SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2005

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

123 HAVEN STREET

Reading, Massachusetts 01867

(Address of principal executive offices, including Zip Code)

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

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 whether the registrant is an accelerated filer (as Defined in Rule 12(b)-2 of the Exchange Act).    Yes  x    No  ¨

The number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date is:

Class: Common stock $1.00 per share.

Outstanding at August 3, 2005: 4,327,867 shares.

MASSBANK CORP. AND SUBSIDIARIES

INDEX

		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 (unaudited)	3
	Consolidated Statements of Income (unaudited) for the three months ended June 30, 2005 and 2004 and for the six months ended June 30, 2005 and 2004	4 - 5
	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2005 and 2004 (unaudited)	6 - 7
	Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2005 and 2004	8 -  9
	Condensed Notes to the Consolidated Financial Statements	10 - 15
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16 - 42
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	43 - 44
ITEM 4.	Disclosure Controls and Procedures	44
PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings	45
ITEM 2.	Changes in Securities	45
ITEM 3.	Defaults Upon Senior Securities	46
ITEM 4.	Submission of Matters to a Vote of Security Holders	46
ITEM 5.	Other Information	46
ITEM 6.	Exhibits and Reports on Form 8-K	46
Signature Page		47

2

PART 1. ITEM 1

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands except share data)

(Unaudited)

	June 30, 2005			December 31, 2004
Assets:
Cash and due from banks	$	9,377		$	9,829
Short-term investments (Note 5)		204,958			194,250
Total cash and cash equivalents		214,335			204,079
Interest-bearing deposits in banks		1,550			2,718
Securities available for sale, at market value (amortized cost of $433,256 in 2005 and $440,835 in 2004)		433,279			443,753
Securities held-to-maturity, at amortized cost (market value of $4,640 in 2005 and $4,883 in 2004)		4,595			4,877
Trading securities, at market value		30,785			59,013
Loans: (Note 6)
Mortgage loans		220,087			226,197
Other loans		9,843			10,001
Allowance for loan losses		(1,253	)		(1,307	)
Net loans		228,677			234,891
Premises and equipment		6,266			6,464
Accrued interest receivable		3,520			3,416
Goodwill		1,090			1,090
Income tax receivable, net		342			164
Deferred income tax asset, net		1,465			588
Other assets		7,160			15,115
Total assets	$	933,064		$	976,168
Liabilities and Stockholders’ Equity:
Deposits	$	817,189		$	849,465
Escrow deposits of borrowers		901			1,074
Allowance for loan losses on off-balance sheet credit exposures		585			588
Other liabilities		5,948			15,026
Total liabilities		824,623			866,153
Stockholders’ Equity:
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, 7,783,680 and 7,736,430 shares issued, respectively		7,784			7,736
Additional paid-in capital		56,440			55,313
Retained earnings		103,267			102,003
		167,491			165,052
Treasury stock at cost, 3,417,063 and 3,354,703 shares, respectively		(59,033	)		(56,794	)
Accumulated other comprehensive income (loss)		(17	)		1,757
Shares held in rabbi trust at cost, 14,744 and 25,804 shares, respectively (Note 8)		(321	)		(553	)
Deferred compensation obligation (Note 8)		321			553
Total stockholders’ equity		108,441			110,015
Total liabilities and stockholders’ equity	$	933,064		$	976,168

See accompanying condensed notes to consolidated financial statements.

3

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended June 30,
(In thousands except share data)	2005		2004
Interest and dividend income:
Mortgage loans	$	3,038	$	3,445
Other loans		164		166
Securities available for sale:
Mortgage-backed securities		1,756		1,492
Other securities		2,393		2,127
Mortgage-backed securities held-to-maturity		60		48
Trading securities		185		309
Federal funds sold		1,458		439
Other investments		15		95
Total interest and dividend income		9,069		8,121
Interest expense:
Deposits		3,674		3,096
Total interest expense		3,674		3,096
Net interest income		5,395		5,025
Provision (credit) for loan losses		—		(51	)
Net interest income after provision (credit) for loan losses		5,395		5,076
Non-interest income:
Deposit account service fees		101		112
Gains on securities available for sale, net		72		679
Gains (losses) on trading securities, net		172		(493	)
Other		240		230
Total non-interest income		585		528
Non-interest expense:
Salaries and employee benefits		1,974		1,831
Occupancy and equipment		529		522
Data processing		126		123
Professional services		135		103
Advertising and marketing		40		31
Deposit insurance		37		42
Other		331		312
Total non-interest expense		3,172		2,964
Income before income taxes		2,808		2,640
Income tax expense		951		906
Net income	$	1,857	$	1,734
Weighted average common shares outstanding:
Basic		4,390,071		4,416,159
Diluted		4,452,405		4,501,866
Earnings per share (in dollars):
Basic	$	0.42	$	0.39
Diluted		0.42		0.39

See accompanying condensed notes to consolidated financial statements.

4

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Six months ended June 30,
(In thousands except share data)	2005			2004
Interest and dividend income:
Mortgage loans	$	6,150		$	7,027
Other loans		326			335
Securities available for sale:
Mortgage-backed securities		3,474			2,977
Other securities		4,708			4,388
Mortgage-backed securities held-to-maturity		122			48
Trading securities		433			594
Federal funds sold		2,588			925
Other investments		33			172
Total interest and dividend income		17,834			16,466
Interest expense:
Deposits		7,135			6,200
Total interest expense		7,135			6,200
Net interest income		10,699			10,266
Provision (credit) for loan losses		(53	)		(113	)
Net interest income after provision (credit) for loan losses		10,752			10,379
Non-interest income:
Deposit account service fees		201			233
Gains on securities available for sale, net		130			1,043
Gains (losses) on trading securities, net		58			(283	)
Other		393			396
Total non-interest income		782			1,389
Non-interest expense:
Salaries and employee benefits		3,749			3,728
Occupancy and equipment		1,128			1,120
Data processing		267			260
Professional services		265			240
Advertising and marketing		60			48
Deposit insurance		75			83
Other		659			645
Total non-interest expense		6,203			6,124
Income before income taxes		5,331			5,644
Income tax expense		1,780			1,961
Net income	$	3,551		$	3,683
Weighted average common shares outstanding:
Basic		4,394,908			4,421,777
Diluted		4,462,343			4,523,552
Earnings per share (in dollars):
Basic	$	0.81		$	0.83
Diluted		0.80			0.81

See accompanying condensed notes to consolidated financial statements.

5

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For The Six Months Ended June 30, 2005 (Unaudited)

(In thousands except share data)

	COMMON STOCK		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS			TREASURY STOCK			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)			SHARES HELD IN RABBI TRUST			DEFERRED COMPENSATION OBLIGATION			TOTAL
Balance at December 31, 2004	$	7,736	$	55,313	$	102,003		$	(56,794	)	$	1,757		$	(553	)	$	553		$	110,015
Net Income		—		—		3,551			—			—			—			—			3,551
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of reclassification adjustment (Note 9)		—		—		—			—			(1,774	)		—			—			(1,774	)
Comprehensive income																					1,777
Cash dividends paid ($0.52 per share)		—		—		(2,287	)		—			—			—			—			(2,287	)
Purchase of treasury stock		—		—		—			(2,239	)		—			—			—			(2,239	)
Distribution of company stock from deferred compensation plan		—		—		—			—			—			232			(232	)		—
Exercise of stock options and related tax benefits		48		1,127		—			—			—			—			—			1,175
Balance at June 30, 2005	$	7,784	$	56,440	$	103,267		$	(59,033	)	$	(17	)	$	(321	)	$	321		$	108,441

See accompanying condensed notes to consolidated financial statements.

