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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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(Mark One)

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



For the quarterly period ended September 30, 2004



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



For the transition period from  to



Commission File Number 0-24935



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SERVICE BANCORP, INC.

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



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Massachusetts                                                  |  | 04-3430806                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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)



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Check whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.    YES  x    NO ̈



State the number of shares outstanding of each of
the issuers classes of common equity, as of the latest practical date: At October 31, 2004, there were 1,664,479 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 September 30, 2004 and June 30, 2004                                       |  | 1   
|        |  |                                                                                                             
|        |  | Consolidated Statements of Income for the quarter ended September 30, 2004 and 2003                          |  | 2   
|        |  |                                                                                                             
|        |  | Consolidated Statements of Changes in Stockholders Equity for the quarter ended September 30, 2004 and 2003 |  | 3   
|        |  |                                                                                                             
|        |  | Consolidated Statements of Cash Flows for the quarter ended September 30, 2004 and 2003                      |  | 5   
|        |  |                                                                                                             
|        |  | Notes to Consolidated Financial Statements                                                                   |  | 6   
|        |  |                                                                                                             
|Item 2. |  | Managements Discussion and Analysis or Plan of Operation                                                    |  | 10  
|        |  |                                                                                                             
|Item 3. |  | Controls and Procedures                                                                                      |  | 15  
|        |  |                                                                                                             
|PART II |  | OTHER INFORMATION                                                                                            |  |     
|        |  |                                                                                                             
|Item 1. |  | Legal Proceedings                                                                                            |  | 16  
|        |  |                                                                                                             
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                  |  | 16  
|        |  |                                                                                                             
|Item 3. |  | Defaults upon Senior Securities                                                                              |  | 16  
|        |  |                                                                                                             
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                          |  | 16  
|        |  |                                                                                                             
|Item 5. |  | Other Information                                                                                            |  | 16  
|        |  |                                                                                                             
|Item 6. |  | Exhibits                                                                                                     |  | 16  
|        |  |                                                                                                             
|        |  | Signatures                                                                                                   |  | 17  



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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)



|                                                                             |  |                    |         |   |               |   |         |  
|---------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------- | - | ------- | -
|                                                                             |  | September 30, 2004 |         |   | June 30, 2004 |  
|ASSETS                                                                       |  |                    |         |   |               |   |         |  
|Cash and due from banks                                                      |  | $                  | 8,516   |   |               | $ | 9,299   |  
|Short-term investments                                                       |  |                    | 1       |   |               |   | 3,903   |  
|                                                                             |  |                    |         |   |               |   |         |  
|Total cash and cash equivalents                                              |  |                    | 8,517   |   |               |   | 13,202  |  
|                                                                             |  |                    |         |   |               |   |         |  
|Securities available for sale, at fair value                                 |  |                    | 44,436  |   |               |   | 47,181  |  
|Securities held to maturity, at amortized cost                               |  |                    | 7,472   |   |               |   | 9,249   |  
|Federal Home Loan Bank stock, at cost                                        |  |                    | 3,026   |   |               |   | 2,936   |  
|                                                                             |  |                   
|Loans                                                                        |  |                    | 247,969 |   |               |   | 237,469 |  
|Less allowance for loan losses                                               |  |                    | (2,243  | ) |               |   | (2,133  | )
|                                                                             |  |                    |         |   |               |   |         |  
|Loans, net                                                                   |  |                    | 245,726 |   |               |   | 235,336 |  
|                                                                             |  |                    |         |   |               |   |         |  
|Banking premises and equipment, net                                          |  |                    | 3,739   |   |               |   | 3,632   |  
|Accrued interest receivable                                                  |  |                    | 1,307   |   |               |   | 1,332   |  
|Bank-owned life insurance                                                    |  |                    | 4,548   |   |               |   | 4,498   |  
|Net deferred tax asset                                                       |  |                    | 433     |   |               |   | 604     |  
|Other assets                                                                 |  |                    | 786     |   |               |   | 703     |  
|                                                                             |  |                    |         |   |               |   |         |  
|Total assets                                                                 |  | $                  | 319,990 |   |               | $ | 318,673 |  
|                                                                             |  |                    |         |   |               |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                         |  |                    |         |   |               |   |         |  
|Deposits                                                                     |  | $                  | 234,933 |   |               | $ | 239,148 |  
|Short-term borrowings                                                        |  |                    | 500     |   |               |   |        |  
|Long-term borrowings                                                         |  |                    | 54,295  |   |               |   | 50,299  |  
|Subordinated debentures                                                      |  |                    | 3,034   |   |               |   | 3,033   |  
|Other liabilities                                                            |  |                    | 1,380   |   |               |   | 1,271   |  
|                                                                             |  |                    |         |   |               |   |         |  
|Total liabilities                                                            |  |                    | 294,142 |   |               |   | 293,751 |  
|                                                                             |  |                    |         |   |               |   |         |  
|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      |   |               |   | 17      |  
|Additional paid-in capital                                                   |  |                    | 7,809   |   |               |   | 7,760   |  
|Retained earnings                                                            |  |                    | 17,822  |   |               |   | 17,363  |  
|Accumulated other comprehensive income                                       |  |                    | 891     |   |               |   | 553     |  
|Treasury stock, at cost  (47,251 and 52,251 shares, respectively)           |  |                    | (477    | ) |               |   | (527    | )
|Unearned ESOP shares  (16,295 and 17,905 shares, respectively)              |  |                    | (163    | ) |               |   | (179    | )
|Unearned RRP stock  (7,157 and 9,125 shares, respectively)                  |  |                    | (51     | ) |               |   | (65     | )
|                                                                             |  |                    |         |   |               |   |         |  
|Total stockholders equity                                                   |  |                    | 25,848  |   |               |   | 24,922  |  
|                                                                             |  |                    |         |   |               |   |         |  
|Total liabilities and stockholders equity                                   |  | $                  | 319,990 |   |               | $ | 318,673 |  
|                                                                             |  |                    |         |   |               |   |         |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

