MASSBANK CORP - 10-K Annual Report

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1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K

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

For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

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 (I.R.S. Employer
incorporation or organization) Identification No.)
123 HAVEN STREET
Reading, Massachusetts 01867
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (617) 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.____

The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price for the registrant's common stock on
March 11, 1996 as reported by NASDAQ, was $85,077,696.

As of March 11, 1996, there were 2,738,562 shares of the registrant's
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's 1995 Annual Report to Stockholders are
incorporated by reference in Parts I, II, III and IV of this Form 10-K. Portions
of the Proxy Statement for the 1996 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
2
PART I

Item 1. Business
Business of MASSBANK Corp.

General

MASSBANK Corp. (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 for Savings (the "Bank"). The Company is a one-bank holding company
registered with the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended. As of and since December 2, 1986, the effective date of the
reorganization whereby MASSBANK Corp. became the holding company for the Bank,
the Bank has been a wholly-owned subsidiary of MASSBANK Corp. The only office of
MASSBANK Corp., and its principal place of business, is located at the main
office of the Bank at 123 Haven Street, Reading, Massachusetts 01867.

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

MASSBANK Corp.'s principal sources of revenues on an unconsolidated basis,
which are used for the payment of dividends to stockholders and other purposes,
are dividends from MASSBANK for Savings and, to a lesser extent, interest income
received from its interest-bearing bank deposits. MASSBANK Corp.'s assets on an
unconsolidated basis at December 31, 1995 were represented by its investment in
the Bank of $91.0 million and other assets of $1.1 million. The Company's
liabilities consisted of loan indebtedness of $1.1 million and other liabilities
of $0.1 million. The proceeds of the loan were used to fund stock purchases
through the Employee Stock Ownership Plan ("ESOP"). See Note 16 to the
Consolidated Financial Statements for parent company only financial information.
At December 31, 1995 MASSBANK Corp. on a consolidated basis had total assets of
$854.5 million, deposits of $753.7 million, and stockholders' equity of $90.8
million which represents 10.63% of total assets. Book value per share at
December 31, 1995 was $33.13.

The Company does not own or lease any real 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 for
Savings - 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.
3
Employees

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

Dividends

MASSBANK Corp. paid total cash dividends of $0.73 per share in 1995
compared to $0.60 per share in 1994 and $0.4533 per share in 1993. The Company's
dividend payout ratios (cash dividends paid divided by net income) for 1995,
1994 and 1993 were 23%, 21% and 20%, respectively.

Stock Repurchase Program

In October 1995, MASSBANK Corp. announced that its Board of Directors had
approved the repurchase of an additional 100,000 shares of its outstanding
common stock. Repurchases are expected to be made in the open market or in
private transactions over the next year. At December 31, 1995, the Company had
repurchased 5,000 shares at a total cost of $153,750.

Preferred Stock Purchase Rights

In January 1990, the Board of Directors declared a dividend distribution of
one Preferred Stock Purchase Right for each outstanding share of MASSBANK Corp.
common stock. These Rights, which expire in January 2000, entitle their holders
to purchase from the Company one one-hundreth of a share (a "unit") of Series A
Junior Participating Cumulative Preferred Stock, par value $1.00 per share
("preferred stock") at a cash exercise price of $70.00 per unit, subject to
adjustment. The Rights will trade separately from the common stock and will
become exercisable when a person or group has acquired 15% or more of the
outstanding common stock, upon a tender offer that would result in a person or
group acquiring 15% or more of the outstanding common stock, or upon the
declaration by the Board of Directors that any person holding 10% or more of the
outstanding shares of common stock is an "adverse person".

In the event a person or group acquires 15% or more of the outstanding
common stock or the Board of Directors declares a person an "adverse person",
each Right would entitle its holder (except if the holder is a person or group
described above) to receive upon exercise sufficient units of preferred stock to
equal a value of two times the exercise price of the Right. In the event the
Company is acquired in a merger or other business combination transaction or if
50% or more of the Company's assets or earning power is sold, each holder may
receive upon exercise common stock of the acquiring company having a market
value equal to two times the exercise price of the Right.

The Rights are redeemable in whole, but not in part, by the Board of
Directors at a price of $.01 1/3 per Right any time before a person or group
acquires 15% or more of the outstanding common stock or the Board of Directors
declares a person an "adverse person".
4
Business of MASSBANK for Savings

General

MASSBANK for Savings is a Massachusetts-chartered savings bank founded in
1872 as the Melrose Savings Bank. In 1983, the Reading Savings Bank was merged
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.

The Bank is primarily engaged in the business of attracting deposits from
the general public through its fourteen full service banking offices in Reading,
Melrose, Stoneham, Wilmington, Medford, Chelmsford, Tewksbury, Westford, Dracut
and Lowell, and originating residential and commercial real estate mortgages,
construction, and a variety of consumer loans. 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, which
is the difference between the interest and dividend income derived by the Bank
from its loans and investments and the interest paid by the Bank on its deposits
and borrowed funds.

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 accounts are insured by the Depositors Insurance Fund ("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.

Acquisitions

In February 1992, the Bank acquired approximately $336 million in federally
insured deposits and other liabilities and certain assets of The Central Savings
Bank of Lowell, Massachusetts from the FDIC for a bid price of $2.2 million. Net
loans acquired totaled $147.9 million. The Bank also acquired Central Savings'
trust department and safe deposit operations.

In September 1991, the Bank acquired from the Resolution Trust Corporation
the insured deposits and branch operations of the former branches of ComFed
Savings Bank located in Tewksbury and Chelmsford, MA. In connection with the
transaction, the Bank paid a premium of $59,800 and received approximately $45.6
million in insured deposits.
5
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 14
branch offices located on a broad arc stretching from Melrose and Medford 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, Lowell, Medford, Melrose, Reading, Stoneham, Tewksbury,
Westford and Wilmington.

Lending Activities

The Bank's net loan portfolio totaled $246.7 million at December 31, 1995.
The following table sets forth information concerning the Bank's loan portfolio
by type of loan at the dates shown:

- -------------------------------------------------------------------------------------------
(In thousands) At December 31, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------

Mortgage
loans:

Residential:
Conventional $209,408 $207,772 $204,096 $201,331 $ 63,686
FHA and VA 3,244 4,158 5,166 6,985 4,670
Commercial 6,975 8,155 9,654 10,878 9,855
Construction 1,516 603 474 355 --
- -------------------------------------------------------------------------------------------
Total mortgage loans 221,143 220,688 219,390 219,549 78,211
Add: premium on loans 388 452 813 912 --
Less: deferred mortgage loan
origination fees (928) (871) (856) (529) (147)
- -------------------------------------------------------------------------------------------
Mortgage loans, net 220,603 220,269 219,347 219,932 78,064
- -------------------------------------------------------------------------------------------
Other
loans:

