OREGON PACIFIC BANCORP - 10-Q Quarterly Report

FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

	For the Quarterly Period Ended September 30, 2004

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

	Commission File Number: 000-50165

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
(Registrant’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 |_|

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|

The number of shares outstanding of the Registrant’s Common Stock, no par value, as of October 31, 2004, was 2,189,026.

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	7-8
		Notes to Consolidated Financial Statements	9-12

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-15

	Item 3.	Quantitive and Qualitive Disclosures about Market Risk	16

	Item 4.	Controls and Procedures	16-17

Part II.	Other Information		17-18
	Signatures		19
	Exhibits and Certifications of Chief Executive Officer and Chief Financial Officer		20-23

PART 1.	FINANCIAL INFORMATION

Item 1.	Financial Statements

OREGON PACIFIC BANCORP
CONSOLIDATED BALANCE SHEETS

							Unaudited			Audited

							SEPTEMBER 30, 2004			DECEMBER 31, 2003

ASSETS

Cash and due from banks								$	5,733,130		$	4,916,985
Interest-bearing deposits in banks									7,742,560			4,764,248
Available-for-sale securities, at fair value									14,927,744			16,845,288
Restricted equity securities									1,020,100			999,100
Loans held for sale									1,577,448			4,057,664
Loans, net of allowance for loan losses and unearned income									100,214,270			82,722,328
Premises & equipment, net									5,242,584			4,811,107
Other real estate owned									234,377			9,746
Accrued interest and other assets									1,771,565			1,549,826


						Total assets		$	138,463,778		$	120,676,292


LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits
		Demand deposits						$	29,691,340		$	21,990,360
		Interest-bearing demand deposits							41,890,756			39,165,421
		Savings deposits							18,275,188			16,207,129
		Time certificate accounts:
			$100,000 or more						8,781,387			7,102,978
			Other time certificate accounts						12,775,216			12,998,516


						Total deposits			111,413,887			97,464,404


Other liabilities
		Federal Home Loan Bank borrowings							11,881,556			7,922,806
		Floating rate Junior Subordinated Deferrable Interest Debentures (Trust Preferred Securities)							4,124,000			4,000,000
	Deferred compensation liability								1,106,155			884,235
	Accrued interest and other liabilities								990,842			1,769,289


					Total liabilities				129,516,440			112,040,734


Stockholders’ equity
	Common stock, no par value, 10,000,000 shares authorized with 2,189,026 and 2,173,592 issued and outstanding at September 30, 2004 and December 31, 2003, respectively								5,003,053			4,894,536
	Undivided profits								3,652,913			3,331,170
	Accumulated other comprehensive income, net of tax								291,372			409,852

				Total stockholders’ equity					8,947,338			8,635,558

				Total liabilities and stockholders’ equity				$	138,463,778		$	120,676,292

See accompanying notes

OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

							Three Months Ended September 30,					Nine Months Ended September 30,

								2004		2003			2004			2003


INTEREST INCOME
		Interest and fees on loans						$	1,809,068	$	1,621,427		$	5,168,311		$	4,761,034
		Interest on investment securities:
					U.S. Teasuries and agencies				47,566		38,650			166,825			94,358
					State and political subdivisions				84,156		92,825			240,873			274,379
					Corporate and other investments				37,951		36,831			139,786			198,263
	Interest on deposits in banks								31,697		13,674			76,083			52,340


						Total interest income			2,010,438		1,803,407			5,791,878			5,380,374


INTEREST EXPENSE
	Interest-bearing demand deposits								88,172		117,755			262,314			422,801
	Savings deposits								24,345		35,005			83,416			111,658
	Time deposits								110,378		128,243			325,447			421,236
	Other borrowings								158,353		85,774			402,809			271,783


			Total interest expense						381,248		366,777			1,073,986			1,227,478


			Net interest income						1,629,190		1,436,630			4,717,892			4,152,896

PROVISION FOR LOAN LOSSES									—		40,000			(360,000	)		130,000


				Net interest income after provision for loan losses					1,629,190		1,396,630			5,077,892			4,022,896


NONINTEREST INCOME
	Mortgage loan sales and servicing fees								170,421		341,732			558,375			1,046,659
	Service charges and fees								234,251		129,006			587,690			341,264
	Investment sales commissions								24,368		62,837			88,307			110,005
	Trust fee income								120,985		115,871			388,794			333,462
	Other income								38,576		22,572			116,554			71,476


