OREGON PACIFIC BANCORP - Quarter Report: 2006 June (Form 10-Q)

Oregon Pacific Bancorp 10-Q 06-30-2006

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark one)

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

For the quarterly period ended June 30, 2006

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

For the transition period from __________ to __________

OREGON PACIFIC BANCORP

(Exact name of Registrant as specified in its charter)

Oregon		71-0918151
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1355 Highway 101

Florence, Oregon 97439

(Address of principal executive offices)

(541) 997-7121

(Issuer’s telephone number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “Accelerated Filer and Large Accelerated Filer” in Rule 12b-2 of the Exchange Act. (check one): Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares outstanding of the issuer’s Common Stock, no par value, as of July 31, 2006, was 2,179,915.

OREGON PACIFIC BANCORP

INDEX

Part I	Financial Information

	Item 1.	Financial statements

		Consolidated balance sheets	3
		Consolidated statements of income and comprehensive income	4-5
		Consolidated statements of changes in stockholders’ equity	6
		Consolidated statements of cash flows	7
		Notes to consolidated financial statements	8-12

	Item 2.	Management’s Discussion and Analysis of Financial Condition And Results of Operations	13-19

	Item 3.	Quantitive and Qualitive Disclosures about Market Risk	19

	Item 4.	Controls and Procedures	19-20

Part II.	Other Information

	Item 1.	Legal proceedings	20

	Item 1A.	Risk Factors	20

	Item 2.	Unregistered sales of equity securities and use of proceeds	20

	Item 3.	Defaults upon senior securities	20

	Item 4.	Submission of matters to a vote of security holders	20-21

	Item 5.	Other information	21

	Item 6.	Exhibits and Reports on Form 8-K	21

	Signatures		22
	Certifications of Chief Executive Officer and Chief Financial Officer		23-25

Index

PART 1.

FINANCIAL INFORMATION

Item 1.

Financial statements

OREGON PACIFIC BANCORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)

ASSETS	JUNE 30, 2006			DECEMBER 31, 2005

Cash and cash equivalents	$	6,566,007		$	5,018,838
Interest-bearing deposits in banks		6,581,299			5,916,224
Available-for-sale securities, at fair value		10,828,399			11,643,557
Restricted equity securities		1,023,100			1,023,100
Loans held-for-sale		1,093,695			1,350,810
Loans, net of allowance for loan losses and deferred fees		120,837,090			117,985,801
Premises & equipment, net		5,562,181			5,232,814
Intangible assets, net		418,600			-
Accrued interest and other assets		2,493,495			2,269,861

Total assets	$	155,403,866		$	150,441,005

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Demand deposits	$	35,302,737		$	29,668,703
Interest-bearing demand deposits		43,247,235			40,468,295
Savings deposits		17,427,659			18,433,466
Time certificate accounts:
$100,000 or more		15,133,428			15,709,566
Other time certificate accounts		15,213,292			17,049,226

Total deposits		126,324,351			121,329,256

Federal Home Loan Bank borrowings and other debt		11,007,306			11,412,806
Floating rate Junior Subordinated Deferrable Interest
Debentures (Trust Preferred Securities)		4,124,000			4,124,000
Deferred compensation liability		2,013,569			1,865,781
Accrued interest and other liabilities		901,589			1,445,931

Total liabilities		144,370,815			140,177,774

Stockholders' equity
Common stock, no par value, 10,000,000 shares authorized with 2,179,915 and 2,166,006 issued and outstanding at June 30, 2006 and December 31, 2005, respectively		5,002,326			4,858,728
Undivided profits		6,074,209			5,376,065
Accumulated other comprehensive (loss) income, net of tax		(43,484	)		28,438

Total stockholders' equity		11,033,051			10,263,231

Total liabilities and stockholders' equity	$	155,403,866		$	150,441,005

See accompanying notes

Index

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005

INTEREST INCOME
Interest and fees on loans	$	2,584,232	$	2,142,097	$	5,141,779	$	4,496,402
Interest on investment securities:
U.S. Teasuries and agencies		36,905		28,951		73,703		87,920
State and political subdivisions		74,288		80,161		149,512		160,973
Corporate and other investments		15,782		24,518		24,256		52,661
Interest on deposits in banks		128,644		31,870		234,599		46,895

Total interest income		2,839,851		2,307,597		5,623,849		4,844,851

INTEREST EXPENSE
Interest-bearing demand deposits		267,595		176,396		490,381		289,994
Savings deposits		27,125		24,453		52,279		48,803
Time deposits		281,074		175,345		561,486		308,796
Other borrowings		212,679		179,877		419,708		351,554

Total interest expense		788,473		556,071		1,523,854		999,147

Net interest income		2,051,378		1,751,526		4,099,995		3,845,704

PROVISION FOR LOAN LOSSES		-		45,000		26,000		215,000


Net interest income after provision for loan losses		2,051,378		1,706,526		4,073,995		3,630,704

NONINTEREST INCOME
Service charges and fees		261,021		239,469		511,414		471,603
Trust fee income		165,149		156,368		324,192		302,172
Mortgage loan sales and servicing fees		119,660		123,723		245,584		285,672
Investment sales commissions		120,529		36,020		211,817		63,913
Other income		39,334		28,953		73,380		126,711