Consumer:
Installment 1,988 1,972 2,474 4,259 1,923
Guaranteed education 10,420 10,152 9,131 8,237 6,140
Other secured 2,012 2,598 1,735 2,406 1,108
Home equity lines of credit 13,144 14,674 15,744 18,440 10,629
Unsecured 265 269 277 333 207
- -------------------------------------------------------------------------------------------
Total consumer loans 27,829 29,665 29,361 33,675 20,007
Commercial 753 882 338 149 53
- -------------------------------------------------------------------------------------------
Other loans, net 28,582 30,547 29,699 33,824 20,060
- -------------------------------------------------------------------------------------------
Total loans 249,185 250,816 249,046 253,756 98,124
Less: Allowance for possible
loan losses (2,529) (2,566) (2,261) (2,056) (375)
- -------------------------------------------------------------------------------------------
Net loans $246,656 $248,250 $246,785 $251,700 $ 97,749
- -------------------------------------------------------------------------------------------

The increase in total loans from December 31, 1991 to December 31, 1992 was
primarily attributable to loans acquired as part of the acquisition of The
Central Savings Bank in 1992.
6
The following table shows the maturity distribution and interest rate
sensitivity of the Bank's loan portfolio at December 31, 1995:

Maturity/Scheduled Payments (1)

Within One to Five to After
(In thousands) one year five years ten years ten years Total
- -------------------------------------------------------------------------------------------

Mortgage loans:
Residential $ 857 $ 5,183 $ 45,119 $160,965 $212,124
Commercial & construction 1,842 4,095 1,485 1,057 8,479
- -------------------------------------------------------------------------------------------
Total mortgage loans 2,699 9,278 46,604 162,022 220,603
Other loans 2,438 3,042 10,243 12,859 28,582
- -------------------------------------------------------------------------------------------
Total loans $ 5,137 $12,320 $56,847 $174,881 $249,185
- -------------------------------------------------------------------------------------------

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

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

Total Due After One Year

Fixed Adjustable
(In thousands) Rate Rate Total
- -------------------------------------------------------------------------------------------

Mortgage loans:
Residential $165,645 $ 45,622 $211,267
Commercial & construction 1,216 5,421 6,637
- -------------------------------------------------------------------------------------------
Total mortgage loans 166,861 51,043 217,904
Other loans 2,698 23,446 26,144
- -------------------------------------------------------------------------------------------
Total loans $169,559 $ 74,489 $244,048
- -------------------------------------------------------------------------------------------

Mortgage Lending. The Bank believes that the repayment periods of long-term
first mortgage loans, the general resistance of the public 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, over several years, has kept its mortgage loan portfolio
to a level at which the Bank believed there was an acceptable risk- to-reward
ratio in light of opportunities in the marketplace and the Bank's long-term
objectives. The Bank's net loan portfolio represented approximately 28.9% and
29.4% of the Company's total assets at December 31, 1995, and 1994,
respectively. The Bank realizes that this low level of loans with respect to
assets in relation to the securities portfolio results in a reduction in yield;
however, the Bank believes that this reduction would be more than offset in risk
and loss associated with lending during periods of economic decline. In today's
economic climate, the Bank would prefer a more even mix of loans and securities.
However, there remains a tremendous amount of competition for mortgages in the
Bank's area, and developing a quality loan portfolio takes time. We anticipate
that our loan portfolio will stay even or grow slowly over the next few years.
7
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 refinancing for existing customers. In addition to actively
soliciting loan referrals, 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
1995 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 retains the 10, 12 or 15 year fixed rate mortgages and adjustable rate
mortgages it originates for its own portfolio. All long-term fixed rate
residential mortgages are generally sold in the secondary market. Adjustable-
rate mortgage loans ("ARMs") have rates that are re-set at either 1, 3 or 5 year
intervals and provide a margin over various mortgage indices.

In 1994, the Bank instituted new loan programs which have been well
received by customers. The first program features a 5/1 and 7/1 year ARM product
with 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 7/1 ARM. This program is designed for first-time home
buyers meeting certain income and property location restrictions.

At December 31, 1995, 1-4 family residential mortgage loans totaled $212.1
million, or 85.1% of the total loan portfolio, compared to $211.5 million, or
84.3% of the total loan portfolio, at December 31, 1994. Residential mortgage
loan originations amounted to $30.4 million during 1995, a decrease of 13.4%
from $35.1 million in 1994. This decrease was attributable, in part, to
decreased customer demand combined with increased competition for residential
mortgage loans in the Bank's market area. Origination volumes have been affected
by the interest rate environment which saw interest rates rise during 1994 and
decline throughout 1995. This recent decrease in rates helped to fuel higher
levels of residential loan refinancings in the last quarter of 1995.

The Bank also originates mortgage loans secured by commercial or investment
property such as multifamily housing, strip shopping centers, office buildings
and retail buildings. At December 31, 1995, commercial and multifamily real
estate mortgages and construction loans totaled approximately $8.5 million, or
3.4% of the total loan portfolio, compared to $8.8 million, or 3.5% of the total
loan portfolio, at December 31, 1994. There were no commercial and multifamily
real estate mortgages originated in 1995 and 1994.

The total amount of first mortgage loans held by the Bank at December 31,
1995 was $220.6 million as indicated in the maturity distribution table
appearing on the previous page. Of this amount, $52.7 million was subject to
interest rate adjustments. The remaining $167.9 million in fixed rate mortgage
loans represents 19.6% of the Company's total assets.
8
Mortgage Lending (continued)

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 using the level-yield method.

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 $27.8 million at December 31, 1995 representing
11.2% of the Bank's total loan portfolio. Of this amount $10.4 million or 4.2%
of the total loan portfolio are education loans made under the Massachusetts
Higher Education Assistance Corporation. The Bank may sell education loans in
the future.

The balance of the Bank's consumer loan portfolio consists of home equity
lines of credit and installment consumer credit contracts such as automobile
loans, home improvement loans and other secured and unsecured financings. These
loans totaled $17.4 million at December 31, 1995, representing 7.0% of the
Bank's total loan portfolio.

At December 31, 1995, the Bank had only $753 thousand 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 employment. 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 the application
fee is paid. At December 31, 1995, the Bank had issued commitments on
residential first mortgage loans totaling $3,466,000, and had commitments to
advance funds on construction loans and unused credit lines, including unused
portions of home equity lines of credit, of $444,000 and $20,714,000,
respectively.

Loan Delinquencies. It is the Bank's policy to manage its loan portfolio so
as to recognize problem loans at an early stage and thereby minimize loan
losses. Loans are considered delinquent when any payment of principal or
interest is 30 days 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 discontinue accrual of interest on all loans for which payments are
more than 90 days past due. Loans delinquent for 90 or more days, as shown in
the table on the following page, totaled $2,428,000 at December 31, 1995.
9
Real Estate Acquired through Foreclosure.

Real estate acquired through foreclosure is comprised of foreclosed
properties where the Bank has actually received title and real estate
substantially repossessed. Real estate formally acquired in settlement of loans
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 or losses upon disposition are reflected in earnings as
realized. Real estate acquired through foreclosure totaled $255,000 as of
year-end 1995.