			Total noninterest income						588,601		672,018			1,739,720			1,902,866

OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(continued)

			Three Months Ended September 30,					Nine Months Ended September 30,

			2004		2003			2004			2003


NONINTEREST EXPENSE
	Salaries and benefits		$	1,174,110	$	1,045,148		$	3,580,025		$	3,054,936
	Occupancy			222,774		155,973			623,261			468,201
	Supplies			42,091		44,654			161,262			143,125
	Postage and freight			21,683		21,339			68,684			71,536
	Outside services			140,234		141,332			439,646			471,237
	Advertising			36,351		23,065			113,476			82,584
	Loan collection expense			26,679		67,419			94,667			152,760
	Securities and trust department expense			41,540		32,339			105,938			96,960
	Other expenses			162,504		107,477			723,407			375,011


		Total noninterest expense		1,867,966		1,638,746			5,910,366			4,916,350


INCOME BEFORE INCOME TAXES				349,825		429,903			907,246			1,009,412

PROVISION FOR INCOME TAXES				109,182		156,492			280,483			293,664


NET INCOME				240,643		273,411			626,763			715,748

OTHER COMPREHENSIVE INCOME
	Unrealized holding gain/(loss) arising during the period, net of tax			86,389		(58,249	)		(118,480	)		(4,441	)


COMPREHENSIVE INCOME			$	327,032	$	215,162		$	508,283		$	711,307


EARNINGS PER SHARE OF COMMON STOCK
	Basic earnings per share		$	0.11	$	0.13		$	0.29		$	0.33

	Diluted earnings per share		$	0.11	$	0.13		$	0.29		$	0.33


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
	Basic earnings per share			2,185,943		2,166,808			2,180,632			2,151,496

	Diluted earnings per share			2,189,087		2,169,102			2,182,205			2,153,950

See accompanying notes

OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

					Surplus			Undivided Profits			Accumulated Other Comprehensive Income				Total Stockholders’ Equity

	Common Stock
	Shares		Amount

Balance, December 31, 2002 (Audited)		2,135,244	$	939,507	$	3,730,019		$	2,735,032			$	488,364			$	7,892,922

Change in capitalization as a result of holding company formation		—		3,730,019		(3,730,019	)		—				—				—

Exercise of stock options		20,000		100,000		—			—				—				100,000

Cash dividends paid		—		—		—			(240,691	)			—				(240,691	)

Dividends reinvested in stock		18,348		125,010		—			(125,010	)			—				—

Net income and comprehensive income		—		—		—			961,839				(78,512	)			883,327

Balance, December 31, 2003 (Audited)		2,173,592	$	4,894,536	$	—		$	3,331,170			$	409,852			$	8,635,558


Cash dividends paid		—		—		—			(196,503	)			—				(196,503	)

Dividends reinvested in stock		15,434		108,517		—			(108,517	)			—				—

Net income and comprehensive income		—		—		—			626,763				(118,480	)			508,283


Balance, September 30, 2004 (Unaudited)		2,189,026	$	5,003,053	$	—		$	3,652,913			$	291,372			$	8,947,338

See accompanying notes

OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


			Nine Months Ended September 30,
			2004			2003


CASH FLOWS FROM OPERATING ACTIVITIES
Net income			$	626,763		$	715,748
Adjustments to reconcile net income to net cash from operating activities:
	Depreciation and amortization			363,120			258,162
	(Benefit) Provision for loan losses			(360,000	)		130,000
	Federal Home Loan Bank stock dividends			(21,000	)		(30,100	)
	Net change in mortgage loans held-for-sale			2,480,216			395,312
	(Gain) loss on disposition of premises, equipment, and other real estate			(22,725	)		2,286
	Net increase in accrued interest and other assets			(142,752	)		(321,859	)
	Net decrease in accrued interest and other liabilities			(556,527	)		(52,145	)


		Net cash from operating activities		2,367,095			1,097,404


CASH FLOWS FROM INVESTING ACTIVITIES
	Proceeds from sales and maturities of available-for-sale securities			6,776,637			4,045,721
	Purchases of available-for-sale-securities			(5,084,907	)		(8,127,756	)
	Purchase of restricted equity securities			—			(650	)
	Net (increase) decrease in interest-bearing deposits in banks			(2,978,312	)		2,019,183
	Loans originated, net of principal repayments			(17,383,870	)		(9,615,767	)
	Purchase of premises and equipment			(756,827	)		(1,359,298	)
	Proceeds from sale of other real estate			40,599			104,949


