13,825		1.00
		Total savings		607,831		1.62			548,947		2.25
Time certificates:
	Fixed rate certificates			129,210		2.00			170,527		2.75
	Variable rate certificates			60,411		1.68			79,127		2.12
		Total time certificates		189,621		1.89			249,654		2.55
		Total deposits	$	882,024		1.55	%	$	883,928		2.16	%

     The maturity distribution and related rate structure of the Bank’s time certificates of deposit at December 31, 2003 follows:

(IN THOUSANDS) AT DECEMBER 31,		2003
				Average
		Amount		Interest Rate
Due within 3 months		$	31,251		1.62	%
Due within 3-6 months			31,924		1.58
Due within 6-12 months			48,585		1.91
Due within 1 – 2 years			46,232		2.04
Due within 2-3 years			20,036		2.09
Due within 3-5 years			9,519		2.20
Thereafter			2,074		4.02
	Total	$	189,621		1.89	%

10.     DEPOSITS (continued)

At December 31, 2003 and 2002, the Bank had individual time certificates of deposit of $100 thousand or more maturing as follows:

(IN THOUSANDS) AT DECEMBER 31,		2003		2002
Due within 3 months		$	4,605	$	17,174
Due within 3-6 months			5,442		9,308
Due within 6-12 months			13,792		9,657
Due within 1-2 years			10,374		11,458
Due within 2-3 years			5,221		7,600
Due within 3-5 years			3,198		4,085
Thereafter			1,279		1,234
	Total	$	43,911	$	60,516

11.     FAIR VALUE OF FINANCIAL INSTRUMENTS

SPAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires that the Bank disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Bank’s financial instruments.

CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS AND ACCRUED INTEREST RECEIVABLE

The carrying amounts for these financial instruments approximate fair value because of the short-term nature of these financial instruments.

INTEREST-BEARING DEPOSITS IN BANKS AND TERM FEDERAL FUNDS SOLD

The carrying amounts of the interest-bearing deposits in banks and term federal funds sold reported in the balance sheet at December 31, 2003 and 2002 approximate fair value.

SECURITIES

The fair value of investment securities is based principally on quoted market prices and dealer quotes.

     Statement 107 specifies that fair values should be calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs.

     The carrying amount and estimated fair values of the Company’s investment securities are as follows:

		2003				2002
				Calculated Fair				Calculated Fair
(IN THOUSANDS) AT DECEMBER 31,		Carrying Amount		Value		Carrying Amount		Value
Securities available for sale		$	429,229	$	429,229	$	380,022	$	380,022
Trading securities			72,633		72,633		36,249		36,249
	Total securities	$	501,862	$	501,862	$	416,271	$	416,271

LOANS

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage, commercial real estate, consumer and commercial.

     The fair values of residential and commercial real estate, and certain consumer loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For variable rate commercial loans and certain variable rate consumer loans, including home equity lines of credit, carrying value approximates fair value. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information.

11.     FAIR VALUE OF FINANCIAL INSTRUMENTS(Continued)

     The following table presents information for loans:

			2003					2002
			Carrying			Calculated Fair		Carrying			Calculated Fair
(IN THOUSANDS) AT DECEMBER 31,			Amount			Value		Amount			Value
Real estate:
	Residential:
		Variable	$	22,949		$	22,991	$	31,526		$	32,222
		Fixed		217,344			220,972		268,925			274,606
	Commercial:
		Variable		1,593			1,605		2,126			2,150
		Fixed		—			—		211			211
Consumer				10,981			11,015		15,895			16,010
Commercial				139			114		116			99
		Total loans		253,006			256,697		318,799			325,298
Allowance for loan losses				(1,554	)		—		(2,271	)		—
		Net loans	$	251,452		$	256,697	$	316,528		$	325,298

DEPOSITS

Under Statement 107, the fair value of deposits with no stated maturity, such as demand deposits, NOW accounts, regular savings and special notice accounts, and money market accounts, is equal to the amount payable on demand as of December 31, 2003 and 2002. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

		2003				2002
		Carrying		Estimated Fair		Carrying		Estimated Fair
(IN THOUSANDS) AT DECEMBER 31,		Amount		Value		Amount		Value
Demand accounts		$	28,464	$	28,464	$	28,034	$	28,034
NOW accounts			56,108		56,108		57,293		57,293
Regular savings and special notice accounts			595,575		595,575		535,122		535,122
Money market accounts			12,256		12,256		13,825		13,825
Time certificates			189,621		190,655		249,654		251,512
	Total deposits		882,024		883,058		883,928		885,786
Escrow deposits of borrowers			1,139		1,139		1,387		1,387
	Total	$	883,163	$	884,197	$	885,315	$	887,173

The fair value estimates and the carrying amounts above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

COMMITMENTS TO EXTEND CREDIT

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

     The Bank estimates the fair value of the cost to terminate commitments to advance funds on construction loans and for residential mortgage loans in the pipeline at December 31, 2003 and 2002 to be immaterial. Unused credit lines, including unused portions of equity lines of credit, are at floating interest rates and therefore there is no fair value adjustment. The Bank’s other loan commitments approximate fair value.

11.     FAIR VALUE OF FINANCIAL INSTRUMENTS(Continued)

LIMITATIONS

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no active market exists for a portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

     Fair value estimates are determined without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a trust department that contributes fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

12.     INCOME TAXES

Income tax expense (benefit) was allocated as follows:

(IN THOUSANDS) YEARS ENDED DECEMBER 31,			2003		2002			2001
Current income tax expense:
	Federal		$	3,702	$	5,210		$	5,891
	State			291		438			367
		Total current tax expense		3,993		5,648			6,258
Deferred income tax expense (benefit):
	Federal			175		(132	)		(181	)
	State			61		(42	)		(58	)
		Total deferred tax expense (benefit)		236		(174	)		(239	)
		Total income tax expense	$	4,229	$	5,474		$	6,019

Income tax expense attributable to income from operations for the years ended December 31, differed from the amounts computed by applying the federal income tax rate of 35 percent as a result of the following:

(IN THOUSANDS) YEARS ENDED DECEMBER 31,		2003			2002			2001
Computed “expected” income tax expense at statutory rate		$	4,232		$	5,351		$	5,872
Increase (reduction) in income taxes resulting from:
	Reduction in federal income tax rate		(97	)		(101	)		—
	State and local income taxes, net of federal benefit		229			257			201
	Dividends received deduction		(54	)		(57	)		(59	)
	Dividends paid to ESOP deduction		(67	)		(34	)		(7	)
	Other		(14	)		58			12
Income tax expense		$	4,229		$	5,474		$	6,019
Effective income tax rate			34.98	%		35.81	%		35.87	%

12.     INCOME TAXES (Continued)

         At December 31, 2003 and 2002, the Bank had gross deferred tax assets and gross deferred tax liabilities as follows:

(IN THOUSANDS) YEARS ENDED DECEMBER 31,		2003		2002
Deferred tax assets:
	Loan losses	$	914	$	997
	Deferred loan fees, net		7		30
	Deferred compensation and pension cost		715		671
	Depreciation		29		40
	Purchase accounting		263		347
	Other		48		84
	Gross deferred tax asset		1,976		2,169
Deferred tax liabilities:
	Valuation of securities		2,555		4,680
	Other unrealized securities gains		106		106
	Other		98		54
	Gross deferred tax liability		2,759		4,840
Net deferred tax liability		$	783	$	2,671

     Based on the Company’s historical and current pretax earnings, management believes it is more likely than not that the Company will realize the gross deferred tax asset existing at December 31, 2003. The primary sources of recovery of the gross federal deferred tax asset are federal income taxes paid in 2003, 2002 and 2001 that are available for carryback and the expectation that the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. Since there is no carryback provision for state income tax purposes, management believes the existing net deductible temporary differences which give rise to the gross deferred state income tax asset will reverse during periods in which the Company generates net taxable income. There can be no assurance, however, that the Company will generate any earnings or any specific level of continuing earnings.

     As a result of the Tax Reform Act of 1996, the special tax bad debt provisions were amended to eliminate the reserve method. However, the tax effect of the pre-1988 bad debt reserve amount of approximately $7.3 million remains subject to recapture in the event that the Bank pays dividends in excess of its reserves and profits.

13.     EARNINGS PER SHARE

         The following is a calculation of earnings per share for the years indicated:

YEARS ENDED DECEMBER 31,		2003				2002						2001
(IN THOUSANDS EXCEPT SHARE DATA)		Basic		Diluted		Basic			Diluted			Basic			Diluted
Net income		$	7,863	$	7,863	$	9,814		$	9,814		$	10,759		$	10,759
Average shares outstanding			4,439,394		4,439,394		4,708,783			4,708,783			4,710,030			4,710,030
Dilutive stock options			—		105,200		—			124,675			—			123,792
Unallocated Employee Stock
	Ownership Plan (“ESOP”) shares not committed to be released		—		—		(10,957	)		(10,957	)		(24,157	)		(24,157	)
Weighted average shares outstanding			4,439,394		4,544,594		4,697,826			4,822,501			4,685,873			4,809,665
Earnings per share (in dollars)		$	1.77	$	1.73	$	2.09		$	2.04		$	2.30		$	2.24

14. STOCKHOLDERS’ EQUITY

The Company may not declare or pay cash dividends on its shares of common stock if the effect thereof would cause its stockholders’ equity to be reduced below or to otherwise violate legal or regulatory requirements. Substantially all of the Company’s retained earnings are unrestricted at December 31, 2003.

     The Bank is a Federal Deposit Insurance Corporation insured institution subject to the FDIC regulatory capital requirements. The FDIC regulations require all FDIC insured institutions to maintain minimum levels of Tier I capital. Highly rated banks (i.e., those with a composite rating of 1 under the CAMELS rating system) are required to maintain a minimum leverage ratio of Tier I capital to total average assets of at least 3.00%. An additional 100 to 200 basis points are required for all but these most highly rated institutions. The Bank is also required to maintain a minimum level of risk-based capital. Under the new risk-based capital standards, FDIC insured institutions must maintain a Tier I capital to risk-weighted assets ratio of 4.00% and are generally expected to meet a minimum total qualifying capital to risk-weighted assets ratio of 8.00%. The new risk-based capital guidelines take into consideration risk factors, as defined by the regulators, associated with various categories of assets, both on and off the balance sheet. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk adjusted assets to determine the risk-based capital ratios. Tier II capital components include supplemental capital components such as qualifying allowance for loan losses, qualifying subordinated debt and up to 45 percent of the pretax net unrealized holding gains on certain available for sale equity securities. Tier I capital plus the Tier II capital components are referred to as total qualifying capital.

     The capital ratios of the Company and its principal subsidiary “MASSBANK” set forth below currently exceed the minimum ratios for “well capitalized” banks as defined by federal regulators.

     As of December 31, 2003, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would cause a change in the Bank’s categorization.

(IN THOUSANDS)						FOR CAPITAL					TO BE WELL
AT DECEMBER 31, 2003	ACTUAL					ADEQUACY PURPOSES					CAPITALIZED(1)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier I Capital (to Average Assets):
MASSBANK Corp. (consolidated)	$	105,876		10.57	%	$	30,054		3.00	%		N/A		—
MASSBANK (the “Bank”)		101,908		10.17			30,054		3.00		$	50,090		5.00	%
Tier I Capital (to Risk-Weighted Assets):
MASSBANK Corp. (consolidated)		105,876		34.56			12,254		4.00			N/A		—
MASSBANK (the “Bank”)		101,908		33.29			12,246		4.00			18,369		6.00
Total Capital (to Risk-Weighted Assets):
MASSBANK Corp. (consolidated)		108,466		35.40			24,509		8.00			N/A		—
MASSBANK (the “Bank”)		104,498		34.13			24,492		8.00			30,615		10.00

(1) This column presents the minimum amounts and ratios that a financial institution must have to be categorized as well capitalized.

(IN THOUSANDS)						FOR CAPITAL					TO BE WELL
AT DECEMBER 31, 2002	ACTUAL					ADEQUACY PURPOSES					CAPITALIZED(1)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier I Capital (to Average Assets):
MASSBANK Corp. (consolidated)	$	107,494		10.96	%	$	29,414		3.00	%		N/A		—
MASSBANK (the “Bank”)		101,857		10.32			29,606		3.00		$	49,343		5.00	%
Tier I Capital (to Risk-Weighted Assets):
MASSBANK Corp. (consolidated)		107,494		32.47			13,242		4.00			N/A		—
MASSBANK (the “Bank”)		101,857		30.76			13,243		4.00			19,865		6.00
Total Capital (to Risk-Weighted Assets):
MASSBANK Corp. (consolidated)		110,149		33.27			26,483		8.00			N/A		—
MASSBANK (the “Bank”)		104,512		31.57			26,486		8.00			33,108		10.00

(1) This column presents the minimum amounts and ratios that a financial institution must have to be categorized as well capitalized.

1

15.     EMPLOYEE BENEFITS

PENSION PLAN

     The Bank sponsors a noncontributory defined benefit pension plan that covers all employees who meet specified age and length of service requirements, which is administered by the Savings Banks Employees Retirement Association (“SBERA”). The plan provides for benefits to be paid to eligible employees at retirement based primarily upon their years of service with the Bank and compensation levels near retirement. Contributions to the plan reflect benefits attributed to employees’ service to date, as well as service expected to be earned in the future. Pension plan assets consist principally of equity securities, bond and equity mutual funds, and money market funds and cash.

     The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated financial statements for the plan years ended October 31, 2003, 2002, and 2001, the plan’s latest valuation dates:

(IN THOUSANDS) YEARS ENDED DECEMBER 31,		2003			2002			2001
Actuarial present value of vested benefits		$	6,548		$	5,929		$	5,700
Total accumulated benefit obligation			6,617			5,969			5,730
Change in benefit obligation:
	Projected benefit obligation at beginning of year	$	7,646		$	7,009		$	6,432
	Service cost		385			386			375
	Interest cost		516			493			499
	Amendments		—			129			—
	Actuarial loss (gain)		91			(173	)		(130	)
	Benefits paid		(249	)		(199	)		(167	)
	Projected benefit obligation at end of year	$	8,389		$	7,645		$	7,009
Change in plan assets:
	Fair value of plan assets at beginning of year	$	5,963		$	6,804		$	7,785
	Actual return on plan assets		902			(643	)		(843	)
	Employer contribution		420			—			29
	Benefits paid		(249	)		(199	)		(167	)
	Other		2			1			—
	Fair value of plan assets at end of year	$	7,038		$	5,963		$	6,804
	(Deficiency) excess of plan assets over projected benefit obligation	$	(1,351	)	$	(1,682	)	$	(205	)

Certain changes in the items shown are not recognized as they occur, but are amortized systematically over subsequent periods.

Unrecognized amounts to be amortized and the amounts included in the consolidated balance sheets are shown below:

Unrecognized net actuarial gain (loss)	$	(459	)	$		(915	)	$	85
Transition asset		84				106			126
Past service cost		(121	)			(129	)		—
Accrued benefit cost		(855	)			(744	)		(416	)
(Deficiency) excess of plan assets over projected benefit obligation	$	(1,351	)		$	(1,682	)	$	(205	)

Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows:

	Discount rate		6.25	%		6.75	%		7.00	%
	Rate of compensation increase		4.00	%		4.00	%		4.50	%
Assumptions used to develop the net periodic benefit cost data were:
	Discount rate		6.75	%		7.00	%		7.75	%
	Expected return on plan assets		7.75	%		7.75	%		7.75	%
	Rate of compensation increase		4.00	%		4.50	%		5.00	%
Components of net periodic pension (benefit) expense:
	Service cost	$	385		$	386		$	375
	Interest cost		516			494			498
	Expected return on plan assets		(462	)		(527	)		(603	)
	Transition obligation		(21	)		(21	)		(21	)
	Past service cost		7			—			—
	Recognized net actuarial (gain) loss		107			(4	)		(253	)
	Net periodic pension (benefit) expense	$	532		$	328		$	(4	)

2

15.     EMPLOYEE BENEFITS (continued)

The approximate composition of pension plan assets as of the end of the plan years ended October 31, 2003 and 2002 is as follows:

YEARS ENDED OCTOBER 31,		2003			2002
Asset Category:
	Cash and money market funds		21	%		10	%
	Equity securities		47	%		22	%
	Mutual funds - equities		8	%		39	%
	Mutual funds - bonds		24	%		28	%
	Mutual funds - bonds and equities		—			1	%
			100	%		100	%

The expected long-term rate of return on plan assets is based on prevailing yields on high quality fixed income investments increased by a premium of 3% - 5% for equity investments.

     The Bank expects to contribute $367 thousand to its pension plan in 2004.

     The investment policies and strategies for the Bank’s pension plan are as follows: MASSBANK (the “Bank”) is a member of the Savings Bank Employees Retirement Association (“SBERA”) within which the Bank maintains a Defined Benefit pension plan. SBERA offers a common and collective trust as the underlying investment structure for pension plans participating in the Association. The target allocation mix for the common and collective trust portfolio calls for an equity-based investment deployment range from 55% to 75% of total portfolio assets. The remainder of the portfolio is allocated to fixed income. The actual investment allocation of the portfolio is approximately 68% Equities, 28% Fixed Income and 4% Money Market. The Trustees of SBERA, through the Association’s Investment Committee, select investment managers for the common and collective trust portfolio. A professional investment advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify equity investments across a spectrum of investment types (e.g., small cap, large cap, international, etc.) and styles (e.g., growth, value, etc.)

PROFIT SHARING AND INCENTIVE COMPENSATION BONUS PLANS

The Bank’s Profit Sharing and Incentive Compensation Bonus Plans provide for payments to employees under certain circumstances based upon a year-end measurement of the Company’s net income and attainment of individual goals and objectives by certain key officers. There were no payments awarded under the profit sharing and incentive compensation bonus plans in 2003. Because some of the target goals and individual goals and objectives were met in 2002 and 2001, bonuses were awarded to officers and non-officer employees of the Bank in the amount of $67 thousand and $158 thousand, respectively. There were no profit sharing distributions in 2002 and 2001 because the criteria for making such distributions were not met.

EMPLOYEE STOCK OWNERSHIP PLAN

The Bank has an Employees’ Stock Ownership Plan (“ESOP”) for the benefit of each employee who has completed at least 1,000 hours of service with the Company in the previous twelve months. Under the plan, the ESOP has borrowed funds from a third party bank to invest in the Company’s common stock. The balance of the ESOP loan was repaid in 2002.

     Shares of the Company’s common stock purchased with the loan proceeds were held in a suspense account. As the loan was repaid, a proportionate number of shares were released for allocation to plan participants, annually. In 2003, the Bank contributed $161,000 to the ESOP to invest in the Company’s common stock. These shares were allocated to plan participants, on a pro rata basis, based on compensation.

     At December 31, 2003, the ESOP held 206,044 shares of the Company’s common stock which have been allocated to plan participants and no unallocated shares.

     Dividends on allocated shares held by the ESOP are allocated to plan participants proportionately based on the number of shares in the participant’s allocated accounts.

