OREGON PACIFIC BANCORP - Quarter Report: 2007 June (Form 10-Q)

form10q.htm

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, 2007

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 incorporation or organization)	(I.R.S. Employer 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, 2007, was 2,208,491.

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	8-11

	Item 2.	Management’s Discussion and Analysis of Financial Condition And Results of Operations	11-17

	Item 3.	Quantitive and Qualitive Disclosures about Market Risk	17

	Item 4.	Controls and Procedures	17-18

Part II.	Other Information

	Item 1.	Legal proceedings	18

	Item 1A.	Risk Factors	18

	Item 2.	Unregistered sales of equity securities and use of proceeds	18

	Item 3.	Defaults upon senior securities	18

	Item 4.	Submission of matters to a vote of security holders	18-19

	Item 5.	Other information	19

	Item 6.	Exhibits and Reports on Form 8-K	19

	Signatures		20
	Certifications of Chief Executive Officer and Chief Financial Officer		21-23

Index

PART 1.

FINANCIAL INFORMATION

Item 1.

Financial statements

OREGON PACIFIC BANCORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)

ASSETS	JUNE 30, 2007			DECEMBER 31, 2006

Cash and cash equivalents	$	3,701,765		$	4,473,047
Interest-bearing deposits in banks		4,761,088			2,986,418
Available-for-sale securities, at fair value		9,712,353			10,297,348
Restricted equity securities		1,023,550			1,023,100
Loans held-for-sale		94,638			152,095
Loans, net of allowance for loan losses and deferred fees		122,406,051			121,066,553
Premises & equipment, net		8,241,759			6,986,301
Intangible assets, net		335,800			377,200
Accrued interest and other assets		2,548,710			3,943,232

Total assets	$	152,825,714		$	151,305,294

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
Demand deposits	$	32,548,521		$	32,942,095
Interest-bearing demand deposits		40,188,564			39,953,529
Savings deposits		15,670,201			15,588,636
Time certificate accounts:
$100,000 or more		17,062,960			16,543,011
Other time certificate accounts		17,889,563			15,583,499

Total deposits		123,359,809			120,610,770

Federal Home Loan Bank borrowings and other debt		9,244,972			11,479,806
Floating rate Junior Subordinated Deferrable Interest Debentures (Trust Preferred Securities)		4,124,000			4,124,000
Deferred compensation liability		2,368,766			2,294,717
Accrued interest and other liabilities		1,018,528			895,168

Total liabilities		140,116,075			139,404,461

Stockholders' equity
Common stock, no par value, 10,000,000 shares authorized with 2,208,491 and 2,187,349 issued and outstanding at June 30, 2007 and December 31, 2006, respectively		5,289,593			5,100,037
Undivided profits		7,438,055			6,795,987
Accumulated other comprehensive (loss) income, net of tax		(18,009	)		4,809

Total stockholders' equity		12,709,639			11,900,833

Total liabilities and stockholders' equity	$	152,825,714		$	151,305,294

See accompanying notes

Index

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006

INTEREST INCOME
Interest and fees on loans	$	2,897,556	$	2,584,232	$	5,586,406	$	5,141,779
Interest on investment securities:
U.S. Teasuries and agencies		40,397		36,905		77,195		73,703
State and political subdivisions		57,429		74,288		116,586		149,512
Corporate and other investments		16,751		15,782		25,177		24,256
Interest on deposits in banks		91,111		128,644		149,529		234,599

Total interest income		3,103,244		2,839,851		5,954,893		5,623,849

INTEREST EXPENSE
Interest-bearing demand deposits		305,981		267,595		609,589		490,381
Savings deposits		27,960		27,125		54,634		52,279
Time deposits		387,240		281,074		749,323		561,486
Other borrowings		207,128		212,679		409,155		419,708

Total interest expense		928,309		788,473		1,822,701		1,523,854

Net interest income		2,174,935		2,051,378		4,132,192		4,099,995

PROVISION FOR LOAN LOSSES		-		-		-		26,000

Net interest income after provision for loan losses		2,174,935		2,051,378		4,132,192		4,073,995