Non-Performing Assets

The following table sets forth information with respect to loans delinquent
for 90 or more days and real estate acquired through foreclosure:

- ------------------------------------------------------------------------------------------------
(In thousands) At December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------

Mortgages delinquent for 90 or more days:
Conventional $2,016 $1,496 $1,048 $1,075 $ 618
FHA and VA 14 62 43 55 78
Commercial -- 152 -- 135 135
Other loans delinquent for 90 or more days:
Consumer 398 388 178 241 212
- ------------------------------------------------------------------------------------------------
Total loans delinquent for 90 or more days 2,428 2,098 1,269 1,506 1,043
- ------------------------------------------------------------------------------------------------
Real estate acquired through foreclosure or
substantively repossessed:
Conventional 255 129 699 545 --
FHA and VA -- -- -- -- 21
Commercial -- -- -- -- 128
Land development -- -- -- 360 1,009
- ------------------------------------------------------------------------------------------------
Total real estate acquired through fore-
closure or substantively repossessed 255 129 699 905 1,158
- ------------------------------------------------------------------------------------------------
Total non-performing assets 2,683 2,227 $1,968 $2,411 $2,201
- ------------------------------------------------------------------------------------------------
Non-performing loans as percent of total loans 0.97% 0.84% 0.51% 0.59% 1.06%
Non-performing assets as percent of total assets 0.31% 0.26% 0.23% 0.29% 0.52%

The reduction in interest income for the periods indicated associated with
nonaccrual loans (loans delinquent for 90 or more days) held at the end of such
years, is as follows:

- ------------------------------------------------------------------------------------------------
(In thousands) Years Ended December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------

Income in accordance with original
loan terms $204 $204 $105 $160 $109
- ------------------------------------------------------------------------------------------------
Income recognized 60 107 40 $ 80 58
- ------------------------------------------------------------------------------------------------
Foregone interest $144 $ 97 $ 65 $ 80 $ 51

10
Allowance for Possible Loan Losses.

Possible losses on loans are provided for under the allowance method of
accounting. The allowance is increased by provisions charged to operations based
on management's assessment of many factors including the risk characteristics of
the portfolio, underlying collateral, current and anticipated economic
conditions that may affect 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 the information available in
establishing the allowance for losses, future adjustments to the allowance may
be necessary if economic conditions differ substantially 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 possible loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on judgments different from those of
management.

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

- ------------------------------------------------------------------------------------------------
(In thousands) Years ended December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------

Balance at beginning of year $2,566 $2,261 $2,056 $ 375 $ 308
- ------------------------------------------------------------------------------------------------
Loans charged-off:
Residential real estate (124) (339) (305) (262) --
Commercial real estate -- -- (135) -- --
Consumer loans (30) (24) (17) (20 ) (18)
Other loans (95) (63) (31) (24) (9)

Recoveries:
Residential real estate 41 23 20 1 3
Consumer loans 1 3 2 2 8
- ------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries (207) (400) (466) (303) (16)
Central Savings acquisition -- -- -- 1,100 --
Provision for loan losses, charged to operations 170 705 671 884 83
- ------------------------------------------------------------------------------------------------
Allowance for loan losses, end of year $2,529 $2,566 $2,261 $2,056 $ 375
- ------------------------------------------------------------------------------------------------

Net loans charged off as a percent of average
loans outstanding during the period 0.08% 0.16% 0.19% 0.13% 0.02%
Allowance for possible loan losses as a percent
of total loans outstanding at year-end 1.01% 1.02% 0.91% 0.81% 0.38%
Allowance for possible loan losses as a percent
of non-performing loans 104.2 % 122.3 % 178.2 % 136.5 % 36.0 %

- ------------------------------------------------------------------------------------------------

11
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.

At December 31, 1993, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 115 "Accounting for Certain Investments
in Debt and Equity Securities". Under this method, the Company records
investment securities available for sale at aggregate market value with the net
unrealized holding gains or losses reported, net of tax effect, as a separate
component of stockholders' equity until realized. As of December 31, 1995,
stockholders' equity included approximately $7.2 million, representing the net
unrealized gains on securities available for sale, less applicable income taxes.
Prior to December 31, 1993, the Company recorded its investment securities
available for sale at the lower of aggregate cost or market value with the net
unrealized losses reported in non-interest income as a component of "gains
(losses) on securities."

In the fourth quarter of 1995, the Company adopted the Financial Accounting
Standards Board guidelines, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," issued on
November 15, 1995. Under these guidelines, the Company was allowed a one-time
opportunity to reassess the appropriateness of its FASB 115 investment
classifications and reclassify securities from the held to maturity category to
the available for sale category, or vice versa. As a result of this reassessment
and after thoughtful consideration, the Company reclassified all of its
mortgage-backed securities from the held to maturity category to the available
for sale category in accordance with the FASB guidelines. The total amortized
cost of the securities reclassified was $202.8 million. These securities had
total unrealized gains of $3.7 million on the date they were reclassified.
12
Investment Activities (continued)

Under the investment policy management determines the appropriate
classification of securities at the time of purchase. Those 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
adjusted for any premiums or discounts.

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 interest rates, changes in prepayment risk, the need to increase
regulatory capital and other similar factors. Income on debt securities
available for sale is accrued and included in interest and dividend income. The
specific identification method is used to determine realized gains and losses on
sales of securities available for sale which are also reported in non-interest
income under the caption "gains (losses) on securities." When a security suffers
a loss in value which is considered other than temporary, such loss is
recognized by a charge to earnings.

Investments classified as trading securities are stated at market with
unrealized gains or losses included in earnings. Income on debt trading
securities is accrued and included in interest and dividend income. All of the
Company's mortgage-backed securities are currently classified as available for
sale. Prior to the fourth quarter of 1995, mortgage-backed securities were
classified as securities held to maturity and stated at cost, which was adjusted
for amortization of premiums and accretion of discounts by crediting or charging
interest and dividend income over the life of the related securities using a
method which approximated the level yield method. 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, 1995, the Company's investments, which consists of
securities held to maturity, securities available for sale (including
mortgage-backed securities), trading securities, short-term investments, term
federal funds sold and interest-bearing deposits in banks totaled $586.8
million, representing 68.7% of the Company's total assets.
13
The following table sets forth the composition of the Company's investment
portfolio as of the dates indicated:

Investment Portfolio

- ------------------------------------------------------------------------------------------------
(In thousands) At December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------

Federal funds sold:
Overnight federal funds $100,245 $ 22,551 $ 21,498
Term federal funds 15,000 -- 5,000
- ------------------------------------------------------------------------------------------------
Total federal funds sold 115,245 22,551 26,498
Money market funds 7,260 -- 2,747
Interest-bearing deposits in banks 941 -- --
- ------------------------------------------------------------------------------------------------
Total federal funds sold and other
short-term investments $123,446 $ 22,551 $ 29,245
- ------------------------------------------------------------------------------------------------
Percent of total assets 14.4% 2.7% 3.4%
- ------------------------------------------------------------------------------------------------

