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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-QSB





(Mark One)


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




For the quarterly period ended September 30, 2002





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




For the transition period from
 to





Commission File Number 0-24935





SERVICE BANCORP, INC.


(Exact name of small business issuer as specified in its charter)





Massachusetts

04-3430806(State or other jurisdiction ofincorporation or organization)

(I.R.S. EmployerIdentification Number)





81 Main Street,


Medway, Massachusetts 02053


(Address of principal executive offices)





(508) 533-4343


(Issuers telephone number,
including area code)





Not Applicable


(Former name, former address and former fiscal


year, if changed since last report)





Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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  ̈





State the number of shares outstanding of each of the
issuers classes of common equity, as of the latest practical date: At October 31, 2002, there were 1,648,124 shares of common stock outstanding, par value $0.01 per share.





Transitional Small Business Disclosure Format (Check one): YES  ̈ NO  x





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SERVICE BANCORP, INC. AND SUBSIDIARY


FORM 10-QSB





Index





PagePART I

FINANCIAL INFORMATIONItem 1.

Financial StatementsConsolidated Balance Sheets as of September 30, 2002 and June 30, 2002

1Consolidated Statements of Income for the three months ended September 30, 2002 and 2001

2Consolidated Statements of Changes in Stockholders Equity for the three months ended September 30, 2002 and 2001

3Consolidated Statements of Cash Flows for the three months ended September 30, 2002 and 2001

5Notes to Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis or Plan of Operation

9Item 3.

Controls and Procedures

15PART II

OTHER INFORMATIONItem 1.

Legal Proceedings

16Item 2.

Changes in Securities

16Item 3.

Defaults upon Senior Securities

16Item 4.

Submission of Matters to a Vote of Security Holders

16Item 5.

Other Information

16Item 6.

Exhibits and Reports on Form 8-K

17Signatures

18







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PART IFINANCIAL INFORMATION





Item 1. Financial Statements





SERVICE BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


(Dollars in thousands, except share amounts)





September 30, 2002


June 30, 2002ASSETSCash and due from banks

$
6,578


$
8,109Short-term investments


13,592



15,616Total cash and cash equivalents


20,170



23,725Certificates of deposit


100



100Securities available for sale, at fair value


54,452



55,310Securities held to maturity, at amortized cost


30,990



34,362Federal Home Loan Bank stock, at cost


1,948



1,948Loans


165,154



152,105Less allowance for loan losses


(1,381
)


(1,258
)Loans, net


163,773



150,847Banking premises and equipment, net


3,569



3,678Accrued interest receivable


1,728



1,757Net deferred tax asset


401



594Bank-owned life insurance


2,790



2,753Other assets


970



2,003Total assets

$
280,891


$
277,077LIABILITIES AND STOCKHOLDERS EQUITYDeposits

$
224,688


$
220,193Federal Home Loan Bank advances


33,666



34,794Other liabilities


1,360



1,725Total liabilities


259,714



256,712Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued






Common stock, $.01 par value; 12,000,000 shares authorized, 1,712,630 issued


17



17Additional paid-in capital


7,445



7,430Retained earnings


14,300



13,889Accumulated other comprehensive income


359



5Treasury stock, at cost  (64,506 shares)


(527
)


(527
)Unearned ESOP shares  (29,174 and 30,784 shares, respectively)


(292
)


(308
)Unearned RRP stock  (17,529 and 19,680 shares, respectively)


(125
)


(141
)Total stockholders equity


21,177



20,365Total liabilities and stockholders equity

$
280,891


$
277,077





See accompanying notes to consolidated financial statements.




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SERVICE BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF INCOME


(Dollars in thousands, except per share amounts)





Three Months Ended September 30,2002

2001Interest and dividend income:Interest and fees on loans

$
2,737

$
2,525Interest and dividends on securities, Federal Home Loan Bank stock and certificates of deposit


1,280


1,391Interest on short-term investments


39


130Total interest and dividend income


4,056


4,046Interest expense:Interest on deposits


1,187


1,527Interest on Federal Home Loan Bank advances


465


459Total interest expense


1,652


1,986Net interest income


2,404


2,060Provision for loan losses


120


60Net interest income, after provision for loan losses


2,284


2,000Noninterest income:Customer service fees


265


264Gain on securities available for sale, net


12


52Other income


75


75Total noninterest income


352


391Operating expenses:Salaries and employee benefits


1,056


980Occupancy and equipment expenses


376


396Data processing expenses


173


160Professional fees


74


88Advertising expenses


68


41Other general and administrative expenses


267


248Total operating expenses


2,014


1,913Income before income taxes


622


478Provision for income taxes


211


169Net income

$
411

$
309Weighted average shares outstanding (basic)


1,598,941


1,579,908Weighted average shares outstanding (diluted)


1,624,041


1,605,076Earnings per share (basic)

$
0.26

$
0.20Earnings per share (diluted)

$
0.25

$
0.19





See accompanying notes to consolidated financial statements.







