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

FORM 10-Q ~~(mark one)~~

[X] QUARTERLY REPORT ~~UNDER~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March~~September 3130, ~~2005~~2008

[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________

For the transition period from _________ to _________

Commission File Number 0-24024

VENTURE ~~Venture~~FINANCIAL ~~Financial Group~~GROUP, ~~Inc~~INC. (Exact name of registrant as specified in its charter)

Washington 91 -1277503 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)

Washington		91 -1277503
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

~~721~~1495 ~~College~~Wilmington ~~Street. SE~~Drive, P.O. Box ~~3800~~970, ~~Lacey~~DuPont, WA ~~98509~~ 98327 (Address of ~~principal~~Principal ~~executive~~Executive ~~offices~~Offices)

~~Issuer'~~Registrant’s telephone number: (~~360~~253) ~~459~~441-~~1100~~4000

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 of 1934 during the ~~past~~preceding 12 months (or for such shorter ~~periods~~period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: X Yes ~~__No~~___ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as~~a ~~defined~~non-accelerated byfiler or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). ~~__Yes X No~~(Check one):

~~Indicate~~Large ~~the~~accelerated ~~number~~filer of____ Accelerated ~~shares~~filer ~~outstanding~~____ Non-accelerated offiler X Smaller ~~each~~reporting ~~of the issuer's classes of common stock as of the latest practicable date.~~company ____

~~Title~~Indicate ofby ~~Class Outstanding~~check atmark ~~April~~whether ~~29,~~the ~~2005 Common~~registrant ~~Stock 6,610,679~~ is a shell company (as defined by Rule 12b-2 of the Exchange Act). ___Yes X No

Venture Financial Group, Inc.
Table of Contents
PART I - FINANCIAL INFORMATION			Page
Item	1	Financial Statements
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Income and Comprehensive Income	4
		Condensed Consolidated Statement of Stockholders' Equity	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
Item	2	Management's Discussion and Analysis of Financial Condition and
		Results of Operations	10
Item	3	Quantitative and Qualitative Disclosures about Market Risk	17
Item	4	Controls and Procedures	18
PART II - OTHER INFORMATION
Item	1	Legal Proceedings	19
Item	2	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item	6	Exhibits and Reports on Form 8-K	20
SIGNATURE			20

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

VENTURE FINANCIAL GROUP, INC. and SUBSIDIARIES
Title of Class	Outstanding at November 19, 2008
Condensed Consolidated Balance Sheets
Common Stock	7,385,687
(Dollars in thousands, except per share data)
	March 31,	December 31,
	2005	2004
	(Unaudited)
Assets
Cash and due from banks	$ 15,823	$ 13,796
Interest bearing deposits in banks	63	65
Federal funds sold	--	--
Securities available for sale	69,800	73,291
Investments in Trusts	589	589
Federal Home Loan bank stock, at cost	3,944	3,930
Loans held for sale	5,074	3,118
Loans	447,733	429,523
Allowance for credit losses	(7,167)	(7,189)
Net loans	440,566	422,334
Premises and equipment	14,104	11,729
Foreclosed real estate	339	718
Accrued interest receivable	2,091	2,084
Cash surrender value of life insurance	13,572	13,431
Goodwill	8,961	8,961
Other intangible assets	499	526
Other assets	2,756	1,644
Total assets	$578,181	$556,216
Liabilities
Deposits:
Demand-noninterest bearing	$ 76,056	$ 72,250
Savings and interest bearing demand	161,908	151,153
Time	121,530	103,318
Total deposits	359,494	326,721
Federal funds purchased	320	5,575
Short term borrowings	118,749	123,128
Accrued interest payable	497	620
Long-term debt	15,000	15,000
Junior subordinated debentures	19,589	19,589
Other liabilities	6,510	7,743
Total liabilities	520,159	498,376
Stockholders' Equity
Common stock (no par value); 10,000,000 shares authorized
shares issued: March 2005 - 6,520,714; December 2004 - 6,527,507	5,412	5,418
Additional paid-in-capital	17,695	18,473
Retained earnings	35,313	33,706
Accumulated other comprehensive income (loss), net of tax	(398)	243
Total stockholders' equity	58,022	57,840
Total liabilities and stockholders' equity	$578,181	$556,216
See notes to condensed consolidated financial statements

	Venture Financial Group, Inc.
	Table of Contents

PART I - FINANCIAL INFORMATION		Page
Item 1	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited)	3
	Condensed Consolidated Statements of Operations (unaudited)	4
	Condensed Consolidated Statements of Shareholders’ Equity and
	Comprehensive Income (Loss) (unaudited)	5
	Condensed Consolidated Statements of Cash Flows (unaudited)	6 & 7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2	Management's Discussion and Analysis of Financial Condition and
	Results of Operations	16
Item 3	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4T	Controls and Procedures	36
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	36
Item 1A	Risk Factors	36
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 6	Exhibits	38
SIGNATURES		39

Item 1. Financial Statements

VENTURE FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)

ASSETS
	September 30,	December 31,
	2008	2007


Cash and due from banks	$ 19,372	$ 17,719
Interest bearing deposits in other banks	6	6

Total cash and cash equivalents	19,378	17,725


Federal funds sold	18,230	-
Securities available-for-sale, at fair value	228,860	280,177
Securities held-to-maturity, at cost	-	16,800
Investment in trusts	682	682
FHLB Stock and TIB Stock	7,166	4,590
Loans held-for-sale	10,545	17,389


Loans	781,745	765,728
Allowance for credit losses	(19,170)	(10,975)

Net loans	762,575	754,753

Premises and equipment, net of accumulated depreciation	34,146	33,337
Foreclosed real estate	3,858	68
Accrued interest receivable	3,806	4,862
Cash surrender value of bank owned life insurance	21,096	20,344
Goodwill	24,202	24,202
Other intangible assets	463	678
Deferred tax asset	27,964	6,568
Other assets	4,962	1,068

Total assets	$ 1,167,933	$ 1,183,243



LIABILITIES AND SHAREHOLDERS’ EQUITY

Non-interest bearing checking	$ 102,856	$ 103,721
NOW, Savings and MMDA	257,057	379,629
Time certificates of deposit	639,114	353,774

Total deposits	999,027	837,124

Securities sold under agreements to repurchase	22,787	28,282
Other borrowings	58,060	195,758
Junior subordinated debentures, at fair value	19,736	21,766
Accrued interest payable	1,704	1,990
Other liabilities	6,949	9,566

Total liabilities	1,108,263	1,094,486


SHAREHOLDERS' EQUITY
Common stock (no par value); 30,000,000 shares authorized, shares
issued and outstanding: September 30, 2008 – 7,385,687
December 31, 2007 -7,221,787	38,537	36,507
Retained earnings	33,911	58,798
Accumulated other comprehensive loss	(12,778)	(6,548)

Total shareholders' equity	59,670	88,757

Total liabilities and shareholders' equity	$ 1,167,933	$ 1,183,243



See notes to condensed consolidated financial statements

VENTURE FINANCIAL GROUP, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
(Dollars in thousands, except per share data)
	Three months ended
	March 31,
	2005	2004
Interest income
Loans	$7,995	$6,651
Federal funds sold and deposits in banks	8	3
Investments	783	907
Total interest income	8,786	7,561
Interest Expense
Deposits	1,164	1,002
Other	1,159	495
Total interest expense	2,323	1,497
Provision for credit losses	215	132
Net interest income after provision
For credit losses	6,248	5,932
Non-interest income
Service charges on deposit accounts	735	889
Mortgage loans sold	411	338
Other operating income	904	569
Total non-interest income	2,050	1,796
Non-interest expense
Salaries and employee benefits	2,985	2,884
Occupancy and equipment	887	855
Other expense	1,459	1,187
Total non-interest expense	5,331	4,926
Operating income before income taxes	2,967	2,802
Income taxes	934	894
Net income	$2,033	$1,908
Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) on securities
arising during the period	(641)	499
Comprehensive Income	$1,392	$2,407
Earnings per Share Data
Basic earnings per share	$ 0.31	$0.29
Diluted earnings per share	$ 0.30	$0.28
Dividends declared per share	$ 0.07	$0.07
Weighted average number of common shares	6,531,379	6,461,411
Weighted average number of common shares,
Including dilutive stock options	6,730,927	6,746,393
Return on average assets	1.45%	1.50%
Return on average equity	14.07%	15.73%
See notes to condensed consolidated financial statements

VENTURE FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except per share data)

	For the three months ended			For the nine months ended
	September 30,			September 30,

	2008	2007		2008	2007
INTEREST INCOME
Loans	$13,554	$16,772		$41,901	$49,139
Federal funds sold and deposits in banks	9		38	18	92
Investment securities
Taxable	3,894	3,855		13,780	9,224
Non-taxable	67		164	275	512
Total interest income	17,524	20,829		55,974	58,967

INTEREST EXPENSE
Deposits	5,943	8,552		18,367	23,499
Federal funds purchased	66		16	425	18
Securities sold under agreement to repurchase	73		386	477	1,216
Other borrowings	943	1,198		3,673	3,256
Junior subordinated debentures	387		433	1,166	1,433
Total interest expense	7,412	10,585		24,108	29,422

Net interest income	10,112	10,244		31,866	29,545

PROVISION FOR CREDIT LOSSES	10,378		375	15,278	1,125
Net interest income(loss) after provision for credit	(266)	9,869		16,588	28,420
losses

NON-INTEREST INCOME
Service charges on deposit accounts	1,101	1,040		3,204	2,995
Origination fees and net gains on sales of loans	1,059		376	3,511	1,241
Gain (loss) on sale of securities	(489)		-	290	139
Change in market value of junior subordinated debentures	1,417		821	2,030	1,029
Other non-interest income	879		873	2,397	2,536
Total non-interest income	3,967	3,110		11,432	7,940

NON-INTEREST EXPENSES
Salaries and employee benefits	2,729	4,444		12,424	12,238
Occupancy and equipment	1,393	1,253		4,142	3,545
Amortization of intangible assets	72		72	215	215
Impairment loss on securities	40,132		-	40,132	-
Other non-interest expenses	2,385	2,448		7,012	6,526
Total non-interest expenses	46,711	8,217		63,925	22,524

Income (loss) before provision for income taxes	(43,010)	4,762		(35,905)	13,836

PROVISION FOR INCOME TAXES (BENEFITS)	(15,270)	1,565		(13,100)	4,275

NET INCOME (LOSS)	$(27,740)	$ 3,197		$(22,805)	$ 9,561

EARNINGS (LOSS) PER SHARE
Basic	$ (3.83)	$ 0.45		$ (3.15)	$ 1.34
Diluted	$ (3.83)	$ 0.44		$ (3.15)	$ 1.31
Weighted average shares outstanding, basic	7,286,903	7,161,814		7,242,821	7,158,156
Weighted average shares outstanding, diluted	7,286,903	7,283,901		7,242,821	7,284,476

See notes to condensed consolidated financial statements

VENTURE FINANCIAL GROUP, INC. and SUBSIDIARIES Condensed Consolidated Statements of Stockholders' Equity (Unaudited) (Dollars in thousands) Three Months Ended March 31, 2004 and 2005
					Accumulated
	Number of	Common		Retained	Other
	Shares	Stock	Surplus	Earnings	Comprehensive	Total
					Income (Loss)
Balance, December 31, 2003	6,474,244	$5,395	$19,894	$23,254	$130	$48,673
Net income	- -	- -	- -	1,908	- -	1,908
Stock Options Exercise	51,117	43	298	- -	- -	341
Stock repurchased	(76,621)	(64)	(1,099)	- -	- -	(1,163)
Cash dividend ($0.05 per	- -	- -	- -	(303)	- -	(303)
share)
Other comprehensive income	- -	- -	- -	- -	499	499
Balance, March 31, 2004	6,448,740	$5,374	$19,093	$24,859	$629	$49,955
Balance, December 31, 2004	6,527,507	$5,418	$18,473	$33,706	$243	$57,840
Net Income	- -	- -	- -	2,033	- -	2,033
Stock options exercised	43,450	36	233	- -	- -	269
Stock repurchased	(50,243)	(42)	(1,011)	- -	- -	(1,053)
Cash dividend ($0.07 per	- -	- -	- -	(426)	- -	(426)
share)
Other comprehensive loss	- -	- -	- -	- -	(641)	(641)
Balance, March 31, 2005	6,520,714	$5,412	$17,695	$35,313	$(398)	$58,022

VENTURE FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
For the Nine Months Ended September 30, 2008 and 2007 (Dollars in thousands)