     The Company’s total expense applicable to the ESOP amounted to $135 thousand, $373 thousand and $328 thousand for the years ended December 31, 2003, 2002 and 2001, respectively.

EMPLOYEE AGREEMENTS

The Bank has entered into employment agreements with certain executive officers which provide that the officer will receive a minimum amount of annual compensation from the Bank for a specified period. The agreements also provide for the continued payment of compensation to the officer for a specified period after termination under certain circumstances, including if the officer’s termination follows a “change of control,” generally defined to mean a person or group attaining ownership of 25% or more of the shares of the Company.

15.     EMPLOYEE BENEFITS (continued)

EXECUTIVE SUPPLEMENTAL RETIREMENT AGREEMENTS

The Bank maintains executive supplemental retirement agreements for certain executive officers. These agreements provide retirement benefits designed to supplement benefits available through the Bank’s retirement plan for employees. The Company made contributions of $50 thousand, $59 thousand and $78 thousand to a rabbi trust for the benefits payable under the agreements in 2003, 2002 and 2001.

DIRECTORS DEFERRED COMPENSATION PLAN

In 1988, the Company established a deferred compensation plan for its directors. The plan allows the Company’s directors to defer receipt of all or a portion of their compensation until the earlier of: (1) their attaining the age of 72, or (2) their termination as a director of the Company. In 2000, the plan was amended to allow the directors’ compensation to be invested in Company stock held in an irrevocable trust. At December 31, 2003, the trust held 25,200 shares of MASSBANK Corp. stock. The shares are considered outstanding in the computation of earnings per share and book value per share.

STOCK OPTION PLAN

Effective May 28, 1986, the Board of Directors of the Bank adopted a stock option plan for the benefit of its officers and other employees. In January, 1991, the plan was amended to authorize the grant of options to non-employee Directors of the Company. All but 8 of the 1,035,000 shares reserved for issuance under the plan were issued. On April 19, 1994, shareholders approved and the Bank adopted the Company’s 1994 Stock Incentive Plan. The total number of shares of common stock that can be issued under this plan is 540,000 shares. Both incentive stock options and non-qualified stock options may be granted under the plans. As of December 31, 2003, there were 98,266 non-qualified stock options and 220,068 incentive stock options granted and outstanding to purchase shares under the plans. The maximum option term is ten years. Further stock options may be granted pursuant to the 1994 Stock Incentive Plan and will generally have an exercise price equal to, or in excess of, the fair market value of a share of common stock of the Company on the date the option is granted.

     A summary of the status of the Company’s fixed stock option plan as of December 31, 2003, 2002 and 2001, and changes during the years ended on those dates is presented below. All share information presented has been adjusted to reflect the 3-for-2 split of the Company’s common stock effective April 19, 2002.

YEARS ENDED DECEMBER 31,	2003					2002					2001
				Weighted					Weighted					Weighted
	Shares			Average		Shares			Average		Shares			Average
	Under			Exercise		Under			Exercise		Under			Exercise
FIXED OPTIONS	Option			Price		Option			Price		Option			Price
Outstanding at beginning of year		376,122		$	19.27		475,651		$	17.09		519,526		$	16.21
Granted		22,600			28.56		32,250			27.63		32,625			20.67
Exercised		(78,138	)		14.90		(130,277	)		13.26		(70,497	)		11.39
Forfeited		(2,250	)		29.50		(1,502	)		28.55		(6,003	)		27.25
Outstanding at end of year		318,334		$	20.94		376,122		$	19.27		475,651		$	17.09
Options exercisable at year-end		318,334					376,122					475,651

The following table summarizes information about fixed stock options outstanding and exercisable at December 31, 2003:

AT DECEMBER 31, 2003	OPTIONS OUTSTANDING					OPTIONS EXERCISABLE
			Weighted Avg.	Weighted Avg.				Weighted Avg.
RANGE OF	Number		Remaining	Exercise		Number		Exercise
EXERCISE PRICES	Outstanding		Contractual Life	Price		Exercisable		Price
$11.25 to $12.19		47,750	0.7 years	$	11.53		47,750	$	11.53
13.25 to 16.63		42,987	2.0 years		15.44		42,987		15.44
19.00 to 20.67		104,875	5.0 years		19.81		104,875		19.81
25.00 to 29.50		121,522	6.0 years		27.45		121,522		27.45
29.60 to 36.70		1,200	9.4 years		30.78		1,200		30.78
$11.25 to $36.70		318,334	4.3 years	$	20.94		318,334	$	20.94

4

16.     SHAREHOLDER RIGHTS PLAN

The Company has in effect a Shareholder Rights Plan, pursuant to which the Board of Directors authorized the issuance of one preferred stock purchase right for each share of common stock of the Company outstanding. Under the Plan, the Rights automatically become part of and trade with the Company’s shares of common stock. Although the Rights are not exercisable initially, they become exercisable if a person becomes an “acquiring person” by acquiring 11% or more of the Company’s common stock or if a person commences a tender offer that could result in that person owning 11% or more of the common stock of Massbank Corp. In the event that a person becomes an “acquiring person,” each holder of a Right (other than the acquiring person) would be entitled to acquire such number of shares of preferred stock which are equivalent to Massbank Corp. common stock having a value of twice the exercise price of the Right. The exercise price of a Right initially shall be $136.00 per one one-thousandth of a share of the Company’s preferred stock. If Massbank Corp. is acquired in a merger or other business combination transaction after any such event, each holder of a Right would be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the Right. The Rights will expire on January 19, 2010, but may be redeemed at the option of the Board of Directors for $0.01 per Right at any time prior to the time at which any person becomes an acquiring person or until the expiration date of the Shareholder Rights Plan.

17.     PARENT COMPANY FINANCIAL STATEMENTS

The following are the condensed financial statements for Massbank Corp. (the “Parent Company”) only:

BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA) AT DECEMBER 31,			2003			2002
Assets:
	Cash		$	5		$	8
	Interest-bearing deposits in banks			3,742			6,401
	Investment in subsidiaries			106,959			111,648
	Other assets			238			382
		Total assets	$	110,944		$	118,439
Liabilities:
	Due to subsidiaries		$	—		$	42
	Other liabilities			17			1,112
		Total liabilities		17			1,154
Stockholders’ Equity (Notes 12, 14, 15 and 16):
	Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued
	Common stock, par value $1.00 per share; 10,000,000 shares authorized, 7,688,333 and 7,610,195 shares issued, respectively			7,688			7,610
	Additional paid-in capital			54,417			52,820
	Retained earnings			99,038			95,243
				161,143			155,673
	Treasury stock at cost, 3,280,880 and 3,002,129 shares, respectively			(54,177	)		(46,080	)
	Accumulated other comprehensive income (Note 1)			3,961			7,692
	Shares held in rabbi trust at cost 3,000 and 2,600 shares, respectively			(72	)		(59	)
	Deferred compensation obligation			72			59
		Total stockholders’ equity		110,927			117,285
		Total liabilities and stockholders’ equity	$	110,944		$	118,439

17.     PARENT COMPANY FINANCIAL STATEMENTS (continued)

STATEMENTS OF INCOME
(IN THOUSANDS) YEARS ENDED DECEMBER 31,			2003			2002			2001
Income:
	Dividends received from subsidiaries		$	9,300		$	11,000		$	8,800
	Interest and dividend income			15			76			41
		Total interest and dividend income		9,315			11,076			8,841
Non-interest expense				166			172			123
		Income before income taxes		9,149			10,904			8,718
Income tax benefit				93			40			16
		Income before equity in undistributed earnings of subsidiaries		9,242			10,944			8,734
Equity in undistributed earnings of subsidiaries				(1,379	)		(1,130	)		2,025
		Net income	$	7,863		$	9,814		$	10,759

The Parent Company only Statements of Changes in Stockholders’ Equity are identical to the consolidated statements and therefore are not presented here.

STATEMENTS OF CASH FLOWS

(IN THOUSANDS) YEARS ENDED DECEMBER 31,				2003			2002			2001
Cash flows from operating activities:
	Net income			$	7,863		$	9,814		$	10,759
	Adjustments to reconcile net income to net cash provided by operating activities:
		Equity in undistributed earnings of subsidiaries			1,379			1,130			(2,025	)
		Decrease (increase) in current income tax asset, net			151			(164	)		(17	)
		Increase in deferred income tax asset, net			(6	)		(6	)		(5	)
	Tax benefit resulting from stock options exercised				89			148			33
	(Decrease) increase in other liabilities				(1,095	)		1,098			(282	)
	Decrease in amount due from subsidiaries				—			—			84
	(Decrease) increase in amount due to subsidiaries				(42	)		(246	)		288
			Net cash provided by operating activities		8,339			11,774			8,835
Cash flow from financing activities:
	Payments to acquire treasury stock				(8,097	)		(7,230	)		(1,989	)
	Purchase of company stock for deferred compensation plan				(13	)		(16	)		(18	)
	Increase in deferred compensation obligation				13			16			18
	Issuance of common stock under stock option plan				1,164			1,726			803
	Dividends paid on common stock				(4,068	)		(4,139	)		(3,935	)
	Tax benefit resulting from dividends paid on unallocated shares held by the ESOP				—			4			7
			Net cash used in financing activities		(11,001	)		(9,639	)		(5,114	)
			Net increase (decrease) in cash and cash equivalents		(2,662	)		2,135			3,721
Cash and cash equivalents at beginning of year					6,409			4,274			553
Cash and cash equivalents at end of year				$	3,747		$	6,409		$	4,274

During the years ended December 31, 2003, 2002 and 2001, the Company made cash payments for income taxes of $32 thousand, $40 thousand and $24 thousand, respectively, and no payments for interest.

In addition, the Company made cash payments to the state of Delaware for franchise taxes in the amount of $38 thousand, $38 thousand and $37 thousand during the years ended December 31, 2003, 2002 and 2001, respectively.

18.     TEN-YEAR STATISTICAL SUMMARY (UNAUDITED)

(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,	2003			2002			2001			2000			1999
Net income	$	7,863		$	9,814		$	10,759		$	11,111		$	11,311
Diluted earnings per share		1.73			2.04			2.24			2.25			2.17
Cash dividends paid per share		0.92			0.88			0.84			0.79			0.74
Book value per share, at year-end		25.17			25.45			24.34			22.83			20.43
Return on average assets		0.78	%		0.99	%		1.13	%		1.20	%		1.20	%
Return on average equity		7.08	%		8.39	%		9.53	%		10.93	%		10.66	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,	1998			1997			1996			1995			1994
Net income	$	10,914		$	10,167		$	9,427		$	8,759		$	8,185
Diluted earnings per share		1.98			1.85			1.72			1.56			1.42
Cash dividends paid per share		0.68			0.59			0.46			0.36½			0.30
Book value per share, at year-end		21.05			19.38			17.17			16.56			13.39
Return on average assets		1.17	%		1.12	%		1.08	%		1.04	%		0.96	%
Return on average equity		10.05	%		10.51	%		10.65	%		10.65	%		10.62	%

19.     QUARTERLY DATA (UNAUDITED)

				2003														2002
YEARS ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT				4th				3rd				2nd			1st			4th				3rd				2nd			1st
PER SHARE DATA)				Quarter				Quarter				Quarter			Quarter			Quarter				Quarter				Quarter			Quarter
Interest and dividend income				$	8,690			$	9,226			$	9,860		$	10,361		$	11,385			$	11,728			$	11,950		$	12,040
Interest expense					3,483				3,622				4,136			4,613			5,062				5,602				5,943			6,094
Net interest income					5,207				5,604				5,724			5,748			6,323				6,126				6,007			5,946
Provision for loan losses					(52	)			(450	)			—			—			—				—				—			—
Net interest income after provision for loan losses					5,259				6,054				5,724			5,748			6,323				6,126				6,007			5,946
Gains (losses) on securities, net					335				72				192			40			(83	)			(50	)			918			933
Other non-interest income					346				271				400			266			317				247				318			323
Non-interest expense					3,204				3,133				3,229			3,049			3,085				2,930				2,987			3,035
Income before income taxes					2,736				3,264				3,087			3,005			3,472				3,393				4,256			4,167
Income tax expense					941				1,127				1,101			1,060			1,220				1,183				1,554			1,517
		Net income		$	1,795			$	2,137			$	1,986		$	1,945		$	2,252			$	2,210			$	2,702		$	2,650
Earnings per share (in dollars):(1)
	Basic		$	0.41			$	0.49			$	0.45		$	0.43		$	0.48			$	0.47			$	0.57		$	0.56
	Diluted				0.40				0.48				0.44			0.42			0.47				0.46				0.56			0.55
Weighted average common shares outstanding:(1)
	Basic			4,397				4,378				4,428			4,557			4,665				4,670				4,724			4,734
	Diluted				4,523				4,490				4,531			4,637			4,775				4,795				4,860			4,862

⁽¹⁾ Computation of earnings per share is further described in Note 1.

MASSBANK CORP. AND SUBSIDIARIES STOCKHOLDER DATA

YEARS ENDED DECEMBER 31, 2003 AND 2002

MASSBANK Corp.’s common stock is currently traded on the Nasdaq Stock Market under the symbol “MASB.” At December 31, 2003 there were 4,407,453 shares outstanding and 803 shareholders of record. Shareholders of record do not reflect the number of persons or entities who hold their stock in nominee or “street” name.

     The following table includes the quarterly ranges of high and low closing sales prices for the common stock, as reported by Nasdaq, and dividends declared per share for the periods indicated.

	Price per Share				Cash
					Dividends
	High		Low		Declared
YEAR ENDED DECEMBER 31,	2003
Fourth Quarter	$	44.27	$	37.23	$	0.23
Third Quarter		37.72		31.91		0.23
Second Quarter		36.20		27.47		0.23
First Quarter		28.90		27.50		0.23

YEAR ENDED DECEMBER 31,	2002
Fourth Quarter	$	31.40	$	27.37	$	0.22
Third Quarter		34.93		27.70		0.22
Second Quarter		35.38		28.90		0.22
First Quarter		31.50		23.73		0.22

MASSBANK BRANCH OFFICES d/b/a

MASSBANK of Reading*

123 Haven Street
Reading, MA 01867
(781) 942-8188
(978) 446-9200
 
MASSBANK of Chelmsford

291 Chelmsford Street
Chelmsford, MA 01824
(978) 256-3751
 
17 North Road
Chelmsford, MA 01824
(978) 256-3733
 
MASSBANK of Dracut

45 Broadway Road
Dracut, MA 01826
(978) 441-0040
 
MASSBANK of Everett

738 Broadway
Everett, MA 02149
(617) 387-5115
 
MASSBANK of Lowell

50 Central Street
Lowell, MA 01852
(978) 446-9200
 
755 Lakeview Avenue
Lowell, MA 01850
(978) 446-9216
 
MASSBANK of Medford

4110 Mystic Valley Parkway
Wellington Circle Plaza
Medford, MA 02155
(781) 395-4899
 
MASSBANK of Melrose

476 Main Street
Melrose, MA 02176
(781) 662-0100
 
27 Melrose Street
Towers Plaza
Melrose, MA 02176
(781) 662-0165
 
MASSBANK of Stoneham

240 Main Street
Stoneham, MA 02180
(781) 662-0177
 
MASSBANK of Tewksbury

1800 Main Street
Tewksbury, MA 01876
(978) 851-0300
 
MASSBANK of Westford

203 Littleton Road
Westford, MA 01886
(978) 692-3467
 
MASSBANK of Wilmington

370 Main Street
Wilmington, MA 01887
(978) 658-4000
 
219 Lowell Street
Lucci’s Plaza
Wilmington, MA 01887
(978) 658-5775

* Main Office

9

CORPORATE INFORMATION

Massbank Corp.
123 Haven Street
Reading, MA 01867
(781) 662-0100
(978) 446-9200
FAX (781) 942-1022

Savings and Mortgage
24-Hour-Rate Lines
(781) 662-0154
(978) 446-9285

Notice of Shareholders’ Meeting
The Annual Meeting of the
Shareholders of Massbank Corp.
will be held at 10:00 A.M.
on Tuesday, April 20, 2004 at the
Sheraton Ferncroft Resort
50 Ferncroft Road
Danvers, MA 01923

Trademark
Massbank and its logo are
registered trademarks of
the Company

Form 10-K
Shareholders may obtain without
charge a copy of the Company’s
2003 Form 10-K. Written requests
should be addressed to:
Shareholder Services
Massbank Corp.
159 Haven Street
Reading, MA 01867

Dividend Reinvestment and
Stock Purchase Plan
Shareholders may obtain a brochure
containing a detailed description of
the plan by writing to:
Shareholder Services
Massbank Corp.
159 Haven Street
Reading, MA 01867

Transfer Agent
American Stock Transfer &
Trust Company
59 Maiden Lane
New York, NY 10038
(800) 937-5449
(877) 777-0800
Website address:
www.amstock.com

Independent Auditors
KPMG LLP
99 High Street
Boston, MA 02110

Legal Counsel
Goodwin Procter LLP
Exchange Place
Boston, MA 02109

OFFICERS AND DIRECTORS
MASSBANK CORP.

OFFICERS

Gerard H. Brandi
Chairman, President and
Chief Executive Officer

Reginald E. Cormier
Senior Vice President, Treasurer and
Chief Financial Officer

Robert S. Cummings
Secretary

Donna H. West
Assistant Secretary

BOARD OF DIRECTORS

*Mathias B. Bedell
Retired, Bedell Brothers Insurance
Agency, Inc.

*Gerard H. Brandi
Chairman, President and
Chief Executive Officer,
Massbank Corp.

Allan S. Bufferd
Treasurer,
Massachusetts Institute of Technology

Kathleen M. Camilli
U.S. Economist
Credit Suisse Asset Management, LLC

†Peter W. Carr
Retired, Guilford Transportation
Industries

†Alexander S. Costello
Teacher, Brooks School

*Robert S. Cummings
Senior Counsel,
Nixon Peabody LLP

Leonard Lapidus
Banking and Bank Regulation
Consultant

*Stephen E. Marshall
Retired, C.H. Cleaves Insurance
Agency, Inc.