SERVICE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Dollars in thousands, except per share amounts)



|                                                                      |  |                             |           |      |   |          
|--------------------------------------------------------------------- |  | --------------------------- | --------- | ---- | - | ---------
|                                                                      |  | Quarter Ended September 30,
|                                                                      |  | 2004                        |           | 2003
|Interest and dividend income:                                         |  |                             |           |      |   |          
|Interest and fees on loans                                            |  | $                           | 3,317     |      | $ | 2,757    
|Interest and dividends on securities and Federal Home Loan Bank stock |  |                             | 701       |      |   | 925      
|Interest on short-term investments                                    |  |                             | 8         |      |   | 22       
|                                                                      |  |                             |           |      |   |          
|Total interest and dividend income                                    |  |                             | 4,026     |      |   | 3,704    
|                                                                      |  |                             |           |      |   |          
|Interest expense:                                                     |  |                             |           |      |   |          
|Interest on deposits                                                  |  |                             | 719       |      |   | 705      
|Interest on borrowings                                                |  |                             | 613       |      |   | 479      
|                                                                      |  |                             |           |      |   |          
|Total interest expense                                                |  |                             | 1,332     |      |   | 1,184    
|                                                                      |  |                             |           |      |   |          
|Net interest income                                                   |  |                             | 2,694     |      |   | 2,520    
|Provision for loan losses                                             |  |                             | 102       |      |   | 140      
|                                                                      |  |                             |           |      |   |          
|Net interest income, after provision for loan losses                  |  |                             | 2,592     |      |   | 2,380    
|                                                                      |  |                             |           |      |   |          
|Noninterest income:                                                   |  |                             |           |      |   |          
|Customer service fees                                                 |  |                             | 256       |      |   | 255      
|Gain on securities, net                                               |  |                             | 39        |      |   | 39       
|Other income                                                          |  |                             | 136       |      |   | 100      
|                                                                      |  |                             |           |      |   |          
|Total noninterest income                                              |  |                             | 431       |      |   | 394      
|                                                                      |  |                             |           |      |   |          
|Noninterest expense:                                                  |  |                             |           |      |   |          
|Salaries and employee benefits                                        |  |                             | 1,312     |      |   | 1,189    
|Occupancy                                                             |  |                             | 243       |      |   | 247      
|Equipment expenses                                                    |  |                             | 130       |      |   | 132      
|Data processing expenses                                              |  |                             | 193       |      |   | 174      
|Professional fees                                                     |  |                             | 102       |      |   | 83       
|Advertising expenses                                                  |  |                             | 75        |      |   | 67       
|Other general and administrative expenses                             |  |                             | 294       |      |   | 313      
|                                                                      |  |                             |           |      |   |          
|Total noninterest expense                                             |  |                             | 2,349     |      |   | 2,205    
|                                                                      |  |                             |           |      |   |          
|Income before income taxes                                            |  |                             | 674       |      |   | 569      
|Provision for income taxes                                            |  |                             | 215       |      |   | 182      
|                                                                      |  |                             |           |      |   |          
|Net income                                                            |  | $                           | 459       |      | $ | 387      
|                                                                      |  |                             |           |      |   |          
|Weighted average shares outstanding (basic)                           |  |                             | 1,637,013 |      |   | 1,605,957
|                                                                      |  |                             |           |      |   |          
|Weighted average shares outstanding (diluted)                         |  |                             | 1,662,246 |      |   | 1,641,862
|                                                                      |  |                             |           |      |   |          
|Earnings per share (basic)                                            |  | $                           | 0.28      |      | $ | 0.24     
|                                                                      |  |                             |           |      |   |          
|Earnings per share (diluted)                                          |  | $                           | 0.28      |      | $ | 0.24     
|                                                                      |  |                             |           |      |   |          



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

SERVICE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(unaudited)

QUARTER ENDED SEPTEMBER 30, 2004 AND 2003

(Dollars in thousands, except share amounts)



|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |                |   |     |                      |   |      |                    |  |   |       |   |  |   |     |   |  |   |       
|---------------------------------------------------------------------------------------------------------- |  | ------------ | -- | ------------------------ | - | ----- | ---------------- |  | ----------------------------------- | ------ | -------------- | - | --- | -------------------- | - | ---- | ------------------ |  | - | ----- | - |  | - | --- | - |  | - | ------
|                                                                                                           |  | Common Stock |    | AdditionalPaid-inCapital |   |       | RetainedEarnings |  | AccumulatedOtherComprehensiveIncome |        | Treasury Stock |   |     | Unearned ESOP Shares |   |      | Unearned RRP Stock |  |   | Total
|Balance at June 30, 2004                                                                                   |  | $            | 17 |                          | $ | 7,760 |                  |  | $                                   | 17,363 |                | $ | 553 |                      | $ | (527 | )                  |  | $ | (179  | ) |  | $ | (65 | ) |  | $ | 24,922
|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |                |   |     |                      |   |      |                    |  |   |       |   |  |   |     |   |  |   |       
|Comprehensive income:                                                                                      |  |              |    |                          |   |       |                  |  |                                     |        |                |   |     |                      |   |      |                    |  |   |       |   |  |   |     |   |  |   |       
|Net income                                                                                                 |  |              |   |                          |   |      |                  |  |                                     | 459    |                |   |    |                      |   |     |                    |  |   |      |   |  |   |    |   |  |   | 459   
|Change in net unrealized gain on securities available for sale, net of tax and reclassification adjustment |  |              |   |                          |   |      |                  |  |                                     |       |                |   | 338 |                      |   |     |                    |  |   |      |   |  |   |    |   |  |   | 338   
|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |                |   |     |                      |   |      |                    |  |   |       |   |  |   |     |   |  |   |       
|Total comprehensive income                                                                                 |  |              |    |                          |   |       |                  |  |                                     |        |                |   |     |                      |   |      |                    |  |   |       |   |  |   |     |   |  |   | 797   
|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |                |   |     |                      |   |      |                    |  |   |       |   |  |   |     |   |  |   |       
|Common stock held by ESOP released and committed to be released (1,610 shares)                             |  |              |   |                          |   | 26    |                  |  |                                     |       |                |   |    |                      |   |     |                    |  |   | 16    |   |  |   |    |   |  |   | 42    
|Stock option exercises (5,000 shares)                                                                      |  |              |    |                          |   | (13   | )                |  |                                     |        |                |   |     |                      |   | 50   |                    |  |   |       |   |  |   |     |   |  |   | 37    
|Income tax benefit on stock option exercises                                                               |  |              |   |                          |   | 31    |                  |  |                                     |       |                |   |    |                      |   |     |                    |  |   |      |   |  |   |    |   |  |   | 31    
|Amortization of RRP stock (1,968 shares)                                                                   |  |              |   |                          |   | 5     |                  |  |                                     |       |                |   |    |                      |   |     |                    |  |   |      |   |  |   | 14  |   |  |   | 19    
|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |                |   |     |                      |   |      |                    |  |   |       |   |  |   |     |   |  |   |       
|Balance at September 30, 2004                                                                              |  | $            | 17 |                          | $ | 7,809 |                  |  | $                                   | 17,822 |                | $ | 891 |                      | $ | (477 | )                  |  | $ | (163  | ) |  | $ | (51 | ) |  | $ | 25,848
|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |                |   |     |                      |   |      |                    |  |   |       |   |  |   |     |   |  |   |       