Total noninterest income		705,693		584,533		1,366,387		1,250,071

Index

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(continued)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006			2005		2006			2005

NONINTEREST EXPENSE
Salaries and benefits	$	1,217,327		$	1,050,371	$	2,448,873		$	2,165,788
Occupancy		226,123			221,161		454,403			430,075
Supplies		40,109			41,798		80,269			88,832
Postage and freight		28,939			28,408		49,810			49,425
Outside services		178,142			158,068		346,296			331,939
Advertising		15,897			30,433		30,373			51,232
Loan collection expense		5,356			14,695		25,041			28,543
Securities and trust department expenses		82,253			46,963		139,602			84,932
Other expenses		188,508			168,010		378,895			324,314

Total noninterest expense		1,982,654			1,759,907		3,953,562			3,555,080

INCOME BEFORE INCOME TAXES		774,417			531,152		1,486,820			1,325,695

PROVISION FOR INCOME TAXES		276,188			220,702		528,009			529,785

NET INCOME		498,229			310,450		958,811			795,910

OTHER COMPREHENSIVE INCOME
Unrealized holding gain/(loss) arising during the period, net of tax		(35,234	)		55,690		(71,922	)		(78,020	)

COMPREHENSIVE INCOME	$	462,995		$	366,140	$	886,889		$	717,890

EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share	$	0.23		$	0.14	$	0.44		$	0.37
Diluted earnings per share	$	0.23		$	0.14	$	0.44		$	0.37

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		2,177,178			2,152,253		2,174,052			2,149,998
Diluted		2,185,702			2,158,574		2,182,414			2,155,300

See accompanying notes

Index

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

										Accumulated
										Other			Total
	Common Stock						Undivided			Comprehensive			Stockholders'
	Shares			Amount			Profits			Income			Equity

Balance, December 31, 2004		2,148,616		$	4,698,162		$	3,983,420		$	210,715		$	8,892,297

Shares acquired in stock repurchase plan		(4,300	)		(31,610	)		-			-			(31,610	)

Sale of nonregistered stock		1,081			11,003			-			-			11,003

Exercise of stock options		1,538			9,997			-			-			9,997

Cash dividends paid		-			-			(301,551	)		-			(301,551	)

Dividends reinvested in stock		19,071			171,176			(171,176	)		-			-

Net income and comprehensive income		-			-			1,865,372			(182,277	)		1,683,095

Balance, December 31, 2005		2,166,006		$	4,858,728		$	5,376,065		$	28,438		$	10,263,231

Bonuses paid in stock for 2005		1,686			20,000			-			-			20,000

Exercise of stock options		4,212			22,500			-			-			22,500

Stock-based compensation		-			7,626			-			-			7,626

Cash dividends paid		-			-			(167,195	)		-			(167,195	)

Dividends reinvested in stock		8,011			93,472			(93,472	)		-			-

Net income and comprehensive income		-			-			958,811			(71,922	)		886,889

Balance, June 30, 2006		2,179,915		$	5,002,326		$	6,074,209		$	(43,484	)	$	11,033,051

See accompanying notes

Index

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2006			2005

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	958,811		$	795,910
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		290,504			240,408
Provision for loan losses		26,000			215,000
Federal Home Loan Bank stock dividends		-			(3,000	)
Stock-based compensation		7,626			-
Net change in mortgage loans held-for-sale		257,115			(538,830	)
Net increase in accrued interest and other assets		(175,686	)		(332,713	)
Net (decrease) increase in accrued interest and other liabilities		(396,554	)		8,257

Net cash from operating activities		967,816			385,032

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of available-for-sale securities		690,000			3,058,836
Net increase in interest-bearing deposits in banks		(665,075	)		(1,480,165	)
Loans originated, net of principal repayments		(2,877,289	)		(7,666,414	)
Purchase of premises and equipment		(573,183	)		(112,850	)
Purchase of brokerage firm		(460,000	)		-

Net cash from investing activities		(3,885,547	)		(6,200,593	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposit accounts		7,407,167			4,207,943
Net (decrease) increase in time deposits		(2,412,072	)		4,166,510
Proceeds from Federal Home Loan Bank borrowings		1,522,000			4,000,000
Repayment of Federal Home Loan Bank borrowings		(1,927,500	)		(5,427,501	)
Shares acquired in stock repurchase plan		-			(31,610	)
Proceeds from exercise of common stock options		22,500			-
Proceeds for issuance of common stock		-			1,003
Stock bonuses granted		20,000			-
Cash dividends paid		(167,195	)		(134,813	)

Net cash from financing activities		4,464,900			6,781,532

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,547,169			965,971

CASH AND CASH EQUIVALENTS, beginning of period	$	5,018,838		$	4,341,385

CASH AND CASH EQUIVALENTS, end of period	$	6,566,007		$	5,307,356

SCHEDULE OF NONCASH ACTIVITIES
Stock dividends reinvested	$	93,472		$	79,078

Change in fair value of AFS securities, net of tax	$	(71,922	)	$	(78,020	)

See accompanying notes

Index

Oregon Pacific Bancorp

Notes to Financial Statements

June 30, 2006

(Unaudited)

Note 1 - Organization and Basis of Presentation

The unaudited interim consolidated financial statements include the accounts of Oregon Pacific Bancorp (“Bancorp”), an Oregon corporation and a registered financial holding company, and its wholly-owned subsidiary Oregon Pacific Bank (the “Bank”), after elimination of intercompany transactions and balances. Substantially all activity of Bancorp is conducted through its banking subsidiary.