(In thousands) At December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------

Securities held to maturity: (a)
Other bonds and obligations $ 402 $ 567 $ 815
Mortgage-backed securities -- 172,263 115,353
Other securities -- -- 253
- ------------------------------------------------------------------------------------------------
Total securities held to maturity 402 172,830 116,421

Securities available for sale: (b)
U.S. Treasury obligations 212,115 242,787 282,719
U.S. Government agency obligations 14,172 6,043 7,496
Other bonds and obligations 2,004 1,914 2,024
Marketable equity securities 11,290 6,900 8,592
Mortgage-backed securities 216,520 -- --
- ------------------------------------------------------------------------------------------------
Total securities available for sale 456,101 257,644 300,831

Trading securities: (b)
U.S. Treasury obligations -- 112,166 132,819
Investments in mutual funds 6,819 3,444 10,350
- ------------------------------------------------------------------------------------------------
Total trading securities 6,819 115,610 143,169
- ------------------------------------------------------------------------------------------------
Total securities $463,322 $546,084 $560,421
- ------------------------------------------------------------------------------------------------
Percent of total assets 54.2% 64.7% 65.5%
- ------------------------------------------------------------------------------------------------
Total investments $586,768 $568,635 $589,666
Total investments as a percent of total assets 68.7% 67.4% 68.9%
- ------------------------------------------------------------------------------------------------

(a) At amortized cost.
(b) At market value.
14
The following tables present the carrying value of debt securities held to
maturity and available for sale at December 31, 1995 maturing within stated
periods with the weighted average interest yield from securities falling within
the range of maturities:

Debt Securities Held to Maturity

Other
bonds
and
(Dollars in thousands) obligations (1) Total
- -----------------------------------------------------------------------------------------

Maturing within 1 year
Amount $ 225 $ 225
Yield 6.02% 6.02%
Maturing after 5 years
but within 10 years
Amount 124 124
Yield 6.47% 6.47%
Maturing after 10 years
but within 15 years
Amount 53 53
Yield 10.98% 10.98%
- -----------------------------------------------------------------------------------------
Total
Amount $ 402 $ 402
Yield 6.81% 6.81%

Average life in years 4.75 4.75

Debt Securities Available for Sale

U.S. Other Mortgage-
U. S. Government bonds backed
Treasury agency and securities (2)
(Dollars in thousands) obligations obligations obligations Total
- ------------------------------------------------------------------------------------------------

Maturing within 1 year
Amount $ 75,948 $ 6,995 999 $ -- $ 83,942
Yield 5.82% 8.00% 4.97% 5.99%
Maturing after 1
but within 5 years
Amount 128,838 6,999 997 38 136,872
Yield 6.70% 6.46% 6.35% 5.30% 6.69%
Maturing after 5
but within 10 years
Amount 2,985 --- --- 21,967 24,952
Yield 6.47% 8.50% 8.26%
Maturing after 10
but within 15 years
Amount 189,518 189,518
Yield 6.92% 6.92%
- ------------------------------------------------------------------------------------------------
Total
Amount $207,771 $13,994 $ 1,996 $211,523 $435,284
Yield 6.37% 7.23% 5.66% 7.09% 6.74%
- ------------------------------------------------------------------------------------------------
Average life in years 1.67 2.12 0.76
Average contractual
maturity in years 12.63

15
(1) Yields on tax exempt obligations have been computed on a tax equivalent
basis.

(2) Mortgage-backed securities are shown at their contractual maturity, but are
expected to have shorter lives due to scheduled payments and prepayments.

At December 31, 1995, the Company did not have an investment in any issuer
(other than securities of the U.S. government) in excess of 10% of stockholders
equity.

Asset/Liability Management

Due to the volatility of interest rates, managing interest rate risk is
important in determining the profitability of the Company.

Interest rate risk arises from the difference in aggregate balances and
repricing dates of interest-earning assets compared to interest-bearing
liabilities. These differences, or repricing "gaps", provide an indication of
the extent to which net interest income is vulnerable to interest rate
fluctuations in future periods.

The Company attempts to manage the net repricing gaps to maintain what it
believes to be the most appropriate balance between earnings and exposure to
interest rate fluctuations. It attempts to manage its interest rate gap
primarily by lengthening or shortening the maturity structure of the Company's
portfolio of securities and other investments.

The Company closely monitors its one year "gap" position. One year "gap" is
the difference between the amount of assets and liabilities repricing over the
next twelve months. An institution with more assets maturing in one year than
liabilities could experience a decline in net interest income if interest rates
declined. Conversely, an institution with more liabilities repricing in one year
than assets could experience a decline in net interest income if rates rose. At
December 31, 1995, the one-year cumulative gap position was negative at $112.4
million, or approximately 13.2% of total assets.

The table on the following page sets forth the Company's repricing "gaps"
both in terms of dollar volume and as a percentage of total assets.
16
The following table details the projected amounts of the Company's
interest-sensitive assets and liabilities at December 31, 1995 that are
scheduled or assumed to mature or reprice during the time periods indicated. All
assets and liabilities shown are at amortized cost or book value, exclusive of
the effects of SFAS No. 115, with the exception of trading securities which are
stated at market.

Interest Rate Sensitivity Gap Analysis - At December 31, 1995

0 - 6 6 - 12 1 - 3 3 - 5 Over 5 Total
(In thousands) Months Months Years Years Years Amount
- ---------------------------------------------------------------------------------------------

Interest sensitive assets:
Mortgage loans (1) $ 6,912 $ 8,638 $ 32,243 $ 6,276 $166,534 $220,603
Other loans 24,523 1,360 914 513 1,272 28,582
- ---------------------------------------------------------------------------------------------
Total loans 31,435 9,998 33,157 6,789 167,806 249,185
Securities held to maturity 402 --- --- --- --- 402
Securities available for sale:
mortgage-backed securities (2) --- --- 38 --- 211,485 211,523
other 62,323 29,973 97,119 39,715 2,985 232,115
Trading securities 6,819 --- --- --- --- 6,819
Short term investments 117,505 --- --- --- --- 117,505
Federal funds sold 5,000 --- --- --- --- 5,000
Interest bearing deposits in
banks --- --- 941 --- --- 941
- ---------------------------------------------------------------------------------------------
Total interest sensitive assets 223,484 39,971 131,255 46,504 382,276 823,490
Non-interest earning assets --- --- --- --- 31,052 31,052
- ---------------------------------------------------------------------------------------------
Total Assets $223,484 $ 39,971 $131,255 $ 46,504 $413,328 $854,542
- ---------------------------------------------------------------------------------------------
Interest sensitive liabilities:
NOW accounts $ 51,197 $ --- $ --- $ --- $ --- $ 51,197
Regular savings and
special notice accounts (3) 32,892 30,220 80,000 45,000 142,118 330,230
Money market accounts 26,368 --- --- --- --- 26,368
Time certificates of deposit 127,848 106,385 90,615 6,558 651 332,057
Escrow deposits of borrowers 992 --- --- --- --- 992
- ---------------------------------------------------------------------------------------------
Total rate sensitive liabilities 239,297 136,605 170,615 51,558 142,769 740,844
Non-interest bearing
liabilities --- --- --- --- 22,881 22,881
Stockholders' equity --- --- --- --- 90,817 90,817
- ---------------------------------------------------------------------------------------------
Total liabilities and
Stockholder's equity $239,297 $136,297 $170,615 $ 51,558 $256,467 $854,542
- ---------------------------------------------------------------------------------------------
Period Repricing Difference
(Period Gap) (15,813) (96,634) (39,360) (5,054) 239,507 82,646
Cumulative Repricing Difference
(Cumulative Gap) (15,813) (112,447) (151,807) (156,861) 82,646
Cumulative Gap as a
Percentage of Total Assets -1.9% -13.2% -17.8% -18.4% 9.7%
- ---------------------------------------------------------------------------------------------

