Oregon Pacific Bancorp (ORPB) 10-Q 2007 Q3 Quarterly report

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

(Mark one)

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

For the quarterly period ended September 30, 2007

£ 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 S                      No £

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 [  ] Accelerated Filer [  ] Non-accelerated Filer S

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

Yes £                      No S

The number of shares outstanding of the issuer’s Common Stock, no par value, as of October 31, 2007, was 2,206,794.

OREGON PACIFIC BANCORP

INDEX

Part I.  Financial Information

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
	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

2

PART 1. FINANCIAL INFORMATION

Item 1. Financial statements

OREGON PACIFIC BANCORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	SEPTEMBER 30,		DECEMBER 31,
ASSETS	2007		2006
Cash and cash equivalents	$	3,797,570	$	4,473,047
Interest-bearing deposits in banks		9,941,511		2,986,418
Available-for-sale securities, at fair value		9,506,815		10,297,348
Restricted equity securities		1,023,550		1,023,100
Loans held-for-sale		360,784		152,095
Loans, net of allowance for loan losses and deferred fees		119,252,960		121,066,553
Premises & equipment, net		8,143,028		6,986,301
Intangible assets, net		315,100		377,200
Accrued interest and other assets		2,864,658		3,943,232
Total assets	$	155,205,976	$	151,305,294
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits	$	37,133,790	$	32,942,095
Interest-bearing demand deposits		35,934,659		39,953,529
Savings deposits		15,022,234		15,588,636
Time certificate accounts:
$100,000 or more		18,254,934		16,543,011
Other time certificate accounts		17,296,857		15,583,499
Total deposits		123,642,474		120,610,770
Federal Home Loan Bank borrowings and other debt		10,731,222		11,479,806
Floating rate Junior Subordinated Deferrable Interest
Debentures (Trust Preferred Securities)		4,124,000		4,124,000
Deferred compensation liability		2,391,153		2,294,717
Accrued interest and other liabilities		1,179,254		895,168
Total liabilities		142,068,103		139,404,461
Stockholders' equity
Common stock, no par value, 10,000,000 shares authorized with 2,206,794 and 2,187,349 issued and outstanding at September 30, 2007 and December 31, 2006, respectively		5,274,510		5,100,037
Undivided profits		7,841,341		6,795,987
Accumulated other comprehensive income, net of tax		22,022		4,809
Total stockholders' equity		13,137,873		11,900,833
Total liabilities and stockholders' equity	$	155,205,976	$	151,305,294

See accompanying notes

3

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
INTEREST INCOME
Interest and fees on loans	$	2,831,558	$	2,857,354	$	8,417,964	$	7,999,133
Interest on investment securities:
U.S. Treasuries and agencies		42,828		37,244		120,023		110,947
State and political subdivisions		61,002		71,040		177,588		220,552
Corporate and other investments		7,680		7,872		32,857		32,128
Interest on deposits in banks		96,295		112,981		245,824		347,580
Total interest income		3,039,363		3,086,491		8,994,256		8,710,340
INTEREST EXPENSE
Interest-bearing demand deposits		295,990		325,055		905,579		815,436
Savings deposits		31,301		28,572		85,935		80,851
Time deposits		393,953		304,193		1,143,276		865,679
Other borrowings		206,297		201,998		615,452		621,706
Total interest expense		927,541		859,818		2,750,242		2,383,672
Net interest income		2,111,822		2,226,673		6,244,014		6,326,668
PROVISION FOR LOAN LOSSES		-		-		-		26,000
Net interest income after
provision for loan losses		2,111,822		2,226,673		6,244,014		6,300,668
NONINTEREST INCOME
Service charges and fees		252,672		236,491		706,532		747,905
Trust fee income		180,710		177,885		530,205		502,077
Investment sales commissions		108,777		100,530		315,829		312,347
Mortgage loan sales and servicing fees		96,781		102,005		312,921		347,589
Other income		68,701		51,083		163,958		124,463
Total noninterest income		707,641		667,994		2,029,445		2,034,381