Oregon Pacific Bancorp, an Oregon Corporation and financial holding company, became the holding company of Oregon Pacific Bank (collectively, the “Company”) effective January 1, 2003 through a Plan of Share Exchange approved by Bank shareholders on December 19, 2002. The Bank is a state-chartered institution authorized to provide banking services by the State of Oregon, from its headquarters in Florence, Oregon. Full-service banking products are offered to the Bank’s customers who live primarily in Lane, Douglas, and Coos counties and on the central Oregon coast. In December 2003, Bancorp formed Oregon Pacific Statutory Trust I, a wholly-owned Connecticut statutory business trust, for purposes of issuing guaranteed undivided beneficial interests in Junior Subordinated Deferrable Interest Debentures. The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts and balances for the periods presented. Actual results could differ from those estimated. Additionally, the results of operations for the three months ended June 30, 2006 are not necessarily indicative of results to be anticipated for the year ending December 31, 2006. The interim financial statements should be read in conjunction with the audited financial statements, including the notes thereto, contained in the Company’s 2005 Annual Report to Shareholders.

The unaudited consolidated interim financial statements have been prepared in conformity with accounting principals generally accepted in the United States of America and industry practice. Certain information in footnote disclosures normally included in financial statements prepared in accordance with accounting principals generally accepted in the United States of America and industry practice have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission.

Reclassifications - Certain reclassifications have been made to the 2005 financial statements to conform to current year presentations.

Note 2 - Securities Available-for-Sale

The following table presents the fair value of investments with continuous unrealized losses for less than or more than 12 months as of June 30, 2006.

Index

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses Less than 12 Months			Gross Unrealized Losses More than 12 Months			Estimated Fair Value
June 30, 2006:

U.S. Treasury and agencies	$	4,000,000	$	-	$	-		$	(100,625	)	$	3,899,375
State and political subdivisions		6,444,307		64,396		(33,505	)		(6,544	)		6,468,654
Corporate notes		456,565		3,805		-			-			460,370

	$	10,900,872	$	68,201	$	(33,505	)	$	(107,169	)	$	10,828,399

December 31, 2005:

U.S. Treasury and agencies	$	4,000,000	$	-	$	(12,500	)	$	(63,125	)	$	3,924,375
State and political subdivisions		6,884,782		123,997		(8,861	)		(6,304	)		6,993,614
Corporate notes		711,378		14,328		(138	)		-			725,568

	$	11,596,160	$	138,325	$	(21,499	)	$	(69,429	)	$	11,643,557

For the securities exhibiting unrealized losses, that is, they currently have fair values less than amortized costs, the Bank has evaluated these securities and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The following information was also considered in determining that the impairments are not other-than-temporary. U.S. Government agencies securities have minimal credit risk as they play a vital role in the nation’s financial markets. State and political subdivisions and corporate securities have a credit rating of at least investment grade by one of the nationally recognized rating agencies. The decline in value is not related to any company or industry-specific event and the Bank anticipates full recovery of amortized costs with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment.

Note 3 - Mortgage Servicing Rights

The Company recognizes as assets the rights to service mortgage loans for others, known as MSRs. MSRs are capitalized based on the relative fair value of the servicing right and the mortgage loan on the date the mortgage loan is sold and amortized over the life of the loan. Utilizing assumptions about factors such as discount rates, mortgage loan prepayment speeds, market trends and industry demand, an estimate of the fair value of the Company’s capitalized MSRs is performed quarterly by management. Since valuation is determined using discounted cash flow models, the primary risk inherent in MSRs is the impact of prepayment speeds on the estimated life of the servicing revenue stream. The use of different estimates or assumptions could produce a different fair value. At June 30, 2006, the Company’s related loan balances serviced by the Company for others totaled $98.6 million.

The following summarizes the Company’s activity related to mortgage servicing rights for the six months ended June 30, 2006 and 2005:

Mortgage Servicing Rights at June 30,	2006			2005

Balance at beginning of year	$	808,709		$	811,436
Additions		61,724			75,117
Amortization		(63,659	)		(91,499	)

Balance at June 30,	$	806,774		$	795,054

For the six months ended June 30, 2006 and 2005 there were no impairment charges recorded.

Index

Note 4 - Loans and Allowance for Loan Losses

The composition of the loan portfolio was as follows as of the dates presented:

	JUN. 30, 2006			DEC. 31, 2005

Real estate	$	20,673,395		$	18,583,333
Commercial		93,370,431			94,138,523
Installment		9,019,049			7,541,900
Overdrafts		98,338			72,495

Total Loans		123,161,213			120,336,251
Less allowance for loan losses		(1,884,235	)		(1,858,185	)
Less deferred loan fees		(439,888	)		(492,265	)
Loans, net of allowance for loan losses and deferred loan fees	$	120,837,090		$	117,985,801

Changes in the allowance for loan losses were as follows for the six-months ended:

	JUN. 30, 2006		JUN. 30, 2005

Balance, beginning of period	$	1,858,185	$	1,640,060
Provision for loan losses		26,000		215,000
Loans charged off		-		(1,569	)
Loan recoveries		50		3,711

Balance, end of period	$	1,884,235	$	1,857,202

It is the policy of the Bank to place loans on nonaccrual status whenever the collection of all or a part of the principal is in doubt. Loans placed on nonaccrual status may or may not be contractually past due at the time of such determination, and may or may not be secured by collateral. Loans in the amount of $113,000 and $356,000 were on nonaccrual status at June 30, 2006 and December 31, 2005.