		Net cash from investing activities		(19,386,680	)		(12,933,618	)


CASH FLOWS FROM FINANCING ACTIVITIES
	Net increase in demand and savings deposit accounts			12,494,374			13,808,157
	Net increase (decrease) in time deposits			1,455,109			(798,801	)
	Proceeds from Federal Home Loan Bank borrowings			4,000,000			550,000
	Repayment of Federal Home Loan Bank borrowings			(41,250	)		(1,050,945	)
	Proceeds from other bank borrowing			124,000			175,000
	Cash received in exercise of stock options			—			100,000
	Cash dividends paid			(196,503	)		(184,091	)


		Net cash from financing activities		17,835,730			12,599,320


NET INCREASE IN CASH AND CASH EQUIVALENTS				816,145			763,106

OREGON PACIFIC BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)

		Nine Months Ended September 30,
		2004			2003


CASH AND CASH EQUIVALENTS, beginning of period		$	4,916,985			$	3,886,203


CASH AND CASH EQUIVALENTS, end of period		$	5,733,130			$	4,649,309



SCHEDULE OF NONCASH ACTIVITIES
	Stock dividends reinvested	$	108,517			$	94,848

	Unrealized loss on available for sale securities, net of tax	$	(118,480	)		$	(4,441	)

Additions to other real estate owned		$	251,928			$	513

See accompanying notes

Oregon Pacific Banking Co.
Notes to Financial Statements
September 30, 2004 and 2003
(Unaudited)

Note 1 – Basis of Presentation

Oregon Pacific Bancorp (the “Company”), an Oregon Corporation and financial bank holding company, became the holding company of Oregon Pacific Banking Co. (the “Bank”) effective January 1, 2003 through a Plan of Share Exchange approved by Bank shareholders on December 19, 2002. The Bank is a state-chartered institution authorized to provide banking services by the State of Oregon, from its headquarters in Florence, Oregon. Full-service banking products are offered to the Bank’s customers who live primarily in Lane, Douglas, and Coos counties and on the central Oregon coast. The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

The financial information included in this interim report has been prepared by management without audit by independent public accountants. The unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. All adjustments including normal recurring accruals necessary for fair presentation of results of operations for the interim periods included herein have been made. However, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

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, 2004 are not necessarily indicative of results to be anticipated for the year ending December 31, 2004. The interim financial statements should be read in conjunction with the audited financial statements, including the notes thereto, contained in the Bank’s 2003 Annual Report to Shareholders.

In the first quarter of 2004, the Company adopted Financial Accounting Standards Board’s Interpretation No. 46 (revised December 2003, “FIN 46R”) “Consolidation of Variable Interest Entities” which provided guidance on how to identify the primary beneficiary of a variable interest entity (“VIE”) and determine when the primary beneficiary of a VIE should include the VIE within its consolidated financial statements. As a result of adoption of FIN 46R, the Company was required to no longer consolidate Oregon Pacific Statutory Trust I (the “Trust”) within its financial statements and to recognize $4.1 million as junior subordinated debentures due to the Trust effective March 31, 2004.

Reclassifications – Certain reclassifications have been made to the 2003 financial statements to conform to current year presentations.

Note 2 – Securities Available-for-Sale

The following table presents the fair value of investments with continuous unrealized losses for less than 12 month as of September 30, 2004. No investments have continuous unrealized losses for more than 12 months.

	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses Less than 12 Months				Estimated Fair Value

September 30, 2004:

U.S. Treasury and agencies	$	4,773,900		$	10,888		$	(452	)	$	4,784,336
State and political subdivisions		7,740,412			389,461			(844	)	$	8,129,029
Corporate notes		1,927,812			86,567			—			2,014,379.0


	$	14,442,124		$	486,916		$	(1,296	)	$	14,927,744

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

Note 3 – Loans and Allowance for Loan Losses

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

	SEPT. 30, 2004				DEC. 31, 2003

Real estate		$	18,461,048			$	14,660,603
Commercial			80,981,982				63,422,739
Installment			2,830,051				6,352,442
Overdrafts			56,338				36,717


			102,329,419				84,472,501
Allowance for loan losses			(1,635,300	)			(1,315,955	)
Unearned loan fees			(479,849	)			(434,218	)

		$	100,214,270			$	82,722,328

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

	SEPT. 30, 2004				SEPT. 30, 2003

Balance, beginning of the period		$	1,315,955			$	1,173,025
Provision for losses			(360,000	)			130,000
Losses			(40,730	)			(33,765	)
Recoveries			720,075				6,695


Balance, end of period		$	1,635,300			$	1,275,955

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. There were $148,000 of loans on nonaccrual status at September 30, 2004 compared to no loans at December 31, 2003.