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

SERVICE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (unaudited)

QUARTER ENDED SEPTEMBER 30, 2004 AND 2003 (concluded)

(Dollars in thousands, except share amounts)



|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |  |                |       |   |                      |   |      |                    |  |   |       |   |  |   |      |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------- |  | ------------ | -- | ------------------------ | - | ----- | ---------------- |  | ----------------------------------- | ------ |  | -------------- | ----- | - | -------------------- | - | ---- | ------------------ |  | - | ----- | - |  | - | ---- | - |  | - | ------ | -
|                                                                                                           |  | Common Stock |    | AdditionalPaid-inCapital |   |       | RetainedEarnings |  | AccumulatedOtherComprehensiveIncome |        |  | Treasury Stock |       |   | Unearned ESOP Shares |   |      | Unearned RRP Stock |  |   | Total |  
|Balance at June 30, 2003                                                                                   |  | $            | 17 |                          | $ | 7,502 |                  |  | $                                   | 15,516 |  | $              | 1,475 |   |                      | $ | (631 | )                  |  | $ | (243  | ) |  | $ | (125 | ) |  | $ | 23,511 |  
|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |  |                |       |   |                      |   |      |                    |  |   |       |   |  |   |      |   |  |   |        |  
|Comprehensive income:                                                                                      |  |              |    |                          |   |       |                  |  |                                     |        |  |                |       |   |                      |   |      |                    |  |   |       |   |  |   |      |   |  |   |        |  
|Net income                                                                                                 |  |              |   |                          |   |      |                  |  |                                     | 387    |  |                |      |   |                      |   |     |                    |  |   |      |   |  |   |     |   |  |   | 387    |  
|Change in net unrealized gain on securities available for sale, net of tax and reclassification adjustment |  |              |   |                          |   |      |                  |  |                                     |       |  |                | (275  | ) |                      |   |     |                    |  |   |      |   |  |   |     |   |  |   | (275   | )
|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |  |                |       |   |                      |   |      |                    |  |   |       |   |  |   |      |   |  |   |        |  
|Total comprehensive income                                                                                 |  |              |    |                          |   |       |                  |  |                                     |        |  |                |       |   |                      |   |      |                    |  |   |       |   |  |   |      |   |  |   | 112    |  
|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |  |                |       |   |                      |   |      |                    |  |   |       |   |  |   |      |   |  |   |        |  
|Common stock held by ESOP released and committed to be released (1,610 shares)                             |  |              |   |                          |   | 20    |                  |  |                                     |       |  |                |      |   |                      |   |     |                    |  |   | 16    |   |  |   |     |   |  |   | 36     |  
|Stock option exercises (2,300)                                                                             |  |              |   |                          |   | (4    | )                |  |                                     |       |  |                |      |   |                      |   | 21   |                    |  |   |      |   |  |   |     |   |  |   | 17     |  
|Purchase of treasury stock (102 shares)                                                                    |  |              |   |                          |   |      |                  |  |                                     |       |  |                |      |   |                      |   | (2   | )                  |  |   |      |   |  |   |     |   |  |   | (2     | )
|Amortization of RRP stock (2,430 shares)                                                                   |  |              |   |                          |   | 5     |                  |  |                                     |       |  |                |      |   |                      |   |     |                    |  |   |      |   |  |   | 15   |   |  |   | 20     |  
|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |  |                |       |   |                      |   |      |                    |  |   |       |   |  |   |      |   |  |   |        |  
|Balance at September 30, 2003                                                                              |  | $            | 17 |                          | $ | 7,523 |                  |  | $                                   | 15,903 |  | $              | 1,200 |   |                      | $ | (612 | )                  |  | $ | (227  | ) |  | $ | (110 | ) |  | $ | 23,694 |  
|                                                                                                           |  |              |    |                          |   |       |                  |  |                                     |        |  |                |       |   |                      |   |      |                    |  |   |       |   |  |   |      |   |  |   |        |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

SERVICE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Dollars in thousands)