6

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For The Six Months Ended June 30, 2004 (Unaudited)

(In thousands except share data)

	COMMON STOCK		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS			TREASURY STOCK			ACCUMULATED OTHER COMPREHENSIVE INCOME			SHARES HELD IN RABBI TRUST			DEFERRED COMPENSATION OBLIGATION		TOTAL
Balance at December 31, 2003	$	7,688	$	54,417	$	99,038		$	(54,177	)	$	3,961		$	(515	)	$	515	$	110,927
Net Income		—		—		3,683			—			—			—			—		3,683
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of reclassification adjustment (Note 9)		—		—		—			—			(3,811	)		—			—		(3,811	)
Comprehensive loss																				(128	)
Cash dividends paid ($0.50 per share)		—		—		(2,215	)		—			—			—			—		(2,215	)
Purchase of treasury stock		—		—		—			(1,473	)		—			—			—		(1,473	)
Purchase of company stock for deferred compensation plan (Note 8)		—		—		—			—			—			(52	)		52		—
Exercise of stock options and related tax benefits		29		529		—			—			—			—			—		558
Balance at June 30, 2004	$	7,717	$	54,946	$	100,506		$	(55,650	)	$	150		$	(567	)	$	567	$	107,669

See accompanying condensed notes to consolidated financial statements.

7

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended June 30,
	2005			2004
	(In thousands)
Cash flows from operating activities:
Net income	$	3,551		$	3,683
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		303			356
Loan interest capitalized		(6	)		(3	)
Increase (decrease) in accrued interest receivable		(104	)		130
Decrease in other liabilities		(9,078	)		(3,767	)
(Increase) decrease in income tax receivable, net		(178	)		165
Amortization of premiums (accretion of discounts) on securities, net		(53	)		401
Net trading securities activity		28,286			(5,859	)
Gains on securities available for sale, net		(130	)		(1,043	)
(Gains) losses on trading securities, net		(58	)		283
Decrease in deferred mortgage loan origination fees, net of amortization		(59	)		(129	)
Deferred income tax expense (benefit)		236			(180	)
Decrease in other assets		7,963			4,129
Provision (credit) for loan losses		(53	)		(113	)
Provision (credit) for off-balance sheet credit exposures		(3	)		(10	)
Gain on sale of equipment		—			(4	)
Net cash provided by (used in) operating activities		30,617			(1,961	)
Cash flows from investing activities:
Net decrease (increase) in interest-bearing bank deposits		1,168			(308	)
Proceeds from sales of investment securities available-for-sale		21,910			16,634
Proceeds from maturities and redemption of investment securities available-for-sale		64,961			95,000
Purchases of investment securities available-for-sale		(69,640	)		(127,310	)
Purchases of mortgage-backed securities available-for-sale		(25,641	)		(50,922	)
Principal repayments of mortgage-backed securities		16,453			20,150
Principal repayments of securities available-for-sale		—			1
Loans originated		(22,498	)		(33,393	)
Loan principal payments received		28,830			41,803
Proceeds from sales of equipment		—			4
Purchases of premises & equipment		(104	)		(76	)
Net cash provided by (used in) investing activities		15,439			(38,417	)

8

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited)

	Six Months Ended June 30,
	2005			2004
	(In thousands)
Cash flows from financing activities:
Net decrease in deposits		(32,276	)		(21,791	)
Decrease in escrow deposits of borrowers		(173	)		(190	)
Payments to acquire treasury stock		(2,239	)		(1,473	)
Purchase of Company stock for deferred compensation plan		—			(52	)
Increase in deferred compensation obligation		—			52
Options exercised, including tax benefit		1,175			558
Cash dividends paid on common stock		(2,287	)		(2,215	)
Net cash used in financing activities		(35,800	)		(25,111	)
Net increase (decrease) in cash and cash equivalents		10,256			(65,489	)
Cash and cash equivalents at beginning of period		204,079			222,910
Cash and cash equivalents at end of period	$	214,335		$	157,421
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest	$	7,164		$	6,224
Cash paid during the period for taxes, net of refunds		1,460			1,790

See accompanying condensed notes to consolidated financial statements.

9

MASSBANK CORP.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The financial condition and results of operations of MASSBANK Corp. (the “Company”) essentially reflect the operations of its subsidiary, MASSBANK (the “Bank”). All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and in the opinion of management, include all adjustments of a normal recurring nature necessary for the fair presentation of the financial condition of the Company as of June 30, 2005 and December 31, 2004, and its operating results for the three months and six months ended June 30, 2005 and 2004. The results of operations for any interim period are not necessarily indicative of the results to be expected for the entire year.

Certain amounts in the prior years’ consolidated financial statements were reclassified to facilitate comparison with the current fiscal year.

The information in this report should be read in conjunction with the financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2004.

(2) Stock-Based Employee Compensation

MASSBANK Corp. utilizes stock options to compensate its officers and non- employee directors. Options are issued pursuant to plans approved by the Company’s shareholders. Under the Company’s Stock Incentive Plan (“the Plan”), options to purchase MASSBANK Corp. common stock have been granted to bank officers and non-employee directors of the Company at prices equal to the fair market value of the underlying stock on the dates the options were granted. The options have all been 100% vested at date of grant, and expire in 10 years.

The Company applies the intrinsic-value-based method 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. Statement of Financial Accounting Standards (“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, to require prominent disclosures in both annual and interim financial statements about the methods of accounting for stock-based employee compensation and the effect of the method used on reported results.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123-Revised 2004 (“SFAS 123(R)”), “Share-Based Payment”. This is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB No. 25, Accounting for Stock issued to Employees. Under SFAS No. 123(R), the Company will be required to measure the cost of employee services received in exchange for stock based on the grant-date fair value (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The fair value will be estimated using an option-pricing model. Excess tax benefits, as defined in SFAS 123(R), will be recognized as an addition to paid-in capital. This was scheduled to become effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, the Securities and Exchange Commission (SEC) recently announced the adoption of a new rule that delays the compliance dates for the adoption of FASB statement No. 123 (revised 2004) Share-Based Payment (“FAS 123(R)”).

10

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

The SEC’s new rule allows companies to implement FAS 123(R) at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The Company is currently in the process of evaluating the impact of SFAS 123(R) on the consolidated financial statements, including different option-pricing models.

The following pro forma table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123. The fair value of stock options was determined using the Black Scholes option-pricing model.

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2005		2004		2005			2004
Net income, as reported	$	1,857	$	1,734	$	3,551		$	3,683
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		—		—		(161	)		(168	)
Pro forma net income	$	1,857	$	1,734	$	3,390		$	3,515
EARNINGS PER SHARE:
Basic – as reported	$	0.42	$	0.39	$	0.81		$	0.83
Basic – pro forma	$	0.42	$	0.39	$	0.77		$	0.79
Diluted – as reported	$	0.42	$	0.39	$	0.80		$	0.81
Diluted – pro forma	$	0.42	$	0.39	$	0.76		$	0.78
Weighed average fair value					$	8.11		$	9.59
Expected life						7.3 yrs			7.3 yrs
Risk-free interest rate						3.97	%		3.48	%
Expected volatility						21.2	%		21.9	%
Expected dividend yield						2.80	%		2.33	%

11

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(3) Recent Accounting Pronouncements:

(a) In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123R, Share-Based Payment which revised SFAS No. 123, Accounting for Stock-Based Compensation. This Statement supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and related implementation guidance and amends SFAS No. 95, Statement of Cash Flows. It requires that all stock-based compensation now be measured at fair value and recognized as expense in the income statement. This Statement also clarifies and expands guidance on measuring fair value of stock compensation, requires estimation of forfeitures when determining expense, and requires that excess tax benefits be shown as financing cash inflows versus a reduction of taxes paid in the statement of cash flows. Various other changes are also required. This Statement is effective beginning January 1, 2006 for public companies as a result of recent SEC actions. Management expects no significant effect on the Company’s financial statement as a result of the adoption of this Statement.

(4) 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.

(5) Short-Term Investments

Short-term investments consist of the following:

(In thousands)	At June 30, 2005		At December 31, 2004
Federal funds sold (overnight)	$	184,955	$	193,728
Term federal funs sold		20,000		—
Money market investment funds		—		302
Interest-bearing bank money market accounts		3		220
Total short-term investments	$	204,958	$	194,250

The investments above are stated at cost, which approximates market value, and have original maturities of less than 90 days.