The Bank had no loans past due 90 days or more on which it continued to accrue interest at either September 30, 2004 or December 31, 2003.

Note 4 – Earnings per Share of Common Stock

Basic earnings per share exclude dilution and are computed by dividing net income by the weighted average common shares outstanding for the period. Diluted earnings per share reflect 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 5 – Stock Option Plans

The Company accounts for its stock option plan under the intrinsic value method in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations. As such, compensation cost is computed as the difference between a company’s stock price and the option price at the grant date. No compensation cost has been recognized for the Company’s stock option plans and no options were granted during the quarter ended September 30, 2004. Had compensation cost for the Company’s grants for stock-based compensation plans been determined consistent with Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” its net income and earnings per common share for September 30, 2004 and 2003 would approximate the pro forma amounts below.

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003


Net earnings, as reported		$	240,643		$	273,411		$	626,763		$	715,748
Deduct: Total stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects			(120	)		(121	)		(359	)		(363	)


Pro forma net earnings		$	240,523		$	273,290		$	626,404		$	715,385


Basic earnings per common share:
	As reported	$	0.11		$	0.13		$	0.29		$	0.33
	Pro forma	$	0.11		$	0.13		$	0.29		$	0.33

Diluted earnings per common share:
	As reported	$	0.11		$	0.13		$	0.29		$	0.33
	Pro forma	$	0.11		$	0.13		$	0.29		$	0.33

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for September 30, 2004 and 2003:

	2004			2003


Dividend yield		2.25	%		0.05	%
Expected life (years)		7.5			7
Expected volatility		19 .72	%		0.01	%
Risk -free rate		3.75	%		4.84 – 5.04	%

Note 6 – Subsequent Events

On September 21, 2004 the Board of Directors adopted a corporate resolution allowing a stock repurchase program in order to increase the liquidity and marketability of the Company’s stock. The program was approved by the Oregon State Division of Finance and Corporate Securities. The Company initiated purchases in October 2004.

The Federal Reserve Board approved the Bank’s request to close the Sutherlin branch effective December 31, 2004. The branch, located in a local supermarket, has not met the Bank’s deposit growth goals and the Board of Directors has approved the redeployment of Bank resources to more profitable venues.

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 contingencies and 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. Actual results may differ from these estimates under different assumptions or conditions.

Overview

Oregon Pacific Bancorp (the “Company”), an Oregon Corporation and financial bank holding company, is the holding company of Oregon Pacific Banking Co. (the “Bank”). 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. In 2003, the Bank expanded from its main office and a full-service Safeway store branch, both located in Florence to three additional Oregon locations including Roseburg, Coos Bay and Sutherlin. Additional financial services provided by the Bank include trust and asset management services and investment and brokerage services. Such services are provided at the main office in Florence and at offices in Roseburg and Coos Bay, Oregon.

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

The Company reported net income of $241,000 or $.11 per basic share and $627,000 or $.29 per basic share for the three months and nine months ended September 30, 2004. This compares to income of $273,000 or $.13 per basic share and $716,000 or $.33 per basic share for the same periods in the prior year. The primary reason for the decrease for the third quarter and year-to-date is the interest paid on the Trust Preferred Securities obtained as part of the Company’s capital plan in December 2003. The earnings by the Bank have remained fairly even although mortgage loan sales have decreased significantly with rates on the rise, commercial loan interest and fees have increased as commercial loan balances have grown.

Financial Condition

Total assets at September 2004 were $138,464,000 compared to $120,676,000 at December 31, 2003, an increase of $17,788,000 (14.7%). The increase was due to an increase in net loans of $17,492,000 (21.1%) funded by an increase in customer deposits which increased $13,949,000 (14.3%), sale of available-for-sale securities and a decrease of loans held for sale. Much of the deposit increase was in interest-free demand deposits helping the Bank maintain its net interest spread.

Premises and equipment increased by $431,000 as facilities were completed and furnished at the two branches located in Roseburg and Coos Bay.