NONINTEREST INCOME
Service charges and fees		235,186		261,021		453,860		511,414
Trust fee income		176,102		165,149		349,495		324,192
Investment sales commissions		106,774		120,529		207,052		211,817
Mortgage loan sales and servicing fees		104,389		119,660		216,140		245,584
Other income		49,538		39,334		95,257		73,380

Total noninterest income		671,989		705,693		1,321,804		1,366,387

Index

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(continued)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006

NONINTEREST EXPENSE
Salaries and benefits	$	1,250,589		$	1,217,327		$	2,446,738		$	2,448,873
Occupancy		212,267			226,123			429,431			454,403
Supplies		48,166			40,109			88,208			80,269
Postage and freight		30,520			28,939			54,048			49,810
Outside services		174,482			178,142			368,470			346,296
Advertising		15,010			15,897			34,997			30,373
Loan collection expense		14,226			5,356			26,766			25,041
Securities and trust department expenses		84,050			82,253			165,297			139,602
Other expenses		197,046			188,508			349,792			378,895

Total noninterest expense		2,026,356			1,982,654			3,963,747			3,953,562

INCOME BEFORE INCOME TAXES		820,568			774,417			1,490,249			1,486,820

PROVISION FOR INCOME TAXES		299,544			276,188			540,729			528,009

NET INCOME		521,024			498,229			949,520			958,811

OTHER COMPREHENSIVE INCOME
Unrealized holding gain/(loss) arising during the period, net of tax		(29,333	)		(35,234	)		(22,818	)		(71,922	)

COMPREHENSIVE INCOME	$	491,691		$	462,995		$	926,702		$	886,889

EARNINGS PER SHARE OF
COMMON STOCK
Basic earnings per share	$	0.24		$	0.23		$	0.43		$	0.44
Diluted earnings per share	$	0.24		$	0.23		$	0.43		$	0.44

WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic		2,206,559			2,177,178			2,198,406			2,174,052
Diluted		2,209,855			2,185,702			2,204,089			2,182,414

See accompanying notes

Index

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

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

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

Sale of nonregistered stock		83		1,009		-			-			1,009

Stock-based compensation		-		15,251		-			-			15,251

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

Cash dividends paid		-		-		(383,566	)		-			(383,566	)

Dividends reinvested in stock		15,362		182,549		(182,549	)		-			-

Net income and comprehensive income		-		-		1,986,037			(23,629	)		1,962,408

Balance, December 31, 2006		2,187,349	$	5,100,037	$	6,795,987		$	4,809		$	11,900,833

Exercise of stock options		13,793		99,999		-			-			99,999

Stock-based compensation		-		796		-			-			796

Cash dividends paid		-		-		(218,691	)		-			(218,691	)

Dividends reinvested in stock		7,349		88,761		(88,761	)		-			-

Net income and comprehensive income		-		-		949,520			(22,818	)		926,702

Balance, June 30, 2007		2,208,491	$	5,289,593	$	7,438,055		$	(18,009	)	$	12,709,639

See accompanying notes

Index

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2007			2006

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	949,520		$	958,811
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		303,836			290,504
Provision for loan losses		-			26,000
Stock-based compensation		796			7,626
Net change in mortgage loans held-for-sale		57,457			257,115
Loss on disposition of premises, equipment, and other real estate		7,650			-
Net decrease (increase) in accrued interest and other assets		1,409,124			(175,686	)
Net increase (decrease) in accrued interest and other liabilities		197,409			(396,554	)

Net cash from operating activities		2,925,792			967,816

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of available-for-sale securities		1,540,000			690,000
Purchases of available-for-sale securities		(1,000,000	)		-
Purchase of restricted equity securities		(450	)		-
Net increase in interest-bearing deposits in banks		(1,774,670	)		(665,075	)
Loans originated, net of principal repayments		(1,339,498	)		(2,877,289	)
Purchase of premises and equipment		(1,517,969	)		(571,183	)
Purchase of brokerage firm		-			(140,000	)

Net cash from investing activities		(4,092,587	)		(3,885,547	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand and savings deposit accounts		(76,974	)		7,407,167
Net increase (decrease) in time deposits		2,826,013			(2,412,072	)
Proceeds from Federal Home Loan Bank borrowings		1,500,000			1,522,000
Repayment of Federal Home Loan Bank borrowings		(3,842,168	)		(1,927,500	)
Change in debt from purchase of brokerage firm		107,334			(322,000	)
Proceeds from exercise of common stock options		99,999			22,500
Stock bonuses granted		-			20,000
Cash dividends paid		(218,691	)		(167,195	)