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SERVICE BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY


THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001


(Dollars in thousands, except share
amounts)





Common Stock

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Income
(Loss)

Treasury Stock


Unearned ESOP
Shares


Unearned RRP
Stock


TotalBalance at June 30, 2002

$
17

$
7,430

$
13,889

$
5

($
527
)

($
308
)

($
141
)

$
20,365Comprehensive income:Net income








411

















411Change in net unrealized gain on securities available for sale, net of tax and reclassification adjustment











354














354Total comprehensive income


























765Common stock held by ESOP released and committed to be released (1,610 shares)





9












16







25Income tax benefit on stock option exercises





6




















6Amortization of RRP stock (2,151 shares)






















16



16Balance at September 30, 2002

$
17

$
7,445

$
14,300

$
359

($
527
)

($
292
)

($
125
)

$
21,177





See accompanying notes to consolidated financial statements.




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SERVICE BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY


THREE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001 (concluded)


(Dollars in thousands, except share amounts)





Common Stock

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Income
(Loss)


Treasury Stock


Unearned ESOP
Shares


Unearned RRP
Stock


TotalBalance at June 30, 2001

$
17

$
7,409

$
12,588

($
514
)

($
560
)

($
372
)

($
202
)

$
18,366Comprehensive income:Net income








309


















309Change in net unrealized loss on securities available for sale, net of tax and reclassification adjustment











433















433Total comprehensive income



























742Common stock held by ESOP released and committed to be released (1,610 shares)





4













16







20Amortization of RRP stock (2,151 shares)























15



15Balance at September 30, 2001

$
17

$
7,413

$
12,897

($
81
)

($
560
)

($
356
)

($
187
)

$
19,143





See accompanying notes to consolidated financial statements.







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SERVICE BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Dollars in thousands)





Three Months Ended September 30,2002


2001Cash flows from operating activities:Net income

$
411


$
309Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses


120



60Gain on securities available for sale, net


(12
)


(52
)Net amortization (accretion) of securities


65



(20
)Depreciation and amortization expense


132



161Decrease (increase) in accrued interest receivable


29



(59
)Bank-owned life insurance income


(37
)


(30
)Deferred tax benefit


(13
)


(49
)Other, net


(74
)


585Net cash provided by operating activities


621



905Cash flows from investing activities:Activity in securities available for sale:Sales


7,542



883Maturities, prepayments and calls


5,899



4,191Purchases


(11,180
)


(22,780
)Activity in securities held to maturity:Maturities, prepayments and calls


3,341



1,742Net (increase) decrease in loans, excluding loan purchases


(7,999
)


972Purchases of loans


(5,139
)


(5,718
)Purchases of banking premises and equipment


(23
)


(10
)Purchases of Federal Home Loan Bank stock






(48
)Net cash used by investing activities


(7,559
)


(20,768
)Cash flows from financing activities:Net increase in deposits


4,495



11,681Proceeds from Federal Home Loan Bank advances


3,174



1,000Repayment of Federal Home Loan Bank advances


(4,302
)


(82
)Repayment of ESOP loan


16



20Net cash provided by financing activities


3,383



12,619Net change in cash and cash equivalents


(3,555
)


(7,244
)Cash and cash equivalents at beginning of period


23,725



30,651Cash and cash equivalents at end of period

$
20,170


$
23,407Supplementary information:Interest paid on deposits

$
1,192


$
1,530Interest paid on Federal Home Loan Bank advances


488



454Income taxes paid


9



15Net change in unsettled securities available for sale transactions


(878
)


3,109





See accompanying notes to consolidated financial statements.