				Accumulated Other	Advance
	Number of	Common	Retained Earnings	Comprehensive	To		Total
	Shares	Stock		Income (Loss)	KSOP/ESOP
Balance, December 31, 2006	7,186,349	$ 35,559	$ 49,841	$ 466	$ (634)		$ 85,232
Comprehensive Income
Net Income	-	-	9,561	-		-	9,561
Other comprehensive income, net of tax
Change in fair value of securities available for sale, net of tax
benefit of $(2,808)	-	-	-	(5,033)		-	(5,033)
Less adjustment for gains on sales of securities included in net income	-	-	-	(90)		-	(90)
net of tax expense of $49
Comprehensive Income							4,438
Stock options exercised	44,221	487	-	-		-	487
Stock issued for purchase of WAM	1,612	35	-	-		-	35
Common Stock repurchased	(17,945)	(391)					(391)
Compensation expense for stock options	-	248	-	-		-	248
Cash dividends ($0.245 per share)	-	-	(1,761)	-		-	(1,761)
Fair value adjustment of junior subordinated debentures, net of tax	-	-	(428)	-		-	(428)
Excess tax benefit from share-based payment arrangements	-	92	-	-		-	92
Compensation expense for unallocated ESOP shares committed to be
released	-	13	-	-		-	13
Compensation expense for restricted stock awards	-	25	-	-		-	25
Balance, September 30, 2007	7,214,237	$ 36,068	$ 57,213	$ (4,657)	$ (634)		$ 87,990

Balance, December 31, 2007	7,221,787	$ 36,507	$ 58,798	$ (6,548)	$ -		$ 88,757
Comprehensive Income (loss)
Net Income (loss)	-	-	(22,805)	-		-	(22,805)
Other comprehensive income (loss), net of tax
Increase in unrealized loss on securities available-for-sale, net of
tax benefit of $17,473	-	-	-	(32,449)		-	(32,449)
Less reclassification adjustment for gains on sales of securities
included in net income, net of tax expense of $101	-	-	-	(189)		-	(189)
Plus reclassification adjustment for impairment loss on securities
included in net income, net of tax benefit of $14,046				26,086			26,086
Change in fair value of swap, net of tax of expense of $174	-	-	-	322		-	322
Comprehensive Loss							(29,035)
Stock options exercised	3,900	57	-	-		-	57
Cumulative effect adjustment for change in accounting principal for
split dollar liability	-	-	(240)	-		-	(240)
Reversal of compensation expense for stock options	-	(127)	-	-		-	(127)
Compensation expense for restricted stock awards	-	20	-	-		-	20
Proceeds from issuance of common stock	160,000	2,080					2,080
Cash dividends ($0.26 per share)	-	-	(1,842)	-		-	(1,842)
Balance, September 30, 2008	7,385,687	$ 38,537	$ 33,911	$ (12,778)	$ -		$ 59,670
See notes to condensed consolidated financial statements

VENTURE FINANCIAL GROUP, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
	Three months ended March 31,
	2005	2004
Cash Flows from Operating Activities
Net Income	$ 2,033	$ 1,908
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses	215	132
Depreciation and amortization	395	411
Income from mortgage loans sold	(411)	(338)
Gain on sale of other real estate owned	(300)	--
Other - net	(1,785)	(109)
Originations of loans held for sale	(10,741)	(9,791)
Proceeds from sales of loans held for sale	9,196	11,698
Net cash provided (used) by operating activities	(1,398)	3,911
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits in banks	2	(98)
Net (increase) decrease in federal funds purchased	(5,255)	3,980
Proceeds from maturities and prepayments of available-for-sale securities	2,494	5,696
Purchase of FHLB stock	(14)	--
Net (increase) decrease in loans	(18,675)	(8,159)
Proceeds from sale of other real estate	600	244
Additions to premises and equipment	(2,911)	(166)
Net cash provided by investing activities	(23,759)	1,497
Cash Flows from Financing Activities
Net increase (decrease) in deposits	32,773	(3,854)
Net increase (decrease) in short-term borrowings	(4,379)	453
Sale of common stock	269	341
Repurchase of common stock	(1,053)	(1,163)
Payment of cash dividends	(426)	(303)
Net cash provided (used) by financing activities	27,184	(4,526)
Net change in cash and due from banks	2,027	882
Cash and Due from Banks:
Beginning of period	13,796	19,048
End of period	$15,823	$19,930
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest	$2,446	$1,286
Taxes	2,800	400
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Fair value adjustment of securities available for sale, net	(641)	499
Foreclosed real estate acquired in settlement of loans	--	(276)
Trust preferred securities	--	589
See notes to condensed consolidated financial statements

VENTURE FINANCIAL GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 2008 and 2007 (Dollars in thousands)

	2008	2007

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$ (22,805)	$ 9,561
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Provision for credit losses	15,278	1,125
Depreciation and amortization	1,669	1,376
Increase in cash value of life insurance	(626)	(700)
Compensation expense for stock options, net	(127)	248
Compensation expense for unallocated ESOP shares	-	13
Restricted stock award compensation	20	25
Impairment loss on securities	40,132	-
Excess tax benefit from share-based payment arrangements	-	(92)
Gain on sale of securities	(290)	(139)
Change in market value of junior subordinated debentures	(2,030)	(1,029)
Change in deferred tax asset	(21,396)	(4,294)
Other	(1,464)	1,379
Origination of loans held-for-sale	(163,375)	(66,607)
Proceeds from sales of loans held-for-sale	173,727	68,312
Origination fees and gains on sales of loans	(3,511)	(1,241)

Net cash from operating activities	$ 15,202	$ 7,937


CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold	(18,230)	6,790
Activity in securities available-for-sale
Maturities, prepayments and calls	16,221	14,754
Sales	71,015	42,532
Purchases	(88,700)	(172,512)
Activity in securities held-to-maturity
Maturities	500	-
Sales	16,802	-
Purchases	(489)	(10,000)
Net increase in loans	(27,059)	(40,888)
Purchase of bank owned life insurance policies	(126)	(1,900)
Proceeds from sales of premises and equipment	-	4
Additions to premises and equipment	(2,489)	(4,929)

Net cash used in investing activities	$ (32,555)	$ (166,149)


CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	161,903	83,437
Net decrease in short-term repurchase agreements	(5,495)	(2,147)
Net increase (decrease) in short-term borrowings	(137,697)	59,667
Net increase (decrease) in long-term debt	-	20,000
Stock issued for purchase of WAM	-	35
Proceeds from exercise of stock options	57	487
Proceeds from issuance of common stock	2,080	-
Repurchase of common stock	-	(391)
Excess tax benefits from share-based payment arrangements	-	92
Payment of cash dividends	(1,842)	(1,761)

Net cash from financing activities	$ 19,006	$ 159,419

See notes to condensed consolidated financial statements

VENTURE FINANCIAL GROUP, INC. ~~and~~CONDENSED ~~SUBSIDIARIES~~CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ~~Notes~~ For tothe ~~Condensed~~Nine ~~Consolidated~~Months ~~Financial~~Ended ~~Statements~~ September 30, 2008 and 2007 (~~Unaudited~~Dollars in thousands)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, 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 the opinion of management, adjustments considered necessary for a fair presentation (consisting of normally recurring accruals) have been included. The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2004 consolidated financial statements, including notes thereto, included in the Company's 2004 Annual Report to Shareholders. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results anticipated for the year ending December 31, 2005.

NET INCREASE IN CASH AND CASH EQUIVALENTS	$ 1,653	$ 1,207

CASH AND CASH EQUIVALENTS
Beginning of period	17,725	17,754


End of period	$ 19,378	$ 18,961


SUPPLEMENTAL INFORMATION:
Cash paid for interest	$ 24,394	$ 29,402
Cash paid for income taxes	$ 4,585	$ 5,482

NONCASH INVESTING AND FINANCING ACTIVITIES
Fair value adjustment of securities available for sale, net of tax	$ (32,449)	$ (5,123)
Cumulative effect of early adoption of SFAS 159	$ -	$ (428)
Cumulative effect of split dollar liability	$ (240)	$ -

~~The~~See ~~preparation~~notes ~~of financial statements in conformity with accounting principles generally accepted in the United States of America requires management~~ to ~~make~~condensed ~~estimates~~consolidated ~~and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the~~ financial statements ~~and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.~~

Stock Based Compensation

The Company accounts for stock-based awards to employees and directors using the intrinsic value method, in accordance with APB No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized in the consolidated financial statements for employee and director stock arrangements where the grant price is equal to market price. However, the required pro forma disclosures of the effects of all options granted on or after January 1, 1995 have been provided in accordance with SFAS No. 123, Accounting for Stock-Based Compensation.

At March 31, 2005 the Company has one stock-based employee and director compensation plan. At March 31, 2004, the Company had two stock-based employee and director compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based compensation cost is reflected in net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based compensation awards for the effects of all options granted on or after January 1, 1995 for the periods ended March 31:

	2005	2004 (1)
Net income, as reported	$2,033	$1,908
Less total stock-based compensation expense determined
under fair value method for all qualifying awards	39	49
Pro forma net income	$1,994	$1,859

Earnings per Share		2005	2004 (1)
	Basic:
	As reported	$0.31	$0.29
	Pro forma	0.31	0.29
	Diluted:
	As reported	0.30	0.28
	Pro forma	0.30	0.27

VENTURE FINANCIAL GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

21. ~~Basic~~ ~~and~~Basis ~~Diluted~~of ~~Earnings per Share~~ Presentation

~~Basic~~The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and ~~diluted~~with ~~earnings~~instructions ~~per~~to ~~share~~Form ~~are~~10-Q ~~calculated~~and byRule ~~dividing~~10-01 ~~net~~of ~~income~~Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the ~~weighted~~United ~~average~~States ~~number~~of America for complete financial statements. In the opinion of ~~common~~management, ~~shares~~adjustments ~~outstanding~~considered ~~during~~necessary for a fair presentation (consisting of normally recurring accruals) have been included. The interim condensed consolidated financial statements should be read in conjunction with the ~~periods~~December ~~presented~~31, 2007 consolidated financial statements, including notes thereto, included in Venture Financial Group, Inc.’s ~~Diluted~~(the ~~earnings~~Company ~~per~~or ~~share~~VFG) ~~assume~~2007 ~~that~~Annual ~~all~~Report ~~dilutive~~to Shareholders. Operating results for the ~~stock~~three ~~options~~and ~~outstanding~~nine months ended September 30, 2008 are ~~issued~~not ~~such~~necessarily ~~that~~indicative ~~their~~of ~~dilutive~~the ~~effect~~results isanticipated ~~maximized~~for the year ending December 31, 2008.

	Three Months Ended
	March 31,
	2005	2004 (1)
Basic EPS computation
Numerator - Net Income	$ 2,033	$ 1,908
Denominator - Weighted Average
common shares outstanding	6,531,379	6,461,411
Basic EPS	$ 0.31	$ 0.29

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, income taxes, fair value and benefit plans.

	Three Months Ended
	March 31,
	2005		2004
Diluted EPS computation
Numerator - Net Income	$ 2,033		$ 1,908
Denominator - Weighted average
common shares outstanding	6,531,379	6,461,411
Effect of dilutive stock options	199,548		284,982
Weighted average common shares
and common stock equivalents	6,730,927	6,746,393
Diluted EPS	$ 0.30		$ 0.28

Certain prior year amounts have been reclassified to conform to the 2008 presentation. The reclassifications had no effect on net income (loss) or retained earnings as previously reported.

2. Share-Based Compensation

On September 30, 2008 the Company had one active share-based compensation plan which is described below. The Company also has various incentive stock option plans, with shares outstanding, which are further disclosed in Note 15 to the annual report and Form-10K as of December 31, 2007. On September 29, 2008 executive officers and directors as well as a portion of the management team elected to forfeit their unvested outstanding options to reduce expenses on behalf of the Company. The pro-rata compensation cost of the unvested shares outstanding was reversed to reflect the portion of the shares that had not reached the annual anniversary vesting date that had previously been charged to income. This resulted in a reversal in the amount of $392 thousand and an offsetting income tax effect of $127 thousand. The effect of this forfeiture resulted in a net credit to share based compensation expense year-to-date in 2008 in the amount of $108 thousand. The total income tax benefit recognized in the statement of operations for share-based compensation cost for the same period ended September 30, 2008 is $38 thousand.

The Company’s Stock Incentive Plan (“2004 Plan”), which is shareholder approved, permits the grant of share-based awards to its employees and directors for up to 300,000 shares of common stock. The shareholders approved at the 2008 annual shareholder meeting to increase the number of shares available under the Plan by 500,000. At September 30, 2008, 288,850 option shares and 5,750 restricted stock award shares have been granted under the Plan since plan inception. At September 30, 2008, 198,500 option shares and 750 restricted option shares previously granted under the 2004 Plan since Plan inception were forfeited and returned to the Plan and are available for future grants. Under the 2004 Plan, 704,650 shares remain available for grant. It is the Company’s policy to issue authorized but unissued shares of common stock upon stock option exercises or restricted stock awards. The Company may, as part of its repurchase program purchase shares that have been listed for sale that may have been acquired through the 2004 share-based award plan or previous plans.