Net cash from financing activities		395,513			4,464,900

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(771,282	)		1,547,169

CASH AND CASH EQUIVALENTS, beginning of period	$	4,473,047		$	5,018,838

CASH AND CASH EQUIVALENTS, end of period	$	3,701,765		$	6,566,007


SCHEDULE OF NONCASH ACTIVITIES
Stock dividends reinvested	$	88,761		$	93,472

Change in fair value of AFS securities, net of tax	$	(22,818	)	$	(71,922	)

See accompanying notes

Index

Oregon Pacific Bancorp

Notes to Consolidated Financial Statements

June 30, 2007

(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.

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 six months ended June 30, 2007 are not necessarily indicative of results to be anticipated for the year ending December 31, 2007. The interim financial statements should be read in conjunction with the audited financial statements, including the notes thereto, contained in the Company’s 2006 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.

Certain amounts for 2006 have been reclassified to conform to the 2007 presentation.

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, 2007.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
June 30, 2007:

U.S. Treasury and agencies	$	4,000,000	$	-	$	(45,000	)	$	3,955,000
State and political subdivisions		5,295,348		36,350		(22,531	)	$	5,309,167
Corporate notes		447,020		1,166		-		$	448,186

	$	9,742,368	$	37,516	$	(67,531	)	$	9,712,353

December 31, 2006:
U.S. Treasury and agencies	$	4,000,000	$	-	$	(50,937	)	$	3,949,063
State and political subdivisions		5,837,779		65,221		(10,156	)	$	5,892,844
Corporate notes		451,554		3,887		-		$	455,441

	$	10,289,333	$	69,108	$	(61,093	)	$	10,297,348

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.

Index

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, 2007, the Company’s related loan balances serviced by the Company for others totaled $90.2 million.

The following summarizes the Company’s activity related to mortgage servicing rights for the six months ended June 30, 2007 and 2006:

Mortgage Servicing Rights at June 30,	2007			2006

Balance at beginning of year	$	763,203		$	808,709
Additions		29,376			61,724
Amortization		(73,483	)		(63,659	)

Balance at June 30,	$	719,096		$	806,774
MSR as a % of serviced portfolio		0.80	%		0.85	%

For the six months ended June 30, 2007 and 2006 there were no impairment charges recorded.

Note 4 – Loans and Allowance for Loan Losses

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

	JUN. 30, 2007			DEC. 31, 2006

Real estate	$	20,563,992		$	20,684,978
Commercial		96,946,879			94,899,657
Installment		6,831,624			7,670,400
Overdrafts		245,556			36,279

Total Loans		124,588,051			123,291,314
Less allowance for loan losses		(1,849,366	)		(1,861,221	)
Less deferred loan fees		(332,634	)		(363,540	)
Loans, net of allowance for loan losses and deferred loan fees	$	122,406,051		$	121,066,553

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

	JUN. 30, 2007			JUN. 30, 2006

Balance, beginning of period	$	1,861,221		$	1,858,185
Provision for loan losses		-			26,000
Loans charged off		(12,855	)		-
Loan recoveries		1,000			-

Balance, end of period	$	1,849,366		$	1,884,185

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 $260,000 and $215,000 were on nonaccrual status at June 30, 2007 and December 31, 2006.

The Bank had no loans past due 90 days or more on which it continued to accrue interest at either June 30, 2007 or December 31, 2006.

Index

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

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 included: (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).

The Company’s recognized expenses of $360 and $3,800 before income taxes for the three months ended June 30, 2007 and 2006, respectively. As of June 30, 2007, the Company had 6,204 nonvested options outstanding and there was $13,900 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, 2011.