The Bank had no loans past due 90 days or more on which it continued to accrue interest at either June 30, 2006 or December 31, 2005.

Note 5 - Earnings per Share of Common Stock

Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common shares were issued pursuant to the exercise of options under stock option plans. Weighted average shares outstanding consist of common shares outstanding and common stock equivalents attributable to outstanding stock options.

Note 6 - Stock-based compensation

Prior to January 1, 2006, the Company’s stock option plans were accounted for under the recognition and measurement provisions of APB Opinion No. 25 (Opinion 25), Accounting for Stock Issued to Employees, and related interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure) (collectively SFAS 123). No stock-based employee compensation cost was recognized in the Company’s Statements of Operations through December 31, 2005, as all options granted to employees under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment (SFAS 123(R)), using the modified- prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). As of January 1, 2006, 20,205 stock options were not fully vested.

Index

The fair value of each option grant on the date of grant is estimated using the Black-Scholes option pricing model based on a weighted average volatility of 15.2%, expected life of options of three to five and one-half years, weighted average risk free interest rate of 4.7%, and a dividend yield of 2% grants in 2006. The fair value of options granted during the quarter ended March 31, 2006 ranged from $1.60 to $2.23; no grants were made in the second quarter.

As a result of adopting SFAS 123(R) on January 1, 2006, the Company’s earnings before income taxes for the three months ended June 30, 2006, was approximately $3,800 lower than if it had continued to be accounted for as share-based compensation under Opinion 25. As of June 30, 2006, the Company had 21,702 nonvested options outstanding and there was $24,700 of total unrecognized compensation cost related to these nonvested options. This cost is expected to be recognized on a straight-line basis, over the vesting periods, through December 31, 2012.

On March 16, 2006 the Board of Directors of the Company modified the vesting period of all incentive stock options granted after 2002 and allowed for accelerated vesting when an employee reaches retirement age and ceases continuous service. Under SFAS 123(R), grants issued subsequent to adoption of SFAS 123(R) which are subject to such an accelerated vesting upon the recipient’s attainment of retirement age, are expensed over the shorter of the time to retirement age or the vesting schedule in accordance with the grant. Thus the vesting period can be less than the plan’s five-year vesting period depending on the age of the grantee.

There were no options granted and 1,612 options exercised during the quarter ended June 30, 2006. The following table summarizes information about the stock options outstanding at June 30, 2006:

	Exercise Price		Number Outstanding		Remaining Contractual Life (years)		Options Exercisable

	$	4.81		2,597		4.5		2,597
	$	7.25		17,242		2.6		8,622
	$	7.40		1,351		1.8		1,351
	$	11.85		13,082		7.8		-

		Total		34,272				12,570
Weighted Average Per Share Price			$	8.83

The following table illustrates the effect on net income and income per share for the periods ended June 30, 2005, if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

Index

	6 Months Ended
	June 30, 2005

Net earnings, as reported	$	795,910
Deduct: Total stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects		(242	)

Pro forma net earnings	$	795,668

Basic earnings per common share:
As reported	$	0.37
Pro forma	$	0.37

Diluted earnings per common share:
As reported	$	0.37
Pro forma	$	0.37

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for grants during the period ended June 30, 2005:

	2005

Dividend yield		2.44	%
Expected life (years)		7.5
Expected volatility		14.39	%
Risk-free rate		4.50	%

Note 7 - Business Combinations

On January 3, 2006, the Bank acquired all of the assets of Coast Investment Advisors, Inc., the local Florence branch of LPL Financial Services, Inc. As a result of the acquisition, the Bank recorded $460,000 in intangible assets, which consist of a customer list and a non-compete agreement, which are amortized on a straight-line basis over the estimated lives of the asset, both of which are 60 months. The amortization of the non-compete agreement will begin at the end of a three-year employment contract. This acquisition was consistent with the Bank’s strategy to grow the Trust and Investment Department and provided an opportunity to increase the customer base in this area.

The aggregate purchase price was $462,000, which included cash of $140,000 and an unsecured Note Payable of $322,000. Interest on the note payable is 7% and paid monthly, while principal payments are made in three equal annual installments, with the final payment due in February 2009. No liabilities or obligations were assumed in the transaction.

Note 8 - Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board issued FAS No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140, which changes the accounting for all loan servicing rights which are recorded as the result of selling a loan where the seller undertakes an obligation to service the loan, usually in exchange for compensation. FAS 156 amends current accounting guidance by permitting the servicing right to be recorded initially at fair value and also permits the subsequent reporting of these assets at fair value. FAS 156 is effective beginning January 1, 2007. Management does not expect the adoption of this standard to have a material impact on the Company’s financial statements.