Nancy L. Pettinelli
Executive Director,
Visiting Nurse Association

†*Herbert G. Schurian
Certified Public Accountant

*Dr. Donald B. Stackhouse
Retired, Dental Health Concepts

*	Member, Executive Committee
	†Member, Audit Committee

OFFICERS AND DIRECTORS
MASSBANK

OFFICERS

Gerard H. Brandi
Chairman, President and
Chief Executive Officer

Donald R. Washburn
Senior Vice President, Lending

Donna H. West
Senior Vice President,
Community Banking

Reginald E. Cormier
Senior Vice President, Treasurer
and Chief Financial Officer

David F. Carroll
Vice President, Operations

Richard J. Flannigan
Vice President and
Senior Trust Officer

Thomas J. Queeney
Vice President and
Senior Trust Officer

Marilyn H. Abbott
Assistant Treasurer

Carol A. Axelrod
Loan Officer

Kathleen M. Baldassari
Assistant Treasurer

Kenneth R. Berard
Assistant Treasurer

David M. Bianco
Assistant Treasurer

Andrea S. Bradford
Assistant Vice President

Melanie M. Buckingham
Assistant Treasurer

Ernest G. Campbell, Jr.
Collections Officer

Marianne J. Carpenter
Assistant Vice President

Lisa A. DiCicco
Trust Operations Officer

Claudeia F. Downing
Assistant Treasurer

Karen L. Flammia
Assistant Vice President

Scott M. Forbes
Mortgage Origination Officer

Rachael E. Garneau
Assistant Treasurer

Martin J. Heneghan
Assistant Comptroller

Brian W. Hurley
Assistant Vice President

Kimberly A. Judge
Assistant Treasurer

Anne M. Lee
Director of Human Resources

Kenneth A. Masson
Assistant Vice President,
Marketing

Davia A. Mello
Information Technology Officer

Laura M. O’Connor
Assistant Treasurer

Erik C. Olson
Auditor and
Compliance Officer

Joseph P. Orefice
Information Technology Officer

Karen L. O’Rourke
Assistant Treasurer

Joseph D. Regan
Comptroller

Charles E. Samour
Security Officer

Margaret E. White
Assistant Treasurer

Patricia A. Witts
Assistant Treasurer

Michael J. Woods
Assistant Vice President

BOARD OF DIRECTORS
AND
EXECUTIVE COMMITTEE

Mathias B. Bedell
Gerard H. Brandi, Chairman
Robert S. Cummings, Clerk
Stephen E. Marshall
Herbert G. Schurian
Dr. Donald B. Stackhouse
Donna H. West EX-21 5 b49847mbexv21.txt EX-21 SUBSIDIARIES Exhibit 21 List of Subsidiaries of MASSBANK Corp. MASSBANK Corp. is the parent company of: MASSBANK (the "Bank") MASSBANK has three wholly-owned subsidiaries: Readibank Properties, Inc. Readibank Investment Corporation Melbank Investment Corporation EX-23 6 b49847mbexv23.txt EX-23 CONSENT OF KPMG LLP EXHIBIT 23 Independent Auditors' Consent The Board of Directors MASSBANK Corp. We consent to the incorporation by reference in the registration statement on Form S-8 of MASSBANK Corp. of our report dated January 15, 2004, with respect to the consolidated balance sheets of MASSBANK Corp. as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2003, which report appears in the December 31, 2003, annual report on Form 10-K of MASSBANK Corp. /s/ KPMG LLP Boston, Massachusetts March 12, 2004 EX-31.1 7 b49847mbexv31w1.txt EX-31.1 CERTIFICATION OF CEO Exhibit 31.1 CERTIFICATION 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/Gerard H. Brandi ----------------------------------- Gerard H. Brandi, President and CEO (principal executive officer) EX-31.2 8 b49847mbexv31w2.txt EX-31.2 CERTIFICATION OF CFO Exhibit 31.2 CERTIFICATION 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 12, 2004 /s/Reginald E. Cormier ------------------------------------ Reginald E. Cormier, Sr. V.P.,Treasurer & CFO (principal financial officer) EX-32.1 9 b49847mbexv32w1.txt EX-32.1 CERTIFICATION PURSUANT TO SEC 906 - CEO Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, the undersigned Chief Executive Officer of MASSBANK Corp. hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 12, 2004 /s/ Gerard H. Brandi -------------------- Gerard H. Brandi Chief Executive Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. EX-32.2 10 b49847mbexv32w2.txt EX-32.2 CERTIFICATION PURSUANT TO SEC 906 - CFO Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, the undersigned Chief Financial Officer of MASSBANK Corp. hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 12, 2004 /s/ Reginald E. Cormier ----------------------- Reginald E. Cormier Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. 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EX-10.2.3

                                                                   EXHIBIT 10.23

                                    MASSBANK

                         EMPLOYEES' STOCK OWNERSHIP PLAN

                                       AND

                                 TRUST AGREEMENT

                   AMENDED AND RESTATED AS OF NOVEMBER 1, 2001



                                TABLE OF CONTENTS



                                                                                                                 Page
                                                                                                                 ----
                                                                                                              
ARTICLE I - THE TRUST.............................................................................................3
         1.01     Continuation of Trust...........................................................................3
         1.02     Interpretation of Trust Agreement...............................................................3
         1.03     Exclusive Benefit...............................................................................3

ARTICLE II - DEFINITIONS..........................................................................................5
         2.01     "Account".......................................................................................5
         2.02     "Affiliated Company"............................................................................5
         2.03     "Agreement".....................................................................................5
         2.04     "Allocation Date"...............................................................................5
         2.05     "Beneficiary"...................................................................................5
         2.06     "Board".........................................................................................5
         2.07     "Committee".....................................................................................5
         2.08     "Company".......................................................................................6
         2.09     "Compensation"..................................................................................6
         2.10     "Computation Period"............................................................................6
         2.11     "Dividend Account"..............................................................................7
         2.12     "Effective Date"................................................................................7
         2.13     "Employee"......................................................................................7
         2.14     "Entry Date"....................................................................................7
         2.15     "Hour of Service"...............................................................................7
         2.16     "Limitation Year"...............................................................................9
         2.17     "Member"........................................................................................9
         2.18     "One-Year Break in Service".....................................................................9
         2.19     "Plan"..........................................................................................9
         2.20     "Plan Year".....................................................................................9
         2.21     "Stock".........................................................................................9
         2.22     "Trust"........................................................................................10
         2.23     "Trustee"......................................................................................10
         2.24     "Year of Eligibility Service"..................................................................10
         2.25     "Year of Vesting Service"......................................................................10

ARTICLE III - MEMBERSHIP.........................................................................................11
         3.01     Eligibility for Membership.....................................................................11
         3.02     Determination of Eligibility by the Committee..................................................11
         3.03     Duration of Membership.........................................................................11
         3.04     Unpaid Leaves of Absence.......................................................................11

ARTICLE IV - CONTRIBUTIONS.......................................................................................13
         4.01     Company Contribution...........................................................................13
         4.02     Payment of Contributions.......................................................................13
         4.03     Reversion of Certain Contributions.............................................................13
         4.04     Member's Contributions.........................................................................14


                                      (i)


                                                                                                              
ARTICLE V - MEMBERS' ACCOUNTS....................................................................................15
         5.01     Maintenance of Accounts........................................................................15
         5.02     Compensation Schedule..........................................................................16
         5.03     Allocation of Company Contributions............................................................16
         5.04     Allocation of Forfeitures......................................................................16
         5.05     Valuation of Assets Other than Stock...........................................................17
         5.06     Allocation of Trust Assets Other than Stock....................................................17
         5.07     Dividends on Stock.............................................................................18
         5.08     Distributions and Forfeitures..................................................................19
         5.09     Limitations on Allocations.....................................................................19

ARTICLE VI - BENEFITS............................................................................................23
         6.01     Restrictions on Payments and Distributions.....................................................23
         6.02     Retirement.....................................................................................23
         6.03     Disability Retirement..........................................................................23
         6.04     Death Benefits.................................................................................24
         6.05     Termination of Employment Prior to Retirement or Death.........................................26
         6.06     Reemployment...................................................................................27
         6.07     Manner and Timing of Distributions.............................................................28
         6.08     Discharge of Trustee's Obligations to Make Payment.............................................31
         6.09     Special Distribution from Account and Dividend Account.........................................32

ARTICLE VII - AMENDMENT AND TERMINATION..........................................................................34
         7.01     Right to Amend or Terminate....................................................................34
         7.02     Amendment for Tax Exemption....................................................................34
         7.03     Liquidation of Trust in Event of Termination...................................................34
         7.04     Termination of Plan and Trust..................................................................35

ARTICLE VIII - ADMINISTRATION OF THE PLAN........................................................................36
         8.01     Named Fiduciaries..............................................................................36
         8.02     Appointment of Committee.......................................................................36
         8.03     Powers of Committee............................................................................37
         8.04     Action by Committee............................................................................37
         8.05     Discretionary Action...........................................................................37
         8.06     Evidence on Which Committee May Act............................................................38
         8.07     Employment of Agents...........................................................................38
         8.08     Compensation and Expense of Committee..........................................................39
         8.09     Indemnification................................................................................39
         8.10     Claims Procedure...............................................................................39

ARTICLE IX - THE TRUSTEE.........................................................................................43
         9.01     Powers of Trustee..............................................................................43
         9.02     Investments....................................................................................43
         9.03     Method of Holding and Selling Securities.......................................................44
         9.04     Exercise of Voting Rights......................................................................44
         9.05     Reliance on Trustee as Owner...................................................................45
         9.06     Liquidation of Assets..........................................................................45



                                      (ii)




                                                                                                              
         9.07     Direction by Committee.........................................................................45
         9.08     Records and Accounting.........................................................................46
         9.09     Payment of Taxes...............................................................................47
         9.10     Trustee's Compensation and Expenses............................................................48
         9.11     Resignation or Removal of Trustee..............................................................48
         9.12     Tender Offer or Exchange Offer.................................................................49
         9.13     Indemnification of Trustee.....................................................................49

ARTICLE X - THE COMPANY..........................................................................................51
         10.01    Powers of the Bank.............................................................................51
         10.02    No Contract of Employment......................................................................51
         10.03    Liability of Company...........................................................................51
         10.04    Action by Company..............................................................................51
         10.05    Successor to Business of Company...............................................................52
         10.06    Dissolution of the Company.....................................................................52

ARTICLE XI - ESOP LOANS..........................................................................................53
         11.01    ESOP Loan......................................................................................53
         11.02    Use of ESOP Loan Proceeds......................................................................53
         11.03    Terms and Conditions...........................................................................53
         11.04    Collateral for ESOP Loan.......................................................................54
         11.05    Suspense Accounts..............................................................................54

ARTICLE XII - TOP-HEAVY PROVISIONS...............................................................................56
         12.01    Article Controls...............................................................................56
         12.02    Definitions....................................................................................56
         12.03    Top-Heavy Status...............................................................................59
         12.04    Minimum Benefit................................................................................60
         12.05    Adjustment to Combined Limitation..............................................................60
         12.06    Minimum Vesting................................................................................61
         12.07    Restriction on Compensation....................................................................61
         12.08    Termination of Top-Heavy Status................................................................61

ARTICLE XIII - ADDITIONAL PARTICIPATING COMPANIES................................................................62
         13.01    Participation..................................................................................62
         13.02    Effective Date.................................................................................62
         13.03    Administration.................................................................................62
         13.04    Termination....................................................................................62
         13.05    Allocation of Forfeitures......................................................................62
         13.06    Contributions..................................................................................63

ARTICLE XIV - MISCELLANEOUS......................................................................................64
         14.01    Spendthrift Provision..........................................................................64
         14.02    Appointment of Person to Receive Payment.......................................................64
         14.03    Construction...................................................................................64
         14.04    Impossibility of Performance...................................................................65
         14.05    Definition of Words............................................................................65


                                      (iii)




                                                                                                              
         14.06    Titles.........................................................................................65
         14.07    Merger or Consolidation........................................................................65
         14.08    Execution of Agreement.........................................................................65
         14.09    Special Provisions for Certain Leased Employees................................................66
         14.10    USERRA.........................................................................................66
         14.11    Correction Methods.............................................................................66
         14.12    Writings.......................................................................................67

ARTICLE XV - DIRECT ROLLOVERS....................................................................................68
         15.01    Application of this Article....................................................................68
         15.02    Definitions....................................................................................68

ARTICLE XVI - MINIMUM DISTRIBUTION REQUIREMENTS..................................................................70
         16.01    General Rules..................................................................................70
         16.02    Time and Manner of Distribution................................................................70
         16.03    Required Minimum Distributions During Member's Lifetime........................................71
         16.04    Required Minimum Distributions After Member's Death............................................72
         16.05    Definitions....................................................................................72


                                      (iv)


                                    MASSBANK
                         EMPLOYEES' STOCK OWNERSHIP PLAN
                                       AND
                                 TRUST AGREEMENT

         The Trust Agreement dated the 16th day of April, 1986, creating the
MASSBANK FOR SAVINGS Employee Stock Ownership Plan, as heretofore amended, is
hereby amended and restated in its entirety as follows:

                         W I T N E S S E T H  T H A T:
T:

         WHEREAS, the Company has changed its name from MASSBANK for Savings to
MASSBANK;

         WHEREAS, the Company recognizes the contribution being made to the
successful operation of its business by its employees and desires to reward such
contribution by maintaining an employee benefit plan for its employees;

         WHEREAS, the Plan and Trust Agreement was last amended on June 6, 1997;

         WHEREAS, the Company desires to amend and restate this Trust Agreement
further to, among other things, comply with the requirements of GUST;

         WHEREAS, the Company also desires to amend this Trust Agreement further
to reflect certain provisions of EGTRRA which are intended as good faith
compliance with the requirements of EGTRRA and guidance thereunder and shall
supersede the provisions of the Plan to the extent those provisions are
inconsistent with the provisions of this restatement;

         WHEREAS, the Company wishes to amend and restate the Plan effective as
of November 1, 2001 (except as otherwise provided herein and except with respect
to EGTRRA amendments which shall be effective October 1, 2002) to reflect the
change in its corporate name, changes in tax laws, and to make certain other
changes;



         NOW, THEREFORE, the parties hereto, each in consideration of the
covenants, agreements and declarations of the other, mutually covenant, agree
and declare as follows:

                                        2


                              ARTICLE I - THE TRUST

         1.01     Continuation of Trust. There is hereby continued the trust
known as the "MASSBANK EMPLOYEES' STOCK OWNERSHIP TRUST." The Trustee shall
receive any contributions paid to the Trust in cash or in other property, and
all contributions so received, together with the income therefrom, shall be
held, managed, and administered as a fund in trust pursuant to the terms of this
Agreement. The Trustee hereby accepts the Trust created hereunder and agrees to
perform the provisions of this Agreement on its part to be performed.

         1.02     Interpretation of Trust Agreement. The Trust has been
stablished and is continued for the purpose of providing retirement and other
benefits to the Employees of the Company in the form of deferred stock bonuses
and is established for the exclusive benefit of the eligible Employees and their
Beneficiaries. The Plan is hereby designated as an employee stock ownership plan
within the meaning of Section 407(d)(6) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and Section 4975(e)(7) of the
Internal Revenue Code of 1986, as amended (the "Code") and as such is designed
to invest primarily in qualified employer securities. So far as possible, this
Agreement shall be interpreted in a manner consistent with these purposes and
with the intent of the Company that the Trust established hereunder shall
satisfy those provisions of the Code and ERISA relating to exempt employees'
trusts.

         1.03     Exclusive Benefit. Except as expressly authorized in Sections
1.04 and 4.03, in no event shall the corpus or income of the Plan be paid or
diverted to the Company or be used for any purpose other than the exclusive
benefit of the Members or their Beneficiaries; provided, however, that neither
the use of qualifying employer securities held by the Plan as a pledge, as
collateral or otherwise, to secure any ESOP Loan pursuant to Article XI nor any
subsequent loss of such securities in connection with a default of such loan nor
the use of any assets of the Trust

                                        3


to pay interest on or to repay such loan pursuant to Article XI shall constitute
a violation of this provision.

                                        4


                            ARTICLE II - DEFINITIONS

         Whenever used herein, unless the context clearly indicates otherwise,
the following words shall have the following meanings:

         2.01     "Account" means the account established and maintained for
each Member pursuant to Article V.

         2.02     "Affiliated Company" means (a) a corporation which, together
with the Company, is a member of a controlled group of corporations (as defined
in Section 414(b) of the Code), (b) a trade or business (whether or not
incorporated) which is under common control (as defined in Section 414(c) of the
Code) with the Company, (c) a corporation, partnership or other entity which,
together with the Company, is a member of an affiliated service group (as
defined in Section 414(m) of the Code) or (d) any other entity required to be
aggregated with MASSBANK pursuant to regulations promulgated under Section
414(o) of the Code. For purposes of determining an Employee's Hours of Service,
Years of Eligibility Service, Years of Vesting Service and the occurrence of a
One-Year Break in Service, any period of employment with an Affiliated Company
shall be deemed to be employment with the Company.

         2.03     "Agreement" means this Agreement as the same may be amended
from time to time.

         2.04     "Allocation Date" means September 30 and any other date which
the Committee in its sole discretion may select.

         2.05     "Beneficiary" means the person or persons designated pursuant
to the provisions of Section 6.04 of this Agreement to receive distribution of
such Member's share upon his death.

         2.06     "Board" means the board of directors of the Company in office
from time to time.

         2.07     "Committee" means the ESOP Committee constituted under Article
VIII of this Agreement in office from time to time.

                                        5


         2.08     "Company" means MASSBANK, or any successor to all or a major
portion of its business which adopts and continues the Plan and Trust pursuant
to Section 10.05.

         2.09     "Compensation" of a Member for any period includes salaries,
wages, bonuses, overtime and all other forms of direct remuneration paid to such
Member by the Company for such period and shall include all amounts which would
have been paid to the Member as Compensation but for an election by such Member
under Section 125 or 401(k) of the Code, and effective October 1, 1998, any
elections by such Member under Section 132(f) of the Code, but excludes
contributions or benefits under this Plan and the Savings Banks Employees
Retirement Association Pension Plan and any compensation paid prior to his Entry
Date. A Member's Compensation for any Limitation Year shall not be taken into
account for any purpose of the Plan, to the extent that such Compensation
exceeds $160,000 (as adjusted by the Commissioner for increases in the
cost-of-living in accordance with Section 401(a)(17)(B) of the Code). The
foregoing Compensation limit shall be increased to $200,000 effective October 1,
2002. The cost-of-living adjustment in effect for a calendar year applies to any
period, not exceeding 12 months, beginning in such calendar year over which
compensation is determined (determination period). If a determination period
consists of fewer than 12 months, the annual compensation limit will be
multiplied by a fraction, the numerator of which is the number of months in the
determination period, and the denominator of which is 12.

         On or after November 1, 1997, any prior references in this Plan to the
family aggregation rule shall cease to apply.

         2.10     "Computation Period" for any Employee means each twelve
consecutive month period beginning on the Employee's date of employment (or
reemployment in the case of an

                                        6


Employee who is reemployed after incurring one or more One-Year Breaks in
Service) and any anniversary thereof.

         2.11     "Dividend Account" means the account established and
maintained for each Member pursuant to Article V for the purpose of holding
dividends paid by MASSBANK Corp. with respect to allocated shares of Stock held
in the Trust. This Dividend Account shall be fully vested and nonforfeitable at
all times.

         2.12     "Effective Date" means November 1, 2001 except as otherwise
stated herein. The original effective date of the Plan is November 1, 1985.

         2.13     "Employee" means any person who is employed by the Company as
a common law employee at the time such person's services are rendered to the
Company, has federal income tax withheld by the Company at such times, and who
receives a Form W-2 from the Company in the ordinary course with respect to such
service. An Employee's employment shall be deemed to have commenced on the date
on which he first performs an Hour of Service as an Employee. An individual
classified by the Company as performing service in a nonemployee capacity
(including, but not limited to, an individual classified as an independent
contractor, or consultant) shall not be considered an "Employee" for purposes of
the Plan (regardless of the status of the individual for income tax withholding
or other purposes) for any period during which he is so classified even if such
classification is later changed for any reason.