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SERVICE BANCORP, INC. AND SUBSIDIARY


Notes to Consolidated Financial Statements





|(1) |  | Basis of Presentation and Consolidation
|--- |  | ---------------------------------------




The accompanying unaudited consolidated financial statements include the accounts of Service Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Strata Bank (the Bank), and the Banks
wholly-owned subsidiaries, Medway Securities Corporation and Franklin Village Security Corporation, both of which engage solely in the purchase and sale of securities. All significant intercompany balances and transactions have been eliminated in
consolidation.





These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP) for interim financial information and the instructions for Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may
be expected for the entire year. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been omitted. A summary of significant accounting policies followed by the Company is
set forth in the Notes to Consolidated Financial Statements of the Companys 2002 annual report to stockholders.





|(2) |  | Earnings per Share
|--- |  | ------------------




Basic
earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects additional common shares (common stock equivalents) that
would have been outstanding if dilutive potential shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options
and unvested stock granted under the Recognition and Retention Plan (RRP) and are determined using the treasury stock method. Assumed conversion of the outstanding dilutive stock options and unvested RRP stock would increase the shares
outstanding, but would not require an adjustment to income as a result of the conversion.





|(3) |  | Commitments
|--- |  | -----------




At September 30,
2002, the Company had outstanding commitments to originate loans of $10.6 million. Unused lines of credit and open commitments available to customers at September 30, 2002 amounted to $25.0 million, of which $9.9 million were home equity lines of
credit.




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SERVICE BANCORP, INC. AND SUBSIDIARY


Notes to Consolidated Financial Statements (Continued)





|(4) |  | Securities
|--- |  | ----------




The following
table sets forth the Companys securities at the dates indicated.





September 30, 2002

June 30, 2002Amortized Cost

Fair Value

Amortized Cost

Fair Value(Dollars in thousands)Securities available for sale:Federal agency securities

$
21,530

$
21,988

$
22,817

$
23,169Federal agency mortgage-backed securities


8,289


8,492


7,678


7,677Other debt securities


22,978


23,312


23,668


23,613Total debt securities


52,797


53,792


54,163


54,459Marketable equity securities


1,080


660


1,117


851Total securities available for sale

$
53,877

$
54,452

$
55,280

$
55,310Securities held to maturity:Federal agency mortgage-backed securities

$
26,259

$
27,023

$
29,638

$
30,086Other debt securities


4,731


5,158


4,724


5,074Total securities held to maturity

$
30,990

$
32,181

$
34,362

$
35,160





|(5) |  | Loans
|--- |  | -----




The following table
presents data relating to the composition of the Companys loan portfolio by type of loan at the dates indicated.





September 30, 2002


June 30, 2002Amount


Percent


Amount


Percent(Dollars in thousands)Real estate loans:Residential

$
93,645


56.95
%

$
83,522


55.13
%Commercial and multi-family


38,376


23.33
%


37,700


24.88
%Construction


8,534


5.19
%


7,513


4.96
%Total real estate loans


140,555


85.47
%


128,735


84.97
%Commercial loans:


11,233


6.83
%


10,855


7.16
%Consumer loans:Home equity and second mortgages


10,823


6.59
%


10,047


6.63
%Passbook secured


629


0.38
%


528


0.35
%Other


1,208


0.73
%


1,354


0.89
%Total consumer loans


12,660


7.70
%


11,929


7.87
%Total gross loans


164,448


100.00
%


151,519


100.00
%Net deferred loan costs and premium


706






586Allowance for loan losses


(1,381
)





(1,258
)Total loans, net

$
163,773





$
150,847




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SERVICE BANCORP, INC. AND SUBSIDIARY


Notes to Consolidated Financial Statements (Concluded)





|(6) |  | Deposits and Federal Home Loan Bank Advances
|--- |  | --------------------------------------------




The following tables indicate types and balances in deposit accounts at the dates indicated.





September 30, 2002


June 30, 2002Amount

Percent


Amount

Percent(Dollars in thousands)Demand

$
28,324

12.61
%

$
27,187

12.35
%NOW


34,080

15.17
%


31,128

14.14
%Money market deposits


21,981

9.78
%


22,009

9.99
%Regular and other savings


39,935

17.77
%


40,721

18.49
%Total non-certificate accounts


124,320

55.33
%


121,045

54.97
%Term certificates of $100,000 or greater


34,407

15.31
%


32,785

14.89
%Term certificates less than $100,000


65,961

29.36
%


66,363

30.14
%Total certificate accounts


100,368

44.67
%


99,148

45.03
%Total deposits

$
224,688

100.00
%

$
220,193

100.00
%





The following is a list of advances from the Federal Home Loan Bank of Boston by the
earlier of the maturity date or the date callable by the FHLB.





