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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 March 31, 2003



| ̈ |  | 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 of |  | (I.R.S. Employer      
|incorporation or organization)  |  | Identification 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)



State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practical date: At April 30, 2003, there were 1,639,284 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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##### Table of Contents

SERVICE BANCORP, INC. AND SUBSIDIARY



FORM 10-QSB



INDEX



|        |  |                                                                                                              |  | Page
|------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|       
|PART I  |  | FINANCIAL INFORMATION                                                                                        |  |     
|       
|Item 1. |  | Financial Statements                                                                                         |  |     
|       
|        |  | Consolidated Balance Sheets as of March 31, 2003 and June 30, 2002                                           |  | 1   
|       
|        |  | Consolidated Statements of Income for the three and nine months ended March 31, 2003 and 2002                |  | 2   
|       
|        |  | Consolidated Statements of Changes in Stockholders Equity For the nine months ended March 31, 2003 and 2002 |  | 3   
|       
|        |  | Consolidated Statements of Cash Flows for the nine months ended March 31, 2003 and 2002                      |  | 5   
|       
|        |  | Notes to Consolidated Financial Statements                                                                   |  | 6   
|       
|Item 2. |  | Managements Discussion and Analysis or Plan of Operation                                                    |  | 10  
|       
|Item 3. |  | Controls and Procedures                                                                                      |  | 17  
|       
|PART II |  | OTHER INFORMATION                                                                                            |  |     
|       
|Item 1. |  | Legal Proceedings                                                                                            |  | 18  
|       
|Item 2. |  | Changes in Securities                                                                                        |  | 18  
|       
|Item 3. |  | Defaults upon Senior Securities                                                                              |  | 18  
|       
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                          |  | 18  
|       
|Item 5. |  | Other Information                                                                                            |  | 18  
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                             |  | 18  
|       
|        |  | Signatures                                                                                                   |  | 19  
|       
|        |  | Certifications                                                                                               |  | 20  



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##### Table of Contents

PART IFINANCIAL INFORMATION



ITEM 1. Financial Statements



SERVICE BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED BALANCE SHEETS (unaudited)



(Dollars in thousands, except share amounts)



|                                                                             |  | March 31, 2003 |         |   | June 30, 2002 |  
|---------------------------------------------------------------------------- |  | -------------- | ------- | - | ------------- | -
|ASSETS                                                                       |  |                |         |   |               |  
|Cash and due from banks                                                      |  | $              | 7,775   |   |               | $
|Short-term investments                                                       |  |                | 14,308  |   |               |  
|                                                                             |  |                |         |   |               |  
|Total cash and cash equivalents                                              |  |                | 22,083  |   |               |  
|                                                                             |  |                |         |   |               |  
|                                                                            
|Certificates of deposit                                                      |  |                | 100     |   |               |  
|Securities available for sale, at fair value                                 |  |                | 47,940  |   |               |  
|Securities held to maturity, at amortized cost                               |  |                | 21,894  |   |               |  
|Federal Home Loan Bank stock, at cost                                        |  |                | 1,948   |   |               |  
|                                                                            
|Loans                                                                        |  |                | 181,606 |   |               |  
|Less allowance for loan losses                                               |  |                | (1,663  | ) |               |  
|                                                                             |  |                |         |   |               |  
|Loans, net                                                                   |  |                | 179,943 |   |               |  
|                                                                             |  |                |         |   |               |  
|                                                                            
|Banking premises and equipment, net                                          |  |                | 3,469   |   |               |  
|Accrued interest receivable                                                  |  |                | 1,398   |   |               |  
|Net deferred tax asset                                                       |  |                | 153     |   |               |  
|Bank-owned life insurance                                                    |  |                | 3,562   |   |               |  
|Other assets                                                                 |  |                | 528     |   |               |  
|                                                                             |  |                |         |   |               |  
|Total assets                                                                 |  | $              | 283,018 |   |               | $
|                                                                             |  |                |         |   |               |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                         |  |                |         |   |               |  
|Deposits                                                                     |  | $              | 223,969 |   |               | $
|Federal Home Loan Bank advances                                              |  |                | 35,405  |   |               |  
|Other liabilities                                                            |  |                | 973     |   |               |  
|                                                                             |  |                |         |   |               |  
|Total liabilities                                                            |  |                | 260,347 |   |               |  
|                                                                             |  |                |         |   |               |  
|                                                                            
|Stockholders 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      |   |               |  
|Additional paid-in capital                                                   |  |                | 7,491   |   |               |  
|Retained earnings                                                            |  |                | 15,042  |   |               |  
|Accumulated other comprehensive income                                       |  |                | 1,047   |   |               |  
|Treasury stock, at cost(64,506 shares)                                      |  |                | (527    | ) |               |  
|Unearned ESOP shares(25,954 and 30,784 shares, respectively)                |  |                | (260    | ) |               |  
|Unearned RRP stock(19,470 and 19,680 shares, respectively)                  |  |                | (139    | ) |               |  
|                                                                             |  |                |         |   |               |  
|Total stockholders equity                                                   |  |                | 22,671  |   |               |  
|                                                                             |  |                |         |   |               |  
|Total liabilities and stockholders equity                                   |  | $              | 283,018 |   |               | $
|                                                                             |  |                |         |   |               |  



See
accompanying notes to consolidated financial statements.