         2.14     "Entry Date" means the November 1, February 1, May 1 and
August 1 of each Plan Year. Effective October 1, 2002, the term "Entry Date"
means October 1, January 1, April 1 and July 1 of each Plan Year.

         2.15     "Hour of Service" means:

                                        7


                  (a)      Each hour for which an Employee is paid, or entitled
to payment, for the performance of duties for the Company or an Affiliated
Company. These hours shall be credited to the Employee for the Computation
Period or Periods in which duties are performed;

                  (b)      Each hour for which an Employee is paid, or entitled
to payment, by the Company or an Affiliated Company on account of a period of
time during which no duties are performed (irrespective of whether the
employment relationship has terminated) due to vacation, holiday, illness,
incapacity (including disability), layoff, jury duty or other leave of absence;
provided that no more than 501 Hours of Service shall be credited under this
paragraph with respect to any single continuous period of absence for which no
duties are performed. Hours under this paragraph shall be calculated and
credited pursuant to Section 2530.200b-2(b) and (c) of the Department of Labor
Regulations which are incorporated herein by this reference;

                  (c)      Each hour for which back pay, irrespective of
mitigation of damages, is either awarded or agreed to by the Company or an
Affiliated Company. The same Hours of Service shall not be credited both under
paragraph (a) or paragraph (b), as the case may be, and under this paragraph
(c). These hours shall be credited to the Employee for the Computation Period or
Periods to which the award or agreement pertains rather than the Computation
Period in which the award, agreement or payment is made; and

                  (d)      Each hour for which an Employee is credited pursuant
to Section 3.04;

                  (e)      Solely for purposes of determining whether a One-Year
Break in Service, as defined in Section 2.18, has occurred in a Computation
Period, an individual who is absent from work for maternity or paternity reasons
shall receive credit for the Hours of Service which would otherwise have been
credited to such individual but for such absence, or in any case in which such
hours cannot be determined, eight (8) Hours of Service per day of such absence.
For

                                        8


purposes of this paragraph, an absence from work for maternity or paternity
reasons means an absence: (i) by reason of the pregnancy of the individual; (ii)
by reason of the birth of the child of the individual; (iii) by reason of the
placement of a child with the individual in connection with the adoption of such
child by such individual; or (iv) for purposes of caring for such child for a
period beginning immediately following such birth or placement. The total number
of hours treated as Hours of Service under this paragraph (e) by reason of any
one such pregnancy or placement shall not exceed 501 hours. Hours of Service
credited under this paragraph (e) shall be credited in the first Computation
Period in which such crediting is necessary to prevent a One-Year Break in
Service.

         2.16     "Limitation Year" means the twelve consecutive month period
ending on September 30 of each year; except that the Limitation Year ending
September 30, 1987 shall only cover an eleven consecutive month period.

         2.17     "Member" means any Employee who is eligible to participate in
the Plan as determined under Article III of this Agreement.

         2.18     "One-Year Break in Service" means any Computation Period
during which an Employee has not completed or been credited with more than 500
Hours of Service.

         2.19     "Plan" means the "MASSBANK EMPLOYEES' STOCK OWNERSHIP PLAN" as
set forth herein, and as it may be amended from time to time. The Plan was
previously named the "MASSBANK for Savings Employee Stock Ownership Plan."

         2.20     "Plan Year" means the fiscal year of the Trust, being the
twelve consecutive month period ending on September 30 of each year, except that
the Plan Year ending September 30, 2002 shall only cover an eleven consecutive
month period.

         2.21     "Stock" means shares of the voting common stock of MASSBANK
Corp.

                                        9


         2.22     "Trust" means the Trust fund created by this Agreement and
held by the Trustee hereunder, including all income, profits and increments
thereon.

         2.23     "Trustee" means the trustee herein named and any duly
appointed successor trustee or trustees.

         2.24     "Year of Eligibility Service" for any Employee means each
Computation Period during which the Employee is credited with at least 1,000
Hours of Service. All Years of Eligibility Service shall be included in
determining an Employee's eligibility to participate in the Plan.

         2.25     "Year of Vesting Service" for any Employee means each
Computation Period during which such Employee is credited with at least 1,000
Hours of Service. With respect to Years of Vesting Service (including Years of
Vesting Service with Reading Savings Bank) credited to an Employee prior to the
original Effective Date, only the lesser of five (5) or fifty percent (50%) of
such prior Years of Vesting Service shall be included in determining an
Employee's vested percentage under Section 6.05.

                                       10


                            ARTICLE III - MEMBERSHIP

         3.01     Eligibility for Membership. Each Employee who was a Member on
October 31, 2001 shall remain a Member on November 1, 2001. Each other Employee,
including each future Employee, shall become a Member under the Plan on the
Entry Date coincident with or next following the date on which he completes one
(1) Year of Eligibility Service. On and after July 1, 2002, each Employee shall
become a Member under the Plan on the Entry Date coincident with or next
following the date on which he attains age 21 and completes one (1) Year of
Eligibility Service.

         3.02     Determination of Eligibility by the Committee. The
determination of an Employee's eligibility for membership under the Plan shall
be made by the Committee from the Company's records, and the Committee's
decisions on these matters shall be conclusive and binding upon all persons.

         3.03     Duration of Membership. A Member shall continue as an active
Member until his employment with the Company is terminated and, except as
otherwise provided in Article V, shall cease to be an active Member entitled to
share in contributions hereunder immediately upon such termination of
employment. A former active Member shall once again become an active Member on
the date on which he again becomes an Employee of the Company.

         3.04 Unpaid Leaves of Absence. In the case of an Employee who leaves
the Company to enter the armed services of the United States of America and who
returns to its employ at or before the expiration of ninety (90) days after the
date on which he is first entitled to be released from active duty in the armed
services (or at such later date as the Company may approve or as may be required
by law) or an Employee who, with the approval of the Company and without pay, is
absent from work on account of sickness, temporary disability, temporary layoff,
jury duty, vacation or for any other similar reason, shall be credited by the
Committee with the

                                       11


number of Hours of Service obtained by multiplying the number of hours in his
regular work week immediately prior to the date such absence began by the
duration (in weeks) of the absence. For purposes of granting leaves of absence
and determining the number of credited hours, Employees in similar circumstances
shall be treated alike in accordance with the standards set forth in Section
8.05. Nothing herein contained shall restrain the Company's right to terminate
the employment of any Employee, whether or not during a leave of absence.

                                       12


                           ARTICLE IV - CONTRIBUTIONS

         4.01     Company Contribution. For each Plan Year, the Company shall
contribute to the Trust that amount of cash and/or that number of shares of
Stock as may be voted by the Board as a regular contribution to the Trust. The
amount of the Company contributions to the Trust for any Plan Year, when added
to any contributions made with respect to that Plan Year under any other
qualified plan to which the Company contributes, shall not exceed the maximum
amount deductible for Federal income tax purposes for the Company's fiscal year
beginning in the Plan Year with respect to which such contributions are made.
Notwithstanding the foregoing, if the Plan borrows money to acquire shares of
Stock, the Company may contribute cash to the Plan at such times and in such
amounts as are necessary to enable the Plan to meet its obligations under any
such loan. In the event that any contribution made by the Company is in excess
of the maximum amount deductible for Federal income tax purposes for the
Company's fiscal year beginning in the Plan Year, such excess contribution shall
be carried over to a subsequent fiscal year of the Company when it can be
deducted from the Company's income.

         4.02     Payment of Contributions. The contributions made by the
Company to the Trust for each Plan Year shall be paid into the Trust at such
time or times as the Company determines but not later than the time required by
law in order for the Company to obtain a deduction of the amount of such payment
for Federal income tax purposes.

         4.03     Reversion of Certain Contributions. Except as otherwise
expressly provided in Section 4.01, all contributions made by the Company
pursuant to Sections 4.01 shall be made upon the condition that such
contributions are fully deductible for Federal income tax purposes. In the event
that any such deduction is disallowed in whole or in part, then the Company may
direct the Trustee to return such contribution (to the extent disallowed) to the
Company at any time within the twelve (12) month period commencing on the date
of disallowance. In the event

                                       13


the Company shall make a contribution hereunder on the basis of a mistake of
fact, the Company may direct the Trustee to return such contribution to the
Company at any time within the twelve (12) month period commencing on the date
of contribution.

         4.04     Member's Contributions. Contributions by Members shall not be
permitted.

                                       14


                         ARTICLE V - MEMBERS' ACCOUNTS

         5.01     Maintenance of Accounts. At the direction of the Committee,
the Trustee shall maintain a book Account for each Member for the purpose of
recording his interest in the Trust. The Account of each Member shall be
credited as of each Allocation Date with such Member's share of Company
contributions, his share of any forfeitures, and his share of the net increase
or decrease in the Trust assets by reason of any changes in the value of the
Trust assets other than Stock, any earnings on the Trust assets, and any
expenses charged against the Trust. Each Member's Account shall be in two parts
(Part A and Part B). Part A shall consist of that number of shares representing
the Member's share of the Stock (other than Stock held in a suspense account
pursuant to Article XI) held by the Trust, and Part B shall consist of that
number of dollars representing the Member's share of the other assets of the
Trust. In maintaining the Accounts of Members and the parts thereof, the
Committee shall direct the Trustee to adopt such accounting methods or make such
equitable adjustments as the Committee determines to be necessary or appropriate
as long as such methods or adjustments are consistent with the standards set
forth in this Agreement. The Committee shall direct the Trustee to maintain
adequate records of the cost basis of all shares of Stock allocated to each
Member's Account. In the event that Trust assets other than Stock are used to
acquire Stock, the Committee shall direct the Trustee to debit Part B of the
Account of each Member and to credit the acquired Stock to Part A of the Account
of each Member in proportion to such Member's share of the assets so used. In
the event Stock is disposed of in return for such other assets, the Committee
shall direct the Trustee to debit Part A of the Account of each Member and to
credit the acquired assets to Part B of the Account of each Member in proportion
to such Member's share of the disposed Stock. Notwithstanding the foregoing, the
Committee shall direct the Trustee to maintain a Dividend Account for each
Member to which shall be allocated each Member's share of

                                       15


dividends paid by MASSBANK Corp. on and after August 1, 2002 with respect to
allocated shares of Stock held in the Trust.

         5.02     Compensation Schedule. As soon as practicable after the end of
each Limitation Year, the Company shall deliver to the Trustee a schedule
showing the name of each Member (a) who was an Employee on the last day of the
Limitation Year and who was credited with at least 1,000 Hours of Service during
such Limitation Year, or (b) who retired, became disabled or died (within the
meaning of Section 6.02 to 6.04) during such Limitation Year, and opposite the
name of each such Member the amount of Compensation paid to him during such
Limitation Year. The schedule shall also contain such other information as the
Trustee may reasonably require for the proper administration of the Plan and
Trust.

         5.03     Allocation of Company Contributions. Upon receiving the total
regular and supplemental contributions made by the Company for the Limitation
Year and the schedule required to be furnished to the Trustee pursuant to
Section 5.02, and after the Account balances of the Members have been adjusted
as provided in Section 5.06 and forfeitures determined and allocated under
Section 5.04, the Trustee shall allocate a portion of the sum of Company
contributions to the Account of each Member listed on said schedule, which
amount shall bear the same ratio to the sum of Company contributions as the
Compensation of each Member shown on said schedule bears to the total
Compensation listed for all such Members.

         5.04     Allocation of Forfeitures. Any amounts forfeited by Members
pursuant to Section 6.05(d) shall be allocated, as of the end of each Limitation
Year, to the Accounts of Members who are entitled to share in the Company
contributions for such Limitation Year on the same basis as that described in
Section 5.03 for the allocation of the Company contributions to the Trust.

                                       16


         5.05     Valuation of Assets Other than Stock. As of each Allocation
Date, the Trustee shall determine the total net worth of the Trust assets (other
than Stock) by evaluating all of such assets and its liabilities (other than
liabilities covered by Article XI) as of that date, but excluding from the
assets (a) the amount of the contributions made by the Company with respect to
the period which includes said Allocation Date, and (b) any dividends on
allocated shares of Stock which accrued after the preceding Allocation Date
("Current Dividends"). In determining the net worth of such Trust assets, the
Trustee shall value such Trust assets at their fair market value and shall
determine the fair market value of assets with no readily ascertainable market
value on any reasonable basis it deems appropriate. There shall be included as
of the Allocation Date, without implied limitation, income on hand, income
accrued, dividends payable but not paid, and uninvested cash, whether income or
principal; and there shall be deducted as of the Allocation Date, without
implied limitation, liabilities accrued (other than liabilities covered by
Article XI). A determination by the Trustee of the fair market value of any of
the Trust assets, or of the net worth of said Trust assets, shall be conclusive
and binding upon all persons.

         5.06     Allocation of Trust Assets Other than Stock. The net worth of
such Trust assets as determined on each Allocation Date pursuant to Section 5.05
shall be compared with the total of all amounts standing to the credit of Part B
of the Accounts all Members of the Plan, as of such Allocation Date, excluding
from Part B of the Accounts of said Members any Current Dividends and any
amounts credited from the contributions of the Company with respect to the
period ending with said Allocation Date. The excess or deficiency of such net
worth as so compared with the total Part B account balances of the Accounts of
all Members shall be credited or charged to Part B of the Accounts of all such
Members in the proportion that each such Part B account balance bears to the
total of all such Part B account balances. After the

                                       17


adjustments described above, Current Dividends, if any, shall be credited to the
Part B of the Account of each Member in the same proportion as the number of
shares of Stock credited to Part A of his Account, exclusive of Stock credited
from the contributions of the Company with respect to the period ending with
said Allocation Date, bears to the total number of such shares credited to Part
A of the Accounts of all Members. Notwithstanding the foregoing, effective
August 1, 2002, Current Dividends shall be credited to the Dividend Account of
each Member. Prior to the time that the Current Dividends are reinvested in
shares of Stock or distributed in cash to Members, they shall be invested in a
short-term money market vehicle or other similar cash equivalents.

         5.07     Dividends on Stock. At the sole discretion of the Company,
dividends on allocated shares of Stock held under the Trust on the record date
may be (a) paid in cash directly to the Members, (b) paid to the Trustee and
distributed in cash to the Members no later than 90 days after the close of the
Plan Year in which paid, or (c) paid to the Trustee and allocated to the
Members' Accounts as provided in Section 5.06. Effective October 1, 2002,
Members may elect to receive the Current Dividends allocated to their Dividend
Accounts in cash within 90 days after the close of the Plan Year in which paid,
or reinvested in shares of Stock. A Member who fails to make an affirmative
dividend election shall be deemed to have elected to reinvest the Current
Dividends in shares of Stock. If any dividend on allocated shares of Stock is to
be distributed in cash to the Members, the Committee shall direct the Trustee to
follow the provisions of Section 5.06 in determining the amount of cash which is
to be distributed to each Member. Dividends on unallocated shares of Stock held
under the Trust on the record date shall be paid to the Trustee and applied
towards payments on an ESOP Loan described in Article XI.

                                       18


         5.08     Distributions and Forfeitures. Whenever the Trustee shall make
any distribution to or in behalf of a Member in accordance with the provisions
of Article VI, such Member's Accounts shall be charged with the amount of such
distribution. Whenever a Member shall forfeit all or any portion of the amount
standing to the credit of his Accounts in accordance with the provisions of
Section 6.05, such Member's Accounts shall be charged with the amount of such
forfeiture.

         In the event that a Member forfeits a portion of his Accounts pursuant
to Section 6.05(d), such forfeiture shall be made with respect to the various
types of assets in his Accounts on the following basis:

                  (a)      such forfeiture shall first be made with respect to
assets other than Stock, if any;

                  (b)      to the extent that such forfeiture exceeds the amount
of assets available under (a), it shall next be made with respect to Stock, if
any, which had not been released to the Member's Accounts from a Suspense
Account established pursuant to Article XI; and

                  (c)      to the extent that such forfeiture exceeds the amount
of assets available under (a) and (b), it shall be made with respect to any
other Stock credited to the Member's Accounts.

         5.09     Limitations on Allocations. Notwithstanding anything
hereinabove to the contrary, the amount credited to the Account of any Member
for any Limitation Year pursuant to Section 5.03 (dealing with Company
contributions), or this Section 5.09 or as a forfeiture pursuant to Section 5.04
shall be reduced to the extent that such amount would cause

                                       19


                  (a)      the amount of such Member's nondeductible
contributions under any other qualified plan maintained by the Company or any
affiliate (within the meaning of Sections 414(b), (c), (m) and (o) of the Code
and subject to Section 415(h) thereof), plus

                  (b)      the Company contributions and the forfeitures
credited to the accounts of such Member under the Plan and any other defined
contribution plan maintained by the Company or any affiliate (within the meaning
of Sections 414(b), (c), (m) and (o) of the Code and subject to Section 415(h)
thereof) for such Limitation Year to exceed the lesser of

                           (A)      $30,000 ($40,000 on and after October 1,
                  2002) as adjusted pursuant to Section 415(d) of the Code, or

                           (B)      twenty-five percent (25%) (100% on and after
                  October 1, 2002) of such Member's compensation (within the
                  meaning of Section 415 of the Code and the regulations
                  promulgated thereunder) from the Company and each such
                  affiliate for such Limitation Year.

         Any reductions required pursuant to the foregoing limitations shall be
made first with respect to the Member's voluntary contributions made under such
other qualified plan, and such reductions shall be returned to the Member. If an
additional reduction must be made with respect to amounts allocated under this
Plan, such reduction shall be made against the Company contributions and
forfeitures allocated to the Member's Account. The amount of such reduction
shall be allocated and credited pursuant to the procedures outlined in Section
5.04 above as of the end of the Limitation Year to the Accounts of remaining
Members exclusive of any other Member for whom a reduction in the Company
contributions and forfeitures for such Limitation Year has been required
pursuant to this Section 5.09. Any amount which cannot be allocated pursuant to
the preceding sentence shall be held unallocated by the Trustee and shall be
treated

                                       20


as if it were a forfeiture to be allocated pursuant to Section 5.04 with
respect to the succeeding Limitation Year.

         Notwithstanding the foregoing, if no more than one-third (1/3) of the
Company contributions for any Limitation Year are allocated to the group of
Members consisting of Highly Compensated Employees (within the meaning of
Section 414(q) of the Code), Company contributions applied to the repayment of
interest on such ESOP Loan (as defined in Article XI) and forfeitures of Stock
acquired with the proceeds of such loan allocated to a Member's Account shall be
disregarded in determining the maximum amount that can be allocated to his
Account under this Section 5.11.