(6) Commitments

At June 30, 2005, the Company had outstanding commitments to originate mortgage loans and to advance funds for construction loans amounting to $4,321,000 and commitments under existing home equity lines of credit and other loans of approximately $37,742,000 which are not reflected on the consolidated balance sheet. The Bank maintains an allowance for loan losses on off-balance sheet credit exposures. At June 30, 2005 this allowance, which is shown separately on the balance sheet, totaled $585,000.

12

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(7) 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 period.

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 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.

Earnings per share was calculated as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2005		2004		2005		2004
Denominator for basic earnings per share:
Average common shares outstanding		4,390		4,416		4,395		4,422
Dilutive common stock options		62		86		67		102
Denominator for diluted earnings per share		4,452		4,502		4,462		4,524
Numerator: Net income attributable to common shares	$	1,857	$	1,734	$	3,551	$	3,683
Earnings per share:
Basic	$	0.42	$	0.39	$	0.81	$	0.83
Diluted		0.42		0.39		0.80		0.81

(8) 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 (1) their attaining the age of 72, or (2) their termination as a director of the Company. The Plan was later amended to allow the directors’ compensation to be invested in Company stock held in a rabbi trust. At June 30, 2005 the trust held 14,744 shares of MASSBANK Corp. common stock which were purchased in the open market or in private transactions over a period of time. The deferred compensation obligation of the Plan may be settled only by delivery of the shares of MASSBANK Corp. stock to the directors participating in the Plan. These shares are considered outstanding in the computation of earnings per share and book value per share.

13

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(9) Comprehensive Income (Loss)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).

The components of other comprehensive income (loss) and related tax effect for the six months ended June 30, 2005 and 2004 are as follows:

	For the Six Months Ended June 30,
(In thousands)	2005			2004
Unrealized holding losses arising during period	$	(2,756	)	$	(5,120	)
Less: reclassification adjustment for gains realized in income		130			1,043
Net unrealized losses		(2,886	)		(6,163	)
Tax (expense) or benefit		1,112			2,352
Other comprehensive loss	$	(1,774	)	$	(3,811	)

14

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(10) 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.

The following table sets forth the amount of net periodic pension expense recognized for the three months and six months ended June 30, 2005 and 2004:

Pension Benefits

	Three months ended June 30,						Six months ended June 30,
(In thousands)	2005			2004			2005			2004
Service cost	$	115		$	108		$	230		$	215
Interest cost		137			131			273			262
Expected return on plan assets		(152	)		(137	)		(304	)		(273	)
Amortization of prior service cost		(4	)		(4	)		(7	)		(7	)
Amortization of net (gains) losses		12			2			24			4
Net periodic pension expense	$	108		$	100		$	216		$	201

The Bank made its annual contribution to its defined benefit pension plan in the amount of $364 thousand in the first quarter of 2005.

15

PART I. ITEM 2

MASSBANK CORP. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION & ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 30, 2005

Forward-Looking Statement Disclosure.

This Form 10-Q 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 stock- holders, 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 markets for equities, bonds, federal funds and other financial instruments;

• An increase in the level of the Company’s 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 its loan originations;

• A decrease in its deposits; and

• A limit on the ability of the Company to attract and retain banking customers;

• Adverse legislative or regulatory developments;

• A significant decline in residential real estate values in the Company’s market area;

• Adverse impacts resulting from the continuing war on terrorism;

• An increase in employee-related costs, including healthcare expenses; and

• The impact of deflation or inflation, and other factors described in the Company’s annual report on Form 10-K.

16

Critical Accounting Policies

The Company’s consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. 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.

Provisions (Credit) for Loan Losses

The provision (credit) for loan losses represents a charge or credit against current earnings and an addition to or deduction from 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 (“loan allowance”). Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient loan allowance. 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.

The provision (credit) for loan losses on off-balance sheet credit exposures represents a charge or credit against current earnings (reported in other non-interest expense) and an addition to or deduction from the allowance for loan losses on off-balance sheet credit exposures (“off-balance sheet exposures”). In determining the amount to provide for off-balance sheet exposures, the key factor is the adequacy of the balance. The balance of the off-balance sheet exposures is maintained based on expected drawdowns of committed loans, their loss experience factors, 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.

Any significant changes in these assumptions and/or conditions could result in higher than estimated 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 allowances. Such agencies may require the Bank to recognize additional allowances based on judgements different from those of management, which could also adversely affect the Company’s earnings results.

Investment Securities Other Than Temporarily Impaired

Management judgment is involved in the evaluation of declines in value (“impairment”)of individual investment securities held by the Company. Declines in value 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 of other than temporarily impaired securities, 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 and the length of time and extent to which the market value has been less than cost.

17

Investment Securities Other Than Temporarily Impaired (continued)

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, and in each case the value of the investment security has been below its cost basis for the entire period in question, then the security is considered “other than temporarily impaired” and it is written down to its current fair market value and the loss is recognized in earnings. 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. There were no other than temporary impairment write downs of investment securities in the first half of 2005 or 2004.

Securities available-for-sale deemed temporarily impaired are carried at market value in the asset section of the Company’s balance sheet. Any change in value is reflected in accumulated other comprehensive income (loss) in the stockholders’ equity section of the Company’s balance sheet.

18

FINANCIAL OVERVIEW

MASSBANK Corp. provides a broad range of banking services through its subsidiary, MASSBANK (“the Bank”). The Bank offers a full range of retail and commercial deposit products through its fifteen banking offices located in Eastern Massachusetts. The Bank’s lending business includes residential and commercial real estate mortgages, construction loans, commercial loans and a variety of consumer loans. The Bank’s loan portfolio is concentrated among borrowers from the municipalities in which it operates banking offices and all of the contiguous cities and towns. The Bank also invests a significant portion of its funds in U.S. Treasury and Government agency securities, mortgage-backed securities, federal funds sold and other authorized investments. The Bank’s earnings depend largely upon net interest income. Securities gains are also an important source of revenue for the Bank.

The Bank faces strong competition from banks and other financial services providers in our market area. The principal methods of competition are through interest rates, financing terms and other customer conveniences. Among the external factors affecting MASSBANK’s operating results are market interest rates, the shape of the U.S. Treasury securities yield curve, the condition of the financial markets and both regional and national economic conditions.

For the quarter ended June 30, 2005, MASSBANK Corp. reported net income of $1,857,000 or $0.42 in basic and diluted earnings per share compared to net income of $1,734,000 or $0.39 in basic and diluted earnings per share in the second quarter of 2004. This represents an increase of 7.7% over the earnings per share results of the prior year.

The improvement in the second quarter 2005 earnings and operating ratios was mainly due to an increase in net interest income. Net interest income, the Company’s core earnings, totaled $5,395,000 for the second quarter of 2005, up $370,000 or 7.4% from the same quarter in 2004. This is the third consecutive quarter that the Company has reported a year-over-year improvement in net interest income. The net interest margin in the recent quarter improved 26 basis points to 2.36% from 2.10% in the second quarter of 2004. This is an increase of 12.4% over the same quarter last year. The Company continues to benefit from rising short-term interest rates. The Federal Reserve Bank Board’s Federal Open Market Committee (FOMC) has raised the target rate for Federal Funds by 25 basis points nine times since the end of June 2004, increasing the rate from 1.00% to 3.25%.

19

FINANCIAL OVERVIEW (continued)

Earnings results for the second quarter of 2005 included the following that are more fully disclosed below:

• An improvement in net interest income of $370,000 due primarily to a rise in short-term interest rates.

• No credit for loan losses as in the second quarter of 2004.

• Securities gains of $244,000 versus gains of $186,000 in the second quarter of 2004.

• An increase in non-interest expense of $208,000, attributable primarily to an increase in salaries and employee benefits, and professional services expense.