September 30, 2002


June 30, 2002Amount

Percent


Amount

Percent(Dollars in thousands)Less than one year

$
27,424

81.46
%

$
28,550

82.05
%One to three years


5,500

16.34
%


5,500

15.81
%Greater than three years


742

2.20
%


744

2.14
%Total borrowed funds

$
33,666

100.00
%

$
34,794

100.00
%




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Item 2. Managements Discussion and Analysis or Plan of Operation





General





This quarterly report on Form 10-QSB contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believe, anticipates, plans, expects and
similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Companys actual results to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Banks continued ability to originate quality loans, fluctuation in interest rates, real estate conditions in the Banks lending areas, general and local economic conditions, the
Banks continued ability to attract and retain deposits, the Companys ability to control costs, new accounting pronouncements, and changing regulatory requirements. The Company undertakes no obligation to publicly release the results of
any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.





Comparison of Financial Condition at September 30, 2002 and June 30, 2002





Total assets were $280.9 million at September 30, 2002, an increase of $3.8 million, or 1.4%, from $277.1 million at June 30, 2002. The increase was primarily attributable to an increase of $12.9
million, or 8.6%, in net loans since June 30, 2002. This increase was partially offset by a $4.2 million, or 4.6%, decrease in investment securities and a $3.6 million, or 15.0%, decrease in the Companys cash and cash equivalents. In addition
to the reduction in investment securities and cash balances, funding for the growth in loans was also provided by a $4.5 million, or 2.0%, increase in deposits since June 30, 2002.





Total investment securities were $87.4 million at September 30, 2002, a decrease of $4.2 million since June 30, 2002 due mostly to amortization on mortgage backed securities. In addition, calls on
federal agency securities and the sale of a $500,000 federal agency bond exceeded purchases. Investment securities have been a less attractive investment due to the low interest rate environment and its effect on securities yield and due to the
volatility in the corporate bond market. The Companys continued objective is to prudently increase its loan portfolio, primarily in residential and commercial loans. For the three-month period ended September 30, 2002, the Strata Mortgage
Center, with its affiliation with Marathon Mortgage Company, originated $15.5 million in residential loans. In addition, the Bank purchased $5.1 million of residential loans directly from Marathon Mortgage Company over the same timeframe. With this
activity, the Banks residential mortgages had a net increase of $10.1 million, or 12.1%, since June 30, 2002. Net deferred loan costs also increased since June 30, 2002 by $120,000, largely due to costs associated with residential loan
originations and purchases through Marathon Mortgage Company. The Bank originated $12.0 million in commercial and commercial real estate loans for the three-month period ended September 30, 2002, which is a $3.9 million volume increase over the
three-month period ending September 30, 2001. After loan paydowns, the total commercial and commercial real estate loan portfolio increased by $2.1 million, or 3.7%, since June 30, 2002. In addition to these loan originations, the Bank frequently
receives commercial checking and money market deposits from new commercial customers. Since June 30, 2002, total commercial deposits have increased by $1.4 million, or 5.4%, and as of September 30, 2002 represented 12.0% of total deposits.





As of September 30, 2002, the Bank had $13.6 million invested in overnight funds, representing 4.8% of total assets, which is a
reduction of $2.0 million since June 30, 2002. This level of overnight funds is




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##### Table of Contents

maintained for liquidity purposes, particularly at end of month periods due to the volatility in certain of the Banks deposits. Much of these funds will be utilized to fund the origination
of loans.





The increase of $4.5 million in deposits since June 30, 2002 was primarily attributable to increases of $1.2 million, or 1.2%,
in term certificates, $3.0 million, or 9.5%, in NOW deposits, and $1.1 million, or 4.2%, in demand deposits. During this same timeframe, regular and other savings decreased $786,000, or 1.9%, while money market deposits were approximately level with
June 30, 2002. Certificates with maturity terms of 18 months and longer increased $2.7 million between June 30, 2002 and September 30, 2002, and as of September 30, 2002 represent 57.5% of the Banks total term certificates.