(1) Fixed rate mortgage loan amounts are accumulated as if the entire balance
came due on the last contractual payment date and adjustable rate mortgage
loan amounts are accumulated as if the entire balance came due on the
repricing date. Accordingly, these amounts do not reflect proceeds from
contractual loan amortization or anticipated prepayments.
(2) Based upon contractual maturity, but lives are expected to be shorter.
Assumes no principal amortization or prepayments.
(3) Based on an historical analysis of runoff of regular savings and special
notice accounts (SNAs) at various levels at which short term rates exceed
savings rates. This analysis anticipates moderate increases in short-term
rates during 1996.
17
Deposits and Other Sources of Funds

General. Deposits have been the primary source of funds of the Bank 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 or maturities of 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 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 fourteen conveniently located banking offices, customers can access
accounts through the Bank's ATM network. The Bank is a member of the Transaxion
("TX"), New York Cash Exchange ("NYCE") and CIRRUS System, Inc. ("CIRRUS")
networks which allow access to ATMs in over 100,000 locations worldwide.

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 consist of
regular, silver and smart savings accounts, special notice accounts, NOW and
Super NOW accounts, business checking accounts, money market deposit accounts,
IRA and Keogh accounts, and term deposit accounts.

The Bank's deposits declined by $6.0 million in the past year, from $759.7
million at December 31, 1994 to $753.7 million at December 31, 1995, a modest
decline considering the performance of the financial markets and mutual funds
which were fierce competitors for the savers' dollars. The composition of the
Bank's deposits continued to shift in 1995, as it did in 1994, from savings to
higher yielding time certificates of deposit. The Bank has maintained flat
regular savings account deposit rates in 1995 and 1994 while selectively
increasing rates on certificates of deposit. This strategy has helped to
minimize the effect of rising interest rates on the Company's net interest
margin. However, the strategy has also helped to encourage a shift from savings
to time certificates of deposit during this period. During 1995, the Bank's
total savings deposits, including money market accounts, declined $101.8
million, from $458.4 million at December 31, 1994 to $356.6 million at December
31, 1995, while its certificates of deposit increased $96.6 million, from $235.4
million at year end 1994 to $332.0 million at year end 1995.

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 Company did not have any borrowed funds in 1995. Borrowed funds
averaged $159,000, and $167,000 during the years ended December 31, 1994, and
1993, respectively. The highest month end balance of the Company's total
borrowings during the years ended December 31, 1994, and 1993 were $228,000 and
$245,000, respectively.
18
DEPOSITS

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

(In thousands) at December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits

Demand and NOW
NOW $ 51,197 6.79% $ 53,428 7.03% $ 52,385 6.84%
Demand accounts
(non interest-bearing) 15,216 2.02 14,068 1.85 12,215 1.59
------- ----- ------ ----- ------- -----
Total demand and NOW 66,413 8.81 67,496 8.88 64,600 8.43

Savings:
Regular savings and
special notice accounts 330,230 43.82 430,143 56.62 500,158 65.26
Money market accounts 26,368 3.50 28,258 3.72 36,655 4.78
------- ----- ------- ----- ------- -----
Total savings 356,598 47.32 458,401 60.34 536,813 70.04

Time Certificates of deposit:
Fixed rate certificates 274,684 36.45 187,319 24.66 125,229 16.34
Variable rate certificates 57,373 7.61 48,102 6.33 41,593 5.43
------- ----- ------- ----- ------- -----
Total time certificates
of deposit 332,057 44.06 235,421 30.99 166,822 21.77

Deposit acquisition premium,
net of amortization (1,411) (.19) (1,642) (.21) (1,872) (.24)
------- ----- ------- ----- ------- ----

Total deposits $753,657 100.00% $759,676 100.00% $766,363 100.00%

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

(In thousands) Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------

Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate

NOW accounts $ 51,301 1.27% $ 52,884 1.29% $ 53,503 1.53%
Demand (non interest-bearing)
accounts 13,645 -- 13,166 -- 12,928 --
Money market accounts 28,052 3.29 31,795 2.70 40,850 2.64
Regular savings and
special notice accounts 359,397 3.59 482,220 3.34 476,441 3.71
Time certificates of deposit 300,141 5.78 186,222 4.57 184,526 4.29
------- ----- ------- ----- ------- -----
$752,536 4.11% $766,287 3.41% $768,248 3.58%

19
Investment Management and Trust Services

In 1992, the Bank acquired a trust division as part of its Central Savings
Bank acquisition. The Trust and Investment Services Division offers a variety of
investment, trust and estate planning services and also serves as Trustee,
Executor, and Executor's Agent for bank customers.

As of December 31, 1995 the Trust Division had approximately $25.3 million
(market value) of assets in custody and under management.

Savings Bank Life Insurance

In 1990 and prior periods, the Bank issued and sold life insurance through
its Savings Bank Life Insurance ("SBLI") department. As required by
Massachusetts law, the assets, reserves and earnings of the Bank's SBLI
department were held solely for policyholders and were segregated from the
Bank's assets. The Bank is not liable for any obligations of its SBLI
department.

As of December 31, 1990, the Bank discontinued offering savings bank life
insurance to its customers.

On December 31, 1991, SBLI was demutualized by legislation enacted in
December, 1990. In connection with this reorganization the newly chartered SBLI
Company distributed stock to the SBLI issuing banks in direct proportion to the
outstanding assets and liabilities of their SBLI departments. During the first
quarter of 1992, the Company recognized non-interest income of $253,000
resulting from this distribution of stock.