September 30, 2004 shareholders’ equity was $8,947,000, an increase of $312,000 from December 31, 2003. This change resulted from net income, partially offset by cash dividends paid ($197,000) and a decrease in unrealized gains on available-for-sale securities ($118,000).

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 $4,960,000 for the nine months ended September 30, 2004 compared to $4,290,000 for the same period in 2003 (see Table 1). The $670,000 increase was due to an increase in average loans and was partially offset a decrease in the rates earned on loans. The decrease in the rates paid on deposits also increased net interest that was only somewhat offset from the increase in interest-bearing liabilities. Average loans were up $13,803,000, while average rates on loans were down 0.55%. Average interest-bearing liability balances were up $5,693,000 while average rates on deposits and borrowed funds were down 0.53%. The net interest spread, which is the difference between the average yield of interest-earning assets less the cost of interest-bearing liabilities, increased 0.17% during the first nine months of 2004 compared with the first nine months of 2003. As a consequence of increased interest-free deposits and lower deposit rates, the net interest margin increased to 5.50% compared to 5.38% for the nine month period in the prior year. The increase is due to strong asset-liability management during this ongoing low interest rate climate causing a decline in loan yields that compress against an already low cost of funds.

Table I

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:

				Nine Months Ended Sept. 30, 2004									Nine Months Ended Sept. 30, 2003									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)			$	95,623			$	5,168		7.21	%	$	81,820			$	4,761		7.76	%		$	804		$	(394	)	$	410
	Investment securities
		Taxable securities			8,139				324		5.31	%		10,442				310		3.96	%			(68	)		82			14
		Nontaxable securities (1)			6,524				338		6.91	%		7,185				389		7.23	%			(35	)		(16	)		(51	)
	Interest-earning balances due from banks				9,614				76		1.05	%		6,576				52		1.05	%			24			—			24

		Total interest-earning assets			119,900				5,906		6.57	%		106,023				5,512		6.93	%			725			(328	)		397


	Cash and due from banks				5,230									3,679
	Premises and equipment, net				5,162									3,122
	Other real estate				114									33
	Loan loss allowance				(1,528	)								(1,232	)
	Other assets				2,127									2,301


			Total assets	$	131,005								$	113,926


Interest-bearing liabilities:
	Interest-bearing checking and savings accounts			$	59,463			$	346		0.78	%	$	53,542			$	535		1.33	%		$	58		$	(245	)	$	(187	)
	Time deposit and IRA accounts				20,359				325		2.13	%		21,558				421		2.60	%			(24	)		(72	)		(96	)
	Borrowed funds				9,679				275		3.79	%		8,708				266		4.07	%			29			(20	)		9

			Total interest-bearing liabilities		89,501				946		1.41	%		83,808				1,222		1.94	%			63			(337	)		(274	)

			Noninterest-bearing deposits		26,751									20,050
			Other liabilities		2,032									1,706

			Total liabilities		118,284									105,564
			Shareholders’ equity		12,721									8,362

			Total liabilities and share-holders’ equity	$	131,005								$	113,926


Net interest income								$	4,960								$	4,290					$	662		$	9		$	671


Net interest spread											5.16	%								4.99	%

Net interest expense to average earning assets											1.05	%								1.53	%


Net interest margin											5.50	%								5.38	%

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

(2)	Includes loan fees.

Provision for Loan Loss

No provision for loan loss was recorded in the three months ended September 30, 2004 compared to $40,000 in the same period in 2003. A benefit was recorded in the amount of $360,000 for the nine months ended September 30, 2004 compared to a provision of $130,000 in 2003. The allowance for loan losses at September 30, 2004 was 1.6% of gross loans, the same as December 31, 2003. There were only $72,000 of non-performing loans at September 30, 2004. Management is satisfied that the reserve is adequate for potential loan losses in the loan portfolio at September 30, 2004. Management’s assessment of the adequacy of the allowance for loan loss is based on a number of factors including current delinquent and non-performing loans, past loan loss experience, evaluation of customers’ financial strength, and economic trends impacting areas and customers served by the Bank. The allowance is based on estimates, and actual losses may vary from those currently estimated.

Noninterest Income

Noninterest income decreased $163,000 or 12.5% and $83,000 or 12.4% for the nine and three months ended September 2004 as compared to the same period in 2003. These smaller changes were after the significant mortgage fee increases in 2003 of 44.8% and 61.0%, respectively, during a period of the lowest mortgage interest rates in forty years. Other than mortgage loan related accounts, noninterest income increased 38.0% and 26.6% for the nine months and three months ended September 2004 as compared to the same period in 2003. This was a result of increased accounts at the new locations earning service charges and fees for Check Protector, a service covering account overdrafts.