(In thousands) Quarters Ended June 30,	2005		2004			Variance
Income Statement Data
Interest and dividend income:
Mortgage and other loans	$	3,202	$	3,611		$	(409	)
Mortgage-backed securities		1,816		1,540			276
Federal funds sold		1,458		439			1,019
Other		2,593		2,531			62
Total interest and dividend income		9,069		8,121			948
Total interest expense		3,674		3,096			(578	)
Net interest income		5,395		5,025			370
Provision (credit) for loan losses		—		(51	)		(51	)
Gains on securities, net		244		186			58
Other non-interest income		341		342			(1	)
Non-interest expense		3,172		2,964			(208	)
Income tax expense		951		906			(45	)
Net income	$	1,857	$	1,734		$	123
Diluted earnings per share	$	0.42	$	0.39		$	0.03
(In thousands) Quarters Ended June 30,	2005		2004			Variance
Average Balance Sheet Data
Earning assets:
Mortgage and other loans	$	230,263	$	245,294		$	(15,031	)
Mortgage-backed securities		136,108		106,814			29,294
Federal funds sold		200,069		183,480			16,589
Short-term investments		1,938		30,600			(28,662	)
Other securities available for sale and trading		347,442		394,412			(46,970	)
Total earning assets	$	915,820	$	960,600		$	(44,780	)
Total deposits	$	827,678	$	867,737		$	(40,059	)

20

FINANCIAL OVERVIEW (Continued)

Condensed Consolidated Balance Sheets

(In Thousands)	June 30, 2005			December 31, 2004			Variance
Assets:
Short-term investments	$	204,958		$	194,250		$	10,708
Interest-bearing deposits in banks		1,550			2,718			(1,168	)
Securities available-for-sale, at market value		433,279			443,753			(10,474	)
Securities held-to-maturity		4,595			4,877			(282	)
Trading securities, at market value		30,785			59,013			(28,228	)
Total investments		675,167			704,611			(29,444	)
Total loans		229,930			236,198			(6,268	)
Allowance for loan losses		(1,253	)		(1,307	)		54
Net loans		228,677			234,891			(6,214	)
Other assets		29,220			36,666			(7,446	)
Total assets	$	933,064		$	976,168		$	(43,104	)
Liabilities:
Total deposits	$	817,189		$	849,465		$	(32,276	)
Escrow deposits of borrowers		901			1,074			(173	)
Other liabilities		6,533			15,614			(9,081	)
Total liabilities		824,623			866,153			(41,530	)
Total stockholders’ equity		108,441			110,015			(1,574	)
Total liabilities and stockholders’ equity	$	933,064		$	976,168		$	(43,104	)

Financial Condition

The Company’s total assets were $933.1 million at June 30, 2005, compared to $976.2 million at December 31, 2004 reflecting a decrease of $43.1 million. This was due largely to a decrease in total deposits.

21

Investments

At June 30, 2005 the Company’s total investments were $675.2 million representing 72.4% of total assets compared to $704.6 million representing 72.2% of total assets at December 31, 2004. Total investments have decreased $29.4 million from year-end 2004 due primarily to a decrease in trading securities. The trading securities portfolio was reduced to fund the outflow of bank deposits. The Company’s investments in the recent quarter also reflect a modest shift from the securities available-for-sale portfolio to short-term investments.

Loans

The loan portfolio, net of allowance for loan losses, decreased $6.2 million or 2.6% in the first half of 2005. At June 30, 2005 the loan portfolio, net of allowance for loan losses, totaled $228.7 million representing 24.5% of total assets compared to $234.9 million representing 24.1% of total assets at December 31, 2004. The decrease in loans is due to regular principal payments and prepayments exceeding the volume of new loan originations. New loan originations totaled $14.4 million in the second quarter of 2005 compared to $20.8 million in the second quarter of 2004. For the first six months of 2005, new loan originations totaled $22.5 million compared to $33.4 million in the first six months of 2004.

The Bank’s loan portfolio consists predominately of residential mortgages. Residential mortgage loans amounted to $220.1 million at June 30, 2005, representing 95.7% of the loan portfolio. See page 39 of this Form 10-Q for a table setting forth the composition of the loan portfolio at June 30, 2005 and December 31, 2004.

Non-Performing Assets

Non-accrual loans, generally those loans that are 90 days or more delinquent, were $343,000 at June 30, 2005 as compared to $74,000 at December 31, 2004 and $398,000 as of June 30, 2004. This represents 0.15% of total loans at June 30, 2005. The Bank had no impaired loans or real estate acquired through foreclosure at June 30, 2005.

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.

Deposits at June 30, 2005 totaled $817.2 million, reflecting a decrease of $32.3 million or 3.8% from $849.5 million at December 31, 2004. In the first six months of 2005 we saw an outflow of deposits due to increased competition for deposits and some deposits being reinvested in the stock market and other types of investments.

For information concerning deposit balances at June 30, 2005 and December 31, 2004, see page 42 of this Form 10-Q.

22

Stockholders’ Equity

Total stockholders’ equity decreased $1.6 million to $108.4 million at June 30, 2005 representing a book value of $24.83 per share. This compares to $110.0 million representing a book value of $25.11 per share at December 31, 2004.

The decrease in stockholders’ equity was essentially the result of the following: a decrease in accumulated other comprehensive income of $1.8 million due primarily to the decline in market value of the Company’s debt securities portfolio as a result of rising interest rates; the payment of dividends to stockholders of $2.3 million; and the Company’s repurchase of treasury stock in the amount of $2.2 million during the first six months of 2005. This was partially offset by the Company’s net income for the first half of 2005 of $3.5 million and the payments and related tax benefits received from the exercise of stock options by the Company’s officers and directors of $1.2 million.

Comparison of Operating Results for the Three Months ended June 30, 2005 and 2004.

Net interest income

Net interest income totaled $5,395,000 in the second quarter of 2005, up $370,000 from the same quarter in 2004. This improvement is primarily attributable to an increase in interest income on federal funds sold due to a rise in short-term interest rates.

The increase in net interest income reflects an increase in net interest margin and a decrease in average earning assets. Net interest margin represents the relationship between net interest income and average earning assets. Net interest margin is affected by several factors, including fluctuations in the overall interest rate environment, funding strategies, and the mix of interest earning assets and interest bearing liabilities. The Company’s net interest margin for the three months ended June 30, 2005 improved 26 basis points to 2.36% from 2.10% reported in the second quarter of last year. Average earning assets for the quarter ended June 30, 2005 decreased $44.8 million to $915.8 million, from $960.6 million in the same quarter of 2004.

23

Interest and Dividend Income

Interest and dividend income on a fully taxable equivalent basis for the three months ended June 30, 2005 increased $952,000 or 11.7% to $9,083,000 from $8,131,000 for the three months ended June 30, 2004. The increase in interest and dividend income resulted from an increase in yield on the Company’s average earning assets, partially offset by a decrease in interest income resulting from a decrease of $44.8 million in average earning assets. As reflected in the table on page 25 of this report, the yield on the Company’s average earning assets in the second quarter of 2005 was 3.97%, as compared to 3.39% in the same quarter of 2004. The improvement in yield on the Company’s average earning assets is primarily attributable to an increase in interest income on federal funds sold due to higher short-term interest rates.

Interest Expense

Total interest expense for the three months ended June 30, 2005 increased $578,000, or 18.7% to $3,674,000 from $3,096,000 for the three months ended June 30, 2004. The increase in interest expense is due primarily to the higher interest rate environment in 2005 and the continued shift in the bank’s deposit mix from savings accounts to certificates of deposit accounts. This has resulted in an increase in the Company’s average cost of funds, from 1.43% in the second quarter of 2004 to 1.78% in the second quarter of 2005. The increase in interest expense resulting from the higher average cost of funds was partially offset by a decrease in interest expense resulting from a decrease in the Company’s average deposits. The Company’s average deposits in the recent quarter, as shown in the table on page 26, decreased approximately $40.0 million or 4.6% to $827.7 million, from $867.7 million in the same quarter of the prior year.