The following table summarizes information about the stock options outstanding at June 30, 2007:

Options	Shares			Weighted Average Exercise Price ($)		Weighted Avg. Remaining Contractual Term ( in yrs.)		Aggregate Intrinsic Value ($)

Outstanding at January 1, 2007		34,272			8.83
Granted		-
Exercised		(13,793	)		7.25
Forfeited		(2,110	)		11.85
Outstanding at June 30, 2007		18,369			9.66		3.42		38,323
Vested at June 30, 2007		12,165			6.86		2.31		38,944
Exercisable at June 30, 2007		7,397			6.42		2.12		39,421

No options were exercised during the quarter ended June 30, 2007. The total intrinsic value of options exercised during both the three and six month periods ended June 30, 2007 was $64,137. The total intrinsic value of options exercised during the three and six month periods ended June 30, 2006 was $19,994 and $29,505, respectively.

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.

Index

Note 8 – Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, and accounting in interim periods and requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 is effective as of the beginning of the Company’s 2007 fiscal year. The cumulative effect, if any, of applying FIN 48 is to be reported as an adjustment to the opening balance of retained earnings in the year of adoption. Adoption on January 1, 2007 did not have a material effect on the Company.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The Statement provides enhanced guidance for measuring assets and liabilities using fair value and applies whenever other standards require or permit assets or liabilities to be measured at fair value. Statement 157 also requires expanded disclosure of items that are measured at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is not expected to have a significant impact on the Company’s consolidated financial condition or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is not expected to have a significant impact on the Company’s consolidated financial condition or results of operations.

Note 9 – Subsequent Events

On July 27, 2007, the Board of Directors approved and adopted a stock repurchase program authorizing the Company to repurchase up to $500,000 of its outstanding common stock. Under the repurchase program, the Company will purchase shares from time to time in the open market, depending on market price and other considerations. The timing of purchases and the prices to be paid will be at the discretion of management. The repurchase program is intended to be structured to conform with the safe harbor provisions of Securities and Exchange Commission Rule 10b-18.

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.

Index

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. 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

Effective January 1, 2003 through a Plan of Share Exchange approved by Bank shareholders on December 19, 2002, Oregon Pacific Bancorp ("Bancorp"), an Oregon corporation and financial bank holding company, became 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.

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 $521,000, or $0.24 per diluted share, for the quarter ended June 30, 2007. This compares to Bank income of $498,000, or $0.23 per diluted share, for the same three month period in the prior year for an increase of 4.6%. Income for the six month period ended June 30, 2007 was $950,000 or $0.43 per diluted share compared to $959,000 or $0.44 per diluted share in the prior year, a decrease of 0.9%. The increase in the second quarter in income is primarily due to increased net interest income while first quarter’s decrease from prior year caused the slight year-to-date decrease; see Table on page 14.

Index

Financial Condition

Total assets at June 30, 2007 were $152,826,000 compared to $151,305,000 at December 31, 2006, an increase of $1,521,000 (1.0%). The increase was due primarily to increased new loans ($1.34 million) and was funded by increases in deposits, primarily certificates of deposit ($2.83 million). The increase in premises and equipment results from the new financial center built behind the Florence main branch that was finished and occupied in April 2007 at a total cost of $3.2 million. It houses the commercial and real estate mortgage lending activities, loan servicing, the Trust and Asset Management Department, and the brokerage or Investment Department.

Stockholders’ equity at June 30, 2007 was $12,710,000, an increase of $809,000 from December 31, 2006. This change resulted from consolidated net income partially offset by cash dividends paid ($219,000).

The net loan portfolio at June 30, 2007 increased $1.34 million to $122.4 million compared to $121.1 million at December 31, 2006 and increased $1.57 million from June 30, 2006 when the portfolio was $120.8 million. See Note 4 of the financial statements for a breakdown of the type of loans.

Borrowings from the Federal Home Loan Bank at June 30, 2007 were $9.0 million compared to $11.5 million at December 31, 2006 and $12.6 million at June 30, 2006. The Bank borrowed $1.5 million during the second quarter of 2007 and paid off $3.0 million of matured or called loans in the second quarter. The rate on the new borrowings was 4.455% and the average rate on all borrowings at June 30, 2007 is 4.40%. The Company also has an obligation to pay interest and, at maturity, principal of $4.1 million on the floating rate Junior Subordinated Deferrable Interest Debentures held by Oregon Pacific Statutory Trust I, and a $215,000 note payable from its 2006 acquisition.

As a result of the acquisition of the local LPL Financial Services brokerage in January 2006, the Company has $336,000 of net intangible assets compared to $377,000 at December 31, 2006. The change in intangible assets is related to amortization recognized during the period.

