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SECURITIES AND EXCHANGE COMMISSION

For the fiscal year ended December 31, 2003
OR

For the transition period from______________to____________

Commission File Number 0-15137

MASSBANK Corp.

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

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Forward-Looking Statement Disclosure.

     This Annual Report on Form 10-K may contain forward-looking information, including information concerning the Company’s expectations of future business prospects. These forward-looking statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. The Company may also make 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.

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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.

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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.

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Market Area

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

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

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

Lending Activities

     The Bank’s net loan portfolio totaled $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:

(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.

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

(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:

     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.

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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.

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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:

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

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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:

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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.

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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.

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

Investment Portfolio

(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.

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     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

(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.

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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.

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DEPOSITS