24

	AVERAGE BALANCE SHEETS Three Months Ended June 30,
	2005							2004
(In thousands)	Average Balance			Interest Income/ Expense (1)		Average Yield/ Rate		Average Balance			Interest Income/ Expense (1)		Average Yield/ Rate
Assets:
Earning assets:
Federal funds sold	$	200,069		$	1,458	2.92	%	$	183,480		$	439	0.96	%
Short-term investments (4)		1,938			15	3.21			30,600			95	1.25
Securities available-for-sale:
Other securities (2)		314,434			2,407	3.06			317,636			2,137	2.69
Mortgage-backed securities (2)		131,438			1,756	5.34			103,029			1,492	5.79
Mortgage-backed securities held-to-maturity		4,670			60	5.20			3,785			48	5.02
Trading securities		33,008			185	2.24			76,776			309	1.61
Mortgage loans (3)		220,317			3,038	5.52			234,627			3,445	5.87
Other loans (3)		9,946			164	6.61			10,667			166	6.24
Total earning assets		915,820		$	9,083	3.97	%		960,600		$	8,131	3.39	%
Allowance for loan losses		(1,253	)						(1,490	)
Total earning assets less allowance for loan losses		914,567							959,110
Other assets		24,592							25,016
Total assets	$	939,159						$	984,126

(1) Dividend income on equity securities is included on a tax equivalent basis.

(2) Average balances include net unrealized gains (losses) on securities available-for-sale.

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

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

25

	AVERAGE BALANCE SHEETS - (continued) Three Months Ended June 30,
	2005						2004
(In thousands)	Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate
Liabilities:
Deposits:
Demand and NOW	$	87,056	$	48	0.22	%	$	85,383	$	44	0.21	%
Savings		513,563		1,998	1.56			593,173		2,149	1.46
Time certificates of deposit		227,059		1,628	2.88			189,181		903	1.92
Total deposits		827,678		3,674	1.78			867,737		3,096	1.43
Other liabilities		3,691						6,774
Total liabilities		831,369						874,511
Stockholders’ equity		107,790						109,615
Total liabilities and stockholders’ equity	$	939,159					$	984,126
Net interest income (tax-equivalent basis)				5,409						5,035
Less adjustment for tax-exempt interest income				14						10
Net interest income			$	5,395					$	5,025
Interest rate spread (5)					2.19	%					1.96	%
Net interest margin (6)					2.36	%					2.10	%

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

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

26

Provision (Credit) for Loan Losses

The Bank, in the second quarter of 2005, recorded a zero provision for loan losses as compared to a negative provision for loan losses of $51,000 in the same quarter of last year. The Bank’s loan portfolio in the recent quarter decreased a modest $0.4 million. In the first six months of 2005 the loan portfolio decreased $6.3 million or 2.7% from $236.2 million at December 31, 2004 to $229.9 million at June 30, 2005.

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 June 30, 2005, the allowance for loan losses was $1.3 million representing 0.54% of total loans and 365% of non-accrual loans. This compares to $1.3 million representing 0.55% of total loans and 1,766% of non-accrual loans at December 31, 2004. Non-accrual loans totaled $343,000 at June 30, 2005. This compares to $74,000 at December 31, 2004 and $398,000 a year earlier. Management believes that the allowance for loan losses as of June 30, 2005 is adequate to cover the risks inherent in the loan portfolio under current conditions.

The Bank also maintains an allowance for loan losses on off-balance sheet credit exposures (shown separately on the balance sheet) that totaled $585,000 and $588,000 at June 30, 2005 and December 31, 2004, respectively. This is intended to protect the Bank against losses on loan commitments made to customers that have not yet been drawn down.

27

Non-Interest Income

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

Non-interest income increased $57,000 to $585,000 in the recent quarter, from $528,000 in the comparable quarter of the prior year.

In the second quarter 2005, the Company recorded net gains on securities of $244,000 compared to net securities gains of $186,000 in the same quarter last year. Net securities gains in the recent quarter consisted of net gains on securities available for sale of $72,000 and net gains on trading securities of $172,000. This compares to net gains on securities available for sale of $679,000 and net losses on trading securities of $493,000 in the second quarter of 2004. The Company’s equity securities portfolio had net unrealized gains of $350,000 as of June 30, 2005; and the Company’s debt securities portfolio had net unrealized losses of $327,000 as of the end of the recent quarter. See page 35 of this report for more detail concerning the Company’s investment securities.

The Bank’s deposit account service fees and other non-interest income totaled $101,000 and $240,000, respectively, for the second quarter of 2005. This compares to $112,000 and $230,000, respectively, in the second quarter of 2004. The combined total of this income is essentially unchanged from the same quarter of the prior year.

Non-Interest Expense

Non-interest expense increased $208,000 or 7.0% to $3,172,000 for the three months ended June 30, 2005 compared to the same period in 2004.

Salaries and employee benefits, the largest component of non-interest expense increased $143,000 or 7.8% to $1,974,000 in the recent quarter, from $1,831,000 in the comparable quarter of 2004. The increase is primarily attributable to an increase in employee salary expense and directors’ fees of $72,000 or 5.2% and an increase in the cost of various employee benefits of $71,000, including an increase of $25,000 in Employee Stock Ownership Plan (“ESOP”) expense.

Professional services expenses increased $32,000 compared to the same quarter of the prior year due mainly to the increased audit fees accrued for the Company’s independent registered public accountants.

All other non-interest expenses combined increased $33,000 or 3.2% to $1,063,000 for the three months ended June 30, 2005 from $1,030,000 for the three months ended June 30, 2004.

Income Tax Expense

The Company, the Bank and its subsidiaries file a consolidated federal income tax return. The Parent Company, the Bank and its subsidiaries are subject to a Massachusetts Corporate Excise Tax as calculated in separately filed Massachusetts tax returns.

The Company recorded income tax expense of $951,000 in the second quarter of 2005, an increase of $45,000 when compared to the same quarter last year. The increase in income tax expense is due primarily to an increase in income before income taxes partially offset by a decrease in effective income tax rate. The Company’s income before income taxes was $2,808,000 in the recent quarter compared to $2,640,000 for the same quarter a year ago. The effective income tax rate for the three months ended June 30, 2005 and 2004 was 33.9% and 34.3%, respectively.

28

Comparison of Operating Results for the Six Months ended June 30, 2005 and 2004

FINANCIAL OVERVIEW

For the six months ended June 30, 2005, the Company reported net income of $3,551,000, or $0.80 in diluted earnings per share compared to net income of $3,683,000 or $0.81 in diluted earnings per share for the first six months of 2004. Basic earnings per share in the first six months of 2005 were $0.81 per share compared to $0.83 per share in the same period of the prior year. Return on average assets and return on average equity were 0.75% and 6.55%, respectively, in the first six months of 2005 compared to 0.75% and 6.65%, respectively, in the same period of 2004.

Earnings results for the first six months of 2005 included the following that are more fully disclosed below:

• An improvement in net interest income of $433,000 due primarily to a rise in short-term interest rates.

• Negative provision for loan losses in the amount of $53,000, which was $60,000 less than the credit of $113,000 recorded in the first six months of last year.

• Net securities gains of $188,000 versus gains of $760,000 in the first half of 2004.

• An increase in non-interest expense of $79,000 or 1.3% over the same period of the prior year

(In thousands) Six Months Ended June 30,	2005			2004			Variance
Income Statement Data
Interest and dividend income:
Mortgage and other loans	$	6,476		$	7,362		$	(886	)
Mortgage-backed securities		3,596			3,025			571
Federal funds sold		2,588			925			1,663
Other		5,174			5,154			20
Total interest and dividend income		17,834			16,466			1,368
Total interest expense		7,135			6,200			935
Net interest income		10,699			10,266			433
Provision (credit) for loan losses		(53	)		(113	)		(60	)
Gains on securities, net		188			760			(572	)
Other non-interest income		594			629			(35	)
Non-interest expense		6,203			6,124			(79	)
Income tax expense		1,780			1,961			181
Net income	$	3,551		$	3,683		$	(132	)
Diluted earnings per share	$	0.80		$	0.81		$	(0.01	)
(In thousands) Six Months Ended June 30,	2005			2004			Variance
Average Balance Sheet Data
Earning assets:
Mortgage and other loans	$	231,867		$	247,748		$	(15,881	)
Mortgage-backed securities		133,675			103,106			30,569
Federal funds sold		194,456			193,263			1,193
Short-term investments		2,178			26,563			(24,385	)
Other securities available for sale and trading		361,928			393,846			(31,918	)
Total earning assets	$	924,104		$	964,526		$	(40,422	)
Total deposits	$	834,251		$	870,099		$	(35,848	)