1



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##### Table of Contents

SERVICE BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF INCOME (unaudited)



(Dollars in thousands, except per share amounts)



|                                                                                               |  | Three Months Ended March 31, |           |      | Nine Months Ended March 31,
|---------------------------------------------------------------------------------------------- |  | ---------------------------- | --------- | ---- | ---------------------------
|                                                                                               |  | 2003                         |           | 2002 |                            
|Interest and dividend income:                                                                  |  |                              |           |      |                            
|Interest and fees on loans                                                                     |  | $                            | 2,712     |      | $                          
|Interest and dividends on securities, Federal Home Loan Bank stock and certificates of
deposit |  |                              | 1,043     |      |                            
|Interest on short-term investments                                                             |  |                              | 23        |      |                            
|                                                                                               |  |                              |           |      |                            
|Total interest and dividend income                                                             |  |                              | 3,778     |      |                            
|                                                                                               |  |                              |           |      |                            
|                                                                                              
|Interest expense:                                                                              |  |                              |           |      |                            
|Interest on deposits                                                                           |  |                              | 887       |      |                            
|Interest on Federal Home Loan Bank advances                                                    |  |                              | 454       |      |                            
|                                                                                               |  |                              |           |      |                            
|Total interest expense                                                                         |  |                              | 1,341     |      |                            
|                                                                                               |  |                              |           |      |                            
|                                                                                              
|Net interest income                                                                            |  |                              | 2,437     |      |                            
|Provision for loan losses                                                                      |  |                              | 150       |      |                            
|                                                                                               |  |                              |           |      |                            
|Net interest income, after provision for loan losses                                           |  |                              | 2,287     |      |                            
|                                                                                               |  |                              |           |      |                            
|                                                                                              
|Noninterest income:                                                                            |  |                              |           |      |                            
|Customer service fees                                                                          |  |                              | 263       |      |                            
|Gain (loss) on securities available for sale, net                                              |  |                              | 6         |      |                            
|Other income                                                                                   |  |                              | 79        |      |                            
|                                                                                               |  |                              |           |      |                            
|Total noninterest income                                                                       |  |                              | 348       |      |                            
|                                                                                               |  |                              |           |      |                            
|                                                                                              
|Noninterest expense:                                                                           |  |                              |           |      |                            
|Salaries and employee benefits                                                                 |  |                              | 1,004     |      |                            
|Occupancy and equipment expenses                                                               |  |                              | 376       |      |                            
|Data processing expenses                                                                       |  |                              | 183       |      |                            
|Professional fees                                                                              |  |                              | 92        |      |                            
|Advertising expenses                                                                           |  |                              | 50        |      |                            
|Other general and administrative expenses                                                      |  |                              | 296       |      |                            
|                                                                                               |  |                              |           |      |                            
|Total noninterest expense                                                                      |  |                              | 2,001     |      |                            
|                                                                                               |  |                              |           |      |                            
|Income before income taxes                                                                     |  |                              | 634       |      |                            
|Provision for income taxes                                                                     |  |                              | 211       |      |                            
|                                                                                               |  |                              |           |      |                            
|Net income                                                                                     |  | $                            | 423       |      | $                          
|                                                                                               |  |                              |           |      |                            
|Weighted average shares outstanding (basic)                                                    |  |                              | 1,606,410 |      |                            
|                                                                                               |  |                              |           |      |                            
|Weighted average shares outstanding (diluted)                                                  |  |                              | 1,637,374 |      |                            
|                                                                                               |  |                              |           |      |                            
|                                                                                              
|Earnings per share (basic)                                                                     |  | $                            | 0.26      |      | $                          
|                                                                                               |  |                              |           |      |                            
|Earnings per share (diluted)                                                                   |  | $                            | 0.26      |      | $                          
|                                                                                               |  |                              |           |      |                            



See
accompanying notes to consolidated financial statements.



2



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SERVICE BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (unaudited)



NINE MONTHS ENDED MARCH 31, 2003 AND 2002

(Dollars in thousands, except share amounts)



|                                                                                                           |  | Common Stock |    | Additional Paid-in Capital |   | Retained Earnings |  | Accumulated Other Comprehensive Income |        | Treasury Stock |   |       | Unearned ESOP Shares |    |     | Unearned RRP Stock |  |    | Total
|---------------------------------------------------------------------------------------------------------- |  | ------------ | -- | -------------------------- | - | ----------------- |  | -------------------------------------- | ------ | -------------- | - | ----- | -------------------- | -- | --- | ------------------ |  | -- | -----
|Balance at June 30, 2002                                                                                   |  | $            | 17 |                            | $ | 7,430             |  | $                                      | 13,889 |                | $ | 5     |                      | ($ | 527 | )                  |  | ($ | 308  
|                                                                                                           |  |              |    |                            |   |                   |  |                                        |        |                |   |       |                      |    |     |                    |  |    |      
|                                                                                                          
|Comprehensive income:                                                                                      |  |              |    |                            |   |                   |  |                                        |        |                |   |       |                      |    |     |                    |  |    |      
|Net income                                                                                                 |  |              |   |                            |   |                  |  |                                        | 1,153  |                |   |      |                      |    |    |                    |  |    |     
|Change in net unrealized gain on securities available for sale, net of tax and
reclassification adjustment |  |              |   |                            |   |                  |  |                                        |       |                |   | 1,042 |                      |    |    |                    |  |    |     
|                                                                                                           |  |              |    |                            |   |                   |  |                                        |        |                |   |       |                      |    |     |                    |  |    |      
|                                                                                                          
|Total comprehensive income                                                                                 |  |              |    |                            |   |                   |  |                                        |        |                |   |       |                      |    |     |                    |  |    |      
|                                                                                                           |  |              |    |                            |   |                   |  |                                        |        |                |   |       |                      |    |     |                    |  |    |      
|                                                                                                          
|Common stock held by ESOP released and committed to be released (4,830
shares)                             |  |              |   |                            |   | 30                |  |                                        |       |                |   |      |                      |    |    |                    |  |    | 48   
|Income tax benefit on stock option exercises                                                               |  |              |   |                            |   | 6                 |  |                                        |       |                |   |      |                      |    |    |                    |  |    |     
|Amortization of RRP stock (210 shares)                                                                     |  |              |   |                            |   | 25                |  |                                        |       |                |   |      |                      |    |    |                    |  |    |     
|                                                                                                           |  |              |    |                            |   |                   |  |                                        |        |                |   |       |                      |    |     |                    |  |    |      
|                                                                                                          
|Balance at March 31, 2003                                                                                  |  | $            | 17 |                            | $ | 7,491             |  | $                                      | 15,042 |                | $ | 1,047 |                      | ($ | 527 | )                  |  | ($ | 260  
|                                                                                                           |  |              |    |                            |   |                   |  |                                        |        |                |   |       |                      |    |     |                    |  |    |      



See
accompanying notes to consolidated financial statements.