|                                                                                  |  |                            |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Quarter EndedSeptember 30, |        
|                                                                                  |  | 2004                       |         |   | 2003 |  
|Cash flows from operating activities:                                             |  |                            |         |   |      |   |         |  
|Net income                                                                        |  | $                          | 459     |   |      | $ | 387     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                            |         |   |      |   |         |  
|Provision for loan losses                                                         |  |                            | 102     |   |      |   | 140     |  
|Gain on securities, net                                                           |  |                            | (39     | ) |      |   | (39     | )
|Net amortization of securities                                                    |  |                            | 34      |   |      |   | 77      |  
|Depreciation and amortization expense                                             |  |                            | 112     |   |      |   | 125     |  
|Decrease in accrued interest receivable                                           |  |                            | 25      |   |      |   | 54      |  
|Net amortization of deferred loan costs and premiums                              |  |                            | 70      |   |      |   | 141     |  
|Bank-owned life insurance income                                                  |  |                            | (50     | ) |      |   | (47     | )
|Deferred tax (benefit) provision                                                  |  |                            | (10     | ) |      |   | 19      |  
|Other, net                                                                        |  |                            | 113     |   |      |   | 263     |  
|                                                                                  |  |                            |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                            | 816     |   |      |   | 1,120   |  
|                                                                                  |  |                            |         |   |      |   |         |  
|Cash flows from investing activities:                                             |  |                            |         |   |      |   |         |  
|Activity in securities available for sale:                                        |  |                            |         |   |      |   |         |  
|Sales                                                                             |  |                            | 2,780   |   |      |   | 1,006   |  
|Maturities, prepayments and calls                                                 |  |                            | 3,086   |   |      |   | 3,339   |  
|Purchases                                                                         |  |                            | (2,593  | ) |      |   | (7,322  | )
|Activity in securities held to maturity:                                          |  |                            |         |   |      |   |         |  
|Sales                                                                             |  |                            |        |   |      |   | 512     |  
|Maturities, prepayments and calls                                                 |  |                            | 1,772   |   |      |   | 3,420   |  
|Net increase in loans, excluding loan purchases                                   |  |                            | (10,361 | ) |      |   | (18,957 | )
|Purchases of loans                                                                |  |                            | (200    | ) |      |   | (8,898  | )
|Purchases of banking premises and equipment                                       |  |                            | (229    | ) |      |   | (357    | )
|Purchases of Federal Home Loan Bank stock                                         |  |                            | (90     | ) |      |   | (489    | )
|                                                                                  |  |                            |         |   |      |   |         |  
|Net cash used by investing activities                                             |  |                            | (5,835  | ) |      |   | (27,746 | )
|                                                                                  |  |                            |         |   |      |   |         |  
|Cash flows from financing activities:                                             |  |                            |         |   |      |   |         |  
|Net decrease in deposits                                                          |  |                            | (4,215  | ) |      |   | (9,246  | )
|Proceeds from long-term borrowings                                                |  |                            | 4,000   |   |      |   | 10,000  |  
|Repayment of long-term borrowings                                                 |  |                            | (4      | ) |      |   | (3      | )
|Net increase in short-term borrowings                                             |  |                            | 500     |   |      |   |        |  
|Purchase of treasury stock                                                        |  |                            |        |   |      |   | (2      | )
|Stock option exercises                                                            |  |                            | 37      |   |      |   | 17      |  
|Repayment of ESOP loan                                                            |  |                            | 16      |   |      |   | 16      |  
|                                                                                  |  |                            |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                            | 334     |   |      |   | 782     |  
|                                                                                  |  |                            |         |   |      |   |         |  
|Net change in cash and cash equivalents                                           |  |                            | (4,685  | ) |      |   | (25,844 | )
|Cash and cash equivalents at beginning of period                                  |  |                            | 13,202  |   |      |   | 37,100  |  
|                                                                                  |  |                            |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                          | 8,517   |   |      | $ | 11,256  |  
|                                                                                  |  |                            |         |   |      |   |         |  
|Supplementary information:                                                        |  |                            |         |   |      |   |         |  
|Interest paid on deposits                                                         |  | $                          | 718     |   |      | $ | 706     |  
|Interest paid on borrowings                                                       |  |                            | 608     |   |      |   | 469     |  
|Income taxes paid                                                                 |  |                            | 74      |   |      |   | 19      |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

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, 2004.



(2) Earnings per Share



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



(3)
Commitments



At September 30, 2004, the Company had
outstanding commitments to originate loans of $7.7 million. Unused lines of credit and open commitments available to customers at September 30, 2004 amounted to $47.9 million, of which $21.3 million were home equity lines of credit.



(4) Securities



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



|                                          |  |                        |        |               |   |                |  |            |        |  |   |       
|----------------------------------------- |  | ---------------------- | ------ | ------------- | - | -------------- |  | ---------- | ------ |  | - | ------
|                                          |  | September 30, 2004     |        | June 30, 2004
|                                          |  | Amortized Cost         |        | Fair Value    |   | Amortized Cost |  | Fair Value
|                                          |  | (Dollars in thousands)
|Securities available for sale:            |  |                        |        |               |   |                |  |            |        |  |   |       
|Federal agency securities                 |  | $                      | 6,914  |               | $ | 7,015          |  | $          | 7,953  |  | $ | 7,935 
|Federal agency mortgage-backed securities |  |                        | 15,163 |               |   | 15,238         |  |            | 14,217 |  |   | 14,064
|Other debt securities                     |  |                        | 19,119 |               |   | 20,290         |  |            | 22,748 |  |   | 23,765
|                                          |  |                        |        |               |   |                |  |            |        |  |   |       
|Total debt securities available for sale  |  |                        | 41,196 |               |   | 42,543         |  |            | 44,918 |  |   | 45,764
|Marketable equity securities              |  |                        | 1,869  |               |   | 1,893          |  |            | 1,409  |  |   | 1,417 
|                                          |  |                        |        |               |   |                |  |            |        |  |   |       
|Total securities available for sale       |  | $                      | 43,065 |               | $ | 44,436         |  | $          | 46,327 |  | $ | 47,181
|                                          |  |                        |        |               |   |                |  |            |        |  |   |       
|Securities held to maturity:              |  |                        |        |               |   |                |  |            |        |  |   |       
|Federal agency mortgage-backed securities |  | $                      | 4,576  |               | $ | 4,768          |  | $          | 5,355  |  | $ | 5,538 
|Other debt securities                     |  |                        | 2,896  |               |   | 3,006          |  |            | 3,894  |  |   | 4,041 
|                                          |  |                        |        |               |   |                |  |            |        |  |   |       
|Total securities held to maturity         |  | $                      | 7,472  |               | $ | 7,774          |  | $          | 9,249  |  | $ | 9,579 
|                                          |  |                        |        |               |   |                |  |            |        |  |   |       



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##### Table of Contents

SERVICE BANCORP, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements (unaudited)(continued)