29

	AVERAGE BALANCE SHEETS Six Months Ended June 30,
	2005							2004
(In thousands)	Average Balance			Interest Income/ Expense (1)		Average Yield/ Rate		Average Balance			Interest Income/ Expense (1)		Average Yield/ Rate
Assets:
Earning assets:
Federal funds sold	$	194,456		$	2,588	2.68	%	$	193,263		$	925	0.96	%
Short-term investments (4)		2,178			33	3.08			26,563			172	1.30
Securities available-for-sale:
Other securities (2)		320,523			4,735	2.95			319,815			4,418	2.76
Mortgage-backed securities (2)		128,906			3,474	5.39			101,214			2,977	5.88
Mortgage-backed securities held-to-maturity		4,769			122	5.12			1,892			48	5.04
Trading securities		41,405			433	2.11			74,031			594	1.60
Mortgage loans (3)		221,897			6,150	5.54			236,838			7,027	5.93
Other loans (3)		9,970			326	6.59			10,910			335	6.17
Total earning assets		924,104		$	17,861	3.87	%		964,526		$	16,496	3.42	%
Allowance for loan losses		(1,280	)						(1,521	)
Total earning assets less allowance for loan losses		922,824							963,005
Other assets		25,754							25,091
Total assets	$	948,578						$	988,096

(1) Dividend income on equity securities is included on a tax equivalent basis.

(2) Average balances include net unrealized gains (losses) on securities available-for-sale.

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

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

30

	AVERAGE BALANCE SHEETS - (continued) Six Months Ended June 30,
	2005						2004
(In thousands)	Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate
Liabilities:
Deposits:
Demand and NOW	$	85,589	$	93	0.22	%	$	84,028	$	88	0.21	%
Savings		530,700		4,055	1.54			597,450		4,345	1.46
Time certificates of deposit		217,962		2,987	2.76			188,621		1,767	1.88
Total deposits		834,251		7,135	1.72			870,099		6,200	1.43
Other liabilities		5,869						7,308
Total liabilities		840,120						877,407
Stockholders’ equity		108,458						110,689
Total liabilities and stockholders’ equity	$	948,578					$	988,096
Net interest income (tax-equivalent basis)				10,726						10,296
Less adjustment for tax-exempt interest income				27						30
Net interest income			$	10,699					$	10,266
Interest rate spread (5)					2.15	%					1.99	%
Net interest margin (6)					2.32	%					2.14	%

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

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

31

Net Interest Income

Net interest income totaled $10,699,000 for the six months ended June 30, 2005, up $433,000 from the same period in 2004. The improvement in net interest income is primarily attributable to an increase in interest income on federal funds sold due to a rise in short-term interest rates.

The increase in net interest income reflects an increase in net interest margin and a decrease in average earning assets. Net interest margin represents the relationship between net interest income and average earning assets. Net interest margin is affected by several factors, including fluctuations in the overall interest rate environment, funding strategies, and the mix of interest earning assets and interest bearing liabilities. The Company’s net interest margin for the six months ended June 30, 2005 improved 18 basis points to 2.32% from 2.14% reported in the first six months of last year. Average earning assets for the six months ended June 30, 2005 decreased $40.4 million to $924.1 million, from $964.5 million in the same period of 2004.

Interest and Dividend Income

Interest and dividend income on a fully taxable equivalent basis for the six months ended June 30, 2005 increased $1,365,000 or 8.3% to $17,861,000 from $16,496,000 for the six months ended June 30, 2004. The increase in interest and dividend income resulted from an increase in yield on the Company’s average earning assets, partially offset by a decrease in interest income resulting from a decrease of $40.4 million in average earning assets. As reflected in the table on page 30 of this report, the yield on the Company’s average earning assets in the first half of 2005 was 3.87%, as compared to 3.42% in the same period of 2004. The improvement in yield on the Company’s average earning assets is primarily attributable to an increase in interest income on federal funds sold due to higher short-term interest rates.

Interest Expense

Total interest expense for the six months ended June 30, 2005 increased $935,000, or 15.1% to $7,135,000 from $6,200,000 for the six months ended June 30, 2004. The increase in interest expense is due primarily to the higher interest rate environment in 2005 and the continued shift in the Bank’s deposit mix from savings accounts to certificates of deposit accounts. This has resulted in an increase in the Company’s average cost of funds, from 1.43% in the first half of 2004 to 1.72% in the first half of 2005. The increase in interest expense resulting from the higher average cost of funds was partially offset by a decrease in interest expense resulting from a decrease in the Company’s average deposits. The Company’s average deposits in the first six months of 2005, as shown in the table on page 31, decreased $35.8 million or 4.1% to $834.3 million, from $870.1 million in the same period of the prior year.

32

Provision (Credit) for Loan Losses

In the first six months of 2005, the Bank recorded a negative provision for loan losses of $53,000, which was $60,000 less than the negative provision of $113,000 in the first six months of 2004. The negative provisions are due to reductions in the size of the bank’s loan portfolio and a low level of problem loans.

In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses (“loan allowance”). 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 loan allowance. 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. 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 the borrowers’ ability to pay, and trends in loan delinquencies and charge-offs.

At June 30, 2005, the allowance for loan losses was $1.3 million representing 0.54% of total loans and 365% of non-accrual loans. This compares to $1.3 million representing 0.55% of total loans and 1,766% of non-accrual loans at December 31, 2004. Non-accrual loans totaled $343,000 at June 30, 2005. This compares to $74,000 at December 31, 2004 and $398,000 a year earlier. Management believes that the allowance for loan losses as of June 30, 2005 is adequate to cover the risks inherent in the loan portfolio under current conditions.

The Bank also maintains an allowance for loan losses on off-balance sheet credit exposures (shown separately on the balance sheet) that totaled $585,000 and $588,000 at June 30, 2005 and December 31, 2004, respectively. This is intended to protect the Bank against loan commitments made to customers that have not yet been drawn down.

Non-Interest Income

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

Non-interest income decreased $607,000 to $782,000 in the six months ended June 30, 2005, from $1,389,000 in the comparable period of the prior year.

In the first six months of 2005, the Company recorded net gains on securities of $188,000 compared to net securities gains of $760,000 in the same period last year. Net securities gains in the first half of 2005 consisted of net gains on securities available for sale of $130,000 and net gains on trading securities of $58,000. This compares to net gains on securities available for sale of $1,043,000 and net losses on trading securities of $283,000 in the first half of 2004.

The Bank’s deposit account service fees and other non-interest income totaled $201,000 and $393,000, respectively, for the six months ended June 30,2005. This compares to $233,000 and $396,000, respectively, in the six months ended June 30,2004. Deposit account service fees have continued to decline due to a decrease in the number of deposit accounts subject to these types of charges.

33

Non-Interest Expense

Non-interest expense increased $79,000 or 1.3% to $6,203,000 for the six months ended June 30, 2005 compared to the same period in 2004. Salaries and employee benefits, the largest component of non-interest expense increased $21,000 or less than 1% to $3,749,000 for the first half of 2005 from $3,728,000 for the first half of 2004.

Professional services expenses increased $25,000 compared to the same period of the prior year due mainly to the increased audit fees accrued for the Company’s independent registered public accountants. All other non-interest expenses combined increased $33,000 or 1.5% to $2,189,000 for the six months ended June 30, 2005 from $2,156,000 for the six months ended June 30, 2004.

Income Tax Expense

The Company, the Bank and its subsidiaries file a consolidated federal income tax return. The Parent Company, the Bank and its subsidiaries are subject to a Massachusetts Corporate Excise Tax as calculated in separately filed Massachusetts tax returns.

The Company recorded income tax expense of $1,780,000 in the first half of 2005, a decrease of $181,000 when compared to the same period last year. The decrease in income tax expense is due primarily to a decrease in income before income taxes and a decrease in effective income tax rate. The Company’s income before income taxes was $5,331,000 in the first six months of 2005 compared to $5,644,000 for the same period a year ago. The effective income tax rate for the six months ended June 30, 2005 and 2004 was 33.4% and 34.7%, respectively.