Beginning January 1, 2006 the Company began accounting for share-based awards to employees and directors using the fair value method, in accordance with SFAS No. 123(R), Share-Based Payment. The Company currently uses the Black-Scholes valuation model to estimate the fair value of stock option awards. The following assumptions are used in the Black-Scholes model: expected volatility, expected dividends, expected term and risk-free rate. Expected volatilities are not based on implied volatilities from traded options on the Company stock because the Company stock does not have any options traded on it. Instead, expected volatilities are based on the historical volatility of the Company stock and other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is a combination of a projection based on historical experience and management’s future expectations. The expected term represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions are determined at the date of grant and are not subsequently adjusted for actual. There was only one grant date in the year presented below.

		4-16-2008


Expected volatility		21.92%
Expected dividends		$1.75
Expected term		7.0 years
Risk-free rate		3.24%

3Options granted by the Company during 2008 are 20% vested on each of the five subsequent anniversaries of the grant date. ~~Recent~~ ~~Accounting~~Stock ~~Pronouncements~~option and per share amounts for current and prior periods have been adjusted to reflect the effect of stock splits. Management’s estimate of future forfeitures, after reviewing historical trends is based on future forfeiture expectations, excluding the September 29, 2008 election of management to forfeit the unvested options outstanding.

OnA ~~December~~summary ~~16,~~of ~~2004,~~option ~~the~~activity ~~Financial~~under ~~Accounting~~the ~~Standards~~Plan ~~Board~~as ~~(FASB)~~of ~~issued~~September ~~FASB Statement No. 123 (revised 2004)~~30, ~~Share-Based Payment~~2008, ~~which~~and ischanges afor ~~revision~~the ofnine ~~FASB~~months ~~No.~~ended ~~123,~~is ~~Accounting~~presented ~~for Stock Based Compensation.~~below:

Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) permits public companies to adopt its requirements using the "modified prospective" method which the Company intends to adopt. Under the "modified prospective" method, the compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. The Securities and Exchange Committee (SEC) recently announced the adoption of a new rule that amends the compliance dates for Statement 123(R) for public companies. Under the Statement as issued by the FASB, fair-value accounting would have been mandatory for the first interim or annual reporting period beginning after June 15, 2005, for public companies that are not small business issuers; all other companies, including all nonpublic companies, were to begin using the new rules for reporting periods after December 15, 2005. The SEC's new rule allows public companies to implement Statement 123(R) at the beginning of their next fiscal year, instead of the next reporting period, after June 15 or December 15, 2005, as applicable. The SEC's new rule does not change the accounting required by Statement 123(R); only the compliance deadlines have been altered. With the recent extension, the Company expects to adopt Statement 123 (R) on January 1, 2006.

					Weighted
				Weighted	Average	Aggregate
				Average	Remaining	Intrinsic
	Director	Employee	Total	Exercise	Contractual	Value
Options	Shares	Shares	Shares	Price	Term	(000’s)

Exercisable at January 1, 2008	24,773	159,844	184,617	$11.14	4.14 years	$859

Outstanding at January 1, 2008	49,633	317,984	367,617	$15.56	6.10 years	$871
Granted	16,100	82,200	98,300	$19.10
Exercised	(1,200)	(2,700)	( 3,900)	$14.63
Forfeited or expired	(32,790)	(166,110)	(198,900)	$19.40

Outstanding at September 30, 2008	31,743	231,374	263,117	$13.61	4.79 years	$ 647

Exercisable at September 30, 2008	31,743	200,054	231,797	$12.74	4.27 years	$ 647

The Astotal ~~permitted~~intrinsic byvalue ~~Statement~~at ~~123~~September 30, ~~the~~2008 ~~Company~~of ~~currently~~options ~~accounts~~exercised ~~for~~during ~~share-based~~the ~~payments~~third toquarter ~~employees~~2008 ~~using~~was ~~APB~~$15 ~~25's~~thousand. The intrinsic value ~~method~~represents ~~and,~~the asfair ~~such,~~market ~~generally~~value ~~recognizes~~of ~~no compensation cost for employee stock~~the ~~options.~~shares ~~Accordingly,~~at ~~the~~exercise ~~adoption~~ of ~~Statement~~$72 ~~123~~thousand (~~R)'s~~where fair market value ~~method~~is ~~will~~the ~~have~~prior anmonth ~~impact~~weighted onaverage ~~our~~price) ~~result~~less ofthe ~~operations,~~cost ~~although~~to itthe ~~will~~recipient ~~have~~to noexercise ~~impact~~which onwas ~~our~~$57 ~~overall financial position~~thousand. The ~~impact~~tax ofbenefits ~~adoption~~created ofby ~~Statement~~these ~~123(R)~~exercises ~~cannot~~are ~~be predicted~~allocated atto ~~this~~common stock ~~time~~and ~~because~~goodwill itdepending ~~will depend~~ on ~~levels~~the source of ~~share-based~~those ~~payments~~options ~~granted~~and inprior ~~the~~accounting ~~future.~~for ~~However,~~those ~~had~~options. weFair ~~adopted~~market ~~Statement~~value ~~123(R)~~for inoptions ~~prior~~exercised ~~periods,~~is ~~the~~calculated ~~impact~~differently ofthan ~~that~~for ~~standard~~options ~~would~~outstanding ~~have~~and ~~approximated~~exercisable. ~~the~~The ~~impact~~fair ofmarket ~~Statement~~value ~~123~~is asthe weighted ~~described~~average share price in the ~~disclosure~~previous month of ~~pro~~the ~~forma~~exercise ~~net~~for ~~income~~timely tax and ~~earnings~~compensation ~~per~~calculations. ~~share~~The unrecognized compensation cost outstanding is $82 thousand as ~~previously~~of ~~disclosed~~September 30, 2008.

In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (VIE), as amended and interpreted with an implementation date of March 31, 2004. Interpretation No. 46 defines a VIE as a corporation, partnership, trust, or other legal structure used for the business purpose that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. This interpretation will require a VIE to be consolidated or deconsolidated by a company generally based on the risk of loss of return. The ~~Company~~ ~~has~~following ~~two~~summarizes ~~VIEs~~information inabout ~~the~~stock ~~form~~options ofoutstanding ~~Trusts~~at ~~set~~September ~~up to issue Trust Preferred Securities and accordingly~~30, ~~the implementation of the Interpretation requires the deconsolidation of the Trusts.~~2008:

The application of Interpretation No. 46 has been implemented as of December 31, 2004. The implementation did not have a significant impact on the Company's financial position or results of operations.

	Options Outstanding			Options Exercisable
		Weighted
		Average	Weighted		Weighted
Range of		Remaining	Average		Average
Exercise	Number	Contractual	Exercise	Number	Exercise
Prices	Outstanding	Life (Years)	Price	Exercisable	Price

$7.00 and under	30,704	3.21	$ 6.74	30,704	$ 6.74
$7.01 to $10.00	82,598	1.75	$ 8.92	82,598	$ 8.92
$10.01 to $15.00	38,435	5.44	$13.44	38,435	$13.44
$15.01 to $19.00	27,900	5.16	$15.33	27,000	$15.33
$19.01 to $21.00	56,530	7.65	$19.52	36,710	$19.63
$21.01 to $25.00	26,950	8.61	$21.91	16,350	$21.87


	263,117	4.79	$13.61	231,797	$12.74

InA ~~May~~summary ~~2003 FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics~~ of ~~both~~the ~~Liabilities~~status ~~and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics~~ of ~~both~~the ~~liabilities~~Company’s ~~and~~non-vested ~~equity.~~shares ~~It requires that an issuer classify a financial instrument that is within its scope~~ as ~~a liability (or an asset in some circumstances). Many~~ of ~~those~~September ~~instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31~~30, ~~2003,~~2008 and ~~otherwise~~changes ~~is effective at the beginning of the first interim period beginning after June 15, 2003, except~~ for ~~mandatory redeemable financial instruments of nonpublic entities. Adoption of~~ the ~~Statement~~quarter ~~did~~ended ~~not~~is ~~result~~presented ~~in an impact on the Company's statement of financial position or results of operations.~~below:

4. Purchase of Redmond National Bank

				Weighted
				Average
	Director	Employee	Total	Grant Date
Non-vested Shares	Shares	Shares	Shares	Fair Value


Non-vested at January 1, 2008	24,860	158,140	183,000	$5.80
Granted	16,100	82,200	98,300	$4.56
Vested	8,170	44,930	53,100	$5.25
Forfeited	32,790	164,090	196,880	$5.39


Non-vested at September 30, 2008	-	31,320	31,320	$5.42

OnCompensation ~~April~~expense ~~22,~~for ~~2005~~restricted ~~Venture~~stock ~~Financial~~is ~~Group,~~measured ~~Inc.~~based ~~and~~upon ~~Washington~~the ~~Commercial~~number ~~Bancorp~~of ~~(WCB)~~shares ~~announced~~granted and the ~~signing~~stock price at the grant date. Accordingly, $20 thousand of acompensation expense ~~definitive~~has ~~agreement~~been recognized in the condensed consolidated financial statements for employee restricted stock arrangements for the ~~merger~~nine ofmonths ~~WCB~~ended September 30, ~~the~~2008. ~~Redmond-based~~Unrecognized ~~parent~~compensation ~~company~~costs offor ~~Redmond~~restricted ~~National~~stock ~~Bank, with~~is ~~and~~$24 ~~into~~thousand ~~Venture~~as ~~Financial~~of September ~~Group~~30, ~~Inc~~2008. ~~Simultaneously,~~Compensation ~~Redmond~~expense ~~National~~is ~~Bank~~measured ~~will~~at ~~merge~~the ~~into~~grant ~~Venture~~date ~~Bank.~~of ~~The~~the ~~stock~~award at fair value and ~~cash~~adjusted ~~transaction~~to isreflect ~~currently~~actual ~~valued~~forfeitures atand ~~approximately~~the ~~$25~~outcome ~~million~~of certain conditions.

Redmond National Bank operates two branches in Redmond with approximately $100 million in total assets. Upon completion of the merger, these branches will operate under the Venture Bank name. An expected benefit of the

~~transaction will be the return of James F~~3. ~~Arneson~~Pension ~~to Venture Bank. Mr. Arneson served as an officer of Venture Bank for ten years prior to accepting the position of President~~ and ~~CEO~~Other ofPostretirement ~~WCB~~Benefit ~~and Redmond National Bank.~~Plans

~~Item~~Effective ~~2 Management'~~January 1, 2005 we replaced the Company’s ~~Discussion~~Salary Continuation Plans and ~~Analysis~~adopted the Supplemental Executive Retirement Plan (SERP), which is a defined benefit pension plan. The SERP is a master nonqualified retirement plan covering a select group of ~~Financial~~employees. ~~Condition~~On an annual or more frequent basis, the SERP is analyzed on an actuarial basis to determine the necessary amounts to expense to cover the plan obligations. Prior to 2005 the liability to individual employees was based on their individual agreements and ~~Results~~now ofis ~~Operations~~accounted for on a group basis. The SERP has no assets.

~~The~~No ~~following~~participant ~~discussion contains a review~~ of the ~~Company's~~Supplemental ~~and~~Executive ~~its~~Retirement ~~subsidiaries~~Plan ~~operating~~has ~~results~~accrued ~~and~~any ~~financial~~benefits ~~condition~~since December ~~for the first three months of and period ended March~~ 31, ~~2005.~~2006 ~~When~~and ~~warranted,~~is ~~comparisons~~not ~~are made~~expected to ~~the~~accrue ~~same~~any ~~period~~additional benefits in ~~2004, and to~~ the ~~previous~~foreseeable ~~year~~future. ~~ended~~As ~~December 31~~a consequence, ~~2004. The discussion should be read in conjunction with~~ the ~~financial~~Plan ~~statements (unaudited) and related notes contained elsewhere in this report. The reader~~ is ~~assumed~~now ~~to have~~a ~~access~~frozen todefined ~~the~~benefit ~~Company's~~plan ~~Form~~effective ~~10-K for the year ended~~ December 31, ~~2004,~~2006 ~~which contains additional statistics~~ and ~~explanations. All~~$854 ~~dollars~~thousand in ~~tables,~~previously ~~except~~recognized ~~per~~unfunded ~~share~~obligations ~~data,~~have ~~are~~been ~~expressed~~reversed in ~~thousands~~the current period.