Index

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains a number of forward looking statements about our anticipated business, operations, financial performance and cash flows. Statements in this report that relate to future plans, events and circumstances are provided to describe management's intentions and expectations based on currently available information, and readers should not construe these statements as assurances or guarantees. As with any predictions, these statements are inherently difficult to make with any degree of assurance, and actual results may differ materially and adversely from management's expectations described herein. Likewise, management's plans described in this report may not come to pass because unforeseen events may force management to deviate from its expressed intentions. Forward-looking statements often can be identified by the use of predictive or prospective terms such as "expect," "anticipate," "believe," "plan," "intend," and words of similar construction or meaning. Some of the events or circumstances that may cause our actual results to deviate from management's expectations include the impact of competition and local and regional economic factors upon our customer base, our deposits and our loan portfolio; economic and regulatory limits on our ability to grow our assets and manage our business; customer acceptance of our products; interest rate fluctuations that may adversely impact our revenues and expenses; and the impact of impairment charges upon our intangible and other assets. Other factors that may adversely impact our performance are discussed in this report as well as other disclosures we make from time to time in our filings with the Securities and Exchange Commission or other federal agencies. Readers also should note that forward-looking statements expressed in this report are made as of the date of this report, and management cannot undertake to update those statements to reflect future events or circumstances.

Critical Accounting Policies and Estimates

On an ongoing basis, management evaluates the estimates used, including the adequacy of the allowance for loan losses and the recorded value of the mortgage servicing asset. Estimates are based upon historical experience, current economic conditions, and other factors that management considers reasonable under the circumstances. These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources as well as assessing and identifying the accounting treatments of commitments and contingencies.

The allowance for loan losses is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible based upon evaluations of the collectibility of loans and prior loan loss experience. Management also attempts to ensure that the overall allowance appropriately reflects a margin for the imprecision in an estimation process and evaluates factors such as the trend in the loan growth and the percentage of change, the level of geographic and/or industry concentrations, competitive issues that impact the loan underwriting or structure, and economic conditions. The increase in the allowance primarily relates to loan growth since June 30, 2005. While management believes that the allowance for loan losses is sufficient to absorb losses inherent in the loan portfolio and credit commitments outstanding based on the best information available, the assessment cannot be determined with precision and may not necessarily be indicative of future losses.

Overview

Oregon Pacific Bancorp ("Bancorp"), an Oregon corporation and financial bank holding company, is the holding company of Oregon Pacific Bank (the "Bank") (collectively, the “Company”). The Company is headquartered in Florence, Oregon.

The Bank is an Oregon banking corporation organized under the Oregon Bank Act on December 17, 1979. The Bank is a full-service commercial bank that provides a broad range of depository and lending services to commercial enterprises, governmental entities and individuals. Full-service banking products are offered to the Bank’s customers from its four branches who live primarily in Lane, Douglas, and Coos counties and on the central Oregon coast. Additional financial services provided by the Bank include trust and asset management services and investment and brokerage services. The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

Index

The Company has a two-tiered corporate structure. At the holding company level the affairs of Bancorp, the sole owner of the Bank, are overseen by a Board of Directors elected by the shareholders of the Company. The business of the Bank is overseen by the Bank’s Board of Directors selected by Bancorp’s Board. Currently the respective members of the Board of Directors of the Bank and of Bancorp are identical.

The Company reported net income of $498,000, or $.23 per diluted share, for the three months ended June 30, 2006. This compares to Bank income of $310,000, or $.14 per diluted share, for the same three month period in the prior year for an increase of 64.3%. Income for the six month period ended June 30, 2006 was $959,000 or $.44 per diluted share compared to $796,000 or $.37 per diluted share in the prior year, an increase of 18.9%. 2005 first quarter income includes an interest payment for a 2004 principal recovery of a previously charged off loan and a repayment of certain Bank costs that increased earnings per share by $.07. The increase in income is primarily due to increased net interest income; see Table on page 15.

Financial Condition

Total assets at June 30, 2006 were $155,404,000 compared to $150,441,000 at December 31, 2005, an increase of $4,963,000 (3.3%). The increase was due primarily to increased new loans ($2.85 million) and cash ($1.55 million) and were funded by increases in deposits, primarily demand deposits ($5.63 million).

Stockholders’ equity at June 30, 2006 was $11,033,000, an increase of $770,000 from December 31, 2005. This change resulted from consolidated net income partially offset by cash dividends paid ($167,000).

The net loan portfolio at June 30, 2006 increased $2.8 million to $120.8 million compared to $118.0 million at December 31, 2005 and increased $4.6 million from June 30, 2005 when the portfolio was $116.2 million. See Note 3 of the financial statements for a breakdown of the type of loans.

Borrowings from the Federal Home Loan Bank at June 30, 2006 were $11.0 million compared to $11.4 million at December 31, 2005 and $10.4 million at June 30, 2005. The Bank borrowed $1.2 million during the first quarter of 2006 to match-fund a fixed rate loan and paid off a $1.5 million matured loan in the second quarter. The new borrowings averaged 5.08% and the average rate on all borrowings at June 30, 2006 is 4.20%. The Company also has an obligation to pay interest and, at maturity, principal on the floating rate Junior Subordinated Deferrable Interest Debentures held by Oregon Pacific Statutory Trust I.