3



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SERVICE
BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (unaudited)



NINE MONTHS ENDED MARCH 31, 2003 AND 2002 (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 |  |    | Total |  
|---------------------------------------------------------------------------------------------------------- |  | ------------ | -- | -------------------------- | - | ----------------- |  | --------------------------------------------- | ------ |  | -------------- | ---- | - | -------------------- | -- | --- | ------------------ |  | -- | ----- | -
|Balance at June 30, 2001                                                                                   |  | $            | 17 |                            | $ | 7,409             |  | $                                             | 12,588 |  | ($             | 514  | ) |                      | ($ | 560 | )                  |  | ($ | 372   | )
|                                                                                                           |  |              |    |                            |   |                   |  |                                               |        |  |                |      |   |                      |    |     |                    |  |    |       |  
|                                                                                                          
|Comprehensive income:                                                                                      |  |              |    |                            |   |                   |  |                                               |        |  |                |      |   |                      |    |     |                    |  |    |       |  
|                                                                                                          
|Net income                                                                                                 |  |              |   |                            |   |                  |  |                                               | 894    |  |                |     |   |                      |    |    |                    |  |    |      |  
|                                                                                                          
|Change in net unrealized loss on securities available for sale, net of tax and
reclassification adjustment |  |              |   |                            |   |                  |  |                                               |       |  |                | (240 | ) |                      |    |    |                    |  |    |      |  
|                                                                                                           |  |              |    |                            |   |                   |  |                                               |        |  |                |      |   |                      |    |     |                    |  |    |       |  
|                                                                                                          
|Total comprehensive income                                                                                 |  |              |    |                            |   |                   |  |                                               |        |  |                |      |   |                      |    |     |                    |  |    |       |  
|                                                                                                           |  |              |    |                            |   |                   |  |                                               |        |  |                |      |   |                      |    |     |                    |  |    |       |  
|                                                                                                          
|Common stock held by ESOP released and committed to be released (4,830
shares)                             |  |              |   |                            |   | 15                |  |                                               |       |  |                |     |   |                      |    |    |                    |  |    | 48    |  
|                                                                                                          
|Amortization of RRP stock(6,453 shares)                                                                    |  |              |   |                            |   |                  |  |                                               |       |  |                |     |   |                      |    |    |                    |  |    |      |  
|                                                                                                           |  |              |    |                            |   |                   |  |                                               |        |  |                |      |   |                      |    |     |                    |  |    |       |  
|                                                                                                          
|Balance at March 31, 2002                                                                                  |  | $            | 17 |                            | $ | 7,424             |  | $                                             | 13,482 |  | ($             | 754  | ) |                      | ($ | 560 | )                  |  | ($ | 324   | )
|                                                                                                           |  |              |    |                            |   |                   |  |                                               |        |  |                |      |   |                      |    |     |                    |  |    |       |  



See
accompanying notes to consolidated financial statements.





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SERVICE BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)



(Dollars in thousands)



|                                                                                  |  | Nine Months Ended March 31, |        
|--------------------------------------------------------------------------------- |  | --------------------------- | -------
|                                                                                  |  | 2003                        |        
|Cash flows from operating activities:                                             |  |                             |        
|Net income                                                                        |  | $                           | 1,153  
|Adjustments to reconcile net income to net cash provided by operating
activities: |  |                             |        
|Provision for loan losses                                                         |  |                             | 420    
|Loss (gain) on securities available for sale, net                                 |  |                             | 21     
|Net amortization of securities                                                    |  |                             | 262    
|Depreciation and amortization expense                                             |  |                             | 378    
|Decrease in accrued interest receivable                                           |  |                             | 359    
|Net amortization of deferred loan costs and premiums                              |  |                             | 320    
|Bank-owned life insurance income                                                  |  |                             | (109   
|Deferred tax (benefit) provision                                                  |  |                             | (119   
|Other, net                                                                        |  |                             | (637   
|                                                                                  |  |                             |        
|Net cash provided by operating activities                                         |  |                             | 2,048  
|                                                                                  |  |                             |        
|                                                                                 
|Cash flows from investing activities:                                             |  |                             |        
|Activity in securities available for sale:                                        |  |                             |        
|Sales                                                                             |  |                             | 8,665  
|Maturities, prepayments and calls                                                 |  |                             | 15,848 
|Purchases                                                                         |  |                             | (14,273
|Activity in securities held to maturity:                                          |  |                             |        
|Maturities, prepayments and calls                                                 |  |                             | 12,340 
|Purchases                                                                         |  |                             |       
|Net increase in loans, excluding loan purchases                                   |  |                             | (17,529
|Purchases of loans                                                                |  |                             | (12,307
|Purchases of banking premises and equipment                                       |  |                             | (169   
|Purchases of bank-owned life insurance                                            |  |                             | (700   
|Purchases of Federal Home Loan Bank stock                                         |  |                             |       
|                                                                                  |  |                             |        
|Net cash used by investing activities                                             |  |                             | (8,125 
|                                                                                  |  |                             |        
|                                                                                 
|Cash flows from financing activities:                                             |  |                             |        
|Net increase in deposits                                                          |  |                             | 3,776  
|Proceeds from Federal Home Loan Bank advances                                     |  |                             | 5,174  
|Repayment of Federal Home Loan Bank advances                                      |  |                             | (4,563 
|Repayment of ESOP loan                                                            |  |                             | 48     
|                                                                                  |  |                             |        
|Net cash provided by financing activities                                         |  |                             | 4,435  
|                                                                                  |  |                             |        
|Net change in cash and cash equivalents                                           |  |                             | (1,642 
|Cash and cash equivalents at beginning of period                                  |  |                             | 23,725 
|                                                                                  |  |                             |        
|Cash and cash equivalents at end of period                                        |  | $                           | 22,083 
|                                                                                  |  |                             |        
|                                                                                 
|Supplementary information:                                                        |  |                             |        
|Interest paid on deposits                                                         |  | $                           | 3,234  
|Interest paid on Federal Home Loan Bank advances                                  |  |                             | 1,373  
|Income taxes paid                                                                 |  |                             | 581    
|Net change in unsettled securities available for sale transactions                |  |                             | 1,424  