Noninterest Expense

Noninterest expense increased $994,000 or 20.2% for the nine months and $229,000 or 14.0% for the three months ended September 30, 2004 over the same periods one year ago. The increase is attributable primarily to an increase in salaries and benefits and occupancy expenses as expected with the Bank’s opening of the new facilities in Roseburg and Coos Bay. “Other” expenses increased primarily as a result of a litigation settlement in second quarter.

The provision for income taxes at both September 30, 2004 and 2003 remained consistent with expected statutory rates adjusted for anticipated permanent differences arising primarily from nontaxable income earned on municipal security investments except for the adjustment discussed above.

Liquidity and Capital Resources

Liquidity management involves the ability to meet cash flow requirements. The Bank’s major sources of liquidity are customer deposits, maturities or calls of investment securities, the use of borrowing arrangements with the Federal Home Loan Bank of Seattle, and net cash provided by operating activities. The Bank’s investment portfolio is another source of funds, if needed. The investment portfolio is of good 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 date of sale.

The Bank maintains liquidity levels adequate to fund loan commitments, investment opportunities, deposit withdrawals, and other financial commitments. Management is satisfied that liquidity is sufficient at September 30, 2004. There are no known trends, events, regulatory authority recommendations, or uncertainties that management is aware of that will have or that are likely to have a material adverse effect on the Bank’s liquidity, capital resources, or operations.

For purposes of determining a bank’s deposit insurance assessment, the FDIC has issued regulations that define a “well capitalized” bank as one with a leverage ratio of 5% or more and a total risk-based ratio of 10% or more. At September 30, 2004, the Bank’s leverage and total risk-based ratios were 9.05% and 12.37% 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 and borrowing activities. 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.

In an effort to assess market risk, an asset/liabilty model to determine the effect of immediate incremental increases and decreases in interest rates on net income was provided by an independent party. Certain assumptions were made regarding loan prepayments and decay rates of demand deposit accounts. Because it is difficult to accurately project the market reaction of depositors and borrowers, the effects of actual changes in interest on these assumptions may differ from simulated results.

The Board of Directors has set limits given a parallel shift of 2% in interest rates--the estimated net interest margin may not decrease by more than 25% within a one-year period. The following table illustrates the simulated impact of a 1% or 2% upward or downward movement in interest rates on net income. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve month period from the September 30, 2004 levels.

INCREASE OR DECREASE IN INTEREST RATES	ESTIMATED FINANCIAL IMPACT ON NET INTEREST MARGIN

2.0%	$	650,000
1.0%	$	369,000
-1.0%	$	(530,000	)
-2.0%	$	(1,120,000	)

There has not been a material change in the quantitative and qualitative market risks faced by the Bank from the risk disclosures reported in Bank’s form 10-K covering the fiscal year ended December 31, 2003.

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, 2004. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer each concludes that as of September 30, 2004, 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, 2004, 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.

PART 2.	OTHER INFORMATION

Item 1.	Legal proceedings.

	In the normal course of its business, the Bank is a party to various debtor-creditor legal actions, none of which, individually or in the aggregate, are presently material to the Bank’s business, operations or financial condition. These include cases filed as a plaintiff in collection and foreclosure cases, and the enforcement of creditors’ rights in bankruptcy proceedings.

	The Company is not currently involved in any material litigation or legal proceeding, and is not aware of any potential material litigation or proceeding threatened against it, other than as follows: The Bank has filed a lawsuit against an insurer, BancInsure, Inc., arising from a policy coverage dispute, specifically, the insurer’s refusal to afford coverage for amounts paid by the Company to settle claims filed by a former employee of the Bank.

Item 2.	Changes in securities and use of proceeds.

	None.

Item 3.	Defaults upon senior securities.

	None.

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

		None.

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 March 31, 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 March 31, 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 Banking Co. Amended and Restated Deferred Compensation Plan.**

	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 Section 302(a) of the Sarbanes-Oxley Act of 2002.**

	32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

	32.2	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**


	** Filed herewith.

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 12, 2004.

	OREGON PACIFIC BANCORP


	By:		/s/ Thomas K. Grove


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


	By:		/s/ Joanne Forsberg


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