The Bank began building a new financial services center on its property behind the current main office in Florence. It will house the commercial and real estate mortgage lending activities, loan servicing, the Trust and Asset Management Department, and the brokerage or Investment Department. Occupancy is expected in late spring 2007.

As a result of the acquisition of the local LPL Financial Services brokerage office in January 2006, the Company recorded $460,000 of intangible assets. The Company had no such intangible assets at December 31, 2005.

Results of Operations

Net interest income

Net interest income is the Bank’s primary source of revenue. Net interest income is the difference between interest income earned from loans and the investment portfolio, and interest expense paid on customer deposits and debt. Changes in net interest income result from changes in volume and changes in rate. Volume refers to the dollar level of interest earning assets and interest bearing liabilities. Rate refers to the underlying yields on assets and costs of liabilities.

Index

Net interest income on a tax-equivalent basis was $4,178,000 for the two quarters ended June 30, 2006 compared to $3,615,000 which excludes the one-time interest payment (discussed above) for the same period in 2005 (see Table below). The $563,000 increase was due to increases in both the volume and rates of loans partially offset by an increase in the cost of funds and a small increase in the volume of time certificates. The increase in interest income of $1.09 million was primarily due to a $265,000 increase from the increase in average loans outstanding of $7.23 million from the same period one year ago and a $695,000 increase in average rates earned resulting from the rising interest rate environment over the past few years. The effective rate on interest-bearing liabilities for the quarter was 2.81% compared to 1.96% for the same period in 2005 which reflect rising interest rates and a shift of depositors to more time certificates.

Average Balances and Average Rates Earned and Paid. The following table shows average balances and interest income or interest expense, with the resulting average yield or rates by category of average earning asset or interest-bearing liability:

Index

	Six Months Ended Jun 30, 2006								Six Months Ended Jun 30, 2005								Increase (Decrease)
				Interest		Average						Interest		Average
	Average			Income or		Yield or			Average			Income or		Yield or			Due to change in						Net
(dollars in thousands)	Balance			Expense		Rates			Balance			Expense		Rates			Volume			Rate			Change
Interest-earning assets:
Loans (2)(3)	$	121,248		$	5,142		8.48	%	$	114,019		$	4,182		7.34	%	$	265		$	695		$	960
Investment securities
Taxable securities		5,592			98		3.51	%		7,888			141		3.58	%		(41	)		(2	)		(43	)
Nontaxable securities (1)		6,726			227		6.76	%		7,255			244		6.72	%		(18	)		1			(17	)
Interest-earning balances due from banks		10,100			235		4.65	%		3,464			47		2.71	%		90			98			188
Total interest-earning assets		143,666			5,702		7.94	%		132,626			4,614		6.96	%		296			792			1,088

Cash and due from banks		4,814								4,388
Premises and equipment, net		5,331								5,147
Other real estate		0								0
Loan loss allowance		(1,878	)							(1,774	)
Other assets		4,513								3,142

Total assets	$	156,446							$	143,529

Interest-bearing liabilities:
Interest-bearing checking and savings accounts	$	59,589		$	543		1.82	%	$	61,436		$	339		1.10	%	$	(10	)	$	214		$	204
Time deposit and IRA accounts		32,179			561		3.49	%		24,376			309		2.54	%		99			153			252
Borrowed funds		16,676			420		5.04	%		15,980			351		4.39	%		15			54			69
Total interest-bearing liabilities		108,444			1,524		2.81	%		101,792			999		1.96	%		104			421			525
Noninterest-bearing deposits		34,161								29,996
Other liabilities		3,646								2,994
Total liabilities		146,251								134,782
Shareholders’ equity		10,195								8,747

Total liabilities and share-holders’ equity	$	156,446							$	143,529

Net interest income				$	4,178							$	3,615				$	192		$	371		$	563

Net interest spread							5.13	%							5.00	%

Net interest expense to average earning assets							2.12	%							1.51	%

Net interest margin							5.82	%							5.45	%

__________

(1)

Tax-exempt income has been adjusted to a tax-equivalent basis at 34%.

(2)

Nonaccrual loans are included in the average balance.

(3)

2005 excludes one-time interest repayment of $377,000 for a loan charged off in 1998 and recovered in 2004.

Index

Provision for Loan Losses

A provision of $26,000 was recorded for the six months ended June 30, 2006 compared to $215,000 in the same period in 2005. The allowance for loan losses at June 30, 2006 was 1.5% of gross loans, the same as December 31, 2005. Management believes the reserve is adequate for probable loan losses in the loan portfolio at June 30, 2006. Management’s assessment of the adequacy of the allowance for loan loss is based on a number of factors including current delinquent and non-performing loans, past loan loss experience, evaluation of customers’ financial strength, and economic trends impacting areas and customers served by the Bank. The allowance is based on estimates, and actual losses may vary from those currently estimated.

Noninterest Income

Noninterest income increased $121,000 or 20.7% for the three months and $116,000 or 9.3% for the six months ended June 30, 2006 as compared to the same periods in 2005.