See
accompanying notes to consolidated financial statements.





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SERVICE BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



(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), a Massachusetts chartered savings bank, and the
Banks wholly-owned subsidiaries, Medway Security 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 Item 310(b) of Regulation S-B.
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 Annual Report on Form 10-KSB for the year ended June 30, 2002.



(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 March 31, 2003, the Company had outstanding commitments to originate loans
of $11.2 million. Unused lines of credit and open commitments available to customers at March 31, 2003 amounted to $27.0 million, of which $11.5 million were home equity lines of credit.



6



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##### Table of Contents

SERVICE BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)



(4) Securities



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



|                                          |  | March 31, 2003         |        | June 30, 2002
|----------------------------------------- |  | ---------------------- | ------ | -------------
|                                          |  | Amortized Cost         |        | Fair Value   
|                                          |  | (Dollars in thousands)
|Securities available for sale:            |  |                        |        |              
|Federal agency securities                 |  | $                      | 14,551 |              
|Federal agency mortgage-backed securities |  |                        | 8,401  |              
|Other debt securities                     |  |                        | 22,319 |              
|                                          |  |                        |        |              
|Total debt securities                     |  |                        | 45,271 |              
|Marketable equity securities              |  |                        | 1,047  |              
|                                          |  |                        |        |              
|Total securities available for sale       |  | $                      | 46,318 |              
|                                          |  |                        |        |              
|Securities held to maturity:              |  |                        |        |              
|Federal agency mortgage-backed securities |  | $                      | 17,150 |              
|Other debt securities                     |  |                        | 4,744  |              
|                                          |  |                        |        |              
|Total securities held to maturity         |  | $                      | 21,894 |              
|                                          |  |                        |        |              



(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.



|                                     |  | March 31, 2003         |         | June 30, 2002
|------------------------------------ |  | ---------------------- | ------- | -------------
|                                     |  | Amount                 |         |              
|                                     |  | (Dollars in thousands)
|Real estate loans:                   |  |                        |         |              
|Residential                          |  | $                      | 99,187  |              
|Commercial and multi-family          |  |                        | 43,911  |              
|Construction                         |  |                        | 9,799   |              
|                                     |  |                        |         |              
|Total real estate loans              |  |                        | 152,897 |              
|                                     |  |                        |         |              
|                                    
|Commercial loans                     |  |                        | 13,092  |              
|                                     |  |                        |         |              
|                                    
|Consumer loans:                      |  |                        |         |              
|Home equity and second mortgages     |  |                        | 13,117  |              
|Passbook secured                     |  |                        | 534     |              
|Other                                |  |                        | 1,161   |              
|                                     |  |                        |         |              
|Total consumer loans                 |  |                        | 14,812  |              
|                                     |  |                        |         |              
|Total gross loans                    |  |                        | 180,801 |              
|                                     |  |                        |         |              
|                                    
|Net deferred loan costs and premiums |  |                        | 805     |              
|Allowance for loan losses            |  |                        | (1,663  | )            
|                                     |  |                        |         |              
|Total loans, net                     |  | $                      | 179,943 |              
|                                     |  |                        |         |              



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##### Table of Contents



SERVICE
BANCORP, INC. AND SUBSIDIARY



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (concluded)



(6) Deposits and Federal Home Loan Bank Advances



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



|                                         |  | March 31, 2003         |         |         | June 30, 2002 |  
|---------------------------------------- |  | ---------------------- | ------- | ------- | ------------- | -
|                                         |  | Amount                 |         | Percent |               |  
|                                         |  | (Dollars in thousands) |        
|Demand                                   |  | $                      | 29,794  |         | 13.30         | %
|NOW                                      |  |                        | 32,489  |         | 14.51         | %
|Money market deposits                    |  |                        | 27,830  |         | 12.43         | %
|Regular and other savings                |  |                        | 43,616  |         | 19.47         | %
|                                         |  |                        |         |         |               |  
|Total non-certificate accounts           |  |                        | 133,729 |         | 59.71         | %
|                                         |  |                        |         |         |               |  
|                                        
|Term certificates of $100,000 or greater |  |                        | 26,882  |         | 12.00         | %
|Term certificates less than $100,000     |  |                        | 63,358  |         | 28.29         | %
|                                         |  |                        |         |         |               |  
|Total certificate accounts               |  |                        | 90,240  |         | 40.29         | %
|                                         |  |                        |         |         |               |  
|Total deposits                           |  | $                      | 223,969 |         | 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.



|                         |  | March 31, 2003         |        |         | June 30, 2002 |  
|------------------------ |  | ---------------------- | ------ | ------- | ------------- | -
|                         |  | Amount                 |        | Percent |               |  
|                         |  | (Dollars in thousands) |       
|Less than one year       |  | $                      | 30,669 |         | 86.62         | %
|One to three years       |  |                        | 4,000  |         | 11.30         | %
|Greater than three years |  |                        | 736    |         | 2.08          | %
|                         |  |                        |        |         |               |  
|Total borrowed funds     |  | $                      | 35,405 |         | 100.00        | %
|                         |  |                        |        |         |               |  





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(7) Stock Compensation Plan



At March 31, 2003, the Company had a stock option plan, which is
described more fully in Note 11 of the Companys annual report on Form 10-KSB for the year ended June 30, 2002. The Company measures compensation cost for its stock option plan using the intrinsic value based method of accounting, whereby
compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Companys stock option plan
have no intrinsic value at the grant date and no compensation cost is recognized for them.