~~Forward-Looking~~4. ~~Information~~Basic and Diluted Earnings (Loss) per Share

InBasic ~~addition~~and todiluted ~~historical~~earnings ~~information,~~(loss) ~~statements~~per ~~appearing~~share inare ~~this~~calculated ~~report~~by ~~which~~dividing ~~are~~net ~~not~~income ~~historical~~(loss) inby ~~nature, including~~ the ~~discussions~~weighted ofaverage ~~the~~number ~~adequacy~~ of ~~the~~common ~~Company's~~shares ~~capital~~outstanding ~~resources~~during ~~and~~the ~~allowance~~periods ~~for credit~~presented. ~~losses,~~Diluted ~~are~~earnings ~~forward-looking~~per ~~statements~~share ~~within~~assume ~~the~~all ~~meaning~~dilutive ofstock ~~the~~options ~~Private~~and ~~Securities~~restricted ~~Litigation~~stock ~~Reform~~outstanding ~~Act~~are ofissued ~~1995~~such ~~("PLSRA"). Any statements~~ that ~~expressly~~their ordilutive ~~implicitly~~effect ~~predict~~is ~~future~~maximized ~~results,~~unless ~~performance,~~the oreffect ~~events~~is ~~should be considered forward-looking~~antidilutive. ~~Forward-looking~~For ~~statements are subject to~~ the ~~risks~~three and ~~uncertainties~~nine ~~that~~months ~~may~~ended ~~cause~~September ~~actual~~30, ~~future~~2007, unallocated ~~results~~shares toof ~~differ~~the ~~materially. Readers~~ESOP are ~~cautioned~~excluded ~~not~~from tothe ~~place~~weighted ~~undue~~average ~~reliance~~common onshares ~~these~~outstanding ~~forward-looking~~to ~~statements,~~the ~~which~~extent ~~speak only~~they ashave ofnot ~~the~~been ~~date~~legally ~~of this Quarterly Report~~released. The ~~Company~~restricted ~~does~~share ~~not~~awards ~~undertake~~are ~~any~~excluded ~~obligation~~from tothe ~~publicly~~weighted ~~release~~average ~~any~~common ~~revisions~~shares tooutstanding ~~forward-looking~~in ~~statements~~the calculation ~~contained~~of inbasic ~~this~~earnings ~~Quarterly~~(loss) ~~Report,~~per ~~with~~share ~~respect~~ to ~~events~~the orextent ~~circumstances~~they ~~after~~have ~~the~~not ~~date~~been ~~of this~~vested ~~Report,~~ or ~~to reflect the occurrence of unanticipated events~~earned.

Such risks and uncertainties with respect to the Company include, among others, those related to the general economic environment, particularly in the region in which the Company operates, competitive products and pricing, that may lead to pricing pressures on rates the Bank charges on loans and pays on deposits, loss of customers of greatest value to the Bank, litigation or other losses, fiscal and monetary policies of the federal government, changes in government regulations affecting financial institutions and small loan practices, including regulatory fees and capital requirements, changes in prevailing interest rates that could lead to decreased net interest margin, acquisitions and the integration of acquired businesses, credit risk management and asset/liability management, the financial and securities markets, changes in technology or required investments in technology, whether the Company can complete the merger with Washington Commercial Bancorp and the availability of and costs associated with sources of liquidity.

	Three Months Ended September 30,		Nine Months Ended September 30,
	2008	2007	2008	2007
Basic earning (loss) per share computation	$ (27,740)	$ 3,197	$ (22,805)	$ 9,561
Numerator - Net Income (loss) (in thousands)
Denominator - Weighted Average	7,286,903	7,161,814	7,242,821	7,158,156
common shares outstanding
Basic earning (loss) per share	$ (3.83)	$ .45	$ (3.15)	$ 1.34

	Three Months Ended September 30,		Nine Months Ended September 30,
	2008	2007	2008	2007
Diluted earning (loss) per share computation	$ (27,740)	$ 3,197	$ (22,805)	$ 9,561
Numerator - Net Income (loss) (in thousands)
Denominator - Weighted average	7,286,903	7,161,814	7,242,821	7,158,156
common shares outstanding
Effect of dilutive stock options ⁽¹⁾	-	122,087	-	126,320
Weighted average common shares	7,286,903	7,283,901	7,242,821	7,284,476
and common stock equivalents
Diluted earning (loss) per share	$ (3.83)	$ .44	$ (3.15)	$ 1.31
(1) Common stock equivalents were excluded from the per
share calculation due to a net loss for the period.

~~Financial~~5. ~~Condition~~Cash Dividends

~~General~~On July 16, 2008, the Board of Directors declared the thirty eighth consecutive quarterly cash dividend, paid on August 8, 2008. The dividend of eight and a half cents per share was paid to all shareholders of record as of July 28, 2008. Subsequent to this dividend, the Board of Directors has suspended future dividends to shareholders’ in order to conserve capital.

The Company's consolidated assets at March 31, 2005 totaling $578,181,000 represents a 3.95% increase from December 31, 2004 assets totaling $556,216,000. The increase is represented by a $3,491,000 decrease in securities available for sale, offset by increases in cash and due from banks of $2,027,000, a $1,956,000 increase in loans held for sale, an increase of $18,210,000 in gross loans and a $2,375,000 increase in premises and equipment. Other assets were largely unchanged.

Loans and loans held for sale

Loans increased $18,210,000 or 4.24% as of March 31, 2005 compared to December 31, 2004. This increase can be attributed to an improved regional economy and increased demand for commercial loans. Loans held for sale increased $1,956,000 to $5,074,000 as of March 31, 2005. This increase is due to stable long term rates and improved local economy.

The composition of the loan portfolio was as follows (dollars in thousands):
	March 31,	December 31,
	2005	2004
Commercial	$57,905	$58,556
Real Estate
Residential 1-4 family	9,182	9,415
Commercial	262,327	250,947
Construction	110,581	101,509
Consumer	4,991	5,275
Small Loans	2,747	3,821
Total Loans	$447,733	$429,523

6. Recent Accounting Pronouncements

~~The~~In ~~total~~June ~~non-performing loans~~2007, ~~defined~~the asFinancial ~~those~~Accounting ~~loans~~Standards onBoard ~~non-accrual~~(FASB) ~~and~~ratified ~~accruing~~an ~~loans~~Emerging ~~over~~Issues 90Task Force (EITF) consensus regarding Accounting for Income Tax Benefits of Dividends on Share-~~days~~Based ~~past~~Payment ~~due,~~Awards. ~~decreased~~This ~~since~~new ~~December~~guidance ~~31,~~became ~~2004~~effective byfor ~~$85~~the Company on January 1,~~000~~ as2008 ~~shown~~and indid ~~the~~not ~~following~~have ~~table~~a ofmaterial ~~non-performing~~effect ~~assets (dollars~~on inthe ~~thousands):~~Company’s consolidated financial statements upon implementation.

	March 31,	December 31,
	2005	2004
Non-accrual loans	$ 4,996	$ 3,081
Accruing loans past due 90 days or more	5	2,005
Foreclosed real estate	339	718
Other assets	1	6
	$ 5,341	$ 5,810

In March 2008, the FASB issued FAS 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, and is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early application encouraged. The Company will adopt the standard as of January 1, 2009. FAS 161 requires only additional disclosures concerning derivatives and hedging activities, and therefore the adoption of FAS 161 will not have an impact on the Company’s financial condition and results of operations.

~~The~~In ~~percentage~~April ~~of non-performing loans to total loans decreased to 1.12% on March 31~~2008, ~~2005~~the ~~from~~FASB ~~1.18%~~issued onFASB ~~December~~Staff ~~31,~~Position ~~2004. Non~~142-~~accrual loans increased $1~~3,~~915,000~~ ~~during~~“Determination of the ~~first~~Useful ~~three~~Lives ~~months~~ of ~~2005,~~Intangible ~~while accruing loans past due 90 days or more decreased $2~~Assets”,~~000,000~~ ~~and~~which ~~foreclosed~~amends ~~real estate decreased $379,000 during~~ the ~~same~~factors ~~period.~~that ~~The~~should ~~increase~~be considered in developing ~~non-accrual~~renewal ~~loans~~or ~~was~~extension ~~attributed~~assumptions used to adetermine ~~$2,000,000~~the ~~commercial~~useful ~~real~~life ~~estate~~of ~~loan~~an ~~moving~~intangible ~~to non-accrual~~asset. ~~status~~This ~~from~~interpretation ~~past~~will ~~due~~be ~~status~~effective asfor ~~collection~~the ~~measures~~Company ~~continue.~~beginning ~~Any~~January ~~potential~~1, ~~loss~~2009 ~~relating~~and tomust ~~this~~also ~~loan~~be isapplied ~~adequately reserved for pursuant~~ to ~~the~~interim ~~bank's~~periods ~~normal~~within ~~loan loss reserve methodology~~2009. The ~~bank anticipates a judicial foreclosure on~~ ~~the~~Company ~~underlying~~is ~~real~~currently ~~estate~~evaluating ~~as well as pursuing~~ the ~~guarantors~~potential onimpact ~~the~~of ~~loan~~this ~~which~~guidance; ~~should~~however, ~~result~~it inis nonot expected to ~~minimal~~have ~~loss. During~~a ~~the~~significant ~~quarter,~~impact ~~the bank received $600,000~~ on the ~~sale~~Company’s offinancial ~~foreclosed~~condition ~~property, resulting in a $300,000 gain on sale,~~ and aresults ~~$300,000~~of ~~reduction in foreclosed real estate for the quarter~~operations.

~~Allowance~~In May 2008, the FASB issued FAS 162 “The Hierarchy of Generally Accepted Principles” (FAS 162) which outlines the order of authority for ~~Credit~~the ~~Losses~~sources of accounting principles. FAS 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The Company does not expect SFAS 162 to have an impact on its financial condition and results of operations.

~~The~~In ~~allowance~~May ~~for~~2008, ~~credit losses reflects management's current estimate of~~ the ~~amount~~FASB ~~required~~issued toFSP ~~absorb~~APB ~~losses~~14-1, on“Accounting ~~existing~~for ~~loans~~Convertible ~~and~~Debt ~~commitments~~Instruments toThat ~~extend~~May ~~credit.~~Be ~~Determination~~Settled ofin ~~the~~Cash ~~appropriate~~upon ~~level~~Conversion of(Including ~~the~~Partial ~~allowance~~Cash Settlement)”, iswhich ~~based~~clarifies onthat anconvertible ~~analysis~~debt ofinstruments ~~various~~that ~~factors~~may ~~including~~be ~~historical~~settled ~~loss experience based on volumes and types of loans; volumes and trends~~ in ~~delinquencies~~cash ~~and~~upon ~~non-accrual~~conversion ~~loans;~~(including ~~trends~~partial incash ~~portfolio~~settlement) ~~volume; results of internal credit reviews; and economic conditions. All commercial and real estate loans in the portfolio~~ are ~~assigned~~not aaddressed ~~grade indicating credit quality~~ by ~~the~~paragraph ~~originating~~12 ~~loan officer at the time~~ of ~~loan~~APB ~~origination~~Opinion No. ~~These~~14, ~~grades~~“Accounting ~~are~~for ~~reviewed~~Convertible atDebt ~~regular~~and ~~intervals~~Debt ~~and,~~Issued ifwith ~~performance~~Stock ~~concerns~~Purchase ~~arise~~Warrants.” onAdditionally, anthis ~~individual~~FSP ~~loan,~~specifies ~~the~~that ~~grade~~issuers isof ~~lowered~~such toinstruments ~~the~~should ~~appropriate~~separately ~~level.~~account ~~Management~~for ~~reviews~~ the ~~composite~~liability ~~changes~~and inequity ~~loan~~components ~~grades within the portfolio~~ in ~~its~~a ~~assessment~~manner ofthat ~~the~~will ~~adequacy~~reflect of the ~~allowance.~~entity’s Ifnon-convertible adebt ~~loan~~borrowing ~~becomes~~rate ~~impaired,~~when ~~the~~interest ~~Company's~~cost ~~loss exposure on that loan~~ is ~~measured~~recognized ~~based~~in onsubsequent ~~expected~~periods. ~~cash~~This ~~flows~~FSP orwill ~~collateral~~be ~~values,~~effective ~~and if necessary, a portion of the allowance~~ for ~~credit losses is allocated to that loan. After reviewing~~ the ~~composition~~Company ofas ~~the loan portfolio at March 31, 2005, the levels~~ of ~~classified~~January ~~loans~~1, ~~losses~~2009 ~~experienced during the period,~~ and ~~the~~will ~~changes~~have ~~in the economy, management has determined the allowance for credit losses~~ to be ~~adequate~~applied retrospectively to ~~cover~~all ~~the~~periods ~~loss exposure in the loan portfolio at that date~~presented. An ~~analysis~~The ofCompany ~~the~~will ~~adequacy~~evaluate of the ~~allowance~~impact ~~is subject to quarterly review by the Board~~ of ~~Directors. Various regulatory agencies, as an integral part of their examination process, periodically review~~ the ~~Bank's~~adoption ~~allowance~~in ~~for~~the ~~loan~~event ~~losses.~~any ~~Such~~instruments ~~agencies~~that ~~may~~would ~~require~~be ~~the~~subject ~~Bank~~ to ~~recognize~~this ~~changes~~guidance toare ~~the~~being ~~allowance~~considered ~~based~~in ~~on their judgments of information available at~~ the ~~time of their examination~~future.