	Three months ended
	June 30,
	2006		2005		$ Change			% Change

Service charges and fees	$	261,021	$	239,469	$	21,552			9.0	%
Trust fee income		165,149		156,368	$	8,781			5.6	%
Mortgage loan sales and servicing fees, net		119,660		123,723	$	(4,063	)		-3.3	%
Investment sales commissions		120,529		36,020	$	84,509			234.6	%
Other income		39,334		28,953	$	10,381			35.9	%

	$	705,693	$	584,533	$	121,160			20.7	%

	Six months ended
	June 30,
	2006		2005		$ Change			% Change

Service charges and fees	$	511,414	$	471,603	$	39,811			8.4	%
Trust fee income		324,192		302,172	$	22,020			7.3	%
Mortgage loan sales and servicing fees, net		245,584		285,672	$	(40,088	)		-14.0	%
Investment sales commissions		211,817		63,913	$	147,904			231.4	%
Other income		73,380		126,711	$	(53,331	)		-42.1	%

	$	1,366,387	$	1,250,071	$	116,316			9.3	%

The increase was primarily the result of the increase of Investment Department commissions subsequent to the acquisition of the brokerage in January as discussed in Note 6. In the six months ended June 30, 2005 the Bank received repayment for expenses resulting from a charged-off loan; no such payment was received in 2006 causing the decrease in “other income” from the prior year.

Noninterest Expense

Noninterest expense increased $223,000 or 12.7% for the three months and $398,000 or 11.2% for the six months ended June 30, 2006 from the same periods one year ago.

Index

	Three months ended
	June 30,
	2006		2005		$ Change			% Change

Salaries and benefits	$	1,217,327	$	1,050,371	$	166,956			15.9	%
Occupancy expense		226,123		221,161	$	4,962			2.2	%
Outside services		178,142		158,068	$	20,074			12.7	%
Securities and trust department expenses		82,253		46,963	$	35,290			75.1	%
Other expenses		278,809		283,344	$	(4,535	)		-1.6	%

	$	1,982,654	$	1,759,907	$	222,747			12.7	%

	Six months ended
	June 30,
	2006		2005		$ Change		% Change

Salaries and benefits	$	2,448,873	$	2,165,788	$	283,085		13.1	%
Occupancy expense		454,403		430,075	$	24,328		5.7	%
Outside services		346,296		331,939	$	14,357		4.3	%
Securities and trust department expenses		139,602		84,932	$	54,670		64.4	%
Other expenses		564,388		542,346	$	22,042		4.1	%

	$	3,953,562	$	3,555,080	$	398,482		11.2	%

Most of the increase is attributable to eight new full-time equivalent staff, three of whom were a part of the brokerage acquisition plus the resulting additional expenses for the Securities Department.

Provision for Income Taxes

The provision for income taxes at both June 30, 2006 and 2005 remained consistent with expected statutory rates adjusted for anticipated permanent differences arising primarily from nontaxable income earned on municipal security investments and timing differences associated with the tax treatment of bad debt.

Liquidity and Capital Resources

Liquidity management involves the ability to meet cash flow requirements. The Bank’s major sources of liquidity are customer deposits, calls and maturities of investment securities, the use of borrowing arrangements through the Federal Home Loan Bank of Seattle, and net cash provided by operating activities. Sales of the Bank’s investment portfolio are another source of funds, if needed. The investment portfolio is of high quality and is highly marketable although a gain or loss would be realized if the market value of securities sold were not equal to their adjusted book value at the date of sale.

The Bank maintains liquidity levels adequate to fund loan commitments, investment opportunities, deposit withdrawals and other financial commitments. The Bank's liquidity position increased significantly during the quarter ended June 30, 2006 as deposit growth exceeded the loan growth volume. As a result, during the first six months, the loan-to-deposit ratio loosened and fell slightly to 97% at June 30, 2006. Liquidity that is deemed to be temporary excess cash may be invested as interest-earning deposits with the FHLB or time certificates at other financial institutions increased during the quarter. As of June 30, 2006, the Bank had $6.6 million in such funds compared to $5.9 million at December 31, 2005. Management believes its liquidity planning will adequately provide the funds necessary to enable the Bank to fund loan commitments and meet customer withdrawals of deposits in the normal course of business.

Index

As disclosed in the Consolidated Statements of Cash Flows, net cash provided by operating activities was $968,000 during the six months ended June, 2006. The principal source of cash provided by operating activities was net income. Net cash of $3.9 million used in investing activities consisted principally of $2.9 million of net loan growth, $573,000 of purchases of premises and equipment, and $460,000 for the purchase of the local LPL Financial Services brokerage office. The $4.5 million of cash provided by financing activities primarily consisted of $7.4 million demand deposit accounts, partly offset by $2.4 million decreases in time deposits and $167,000 payment of dividends.

For purposes of determining a bank’s deposit insurance assessment, the FDIC has issued regulations that define a “well capitalized” bank as one with a leverage ratio of 5% or more and a total risk-based ratio of 10% or more. At June 30, 2006, the Bank’s leverage and total risk-based ratios were 9.32% and 12.42%, respectively, which exceed the well-capitalized threshold.

Item 3.

Quantitive and Qualitive Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. The Bank’s market risk arises principally from interest rate risk in its lending, deposit taking, and borrowing activities. A sudden and substantial increase in interest rates could adversely impact the Company’s earnings, to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis.