         In addition, prior to October 1, 2000, the sum for each Limitation Year
of such Member's defined benefit plan fraction and his defined contribution plan
fraction to exceed 1.0. As used in the preceding sentence, "defined benefit
fraction" means for any Limitation Year a fraction determined at the close of
such year, the numerator of which is the projected annual benefit of the Member
under the Company's defined benefit plan or any other defined benefit plan
maintained by an affiliate and the denominator of which is the lesser of (1)
1.25 multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of
the Code for such year, or (2) 1.40 multiplied by the limitation in effect under
Section 415(b)(1)(B) of the Code for such year, and "defined contribution plan
fraction" means for any Limitation Year a fraction determined at the close of
such year, the numerator of which is the sum of the annual additions to the
Member's accounts under this Plan and under any other defined contribution plan
maintained by the Company or an affiliate and the denominator of which is the
sum of the lesser of the following amounts determined for such year and all
prior years of service with the Company: (i) 1.25 multiplied by the dollar
limitation in effect under Section 415(c)(1)(A) of the Code for such year,

                                       21


or (ii) 1.40 multiplied by twenty-five percent (25%) of the Member's
compensation for such year. Any reduction required by this paragraph shall be
made in the defined benefit plan. For Limitation Years beginning on or after
October 1, 2000, the provisions of Section 415(e) of the Code shall cease to
apply.

         On and after the Limitations Year beginning on or after October 1,
1998, the definition of "compensation" as used in subsection (B) above shall
include any elective contribution to a Section 401(k) plan or amounts deferred
by the Member pursuant to Section 125 or 132(f) of the Code.

                                       22


                             ARTICLE VI - BENEFITS

         6.01     Restrictions on Payments and Distributions. No shares of Stock
or other property of the Trust shall be paid out or distributed by the Trustee
except (a) for the purchase or other acquisition of Stock or other appropriate
investments, (b) for defraying the expenses, including taxes, if any, of
administering the Trust as elsewhere provided herein, (c) for the repayment of
loans or indebtedness or satisfaction of obligations incurred in connection with
loans made to the Trust or indebtedness incurred by it, (d) for the purpose of
making distributions to or for the benefit of Members in accordance with the
provisions of this Article VI, or (e) for the return of Company contributions
pursuant to Sections 4.03.

         All benefits payable under the Plan shall be paid or provided for
solely from the Trust, and the Company, Committee and Trustee assume no
liability or responsibility therefor.

         6.02     Retirement. Upon retirement of a Member, which shall be deemed
to mean any termination of his employment with the Company at or after (a) his
attainment of age sixty-five (65), or (b) his attainment of age sixty (60) and
completion of five (5) Years of Vesting Service, for a reason other than the
death of such Member, the Committee shall direct the Trustee to distribute, in
accordance with the provisions of Section 6.07, the full amount standing to the
credit of such Member's Account and Dividend Account. A Member shall become
fully vested in his Account upon the earlier of his attainment of age sixty-five
(65), or his attainment of age sixty (60) and completion of five (5) Years of
Vesting Service.

         6.03     Disability Retirement. If a physician appointed or approved by
the Committee shall determine that a Member is unable to continue in the employ
of the Company by reason of illness or mental or physical incapacity, the
Committee shall direct the Trustee to distribute, in accordance with the
provisions of Section 6.07, the full amount standing to the credit of such
Member's Account and Dividend Account. The determination of such a physician as
to whether

                                       23


a Member has become ill or incapacitated so as to become unable to continue in
the employ of the Company shall be conclusive and binding upon all persons.

         6.04     Death Benefits.

                  (a)      Upon the death of any Member who has a surviving
spouse, the Committee shall direct the Trustee to distribute the full amount
standing to the credit of such Member's Account and Dividend Account to the
Member's surviving spouse, unless the exception provided by paragraph (b) of
this Section 6.04 applies.

                  (b)      The requirement of paragraph (a) of this Section 6.04
shall not apply if (i) the Member elects to designate a Beneficiary other than
his spouse and (A) his spouse consents to such election in a writing that
acknowledges the effect of the election, (B) such election designates a
Beneficiary which may not be changed without the consent of the spouse (or the
consent of the spouse expressly permits designations by the Member without any
requirement of further consent by the spouse), and (C) the spouse's consent
acknowledges the effect of the election and is witnessed by a notary public or a
representative of the Plan, or (ii) it is established to the satisfaction of the
Committee that the consent of the surviving spouse could not have been obtained
because there is no spouse, because the spouse cannot be located, or because of
other circumstances prescribed by regulations under Section 417(a)(2) of the
Code.

         A former spouse shall be treated as a surviving spouse to the extent
benefits must be paid to such former spouse upon the Member's death pursuant to
a qualified domestic relations order (as defined in Section 414(p) of the Code),
except that no consent shall be required from such former spouse with respect to
the designation of a Beneficiary to receive benefits not subject to said order.

                                       24


                  (c)      If, and only if, a Member is permitted under this
Section 6.04 to designate a Beneficiary other than his surviving spouse, then
such Member's Account and Dividend Account shall be distributed in accordance
with this paragraph (c) of Section 6.04. Such a Member shall have the right to
designate one or more Beneficiaries, including contingent Beneficiaries,
entitled to receive the amount payable in behalf of such Member under the
provisions of this Plan in the event of death. Such designation shall be made in
writing in such manner as the Committee shall determine. A Member may change
such designation from time to time, and may revoke such designation, provided,
however, that any subsequent designation must meet the requirements of this
Section 6.04. Upon the death of any Member, the Committee shall distribute, for
the benefit of such Member's Beneficiaries and in accordance with the provisions
of Section 6.07, the full amount standing to the credit of the Member's Account.
If a Member dies without having designated a Beneficiary, or if none of the
designated Beneficiaries survives the Member, or if the Committee is in doubt as
to the effective status of a Beneficiary designation, all amounts payable in
behalf of the Member shall be distributed to:

                  (a)      his spouse,

                  (b)      his natural and adopted children, per stirpes,

                  (c)      his parents, in equal shares,

                  (d)      his brothers and sisters, in equal share,

                  (e)      his executors and administrators.

The amount payable shall be paid to the first-named person surviving the Member
or class with one or more persons surviving the Member, in the order named, to
the exclusion of all subsequently-named persons and classes. If a Beneficiary
entitled to receive any amount payable on behalf of a Member under the Plan dies
prior to having received the entire amount, the

                                       25


undistributed balance, together with any accumulated interest thereon, shall be
distributed to the estate of such Beneficiary in accordance with Section 6.07.

         6.05     Termination of Employment Prior to Retirement or Death.

                  (a)      If a Member's employment with the Company is
terminated under circumstances other than as provided in Sections 6.02 through
6.04, such Member shall be entitled to a benefit equal to the amount standing to
the credit of his Dividend Account and a percentage of the amount standing to
the credit of his Account, which percentage shall be based upon his Years of
Vesting Service and determined in accordance with the following table:



    Years of                        Percentage
 Vesting Service                    of Account
 ---------------                    ----------
                                 
   Less than 1                           0%
        1                               10%
        2                               20%
        3                               30%
        4                               40%
        5                               60%
        6                               80%
        7                              100%


         A Member absent from the employ of the Company on an absence with
respect to which he is credited with Hours of Service pursuant to Section 3.04
shall not be considered to have terminated his employment for purposes of this
Section.

         (b)      The benefit determined in accordance with the provisions of
this Section 6.05 shall never be adjusted or altered in any fashion on account
of any Years of Vesting Service which the Member completes upon any reemployment
with the Company, except as provided in Section 6.06.

         (c)      The determination of the amount to which such Member is
entitled in accordance with this Section 6.05 shall be made by the Committee and
communicated to the

                                       26


Trustee, and the Committee's determination shall be conclusive and binding upon
all persons. Distribution of such benefit shall be made in accordance with the
provisions of Section 6.07.

         (d)      Any amounts standing to the credit of a Member's Account to
which he is not entitled at the time of his termination of employment shall be
forfeited by him upon the earlier of the payment of the full amount to which
such Member is entitled under the Plan or the occurrence of five (5) consecutive
One-Year Breaks in Service by such Member. For purposes of the preceding
sentence, a terminated Member who is not entitled to receive any portion of his
Account under the Plan shall be deemed to have received the entire amount to
which he is entitled on the date his employment terminates and shall forfeit his
entire Account as of that date. Amounts forfeited pursuant to this paragraph
shall be allocated to the Accounts of remaining Members in accordance with the
provisions of Section 5.04 as of the end of the Limitation Year in which
termination of employment occurs.

         6.06     Reemployment. If a terminated Member is reemployed by the
Company, he shall again become a Member upon reemployment pursuant to Section
3.03. All future Company contributions on his behalf shall be credited to his
Account, and all his prior Years of Vesting Service shall be restored for the
purpose of calculating the vested portion of such Account.

         If such a terminated Member was not 100% vested under Section 6.05(a)
at the time of his prior termination, the following special provisions shall
apply:

                  (a)      If such a terminated Member is reemployed after
incurring five (5) or more consecutive One-Year Breaks in Service, he shall have
no right to the previously forfeited portion of his Account, and any
undistributed vested portion of his Account shall be held in a separate (fully
vested) account until such Member becomes 100% vested under Section 6.05(a)

                                       27


whereupon such separate account shall be merged with the Account otherwise
maintained for him.

         (b)      If such a terminated Member is reemployed before incurring
five (5) consecutive One-Year Breaks in Service, the full amount, if any, which
was forfeited from his Account as a result of his prior termination shall be
restored to his Account as of the last day of the Limitation Year which contains
the date of reemployment. In order to effect the restoration of previously
forfeited amounts to a Member's Account, the Committee shall have the authority
to direct the Trustee to use any unallocated amounts for said purpose. In making
such restoration, the Committee shall direct the Trustee to first utilize any
available forfeitures, and then Company contributions. If such a terminated
Member had previously received a distribution of all or any part of the vested
portion of his Account, the vested portion of his Account shall thereafter be
determined by (i) adding the amount previously distributed to his current
account balance, (ii) multiplying the resulting sum by his current vesting
percentage and (iii) subtracting from the resulting product the amount
previously distributed.

         6.07     Manner and Timing of Distributions.

                  (a)      Whenever a Member's Account and Dividend Account
become distributable pursuant to Sections 6.02 through 6.05 hereof to such
Member or his Beneficiary, distribution of said Accounts shall be made by the
payment of the full amount distributable in one lump sum, in cash or in shares
of Stock or partially in cash and partially in shares of Stock as selected by
such Member or his Beneficiary in writing; provided, however, that the Committee
shall direct the Trustee to distribute cash in lieu of fractional shares.
Distributions shall generally be processed as of the end of each calendar
quarter with respect to terminated Members (or Beneficiaries in the case of
deceased Members) who have returned their distribution forms to the

                                       28


Committee at least 15 days (or such shorter period permitted by the Committee)
prior to the end of the calendar quarter. If cash is to be distributed in lieu
of shares of Stock, the Trustee may either sell such shares at fair market value
to MASSBANK Corp. or on the open market and distribute the cash proceeds (net of
selling expenses) or utilize cash already held in the Trust.

                  (b)      Whenever during any Plan Year, the amount standing to
the credit of a Member's Accounts become distributable pursuant to Sections 6.02
through 6.05, the Committee shall direct the Trustee to distribute the vested
portion of the Member's Accounts within a reasonable time after such separation
of service or death. Such distributions may commence less than 30 days after the
notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is
given, provided that:

                           (i)      the Committee clearly informs the Member
         that the Member has a right to a period of at least 30 days after
         receiving the notice to consider the decision of whether or not to
         elect a distribution (and, if applicable, a particular distribution
         option), and

                           (ii)     the Member, after receiving the notice,
         affirmatively elects a distribution.

                  (c)      Notwithstanding any provision elsewhere herein to the
contrary, in order to comply with Sections 401(a)(9), 401(a)(14), 411(a)(11),
414(p) and 417 of the Code, the following provisions shall apply:

                           (i)      If a Member's aggregate account balances to
         be distributed upon disability or severance under Section 6.03 or 6.05
         are greater than $5,000 ($3,500 before July 1, 2002) , such Accounts
         shall not be distributed in whole or in part until the

                                       29


         Member attains age sixty-five (65), dies, or requests the distribution
         in writing, whichever is earliest.

                           (ii)     Distribution of benefits to a Member who
         attains age 70 1/2 after January 1, 2003 shall begin no later than the
         April 1 next following the calendar year in which such Member (A)
         attains age 70 1/2 or (B) terminates employment with the Company,
         whichever is later (the "Required Beginning Date"). Clause (B) shall
         not apply in the case of a Member who is a "Five Percent Owner" at any
         time during the Plan Year ending in the calendar year in which the
         Member attains age 70 1/2. If the Member becomes a Five Percent Owner
         during any subsequent Plan Year, the required distribution date shall
         be April 1 of the calendar year following such Plan Year. For purposes
         of this subsection, a Five Percent Owner is defined in Section
         416(i)(1)(B)(i) of the Code.

                           (iii)    Distribution of benefits to a Member who
         attained age 70 1/2 before January 1, 2003 shall begin no later than
         the April 1 next following the calendar year in which such Member
         attains age 70 1/2; provided, effective as of January 1, 1996, a Member
         who is not a Five Percent Owner may elect to defer distribution of
         benefits until after his termination of employment with the Company.

                           (iv)     If a Member dies before his entire interest
         has been distributed to him as provided in this Article VI, his entire
         interest shall be distributed by December 31 of the year containing the
         fifth anniversary of the Member's death. Notwithstanding the foregoing,
         in the case of a Member who had begun distributions under Section
         6.07(c)(ii) or (iii), upon the Member's death distributions shall be
         made at least as rapidly as they were being made to the Member.

                                       30


                           (v)      In no event (unless the Member otherwise
         consents in writing) shall the distribution of a Member's account begin
         later than the sixtieth (60th) day after the close of the Plan Year in
         which the later of the following events occurs:

                                    (A)      the Member's sixty-fifth (65th)
                  birthday; or

                                    (B)      the tenth (10th) anniversary of the
                  date on which the Member first became a Member; or

                                    (C)      the Member's termination of
                  employment with the Company.

                  (vi)     If, and to the extent that, any portion of a Member's
         Account is payable to a former spouse or dependent pursuant to a
         qualified domestic relations order within the meaning of Sections
         401(a)(13)(B) and 414(p) of the Code, the provisions of said order
         shall govern the distribution thereof. Distribution may be made to the
         alternate payee under a qualified domestic relations order with respect
         to the Member prior to the time such Member's Account otherwise becomes
         distributable if such Member would have been entitled to receive such
         amount under this Article VI had he terminated employment with the
         Company.

         6.08     Discharge of Trustee's Obligations to Make Payment. Whenever
the Trustee is required to make any payment or payments to any person in
accordance with the provisions of this Article VI or Article VII, the Committee
shall notify the Trustee in writing of such person's last known address as it
appears in the Company's records; and the obligation of the Trustee to make such
payment or payments shall be fully discharged by mailing the same to the address
specified by the Committee.

                                       31


         6.09     Special Distribution from Account and Dividend Account.

                  (a)      For the first Plan Year in which a Member attains age
55 and completes at least 10 years of Plan membership, and for the five (5)
succeeding Plan Years, such Member may elect to receive an amount from his
Account and Dividend Account not exceeding his Diversified Investment Amount
determined as of the end of the Plan Year. Such election must be filed in
writing with the Committee during the 90 day period immediately following the
end of the Plan Year to which it relates.

                  (b)      For purposes of (a) above, a Member's Diversified
Investment Amount for each Plan Year is equal to (i) 25% of the sum of (A) the
portion of the Member's account balances as of the end of the Plan Year
attributable to Stock acquired by the Plan after December 31, 1986, and (B)
amounts previously distributed to the Member pursuant to this Section 6.09,
minus (ii) amounts previously distributed to the Member pursuant to this Section
6.09. The portion of the Member's account balance attributable to Stock acquired
by the Plan after December 31, 1986 shall be determined by multiplying the
number of shares of Stock held in his Account and Dividend Account by a fraction
the numerator of which is the number of shares of Stock acquired by the Plan
after December 31, 1986 and allocated under the Plan to the Accounts and
Dividend Accounts of all Members (not to exceed the number of shares held under
the Plan as of the end of the Plan Year) and the denominator of which is the
total number of shares of Stock allocated under the Plan to the Accounts and
Dividend Accounts of all Members as of the end of the Plan Year.

                  (c)      Any distribution required to be made under this
Section 6.09 shall be made no later than 180 days after the end of the Plan Year
to which such distribution relates.

                                       32


                  (d)      Notwithstanding anything to the contrary above, 50%
shall be substituted for 25% in (b)(i) above for the last Plan Year for which
the Member may make an election under this Section 6.09.

                  (e)      Notwithstanding anything to the contrary above, if
the fair market value (determined as of the date immediately preceding the first
day a Member is eligible to make an election under (a) above) of the portion of
a Member's account balance attributable to Stock acquired by the Plan after
December 31, 1986 is $500 or less, then the provisions of this Section 6.09
shall not be applicable to such Member and he shall not be eligible to receive a
distribution from his Account and Dividend Account pursuant to this Section
6.09.

                                       33


                    ARTICLE VII - AMENDMENT AND TERMINATION

         7.01     Right to Amend or Terminate. The Company reserves the right at
any time and from time to time to amend this Agreement, or discontinue or
terminate the Plan and Trust by delivering to the Trustee a copy of an amendment
or appropriate Board's resolution of discontinuance or termination certified by
an officer of the Company. In addition, the Committee may amend the claims
procedures of Section 8.10 provided such amendment does not adversely affect the
qualified status of the Plan under Code Section 401(a). Notwithstanding the
foregoing, and except as provided in Section 7.02, neither the Company nor the
Committee shall have any power to amend or terminate this Agreement in such
manner as would cause or permit any of the Trust assets to be diverted to
purposes other than for the exclusive benefit of the Employees of the Company or
their Beneficiaries or would cause a reduction in the amount theretofore
credited to any Member's Account and Dividend Account or would cause or permit
any portion of the Trust assets to revert to or become the property of the
Company; and provided further that the rights and responsibilities of the
Trustee with respect to the Trust assets shall not be altered in any manner
without its written consent.

         7.02     Amendment for Tax Exemption. The Company reserves the right to
amend this Agreement and the Plan and Trust hereunder in such manner as may be
necessary or advisable so that said Trust may qualify and continue to qualify as
an exempt employees' trust under the provisions of the Code as now in force or
as it may hereafter be changed or amended; and any such amendment may be made
retroactively.

         7.03     Liquidation of Trust in Event of Termination. In the event of
termination or partial termination (within the meaning of Section 411(d)(3) of
the Code) of this Plan and Trust, or complete discontinuance of contributions
thereto by the Company, the rights of all Members (or, in the case of a partial
termination, the Members affected thereby) to amounts theretofore

                                       34


credited to their accounts shall be fully vested and nonforfeitable. In the
event of such termination, partial termination or discontinuance, the Trustee
shall hold the assets of the Trust in accordance with the provisions of the Plan
and distribute such assets from time to time to Members entitled thereto in
accordance with such provisions; provided that the Committee in its discretion
may direct the Trustee to apply the amount standing to the credit of an affected
Member's Account and Dividend Account for his benefit, in accordance with
Section 6.07, at any time after such termination, partial termination or
discontinuance but prior to the time when such Member would otherwise become
entitled thereto under the Plan. In the event that the Company shall terminate
the Trust at any time prior to the complete distribution of all property held by
the Trustee pursuant to such provisions, the Trustee shall (a) pay the
liabilities, if any, of the Trust; (b) value the remaining assets of the Trust
as of the date of termination and adjust the Accounts of the Members in
accordance with Sections 5.05 and 5.06; and (c) distribute the assets of the
Trust in Stock or partly in Stock and partly in cash to and among the Members in
liquidation in proportion to the amounts standing to the credit of their
respective Accounts and Dividend Accounts under the Trust as of the termination
date.