~~The~~In ~~allowance~~June ~~for~~2008, ~~credit~~the ~~losses~~FASB ~~was~~issued ~~essentially~~FASB ~~unchanged~~Staff atPosition $7EITF 03-6-1,~~167,000~~ on“Determining ~~March~~Whether 31Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FASB Staff Position (FSP) addresses whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, ~~2005~~therefore, ~~compared~~need to be included in the ~~December~~earnings ~~31,~~allocation ~~2004~~in ~~level~~computing basic earnings per share (EPS) pursuant to the two-class method described in paragraphs 60 and 61 of $7FASB Statement No. 128,~~189,000~~ “Earnings per Share.” ~~The~~A ~~ratio~~share-based payment award that contains a non-forfeitable right to receive cash when dividends are paid to common shareholders irrespective of ~~the~~whether ~~allowance~~that ~~for~~award ~~credit~~ultimately ~~losses~~vests or remains unvested shall be considered a participating security as these rights to ~~loans~~dividends ~~was1.60%~~provide ona non-contingent transfer of value to the holder of the share-based payment ~~March~~award. 31Accordingly, ~~2005,~~these ~~compared~~awards should be included in the computation of basic EPS pursuant to 1the two-class method.~~67%~~ onThe ~~December~~guidance 31in this FSP is effective for the Company for the fiscal year beginning January 1, ~~2004~~2009 and all interim periods within 2009. All prior period EPS data presented will have to be adjusted retrospectively to conform to the provisions of the FSP. The ~~allowance~~Company ~~for~~does ~~credit~~not ~~losses~~expect EITF 06-3-1 to ~~nonperforming~~have ~~loans~~an ~~was~~impact on its financial condition and results of operation.

In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” The FSP clarifies the application of FAS No. 157, Fair Value Measurements, when the market for a financial asset is not active. The FSP was effective upon issuance, including reporting for prior periods for which financial statements have not been issued. The adoption of the FSP for reporting as of September 30, 2008, did not have a material impact on our consolidated financial statements.

7. Fair Value

Effective January 1, 2007, the Company early adopted SFAS 157 and SFAS 159. Without early adoption, the Company would be required to adopt SFAS 157 effective January 1, 2008. Both standards address aspects of the expanding application of fair value accounting.

Early adoption provided a one-time opportunity to treat the economic impact of moving to fair value treatment as a cumulative effect to capital rather than to the income statement. The Company has the opportunity to refinance or prepay without penalty the junior subordinated debentures issued by FCFG Capital Trust II and will have the opportunity to prepay without penalty the junior subordinated debentures issued by WCB Capital Trust I in December 2008. Because the Company anticipated fair value treatment for the reissued debentures on an item-by-item basis, the Company decided to take advantage of the one-time opportunity made available under the standard with early adoption. As a result of the early adoption of SFAS 159 the Company recorded a cumulative effect adjustment of $428 thousand net of tax as a decrease to the opening balance of retained earnings as of January 1, 2007. The fair value option of the junior subordinated debentures accounted for $222 thousand of the $428 thousand change and the write off of the prepaid fees associated with the junior subordinated debentures to retained earnings accounted for remaining $206 thousand. In the first nine months of 2008 and 2007, the Company recognized other operating income totaling $2.0 million and $1.0 thousand, respectively associated with the change in fair value of the junior subordinated debentures. Since the Company’s adoption of FASB 157 at January 1, 2007, total income recorded through June 30, 2008 was $3.3 million.

~~143.31%~~The onfollowing ~~March~~table ~~31,~~presents ~~2005,~~gains ~~compared~~and to(losses) ~~141.35%~~due onto ~~December~~changes ~~31,~~in ~~2004.~~fair ~~Management~~value ~~believes~~for ~~the~~items ~~allowance~~measured is at anfair ~~appropriate~~value ~~level.~~pursuant ~~Management~~to ~~anticipates~~election ~~additional provisions for the general loan portfolio during 2005 as the loan portfolio grows and as we evaluate the risks~~ of the ~~portfolio~~fair ~~throughout~~value ~~the~~option ~~remainder~~for of the ~~year.~~period ~~Management~~ended September ~~will~~30, ~~continue to provide a reserve for its small loan portfolio~~2008.

During a regulatory examination during the fourth quarter of 2004, the Bank's federal regulator, the Federal Deposit Insurance Corporation (FDIC), directed the Bank to charge-off all payday loans that had been outstanding to borrowers for 60 days from the original loan date. The regulators requested that the Bank charge-off the principal balance of loans meeting the above criteria for the periods of 12/31/03, 9/30/04 and 12/31/04. The Company believes that under generally accepted accounting principles, a total loss of all loans outstanding for 60 days from origination date is not probable and the specific allowance allocated to the payday lending portfolio partnered with the stop-loss gap in the marketing and servicing agreement with the Company's payday partner is adequate. All actual charge-offs and recoveries for 12/31/03, 9/30/04 and 12/31/04 have been recognized and run through the allowance for loan losses. As a result of the regulatory charge-off, the Company has a difference between its regulatory accounting principles (RAP) books and its generally accepted accounting principles (GAAP) books. The financial entries made for regulatory purposes resulted in a $619 thousand reduction in loan balances as of March 31, 2005 with a corresponding reduction in the allowance for loan losses. Additional charge-offs of $619,000 and recoveries of $782,000 were also required for regulatory accounting purposes for the quarter ended March 31, 2005 as compared to the financial statement presented under GAAP in this Form 10-Q.

(dollars in thousands)	Carrying Value of	Fair Value	Carrying Value of	Other non-	Total changes in fair
	Instrument at	Measurements at	Instrument at	interest (income)	value included in
	January 1, 2008	September 30, 2008	September 30,	expense	current period results
		using significant	2008		of operations
		other observable
		inputs (Level 2)

Liabilities

FCFG Capital Trust II¹	$ 6,187	$(1)	$ 6,186	$(1)	$(1)
WCB Capital Trust ²	3,083	(18)	3,065	(18)	(18)
VFG Capital Trust I	12,496	(2,011)	10,485	(2011)	(2,011)


Total	$21,766	$(2,030)	$19,736	$(2,030)	$(2,030)

~~Investment~~Fair ~~Portfolio~~Value Measurements (SFAS 157)

~~Securities~~SFAS ~~available~~157 ~~for~~defines ~~sale~~fair ~~decreased $3~~value,~~491,000,~~ orestablishes ~~4.76%~~a ~~during~~consistent ~~the~~framework ~~first~~for ~~three~~measuring ~~months~~fair ofvalue ~~2005~~and toexpands adisclosure ~~total~~requirements ofabout ~~$69~~fair value measurements. SFAS 157,~~800~~ among other things,~~000.~~ ~~The~~requires ~~decrease~~the inCompany ~~securities~~to ~~available~~maximize ~~for~~the ~~sale~~use isof ~~primarily~~observable ~~attributed~~inputs toand ~~principal reductions~~minimize onthe ~~mortgage~~use ~~backed~~of ~~securities~~unobservable ~~and~~inputs ~~agency~~when ~~securities~~measuring ~~called~~fair value. ~~These~~SFAS ~~securities~~157 ~~were~~requires ~~not~~fair ~~replaced~~value asmeasurement ~~the~~disclosure ~~funds~~of ~~generated~~all ~~from~~assets ~~this~~and ~~reduction~~liabilities. inThe ~~investments~~Company ~~were~~determines fair ~~used~~value tobased ~~fund~~upon ~~loan~~quoted ~~growth. Securities~~prices ~~are~~when ~~typically~~available ~~purchased~~or ~~from~~through ~~time~~the touse ~~time as~~of ~~either~~alternative ~~collateral~~approaches, ~~for~~such ~~various~~as ~~operational~~matrix ~~purposes~~ or ~~for~~model ~~additional~~pricing, ~~income~~when inmarket ~~times~~quotes ofare ~~excess~~not ~~liquidity~~readily accessible or available.

~~Deposits~~The valuation techniques used in SFAS 157 are based upon observable and ~~Borrowings~~unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy:

~~Total~~• ~~deposits~~Level ~~increased~~1—Quoted ~~$32,773,000,~~prices or(unadjusted) 10.03% in the three months ended March 31, 2005 to $359,494,000. Savings and interest-bearing deposit accounts and non-interest bearing demand experienced a significant increase of $14,561,000 or 6.52% for ~~the~~identical ~~three~~assets ~~month period, while time deposits increased an additional $18,212,000~~ or ~~17.63%~~liabilities .in ~~These~~active ~~increases~~markets ~~can~~that ~~be attributed to~~ the ~~success~~entity ofhas ~~special promotions and marketing efforts over~~ the ~~last several~~ability ~~months~~to asaccess ~~well~~ as ~~the effectiveness~~ of ~~our re-branding efforts especially in our new and refurbished financial centers. These re-branding efforts will continue throughout this year as we continue to meet our schedule for remodeling~~ the ~~bank's~~ ~~existing~~measurement ~~financial centers~~date. Short term borrowings and fed funds purchased decreased by $9,634,000 or 7.49% . The decrease was offset by the increase in deposits. The Company's intention is to reduce the short term debt that was incurred following the divestiture of seven branches in October 2004 as deposits continue to grow. Long term borrowings experienced no significant change.

~~Liquidity~~• Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.

~~Liquidity~~• ~~management~~Level ~~involves~~3—Significant ~~the~~unobservable ~~ability~~inputs ~~to meet cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance~~ that ~~sufficient~~reflect funds will be available to meet their credit needs. Liquidity is generated from both internal and external sources. Internal sources are those assets that can be converted to cash with little or no risk of loss and are the ~~principal~~reporting ~~source~~entity’s ofown ~~asset~~assumptions ~~liquidity.~~about These include overnight investments in interest bearing deposits in banks, federal funds sold and investment securities, particularly those of shorter maturity. At March 31, 2005, cash, deposits in banks, federal funds sold, securities available for sale and Investments in Trusts totaled $86,275,000. External sources refer to the ~~ability~~assumptions tothat ~~access~~market ~~new~~participants ~~borrowings~~would ~~and~~use capital. These include increasing savings and demand deposits, federal funds purchased borrowings, and the issuance of capital and debt securities. At March 31, 2005, borrowing lines of credit totaled $41,000,000. These credit facilities are being used regularly as a source of funds. At March 31, 2005, $10,000,000 was borrowed against these lines of credit in ~~the~~pricing ~~form~~an ofasset ~~long~~or ~~term advances~~liability.

~~Net~~The ~~cash~~following ~~flows~~is from operations and investing activities decreased liquidity while net cash flows from financing activities contributed to liquidity. Net cash from operating activities for the three months ended March 31, 2005 indicated a ~~decrease~~description ~~in liquidity or use~~ of ~~funds~~the ofCompany’s ~~$1,398,000~~valuation ~~compared~~methodologies toused ~~an increase of $3,911,000 or addition~~ to ~~liquidity~~measure ~~for~~and ~~the~~disclose ~~three months ended March 31, 2004. The majority of~~ the ~~cash~~fair ~~used~~values ~~from operating activities for the first three months~~ of ~~2005~~its ~~was~~financial ~~from~~assets ~~the~~and ~~company's~~liabilities ~~mortgage~~on ~~loan~~a ~~operations~~recurring and nonrecurring ~~related~~basis: toInvestment ~~the~~securities ~~timing~~available offor ~~originations and~~ sale: ofSecurities ~~loans.~~available ~~Origination of loans held~~ for sale ~~exceeded~~are ~~proceeds~~recorded ~~from~~at ~~the~~fair ~~sale~~value ofon ~~those~~a ~~loans~~recurring ~~for~~basis. ~~the~~If ~~three~~quoted ~~months~~market ~~ended March~~prices ~~31,~~are ~~2005~~not ~~by $1~~available,~~545,000.~~ ~~This~~fair isvalue anmeasurement ~~indication~~is ofbased ~~the~~on ~~improvement~~an inindependent ~~the~~grid ~~mortgage~~pricing ~~loan~~model ~~market~~ for ~~the~~identical ~~quarter~~or assimilar ~~the~~assets ~~Company~~which ~~originated~~may ~~loans~~ at atimes ~~faster~~include ~~rate~~quoted ~~than~~prices. Securities ~~they~~include ~~could~~private ~~sell~~collateralized ~~them~~mortgage ~~due~~obligations, toprivate ~~the lag in the time of closing a~~ mortgage-backed ~~loan and~~securities, ~~the~~government ~~subsequent packaging of~~ mortgage-backed ~~loans~~securities, ~~for~~municipal ~~sale~~securities, toasset-backed ~~the secondary market. Cash flow from investing activities decreased cash by $23~~securities,~~759,000~~ ~~for~~corporate ~~the~~securities ~~three~~and ~~months~~other ~~ended~~equity ~~March 31, 2005 compared~~securities.

The Company also utilizes an independent third party valuation service for our trust preferred securities. If there are no similar assets or less transparency around inputs to the valuation, securities would be classified within Level 3 of the valuation hierarchy. The Company reviews investment securities for the presence of other-than-temporary impairment (OTTI), taking into consideration current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, the Company’s ability and intent to hold investment until a recovery of fair value, which maybe maturity as well as other factors.

The Company has in its available for sale portfolio two investments in trust preferred pooled securities. These are pools of trust preferred securities (“TPS”) issued by a number of U.S. banks and a few insurance companies. Corporate pooled TPS have exposure to financial institutions which may have been severely impacted by the significantly stressed markets.