(5) Loans



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



|                                     |  |                        |         |   |               |        |   |        |   |         |         |  |        |  
|------------------------------------ |  | ---------------------- | ------- | - | ------------- | ------ | - | ------ | - | ------- | ------- |  | ------ | -
|                                     |  | September 30, 2004     |         |   | June 30, 2004 |       
|                                     |  | Amount                 |         |   | Percent       |        |   | Amount |   |         | Percent | 
|                                     |  | (Dollars in thousands) |        
|Real estate loans:                   |  |                        |         |   |               |        |   |        |   |         |         |  |        |  
|Residential                          |  | $                      | 134,420 |   |               | 54.44  | % |        | $ | 130,278 |         |  | 55.10  | %
|Residential construction             |  |                        | 1,638   |   |               | 0.66   | % |        |   | 1,453   |         |  | 0.61   | %
|Commercial and multi-family          |  |                        | 56,506  |   |               | 22.88  | % |        |   | 53,051  |         |  | 22.44  | %
|Commercial construction              |  |                        | 10,934  |   |               | 4.43   | % |        |   | 10,141  |         |  | 4.29   | %
|                                     |  |                        |         |   |               |        |   |        |   |         |         |  |        |  
|Total real estate loans              |  |                        | 203,498 |   |               | 82.41  | % |        |   | 194,923 |         |  | 82.44  | %
|                                     |  |                        |         |   |               |        |   |        |   |         |         |  |        |  
|Commercial loans                     |  |                        | 22,405  |   |               | 9.07   | % |        |   | 20,968  |         |  | 8.87   | %
|                                     |  |                        |         |   |               |        |   |        |   |         |         |  |        |  
|Consumer loans:                      |  |                        |         |   |               |        |   |        |   |         |         |  |        |  
|Home equity                          |  |                        | 12,303  |   |               | 4.98   | % |        |   | 12,505  |         |  | 5.29   | %
|Second mortgages                     |  |                        | 7,541   |   |               | 3.05   | % |        |   | 6,847   |         |  | 2.90   | %
|Passbook secured                     |  |                        | 436     |   |               | 0.18   | % |        |   | 372     |         |  | 0.16   | %
|Other                                |  |                        | 760     |   |               | 0.31   | % |        |   | 795     |         |  | 0.34   | %
|                                     |  |                        |         |   |               |        |   |        |   |         |         |  |        |  
|Total consumer loans                 |  |                        | 21,040  |   |               | 8.52   | % |        |   | 20,519  |         |  | 8.69   | %
|                                     |  |                        |         |   |               |        |   |        |   |         |         |  |        |  
|Total gross loans                    |  |                        | 246,943 |   |               | 100.00 | % |        |   | 236,410 |         |  | 100.00 | %
|                                     |  |                        |         |   |               |        |   |        |   |         |         |  |        |  
|Net deferred loan costs and premiums |  |                        | 1,026   |   |               |        |   |        |   | 1,059   |         |  |        |  
|Allowance for loan losses            |  |                        | (2,243  | ) |               |        |   |        |   | (2,133  | )       |  |        |  
|                                     |  |                        |         |   |               |        |   |        |   |         |         |  |        |  
|Total loans, net                     |  | $                      | 245,726 |   |               |        |   |        | $ | 235,336 |         |  |        |  
|                                     |  |                        |         |   |               |        |   |        |   |         |         |  |        |  



(6)
Deposits



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



|                                         |  |                        |         |         |               |   |        |   |         |  |        |  
|---------------------------------------- |  | ---------------------- | ------- | ------- | ------------- | - | ------ | - | ------- |  | ------ | -
|                                         |  | September 30, 2004     |         |         | June 30, 2004 |  
|                                         |  | Amount                 |         | Percent |               |   | Amount |   | Percent | 
|                                         |  | (Dollars in thousands) |        
|Demand                                   |  | $                      | 36,868  |         | 15.69         | % |        | $ | 35,920  |  | 15.02  | %
|NOW                                      |  |                        | 30,656  |         | 13.05         | % |        |   | 32,279  |  | 13.50  | %
|Money market deposits                    |  |                        | 37,319  |         | 15.88         | % |        |   | 34,177  |  | 14.29  | %
|Regular and other savings                |  |                        | 45,202  |         | 19.25         | % |        |   | 46,271  |  | 19.34  | %
|                                         |  |                        |         |         |               |   |        |   |         |  |        |  
|Total non-certificate accounts           |  |                        | 150,045 |         | 63.87         | % |        |   | 148,647 |  | 62.15  | %
|                                         |  |                        |         |         |               |   |        |   |         |  |        |  
|Term certificates of $100,000 or greater |  |                        | 24,223  |         | 10.31         | % |        |   | 28,405  |  | 11.88  | %
|Term certificates less than $100,000     |  |                        | 60,665  |         | 25.82         | % |        |   | 62,096  |  | 25.97  | %
|                                         |  |                        |         |         |               |   |        |   |         |  |        |  
|Total certificate accounts               |  |                        | 84,888  |         | 36.13         | % |        |   | 90,501  |  | 37.85  | %
|                                         |  |                        |         |         |               |   |        |   |         |  |        |  
|Total deposits                           |  | $                      | 234,933 |         | 100.00        | % |        | $ | 239,148 |  | 100.00 | %
|                                         |  |                        |         |         |               |   |        |   |         |  |        |  



(7)
Borrowings



Short-term borrowings consisted of $500,000 in
overnight federal funds purchased at September 30, 2004 while there were none at June 30, 2004. Long-term borrowings were comprised of the following advances from the Federal Home Loan Bank of Boston (FHLB). The advances are presented by
the earlier of the maturity date or the date callable by the FHLB.



|                           |  |                        |        |         |               |   |        |   |         |  |        |  
|-------------------------- |  | ---------------------- | ------ | ------- | ------------- | - | ------ | - | ------- |  | ------ | -
|                           |  |                       
|                           |  | September 30, 2004     |        |         | June 30, 2004 |  
|                           |  | Amount                 |        | Percent |               |   | Amount |   | Percent | 
|                           |  | (Dollars in thousands) |       
|Less than one year         |  | $                      | 35,500 |         | 65.38         | % |        | $ | 32,500  |  | 64.61  | %
|One to three years         |  |                        | 11,000 |         | 20.26         | % |        |   | 13,000  |  | 25.85  | %
|Greater than three years   |  |                        | 7,795  |         | 14.36         | % |        |   | 4,799   |  | 9.54   | %
|                           |  |                        |        |         |               |   |        |   |         |  |        |  
|Total long-term borrowings |  | $                      | 54,295 |         | 100.00        | % |        | $ | 50,299  |  | 100.00 | %
|                           |  |                        |        |         |               |   |        |   |         |  |        |  



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##### Table of Contents

SERVICE BANCORP, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements (unaudited)(continued)



(8) Subordinated Debentures



On March 16, 2004, Service Capital Trust I (Trust I), a newly
formed trust sponsored by the Company, participated in a pooled offering of trust preferred securities. In connection with this offering, Trust I issued $3.0 million of trust preferred securities and reinvested the proceeds in a 30 year $3.0 million
junior subordinated debenture issued by the Company. Interest is calculated on the subordinated debenture and trust preferred securities at a rate equal to the three-month London Interbank Offering Rate plus 285 basis points. The junior subordinated
debenture represents the sole asset of Trust I. The Company has guaranteed, on a subordinated basis, distribution and other payments due on the trust preferred securities (the Guarantee). The Guarantee, when taken together with the
Companys obligations under (i) the junior subordinated debenture; (ii) the indenture pursuant to which the junior subordinated debentures was issued; and (iii) the Amended and Restated Declaration of Trust governing Trust I, constitutes a full
and unconditional guarantee of Trust Is obligations under the trust preferred securities.