         7.04     Termination of Plan and Trust. This Agreement and the Plan and
Trust hereunder shall in any event terminate whenever all property held by the
Trustee shall have been distributed in accordance with the terms hereof.

                                       35


                   ARTICLE VIII - ADMINISTRATION OF THE PLAN

         8.01     Named Fiduciaries. The named fiduciaries with respect to the
Plan shall be the Company, the Committee and the Trustee. The responsibilities
of the named fiduciaries shall be allocated as provided herein, and each such
fiduciary shall have only those responsibilities and obligations that are
specifically imposed upon it by this Trust Agreement. It is intended that each
of the named fiduciaries shall be responsible for the proper exercise of its own
powers, duties, responsibilities and obligations under the Plan and shall not be
responsible for any act or omission of any other fiduciary. The Company and the
Committee, as named fiduciaries, shall be entitled to delegate all or any part
of their fiduciary responsibilities and obligations to any other person or
entity. In the event of any such delegation, (a) the named fiduciary shall not
be liable for any act or omission of the person to whom the responsibility has
been delegated as long as the selection and retention of such person is prudent
and (b) the person to whom the fiduciary powers and obligations are delegated
shall be responsible only for the proper exercise of the powers, duties,
responsibilities and obligations that have been specifically delegated to him.

         8.02     Appointment of Committee. The Company shall appoint a
Committee of three (3) or more persons, any or all of whom may be officers or
Employees of the Company or any other individuals, to be known as an "ESOP
Committee." The Committee is the Plan Administrator for all purposes of ERISA.
The members of the Committee shall serve at the pleasure of and may be removed
by the Company. Vacancies in the Committee arising by resignation, death,
removal or otherwise shall be filled by the Company. The number of members of
the Committee shall be as designated by the Company from time to time. The
Trustee shall accept and may rely upon a certification by the Company as to the
number and identity of the individuals comprising the Committee from time to
time.

                                       36


         8.03     Powers of Committee. The Committee is hereby vested with all
the discretionary powers and authority necessary in order to carry out its
duties and responsibilities in connection with the administration of the Plan
and Trust as herein provided, and is authorized to make such rules and
regulations as it may deem necessary or desirable to carry out the provisions of
the Plan and Trust. The Committee shall determine, in its sole discretion, any
question arising in the administration, interpretation and application of the
Plan and Trust, including, without limitation, any questions of fact and any
questions submitted by the Trustee on a matter necessary for it properly to
discharge its duties; and the decision of the Committee shall be conclusive and
binding on all persons.

         8.04     Action by Committee. The Committee shall act by a majority of
its members at the time in office and such action may be taken by vote at a
meeting or in writing without a meeting. The Committee may by such majority
action authorize any one or more of its members, or any other person, to execute
any direction or document or take any other action on behalf of the Committee,
and in such event any one of the members of the Committee may certify in writing
to the Trustee or any other person the taking of such action and the name or
names of the persons so authorized, including himself. The execution of any
direction, document, or certificate in behalf of the Committee by any of its
members shall constitute his certification of his authority with respect
thereto, and the Trustee or other person shall be protected in accepting and
relying upon any such direction, document, or certificate and is released from
inquiry into the authority of any of the members of the Committee.

         8.05     Discretionary Action. Wherever under the provisions of this
Plan the Committee is given any discretionary power or powers, such power or
powers shall not be exercised in such

                                       37


manner as to cause any discrimination in favor of or against any Employee or
class of Employees.

         8.06     Evidence on Which Committee May Act. In taking any action or
determining any fact or question which may arise under this Plan and Trust, the
Committee may, with respect to the affairs of any the Company or its Employees,
rely upon any statement by the Company with respect thereto. In the event that
any dispute may arise regarding the distribution of any sums or regarding any
act to be performed by the Committee or the Trustee, the Committee may in its
sole discretion direct that such distribution be retained or postponed or direct
the postponement of the performance of such act until actual adjudication of
such dispute shall have been made in a court of competent jurisdiction, or until
the Company, the Committee or the Trustee shall have been indemnified against
loss to the satisfaction of the Committee; provided, however, that in the event
of any such dispute, the Committee may rely upon and act in accordance with any
directions received from the Company.

         8.07     Employment of Agents. The Committee may employ agents,
including, but not limited to, custodians, accountants, consultants or
attorneys, to exercise and perform such of the powers and duties of the
Committee hereunder as the Committee may delegate to them, and otherwise to
render such services to the Committee as the Committee may determine, and the
Committee may enter into agreements setting forth the terms and conditions of
such service. The compensation of such agents shall be an expense chargeable in
accordance with Section 8.08. The Committee shall be fully protected in
delegating any such power or duty to, or in acting upon the advice of, any such
agent, in whole or in part, and except as may be required by Federal law, shall
not be liable for any act or omission of any such agent, the Committee's only
duty being to use reasonable care in the selection and retention of any such
agent.

                                       38


         8.08     Compensation and Expense of Committee. The members of the
Committee shall serve without compensation for services as such, but all
expenses of the Committee, shall be paid by the Trust; provided, the Company, in
its sole discretion, may elect to pay all or any portion of such expenses. Such
expenses shall include any expenses incident to the functioning of the Trust,
including but not limited to attorneys' fees and the compensation of other
agents, accounting and clerical charges, expenses, if any, of being bonded as
required by ERISA, and other costs of administering the Plan and Trust.

         8.09     Indemnification. The Company shall indemnify and hold harmless
each member of the Committee from and against any and all claims, losses,
damages, expenses (including reasonable attorneys' fees approved by the
Company), and liability (including any reasonable amounts paid in settlement
with the Company's approval), arising from any act or omission of such member,
except with respect to a matter as to which such member shall have been
judicially determined (or determined by the majority vote of disinterested
members of the Board in the event such matter shall have been compromised or
settled) not to have acted in good faith in the reasonable belief that the
action or omission of such member was in the best interest of the Members and
Beneficiaries of the Trust.

         8.10     Claims Procedure.

                  (a)      If a Member, Beneficiary, alternate payee, or their
authorized representative (hereinafter the "Claimant") asserts a right to a
benefit under the Plan which has not been received, the Claimant must file a
claim for such benefit with the Committee on forms provided by the Committee.
The Committee shall render its decision on the claim within 90 days after its
receipt of the claim.

                                       39


         If special circumstances apply, the 90-day period may be extended by an
additional 90 days; provided, written notice of the extension is provided to the
Claimant during the initial 90-day period and such notice indicates the special
circumstances requiring an extension of time and the date by which the Committee
expects to render its decision on the claim.

         If the Committee wholly or partially denies the claim, the Committee
shall provide written notice to the Claimant within the time limitations of the
immediately preceding paragraph. Such notice shall set forth:

                           (i)      the specific reasons for the denial of the
         claim;

                           (ii)     specific reference to pertinent provisions
         of the Plan on which the denial is based;

                           (iii)    a description of any additional material or
         information necessary to perfect the claim and an explanation of why
         such material or information is necessary;

                           (iv)     a description of the Plan's claims review
         procedures, and the time limitations applicable to such procedures; and

                           (v)      a statement of the Claimant's right to bring
         a civil action under Section 502(a) of ERISA if the claim denial is
         appealed to the Committee and the Committee fully or partially denies
         the claim.

                  (b)      A Claimant whose application for benefits is denied
may request a full and fair review of the decision denying the claim by filing,
in accordance with such procedures as the Committee may establish, a written
appeal which sets forth the documents, records and other information relating to
the claim within 60 days after receipt of the notice of the denial from the
Committee. In connection with such appeal and upon request by the Claimant, a
Claimant may review (or receive free copies of) all documents, records or other
information relevant to the

                                       40


Claimant's claim for benefit, all in accordance with such procedures as the
Committee may establish. If a Claimant fails to file an appeal within such
60-day period, he shall have no further right to appeal.

                  (c)      A decision on the appeal by the Committee shall
include a review by the Committee that takes into account all comments,
documents, records and other information submitted by the Claimant relating to
the claim, without regard to whether such information was submitted or
considered in the initial claim determination. The Committee shall render its
decision on the appeal not later than 60 days after the receipt by the Committee
of the appeal. If special circumstances apply, the 60-day period may be extended
by an additional 60 days; provided, written notice of the extension is provided
to the Claimant during the initial 60-day period and such notice indicates the
special circumstances requiring an extension of time and the date by which the
Committee expects to render its decision on the claim on appeal.

         If the Committee wholly or partly denies the claim on appeal, the
Committee shall provide written notice to the Claimant within the time
limitations of the immediately preceding paragraph. Such notice shall set forth:

                           (i)      the specific reasons for the denial of the
         claim;

                           (ii)     specific reference to pertinent provisions
         of the Plan on which the denial is based;

                           (iii)    a statement of the Claimant's right to
         receive, upon request and free of charge, reasonable access to, and
         copies of, all documents, records, and other information relevant to
         the Claimant's claim for benefits; and

                           (iv)     a statement of the Claimant's right to bring
         a civil action under Section 502(a) of ERISA.

                                       41


                  (d)      In no event may a claim for benefits be filed by a
Claimant more than 120 days after the applicable "Notice Date," as defined in
(i) through (iii) below.

                           (i)      In any case where benefits are paid to the
         Claimant as a lump sum, the Notice Date shall be the date of payment of
         the lump sum.

                           (ii)     In any case where the Committee (prior to
         the filing of a claim for benefits under this Section 8.10) determines
         that an individual is not entitled to benefits from the Plan and the
         Committee provides written notice to such individual of its
         determination, the Notice Date shall be the date of the individual's
         receipt of such notice.

                           (iii)    In any case where the Committee provides an
         individual, in connection with a distributable event under the Plan, a
         written statement of the vested account balance as of a specific date,
         the Notice Date shall be the latest date of the individual's receipt of
         such notice.

         In no event may any legal proceeding regarding entitlement to benefits
or any aspect of benefits under the Plan be commenced later than the earliest of
(i) two (2) years after the applicable Notice Date; or (ii) one (1) year after
the date a Claimant receives a decision from the Committee regarding his appeal,
or (iii) the latest date otherwise prescribed by applicable law.

                                       42


                            ARTICLE IX - THE TRUSTEE

         9.01     Powers of Trustee. It shall be the duty of the Trustee to hold
and, subject to the provisions of this Article, to invest and reinvest the funds
of the Trust and to make distributions therefrom in accordance with the written
directions of the Committee. The Trustee shall have no responsibility for the
correctness under the terms of the Plan of any written directions which it
receives from the Committee and the Trustee will be fully protected in following
the Committee's directions with respect to any matter relating to the
administration of the Plan, including without limitation, the payment of
benefits to Members or Beneficiaries, the allocation of contributions and
forfeitures to Members' Accounts, and the charging of forfeitures to the
Accounts of terminated Members.

         9.02     Investments. The Trustee shall invest and reinvest the funds
of the Trust (except those necessary to pay any expenses incurred by the
Committee or the Trustee which are not paid by the Company) exclusively in
shares of Stock. The Trustee shall, in investing and reinvesting the trust
funds, comply with all the requirements of ERISA. The Trustee may purchase Stock
from existing stockholders or from MASSBANK Corp. (regardless of whether such
Stock is newly-issued Stock or Stock held in the treasury of MASSBANK Corp.) in
a public offer, a private transaction or by subscription at a price not to
exceed the fair market value of the Stock at the time such Stock is purchased.
In making investments in shares of Stock pursuant to the preceding three
sentences, the Trustee will act as a directed Trustee and will follow the
directions of the Committee concerning the time, manner and price for purchasing
or selling any such shares of Stock. To the extent permitted by applicable law
and regulations, the Trustee may invest the funds of the Trust on an interim
basis, in short-term fixed income securities including any pooled fund which it
maintains and which is primarily invested in such securities, and in such event,
the instrument establishing such pooled fund shall be deemed a part of this
Plan.

                                       43


         9.03     Method of Holding and Selling Securities. The Trustee may keep
any shares of Stock in the name of some other person, firm or corporation or in
its own name without disclosing fiduciary capacity. The Trustee may sell at
public auction or by private contract, redeem, or otherwise realize upon, any
Stock held in the Trust and for such purposes may execute such instruments and
writings and do such things as it shall deem proper.

         9.04     Exercise of Voting Rights.

                  (a)      Except as otherwise provided in subsection (b), the
Trustee is hereby authorized to vote upon the Stock and any other securities
comprising the Trust or otherwise consent to or request any action on the part
of the issuer of such securities, and to give general and special proxies or
powers of attorney, with or without power of substitution, and to participate in
reorganizations, recapitalizations, consolidations, mergers and similar
transactions with respect to such securities; to deposit such securities (if
any) in a voting trust, or with any protective or like committee, or with a
Trustee, or with depositories designated thereby; and generally to exercise any
of the powers of an owner with respect to such securities which the Trustee
deems to be for the best interest of the Trust to exercise.

                  (b)      Each Member shall have the power to instruct the
Trustee as to how the Stock (including any fractional shares) held in his
Account and Dividend Account should be voted at all stockholders' meetings. The
Trustee shall vote such Stock in accordance with such instructions. To
facilitate such right, the Trustee, with the assistance of the Committee, shall
deliver to each Member a copy of all proxies, notices and other information
which MASSBANK Corp. distributes to its shareholders generally and the Committee
shall establish such procedures for the collection of Members' instructions in
the voting of such Stock and the timely transmission of such instructions to the
Trustee as it shall determine to be appropriate. Any such

                                       44


Stock with respect to which voting instructions have been sought but have not
been timely received by the Trustee shall not be voted by the Trustee. Any Stock
with respect to which the Trustee has the power to vote but which has not been
allocated to the accounts of any Member shall be voted by the Trustee in the
same proportion as the Trustee is directed to vote the Stock with respect to
which instructions have been received up to twenty-four (24) hours before the
commencement of the shareholders' meeting. Members do not acquire ownership of
Stock held by the Trustee for their account unless and until the Trustee
delivers to them in accordance with Article VI hereof, stock certificates which
have been registered in their names on the stock books of MASSBANK Corp..

         9.05     Reliance on Trustee as Owner. No person dealing with the
Trustee shall be required to take any notice of this Agreement, but all persons
so dealing shall be protected in treating the Trustee as the absolute owner with
full power of disposition of all Stock and other property comprising the Trust,
and all persons dealing with the Trustee are released from inquiry into the
decision or authority of the Trustee and from seeing to the application of
monies, Stock, or other property paid or delivered to the Trustee.

         9.06     Liquidation of Assets. In the event that cash is required by
the Trustee to effect any action or distribution under this Trust, or to pay any
expenses of this Trust, or for any other reason deemed sufficient by the Trustee
consistent with any outstanding obligations of the Trust, the Trustee shall take
such action as to the disposition of Stock or other property forming a part of
the Trust as will provide the amount of cash necessary for such payments.

         9.07     Direction by Committee. Whenever the Trustee is required or
authorized to take any action hereunder pursuant to any written direction or
determination of the Committee, such direction or determination shall be
sufficient protection to the Trustee if contained in a writing

                                       45


signed by any one or more of its members, or any other person, authorized to
execute documents on behalf of the Committee pursuant to Section 8.04. By such
writing the Committee may ratify, approve, or confirm any action taken by the
Trustee, and upon such ratification, approval, or confirmation the Trustee shall
be protected as though authorization or determination by the Committee has
preceded such action. In the absence of direction by the Committee as to any
matter provided in this Plan, the Trustee may in its discretion take such action
as it deems fit and proper with respect thereto after reasonable attempts to
secure Committee direction. The Trustee may deliver documents to the Committee
by delivering the same to each member of the Committee or by mailing the same,
postage prepaid, addressed to the Committee in care of the Company at its
principal office.

         9.08     Records and Accounting. The Trustee shall keep accurate and
detailed records of its transactions hereunder and all its accounts, books and
records relating thereto shall be open at all reasonable times to the inspection
of the Committee and its authorized representatives. The Trustee shall render in
writing, at least once each twelve (12) months and, in any event, within ninety
(90) days after its removal or resignation as provided in Section 9.11, accounts
of its transactions under this Agreement (including a statement of the assets of
the Trust valued at current fair market value) to the Company and each member of
the Committee, and the Committee may approve such accounts of the Trustee by an
instrument in writing delivered to the Trustee. In the absence of the filing in
writing with the Trustee by the Committee of exceptions or objections to any
such account within sixty (60) days after the receipt by the Committee of any
such account, the Committee shall be deemed to have approved such account; and
in such case, or upon the written approval of the Committee of any such account,
the Trustee shall be released, relieved and discharged with respect to all
matters and things set forth in such

                                       46


account. Except as may otherwise be required by applicable Federal law, no
person interested in the Trust or otherwise other than the Company or the
Committee may require an accounting or bring any action against the Trustee with
respect to the Trust and its actions as Trustee. In any proceeding instituted by
the Trustee, the Company and/or the Committee with respect to these accounts,
only such Company, the Committee and the Trustee shall be the necessary parties.
The Trustee shall from time to time make such other reports and furnish such
other information concerning the Trust as the Committee may in writing
reasonably request or as may be required by applicable Federal law.

         9.09     Payment of Taxes. The Trustee shall upon direction of the
Committee pay out of the Trust fund any and all taxes of any and all kinds,
including without limitation property taxes and income taxes levied or assessed
under existing or future laws upon or in respect of the Trust or any property
forming a part thereof or the income therefrom subject to the terms of any
agreements or contracts made with respect to trust investments which make other
provision for such tax payments. The Trustee may assume that any taxes assessed
on or in respect of the Trust or its income are lawfully assessed unless the
Committee shall in writing advise the Trustee that in the opinion of counsel for
the Company such taxes are or may be unlawfully assessed. In the event that the
Committee shall so advise the Trustee, the Trustee will, if so requested in
writing by the Committee, contest the validity of such taxes in any manner
deemed appropriate by the Company or its counsel; or the Company may itself
contest the validity of any such taxes in the name of the Trustee; and the
Trustee agrees to execute all documents, instruments, claims and petitions
necessary or advisable in the opinion of the Company or its counsel for the
refund, abatement, reduction or elimination of any such taxes.

                                       47


         9.10     Trustee's Compensation and Expenses. The Trustee shall be paid
such reasonable compensation as shall from time to time be agreed upon by the
Company and the Trustee. The compensation of the Trustee and all reasonable
expenses, including reasonable attorneys' fees, incurred by the Trustee in the
administration of the Trust, shall be paid by the Trust; provided, the Company
may, in its sole discretion, elect to pay all or any portion of such expenses.