There are forty-six issuers in one of the trust preferred pooled securities, and fifty-two issuers in the other. No issuer in either of the two trust preferred pooled securities has issued more than 3.5 percent of the aggregate amount of the pool. Four of the forty-six pooled issuers for one security and five of the fifty-two pooled issuers for the other have invoked their original contractual right to defer interest payments. There has been one bank, Indy Mac, that has defaulted in each security pool. However, the tranche of the securities held by the Company continues to pay as agreed. The Company has received 100% of all contractual payments since inception. The Company’s cash analysis shows that the present value of the currently projected remaining cash flows is not less than the present value of the remaining previously projected cash flows. On August 14, 2008 Fitch and Moody’s rated these securities. Fitch rated them investment grade and Moody’s rated them below investment grade. The Company has not incurred any loss on either security and the Company has the ability and intent to continue to hold them until a recovery of fair value, which may be until maturity. Accordingly, the Company believes the impairment loss is temporary.

The Company has calculated fair value using SFAS 157 Level 3 inputs because the pooled TPS have been thinly traded and do not represent the prices at which market participants would be expected to ~~contributing~~transact. $1In addition,~~497,000~~ ~~for~~any trades in the ~~same~~pooled ~~period~~TPS inthat ~~2004~~have taken place all appear to be at distressed prices. Instead, the Company compiled a list of other traded TPS that had similar characteristics to its pooled TPS; the Company found 34 TPS. The majority of the ~~cash~~34 ~~used~~TPS ~~from~~are ~~investing~~comprised ~~activities~~of ~~during~~large bank, single issuer securities. The Company aggregated the ~~first~~list ~~quarter~~of 34 TPS and the median price was approximately 77% of ~~2005~~par value and the average price was ~~from~~approximately an75% ~~increase~~of inpar value. ~~loans~~Since the key difference of ~~$18~~the Company’s pooled TPS and the list of 34 other TPS was size and pooled versus single issuer,~~675,000~~ the Company elected to adjust for size in order to effectively simulate its pooled TPS. ~~Cash~~The ~~flow~~average ~~from~~price after ~~financing~~adjusting ~~activities~~for ~~contributed~~size ~~cash~~was approximately 85% of ~~$27,184,000~~par value. Size was adjusted for by considering the small composite levered raw beta as derived from Morningstar’s Cost of ~~March~~Capital ~~31,~~Yearbook ~~2005~~for ~~compared~~Standard toIndustrial aClassification ~~use~~(SIC) 602. Morningstar’s Cost of ~~$4,526,000~~Capital ~~during~~Yearbook for SIC 602 contains cost of capital information for commercial banks based on capitalization weighted averages of peer group (i.e. small composite peer group) betas of the ~~same~~companies ~~period~~that inmake ~~2004~~up the composite. The ~~majority~~adjustment ofto the ~~cash~~average ~~contributed~~price was ~~from~~based anon ~~increase~~the inratio ~~deposits~~of inthe small composite levered raw beta to the ~~amount~~large composite levered raw beta. Using Morningstar’s levered raw beta numbers allowed the Company to estimate the pricing adjustment that could be expected for a similar group of 34 TPS issued by smaller institutions. Performing the adjustment for size allowed the Company to create a simulated pooled TPS. The resultant range of pricing was 75% to 85% of par value. ~~$32~~After considering all of the above information,~~773,000~~ the Company arrived at a fair value for these securities at approximately 75% of par value.

OnThe ~~December~~Company’s ~~11,~~investments ~~2002,~~in ~~the~~Fannie ~~Board~~Mae ~~approved~~and aFreddie Mac perpetual preferred stock ~~repurchase~~were ~~program~~considered ~~that~~impaired ~~allowed~~due ~~for~~to the ~~repurchase~~decline ofin upmarket tovalue ~~198,000~~of the shares in connection with the federal government’s takeover of ~~VFG~~Fannie ~~Common~~Mae ~~Stock~~and Freddie Mac in ~~purchases~~September ~~over~~2008, aalong ~~three~~with ~~month~~the ~~period~~elimination of dividends on these shares. At September 30, ~~through~~2008, ~~open~~the ~~market~~fair ~~transactions~~value of the securities was $2.2 million, and the Company has written ordown the security through ~~privately~~an ~~negotiated~~other-than-temporary ~~transactions~~impairment charge of $40.1 Nomillion ~~purchases~~which ~~were~~is ~~made~~reflected ~~under~~within ~~this~~noninterest ~~plan~~expenses infor ~~2002.~~the Asquarter ofand ~~March~~nine 11months ended September 30, ~~2003~~2008. Junior subordinated debentures at fair value: Junior subordinated debentures are recorded at fair value on a recurring ~~total~~basis. ofFair ~~104,358~~value ~~shares~~measurement ~~were~~is ~~repurchased~~based ~~under~~on ~~this~~quoted ~~plan~~prices ~~for~~based on similar liabilities in active markets or similar liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means. The debentures are a ~~total~~floating ofrate $1instrument,~~174,792~~ tied directly to LIBOR whose changes in values are influenced by changes in the credit spreads of such instruments. The spreads are determined by a third party vendor who utilizes comparable market spreads for similar bank debt.

OnNon-performing ~~February~~loans: ~~19,~~A ~~2003~~loan ~~the~~is ~~Board~~considered ~~approved a stock repurchase program~~ to ~~allow~~be ~~for~~non-performing ~~the repurchase of 131~~when,~~370~~ ~~shares~~based ofon ~~VFG Common Stock in purchases over time in either privately negotiated transactions or through the~~current ~~open~~information ~~market. On June 18, 2003 this plan was amended~~ and ~~an additional 56~~events,~~130~~ ~~shares~~it ~~were~~is ~~added~~probable tothat the ~~plan.~~Company Onwill ~~October~~be ~~15,~~unable ~~2003~~to ~~this~~collect ~~plan~~all ~~was~~amounts ~~amended~~due ~~again~~(both interest and anprincipal) ~~additional~~according ~~225,000 shares were added~~ to ~~this~~the ~~plan~~contractual ~~bringing~~terms of the ~~total~~loan ~~to 412,500 shares~~agreement. ~~Under~~Non-performing ~~this~~loans ~~plan~~are ~~266,097~~measured ~~shares~~at ~~were~~the ~~repurchased~~loan’s inobservable fair ~~2003~~price, ~~146,403~~or ~~were repurchased in 2004 and 14,337 share were repurchased in~~ the ~~first~~fair ~~quarter~~value of ~~2005~~collateral, ~~for~~if arepayment ~~total~~ of ~~$3,278,975.~~the ~~All~~loan ~~share~~is ~~amounts~~expected ~~have~~to ~~been~~be ~~adjusted~~provided ~~for~~by the ~~three-for-two~~ ~~stock~~underlying ~~split effective May 16, 2004~~collateral.

OnDerivative ~~June~~contract ~~16,~~held ~~2004~~for ~~the~~purposes ~~Board~~other ~~approved~~than atrading: ~~stock~~Derivative ~~repurchase~~contract ~~program~~held ~~to allow~~ for ~~the~~purposes other ~~repurchase~~than oftrading ~~200,000~~are ~~shares~~recorded ofat ~~VFG~~fair ~~Common~~value ~~Stock~~on ina ~~purchases~~recurring ~~over time in either privately negotiated transactions or through the open market~~basis. ~~Under~~Fair ~~this~~value ~~plan~~measurement ~~50,779~~is ~~shares~~based ~~have~~on ~~been~~independent ~~repurchased~~pricing ~~for a total of $780,424~~models.

OnAssets ~~May~~and 6,liabilities ~~2004,~~measured ~~the~~at ~~Board~~fair ofvalue ~~Directors~~on ~~announced~~ a ~~three~~recurring (available-for-~~two~~sale ~~stock~~securities, ~~split~~derivatives, onjunior ~~VFG~~subordinated ~~stock~~debt) ~~for~~and ~~shareholders~~non ofrecurring (impaired ~~record~~loans) onbasis ~~May~~as 16of September 30, ~~2004~~2008.

Management believes the Bank's liquidity position at March 31, 2005, was adequate to meet its short term funding requirements.

	Quote Prices in		Significant
	Active Markets for	Significant Other	Unobservable
(dollars in thousands)	Identical Assets	Observable Inputs	Inputs	Balance as of
	(Level 1)	(Level 2)	(Level 3)	September 30, 2008

Financial Assets and Liabilities
Securities available-for-sale		$196,797	$32,063	$228,860
Junior subordinated debentures at fair value		19,736		19,736

Impaired loans			57,292	57,292

Derivative contract held for purposes other
than trading		(495)		(495)

~~Capital~~The following table presents changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2008.

Consolidated capital of the Company increased $182,000 during the first three months of 2005. The net income of $2,033,000 for the first three months and its corresponding increase to retained earnings was the primary component of this increase along with the exercising of stock options, which added $269,000. These increases were offset by decreases in the market value of securities available for sale of $641,000 on an after-tax basis, quarterly cash dividends paid to shareholders totaling $426,000 and stock repurchases of $1,053,000.

(dollars in thousands)	Securities	Impaired	Total
	Available for Sale	Loans


Balance at January 1, 2008	$ -	$ -		$ -
Total gains or losses (realized or unrealized) for the nine months
ended included in:
Net income	-	-		-
Other comprehensive income	-	-		-
Purchases, sales, issuances and settlements, net	-	-		-
Transfers in and/or out of Level 3	$32,063	$57,292		$89,355
Balance at September 30, 2008	$32,063	$57,292		$89,355

There are regulatory constraints placed upon capital adequacy, and it is necessary to maintain an appropriate ratio between capital and assets. Regulations require banks and holding companies to maintain a minimum "leverage" ratio (primary capital ratio) of total assets. For the most highly rated holding companies this ratio must be at least 3%, and for others it must be 4 to 5%. At March 31, 2005, the Company's leverage ratio was 11.95%, compared to 12.94% at year-end 2004. In addition, banks and holding companies are required to meet minimum risk-based capital guidelines under which risk percentages are assigned to various categories of assets and off-balance-sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common stockholders' equity, less goodwill, while total capital includes the allowance for possible credit losses, subject to 1.25% limitation of risk-adjusted assets. The rules require Tier I capital of 4% of risk-adjusted assets and total capital of 8%. At March 31, 2005, the Company's Tier I capital ratio was 11.34%, and total capital was 12.47% . At December 31, 2004 the Company's Tier I capital ratio was 12.24% and the total capital ratio was 13.49% .

Results of Operations

General

Net income for the three months ended March 31, 2005 increased 6.55% to $2,033,000, compared to $1,908,000 for the same period in 2004. The increase in net income is primarily attributed to an increase in net interest income and a $300,000 gain on the sale of foreclosed property, which was partially offset by an increase in non-interest expense.

Interest income for the three months ended March 31, 2005 increased $1,225,000 or 16.20%, from the same period in the prior year. Increased volume in loans provided an additional $1,344,000 of interest income for the first three months, which was partially offset by a $119,000 reduction in interest income due to the reduced earnings on investments due to reduced volumes. Average earning assets for the first three months of 2005 were $54,475,000

~~or 11~~8.~~95%~~ ~~higher~~Derivative ~~than in the same period of 2004. The average rate earned on assets increased to 7.00% in the first three months of 2005 from 6.72% for the same period in 2004, an increase of 28 basis points.~~Instruments

As ~~Total~~part ~~interest~~of ~~expense~~the ~~for~~Company’s ~~the~~overall ~~three~~interest ~~months~~rate ~~ended~~risk ~~March~~management 31strategy, ~~2005~~the ~~increased~~Company ~~$826,000,~~has oradopted ~~55.18%,~~a ~~from~~policy whereby the ~~comparable~~Company ~~period~~may inperiodically ~~the~~use ~~prior~~derivative ~~year.~~instruments ~~Although~~to minimize ~~the~~significant ~~average~~fluctuations ~~balance~~in ofearnings ~~total~~caused by interest ~~bearing~~rate ~~deposits decreased~~volatility. toThis ~~$267,568,000~~interest ~~for~~rate ~~the~~risk ~~three~~management ~~months~~strategy ~~ended~~involves ~~March~~the ~~31,~~use ~~2005~~of ~~from~~interest ~~the~~rate ~~average~~floors, ~~balance~~caps ofand ~~$296,716,000~~swaps. ~~for~~During the ~~same~~first ~~period~~quarter inof ~~2004~~2008, the ~~average~~Company entered into a two-year interest ~~paid~~rate swap on ~~the~~$100 ~~deposits~~million ~~increased~~notional 41value ~~basis~~of ~~points,~~its toprime-based ~~1.76%~~loan inportfolio ~~the~~with ~~first~~a ~~three~~maturity ~~months~~ date of ~~2005~~March ~~from~~27, 12010.~~35%~~ inThe ~~the~~Company ~~first~~receives ~~three~~5.25% ~~months~~and ofwe ~~2004~~pay Prime. ~~The~~When ~~decrease~~executed in ~~deposit~~the ~~balances~~first ~~are~~quarter ~~attributed~~of to2008, the ~~carry~~Company ~~over~~recorded an asset of ~~the~~$312 ~~October~~thousand ~~2004~~representing ~~branch~~the ~~divestiture~~fair ~~which~~value ~~included~~of ~~$96,000,000~~the inswap ~~deposits.~~at ~~The~~the ~~balance~~time of purchase. In the ~~increase~~third inquarter ~~interest expense~~of ~~was~~2008 athe ~~result~~Company ofrecorded aan asset of $~~92,701,000~~495 ~~increase~~thousand inrepresenting the ~~average~~fair ~~balance~~value of ~~borrowings~~the ~~over~~swap ~~the~~as ~~same~~of ~~period~~September 30, ~~increasing~~2008. ~~from~~The anCompany has ~~average~~designated ~~balance~~this ofagreement ~~$62,886,000~~as ina ~~2004~~cash toflow ~~$155,587,000~~swap inpursuant ~~2005.~~to ~~The~~SFAS ~~increase~~No. is133. ~~attributed~~Accordingly, to the ~~increased borrowings~~change in the ~~fourth~~fair ~~quarter~~value ~~2004~~of ~~carried~~the ~~over~~instrument related to the ~~first~~swap’s ~~quarter~~intrinsic ~~2005~~value, ~~which~~or ~~were~~approximately ~~utilized~~$322 tothousand, ~~partially~~net ~~fund~~of ~~the~~tax, ~~bank's~~is ~~continuing~~recorded ~~operations~~as ~~following~~a ~~the~~gain component ~~October~~of ~~2004~~other ~~branch~~comprehensive ~~divesture,~~income as(OCI) ~~well~~in asthe toconsolidated ~~fund~~statement ~~the~~of ~~Company's~~changes ~~loan growth~~in shareholders’ equity.