Stockholders equity increased from $20.4 million, or 7.4% of total assets at June 30, 2002 to $21.2 million, or 7.5% of total assets at
September 30, 2002. The increase in stockholders equity resulted primarily from the Companys retained earnings since the beginning of the fiscal year.





Non-Performing Assets and Allowance for Loan Losses





The following indicates the non-performing assets and related allowance for loan loss ratios at the dates indicated.





September 30, 2002


June 30, 2002(Dollars in thousands)Non-accrual loans:One- to four-family real estate loans

$
95


$
215Commercial and multi-family real estate


198



169Consumer loans






Commercial


208



Total


501



384Accruing loans delinquent more than 90 daysOne- to four-family real estate loans






198Consumer






71Total






269Foreclosed assets






Total non-performing assets and delinquent loans

$
501


$
653Total as a percentage of total assets


0.18
%


0.24
%





For the three months ended September 30, 2002, the Banks provision for loan losses
was $120,000 compared with $60,000 for the same period last year. The increase is consistent with the growth in loans including the commercial loan portfolios, which generally present a greater risk of loss than residential loans. During the
three-months ended September 30, 2002, recoveries from previously charged-off loans of $3,000 were received and no loans were charged-off.





While management believes that, based on information currently available, the allowance for loan losses is sufficient to cover losses in the Banks loan portfolio at this time, no assurances can be given that the level of the
allowance will be sufficient to cover loan losses or that future adjustments to the allowance




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will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of
the allowance.





Comparison of Operating Results for the Three Months Ended September 30, 2002 and 2001





General





Operating results are primarily dependent on the Banks net interest income, which is the difference between the interest earned on the Banks earning assets (short-term investments, loans, and securities) and the interest
paid on deposits and borrowings. Operating results are also affected by provisions for loan losses, the level of income from non-interest sources such as fees and sales of securities and other assets, operating expenses and income taxes. Operating
results are also significantly affected by general economic conditions, particularly changes in interest rates, as well as government policies and actions of regulatory authorities.





Net income for the three months ended September 30, 2002 was $411,000 as compared to $309,000 for the three months ended September 30, 2001, an increase of $102,000, or 33%. This quarters net
income growth was primarily attributable to an increase of $344,000, or 17%, in net interest income. Partially offsetting this revenue increase were higher operating expenses of $101,000, or 5%, lower noninterest income of $39,000, and an increase
in the loan loss provision of $60,000. Earnings per share data for the three months ended September 30, 2002 was $0.26 per share (basic) and $0.25 per share (diluted) as compared to $0.20 per share (basic) and $0.19 (diluted) calculations for the
three months ended September 30, 2001.





The Banks interest rate spread (the difference between yields earned on earning assets and
rates paid on deposits and borrowings) increased from 3.12% for the three months ended September 30, 2001 to 3.38% for the three months ended September 30, 2002. The net interest margin (net interest income divided by average earning assets)
increased from 3.61% to 3.74% over the same time period. The interest rate spread increased primarily as a result of the decrease of 104 basis points in funding costs for both deposits and borrowings from 3.97% to 2.93% between periods due to the
lower interest rate environment this year. The decrease in funding costs was principally the result of the Bank reducing rates offered on new and maturing deposits. The lower market interest rate environment this year also had an impact on the
pricing of the loan products, especially on those products that are prime or treasury indexed-based. In addition, certain investments within the Banks securities portfolio that matured, were sold or called, were reinvested in lower yielding
investments. These factors were the primary reason for the decline of 78 basis points on the yield on earning assets from 7.09% to 6.31%. The Banks reduction in rates on deposit accounts exceeded the effect of lower yields on earning assets
which resulted in the expanded interest rate spread and margin.





While core-based deposit growth will be emphasized, the Bank may have to
rely more on higher-cost retail certificates rather than lower-cost core deposits for future funding requirements. Any increase in interest rates and continued competition from other financial institutions together with the aforementioned growth in
retail certificates could cause future tightening in the interest rate spread.