4

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(continued)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
NONINTEREST EXPENSE
Salaries and benefits	$	1,235,635	$	1,265,594	$	3,682,373	$	3,714,467
Occupancy		224,912		227,108		654,343		681,511
Supplies		43,417		49,557		131,625		129,826
Postage and freight		22,811		27,005		76,859		76,815
Outside services		225,482		178,482		593,952		524,778
Advertising		19,047		33,007		54,044		63,380
Loan collection expense		12,383		48,804		39,149		73,845
Securities and trust department expenses		81,302		85,123		246,599		224,725
Other expenses		264,260		175,152		614,052		554,047
Total noninterest expense		2,129,249		2,089,832		6,092,996		6,043,394
INCOME BEFORE INCOME TAXES		690,214		804,835		2,180,463		2,291,655
PROVISION FOR INCOME TAXES		132,334		280,593		673,063		808,602
NET INCOME		557,880		524,242		1,507,400		1,483,053
OTHER COMPREHENSIVE INCOME
Unrealized holding gain/(loss)
arising during the period, net of tax		40,031		57,797		17,213		(14,125	)
COMPREHENSIVE INCOME	$	597,911	$	582,039	$	1,524,613	$	1,468,928
EARNINGS PER SHARE OF
COMMON STOCK
Basic earnings per share	$	0.25	$	0.24	$	0.68	$	0.68
Diluted earnings per share	$	0.25	$	0.24	$	0.68	$	0.68
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic		2,210,453		2,181,925		2,202,229		2,176,705
Diluted		2,212,679		2,191,395		2,206,618		2,184,979

See accompanying notes

5

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, 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		14,833			105,001			-			-			105,001
Stock repurchased		(6,450	)		(62,740	)		-			-			(62,740	)
Stock-based compensation		-			275			-			-			275
Cash dividends paid		-			-			(330,109	)		-			(330,109	)
Dividends reinvested in stock		11,062			131,937			(131,937	)		-			-
Net income and comprehensive income		-			-			1,507,400			17,213			1,524,613
Balance, September 30, 2007		2,206,794		$	5,274,510		$	7,841,341		$	22,022		$	13,137,873

6

OREGON PACIFIC BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,507,400		$	1,483,053
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		481,442			437,185
Provision for loan losses		-			26,000
Stock-based compensation		275			11,439
Net change in mortgage loans held-for-sale		(208,689	)		471,379
Loss on disposition of premises, equipment, and other real estate		37,225			-
Net decrease (increase) in accrued interest and other assets		1,066,489			(181,270	)
Net increase (decrease) in accrued interest and other liabilities		380,522			(231,139	)
Net cash from operating activities		3,264,664			2,016,647
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of available-for-sale securities		1,810,000			690,000
Purchases of available-for-sale securities		(1,000,000	)		-
Purchase of restricted equity securities		(450	)		-
Net (decrease) increase in interest-bearing deposits in banks		(6,955,093	)		696,427
Loans originated, net of principal repayments		1,813,593			(7,389,816	)
Purchase of premises and equipment		(1,611,028	)		(1,075,604	)
Proceeds from sales of premises and equipment		7,565			-
Purchase of brokerage firm		-			(138,000	)
Net cash from investing activities		(5,935,413	)		(7,538,993	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand and savings deposit accounts		(393,577	)		7,433,288
Net increase (decrease) in time deposits		3,425,281			(2,193,070	)
Proceeds from Federal Home Loan Bank borrowings		3,000,000			1,200,000
Repayment of Federal Home Loan Bank and other borrowings		(3,855,918	)		(2,441,250	)
Repayment of debt from purchase of brokerage firm		107,334			-
Shares acquired in stock repurchase plan		(62,740	)		-
Proceeds from exercise of common stock options		105,001			22,500
Stock bonuses granted		-			20,000
Cash dividends paid		(330,109	)		(275,116	)
Net cash from financing activities		1,995,272			4,088,352
NET DECREASE IN CASH AND CASH EQUIVALENTS		(675,477	)		(1,433,994	)
CASH AND CASH EQUIVALENTS, beginning of period	$	4,473,047		$	5,018,838
CASH AND CASH EQUIVALENTS, end of period	$	3,797,570		$	3,584,844
SCHEDULE OF NONCASH ACTIVITIES
Stock dividends reinvested	$	131,937		$	138,145
Change in fair value of AFS securities, net of tax	$	17,213		$	(14,125	)

See accompanying notes

7

Oregon Pacific Bancorp

Notes to Consolidated Financial Statements

September 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 nine months ended September 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 as of September 30, 2007.