Under regulatory capital guidelines, trust preferred securities, within certain limitations, qualify as regulatory capital. Trust I, consistent with the
Financial Accounting Standards Board Interpretation No. 46, Variable Interest Entities, is not consolidated in the consolidated financial statements of the Company. Therefore, the Company presents in its consolidated financial statements
junior subordinated debt as a liability and its investment in Trust I as a component of other assets.



(9) Stock Compensation Plan



The Company has a stock option plan, which is described more fully in Note 12 of the Companys annual report on Form 10-KSB for the year ended June
30, 2004. 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s 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 quarter ended September 30, 2004 and 2003, would have been reduced to the following pro forma
amounts:



|                                                                                                   |  |                                                 |      |      |   |     
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ---- | ---- | - | ----
|                                                                                                   |  | Quarter EndedSeptember 30,                     
|                                                                                                   |  | 2004                                            |      | 2003
|                                                                                                   |  | (Dollars in thousands,except per share amounts)
|Net income, as reported                                                                            |  | $                                               | 459  |      | $ | 387 
|Deduct: Total stock-based compensation expense determined underthe fair value method, net of taxes |  |                                                 | 12   |      |   | 9   
|                                                                                                   |  |                                                 |      |      |   |     
|Pro forma net income                                                                               |  | $                                               | 447  |      | $ | 378 
|                                                                                                   |  |                                                 |      |      |   |     
|Earnings per share (basic):                                                                        |  |                                                 |      |      |   |     
|As reported                                                                                        |  | $                                               | 0.28 |      | $ | 0.24
|                                                                                                   |  |                                                 |      |      |   |     
|Pro forma                                                                                          |  | $                                               | 0.27 |      | $ | 0.24
|                                                                                                   |  |                                                 |      |      |   |     
|Earnings per share (diluted):                                                                      |  |                                                 |      |      |   |     
|As reported                                                                                        |  | $                                               | 0.28 |      | $ | 0.24
|                                                                                                   |  |                                                 |      |      |   |     
|Pro forma                                                                                          |  | $                                               | 0.27 |      | $ | 0.23
|                                                                                                   |  |                                                 |      |      |   |     



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##### Table of Contents

SERVICE BANCORP, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements (unaudited)(concluded)



(10) Stock Repurchase Plan



In February 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 Stock Repurchase Plan, shares may be repurchased from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. There were no shares repurchased during the quarter ended September 30, 2004.
The maximum number of shares that may yet be purchased under the plan is 54,683.

|
|



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##### Table of Contents

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 affect 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 September 30, 2004 and June 30, 2004



Total assets were $320.0 million at September 30, 2004, an increase of $1.3 million from the $318.7 million at June 30,
2004. Reductions in short-term investments of $3.9 million, or 100.0% and securities of $4.5 million, or 8.0%, were reinvested in loans, which increased $10.5 million, or 4.4%. Total deposits decreased $4.2 million, or 1.8%, while long-term
borrowings from the Federal Home Loan Bank of Boston (FHLB) increased $4.0 million, or 7.9%.



Total investment securities were $51.9 million at September 30, 2004, a decrease of $4.5 million since June 30, 2004. The decrease in securities was due
to amortization and prepayment on mortgage-backed securities, federal agency bond calls and corporate bond sales and maturities. These reductions to investment securities were only partially offset by purchases of $2.0 million in federal agency
mortgage-backed securities and net purchases of $455,000 in equity securities.



Residential real estate loans are originated through the residential mortgage division of the Bank, the Strata Mortgage Center. The Bank also had a contractual arrangement with Marathon Mortgage Company
(Marathon), an independent mortgage loan origination company, which supplemented the Banks residential mortgage loan origination business. In December 2003, however, the Bank added to its staffing level at Strata Mortgage Center to
be able to service all of the Banks residential loan customers. As a result, the additional loan origination services provided by Marathon were no longer required and the contractual agreement with Marathon was terminated. The Bank may, as it
has done in the past, continue to buy residential loans directly from Marathon.



For the quarter ended September 30, 2004, the Strata Mortgage Center originated $11.2 million in residential real estate loans. In addition, the Bank purchased $200,000 in loans from other institutions. As a result,
the Banks residential mortgage loans, net of principal payments, increased $4.3 million, or 3.3%, since June 30, 2004. This quarters originations were lower than previous quarters due to a slower residential loan refinance marketplace.
Home equity and second mortgage loans increased $492,000, or 2.5%, since June 30, 2004 to $19.8 million at September 30, 2004.



Commercial lending continues to be an area of opportunity and strong growth for the Bank. The Bank originated $18.3 million in commercial, commercial real
estate and construction loans and lines of credit for the quarter ended September 30, 2004, $7.3 million, or 66.2% more than the same period last year. The net increase in the total commercial loan portfolio during the quarter ended September 30,
2004 was $5.7 million, or 6.8%. In addition to these loan originations, the Bank emphasizes cross selling of commercial checking and money market deposits from new commercial customers. As of September 30, 2004, total commercial deposits totaled
$36.8 million and represented 15.7% of total deposits.



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##### Table of Contents

Total deposits decreased $4.2 million, or 1.8% since June 30, 2004 to $234.9 million at September 30,
2004. A decrease of $5.6 million, or 6.2% in higher cost certificates of deposit was only partially offset by an increase in non-certificate core deposits of $1.4 million. The decrease in certificates of deposit was due to the combination of an
unusually high amount of certificate maturities during the quarter, competitive pricing from other institutions, and the Companys ability to utilize other sources of funding. The Company anticipates growth in certificates in the future
quarters as it launches several new certificate promotions and more competitive pricing. The increase in non-certificate deposits was led by a $3.1 million, or 9.2%, increase in money market deposits and a $948,000 increase in demand deposits. NOW
and regular savings decreased $1.6 million and $1.1 million respectively. Borrowings from the FHLB increased $4.0 million since June 30, 2004 to $54.3 million at September 30, 2004, and provided the additional funding for this quarters loan
growth and provided the Bank the opportunity to lock in long-term advances at historically low interest rates.



Stockholders equity increased from $24.9 million, or 7.82% of total assets at June 30, 2004 to $25.8 million, or 8.08% of total assets at September
30, 2004. The increase in stockholders equity resulted primarily from the Companys retained earnings since the beginning of the fiscal year.