34

FINANCIAL CONDITION

INVESTMENT SECURITIES

The amortized cost and market value of investment securities at June 30, 2005 with gross unrealized gains and losses follows:

(In thousands) At June 30, 2005	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Securities held-to-maturity:
Mortgage-backed securities:
Federal National Mortgage Association	$	4,595	$	45	$	—		$	4,640
Total securities held-to-maturity		4,595		45	$	—		$	4,640
Securities available-for-sale:
Debt securities:
U.S. Treasury obligations		89,219		56		(641	)		88,634
U.S. Government agency obligations		208,026		44		(2,338	)		205,732
Total		297,245		100		(2,979	)		294,366
Mortgage-backed securities:
Government National Mortgage Association		4,351		150		—			4,501
Federal Home Loan Mortgage Corporation		120,292		2,440		(71	)		122,661
Federal National Mortgage Association		3,539		33		—			3,572
Collateralized mortgage obligations		113		—		—			113
Total mortgage-backed securities		128,295		2,623		(71	)		130,847
Total debt securities available for sale		425,540		2,723		(3,050	)		425,213
Equity securities		7,716		632		(282	)		8,066
Total securities available-for-sale		433,256	$	3,355	$	(3,332	)	$	433,279
Net unrealized gains on securities available-for-sale		23
Total securities available for sale, net		433,279
Total investment securities, net	$	437,874

TRADING SECURITIES

The market value of trading securities is as follows:

(In Thousands) At June 30, 2005	Market Value
U.S. Treasury obligations	$	28,831
Marketable equity securities		1,950
Investments in mutual funds		4
Total trading securities	$	30,785

35

FINANCIAL CONDITION

INVESTMENT SECURITIES (continued)

The amortized cost and market value of investment securities at December 31, 2004 with gross unrealized gains and losses follows:

(In thousands) At December 31, 2004	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Securities held to maturity:
Mortgage-backed securities:
Federal National Mortgage Association	$	4,877	$	6	$	—		$	4,883
Total		4,877		6		—			4,883
Securities available-for-sale:
Debt securities:
U.S. Treasury obligations		125,491		126		(520	)		125,097
U.S. Government agency obligations		190,032		81		(1,594	)		188,519
Total		315,523		207		(2,114	)		313,616
Mortgage-backed securities:
Government National Mortgage Association		5,622		297		—			5,919
Federal Home Loan Mortgage Corporation		112,929		3,694		(66	)		116,557
Federal National Mortgage Association		94		4		—			98
Collateralized mortgage obligations		133		2		—			135
Total mortgage-backed securities		118,778		3,997		(66	)		122,709
Total debt securities available for sale		434,301		4,204		(2,180	)		436,325
Equity securities		6,534		933		(39	)		7,428
Total securities available-for-sale		440,835	$	5,137	$	(2,219	)	$	443,753
Net unrealized gains on securities available-for-sale		2,918
Total securities available for sale, net		443,753
Total investment securities, net	$	448,630

TRADING SECURITIES

The market value of trading securities is as follows:

(In Thousands) At December 31, 2004	Market Value
U.S. Treasury obligations	$	57,878
Marketable equity securities		1,131
Investments in mutual funds		4
Total trading securities	$	59,013

36

Investments (continued)

The amortized cost and market value of debt securities available-for-sale by contractual maturity at June 30, 2005 and December 31, 2004 are shown in the following tables. Actual maturities will differ from contractual maturities because of callable government agency securities in the Company’s portfolio that may be called prior to maturity.

	June 30, 2005
	Available-for-Sale
Maturing:	Amortized Cost		Market Value
	(In thousands)
Within 1 year	$	73,983	$	73,593
After 1 year but within 5 years		201,249		198,775
After 5 years but within 10 years		21,975		21,959
After 10 years but within 15 years		38		39
U.S. Treasury and Government agency obligations (a)		297,245		294,366
Mortgage-backed securities		128,295		130,847
Total	$	425,540	$	425,213
	December 31, 2004
	Available-for-Sale
Maturing:	Amortized Cost		Market Value
	(In thousands)
Within 1 year	$	87,905	$	87,748
After 1 year but within 5 years		201,620		199,913
After 5 years but within 10 years		25,958		25,915
After 10 years but within 15 years		40		40
U.S. Treasury and Government agency obligations (b)		315,523		313,616
Mortgage-backed securities		118,778		122,709
Total	$	434,301	$	436,325

(a) At June 30, 2005 the Company’s debt securities available-for-sale portfolio included U.S. Government agency obligations that can be called prior to maturity with an amortized cost of $167.0 million and a market value of $165.2 million.

(b) At December 31, 2004 the Company’s debt securities available-for-sale portfolio included U.S. Government agency obligations that can be called prior to maturity with an amortized cost of $160.0 million and a market value of $158.8 million.

37

INVESTMENT SECURITIES (continued)

The following table presents temporarily impaired investment securities as of June 30, 2005 and December 31, 2004.

Temporarily Impaired Investment Securities (Unaudited)

	Temporarily Impaired Less Than 12 Months					Temporarily Impaired 12 Months or Longer					Total
(In thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
June 30, 2005
Debt Securities:
U.S. Treasury obligations	$	46,522	$	(304	)	$	25,112	$	(337	)	$	71,634	$	(641	)
U.S. Government agency obligations		94,172		(817	)		82,483		(1,521	)		176,655		(2,338	)
Mortgaged-backed securities		3,735		(4	)		3,299		(67	)		7,034		(71	)
Total debt securities		144,429		(1,125	)		110,894		(1,925	)		255,323		(3,050	)
Equity securities		2,373		(282	)		—		—			2,373		(282	)
Total temporarily impaired investment securities
June 30, 2005	$	146,802	$	(1,407	)	$	110,894	$	(1,925	)	$	257,696	$	(3,332	)
December 31, 2004	$	206,136	$	(1,777	)	$	21,557	$	(442	)	$	227,693	$	(2,219	)

The gross unrealized losses on temporarily impaired investment securities at June 30, 2005 represents 0.8% of the total amortized cost of total investment securities. These unrealized losses were primarily attributable to an increase in interest rates. The Company has the ability to hold the securities for the time necessary to recover amortized cost.

38

LOANS

The composition of the Bank’s loan portfolio is summarized as follows:

(In thousands)	At June 30, 2005			At December 31, 2004
Mortgage loans:
Residential	$	217,932		$	224,587
Commercial		1,750			1,623
Construction		444			84
		220,126			226,294
Premium on loans		4			5
Deferred mortgage loan origination fees		(43	)		(102	)
Total mortgage loans		220,087			226,197
Other loans:
Consumer:
Installment		257			327
Guaranteed education		1,410			1,616
Other secured		453			504
Home equity lines of credit		7,481			7,284
Unsecured		152			161
Total consumer loans		9,753			9,892
Commercial		90			109
Total other loans		9,843			10,001
Total loans	$	229,930		$	236,198

The Bank’s loan portfolio decreased $6.3 million during the first six months of 2005, from $236.2 million at December 31, 2004 to $229.9 million at June 30, 2005. Mortgage loans decreased $6.1 million and consumer loans decreased $0.2 million.

The bank’s mortgage refinancing activity has decreased in 2005. As a result, loan originations decreased to $14.4 million in the recent quarter from $20.8 million in the second quarter of last year. For the first six months of 2005, loan originations totaled $22.5 million compared to $33.4 million in the first six months of 2004.

39

NON-PERFORMING ASSETS

The following table shows the composition of the Bank’s non-performing assets at June 30, 2005 and 2004, and December 31, 2004:

(In thousands)	At June 30, 2005			At December 31, 2004			At June 30, 2004
Non-Performing Assets:
Non-accrual loans	$	343		$	74		$	398
Real estate acquired through foreclosure		—			—			—
Total non-performing assets	$	343		$	74		$	398
Allowance for loan losses	$	1,253		$	1,307		$	1,439
Allowance as a percent of non-accrual loans		365.3	%		1,766.2	%		361.6	%
Allowance as a percent of total loans		0.54	%		0.55	%		0.59	%
Non-accrual loans as a percent of total loans		0.15	%		0.03	%		0.16	%

The Bank generally does not accrue interest on loans which are 90 days or more past due. It is the Bank’s policy to place such loans on non-accrual status and to reverse from income all interest previously accrued but not collected and to discontinue all amortization of deferred loan fees.