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2007:
U.S. Treasury and agencies	$	4,000,000	$	1,250	$	(10,313	)	$	3,990,937
State and political subdivisions		5,025,761		47,853		(2,966	)		5,070,648
Corporate notes		444,351		879		-			445,230
	$	9,470,112	$	49,982	$	(13,279	)	$	9,506,815
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.

8

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 September 30, 2007, the Company’s related loan balances serviced by the Company for others totaled $88.4 million.

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

Mortgage Servicing Rights at September 30,	2007			2006
Balance at beginning of year	$	763,203		$	808,709
Additions		41,069			67,341
Amortization		(105,926	)		(95,717	)
Balance at September 30,	$	698,346		$	780,333
MSR as a % of serviced portfolio		0.79	%		0.81	%

For the nine months ended September 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:

	SEPT. 30, 2007			DEC. 31, 2006
Real estate	$	20,558,796		$	20,616,479
Commercial		94,257,780			94,968,156
Installment		6,571,296			7,670,400
Overdrafts		35,390			36,279
Total Loans		121,423,262			123,291,314
Less allowance for loan losses		(1,852,196	)		(1,861,221	)
Less deferred loan fees		(318,106	)		(363,540	)
Loans, net of allowance for loan losses and deferred loan fees
	$	119,252,960		$	121,066,553

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

	SEPT. 30, 2007			SEPT. 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		3,830			-
Balance, end of period	$	1,852,196		$	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 $312,000 and $215,000 were on nonaccrual status at September 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 September 30, 2007 or December 31, 2006.

9

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 $275 and $11,400 before income taxes for the nine months ended September 30, 2007 and 2006, respectively.  As of September 30, 2007, the Company had 6,204 nonvested options outstanding and there was $13,600 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 September 30, 2007:

				Weighted		Weighted Avg.
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
Options	Shares			Price ($)		Term ( in yrs.)		Value ($)
Outstanding at January 1, 2007		34,272			8.83
Granted		-
Exercised		(14,833	)		7.08
Forfeited		(2,110	)		11.85
Outstanding at September 30, 2007		17,329			9.95		3.17		19,807
Vested at September 30, 2007		11,125			7.10		1.95		19,807
Exercisable at September 30, 2007		6,357			6.42		1.64		19,807

There were options for 1,040 shares exercised during the quarter ended September 30, 2007.  The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2007 was $4,878 and $69,015, respectively.  The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2006 was $0 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 the 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.

10

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.

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.

11

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.

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 to assess the potential for impairment. 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.  Also see footnote 3 above.

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 $558,000, or $0.25 per diluted share, for the quarter ended September 30, 2007.  This compares to Bank income of $524,000, or $0.24 per diluted share, for the same three month period in the prior year for an increase of 6.5%.  Income for the nine month period ended September 30, 2007 was $1,507,000 or $0.68 per diluted share compared to $1,483,000 or $0.68 per diluted share in the prior year, an increase of 1.6%.  The increase in the third quarter in income is primarily due to a reduction in taxes payable for the year ending December 31, 2006 and the filing of amended tax returns for 2004 and 2005 reducing the current year tax provision by $104,000.  This change was caused by the Company’s coding errors on most tax-exempt interest loans causing subsequent errors in the reporting of same to the Internal Revenue Service.

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Financial Condition

Total assets at September 30, 2007 were $155,206,000 compared to $151,305,000 at December 31, 2006, an increase of $3,901,000 (2.6%).  The increase was due primarily to increased interest-bearing deposits in banks ($6.96 million) and was funded by increases in customer deposits, primarily demand deposits ($3.03 million), and decreases in the loan portfolio ($1.81million).  There also was an increase in premises and equipment resulting 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 September 30, 2007 was $13,138,000, an increase of $1,237,000 from December 31, 2006.  This change resulted primarily from consolidated net income partially offset by cash dividends paid ($330,000).