Non-Performing Assets and Allowance for Loan Losses  Critical Accounting Estimate



The following table sets forth the Companys non-performing assets at
the dates indicated.



|                                          |  |                        |      |   |              |   |      |                    |  |   |      |  
|----------------------------------------- |  | ---------------------- | ---- | - | ------------ | - | ---- | ------------------ |  | - | ---- | -
|                                          |  | September 30, 2004     |      |   | June 30,2004 |   |      | September 30, 2003 | 
|                                          |  | (Dollars in thousands) |     
|Non-accrual loans:                        |  |                        |      |   |              |   |      |                    |  |   |      |  
|Residential real estate                   |  | $                      |     |   |              | $ |     |                    |  | $ |     |  
|Commercial and multi-family real estate   |  |                        |     |   |              |   |     |                    |  |   |     |  
|Consumer                                  |  |                        |     |   |              |   |     |                    |  |   | 12   |  
|Commercial                                |  |                        |      |   |              |   |     |                    |  |   | 289  |  
|                                          |  |                        |      |   |              |   |      |                    |  |   |      |  
|Total                                     |  |                        |     |   |              |   |     |                    |  |   | 301  |  
|                                          |  |                        |      |   |              |   |      |                    |  |   |      |  
|Accruing loans more than 90 days past due |  |                        |     |   |              |   |     |                    |  |   |     |  
|Foreclosed assets                         |  |                        |     |   |              |   |     |                    |  |   |     |  
|                                          |  |                        |      |   |              |   |      |                    |  |   |      |  
|Total non-performing assets               |  | $                      |     |   |              | $ |     |                    |  | $ | 301  |  
|                                          |  |                        |      |   |              |   |      |                    |  |   |      |  
|Total as a percentage of total assets     |  |                        | 0.00 | % |              |   | 0.00 | %                  |  |   | 0.10 | %



For the quarter ended
September 30, 2004, the Banks provision for loan losses was $102,000 compared with $140,000 for the same period last year. The decrease in the provision was due to lower net loan growth this quarter compared to a peak loan growth quarter a
year ago. The lower provision was also due to a lower level of nonperforming assets at September 30, 2004 compared with a year ago. Total nonperforming assets decreased from $301,000 at September 30, 2003 to none at June 30, 2004 and September 30,
2004. The allowance for loan losses as a percentage of loans was .90% at September 30, 2004, consistent with the recent fiscal year-end June 30, 2004 and a year ago, September 30, 2003. For a further discussion of the allowance refer to the
Companys Annual Report on Form 10-KSB for the year ended June 30, 2004 under Allowance for Loan Losses. During the quarter ended September 30, 2004, recoveries from previously charged-off loans of $8,000 were received and an
insignificant amount of loans were charged-off.



While
management believes that, based on information currently available, the allowance for loan losses is sufficient to cover losses in the Banks loan portfolio at this time, no assurances can be given that the level of the allowance will be
sufficient to cover loan losses or that future adjustments to the allowance 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 Quarter Ended September 30, 2004 and 2003



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 noninterest 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 quarter ended September 30, 2004 was $459,000 compared with $387,000 for the quarter ended September 30,
2003, an increase of $72,000, or 18.6%. Net interest income increased $174,000, or 6.9%, and noninterest income increased $37,000, or 9.4%, while the provision for loan losses was $38,000 lower compared to the same quarter a year ago. Partially
offsetting



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these increases to income was higher noninterest expense of $144,000, or 6.5%. Earnings per share for the quarter ended
September 30, 2004 were $0.28 per share (basic and diluted) compared with $0.24 per share (basic and diluted) for the quarter ended September 30, 2003.



Interest and Dividend Income



Total interest and dividend income for the quarter ended September 30, 2004 was $4.0 million, $322,000 more than the same quarter a year ago. An increase
in average earning assets of $21.8 million and the effect of an increase in yield on earning assets of 3 basis points to 5.41% accounts for the higher interest and dividend income. Average net loans for the quarter increased $45.7 million, or 23.8%,
while total loan yield decreased 16 basis points to 5.55%. This years low interest 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.
The residential loan refinance activity in the Banks existing portfolio contributed to the amount of new loan volume priced at this years lower rates.



Average short-term investments, which consist primarily of overnight federal funds sold, decreased $5.9 million for the
quarter ended September 30, 2004, while the yield on short-term investments increased 18 basis points to 1.20%, consistent with this quarters rise in short-term interest rates. The average securities portfolio balance decreased $17.9 million
this quarter, which resulted in lower interest income on securities. Yield on the securities portfolio increased 5 basis points to 5.02%.



Interest Expense



Total interest expense increased $148,000 for the quarter ended September 30, 2004 to $1.3 million compared to the same quarter last year due to an
increase in average interest-bearing liabilities of $16.4 million and an increase in the cost of interest-bearing liabilities of 10 basis points to 2.09%. Interest expense on deposits increased $14,000, or 2.0%, to $719,000 for the quarter ended
September 30, 2004. The higher interest expense was the result of an increase in the average cost of interest bearing deposits of 3 basis points to 1.45%, while average interest bearing deposits was approximately the same as last year at $196.5
million. Within the interest-bearing deposit category, average core interest-bearing deposits increased approximately $2 million while average higher cost certificates of deposit decreased approximately $2 million.



Interest expense on borrowings increased $134,000, or 28.0%, for the quarter
ended September 30, 2004 compared to the same quarter last year. The average balance of borrowings was $54.4 million during the quarter, an increase of $16.6 million, or 44.0% from the quarter ended September 30, 2003. The cost of average borrowings
decreased from 4.96% a year ago to 4.41% this quarter due to this years lower rate for new borrowings.



Net Interest Income



Net interest income for the quarter ended September 30, 2004 increased $174,000, or 6.9% over the same period last year. The increase in net interest
income was due mainly to an increase in total average earning assets of $21.8 million for the quarter ended September 30, 2004 compared to the same period last year, and a change in mix of earning assets to more higher yielding loans exceeding the
effect of an increase in average interest-bearing liabilities of $16.4 million and change in the mix of liabilities to higher cost long-term borrowings. The Banks interest rate spread (the difference between yields earned on earning assets and
rates paid on deposits and borrowings) decreased 7 basis points to 3.32% this quarter compared to last year. The net interest margin (net interest income divided by average earning assets) decreased 4 basis points to 3.64% for the quarter ended
September 30, 2004 compared to last year. The decrease in the interest rate spread and margin reflects the increase in cost of funds exceeding the increase in yield on interest-earning assets.