         9.11     Resignation or Removal of Trustee. Any Trustee acting
hereunder may resign at any time upon thirty (30) days' written notice to the
Company, and the Company may at any time remove any Trustee upon thirty (30)
days' written notice to the Trustee; but the Company and the Trustee may by
written instrument waive or modify such notice. If any Trustee shall resign, be
removed or for any other reason cease to be Trustee, the Company shall appoint a
successor Trustee or Trustees, and if no such successor Trustee is appointed,
the Trustee may deliver the assets of the Trust to the Committee or the Company
as successor Trustee. Subject to the foregoing provisions, any resignation or
removal of the Trustee or appointment of a new Trustee shall be by instrument in
writing and shall become effective on the date therein specified. Any successor
Trustee shall have the same powers and duties as the succeeded Trustee, subject
to such changes as the Company may then determine. The appointment of any
successor Trustee or Trustees hereunder shall without any separate instrument or
conveyance immediately vest title to the assets of the Trust in such successor
Trustee or Trustees. Upon request of such successor Trustee or Trustees, the
Company and the Trustee ceasing to act shall execute and deliver such
instruments of conveyance and further assurance and do such other things as may
reasonably be required for more fully and certainly vesting and confirming in
such successor Trustee or Trustees all the right, title, and interest of the
retiring Trustee in and to the Trust funds.

                                       48


         A successor Trustee will have no responsibility or liability for any
act or omission in the administration of the Trust before the effective date of
its appointment as successor Trustee.

         9.12     Tender Offer or Exchange Offer. In the event of a tender offer
or exchange offer by any person (including the Company or MASSBANK Corp.) for
any or all shares of Stock held in the Trust, each Member shall have the right
and shall be afforded the opportunity to direct in writing whether the Stock
(including any fractional shares) allocable to his Account and Dividend Account
shall be tendered or exchanged in response to such offer. The Trustee shall act
with respect to such Stock in accordance with such written instructions. Any
Stock held by the Trustee which is not yet allocable to any Member's Account and
Dividend Account and any Stock with respect to which written instructions have
been sought but have not been timely received by the Trustee shall be tendered
or exchanged in the same proportion as the Stock which is allocable to the
Members' Accounts and Dividend Accounts and with respect to which written
instructions have been timely received is being tendered or exchanged. To
facilitate the foregoing right of the Members, the Committee shall distribute or
cause to be distributed to each Member substantially the same information as may
be distributed to the stockholders of MASSBANK Corp. in connection with such
offer and the Committee shall establish such procedures for the collection of
Members' instructions with respect to such Stock and the timely transmission of
such instructions to the Trustee as it shall determine to be appropriate.

         9.13     Indemnification of Trustee. The Company shall indemnify and
hold harmless the Trustee from any and all claims, losses, damages, expenses
(including reasonable counsel fees approved by the Company, which approval will
not reasonably be withheld) and liability (including any reasonable amounts paid
in settlement with the Company's approval, which approval will not unreasonably
be withheld), arising from any act or omission of the Trustee

                                       49


which results from a direction given by the Committee or the Company or from the
Trustee's acting or refraining from acting in accordance with the terms of this
Agreement, except when the same is judicially determined to be due to the gross
negligence or willful misconduct of the Trustee.

                                       50


                            ARTICLE X - THE COMPANY

         10.01    Powers of the Bank. The Company shall have the power to amend
or terminate the Plan and Trust as provided in Article VII, to appoint and
remove members of the Committee as provided in Article VIII, to appoint and
remove the Trustee as provided in Article IX, and to do such other acts and
things as are provided elsewhere herein.

         10.02    No Contract of Employment. This Trust shall not be construed
as creating any contract of employment between the Company and any Member,
Employee or other person, and nothing herein contained shall give any person the
right to be retained in the employ of the Company or otherwise restrain the
Company's right to deal with its employees, including Members and Employees, and
their hiring discharge, layoff, compensation, and all other conditions of
employment in all respects as though this Trust did not exist.

         10.03    Liability of Company. Subject to its agreement to indemnify
the Committee as provided in Section 8.09 and except as otherwise provided by
applicable Federal law, neither the Company nor any person acting on behalf of
the Company shall be liable for any act or omission on the part of any member of
the Committee or the Trustee, or for any act performed or the failure to perform
any act by any person with respect to this Agreement, the Plan or Trust, the
Company's only duty being to use reasonable care in the selection of the members
of the Committee and the Trustee.

         10.04    Action by Company. Whenever under the terms of this Agreement
the Company is permitted or required to take any action, such action shall be
taken by the Board or by any officer of the Company thereunto duly authorized,
by the Board or otherwise. In such event, any such officer may certify to the
Trustee or any person the taking of such action and the name and names of the
officers so authorized, including himself. The execution of any direction,
document or certificate on behalf of the Company by any of its officers shall
constitute his

                                       51


certification of his authority with respect thereto, and the Trustee or other
person shall be protected in accepting and relying upon any such direction,
document or certificate and are released from inquiry into the authority of any
officer of the Company.

         10.05    Successor to Business of Company. Unless this Plan and Trust
be sooner terminated, a successor to the business of the Company, by whatever
form or manner resulting, may continue the Plan and Trust by executing an
appropriate supplemental agreement and such successor shall ipso facto succeed
to all the rights, powers and duties of the Company hereunder. The employment of
any Employee who has continued in the employ of such successor shall not be
deemed to have been terminated or severed for any purposes hereunder by reason
of such succession.

         10.06    Dissolution of the Company. In the event that the Company is
dissolved by reason of bankruptcy or insolvency or otherwise, without any
provision being made for the continuation of this Plan and Trust by a successor
to the business of the Company, the Plan and Trust hereunder shall terminate,
and the Trustee shall proceed in the same manner as though the Plan and Trust
were being terminated by the Company as provided in Section 7.03.

                                       52


                            ARTICLE XI - ESOP LOANS

         11.01    ESOP Loan. For purposes of this Article XI, an "ESOP Loan"
means a loan made to the Trust by a party in interest (as that term is defined
in Section 3(14) of ERISA) or a loan to the Trust which is guaranteed or
otherwise secured by a party in interest and which, in either case, satisfies
all of the requirements for an exempt loan under Section 408(b)(3) of ERISA and
Section 4975(d)(3) of the Code and all applicable regulations thereunder (such
statutes and regulations being collectively referred to herein as the "ESOP
Rules").

         11.02    Use of ESOP Loan Proceeds. The Plan and Trust are designed to
invest primarily in Stock and the Trustee is hereby authorized and directed to
acquire shares of Stock to the extent such Stock is reasonably available. To
effectuate this purpose, the Trustee is hereby authorized to enter into ESOP
Loans and to apply the proceeds thereof to the acquisition of shares of Stock in
accordance with Section 9.02 or to the repayment of such ESOP Loans or a prior
ESOP Loan. All Stock acquired with the proceeds of an ESOP Loan shall while held
by the Trustee be free from any put, call or other option, or any buy-sell or
similar arrangement. Any actions by the Trustee under this Section will be at
the direction of the Committee.

         11.03    Terms and Conditions. Any such ESOP Loan shall be upon such
terms and conditions, consistent with the ESOP Rules and this Article XI, as the
Committee shall determine. Such terms and conditions shall, in addition to those
terms and conditions required by the ESOP Rules, include the following:

                  (a)      the recourse of the lender against the Trust shall be
limited to one or more of the following: (i) any collateral given for the ESOP
Loan, (ii) Company contributions made subsequent to the date of the ESOP Loan,
and (iii) earnings attributable to such collateral or the investment of such
contributions;

                                       53


                  (b)      the aggregate of all payments under the ESOP Loan by
the Trust shall not exceed the aggregate of items (ii) and (iii) under (a) above
at the date of any such payment;

                  (c)      in the event of a default under an ESOP Loan, the
                           value of Trust assets transferred to the lender shall
not exceed the amount of the default, provided further that if the lender is a
party in interest a transfer of Trust assets upon default shall be made only if,
and to the extent of, the Trust's failure to meet the ESOP Loan's payment
schedule;

                  (d)      the interest rate must not be in excess of a
reasonable rate;

                  (e)      the ESOP Loan must be for a specific term and may not
be payable at the demand of any person, except in the case of default.

         11.04    Collateral for ESOP Loan. The Committee is hereby authorized
to direct the Trustee to collateralize an ESOP Loan by giving a security
interest in all or any portion of the Stock acquired with the proceeds of said
Loan (or the proceeds of a previous ESOP Loan repaid by said Loan). No other
Trust assets may be so used as collateral. In the event that Stock is used by
the Trustee as collateral for an ESOP Loan, such Stock shall be released from
such encumbrance at an annual rate which is geared to the rate of total
repayment (principal plus interest) of the ESOP Loan or the rate of principal
repayment of the ESOP Loan provided that all applicable requirements of the ESOP
Rules shall be satisfied.

         11.05    Suspense Accounts. All Stock acquired with the proceeds of an
ESOP Loan shall be credited to a Suspense Account rather than allocated among
the Members' Accounts. In the event there is more than one (1) ESOP Loan
outstanding, two (2) or more Suspense Accounts shall be established as provided
herein. If such Stock is being used as collateral, it shall be withdrawn from
the Suspense Account at the same time and on the same basis as it is released
from encumbrance. If such Stock is not used as collateral, it shall be withdrawn
from the

                                       54


Suspense Account as if it had been so used and was being released from
encumbrance at a rate geared to the repayment of the principal portion of the
ESOP Loan. If, during any Limitation Year, Stock is withdrawn from the Suspense
Account, it shall be allocated among the Members' Accounts in accordance with
the provisions of Section 5.03.

         No Member shall have any interest in, or rights with respect to, any
Stock while it is held in a Suspense Account. In the event that any Stock held
in a Suspense Account is sold, the proceeds may be used to repay the ESOP Loan
to the extent permitted by applicable law, and any excess amount (including any
shares of Stock released from encumbrance by reason of such repayment) shall be
allocated among the Accounts and Dividend Accounts of all Members in proportion
to the aggregate value (Part A plus Part B) of each such Member's Account and
Dividend Account.

                                       55


                       ARTICLE XII - TOP-HEAVY PROVISIONS

         12.01    Article Controls. Any provisions of the Plan to the contrary
notwithstanding, the provisions of this Article XII shall control the Plan to
the extent required to cause the Plan to comply with the requirements imposed by
Section 416 of the Code.

         12.02    Definitions. Where the following words and phrases appear in
this Article XII, they shall have the respective meanings set forth below,
unless their context clearly indicates to the contrary:

                  (a)      Account Balance. As of any Valuation Date, the
aggregate amount credited to an individual's account or accounts under the Plan
and all other qualified defined contribution plans maintained by the Company or
an Affiliated Company increased by (i) the aggregate distributions made to such
individual from the Plan or any other such plan during a five (5) year period
ending on the Determination Date, and (ii) the amount of any contributions due
as of the Determination Date immediately following such Valuation Date.
Effective October 1, 2002, the amount of Account balances of a Member as of the
Determination Date shall be increased by the distributions made with respect to
the Member under the Plan and any plan in the Aggregation Group during the
one-year period ending on the Determination Date. The preceding sentence shall
also apply to distributions under a terminated plan which, had it not been
terminated, would have been in the Aggregation Group. In the case of a
distribution made for a reason other than separation from service, death, or
disability, this provision shall be applied by substituting "five-year period"
for "one-year period."

                  (b)      Accrued Benefit. As of any Valuation Date, the
present value of the cumulative accrued benefit (excluding the portion thereof
which is attributable to rollover or transfer contributions made by or on behalf
of such individual to such plan from another qualified plan sponsored by an
entity other than the Company or an Affiliated Company, to

                                       56


proportional subsidies, or to ancillary benefits) of an individual under an
qualified defined benefit plan maintained by the Company or an Affiliated
Company increased by (i) the aggregate distributions made to such individual
from such plan within a five (5) year period ending on the Determination Date
and (ii) the estimated benefit accrued by such individual between such Valuation
Date and the Determination Date immediately following such Valuation Date. The
Accrued Benefit of Non-Key Employees shall be determined under (A) the method,
if any, that uniformly applies for accrual purposes under all defined benefit
plans maintained by the Company and Affiliated Company's, or (B) if there is no
such method, as if such benefit accrued not more rapidly than the slowest
accrual rate permitted under Section 411(b)(1)(C) of the Code. Effective October
1, 2002, the amount of Account balances of a Member as of the Determination Date
shall be increased by the distributions made with respect to the Member under
the Plan and any plan in the Aggregation Group during the one-year period ending
on the Determination Date. The preceding sentence shall also apply to
distributions under a terminated plan which, had it not been terminated, would
have been in the Aggregation Group. In the case of a distribution made for a
reason other than separation from service, death, or disability, this provision
shall be applied by substituting "five-year period" for "one-year period."

                  (c)      Aggregation Group. The group of qualified plans
(whether or not terminated) maintained by the Company and each Affiliated
Company consisting of (i) each plan in which a Key Employee participates and
each other plan which enables a plan in which a Key Employee participates to
meet the requirements of Sections 401(a)(4) or 410 of the Code, or (ii) each
plan in which a Key Employee participates, each other plan which enables a plan
in which a Key Employee participates to meet the requirements of Sections
401(a)(4) or 410 of the Code, and any other plan which the Committee elects to
include as a part of such group;

                                       57


provided, however, that the Committee may not elect to include a plan if its
inclusion would cause the group to fail the requirements of Sections 401(a)(4)
and 410 of the Code.

                  (d)      Determination Date. For the first Plan Year of any
plan, the last day of such Plan Year, and for each subsequent Plan Year of such
plan, the last day of the preceding Plan Year. If two or more plans are being
aggregated, they shall be aggregated by adding together the results for each
plan as of the Determination Dates for such plans that fall within the same
calendar year.

                  (e)      Former Key Employee. With respect to any Plan Year,
any individual who was a Key Employee in a previous Plan Year but who is not a
Key Employee with respect to such Plan Year. For purposes of this definition, a
beneficiary (who would not otherwise be a Key Employee) of a deceased former Key
Employee shall be deemed to be a Former Key Employee in substitution for such
deceased Former Key Employee.

                  (f)      Highest Average Compensation. The highest annual
average of the Compensation paid by the Company to an Employee during any five
(5) consecutive Plan Years (excluding Plan Years prior to the first Plan Year
the Plan was top-heavy and excluding Plan Years subsequent to the last Plan Year
the Plan was top-heavy) or during all of such Plan Years during which the
Employee received Compensation from the Company or an Affiliated Company if less
than five (5).

                  (g)      Key Employee. With respect to any Plan Year, any
employee (and any beneficiary of a deceased employee) of the Company or an
Affiliated Company who is a "Key Employee" as determined in accordance with
Section 416(i)(1) of the Code.

                  (h)      Non-Key Employee. With respect to any Plan Year, any
employee of the Company or an Affiliated Company who is not a Key Employee.

                                       58


                  (i)      Plan Year. With respect to any plan, the annual
accounting period used by such plan for annual reporting purposes.

                  (j)      Top-Heavy Service. Under the defined benefit plan,
each year of benefit accrual service, excluding all such years accrued before
November 1, 1984 and before the plan became top-heavy.

                  (k)      Valuation Date. With respect to any Plan Year, the
most recent date within the twelve (12) month period ending on a Determination
Date as of which the Trust fund established was valued and the net income (or
loss) thereof allocated to Members' accounts.

         12.03    Top-Heavy Status. The Plan shall be deemed to be top-heavy if,
as of any Determination Date, (i) the sum (computed in accordance with Section
416(g) of the Code and the regulations promulgated thereunder) of the Account
Balances of Key Employees under the Plan exceeds sixty percent (60%) of the sum
of the Account Balances of all individuals (excluding Former Key Employees and
individuals who have not performed any services for the Company or an Affiliated
Company at any time during the five-year period ending on the Determination
Date) under the Plan unless an Aggregation Group including the Plan is not
top-heavy or (ii) an Aggregation Group including the Plan is top-heavy. An
Aggregation Group shall be deemed to be top-heavy as of a Determination Date if
the sum (computed in accordance with Section 416(g)(2)(B) of the Code and the
regulations promulgated thereunder) of the Account Balances of the Key Employees
under all defined contribution plans included in the Aggregation Group and the
Accrued Benefit of all Key Employees under all defined benefit plans included in
the Aggregation Group exceeds sixty percent (60%) of the sum of the Account
Balances and the Accrued Benefit of all individuals (excluding the Account
Balances and the Accrued Benefit of former Key Employees and individuals who
have not performed any services

                                       59


for the Company or an Affiliated Company at any time during the five-year period
ending on the Determination Date) under such plans. The foregoing determination
shall be made by the Committee. The accrued benefits and accounts of any
individual who has not performed services for the Company or an Affiliation
during the one-year period ending on the Determination Date shall not be taken
into account.

         12.04    Minimum Benefit. If the Plan is determined to be top-heavy for
a Plan Year, then each Member who is a Non-Key Employee shall be entitled to a
benefit in the Company's defined benefit plan equal to the lesser of

                  (a)      Two percent (2%) of such Member's Highest Average
Compensation multiplied by the Member's years of To-Heavy Service;

                  (b)      Twenty percent (20%) of the Member's Highest Average
Compensation.

         12.05    Adjustment to Combined Limitation. In each Plan Year in which
the Plan is determined to be top-heavy, the number "1.0" shall be substituted
for the number "1.25" wherever it appears in Section 5.09; provided, however,
that the foregoing shall not apply if

                  (a)      the minimum benefit provided to each Non-Key Employee
who also participates in a top-heavy defined benefit plan in the Aggregation
Group is at least the lesser of

                           (i)      three percent (3%) of the Member's Highest
         Average Compensation multiplied by the Member's years of Top-Heavy
         Service, and

                  (b)      thirty percent (30%) of the Member's Highest Average
Compensation, and

                  (c)      the Plan would not be a top-heavy plan if "ninety
percent (90%)" were substituted for "sixty percent (60%)" each place it appears
in Section 12.03 above.

         Notwithstanding the foregoing, for Plan Years beginning after October
31, 2000, this Section 12.05 shall cease to apply.

                                       60


         12.06    Minimum Vesting. If the Plan determined to be top heavy for a
Plan Year, the following minimum vesting schedule will automatically apply:



   Years of
Vesting Service                             Vested Percentage
- ---------------                             -----------------
                                         
  Less than 2                                        0%
       2                                            20%
       3                                            40%
       4                                            60%
       5                                            80%
6 years or more                                    100%


         Such minimum vesting schedule applies to the entire Account Balance of
each Member. In the event the Plan ceases to be top-heavy for any subsequent
Plan Year, the vested percentage of any Member who terminated after the Plan has
ceased to be top-heavy shall be determined in accordance with the vesting
schedule in Section 6.05 except that (a) the vested percentage of a Member shall
not be less than the vested percentage which the Member had achieved under the
vesting schedule set forth above as of the last day of the last Plan Year for
which the Plan was top-heavy and (b) the vested percentage of a Member who had
been credited with three (3) or more Years of Vesting Service as of the last day
of the last Plan Year for which the Plan was top-heavy shall always be
determined under the vesting schedule set forth above.