11




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##### Table of Contents




The interest rate spread and margin for the periods indicated are as follows:





Three months ended September
30,2002


2001Weighted average yield earned on:Short-term investments

1.75
%

3.50
%Securities

5.54
%

6.44
%Total loans, net

7.03
%

7.96
%All interest-earning assets

6.31
%

7.09
%Weighted average rate paid on:Deposits

2.50
%

3.66
%Borrowed funds

5.27
%

5.56
%All interest-bearing liabilities

2.93
%

3.97
%Weighted average rate spread

3.38
%

3.12
%Net interest margin

3.74
%

3.61
%





Interest and Dividend Income





Total interest and dividend income for the three months ended September 30, 2002 was level with the same period a year ago at $4.1 million. The effect
of an increase in average earning assets of $28.8 million was offset by a 78 basis point reduction in yield on earning assets to 6.31%. Average net loans increased $28.7 million, or 22.8%, while total loan yield decreased by 93 basis points to
7.03%. The reduction in the prime rate and the indexed rates used to set interest rates in loan repricing periods and for new loans were the primary reasons for the reduction in loan yield between periods.





Average short-term investments decreased $5.9 million, or 40.1%, between periods, and experienced a sharp reduction in yield going from 3.50% for the quarter
ending September 30, 2001 to 1.75% for the quarter ending September 30, 2002. The yield reduction reflects the lower interest rate environment this year. The yield on the securities portfolio was also lower and declined by 90 basis points to 5.54%,
while the average securities portfolio balance increased $6.0 million, or 7.0%, over this same period.





Interest Expense





Interest expense on deposits decreased $340,000, or 22.3%, from $1.5 million for the three
months ended September 30, 2001, to $1.2 million for the three months ended September 30, 2002. This decrease was primarily attributable to a 116 basis point reduction in cost of deposits and an increase of $15.9 million in average lower-priced
non-certificate deposit balances between periods. Over this same timeframe, the higher-priced term certificate balances increased by $6.8 million.





The Bank increased its use of borrowings from the FHLB since in some cases it proved to be a less expensive source of funding than term certificates. Average balances in these advances were $35.0 million during the three months ended
September 30, 2002, an increase of $2.3 million, or 6.9% from the three months ended September 30, 2001. Over this same timeframe, average borrowing rates decreased from 5.56% to 5.27%. The combination of the increase in average borrowings and
decrease in rates resulted in an increase in interest expense on FHLB advances of $6,000 for the three months ended September 30, 2002.




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Noninterest Income





Total noninterest income decreased $39,000, from $391,000 for the three months ended September 30, 2001 to $352,000 for the same period in 2002. The decrease was
principally due to net gains on securities of $12,000 for the three-month period this year compared with net gains of $52,000 last year. The net gain reported this year included a $49,000 gain on the sale of an agency bond less an impairment
write-down on equity investments of $37,000. The Company reviews its available for sale investment securities with unrealized depreciation to assess whether a decline in fair value is temporary or other-than-temporary. The Company judges whether the
decline in value is from company-specific events, industry developments, general economic conditions or other reasons. Once the estimated reasons for the decline are identified, further judgments are required as to whether those conditions are
likely to reverse and, if so, whether that reversal is likely to result in a recovery of the fair value of the investment in the near term. As part of the Companys quarterly review of the investment securities portfolio, it was determined that
the decline in the fair value of certain equity investment securities was other-than-temporary. As a result, the Company recorded an impairment charge this quarter of $37,000 related to these securities.





Operating Expenses





Total operating expenses increased $101,000, or 5.3%, from $1.9 million for the three months ended September 30, 2001 to $2.0 million for the three months ended September 30, 2002. Salary and benefits increased $76,000, or
7.8%, which is the result of the growth in operations and enhancements in the employee benefit plans as well as increases in benefit costs such as health insurance. Occupancy and equipment expenses decreased $20,000, or 5.1%, due mostly to lower
depreciation expense on computer equipment and peripherals. Data processing fees increased $13,000, or 8.1%, consistent with the growth in business. Professional fees decreased $14,000 while advertising expense increased $27,000. Other operating
expense included expenses associated with additional security measures at the Banks branches and a loss due to a robbery. The operating efficiency ratio for the three months ended September 30, 2002, excluding gains on securities, was 73.4%,
which is a reduction from 79.7% for the three months ended September 30, 2001.





Income
Taxes





Income tax expense increased by $42,000, or 24.9%, between reporting periods due to this years higher level of pre-tax
income. The effective income tax rates were 33.9% and 35.4% for the three months ended September 30, 2002 and 2001, respectively. The effective tax rates are below the statutory combined state and federal income tax rates because the Banks two
security corporations take advantage of the lower state tax rate afforded to these types of entities and additional tax preference items that are nontaxable.