~~Net interest income increased $399,000, an increase of 6~~9.~~58%~~ ~~for~~Investment the three months ended March 31, 2005 over the same period for 2004. This increase was the direct result of growth of the loan portfolio, offset somewhat by overall higher costs of funding the portfolio.Portfolio

~~Net~~The ~~interest~~carrying ~~margin,~~value ~~defined~~of asour ~~net~~investment ~~interest~~securities ~~income~~at asSeptember a30, ~~percentage~~2008 oftotaled ~~average~~$239.5 ~~earning~~million ~~assets,~~compared ~~decreased~~to by$297.0 14million ~~basis~~at ~~points~~December to31, 52007.~~00%~~ ~~from~~We 5purchased $89.~~14%~~3 million in securities in the first ~~three~~nine months of ~~2005~~2008, ~~compared~~which towas ~~the~~offset ~~same~~by ~~period~~maturities, principal pay downs, impairment charge and sales totaling $144.7 million. The risk weighting of securities are considered in purchase decisions to maximize the ~~2004~~utilization of capital.

The recorded amounts of investment securities that are in a loss position held by us and their fair value at the dates indicated are set forth in the following table:

		Gross	Gross
		Unrealized	Unrealized
(dollars in thousands)		Losses	Losses
	Amortized	Less Than	Greater Than	Fair
	Cost	12 Months	12 Months	Value


September 30, 2008
Securities Available-for-sale
Mortgage-backed securities	$ 75,520	$ ( 2,479)	$ -	$ 73,041
Municipal securities	5,731	(437)	(398)	4,896
Asset-backed securities	103,156	(5,293)	(11,613)	86,250
Corporate securities	940	(610)	-	330
Equity securities	1,135	( 194)	-	941


Total at September 30, 2008	$ 186,482	$ (9,013)	$ (12,011)	$ 165,458


December 31, 2007
Securities Available-for-sale
Mortgage-backed securities	$ 111,373	$ (772)	$ (291)	$ 110,310
Municipal securities	9,420	(333)	-	9,087
Asset-backed securities	42,736	(3,978)	-	38,758
Corporate securities	2,934	(77)	-	2,857
Equity securities	48,778	(5,793)	-	42,985

	$ 215,241	$ (10,953)	$ (291)	$ 203,997

Securities Held-to-maturity
December 31, 2007
Corporate Securities	$ 10,000	$ (400)	$ -	$ 9,600

Total at December 31, 2007	$ 225,241	$ (11,353)	$ (291)	$ 213,597

The following tables show the stated maturities and weighted average yields of investment securities held by us at September 30, 2008:

(dollars in thousands)		Available-For-Sale Securities
				Weighted
	Amortized		Fair	Average
	Cost		Value	Yield (1)


Due in one year or less	$ 380		$ 381	7.95%
Due after one year through five
years		39	39	8.40%
Due after five years through ten
years		940	610	5.13%
Due after ten years		70,642	57,753	5.21%
No maturity investment		3,357	3,162	6.72%
Mortgage backed securities		173,357	166,915	2.37%

Total		$ 248,715	$228,860

⁽¹⁾Weighted average yield is reported on tax-equivalent basis.

~~The~~Management ~~yield~~has the ability and ~~cost~~intent to hold securities classified as available-for-sale for a period of ~~funds~~time sufficient for ~~earning~~a ~~assets~~recovery ~~and~~of ~~interest~~cost. ~~bearing~~Some ~~liabilities~~of the unrealized losses are due to yields at issuance of new securities in the recent turbulent markets being higher than the yield available at the time the underlying securities were aspurchased ~~follows~~even asthough rates had declined in the general market. The unrealized losses over twelve months are primarily investments in middle tranche trust preferred debt securities. These securities are made up of pools of financial institutions and are floating rate. Much of the unrealized losses are due to credit spread deterioration in bank related debt securities as a result of market disturbances affecting the U.S. financial system. We expect confidence to return to the U.S. banking system although we believe that the workout of the recessionary cycle could take several years. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for newly issued securities for such investments decline. Management does not believe any of the ~~three~~securities ~~months~~are ~~ended~~impaired ~~March~~due to 31reasons ~~(dollars~~of credit quality. Accordingly, as of September 30, 2008, management believes the unrealized losses detailed in ~~thousands):~~the table above are temporary and no impairment loss has been realized in the Company’s consolidated income statement.

2005 2004 Average Interest Average Interest Average Balance Income Average Balance Income Rates (Expense) Rates (Expense) EarningAs ~~Assets: Loans~~of ~~(Interest~~September ~~and~~30, ~~fees)~~2008 the Company incurred a pretax loss of $~~436,927 $7,995 7~~40.~~44% $370,501 $6,651 7.22% Federal~~1 ~~funds~~million ~~sold 1,450 8 2~~or $26.~~24%~~ 1~~,207 3 1.00% Investment~~ ~~securities 72~~million after tax loss,~~118 783 4.42% 84,312 907 4.33% Total~~ ~~earning~~due ~~assets~~ to an ‘other-than temporary’ impairment charge related to the Company’s investments in Fannie Mae and ~~interest~~Freddie ~~income $510,495 $8,786 7~~Mac perpetual preferred stock.~~00% $456,020 $7,561 6.67% Interest~~ ~~bearing~~The ~~liabilities:~~ impairment in the Company’s holdings of these government-sponsored entities resulted from the decline in market value of these shares in ~~Deposits: Savings,~~connection ~~NOW,~~with the federal government’s takeover of Fannie Mae and ~~Money~~ ~~Market~~Freddie ~~Deposits $155,054 $(430) 1.12% $180,252 $(364) 0.81% Time~~Mac ~~deposits 112~~in September 2008,~~514 (734) 2.65% 116,464 (638) 2.20% Total~~ ~~interest~~along ~~bearing~~with ~~deposits 267,568 (1,164) 1~~the elimination of dividends and preferential tax treatment on these shares.~~76% 296,716 (1,002) 1.35% Other~~ ~~borrowings~~ The dividends on these shares received preferential ~~155,587 (1,159) 3~~dividend received deductions for tax purposes.~~02% 62,886 (495) 3.16% Total~~ ~~interest~~The ~~bearing~~fair ~~liabilities~~ market value of the Company’s preferred shares of Fannie Mae and ~~interest~~Freddie ~~expense $423~~Mac at September 30,~~155~~ 2008 after the other-than-temporary impairment charge was $(2~~,323)~~ .2 million.~~23% $359,602 $(1,497) 1.67% Net~~ ~~interest~~The ~~income~~ Company ~~$6,463 $6,064 Net~~anticipates ~~interest~~selling ~~margin~~these asshares aby ~~percent of~~December ~~average~~31, ~~earning assets: 5~~2008.~~13% 5.33%~~

An10. ~~analysis~~Nonperforming ofAssets ~~the~~and ~~change~~Analysis inof ~~net~~Allowance ~~interest income is as follows~~ for ~~the~~Credit ~~three months ended March 31 (dollars in thousands):~~Losses

	2005 compared to 2004
	Increase (decrease) due to
	Volume	Rate	Net
Interest earned on:
Loansb	$ 1,148	$ 196	$ 1,344
Federal funds sold and deposits in banks	1	4	5
Investment securities	(239)	115	(124)
Total interest income	910	315	1,225
Interest paid on:
Savings, NOW and MMA	(283)	349	66
Time deposits	(135)	231	96
Other borrowings	811	(147)	664
Total Interest expense	(393)	433	(826)
Net interest income	$ 517	$ (118)	$ 399

The following table summarizes our non-performing assets, which consist of loans on which interest is no longer accrued, accruing loans past due 90 days or more, foreclosed real estate and other assets.

The change in interest, due to both rate and volume, has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

	September 30.	December 31,
(dollars in thousands)	2008	2007

Non-accrual loans	$ 53,792	$ 3,007
Accruing loans past due 90 days or more	-	110

Total non-performing loans (NPLs)	53,792	3,117
Foreclosed real estate	3,858	68

Total non-performing assets (NPAs)	$ 57,650	$ 3,185

Selected ratios
NPLs to total loans	6.79%	0.40%
NPAs to total loans and foreclosed real estate	7.24%	0.41%
NPAs to total assets	4.94%	0.27%

Impaired and Nonaccrual Loans. These loans are generally loans for which it is probable that we will not collect all amounts due according to the original contractual terms of the loan agreement. We typically classify these loans as Substandard, Doubtful, or Loss. Impaired loans, specifically Substandard or Doubtful loans may not be on nonaccrual status as we continue to accrue interest if borrowers continue to make payments and if we expect them to continue to make payments. The category "impaired loans" is broader than the category "nonaccrual loan, " although the two categories overlap. Nonaccrual loans are those loans on which the accrual of interest is discontinued when the ability to collect principal and interest is uncertain or payments of principal or interest have become contractually past due 90 days. Management may choose to categorize a loan as impaired due to payment delinquency or if collection is uncertain, and will closely monitor the loan to ensure performance and collection of amounts due in accordance with the original contractual terms of the loan.

During the nine months ending September 30, 2008 nonaccrual loans increased $50.8 million, bringing total nonaccrual loans to $53.8 million, comprised of 76 loans, inclusive of the following: 48 single family speculative / 1-4 family building lots loans totaling $17.1 million (the largest with a ~~Average~~balance of $2.2 million and located in Kirkland, WA); one land development loan ~~balance~~totaling ~~includes~~$4.8 ~~nonaccrual~~million located in Monroe, WA; five lot inventory loans for $12.3 ~~Interest~~million ~~income~~(the onlargest with ~~nonaccrual~~a balance of $3.3 million located in Lacey, WA); eight custom construction loans ~~has~~for ~~been~~a ~~included~~total of $3.5 bmillion ~~Balances~~(the largest with a balance of $1.2 million located in Lake Tapps, WA); seven commercial real estate loans for $13.6 million (the largest with a balance of $5.7 million located in Ellensburg, WA); and seven other miscellaneous loans including consumer, residential real estate and commercial. The increase in nonaccrual loans in the third quarter 2008 was primarily attributed to five credit relationships totaling $29.0 million comprised of 23 single family speculative/1-4 family building lots loans totaling $6.6 million to three borrowers with properties located in Kelso, Lacey, ifPuyallup ~~any~~and Montesano, WA; three lot inventory loans totaling $7.1 million located in Kelso, Lacey and ~~related~~Tacoma, ~~income~~WA; ~~recognized~~and ~~have~~on ~~been~~relationship ~~included~~comprised ~~for~~of four ~~computational~~CRE ~~purposes~~loans and three commercial loans totaling $9.5 million located in Milton, WA.

A decrease in real estate values has occurred in the Bank's market area, up to 25% in certain areas. The affected borrowers have seen a decrease in the underlying values of their properties, combined with a general slowdown in home sales throughout the market area. It is this slowdown in home sales, and the resultant impact on cash-flows that have caused these borrowers to either fall behind on, or curtail payments one their loans, causing the Bank to place them on nonaccrual.