Had compensation cost for the Company stock option plan been determined using the fair value method based on the Black-Scholes option-pricing model, the Companys net income and earnings per share
for the three and nine month periods ended March 31, 2003 and 2002, would have been reduced to the following pro forma amounts:



|                                                                                                    |  | Three Months Ended March 31,                     |      | Nine Months Ended March 31,
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ---- | ---------------------------
|                                                                                                    |  | 2003                                             |      | 2002                       
|                                                                                                    |  | (Dollars in thousands, except per share amounts)
|Net income, as reported                                                                             |  | $                                                | 423  |                            
|Deduct: Total stock-based compensation expense determined under the fair value method,
net of taxes |  |                                                  | 10   |                            
|                                                                                                    |  |                                                  |      |                            
|                                                                                                   
|Pro forma net income                                                                                |  | $                                                | 413  |                            
|                                                                                                    |  |                                                  |      |                            
|                                                                                                   
|Earnings per share (basic):                                                                         |  |                                                  |      |                            
|As reported                                                                                         |  | $                                                | 0.26 |                            
|                                                                                                    |  |                                                  |      |                            
|Pro forma                                                                                           |  | $                                                | 0.26 |                            
|                                                                                                    |  |                                                  |      |                            
|                                                                                                   
|Earnings per share (diluted):                                                                       |  |                                                  |      |                            
|As reported                                                                                         |  | $                                                | 0.26 |                            
|                                                                                                    |  |                                                  |      |                            
|Pro forma                                                                                           |  | $                                                | 0.25 |                            
|                                                                                                    |  |                                                  |      |                            





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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, competitive conditions in the Banks marketplace generally, the Banks
continued ability to originate quality loans, fluctuation in interest rates including fluctuations which may effect the Banks interest rate spread, real estate conditions in the Banks lending areas, changes in the securities or financial
markets, changes in loan defaults and charge-off rates, 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 March 31, 2003 and June 30, 2002



Total assets
were $283.0 million at March 31, 2003, an increase of $5.9 million, or 2.1%, from $277.1 million at June 30, 2002. The increase was primarily attributable to an increase of $29.1 million, or 19.3%, in net loans since June 30, 2002. This increase was
partially offset by a $19.8 million, or 22.1%, decrease in investment securities. Total deposits increased $3.8 million, or 1.7%, since June 30, 2002, which when combined with the reduction in investment securities provided the funding for the loan
growth.



Total investment securities were $69.8 million at March
31, 2003, a decrease of $19.8 million since June 30, 2002 due mostly to amortization on mortgage-backed securities and calls on federal agency securities exceeding new purchases. Investment securities have been a less attractive investment due to
the current low interest rate environment and its effect on securities yield. The Companys continued objective is to prudently increase its loan portfolio, primarily in residential and commercial loans.



Residential real estate loans are originated through the residential mortgage
division of the Bank, the Strata Mortgage Center. In addition, the Bank, through Strata Mortgage Center has a contractual arrangement with Marathon Mortgage Company, an independent mortgage loan origination company, which supplements the Banks
residential mortgage loan origination business. For the nine-month period ended March 31, 2003, the Strata Mortgage Center originated $36.0 million in residential loans. In addition, the Bank purchased $12.3 million of residential loans directly
from Marathon Mortgage Company over the same timeframe. With this activity, the Banks residential mortgages net of principal payments, increased $15.7 million, or 18.8%, since June 30, 2002. The net increase in residential loans for the
quarter ended March 31, 2003 was $1.5 million, which was lower than the increase in the quarter ended December 31, 2002 of $4.1 million and the quarter ended September 30, 2002 of $10.1 million. The decrease in quarterly net growth reflects an
increase in refinance and payoff activity in the Banks portfolio as a result of the historically low market interest rates for residential mortgage loans. Net deferred loan costs and premiums increased since June 30, 2002 by $219,000, largely
due to costs associated with residential loan originations and purchases through Marathon Mortgage Company.



Commercial loans continue to be an area of strong growth for the Bank due to additions to the staff of commercial lenders and healthy demand for commercial loans in the Banks market area. The
Bank originated $33.1 million in commercial, commercial real estate and construction loans for the nine-month period ended March 31, 2003, which was an $11.1 million increase over the same nine-month period ending March 31, 2002. The total
commercial and commercial real estate loan portfolios increased by $10.7 million, or 19.1%, since June 30, 2002. In addition to these loan originations, the Bank emphasizes cross selling of commercial checking and money market deposits from new
commercial customers. Since June 30, 2002, total commercial deposits have increased by $4.3 million, or 16.7%, and as of March 31, 2003 represented 13.3% of total deposits.



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Home equity and second
mortgage loans increased 30.6% since June 30, 2002 to $13.1 million at March 31, 2003. The strong growth was due to expansion of the product offerings for new home equity loans and aggressive promotions for these products.



As of March 31, 2003, the Bank had $14.3 million invested in overnight funds,
representing 5.1% of total assets, which was a reduction of $1.3 million, since June 30, 2002. This level of overnight funds is maintained for liquidity purposes, particularly at end of month periods due to the volatility in certain of the
Banks deposits. In addition, excess funds are expected to be utilized to fund the origination of new loans.