The net loan portfolio at September 30, 2007 decreased $1.81 million to $119.3 million compared to $121.1 million at December 31, 2006 due to real estate development loans coming to completion.  See Note 4 of the financial statements for a breakdown of the type of loans.

Borrowings from the Federal Home Loan Bank at September 30, 2007 were $10.7 million compared to $11.5 million at December 31, 2006.  The Bank borrowed $1.5 million during the third quarter of 2007 to replace loans that matured or were called in the second quarter.  The rate on the new borrowings was 4.74% and the average rate on all borrowings at September 30, 2007 is 4.45%.  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 $315,000 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 September 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 $6,335,000 for the three quarters ended September 30, 2007 compared to $6,441,000 for the same period in 2006 (see Table below).  The $106,000 decrease was due to an increase in cost of funds and a decrease in the volume of loans partially offset by an increase in the average rates earned on the loans portfolio. The increase in interest income of $261,000 was primarily due to a $373,000 increase from the increase in average loan rates earned from the same period one year as a result of loans upwardly repricing on repricing dates through August of this year. The effective rate on interest-bearing liabilities for the quarter was 3.52% compared to 2.93% for the same period in 2006 which reflect  depositors expectation for rising deposit 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:

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	Nine Months Ended Sept. 30, 2007								Nine Months Ended Sept. 30, 2006									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)	$	123,361		$	8,418		9.10	%	$	122,657		$	7,999		8.70	%		$	46		$	373		$	419
Investment securities
Taxable securities		5,609			152		3.61	%		5,599			143		3.41	%			0			9			9
Nontaxable securities (1)		5,239			270		6.86	%		6,597			335		6.77	%			(69	)		4			(65	)
Interest-earning balances due from banks		6,239			246		5.26	%		9,575			348		4.85	%			(121	)		19			(102	)
Total interest-earning assets		140,448			9,086		8.63	%		144,428			8,825		8.15	%			(144	)		405			261
																	��
Cash and due from banks		4,062								4,542
Premises and equipment, net		7,904								5,483
Loan loss allowance		(1,855	)							(1,880	)
Other assets		3,082								4,316
Total assets	$	153,641							$	156,889
Interest-bearing liabilities:
Interest-bearing checking and savings accounts	$	54,523		$	992		2.43	%	$	60,861		$	896		1.96	%		$	(93	)	$	189		$	96
Time deposit and IRA accounts		34,444			1,143		4.42	%		31,643			866		3.65	%			77			200			277
Borrowed funds		15,167			616		5.42	%		15,987			622		5.19	%			(32	)		26			(6	)
Total interest-bearing liabilities		104,134			2,751		3.52	%		108,491			2,384		2.93	%			(48	)		415			367
Noninterest-bearing deposits		33,436								34,333
Other liabilities		3,611								3,263
Total liabilities		141,181								146,087
Shareholders’ equity		12,460								10,802
Total liabilities and share- holders’ equity	$	153,641							$	156,889
Net interest income				$	6,335							$	6,441					$	(96	)	$	(10	)	$	(106	)
Net interest spread							5.10	%							5.22	%
Net interest expense to average earning assets							2.61	%							2.20	%
Net interest margin							6.01	%							5.95	%

_____

(1) Tax effective yield

(2) Excludes loans held for sale and includes non-accrual loans

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Provision for Loan Losses

No provision was recorded for the nine months ended September 30, 2007 compared to $26,000 in the same period in 2006.  The allowance for loan losses at September 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 September 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 increased $40,000 or 5.9% for the three months and decreased $5,000 or 0.2% for the nine months ended September 30, 2007 as compared to the same periods in 2006.