Accrued interest and other assets at December 31, 2006 included a $1.2 million receivable for the sale of an SBA guaranteed loan. No such amounts existed at June 30, 2007.

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.

Net interest income on a tax-equivalent basis was $4,209,000 for the two quarters ended June 30, 2007 compared to $4,178,000 for the same period in 2006 (see Table below). The $31,000 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 plus a decrease in the amount of interest-earning balances at banks. The increase in interest income of $330,000 was primarily due to a $363,000 increase from the increase in average loan rates earned from the same period one year as a result of the rising interest rate environment over the past few years. The effective rate on interest-bearing liabilities for the quarter was 3.48% compared to 2.81% for the same period in 2006 which reflect those rising interest rates and a shift of depositors to more time certificates.

Index

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:

	Six Months Ended Jun 30, 2007								Six Months Ended Jun 30, 2006								Increase (Decrease)
	Average			Interest Income or		Average Yield or			Average			Interest Income or		Average Yield or			Due to change in						Net
(dollars in thousands)	Balance			Expense		Rates			Balance			Expense		Rates			Volume			Rate			Change
Interest-earning assets:
Loans (2)	$	123,569		$	5,586		9.04	%	$	121,248		$	5,142		8.48	%	$	98		$	346		$	444
Investment securities
Taxable securities		5,573			102		3.66	%		5,592			98		3.51	%		(0	)		4			4
Nontaxable securities (1)		5,331			177		6.65	%		6,726			227		6.76	%		(47	)		(3	)		(50	)
Interest-earning balances due from banks		5,645			150		5.31	%		10,100			235		4.65	%		(104	)		19			(85	)
Total interest-earning assets		140,118			6,015		8.59	%		143,666			5,702		7.94	%		(53	)		366			313

Cash and due from banks		4,029								4,814
Premises and equipment, net		7,788								5,331
Other real estate		0								0
Loan loss allowance		(1,858	)							(1,878	)
Other assets		3,084								4,513

Total assets	$	153,161							$	156,446

Interest-bearing liabilities:
Interest-bearing checking and savings accounts	$	55,094		$	665		2.41	%	$	59,589		$	543		1.82	%	$	(41	)	$	163		$	122
Time deposit and IRA accounts		34,236			749		4.38	%		32,179			561		3.49	%		36			152			188
Borrowed funds		15,331			409		5.34	%		16,676			420		5.04	%		(34	)		23			(11	)
Total interest-bearing liabilities		104,661			1,823		3.48	%		108,444			1,524		2.81	%		(39	)		338			299
Noninterest-bearing deposits		32,730								34,161
Other liabilities		3,514								3,249
Total liabilities		140,905								145,854
Shareholders’ equity		12,256								10,592

Total liabilities and share-holders’ equity	$	153,161							$	156,446

Net interest income				$	4,192							$	4,178				$	(14	)	$	28		$	14

Net interest spread							5.10	%							5.13	%

Net interest expense to average earning assets							2.60	%							2.12	%

Net interest margin							5.98	%							5.82	%

(1)

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

(2)

Nonaccrual loans and mortgage loans held for sale are included in the average balance.

Index

Provision for Loan Losses

No provision was recorded for the six months ended June 30, 2007 compared to $26,000 in the same period in 2006. The allowance for loan losses at June 30, 2007 was 1.5% of gross loans, the same as December 31, 2006. Management is satisfied that the reserve is adequate for probable loan losses in the loan portfolio at June 30, 2007. 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, collateral, concentrations, 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 decreased $50,000 or 7.1% for the three months and $61,000 or 4.5% for the six months ended June 30, 2007 as compared to the same periods in 2006.

The decrease was primarily the result of the decrease of mortgage loan sales as the housing market has slowed and mortgage rates have increased plus the decrease of service charges and fees due to lower overdraft fee income.

Noninterest Expense

Noninterest expense increased $44,000 or 2.2% for the three months and $10,000 or 0.3% for the six months ended June 30, 2007 from the same periods one year ago.