Total deposits increased $3.8 million since June 30, 2002 to $224.0 million at March 31, 2003. Core deposits or non-certificate deposits increased $12.7
million, or 10.5%, which provided the Bank the opportunity to reduce higher cost certificate of deposits by $8.9 million, or 9.0%. Most of the decrease in certificate of deposits, approximately $5.9 million, occurred in certificates of deposits with
balances in excess of $100,000 which typically are a more volatile funding source compared with certificates under $100,000. Certificates with maturity terms of 18 months and longer decreased $12.6 million since June 30, 2002, and represented 47.0%
of the Banks total term certificates at March 31, 2003 compared with 55.3% at June 30, 2002.



Stockholders equity increased from $20.4 million, or 7.4% of total assets at June 30, 2002 to $22.7 million, or 8.0% of total assets at March 31, 2003. The increase in stockholders equity
resulted primarily from the Companys retained earnings and the increase in accumulated other comprehensive income related to unrealized gains on securities available for sale since the beginning of the fiscal year.



Non-Performing Assets and Allowance for Loan Losses



The following indicates the non-performing assets at the dates indicated.



|                                           |  | March 31, 2003         |      |   | June 30, 2002 |  
|------------------------------------------ |  | ---------------------- | ---- | - | ------------- | -
|                                           |  | (Dollars in thousands) |     
|Non-accrual loans:                         |  |                        |      |   |               |  
|Residential real estate loans              |  | $                      |     |   |               | $
|Commercial and multi-family real estate    |  |                        | 198  |   |               |  
|Consumer loans                             |  |                        | 2    |   |               |  
|Commercial                                 |  |                        | 107  |   |               |  
|                                           |  |                        |      |   |               |  
|Total                                      |  |                        | 307  |   |               |  
|                                           |  |                        |      |   |               |  
|Accruing loans more than 90 days past due: |  |                        |      |   |               |  
|Residential real estate loans              |  |                        |     |   |               |  
|Consumer                                   |  |                        |     |   |               |  
|                                           |  |                        |      |   |               |  
|Total                                      |  |                        |     |   |               |  
|                                           |  |                        |      |   |               |  
|                                          
|Foreclosed assets                          |  |                        |     |   |               |  
|                                           |  |                        |      |   |               |  
|                                          
|Total non-performing assets                |  | $                      | 307  |   |               | $
|                                           |  |                        |      |   |               |  
|                                          
|Total as a percentage of total assets      |  |                        | 0.11 | % |               |  



For the three months
ended March 31, 2003 the Banks provision for loan losses was $150,000 compared with $90,000 for the same period last year. For the nine months ended March 31, 2003, the Banks provision for loan losses was $420,000 compared with $225,000
for the same period last year. The increases were consistent with the growth in loans, including the commercial loan portfolios, which generally present a greater risk of loss than residential loans. In addition, during the second quarter of this
fiscal year the Company after considering current economic conditions and risk factors in its loan portfolio, increased the percentage of allowance for loan losses required to be allocated to certain categories of loans. The allowance for loan
losses as a percentage of loans was



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.92% at March 31, 2003,
compared with .83% at June 30, 2002. During the nine months ended March 31, 2003, recoveries from previously charged-off loans of $26,000 were received and $41,000 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 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 and Nine Months Ended March 31, 2003 and 2002



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 March 31, 2003 was $423,000 compared with $198,000 for the three months ended March 31, 2002, an increase of $225,000, or 113.6%. Net income for the nine months ended March 31, 2003 was $1,153,000 compared with
$894,000 for the same period last year, an increase of $259,000, or 29.0%. This years results included a net gain on securities of $6,000 and net loss on securities of $21,000 for the three and nine month periods, respectively compared with a
net loss on securities of $257,000 and net gain on securities of $25,000, respectively, for the same periods last year. Net interest income grew in both periods. For the three-month period ended March 31, 2003 net interest income was $172,000, or
7.6% higher while net interest income for the nine-month period increased $626,000, or 9.6%. The three and nine month periods ended March 31, 2003 also included loan loss provisions of $150,000 and $420,000, respectively, compared with $90,000 and
$225,000, respectively, last year. Noninterest expenses were higher by $33,000 and $21,000 for the three and nine-month periods, respectively, compared to the same periods last year. Earnings per share data for the three months ended March 31, 2003
were $0.26 per share (basic and diluted) compared with $0.13 per share (basic) and $0.12 per share (diluted) for the three months ended March 31, 2002. Earnings per share for the nine months ended March 31, 2003 were $0.72 per share (basic) and
$0.71 per share (diluted), compared with $0.57 per share (basic) and $0.56 per share (diluted) for the same nine-month period last year.



Interest and Dividend Income



Total interest and dividend income for the three months ended March 31, 2003 was $3.8 million, $242,000 less than the same quarter a year ago. Total
interest and dividend income for the nine months ended March 31, 2003 was $11.7 million, $389,000 less than the same nine-month period a year ago. The effect of a reduction in yield on earning assets of 73 basis points this quarter to 5.84% compared
to the same quarter a year ago, was only partially offset by an increase in average earning assets this quarter of $14.0 million. Yield on earning assets for the nine months ended March 31, 2003 decreased 75 basis points to 6.04% compared to last
year, while average earning assets increased $20.9 million. Average net loans for the quarter increased $34.0 million, or 24.1%, while total loan yield decreased by 97 basis points to 6.23%. Average net loans for the first nine months of this year
increased $33.5 million, or 25.3%, while total loan yield decreased by 104 basis points to 6.55%. This years lower rate environment reduced the index rates used to set interest rates for loan re-pricing and for new loans which resulted in a
lower loan yield between periods. Contributing to the amount of new loan volume priced at this years lower rates was an increase level of residential loan refinance activity in the Banks existing portfolio. The decrease in yield on loans
was also attributable to an increase in amortization expense on deferred loan costs and premiums. Such expense increased $71,000 in the quarter-to-quarter comparison and $244,000 in the nine-month comparison largely as a result of increased loan
activities, particularly in residential mortgage loans.