Asset/Liability Management





A
principal operating objective of the Bank is to produce stable earnings by achieving a favorable interest rate spread that can be sustained during fluctuations in prevailing interest rates. Since the Banks principal interest-earning assets
generally have longer terms to maturity than its primary source of funds, i.e., deposit liabilities, increases in general interest rates will generally result in an increase in the Banks cost of funds before the yield on its asset portfolio
adjusts upward. Financial institutions have generally sought to reduce their exposure to adverse changes in interest rates by attempting to achieve a closer match




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between the repricing periods of interest rate sensitive assets and liabilities. Such matching, however, is carefully monitored so as not to sacrifice net interest margin performance for the
perfect matching of these interest rate sensitive instruments. The Bank has established an Asset/Liability Management Committee (ALCO) made up of the chief executive officer, the chief financial officer, the senior loan officer, and the
senior vice president of bank administration to assess the asset/liability mix and recommend strategies that will enhance income while managing the Banks vulnerability to changes in interest rate. This committee meets regularly to discuss
interest rate conditions and potential product lines that would enhance the Banks income performance.





Certain strategies have been
implemented to improve the match between interest rate sensitive assets and liabilities. These strategies include, but are not limited to: daily monitoring of the Banks cash requirements, originating adjustable and fixed rate mortgage loans,
both residential and commercial, for the Banks own portfolio, managing the cost and structure of deposits, and generally using the matched borrowings to fund specific purchases of loan packages and large loan originations. Occasionally,
management may choose to deviate from specific matching of maturities of assets and liabilities if an attractive opportunity to enhance yield becomes available.





Quarterly, ALCO modeling is performed with the assistance of an outside advisor which projects the Banks financial performance over the next twenty four months using loan and deposit projections, projections of changes
in interest rates, and anticipated changes in other income and operating expenses to reveal the full impact of the Banks operating strategies on financial performance. The results of the ALCO process are reported to the Board at least on a
quarterly basis.





Liquidity and Capital Resources





The Banks primary sources of funds consist of deposits, borrowings, repayment and prepayment of loans, sales of loans and securities, maturities and early
calls of securities, and funds provided from operations. While scheduled repayments of loans and maturities of securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest
rates, economic conditions, and competition. The Bank uses its liquidity resources primarily to fund existing and future loan commitments, to fund net deposit outflows, to invest in other interest-earning assets, to maintain liquidity, and to pay
operating expenses.





From time to time, the Bank utilizes advances from the FHLB primarily in connection with its management of the
interest rate sensitivity of its assets and liabilities. Total advances outstanding at September 30, 2002 amounted to $33.7 million. The Banks ability to borrow from the FHLB is dependent upon the amount and type of collateral the Bank has to
secure the loans. Such collateral consists of, but is not limited to, one-to-four family owner-occupied residential property. As of September 30, 2002, the Banks total borrowing capacity through the Federal Home Loan Bank was $67.0 million.
The Bank has additional capacity to borrow through such instruments as repurchase agreements if the situation arises utilizing federal agency obligations and mortgage-backed securities as collateral.





A major portion of the Banks liquidity consists of cash and cash equivalents, short-term investments, U.S. Government and federal agency obligations,
mortgage-backed securities, and other debt securities. The level of these assets is dependent upon the Banks operating, lending, and financing activities during any given period.





At September 30, 2002, the Bank had $10.6 million of outstanding commitments to originate loans. The Bank anticipates that it will have sufficient funds available to meet these commitments.
Certificates of




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deposit, which are scheduled to mature in one year or less, totaled $86.7 million at September 30, 2002. Based upon historical experience, management believes that a significant portion of such
deposits will remain with the Bank.





At September 30, 2002, the Company and the Bank exceeded all regulatory capital requirements.





Recent Accounting Pronouncements





In October 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 147, Acquisitions of Certain
Financial Institutions. This Statement amends SFAS No. 72, SFAS No. 144 and FASB Interpretation No. 9, and SFAS No. 147 and provides guidance on the application of the purchase method to acquisitions of financial institutions and includes
guidance on the recognition and measurement of intangible assets associated with such acquisitions. This Statement is generally effective for acquisitions occurring on or after October 1, 2002. This Statement is not expected to have any impact on
the Companys consolidated financial statements.