Non-performing assets increased from December 31, 2004 to June 30, 2005 as noted in the table above. The principal balance of non-accrual loans was $343,000, or approximately 0.15% of total loans at June 30, 2005.

The Bank did not have any impaired loans as of June 30, 2005.

40

ALLOWANCE FOR LOAN LOSSES

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

	Six Months Ended June 30,
	2005			2004
	(In thousands)
Balance at December 31, 2004 and 2003	$	1,307		$	1,554
Provision (credit) for loan losses		(53	)		(113	)
Recoveries of loans previously charged-off		—			—
Charge-offs		(1	)		(2	)
Balance at June 30,	$	1,253		$	1,439

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 effect the borrower’s ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses currently available information 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.

At June 30, 2005 the balance of the allowance for loan losses was $1,253,000 representing 365.3% of non-accrual loans and 0.54% of total loans. Management believes that the allowance for loan losses is adequate to cover the risks inherent in the portfolio under current conditions.

The Company also maintains an allowance for probable losses on its out- standing loan commitments that totaled $585,000 and $616,000 at June 30, 2005 and 2004, respectively. 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.

41

DEPOSITS

Deposit accounts of all types have traditionally been the primary source of funds for the Bank’s lending and investment activities. The Bank’s deposit flows are influenced by prevailing interest rates, competition and other market conditions. The Bank’s management attempts to manage its deposits through selective pricing and marketing.

The Bank’s total deposits decreased $32.3 million to $817.2 million at June 30, 2005 from $849.5 million at December 31, 2004.

The composition of the Bank’s total deposits as of the dates shown are summarized as follows:

	June 30, 2005		December 31, 2004
	(In thousands)
Demand and NOW	$	85,798	$	87,653
Savings and money market accounts		497,391		561,313
Time certificates of deposit		234,000		200,499
Total deposits	$	817,189	$	849,465

42

PART I. ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK

Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in prices. The Company’s investment securities portfolio includes equity securities with a market value of approximately $8.1 million at June 30, 2005. Movements in equity prices affect the value of the equity portfolio and affect the amount of securities gains or losses that the Company realizes from the sale of equity securities. The Company’s debt securities available for sale portfolio and trading account have a market value of $425.2 million and $30.8 million, respectively, at June 30, 2005. Interest rate changes affect the value of these portfolios. Rising interest rates would generally reduce the value of these portfolios.

Interest Rate Risk

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change the interest income and expense streams associated with the Company’s financial instruments also change, which impacts net interest income, the primary component of the Company’s earnings. The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process. For additional information about the Company’s asset/liability management and interest rate risk, see the Management Discussion and Analysis section of the Company’s Form 10-K for the year ended December 31, 2004.

Liquidity and Capital Resources

The Bank must maintain a sufficient amount 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 or maturities of investment securities, investment securities called before maturity 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 overnight federal funds sold and money market funds, which can be immediately converted into cash and United States Treasury and Government agency securities, which can be sold or pledged to raise funds. At June 30, 2005 the Bank had $185.0 million or 19.8% of total assets and $323.2 million or 34.6% of total assets invested, respectively, in overnight federal funds sold and money market funds, and United States Treasury and Government agency obligations.

The Bank is a Federal Deposit Insurance Corporation (“FDIC”) insured institution subject to the FDIC regulatory capital requirements. The FDIC regulations require all FDIC insured institutions to maintain minimum levels of Tier 1 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 1 capital to total 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 1 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.

43

Liquidity and Capital Resources (continued)

Tier II components include supplemental capital components such as qualifying allowance for loan losses and qualifying subordinated debt and up to 45 percent of the pre-tax 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 June 30, 2005, the Bank had a leverage Tier I capital to average assets ratio of 10.98%, a Tier I capital to risk- weighted assets ratio of 38.18% and a total capital to risk-weighted assets ratio of 38.92%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to average assets of 11.47%, Tier I capital to risk-weighted assets of 39.79% and total capital to risk-weighted assets of 40.53% at June 30, 2005.

PART I. ITEM 4

Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our principal executive officer and our principal financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, such officers have concluded that our disclosure controls and procedures are effective as of the end of such period.

(b) Changes in internal controls over financial reporting. There have been no changes during the period covered by this Quarterly Report in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

44

PART II - OTHER INFORMATION

Item 1. 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 June 30, 2005, 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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

Issuer Purchases of Equity Securities

The following table sets forth purchases made by the Company of its shares of common stock under the stock repurchase program during the three months ended June 30, 2005:

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Repurchase Program (1)	Maximum Number of Shares That May Yet Be Purchased Under The Repurchase Program
March 31, 2005	—		—	—	115,117	(1)
April 1 – April 30, 2005	5,000	$	36.60	5,000	110,117
May 1 – May 31, 2005	23,800	$	35.82	23,800	86,317
June 1 – June 30, 2005	22,500	$	35.18	22,500	63,817
	51,300	$	35.61	51,300

(1) On January 22, 2004, the Registrant announced that its Board of Directors had authorized management to repurchase up to 100,000 shares of its common stock in the open market or through private transactions during the next twelve months. On January 19, 2005 the Registrant announced that its Board of Directors had extended, for another year, the stock repurchase program which it authorized in January 2004. Additionally, the Board approved an increase of 100,000 in the number of shares of the Registrant’s common stock authorized for repurchase in the current program, bringing the total shares available for repurchase to 126,177. During the first quarter 2005, the Company repurchased 11,060 shares further reducing the total shares available for repurchase to 115,117.

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Item 3. Defaults Upon Senior Securities

Not Applicable.

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

None

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

a. Exhibit Index

31.1 Section 302 Certification of Chief Executive Officer. (filed herewith)

31.2 Section 302 Certification of Chief Financial Officer. (filed herewith)

32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Gerard H. Brandi, Chief Executive Officer of the Company. (filed herewith)

32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Reginald E. Cormier, Chief Financial Officer of the Company. (filed herewith)

b. Reports on Form 8-K

On April 5, 2005, the Company filed a current report on Form 8-K, reporting under Item 4.01, announcing that the Audit Committee of the Board of Directors of MASSBANK Corp. replaced KPMG as the Company’s independent registered public accountants as of March 31, 2005. The Company engaged Parent, McLaughlin & Nangle, as of such date, to serve as the Company’s registered public accountants for the year ending December 31, 2005.

On April 11, 2005, the Company filed a current report on Form 8-K, reporting under Item 4.01 and filing as an exhibit under Item 9.01, a letter from KPMG LLP dated April 8, 2005 stating that KPMG agreed with the statements the Company made in its April 5, 2005 filing that the reports issued by KPMG on the Company’s financial statements for each of the past two fiscal years did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. And that during the Company’s two most recent fiscal years and through the filing date, there were no disagreements with KPMG on any matter of accounting principle or practice, financial statement disclosure or auditing scope or procedure, which, if not resolved to KPMG’s satisfaction, would have caused them to make reference to the subject matter in connection with their report of the Company’s financial statements for such years; and there were no “reportable events” as defined in Item 304 (a)(1)(v) of Regulation S-K.

On April 25, 2005, the Company filed a current report on Form 8-K, reporting under Item 4.02 and 9.01, announcing the Company’s first quarter 2005 earnings results.

On July 22, 2005, the Company filed a current report on Form 8-K, reporting under Item 4.02 and 9.01, announcing the Company’s second quarter 2005 earnings results.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MASSBANK Corp. & Subsidiaries
	(Registrant)
Date: August 8, 2005	/s/ Gerard H. Brandi
	(Signature)
	Gerard H. Brandi
	President and CEO
Date: August 8, 2005	/s/ Reginald E. Cormier
	(Signature)
	Reginald E. Cormier
	Sr. V.P., Treasurer and CFO

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