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Average short-term investments
this quarter decreased $1.0 million, or 11.0%, and experienced a reduction in yield of 60 basis points to 1.18%. Average short-term investments for the first nine months of this year decreased $3.5 million, or 27.5%, and experienced a sharp
reduction in yield of 121 basis points to 1.46%. Yields on the securities portfolio were also lower and declined by 74 and 67 basis points for the three and nine month periods, respectively, to 5.43% and 5.52%, respectively, this year. Certain
investments within the Banks securities portfolio that matured, were sold or called, were reinvested in lower yielding investments. The average securities portfolio balance decreased $19.0 million and $9.2 million for the three and nine month
periods, respectively, compared with the same periods last year, contributing to the lower interest income.



Interest Expense



Interest expense on deposits decreased $382,000, or 30.1%, from $1.3 million for the three months ended March 31, 2002, to $887,000 for the three months ended March 31, 2003. Interest expense on deposits decreased $967,000, or 23.0%,
from $4.2 million for the nine months ended March 31, 2002, to $3.2 million for the nine months ended March 31, 2003. These decreases were mostly attributable to a 97 and 95 basis point reduction in cost of deposits for the three and nine month
period, respectively, and to increases of $16.1 million and $15.1 million, respectively, in average lower-cost non-certificate deposit balances compared to last year. Over these same timeframes, the higher-cost term certificate balances decreased by
$6.4 million and increased by $1.6 million, respectively.



The
average balance of FHLB borrowings was $34.5 million during the three months ended March 31, 2003, a decrease of $2.4 million, or 6.6% from the three months ended March 31, 2002. The average balance of FHLB borrowings was $34.4 million during the
nine months ended March 31, 2003, a decrease of $347,000, or 1.0% from the nine months ended March 31, 2002. Over the past year the Banks deposit growth and reduction in investments has provided most of the funding for the growth in loans, as
opposed to additional borrowings. The cost of average borrowings increased from 5.25% to 5.26% in the quarterly comparison and decreased from 5.40% to 5.27% in the nine-month comparison.



Net Interest Income



Net interest income for the three months ended March 31, 2003 increased $172,000, or 7.6%, over the same period last year. Net interest income for the
nine months ended March 31, 2003 increased $626,000, or 9.6%, over the same period last year. The increases were mostly due to an increase in average earning assets of $14.0 million and $20.9 million for the three and nine month periods,
respectively, over the same periods last year. The Banks interest rate spread (the difference between yields earned on earning assets and rates paid on deposits and borrowings) increased 13 basis points to 3.42% in the quarterly comparison and
11 basis points to 3.32% in the nine-month comparison to last year. The Banks reductions in rates offered on new and maturing certificates of deposit and reduced rates on savings and money market products were successful in keeping pace with
the decrease in yield on earning assets. The net interest margin (net interest income divided by average earning assets) increased from 3.68% to 3.77% for the quarter ended March 31, 2003 and increased from 3.65% to 3.69% for the nine months ended
March 31, 2003 over the same time periods last year.



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, or rely on borrowings from the FHLB for future funding requirements. A decrease in market 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.



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



|                                  |  | Three Months Ended March 31, |  | Nine Months Ended March 31,
|--------------------------------- |  | ---------------------------- |  | ---------------------------
|                                  |  | 2003                         |  | 2002                       
|Weighted average yield earned on: |  |                              |  |                            
|Short-term investments            |  | 1.18%                        |  | 1.78%                      
|Securities                        |  | 5.43%                        |  | 6.17%                      
|Total loans, net                  |  | 6.23%                        |  | 7.20%                      
|                                  |  |                              |  |                            
|All interest-earning assets       |  | 5.84%                        |  | 6.57%                      
|                                  |  |                              |  |                            
|Weighted average rate paid on:    |  |                              |  |                            
|Deposits                          |  | 1.90%                        |  | 2.87%                      
|Borrowed funds                    |  | 5.26%                        |  | 5.25%                      
|                                  |  |                              |  |                            
|All interest-bearing liabilities  |  | 2.42%                        |  | 3.28%                      
|                                  |  |                              |  |                            
|Weighted average rate spread      |  | 3.42%                        |  | 3.29%                      
|                                  |  |                              |  |                            
|                                 
|Net interest margin               |  | 3.77%                        |  | 3.68%                      
|                                  |  |                              |  |                            



Noninterest
Income



Total noninterest income increased $257,000 from
$91,000 for the three months ended March 31, 2002 to $348,000 for the same period in 2003. The increase was largely the result of net securities gains this quarter of $6,000 which included gains from the sale of securities of $48,000 net of
impairment write-downs of $42,000, while net securities losses were $257,000 for the same quarter last year due to write-downs of $351,000 net of gains from the sale of securities of $94,000. For the nine months ended March 31, 2003 total
noninterest income decreased $55,000 to $1.0 million compared to the same period last year. This decrease was principally due to a net loss on securities of $21,000 due to impairment write-downs of $118,000 net of gains from the sale of securities
of $97,000 this year while net securities gains were $25,000 for the same nine month period last year due to $376,000 in net gains from the sale of securities net of $351,000 in write-downs. 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 and required impairment write-downs for the quarter and nine months ended March 31, 2003 and the comparable periods last year.