Item 3.
Controls and Procedures





| | (a) |  | Evaluation of disclosure controls and procedures. The Companys Chief Executive Officer and its Chief Financial Officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on November 14, 2002, have concluded that, as of such date, the Companys disclosure controls and procedures were
adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | Changes in internal controls. There were no significant changes in the Companys internal controls or in other factors that could significantly
affect the Companys disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Companys internal controls. As a result, no corrective actions
were required or undertaken.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART IIOTHER INFORMATION





ITEM 1.
Legal Proceedings





The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involved amounts believed by management to be immaterial to the financial condition and operations of the Company.





ITEM 2.
Changes in Securities





Not applicable.





ITEM 3.
Defaults Upon Senior Securities





Not applicable.





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





On October 22, 2002, the Company
held its annual meeting of stockholders for the purpose of the election of five Directors to three year terms and the ratification of Wolf & Company, P.C. as the Companys independent auditors for the fiscal year ending June 30, 2003.





The number of votes cast at the meeting as to each matter acted upon was as follows:





NO. OF VOTES FOR

NO. OF VOTES WITHHELD1. Election of Directors:Pamela J. Montpelier

1,478,248

3,300Richard Giusti

1,478,248

3,300Thomas R. Howie

1,478,248

3,300James W. Murphy

1,478,248

3,300Eugene G. Stone

1,478,248

3,300





NO. OF VOTES FOR

NO. OF VOTES AGAINST

NO. OF VOTES ABSTAINING2. Ratification of the Appointment of Wolf & Company, P.C. as the Companys Independent Auditors

1,478,418

2,000

1,130





Item 5.
Other Information





Not applicable.




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Item 6.
Exhibits and Reports on Form 8-K





| | (a) |  | Exhibits
| | --- |  | --------




99.1

Certification of Pamela J. Montpelier, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.2

Certification of Dana S. Philbrook, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.





| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------




None.




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SIGNATURES





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





SERVICE BANCORP, INC.By:

/s/    PAMELA J.
MONTPELIERPamela J. Montpelier President and Chief Executive Officer


Date: November 14, 2002





By:

/s/    DANA S.
PHILBROOKDana S. PhilbrookChief Financial Officer


Date: November 14, 2002




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##### Table of Contents

CERTIFICATIONS





I, Pamela J. Montpelier, hereby certify that:





(1)    I have reviewed this quarterly report on Form
10-QSB of Service Bancorp, Inc.;





(2)    Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





(3)    Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this quarterly report;





(4)    I and the other certifying officers are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)) for the issuer and have:





a)    Designed such disclosure controls and
procedures to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this quarterly report is being prepared;





b)    Evaluated the effectiveness of the issuerss disclosure controls and procedures as
of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)    Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;





(5)    I and the other certifying officers have disclosed, based on our most recent evaluation, to the issuerss auditors and the audit
committee of the board of directors (or persons fulfilling the equivalent functions):





a)    All significant deficiencies in the design or operation of internal controls which could adversely affect the issuers ability to record, process, summarize and report financial data and have identified
for the issuers auditors any material weaknesses in internal controls; and





b)    Any
fraud, whether or not material, that involves management or other employees who have a significant role in the issuers internal controls; and





(6)    I and the other certifying officers have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





/S/    PAMELA J. MONTPELIERPamela J. Montpelier Chief Executive Officer November 14, 2002




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I, Dana S. Philbrook, hereby certify that:





(1)    I have reviewed this quarterly report on Form 10-QSB of Service Bancorp, Inc.;





(2)    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this quarterly report;





(3)    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and
cash flows of the issuer as of, and for, the periods presented in this quarterly report;





(4)    I and the other
certifying officers are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the issuer and have:





a)    Designed such disclosure controls and procedures to ensure that material information relating to the issuer, including its consolidated
subsidiaries, is made known to them by others within those entities, particularly during the period in which this quarterly report is being prepared;





b)    Evaluated the effectiveness of the issuerss disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and





c)    Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;





(5)    I and the other certifying officers have disclosed, based on our most recent evaluation, to the issuerss auditors and the audit committee of the board of directors (or persons fulfilling the
equivalent functions):





a)    All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuers ability to record, process, summarize and report financial data and have identified for the issuers auditors any material weaknesses in internal controls; and





b)    Any fraud, whether or not material, that involves management or other employees who have a
significant role in the issuers internal controls; and





(6)    I and the other certifying officers have
indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.





/S/    DANA S. PHILBROOKDana S. Philbrook Chief Financial Officer November 14, 2002




20