         12.07    Restriction on Compensation. If the Plan is determined to be
top-heavy for a Plan Year, the amount of each Member's Compensation to be taken
into account for such Plan Year for all purposes of the Plan shall not exceed
$160,000 ($200,000 on and after October 1, 2002), as adjusted pursuant to
Section 416(d) of the Code and the regulations thereunder.

         12.08    Termination of Top-Heavy Status. Except as otherwise provided
in Section 12.06, if the Plan has been top-heavy for one or more Plan Years and
thereafter ceases to be top-heavy, the provisions of this Article XII shall
cease to apply to the Plan effective as of the day following the Determination
Date on which the Plan is determined to no longer be top-heavy.

                                       61


               ARTICLE XIII - ADDITIONAL PARTICIPATING COMPANIES

         13.01    Participation. Any Affiliated Company may become a
participating Company by vote of the board of directors of such Affiliated
Company adopting the Plan and Trust as a plan and trust for the benefit of its
employees. Any such additional participating employer is hereinafter referred to
in this Article XIII as a "Participating Company."

         13.02    Effective Date. The participation of any Participating Company
shall take effect as of the date specified in its action to adopt the Plan and
Trust.

         13.03    Administration. Each Participating Company shall be deemed the
"Company" with respect to its Employees and shall have and exercise all the
rights, powers, and duties thereof with respect to the Plan as applied to itself
and its Employees and that part of the Trust which represents the Accounts of
Members employed by it. Subject to Sections 13.04 and 13.06, each Participating
Company hereby authorizes MASSBANK to exercise on its behalf all such rights,
powers, and duties, including amendment or termination of the Plan.

         13.04    Termination. If the Plan shall be terminated by any one
Participating Company, the Trust shall be valued pursuant to Section 5.07 and
assets representing the Accounts of all Members employed by such Participating
Company shall be segregated into a separate trust and held subject to the
provisions of the Plan and Trust Agreement, and all rights, powers, and duties
of the Company with respect to such separate trust shall be exercised by such
Participating Company.

         13.05    Allocation of Forfeitures. Whenever part or all of the Account
of any Member shall be forfeited by him and reallocated among the Accounts of
the remaining eligible Members pursuant to Sections 5.04 and 6.06(d), such
amount shall be reallocated to the Accounts of all eligible Members, regardless
of whether they are Employees of the Participating Company which last employed
the former Member whose Account (or part thereof) is being forfeited.

                                       62


         13.06    Contributions. Each participating employer, including the
Company and each Participating Company, shall make contributions hereunder, on
behalf of its Employees, in accordance with Section 4.01, and as determined by
such participating employer. All contributions made by a Participating Company
with respect to any fiscal year of such Participating Company shall be made no
later than the date specified in Section 4.02 and shall be allocated pursuant to
the provisions of Section 5.03.

                                       63


                          ARTICLE XIV - MISCELLANEOUS

         14.01    Spendthrift Provision. Beneficial interests of Members or
their Beneficiaries in the Trust shall not be assignable nor subject to
attachment nor receivership, nor shall they pass to any trustee in bankruptcy or
be reached or applied by any legal process for the payment of any obligations of
any such person, except as otherwise provided under Section 401(a)(13) of the
Code.

         14.02    Appointment of Person to Receive Payment. Upon the appointment
by a court having jurisdiction of a legal representative for a Member or
Beneficiary, following a judicial determination that such Member or Beneficiary
is of unsound mind, any payment or distribution hereunder shall thereafter be
made to such legal representative. In the event any amount shall become payable
hereunder to any person (or his Beneficiary or estate), and if after written
notice from the Committee mailed to such person's last known address as shown on
the Company's records, such person or his personal representative shall not have
presented himself to the Committee or notified the Committee in writing of his
address within one (1) year after the mailing of such notice, then the Committee
shall in its discretion appoint one or more of the spouse or blood relatives of
such person to receive such amount, including any amount thereafter becoming due
to such person (or his estate), in the proportions determined by the Committee.
Any action of the Committee hereunder shall be binding and conclusive upon all
persons.

         14.03    Construction. In any question of interpretation or other
matter of doubt, the Trustee and the Company may rely upon the opinion of
counsel for the Company or any other attorney-in-law designated by the Company
with the approval of the Trustee. The provisions of this Agreement shall be
construed, administered and enforced according to the laws of the United States
and, to the extent permitted by such laws, by the laws of the Commonwealth of

                                       64


Massachusetts. All contributions to the Trust shall be deemed to be made in the
Commonwealth of Massachusetts.

         14.04    Impossibility of Performance. In case it becomes impossible
for the Company, the Committee or the Trustee to perform any act under this Plan
and Trust, that act shall be performed which in the judgment of the Company, the
Committee or the Trustee, respectively, will most nearly carry out the intent
and purpose of this Plan and Trust. All parties to this Agreement or in any way
interested in this Plan and Trust shall be bound by any acts performed under
such condition.

         14.05    Definition of Words. Feminine or neuter pronouns shall be
substituted for those of the masculine form, and the plural shall be substituted
for the singular, in any place or places herein where the context may require
such substitution or substitutions.

         14.06    Titles. The titles of articles and sections are included only
for convenience and shall not be construed as a part of this Agreement or in any
respect affecting or modifying its provisions.

         14.07    Merger or Consolidation. In the event that this Plan is merged
with or consolidated with any other plan, or the assets or liabilities accrued
under this Plan are transferred to any other plan, each Member's benefit under
such other plan shall be at least as great immediately after such merger,
consolidation or transfer (if such plan were then to terminate) as the benefit
to which he would have been entitled under this Plan immediately before such
merger, consolidation or transfer (if the Plan were then to terminate).

         14.08    Execution of Agreement. This Agreement may be executed in any
number of counterparts and each fully executed counterpart shall be deemed an
original.

                                       65


         14.09    Special Provisions for Certain Leased Employees. A "leased
employee" shall receive credit for Hours of Service, Years of Eligibility
Service and Years of Vesting Service for the entire period during which he is a
leased employee of the Company or an Affiliated Company as if he were an
Employee of the Company or an Affiliated Company; provided, however, that a
leased employee shall not be an Employee eligible to participate in the Plan as
long as he remains a leased employee. For purpose of this Section 14.09, the
term "leased employee" means any person (a) who is not an Employee of the
Company or an Affiliated Company and (b) who pursuant to an agreement between
the Company or an Affiliated Company and any other person (a "leasing
organization") has performed services for the Company or an Affiliated Company
on a substantially full-time basis for a period of at least one (1) year and
such services are performed under the primary direction or control by the
Company or an Affiliated Company. Notwithstanding the foregoing, if leased
employees constitute less than twenty percent (20%) of the Company's and
Affiliated Company's nonhighly compensated work force within the meaning of
Section 414(n)(5) of the Code, a person who is covered by a money purchase
pension plan maintained by the leasing organization which provides a
nonintegrated employer contribution rate of at least ten percent (10%) of
compensation, immediate participation and full and immediate vesting shall not
be considered a "leased employee."

         14.10    USERRA. Notwithstanding any provision of this Plan to the
contrary, contributions, benefits and service credit with respect to qualified
military service shall be provided in accordance with Section 414(u) of the
Code.

         14.11    Correction Methods. The Company may make any corrections under
the Plan necessary to retain the qualified status of the Plan and Trust under
Code Sections 401(a) and

                                       66


501(a). Such corrections shall include, but not be limited to, any corrections
described in the Internal Revenue Service's Employee Plans Compliance Resolution
System.

         14.12    Writings. Whenever under the terms of the Plan a Member,
former Member, Beneficiary or alternate payee is required to make a claim,
request, election or direction in writing, such claim, request, election or
direction may be made in such other form allowable by the Committee on a
nondiscriminatory basis.

                                       67


                         ARTICLE XV - DIRECT ROLLOVERS

         15.01    Application of this Article. Notwithstanding any provision of
the Plan to the contrary that would otherwise limit a distributee's election
under this Article, a distributee may elect, at the time and in the manner
prescribed by the Committee, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan specified by the
distributee in a direct rollover.

         15.02    Definitions. Whenever used in this Article, the following
words shall have the following meanings:

                  (a)      Eligible rollover distribution: An eligible rollover
distribution is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover distribution does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution to the extent such
distribution is required under Section 401(a)(9) of the Code; and the portion of
any distribution that is not includible in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to employer
securities); and a hardship distribution. With respect to distributions made
after December 31, 2001, any amount that is distributed on account of hardship
shall not be eligible rollover distribution and the distributee may not elect to
have any portion of such a distribution paid directly to an eligible retirement
plan.

                  (b)      Eligible retirement plan: An eligible retirement plan
is an individual retirement account described in Section 408(a) of the Code, an
individual retirement annuity described in Section 408(b) of the Code, an
annuity plan described in Section 403(a) of the Code,

                                       68


or a qualified trust described in Section 401(a) of the Code, that accepts the
distributee's eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an eligible retirement
plan is an individual retirement account or individual retirement annuity. With
respect to distributions after December 31, 2001, an eligible retirement plan
shall also mean an annuity contract described in Section 403(b) of the Code and
an eligible plan under Section 457(b) of the Code which is maintained by a
state, political subdivision of a state, or any agency or instrumentality of a
state or political subdivision of a state and which agrees to separately account
for amounts transferred into such plan from the Plan. The definition of eligible
retirement plan shall also apply in the case of a distribution to a surviving
spouse, or to a spouse or former spouse who is the alternate payee under a
qualified domestic relation order, as defined in Section 414(p) of the Code.

                  (c)      Distributee: A distributee includes an employee or
former employee. In addition, the employee's or former employee's surviving
spouse and the employee's or former employee's spouse or former spouse who is
the alternate payee under a qualified domestic relations order, as defined in
Section 414(p) of the Code, are distributees with regard to the interest of the
spouse or former spouse.

                  (d)      Direct rollover: A direct rollover is a payment by
the Plan to the eligible retirement plan specified by the distributee.

                                       69


         ARTICLE XVI - MINIMUM DISTRIBUTION REQUIREMENTS

         16.01    General Rules.

                  (a)      Effective Date. The provisions of this Article will
apply for purposes of determining required minimum distributions for calendar
years beginning with the 2002 calendar year.

                  (b)      Coordination with Minimum Distribution Requirements
Previously in Effect. If the total amount of 2002 required minimum distributions
under the Plan made to the distributee prior to the execution date of this Plan
restatement equals or exceeds the required minimum distributions determined
under this Article, then no additional distributions will be required to be made
for 2002 on or after such date to the distributee. If the total amount of 2002
required minimum distributions under the Plan made to the distributee prior to
the execution date of this Plan restatement is less than the amount determined
under this Article, then required minimum distributions for 2002 on and after
such date will be determined so that the total amount of required minimum
distributions for 2002 made to the distributee will be the amount determined
under this Article.

                  (c)      Precedence. The requirements of this Article will
take precedence over any inconsistent provisions of the Plan.

                  (d)      Requirements of Treasury Regulations Incorporated.
All distributions required under this Article will be determined and made in
accordance with the Treasury regulations under Section 401(a)(9) of the Internal
Revenue Code.

         16.02    Time and Manner of Distribution.

                  (a)      Required Beginning Date. The Member's entire interest
will be distributed, or begin to be distributed, to the Member no later than the
Member's Required Beginning Date.

                                       70


                  (b)      Death of Member Before Distributions Begin. If the
Member dies before distributions begin, the Member's entire interest will be
distributed as follows:

                           (i)      By December 31 of the calendar year
         containing the fifth anniversary of the Member's death.

                           (ii)     If the Member's surviving spouse is the
         Member's sole Designated Beneficiary and the surviving spouse dies
         after the Member but before distributions to the surviving spouse
         begin, this Section 16.02(b) will apply as if the surviving spouse were
         the Member.

         For purposes of this Section 16.02(b) and Section 16.04, unless Section
16.02(b)(ii) applies, distributions are considered to begin on the Member's
Required Beginning Date. If Section 16.02(b)(ii) applies, distributions are
considered to begin on the date distributions are required to begin to the
surviving spouse under Section 16.02(b)(i).

                  (c)      Forms of Distribution. Unless the Member's interest
is distributed in a single sum on or before the Required Beginning Date, as of
the first Distribution Calendar Year distributions will be made in accordance
with Sections 16.03 and 16.04 of this Article.

         16.03    Required Minimum Distributions During Member's Lifetime.

                  (a)      Amount of Required Minimum Distribution for each
Distribution Calendar Year. During the Member's lifetime, the minimum amount
that will be distributed for each Distribution Calendar Year is the lesser of:

                           (i)      the quotient obtained by dividing the
         Member's account balance by the distribution period in the Uniform
         Lifetime Table set forth in Section 1.401(a)(9)-9 of the Treasury
         regulations, using the Member's age as of the Member's birthday in the
         Distribution Calendar Year; or

                                       71


                           (ii)     if the Member's sole Designated Beneficiary
         for the Distribution Calendar Year is the Member's spouse, the quotient
         obtained by dividing the Member's account balance by the number in the
         Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the
         Treasury regulations, using the Member's and spouse's attained ages as
         of the Member's and spouse's birthdays in the Distribution Calendar
         Year.

                  (b)      Lifetime Required Minimum Distributions Continue
Through Year of Member's Death. Required minimum distributions will be
determined under this Section 16.03 beginning with the first Distribution
Calendar Year and up to and including the Distribution Calendar Year that
includes the Member's date of death.

         16.04    Required Minimum Distributions After Member's Death. If the
Member dies on or after the date distributions begin, his remaining account
balance shall be distributed to his Beneficiary in a lump sum as soon as
practicable.

         16.05    Definitions.

                  (a)      Designated Beneficiary. The individual who is
designated as the Beneficiary under Section 6.04 of the Plan and is the
designated beneficiary under Section 401(a)(9) of the Internal Revenue Code and
Section 1.401(a)(9)-4, Q&A-1, of the Treasury regulations.

                  (b)      Distribution Calendar Year. A calendar year for which
a minimum distribution is required. For distributions beginning before the
Member's death, the first Distribution Calendar Year is the calendar year
immediately preceding the calendar year which contains the Member's Required
Beginning Date. For distributions beginning after the Member's death, the first
Distribution Calendar Year is the calendar year in which distributions

                                       72


are required to begin under Section 16.02(b). The required minimum distribution
for the Member's first Distribution Calendar Year will be made on or before the
Member's Required Beginning Date. The required minimum distribution for other
Distribution Calendar Years, including the required minimum distribution for the
Distribution Calendar Year in which the Member's Required Beginning Date occurs,
will be made on or before December 31 of that Distribution Calendar Year.

                  (c)      Life Expectancy. Life expectancy as computed by use
of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury regulations.

                  (d)      Member's Account Balance. The account balance as of
the last valuation date in the calendar year immediately preceding the
Distribution Calendar Year (valuation calendar year) increased by the amount of
any contributions made and allocated or forfeitures allocated to the account
balance as of dates in the valuation calendar year after the valuation date and
decreased by distributions made in the valuation calendar year after the
valuation date. The account balance for the valuation calendar year includes any
amounts rolled over or transferred to the Plan either in the valuation calendar
year or in the Distribution Calendar Year if distributed or transferred in the
valuation calendar year.

                  (e)      Required Beginning Date. The date specified in
Section 6.07(c)(ii) of the Plan.

                                       73

         IN WITNESS WHEREOF these presents have been signed and sealed for and
in behalf of the Company and the Trustee by their duly authorized officers this
14th day of August, 2002.

                                 MASSBANK

                                 By:   /s/ Reginald E. Cormier
                                       _________________________________________
                                       Title Sr. V.P., Treasurer & CFO

                                 EASTERN BANK, TRUSTEE

                                 By:   /s/ John Henderson
                                       _________________________________________
                                       Title Vice President

                                       74

EX-13

EX-13 PORTIONS OF THE ANNUAL REPORT

EX-21

                                                                      Exhibit 21

                     List of Subsidiaries of MASSBANK Corp.

MASSBANK Corp. is the parent company of:

         MASSBANK (the "Bank")

MASSBANK has three wholly-owned subsidiaries:

         Readibank Properties, Inc.
         Readibank Investment Corporation
         Melbank Investment Corporation

EX-23

                                                                      EXHIBIT 23

                          Independent Auditors' Consent

The Board of Directors
MASSBANK Corp.

We consent to the incorporation by reference in the registration statement on
Form S-8 of MASSBANK Corp. of our report dated January 15, 2004, with respect to
the consolidated balance sheets of MASSBANK Corp. as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2003, which report appears in the December 31, 2003,
annual report on Form 10-K of MASSBANK Corp.

/s/ KPMG LLP

Boston, Massachusetts
March 12, 2004

EX-31.1

                                                                    Exhibit 31.1

                                  CERTIFICATION

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-15(e) and 15d-15(e)) for the
         registrant and have:

         a)       Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, 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;

         b)       Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this annual report
                  our conclusions about the effectiveness of the disclosure
                  controls and procedures, as of the end of the period covered
                  by this annual report based on such evaluation; and

         c)       Disclosed in this annual report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter (the registrant's
                  fourth quarter in the case of an annual report) that has
                  materially affected, or is reasonably likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

5.       The registrant's other certifying officers and I have disclosed, based
         on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of
         registrant's board of directors (or persons performing the equivalent
         function):

         a)       All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

         b)       Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.

Date:  March 12, 2004                   /s/Gerard H. Brandi
                                        -----------------------------------
                                        Gerard H. Brandi, President and CEO
                                        (principal executive officer)

EX-31.2

                                                                    Exhibit 31.2

                                  CERTIFICATION

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-15(e) and 15d-15(e)) for the
         registrant and have:

         a)       Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, 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;

         b)       Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this annual report
                  our conclusions about the effectiveness of the disclosure
                  controls and procedures, as of the end of the period covered
                  by this annual report based on such evaluation; and

         c)       Disclosed in this annual report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter (the registrant's
                  fourth quarter in the case of an annual report) that has
                  materially affected, or is reasonably likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

5.       The registrant's other certifying officers and I have disclosed, based
         on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of
         registrant's board of directors (or persons performing the equivalent
         function):

         a)       All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

         b)       Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.

Date:  March 12, 2004              /s/Reginald E. Cormier
                                   ------------------------------------
                                   Reginald E. Cormier, Sr. V.P.,Treasurer & CFO
                                   (principal financial officer)

EX-32.1

                                                                    Exhibit 32.1

                                  Certification

         Pursuant to 18 U.S.C. Section 1350, the undersigned Chief Executive
Officer of MASSBANK Corp. hereby certifies that the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 (the "Report") fully complies
with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.

Dated: March 12, 2004

                                                /s/ Gerard H. Brandi
                                                --------------------
                                                Gerard H. Brandi
                                                Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.

EX-32.2

                                                                    Exhibit 32.2

                                  Certification

         Pursuant to 18 U.S.C. Section 1350, the undersigned Chief Financial
Officer of MASSBANK Corp. hereby certifies that the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 (the "Report") fully complies
with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.

Dated: March 12, 2004

                                                 /s/ Reginald E. Cormier
                                                 -----------------------
                                                 Reginald E. Cormier
                                                 Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.