Noninterest Expense



Total noninterest expense increased $33,000, or less than 2%, to $2.0 million for the three months ended March 31, 2003 compared with the same period last
year. For the nine months ended March 31, 2003, total noninterest expense increased $21,000 from the same period last year. The 2002 nine-month period included $150,000 in charges related to the cancellation of a property lease. Excluding these
charges, noninterest expense increased $171,000, or only 2.9%, over the same nine-month period last year. Salary and benefits increased $34,000, or 3.5%, and $160,000, or 5.5%, for the quarter and first nine months of this year compared with last
year, respectively, as 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 $38,000, or 9.2%, and $105,000,
or 8.6%, respectively, due mostly to lower depreciation expense on fixed assets. The decrease in depreciation was the result of older capital assets reaching their depreciation lives and the Companys recent successful efforts in limiting fixed
asset expenditures. Data processing fees increased $14,000, or 8.3%, and $36,000, or 7.3%, for the three and nine



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month periods, respectively, consistent with the growth in business. Professional fees increased $18,000
this quarter reflecting increased legal fees related to new and changing regulations and higher fees paid to new outsourced professional service providers such as internal audit and credit review. In the nine-month comparison professional fees
decreased $14,000 over last year, which included $40,000 in charges related to the aforementioned lease cancellation. Advertising expenses were consistent with the same quarter last year at approximately $50,000, in the nine-month period advertising
expenses were $36,000 higher due to the additional product promotions this year.



Other operating expenses for the quarter ended March 31, 2003 were $296,000, consistent with the same quarter last year, while other operating expenses for the nine-month period decreased $92,000 mostly as the result of $110,000 in
charges last year for the aforementioned lease cancellation. The operating efficiency ratio (total noninterest expense divided by the sum of net interest income plus total noninterest income excluding securities gains and losses) for the three
months ended March 31, 2003, was 72.0%, which was a reduction from 75.3% for the three months ended March 31, 2002. The operating efficiency ratio for the nine months ended March 31, 2003, was 73.5%, compared with 79.2% for the nine months ended
March 31, 2002.



Income Taxes



Income tax expense increased by $111,000, or 111.0%, for three months ended
March 31, 2003 and increased $96,000, or 20.3% for the nine months ended March 31, 2003 due mostly to this years higher level of pre-tax income. The effective income tax rates were 33.3% and 33.6% for the three months ended March 31, 2003 and
2002, respectively, and 33.0% and 34.6% for the nine months ended March 31, 2003 and 2002, respectively. The effective tax rates are below the statutory combined state and federal income tax rates because the Banks two securities 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 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, the senior vice president of bank
administration and others 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.



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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 March 31, 2003 amounted to $35.4 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 March 31, 2003, the Banks total borrowing capacity through the Federal Home Loan Bank was $73.9 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 March 31, 2003, the Bank had $11.2 million of outstanding commitments to
originate loans and unused lines of credit and open commitments available to customers totaling $27.0 million. The Bank anticipates that it will have sufficient funds available to meet these commitments. Certificates of deposit, which are scheduled
to mature in one year or less, totaled $60.1 million at March 31, 2003. Based upon historical experience, management believes that a significant portion of such deposits will remain with the Bank.



At March 31, 2003, the Company and the Bank continued to exceed all regulatory
capital requirements.



On February 25, 2003, the Board of
Directors of the Company approved a Stock Repurchase Plan under which the Company is authorized to acquire up to 4% of the outstanding common stock, or up to approximately 65,925 shares of the issued and outstanding shares of its common stock in the
open market or in private transactions. Under the plan, shares may be repurchased from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The repurchased shares are expected to be used by the
Company for general corporate purposes. As of March 31, 2003, no shares of the Companys common stock had been repurchased under the plan.



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 did
not have any effect on the Companys consolidated financial statements.



In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure. This Statement amends SFAS No. 123 Accounting for Stock-Based Compensation and provides three alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based
compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123. The transition guidance and annual disclosure provisions of this Statement are effective for fiscal years ending after December 15, 2002 and the interim
period disclosure provisions are effective for interim periods beginning after December 31, 2002. Other than expanding the required disclosures with these interim financial statements, this Statement did not have any effect on the Companys
consolidated financial statements.



On April 30, 2003, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends
SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for



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hedging activities under SFAS No. 133. This Statement is effective for contracts entered into or modified
after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. This Statement is not expected to have a material effect on the Companys consolidated financial statements.



ITEM 3. Controls and Procedures



(a)
Evaluation of disclosure controls and procedures.



As required by new Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms.



(b) Change in internal controls.



None.



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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



Not applicable.



ITEM 5. Other Information



Not applicable.



ITEM 6. Exhibits and Reports on Form 8-K



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



| | 10.1 |  | Supplemental Retirement Agreement between Pamela J. Montpelier and the Company, Strata Bank and Service Bancorp, MHC dated March 18, 2003.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------



| | 99.1 |  | Certification of 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 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. |  |                                      
|------------------------- |  |  |  | --------------------- |  | -------------------------------------
|                         
|Date:        May 13,
2003 |  |  |  | By:                   |  | /s/    Pamela J. Montpelier          
|                          |  |  |  |                       |  | Pamela J. Montpelier                 
|                          |  |  |  |                       |  | President and Chief Executive Officer
|                          |  |  |  |                       |  |                                      
|                         
|Date:        May 13,
2003 |  |  |  | By:                   |  | /s/    Dana S.
Philbrook             
|                          |  |  |  |                       |  | Dana S. Philbrook                    
|                          |  |  |  |                       |  | Chief Financial Officer              



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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
registrant as of, and for, the periods presented in this quarterly report;



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



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



b) evaluated the effectiveness of the
registrant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) The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant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 registrants ability to record, process, summarize and report financial data and have identified for the registrant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 registrants internal controls; and



(6) The registrants other certifying officers and I 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. Montpelier

---

Pamela J. Montpelier

Chief Executive Officer

May 13, 2003





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CERTIFICATIONS



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 registrant as of, and
for, the periods presented in this quarterly report;



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



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



b) evaluated the effectiveness of the registrant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) The registrants
other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant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 registrants ability to record, process, summarize and report financial data and have identified for the registrant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 registrants internal controls; and



(6) The registrants other certifying officers and I 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. Philbrook

---

Dana S. Philbrook

Chief Financial Officer

May 13, 2003





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