	Three months ended
	September 30,
	2007		2006		$ Change			% Change
Service charges and fees	$	252,672	$	236,491	$	16,181			6.8	%
Trust fee income		180,710		177,885		2,825			1.6	%
Investment sales commissions		108,777		100,530		8,247			8.2	%
Mortgage loan sales and servicing fees, net		96,781		102,005		(5,224	)		-5.1	%
Other income		68,701		51,083		17,618			34.5	%
	$	707,641	$	667,994	$	39,647			5.9	%

	Nine months ended
	September 30,
	2007		2006		$ Change			% Change
Service charges and fees	$	706,532	$	747,905	$	(41,373	)		-5.5	%
Trust fee income		530,205		502,077		28,128			5.6	%
Investment sales commissions		315,829		312,347		3,482			1.1	%
Mortgage loan sales and servicing fees, net		312,921		347,589		(34,668	)		-10.0	%
Other income		163,958		124,463		39,495			31.7	%
	$	2,029,445	$	2,034,381	$	(4,936	)		-0.2	%

The increase was for the three months ended September 30 was an increase in debit card fee income and an increase in merchant services income.   The decrease for the nine months ended September 30 was primarily a reduction in services fees for overdraft protection due to changes in the program in mid-2006.

Noninterest Expense

Noninterest expense increased $39,000 or 1.9% for the three months and $50,000 or 0.8% for the nine months ended September 30, 2007 from the same periods one year ago.

	Three months ended
	September 30,
	2007		2006		$ Change			% Change
Salaries and benefits	$	1,235,635	$	1,265,594	$	(29,959	)		-2.4	%
Occupancy expense		224,912		227,108		(2,196	)		-1.0	%
Outside services		225,482		178,482		47,000			26.3	%
Securities and trust department expenses		81,302		85,123		(3,821	)		-4.5	%
Other expenses		361,918		333,525		28,393			8.5	%
	$	2,129,249	$	2,089,832	$	39,417			1.9	%

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	Nine months ended
	September 30,
	2007		2006		$ Change			% Change
Salaries and benefits	$	3,682,373	$	3,714,467	$	(32,094	)		-0.9	%
Occupancy expense		654,343		681,511		(27,168	)		-4.0	%
Outside services		593,952		524,778		69,174			13.2	%
Securities and trust department expenses		246,599		224,725		21,874			9.7	%
Other expenses		915,729		897,913		17,816			2.0	%
	$	6,092,996	$	6,043,394	$	49,602			0.8	%

Most of the change for the three and nine months ended is attributable to increased data processing charges and other miscellaneous expenses.

Provision for Income Taxes

The provision for income taxes for both the three and nine months ended September 30, 2007 are lower than the same periods in 2006 as a result of the correction for tax-exempt interest noted above.  The provisions at both September 30, 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 September 30, 2007 as deposit growth exceeded the loan growth volume. As a result, during the first nine months, the loan-to-deposit ratio loosened and fell slightly to 96% at September 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 September 30, 2007, the Bank had $9.9 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 $3.3 million during the nine months ended September, 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 $5.9 million used in investing activities consisted principally of $7.0 million increase in interest-bearing deposits in banks and $1.6 million of purchases of premises and equipment.  The $2.0 million of cash provided by financing activities primarily consisted of a $3.4 million increase in time deposit accounts, partly offset by a net $0.9 million pay down of FHLB borrowings.

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 September 30, 2007, the Bank’s leverage and total risk-based ratios were 10.83% and 14.05%, respectively, which exceed the well-capitalized threshold.

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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 plus one member of the board of directors, 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 September 30, 2007. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer each concludes that as of September 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 September 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.

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.

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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.

a. None.

b. None.

c.

					Total Number of		Maximum $
					of Shares		Remaining
					Purchased as		that May
	Total number		Average		Part of Publicly		be Used to
	of Shares		Price Paid		Announced		Repurchase
Period	Purchased (1)		per Share		Plan (2)		Stock
7/1/07 - 7/31/07		-	$	-		-		500,000
8/1/07 - 8/31/07		1,900	$	9.55		18,150		481,850
9/1/07 - 9/30/07		4550	$	9.80		44,590		437,260
Total for quarter		6,450	$	9.73		62,740

Item 3. Defaults upon senior securities.

None.

Item 4. Submission of matters to a vote of security holders.

None.

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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 September 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 September 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.  On July 27, 2007 a Form 8-K was filed under item 8.01 announcing a stock repurchase program.

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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 November 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)

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