Management actively monitors and manages its interest rate risk exposure. Although the Bank manages other risks, such as credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be a significant market risk which could have the largest material effect on the Bank’s financial condition and results of operations.

Through the Bank’s Asset/Liability Management Committee (“ALCO”), which is comprised of senior management, the Bank monitors the level and general mix of earning assets and interest-bearing liabilities, with special attention to those assets and liabilities which are rate-sensitive. The primary objective of ALCO is managing the Company’s assets and liabilities in a manner that balances profitability, interest rate risk, and various other risks including liquidity. ALCO operates under policies and within risk limits prescribed by, reviewed and approved by the Board of Directors. The Bank’s strategy has included the funding of certain fixed rate loans with medium term borrowed funds in order to mitigate a margin squeeze should interest rates rise. There have been no significant changes in the Company’s market risk exposure since December 31, 2005.

Item 4.

Controls and Procedures

(a)

The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of its disclosure controls and procedures as of June 30, 2006. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer each concludes that as of June 30, 2006, the Company maintained effective disclosure controls and procedures in all material respects, including those to ensure that information required to be disclosed in reports filed or submitted with the SEC is recorded, processed, and reported within the time periods specified by the SEC, and is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decision regarding required disclosure.

(b)	Changes in Internal Controls: In the quarter ended June 30, 2006, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls.

Disclosure Controls and Internal Controls. Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all to permit the preparation of financial statement in conformity with accounting principles generally accepted in the United States of America.

Index

Limitations on the Effectiveness of Controls. The Company’s management does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II.

OTHER INFORMATION

Item 1.

Legal proceedings.

As of the date of filing this Form 10-Q neither Bancorp nor the Bank was a party to any material legal proceedings. Further, management is not aware of any threatened or pending lawsuits or other proceedings against the Company which, if determined adversely, would have a material effect on the business or its financial position. Bancorp or the Bank may from time to time become a party to litigation in the ordinary course of business, such as debt collection litigation or through an appearance as a creditor in a bankruptcy case.

Item 1A.

Risk factors.

There has not been any material change in the risk factors disclosure from that contained in the Company’s 2005 10-K for the fiscal year ended December 31, 2005.

Item 2.

Unregistered sales of equity securities and use of proceeds.

In August 2005 the Board of Directors approved the Bancorp Amended Dividend Reinvestment Plan that permits the direct purchase of additional shares of Bancorp Common Stock for cash in addition to the automatic reinvestment of cash dividends. During 2005, 1,081 shares were purchased by existing shareholders at an average price of $10.18 per share as part of the new Plan. No such purchases were made in the first half of 2006.

Item 3.

Defaults upon senior securities.

None.

Item 4.

Submission of matters to a vote of security holders.

The Annual Meeting of Stockholders was held on April 27, 2006. There were 2,174,070 shares of common stock that could be voted, and 1,603,308 shares present at the meeting by holders thereof by proxy, which constituted a quorum. The following is a summary of the results of the vote:

Index

Vote for the election of Directors:

Nominees

Term

Votes:

For

Withheld

Dr. A. J. Brauer

Three Years

1,574,661

28,647

Lydia G. Brackney

Three Years

1,603,208

100

Richard L. Yecny

Three Years

1,603,208

100

Item 5.

Other information.

None.

Item 6.

Exhibits and reports on Form 8-K.

(a)

Exhibits.

The following documents are filed as part of this Form 10-Q as required by Item 601 of Regulation S-K:

3.1

Articles of Incorporation of Oregon Pacific Bancorp (incorporated herein by reference to Exhibit 3(i) to Oregon Pacific Bancorp’s Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on June 30, 2003).

3.2

Bylaws of Oregon Pacific Bancorp (incorporated herein by reference to Exhibit 3(i) to Oregon Pacific Bancorp’s Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on June 30, 2003).

10.1

2003 Stock Incentive Plan (incorporated by reference to Exhibit 1 to Oregon Pacific Bancorp’s Form DEF 14A filed with the Securities and Exchange Commission on March 25, 2003).

10.2

Oregon Pacific Bank Deferred Compensation and Incentive Plan (incorporated herein by reference to Exhibit 10.2 to Oregon Pacific Bancorp’s Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 30, 2004).

31.1

Certification of Chief Executive Officer pursuant to rule 13a-14(a) or Rule 15d-14(a) and Section 302(a) of the Sarbanes-Oxley Act of 2002.**

31.2

Certification of Chief Financial Officer pursuant to rule 13a-14(a) or Rule 15d-14(a) and Section 302(a) of the Sarbanes-Oxley Act of 2002.**

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

_________________

** Filed herewith.

(b)	On February 10, 2006 a Form 8-K was filed under items 2.02 and 9.01 announcing 2005 fourth quarter and year earnings.

Index

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto, duly authorized, in the City of Florence, State of Oregon, on August 11, 2006.

	OREGON PACIFIC BANCORP


	By:	/s/ Thomas K. Grove

		Thomas K. Grove
		President, Chief Executive Officer And Director (Chief Executive Officer)


	By:	/s/ Joanne Forsberg

		Joanne Forsberg
		Chief Financial Officer and Secretary (Principal Financial Officer)