Competition

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

In attracting deposits, the Bank's primary competitors are other thrift
institutions, commercial banks, mutual funds and credit unions located in its
market area. The Bank's attraction and retention of deposits depend on its
ability to provide investment opportunities that satisfy the requirements of
customers with respect to rate of return, liquidity, risk and other factors. The
Bank attracts a significant amount of deposits through its branch offices
primarily from the communities in which those branch offices are located. The
Bank competes for these deposits by offering competitive rates, convenient
branches and ATM locations and convenient business hours.
20
Supervision and Regulation

The Bank is in a heavily regulated industry. As a Massachusetts- chartered
savings bank whose deposits are insured by the FDIC and The Depositors Insurance
Fund, the Bank is subject to regulation, supervision and examination by federal
and state regulatory authorities, including, but not limited to the FDIC, the
Massachusetts Commissioner of Banks and The Depositors Insurance Fund. This
Federal and State regulation is for the benefit of borrowers, depositors and the
respective deposit insurance funds and is not for the benefit of the Bank, the
Company or its stockholders.

The Bank is subject to extensive federal and state statutes, regulations,
policies and standards regarding virtually all aspects of its operations,
including capital adequacy, reserves, liquidity, payment of dividends,
transactions with affiliates, loans to officers, directors, principal
shareholders and their related interests, mergers, acquisitions and changes in
controlling ownership, establishment, relocation and closure of branch banking
offices, community reinvestment, fair lending, fair credit reporting, real
estate settlement procedures, funds availability, disclosure to consumers and
financial accounting, reporting and recordkeeping. In the event the Bank did not
operate in accordance with FDIC statutes, regulations or policies, the FDIC has
authority to terminate insurance of the Bank's deposit accounts and the FDIC and
the Commissioner of Banks have authority to impose other sanctions for such
non-compliance. For a discussion of the Bank's capital adequacy, see the heading
"Liquidity and Capital Resources" appearing in the Company's 1995 Annual Report
to Stockholders, which is incorporated herein by reference.

In addition, as a bank holding company, the Company is subject to
supervision, examination and regulation by the Board of Governors of the Federal
Reserve System and is subject to statutes, regulations and policies relating to,
among other things, mergers, acquisitions and changes in controlling ownerships,
non-bank activities and subsidiaries, capital adequacy, the payment of
dividends, the tying of the sale or pricing of products or services of bank and
nonbank subsidiaries, and the provision of financial and managerial support of
its subsidiary bank.
21
Federal Deposit Insurance Corporation Improvement Act of 1991

The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") made significant changes in federal laws governing depository
institutions and the FDIC. Among other changes, FDICIA requires federal bank
regulatory agencies to take "prompt corrective action" with respect to banks
that do not meet applicable regulatory capital requirements. In addition, FDICIA
prohibits state chartered banks from engaging, as principals, in activities such
as equity investments and insurance underwriting, which are not permissible for
national banks, unless the FDIC has determined that the activity would pose no
significant risk to the Bank Insurance Fund and the state bank is in compliance
with applicable capital standards. An insured state bank, such as MASSBANK, may
to the extent permitted by the FDIC, acquire and retain ownership of common or
preferred stock listed on a national securities exchange, provided that the
insured state bank made or maintained an investment in such securities during
the period beginning on September 30, 1990 and ending on November 26, 1991,
which MASSBANK did, and provided further that the aggregate amount of the
investment does not exceed 100 percent of the Bank's capital. At December 31,
1995, the Bank had marketable equity securities with a market value of
approximately $11.3 million, representing 12.6% of the Bank's equity capital. In
addition, FDICIA limits the aggregate amount a bank may lend to its directors,
executive officers and principal shareholders and their related interests,
prohibits depository institutions that are not well capitalized from accepting
brokered deposits without an express waiver from the FDIC, requires uniform
disclosures to consumers of the terms of bank deposit accounts, and requires
banks to give regulators and bank customers advance notice of branch closings.
FDICIA also establishes a system of risk-based deposit insurance assessments
that takes a bank's capital level and supervisory risk characteristics into
account in calculating the amount of its federal deposit insurance assessment.

FDICIA imposes new annual audit and reporting requirements on banking
organizations with more than $500 million in total assets. Finally, the FDICIA
requires the FDIC and the other Federal bank regulatory agencies to issue
regulatory standards to govern various aspects of bank operations including real
estate lending, executive compensation, loan documentation, credit underwriting,
interest rate risk exposure, and asset growth.

From time to time the U.S. Congress and the Massachusetts Legislature adopt
legislation and the Federal and State bank regulatory agencies issue regulations
and policies that may significantly affect the operations of the Bank and the
Company. No assurance can be given as to whether additional legislation will be
enacted or whether additional regulations or policies will be issued or as to
the effect any such legislation, regulations or policies may have on the Bank or
the Company.
22
Employees

MASSBANK Corp. utilizes the support staff of the Bank from time to time
without the payment of any fees. No separate compensation is being paid to the
executive officers of MASSBANK Corp., all of whom are executive officers of the
Bank and receive compensation as such. As of December 31, 1995, the Bank had 150
full-time employees, including 27 officers, and 65 part-time employees. None of
the Bank's employees is represented by a collective bargaining group, and
management believes that its employee relations are good. The Bank provides its
employees with formal training in product knowledge, sales techniques, fair
lending, and motivation. In addition, each supervisor at the Bank receives
management training before assuming his or her supervisory duties and
periodically thereafter. The Bank maintains a comprehensive employee benefit
program for qualified employees that includes a qualified pension plan, an
Employee Stock Ownership Plan (ESOP), health and dental insurance, life and
long-term disability insurance and tuition assistance.

Subsidiaries

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

Readibank Investment Corporation and Melbank Investment Corporation were
established for the purpose of managing portions of the Bank's investment
portfolio. Assets of Readibank Investment Corporation and Melbank Investment
Corporation totaled $11.9 million and $58.9 million, at December 31, 1995,
respectively.

Readibank Equipment Corporation is an office equipment and furniture lessor
whose sole lessee is the Bank. Assets of Readibank Equipment Corporation totaled
$219 thousand at December 31, 1995.

Readibank Properties, Inc. incorporated primarily for the purpose of real
estate development, had total assets of $639 thousand at December 31, 1995.

Executive Officers of the Registrant

The executive officers of the Company and the Bank and the age of each
officer as of February 29, 1996 are as follows:

Name Age Office

Gerard H. Brandi 47 Chairman of the Board of Directors,
President and Chief Executive
Officer of the Company and the Bank

Raymond A. Brearey 59 Vice President of the Bank

David F. Carroll 48 Vice President of the Bank

Reginald E. Cormier 48 Vice President, Treasurer and Chief
Financial Officer of the Company and
the Bank

Donald R. Washburn 52 Senior Vice President of the Bank

Donna H. West 50 Senior Vice President of the Bank
and Assistant Secretary of the
Company
23
Gerard H. Brandi. Mr. Brandi has served in various capacities with
MASSBANK since he joined the Bank in 1975 as Vice President of the Lending
Division. He served as Senior Vice President from 1978 to 1981, Executive
Vice President and Senior Lending Officer from 1981 to 1983, Executive Vice
President and Treasurer from 1983 to 1986, and has served as the Bank's
President since 1986. Mr. Brandi became Chief Executive Officer in April,
1992, and Chairman in January, 1993.