	Three months ended June 30,
	2007		2006		$ Change			% Change

Service charges and fees	$	235,186	$	261,021	$	(25,835	)		-9.9	%
Trust fee income		176,102		165,149		10,953			6.6	%
Investment sales commissions		106,774		120,529		(13,755	)		-11.4	%
Mortgage loan sales and servicing fees, net		87,711		119,660		(31,949	)		-26.7	%
Other income		49,538		39,334		10,204			25.9	%

	$	655,311	$	705,693	$	(50,382	)		-7.1	%

	Six months ended June 30,
	2007		2006		$ Change			% Change

Service charges and fees	$	453,860	$	511,414	$	(57,554	)		-11.3	%
Trust fee income		349,495		324,192		25,303			7.8	%
Investment sales commissions		207,052		211,817		(4,765	)		-2.2	%
Mortgage loan sales and servicing fees, net		216,140		245,584		(29,444	)		-12.0	%
Other income		95,257		73,380		21,877			29.8	%

	$	1,321,804	$	1,366,387	$	(44,583	)		-3.3	%

Noninterest Expense

Noninterest expense increased $44,000 or 2.2% for the three months and $10,000 or 0.3% for the six months ended June 30, 2007 from the same periods one year ago.

Index

	Three months ended June 30,
	2007		2006		$ Change			% Change

Salaries and benefits	$	1,250,589	$	1,217,327	$	33,262			2.7	%
Occupancy expense		212,267		226,123		(13,856	)		-6.1	%
Outside services		174,482		178,142		(3,660	)		-2.1	%
Securities and trust department expenses		84,050		82,253		1,797			2.2	%
Other expenses		304,968		278,809		26,159			9.4	%

	$	2,026,356	$	1,982,654	$	43,702			2.2	%

	Six months ended June 30,
	2007		2006		$ Change			% Change

Salaries and benefits	$	2,446,738	$	2,448,873	$	(2,135	)		-0.1	%
Occupancy expense		429,431		454,403		(24,972	)		-5.5	%
Outside services		368,470		346,296		22,174			6.4	%
Securities and trust department expenses		165,297		139,602		25,695			18.4	%
Other expenses		553,811		564,388		(10,577	)		-1.9	%

	$	3,963,747	$	3,953,562	$	10,185			0.3	%

Most of the change for the three months ended is attributable to pay increases as well as increases in postage and business development expenses.

Provision for Income Taxes

The provision for income taxes at both March 31, 2007 and 2006 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 fairly significantly during the two quarters ended June 30, 2007 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 99% at June 30, 2007. 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, 2007, the Bank had $4.8 million in such funds compared to $3.0 million at December 31, 2006. 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.

As disclosed in the Consolidated Statements of Cash Flows, net cash provided by operating activities was $2.9 million during the six months ended June, 2007. The principal sources of cash provided by operating activities were net income and a decrease in accounts receivable for a loan sold prior to December 31, 2006. Net cash of $4.1 million used in investing activities consisted principally of $1.3 million of net loan growth, $1.5 million of purchases of premises and equipment, and $1.7 million increase in interest-bearing deposits in banks. The $396,000 of cash provided by financing activities primarily consisted of a $2.8 million increase in demand deposit accounts, partly offset by a net $2.2 million pay down of FHLB borrowings.

Index

For purposes of determining a bank’s capital adequacy, 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, 2007, the Bank’s leverage and total risk-based ratios were 10.58% and 13.64%, 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, 2006.

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, 2007. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer each concludes that as of June 30, 2007, 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, 2007, 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 2006 10-K for the fiscal year ended December 31, 2006.

Item 2.

Unregistered sales of equity securities and use of proceeds.

None.

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 26, 2007. There were 2,190,858 shares of common stock that could be voted, and 1,471,823 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

James P. Clark	Three Years			1,455,845		15,978
Thomas K. Grove	Three Years			1,361,381		110,442
Robert R King	Three Years			1,439,410		32,413
Jon Thompson	Three Years			1,455,845		15,978

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, 2007 a Form 8-K was filed under items 2.02 and 9.01 announcing 2006 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 14, 2007.

	OREGON PACIFIC BANCORP



	By:	/s/ James P. Clark

		James P. Clark
		President, Chief Executive Officer
		And Director (Chief Executive Officer)



	By:	/s/ Joanne Forsberg
		Joanne Forsberg
		Chief Financial Officer and Secretary
		(Principal Financial Officer)