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. An increase 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:



|                                  |  |                             |   |  |      |  
|--------------------------------- |  | --------------------------- | - |  | ---- | -
|                                  |  | Quarter Ended September 30, |  
|                                  |  | 2004                        |   |  | 2003 |  
|Weighted average yield earned on: |  |                             |   |  |      |  
|Short-term investments            |  | 1.20                        | % |  | 1.02 | %
|Securities                        |  | 5.02                        | % |  | 4.97 | %
|Total loans, net                  |  | 5.55                        | % |  | 5.71 | %
|                                  |  |                             |   |  |      |  
|All interest-earning assets       |  | 5.41                        | % |  | 5.38 | %
|                                  |  |                             |   |  |      |  
|Weighted average rate paid on:    |  |                             |   |  |      |  
|Deposits                          |  | 1.45                        | % |  | 1.42 | %
|Borrowed funds                    |  | 4.41                        | % |  | 4.96 | %
|                                  |  |                             |   |  |      |  
|All interest-bearing liabilities  |  | 2.09                        | % |  | 1.99 | %
|                                  |  |                             |   |  |      |  
|Weighted average rate spread      |  | 3.32                        | % |  | 3.39 | %
|                                  |  |                             |   |  |      |  
|Net interest margin               |  | 3.64                        | % |  | 3.68 | %
|                                  |  |                             |   |  |      |  



Noninterest
Income



Total noninterest income increased $37,000, or
9.4% to $431,000 for the quarter ended September 30, 2004. The increase was largely the result of increased financial service fees due to a higher level of sales in the Financial Services Center at Strata Bank and increased fee income from the
Companys merchant credit card services and loan servicing fees.



Noninterest Expense



Total noninterest
expense increased $144,000, or 6.5% to $2.3 million for the quarter ended September 30, 2004 compared with the same period last year. Salary and benefits increased $123,000 for the quarter due to increased loan origination staffing at the Strata
Mortgage Center as a result of a strategic decision during last year to no longer outsource certain residential loan origination services, and increased staffing in other functional areas of the Bank consistent with the growth in operations. Benefit
costs, such as medical insurance, and Employee Stock Ownership Plan expense where the amount of expense recognized is affected by the rising price of the Companys stock, were also higher. Supplemental retirement expense decreased compared with
last year, which included an $89,000 adjustment related to the directors supplemental retirement plan.



Data processing increased $19,000, or 10.9% to $193,000 due to the higher processing volumes and enhancements in the Banks customer oriented systems
and software. Professional fees increased $19,000, or 22.9% for the quarter ended September 30, 2004 due to increased legal fees and increased outsourced professional services such as internal audit and credit review. Most other categories of
noninterest expense were similar to expense levels during the same quarter last year.



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 quarter ended September 30, 2004 was
76.1% compared with 76.7% for the same quarter a year ago.



Income Taxes



Income tax expense
increased by $33,000 for the quarter ended September 30, 2004 compared with the same period last year due mostly to this years higher level of pre-tax income. The effective income tax rate was 31.9% for the quarter ended September 30, 2004,
approximately the same as the 32.0% for the same quarter last year. The effective tax rates reflect the utilization by the Bank of certain tax preference items such as bank-owned life insurance, dividends received deductions and security corporation
subsidiaries to reduce the statutory corporate tax rates.



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



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Management Committee (ALCO) made up of the chief executive officer, the chief financial officer, the senior
loan officer, 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, selling loans, managing the cost and structure of deposits, short and long-term borrowings and using matched
borrowings to fund specific purchases of loan packages and large loan originations. Occasionally, management may choose to deviate from specific matching of maturities of assets and liabilities if an attractive opportunity to enhance yield becomes
available.



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



Liquidity and Capital Resources



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



From time to time, the Bank utilizes advances from the FHLB primarily in connection with its management of the interest rate sensitivity of its assets and
liabilities. Total advances outstanding at September 30, 2004 amounted to $54.3 million. The Banks ability to borrow from the FHLB is dependent upon the amount and type of collateral the Bank has to secure the loans. Such collateral consists
of, but is not limited to, one-to-four family owner-occupied residential property. As of September 30, 2004, the Bank had a borrowing capacity with the Federal Home Loan Bank to borrow an additional $45.4 million for a total of $99.7 million. The
Bank has additional capacity to borrow federal funds from other banks and through such instruments as repurchase agreements 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, federal agency obligations, mortgage-backed securities, and other debt securities. The level of these assets is dependent upon the Banks operating, lending, and financing activities during any given period.



At September 30,2004, the Bank had $7.7 million of outstanding
commitments to originate loans and unused lines of credit and open commitments available to customers totaling $47.9 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 $56.1 million at September 30, 2004. Based upon historical experience, management believes that a significant portion of such deposits will remain with the Bank.



At September 30, 2004, the Company and the Bank continued to exceed all
regulatory capital requirements.



In February 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 September 30, 2004, 11,242 shares of the Companys common stock had been repurchased under the plan at an average price of $19.58 per share.



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|ITEM | 3. Controls and Procedures
|---- | --------------------------



|(a) | Evaluation of disclosure controls and procedures.
|--- | -------------------------------------------------



As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), the Companys
management conducted an evaluation with the participation of the Companys Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the Companys disclosure controls and procedures, as of the end of the last
fiscal quarter. In designing and evaluating the Companys disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable
assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that they believe the Companys disclosure controls and procedures are reasonably effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our
internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business.



|(b) | Changes in internal controls over financial reporting.
|--- | ------------------------------------------------------



There were no changes in the Companys internal controls over financial reporting identified in connection with the Companys
evaluation of its disclosure controls and procedures that occurred during the Companys last fiscal quarter that have materially affected, or are reasonably likely to materially affect the Companys internal control over financial
reporting.



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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. Unregistered Sales of Equity Securities and Use of Proceeds



| | (a) | Not applicable.
| | --- | ---------------



| | (b) | Not applicable.
| | --- | ---------------



| | (c) | Refer to Footnote 10 to the Financial Statements.
| | --- | -------------------------------------------------



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



Exhibits



|     |  |                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                       
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                       
|     | 
|32.1 |  | 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.
|     | 
|32.2 |  | 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.



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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: November 10, 2004 |  | By:                   |  | /s/ PAMELA J. MONTPELIER             
|                        |  |                       |  | Pamela J. Montpelier                 
|                        |  |                       |  | President and Chief Executive Officer



|                        |  |     |  |                        
|----------------------- |  | --- |  | -----------------------
|Date: November 10, 2004 |  | By: |  | /s/ DANA S. PHILBROOK  
|                        |  |     |  | Dana S. Philbrook      
|                        |  |     |  | Chief Financial Officer



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