Raymond A. Brearey. Mr. Brearey is Vice President and Senior Trust
Officer of the Bank. Prior to joining the Bank in 1992, Mr. Brearey was a
Senior Trust Officer of the Malden Trust Company in Malden, Massachusetts.

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

Reginald E. Cormier. Mr. Cormier joined the Bank as Treasurer in
September, 1987 and has served in this capacity until his promotion to Vice
President, Treasurer and Chief Financial Officer in January, 1995.

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

Donna H. West. Mrs. West has been employed by the Bank since 1979 and
has served as Vice President of the Retail Banking Division since October,
1987. Starting at the Bank as an Assistant Branch Manager in 1979, Mrs. West
became a Branch Manager in 1981, an Assistant Treasurer and Branch Manager in
1982, an Assistant Treasurer and Regional Branch Administrator in 1984 and an
Assistant Vice President and Regional Branch Administrator in 1986. She
served in this capacity until her October, 1987 promotion to Vice President of
the Retail Banking Division. In June, 1994, Mrs. West was promoted to Senior
Vice President of the Retail Banking Division.
24
Item 2. Properties

The main office of MASSBANK Corp. and MASSBANK for Savings is located at
123 Haven Street, Reading, Massachusetts. Additionally, the Bank has thirteen
branches and three operations facilities. The Bank owns its main office, two
operations facilities and six of its branches. All of the remaining branches and
other facilities are leased under various leases. At December 31, 1995,
management believes that the Bank's existing facilities are adequate for the
conduct of its business.

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

Owned Lease Renewal
or Expiration Option
Location Leased Date Through

MAIN OFFICE: 123 Haven Street, Reading, MA Owned ---- ----
BRANCH 476 Main Street, Melrose, MA Owned ---- ----
OFFICES: 27 Melrose Street, Towers Plaza,
Melrose, MA Leased 2004 2014
370 Main Street, Wilmington, MA Owned ---- ----
219 Lowell Street, Lucci's Plaza,
Wilmington, MA Leased 1996 2006
240 Main Street, Stoneham, MA Leased 1998 2003
4110 Mystic Valley Pkwy, Medford, MA Leased 1996 2001
296 Chelmsford Street, Chelmsford, MA Leased 1998 ----
17 North Road, Chelmsford, MA Leased 1999 (1)
45 Broadway Road, Dracut, MA Leased 2002 ----
50 Central Street, Lowell, MA Owned ---- ----
755 Lakeview Avenue, Lowell, MA Owned ---- ----
1800 Main Street, Tewksbury, MA Owned ---- ----
203 Littleton Road, Westford, MA Owned ---- ----
OPERATIONS
FACILITIES: 159 Haven Street, Reading, MA Owned ---- ----
169 Haven Street, Reading, MA Owned ---- ----
11 North Road, Chelmsford, MA Leased 1999 (1)

(1) Bank has option to purchase in year 2000.

Item 3. Legal Proceedings

From time to time, MASSBANK Corp. and/or the Bank are involved as a
plaintiff or defendant in various legal actions incident to their business. As
of December 31, 1995, none of these actions individually or in the aggregate is
believed by management to be material to the financial condition of MASSBANK
Corp. or the Bank.

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

None.
25
PART II

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

The information contained under the caption "MASSBANK Corp. and
Subsidiaries Stockholder Data" in the Registrant's 1995 Annual Report to
Stockholders is incorporated herein by reference.

Item 6. Selected Financial Data

The information contained under the caption "MASSBANK Corp. and
Subsidiaries - Selected Consolidated Financial Data" in the Registrant's 1995
Annual Report to Stockholders is incorporated herein by reference.

This selected consolidated financial data should be read in conjunction
with the consolidated statements and related notes thereto appearing in the
Registrant's 1995 Annual Report to Stockholders which are incorporated herein by
reference.

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

The information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1995 Annual Report to Stockholders is incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

The Registrant's consolidated financial statements and notes thereto,
together with the report of KPMG Peat Marwick LLP, contained in the Registrant's
1995 Annual Report to Stockholders are incorporated herein by reference. The
unaudited quarterly financial data set forth on page 45 of such Annual Report is
incorporated herein by reference.

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

None

PART III

Item 10. Directors and Executive Officers of the Registrant

The information appearing under the captions "Election of Directors"
and "Compliance with Section 16(A) of the Exchange Act" in the Registrant's
definitive proxy statement relating to its 1996 Annual Meeting of Stockholders
is incorporated herein by reference. Information required by this item
concerning the Executive Officers of the Registrant is contained in Part I of
this Form 10-K.

Item 11. Executive Compensation

The information appearing under the caption "Executive Compensation" in
the Registrant's definitive proxy statement relating to its 1996 Annual Meeting
of Stockholders is incorporated herein by reference.
26
Item 12. Security Ownership of Certain Beneficial Owners and Management

The information appearing under the captions "Election of Directors"
and "Principal Stockholders" in the Registrant's definitive proxy statement
relating to its 1996 Annual Meeting of Stockholders is incorporated herein by
reference.

Item 13. Certain Relationships and Related Transactions

The information contained in Note 5 of the Financial Statements under
the caption "Loans" in the Registrant's 1995 Annual Report to Stockholders is
incorporated herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

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

(a)1. Financial Statements

Reference to 1995
Annual Report
to Stockholders
(Pages)

Independent Auditors' Report 21
Consolidated balance sheets at December 31,
1995 and 1994 22
Consolidated statements of income for the three
years ended December 31, 1995 23
Consolidated statements of cash flows for the three
years ended December 31, 1995 24-25
Consolidated statements of changes in stockholders'
equity for the three years ended December 31,
1995 26
Notes to consolidated financial statements 27-45

2. Financial Statement Schedules

All schedules are omitted as the required information is either not
applicable or is included in the consolidated financial statements or related
notes.
27
3. Exhibits

Exhibit No. Description of Exhibit

3.1 Restated Certificate of Incorporation of the
Registrant - incorporated by reference to Exhibit
3.1 of the Registrant's Form S-4 Registration
Statement (Reg. No. 33-7916).

3.2 By-Laws of the Registrant - incorporated by reference to
Exhibit 3 of the Registrant's Form 10-Q for the quarter
ended September 30, 1991.

4.1 Shareholder Rights Agreement dated as of January 16,
1990, between the Company and The First National Bank of
Boston, as Rights Agent - incorporated herein by
reference to the Exhibit to the Company's Current Report
on Form 8-K dated as of January 16, 1990.

10.1 MASSBANK Corp. 1986 Stock Option Plan, as amended -
incorporated by reference to Exhibit 28.1 to the
Registrant's Form S-8 Registration Statement
(Reg. No. 33-11949).

10.1.2 Amendment to MASSBANK Corp. 1986 Stock Option Plan dated
April 19, 1991 - incorporated by reference to Exhibit
10.1.2 to the Registrant's annual report on Form 10-K for
the year ended December 31, 1992.

10.1.3 MASSBANK Corp. 1994 Stock Incentive Plan - incorporated
by reference to Exhibit 10.1 to the Registrant's Form S-8
Registration Statement (Reg. No. 33-82110).

10.2 MASSBANK for Savings Employees' Stock Ownership Plan
and Trust Agreement - incorporated by reference to
Exhibit 10.2 of the Registrant's Form S-4 Registration
Statement (Reg. No. 33-7916).

10.2.1 Amendments to the MASSBANK for Savings Employee's Stock
Ownership Plan and Trust Agreement - incorporated by
reference to Exhibit 10.2.1 to the Registrant's annual
report on Form 10-K for the year ended December 31, 1993.

10.3 Form of Employment Agreement, as amended, with Gerard H.
Brandi - incorporated by reference to Exhibit 10.3 of the
Registrant's annual report on Form 10-K for the year
ended December 31, 1986 and Exhibit 10.3.1 of the
Registrant's annual report on Form 10-K for the year
ended December 31, 1989.

10.3.2 Amendment to the Employment Agreement with Gerard H.
Brandi - incorporated by reference to Exhibit 10.3.2 of
the Registrant's annual report on Form 10-K for the year
ended December 31, 1990.

10.3.3 Second amendment dated as of February 1, 1993 to the
Employment Agreement with Gerard H. Brandi - incorporated
by reference to Exhibit 10.3.3. to the Registrant's
annual report on Form 10-K for the year ended December
31, 1992.
28
Exhibit No. Description of Exhibit

10.3.4 Form of Employment Agreement with Raymond A. Brearey
dated June 22, 1992 - incorporated by reference to
Exhibit 10.3.4 to the Registrant's annual report on Form
10-K for the year ended December 31, 1992.

10.3.5 First amendment dated as of February 1, 1993 to the
Employment Agreement with Raymond A. Brearey -
incorporated by reference to Exhibit 10.3.5 to the
Registrant's annual report on Form 10-K for the year
ended December 31, 1992.

10.3.6 Second amendment dated as of February 1, 1993 to the
Employment Agreement with Raymond A. Brearey -
incorporated by reference to Exhibit 10.3.6 to the
Registrant's annual report on Form 10-K for the year
ended December 31, 1992.

10.3.7 Form of Employment Agreement with David F. Carroll dated
as of February 1, 1993 - incorporated by reference to
Exhibit 10.3.7 to the Registrant's annual report on Form
10-K for the year ended December 31, 1992.

10.3.8 Form of Employment Agreement with Reginald E. Cormier
dated as of February 1, 1993 - incorporated by reference
to Exhibit 10.3.8 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1992.

10.3.9 Form of Employment Agreement with Donald R. Washburn
dated as of February 1, 1993 - incorporated by reference
to Exhibit 10.3.9 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1992.

10.3.10 Form of Employment Agreement with Donna H. West dated as
of February 1, 1993 - incorporated by reference to
Exhibit 10.3.10 to the Registrant's annual report on Form
10-K for the year ended December 31, 1992.

10.3.11 Executive Severance Agreement with Gerard H. Brandi dated
as of January 18, 1994 incorporated by reference to
exhibit 10.3.11 to the Registrant's annual report on Form
10-K for the year ended December 31, 1993.

10.3.12 Executive Severance Agreement with David F. Carroll dated
as of December 23, 1993 incorporated by reference to
exhibit 10.3.12 to the Registrant's annual report on Form
10-K for the year ended December 31, 1993.

10.3.13 Executive Severance Agreement with Reginald E. Cormier
dated as of December 23, 1993 incorporated by reference
to exhibit 10.3.13 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1993.

10.3.14 Executive Severance Agreement with Donald R. Washburn
dated as of December 23, 1993 incorporated by reference
to exhibit 10.3.14 to the Registrant's annual report on
Form 10-K for the year ended December 31, 1993.
29
Exhibit No. Description of Exhibit

10.3.15 Executive Severance Agreement with Donna H. West dated as
of December 23, 1993 incorporated by reference to exhibit
10.3.15 to the Registrant's annual report on Form 10-K
for the year ended December 31, 1993.

10.4 Form of Executive Supplemental Retirement Agreement, as
amended, with Gerard H. Brandi - incorporated by
reference to Exhibit 10.4 of Registrant's annual report
on Form 10-K for the year ended December 31, 1986.

11.1 Computation of Per Share Earnings - Computation of
primary and fully diluted earnings per share is attached
hereto as Exhibit 11.1 to this Annual Report on Form
10-K.

12 Statement re Computation of Ratios - Not applicable as
MASSBANK Corp. does not have any debt securities
registered under Section 12 of the Securities Exchange
Act of 1934.

13 1995 Annual Report to Stockholders - except for those
portions of the 1995 Annual Report to Stockholders which
are expressly incorporated by reference in this report,
such 1995 Annual Report to Stockholders is furnished for
the information of the SEC and is not to be deemed
"filed" with the SEC.

22 Subsidiaries of the Registrant - incorporated by
reference to Exhibit 22 of the Registrant's Form S-4
Registration Statement (Reg. No. 33-7916).

23 Consent of Independent Auditors.

(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last
quarter of the period covered by this Form 10-K.

(c) Exhibits to this Form 10-K are attached or
incorporated by reference as stated in the
Index to Exhibits.

(d) Not applicable.
30
Signatures

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

MASSBANK CORP.

/s/Gerard H. Brandi
-------------------
Gerard H. Brandi
Chairman, President and Chief Executive Officer

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

/s/Gerard H. Brandi Chairman, President,
- ---------------------------- Chief Executive Officer and
Gerard H. Brandi Director March 27, 1996

/s/Reginald E. Cormier Vice President, Treasurer
- ---------------------------- and Chief Financial Officer
Reginald E. Cormier (Principal Financial and
Accounting Officer) March 27, 1996

/s/Samuel Altschuler Director March 22, 1996
- ----------------------------
Samuel Altschuler

/s/Mathias B. Bedell Director March 28, 1996
- ----------------------------
Mathias B. Bedell

- ---------------------------- Director
Allan S. Bufferd

- ---------------------------- Director
Peter W. Carr

/s/Alexander S. Costello Director March 25, 1996
- ----------------------------
Alexander S. Costello
31
- ---------------------------- Director
Robert S. Cummings

/s/Robert E. Dyson Director March 25, 1996
- ----------------------------
Robert E. Dyson

/s/Louise A. Hickey Director March 22, 1996
- ----------------------------
Louise A. Hickey

- ---------------------------- Director
Leonard Lapidus

/s/Stephen E. Marshall Director March 26, 1996
- ----------------------------
Stephen E. Marshall

/s/Arthur W. McPherson Director March 22, 1996
- ----------------------------
Arthur W. McPherson

/s/Herbert G. Schurian Director March 22, 1996
- ----------------------------
Herbert G. Schurian

/s/Donald B. Stackhouse Director March 25, 1996
- ----------------------------
Donald B. Stackhouse