~~Non-interest~~The ~~income~~following ~~for~~table ~~the~~sets ~~three~~forth ~~months~~activity ~~ended~~in ~~March 31, 2005 was $2,050,000, or a 14.14% increase over~~ the ~~same~~allowance ~~period~~ for ~~2004.~~credit ~~This~~losses ~~increase~~for ~~can~~the beperiods ~~primarily attributed to a $300,000 recovery on a loan previously charged off.~~indicated:

Non-interest expense for the three months ended March 31, 2005 increased by $405,000 or 8.22% over the same period in 2004. Part of the increase was due to an increase in salaries and employee benefits for the quarter ended March 31, 2005 which increased $101,000 or 3.50% compared to the same quarter in 2004. This increase in expense is primarily attributed to $158,000 in additional payroll expenses associated with the recent exit of the bank's President and the Company's Chief Financial Officer offset by a reduction in other employee compensation. Other expenses for the quarter ended March 31, 2005 increased $272,000 or 22.91% compared to the same period in 2004. The other expense increase can be primarily attributed to $176,000 in expense on a new marketing campaign and mailings intended to attract new customers and deposits. The increase in deposits mentioned previously can be attributed to the success of these efforts. Additionally, the Company spent approximately $30,000 for the quarter to continue the process to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The Company will continue to have additional ongoing expense associated with Sarbanes-Oxley compliance efforts.

(dollars in thousands)	Nine Months	Year Ended
	Ended	December 31,
	September 30,
	2008	2007
Balance at beginning of period	$10,975	$8,917
Provision for credit losses	15,278	3,600

Charge-offs:
Commercial	(853)	(568)
Real Estate Mortgage and Construction	(6,255)	(999)
Consumer	(46)	(54)

Total charge-offs	(7,154)	(1,621)

Recoveries:
Commercial	77	30
Real Estate Mortgage and Construction	85	37
Consumer	28	12

Total recoveries	190	79


Net charge-offs	(6,964)	(1,542)
Transfer to reserve for unfunded commitments	(119)	-

Balance at end of period	$19,170	$10,975

Gross loans	$792,290	$783,117
Average loans	$794,988	$746,498
Non-performing loans	$53,792	$3,117

Selected ratios:

Net charge-offs to average loans	0.88%	0.21%

Allowance for credit losses to average loans	2.41%	1.48%

Allowance for credit losses to loans outstanding at end of period	2.42%	1.43%

Allowance for credit losses to non-performing loans	35.64%	352.1%

~~Business~~11. Income ~~Segment Reporting~~Taxes

~~The~~During ~~Company~~the quarter isended ~~managed~~September ~~along~~30, ~~two~~2008 ~~major~~the ~~lines~~Company ofincurred ~~business;~~a ~~community~~$40.1 ~~banking,~~million ~~its~~pre-tax other-than-temporary ~~core~~impairment ~~business,~~("OTTI") ~~and~~charge ~~the~~on ~~small~~Fannie ~~loan~~Mae ~~division,~~and ~~which~~Freddie ~~began~~Mac preferred ~~operations~~shares inwhich resulted from the ~~fourth~~U.S. ~~quarter~~Government ofplacing ~~2000~~Fannie Mae and Freddie Mac into conservatorship. ~~Community~~ The ~~banking~~market ~~consists~~value of ~~all~~the Company's ~~lending~~holdings declined following the federal government takeover, ~~deposit~~which ~~and~~included ~~administrative~~the elimination ~~operations~~of ~~conducted~~dividends ~~through~~on 14the ~~offices~~preferred shares held, in ~~Washington.~~September 2008. The ~~small~~impairment ~~loan~~charge ~~division~~caused ~~provides~~net ~~small~~income to decrease by $26.1 million, ~~short~~net-~~term~~of-tax and ~~consumer~~thus ~~loans~~resulted in an increase to ~~customers~~its indeferred ~~Arkansas~~tax asset. No valuation allowance for deferred tax assets was recorded at September 30, 2008 as management believes it is more likely than not that all of the deferred tax assets will be realized.

Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

~~Prior~~You toshould ~~2001,~~read the ~~Company~~following ~~was~~discussion ~~managed~~and asanalysis aof ~~whole,~~our ~~not~~Results byof ~~discrete~~Operations ~~operating~~and ~~segments. When~~Financial ~~the~~Condition ~~Company~~together ~~began~~with ~~offering~~our ~~small~~financial ~~loans,~~statements ~~its~~and ~~operating~~related ~~results~~notes ~~were~~appearing ~~segregated~~ elsewhere in ~~the~~this ~~general~~report ~~ledger~~and ~~system~~our toForm ~~better~~10-K ~~manage financial~~for ~~performance~~the year ended December 31, 2007. ~~The~~After ~~financial~~Forward-Looking ~~performance~~Information ofand the ~~business~~Summary ~~lines~~of isCritical ~~measured~~Accounting byEstimates and Accounting Policies, the ~~Company's~~analysis ~~profitability~~of ~~reporting~~the ~~process,~~Results ~~which~~of ~~utilizes~~Operations ~~various~~and ~~management~~Financial ~~accounting~~Condition ~~techniques~~will be todiscussed. ~~more~~The ~~accurately~~analysis ~~reflect~~includes ~~each~~a ~~business~~comparison ~~line's~~of ~~financial results.~~the ~~Revenues~~three and ~~expenses~~nine ~~are~~months ~~primarily~~ended ~~assigned~~September ~~directly~~30, to2008 ~~business~~and ~~lines~~2007.

Selected comparative financial information for community banking and the small loan division, which are included in the overall financial results, as of and for the three months ended March 31, are as follows (dollars in thousands):

Three months ended March 31, 2005		Community		Small
		Banking		Loans		Total
Net Interest income after provision for credit losses	$	5,875	$	373	$	6,248
Non-interest income		2,038		12		2,050
Non-interest expense		5,298		33		5,331
Income taxes		787		147		934
Net Income	$	1,828	$	205	$	2,033
Total assets	$	574,517	$	3,664	$	578,181
Total Loans	$	444,986	$	2,747	$	447,733
Three months ended March 31, 2004		Community		Small
		Banking		Loans		Total
Net Interest income after provision for credit losses	$	5,571	$	361	$	5,932
Non-Interest income		1,782		14		1,796
Non-Interest expense		4,903		23		4,926
Income taxes		774		120		894
Net Income	$	1,676	$	232	$	1,908
Total assets	$	502,300	$	9,444	$	511,744
Total Loans	$	368,788	$	2,322	$	371,110

~~Regulatory~~Forward-Looking ~~Developments~~Information

~~Two~~In ~~legislative~~addition to historical information, statements appearing in this report which are not historical in nature, including the discussions of the adequacy of the Company's capital resources and ~~regulatory~~allowance ~~developments~~for ~~impacted~~credit losses, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that expressly or implicitly predict future results, performance, or events should be considered forward-looking. Forward-looking statements are subject to risks and uncertainties that may ~~impact~~cause actual future results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the ~~operations~~date ~~and~~of ~~earnings~~this ~~generated~~Quarterly byReport. The Company does not undertake any obligation to publicly release any revisions to forward-looking statements contained in this Quarterly Report, with respect to events or circumstances after the date ~~small~~of ~~loan~~this ~~division~~Report, or to reflect the occurrence of unanticipated events.

~~The~~Risks ~~Federal~~and ~~Deposit~~uncertainties ~~Insurance~~with ~~Corporation~~respect ~~(FDIC)~~to inthe ~~2003~~Company ~~issued~~include, ~~Guidelines~~among ~~for state chartered~~others, ~~nonmember~~those ~~banks~~set ~~that~~forth ~~participate~~ in ~~small~~Item ~~loan~~1A ~~programs~~of ~~with~~our ~~third~~Annual ~~party~~Report ~~contractors. The~~on ~~Guidelines~~Form ~~cover~~10-K ~~safety~~filed ~~and soundness~~with ~~considerations,~~the ~~including loan concentrations~~SEC, ~~capital~~this ~~adequacy,~~Form ~~allowance~~10-Q ~~for loan~~ and ~~lease~~other SEC ~~losses~~filings, and ~~loan~~those ~~classification~~related ~~guidelines.~~to ~~Compliance~~the ~~considerations,~~general ~~such~~economic asenvironment, ~~Community~~particularly ~~Reinvestment~~in ~~Act~~the ~~performance,~~region ~~Truth~~ in ~~Lending,~~which ~~and consumer~~the ~~privacy~~Company ~~are~~operates; ~~also~~competitive ~~covered.~~products ~~The~~and ~~Guidelines~~pricing ~~allow~~that ~~examiners~~may ~~wide~~lead ~~discretion~~ to ~~review~~pricing ~~and,~~pressures ~~where~~on ~~necessary,~~rates ~~criticize~~the aBank ~~bank's~~charges ~~loan~~on ~~program~~loans ~~based~~and ~~upon~~pays ~~these~~on deposits; ~~considerations.~~loss ~~Where~~of ~~serious~~customers ~~deficiencies~~of ~~exist,~~greatest ~~the~~value ~~FDIC~~to ~~may~~the ~~order~~Bank; alitigation ~~bank~~or ~~to discontinue~~other ~~its~~losses; ~~small~~fiscal ~~loan~~and ~~program. The~~monetary ~~Guidelines~~policies ~~will~~of ~~certainly increase~~ the ~~regulatory~~federal ~~scrutiny~~government; ofchanges ~~the~~in ~~Bank's~~government ~~small~~regulations ~~loan~~affecting ~~program.~~financial ~~While~~institutions; acquisitions weand dothe ~~not~~integration ~~believe~~of ~~that~~acquired ~~grounds~~businesses; ~~exist~~credit ~~for~~risk ~~the~~management ~~FDIC~~and toasset/liability ~~order~~management; the ~~Bank~~financial toand ~~curtail~~securities ormarkets; ~~discontinue~~changes ~~its~~in ~~small~~technology ~~loan program,~~or itrequired isinvestments ~~likely~~in ~~that~~technology; and the ~~increased~~availability ~~regulatory~~of ~~scrutiny~~and ~~will~~costs associated ~~add~~with tosources ~~the~~of ~~Bank's~~liquidity. ~~compliance~~Our ~~burdens~~actual ~~and~~results ~~costs. It~~ may ~~also~~differ ~~cause~~materially ~~the~~from ~~Bank~~those toanticipated ~~evaluate~~in ~~the~~forward-looking ~~extent~~statements ofas ~~its~~a ~~continued~~result ~~participation~~of insuch ~~the~~risk ~~small loan business~~factors.

OnSummary ~~March 2, 2005, the FDIC issued revised payday lending guidelines. The full text~~ of ~~such~~Critical ~~guidelines~~Accounting isEstimates ~~available on the FDIC website at http://www.fdic.gov/ . The effective date for compliance with this regulation is March 1, 2005~~ and ~~includes~~Accounting limiting customers to 90 days of payday loans in a rolling 12 month calendar and offering or referring the customer to an alternative longer term credit product. At this time, the impact on earnings of compliance with this regulation cannot be determined. Management will continue to monitor the situation.Policies

~~The~~Our ~~Company~~accounting ~~continues~~policies are integral to ~~take~~understanding ~~steps~~our financial results. Our most critical accounting estimates and policies require management to ~~forestall~~make ~~any~~subjective, ~~negative~~complex judgments, often as a result of the need to estimate the effect of matters that ~~may~~are ~~occur~~inherently ~~from~~uncertain. ~~these~~Management ~~developments,~~has ~~including~~identified ~~discussions~~several ~~regarding~~accounting ~~providing~~estimates ~~small~~and ~~loan~~policies ~~programs~~that, ~~with~~due ~~Advance~~to ~~America~~the judgments, estimates and ~~other~~assumptions ~~small~~inherent ~~loan~~in those ~~providers~~policies, inare ~~other~~critical ~~states~~to an understanding of our financial statements. These estimates and policies relate to items such as the ~~introduction~~methodology for the determination of ~~replacement~~the ~~programs.~~allowance ~~While~~for credit losses, the ~~Company~~valuation ~~believes~~of itreal ~~will~~estate beacquired ~~able~~in connection towith ~~minimize~~foreclosures ~~any~~or ~~long-term~~in ~~negative~~satisfaction ~~impact~~of onloans, ~~its~~income ~~earnings~~taxes, ~~from~~the ~~these~~impairment ~~developments~~of AFS securities and goodwill, ~~there~~share-based ~~can~~compensation, beemployer’s noaccounting ~~assurance~~for ~~that~~defined ~~its~~benefit ~~efforts~~pension ~~will~~and beother post-retirement plans, and fair value ~~wholly~~measurements. ~~successful~~Our significant accounting policies are set forth in Note 1 to our Audited Consolidated Financial Statements for the year ended December 31, 2007.

~~Item~~Defined ~~3 Quantitative~~Benefit Plans.. Effective January 1, 2008, the Company applied the consensus reached by the Emerging Issues Task Force in Issue No. 06-4, Accounting for Deferred Compensation and ~~Qualitative~~Postretirement ~~Disclosure~~Benefit ~~about~~Aspects ~~Market~~of ~~Risk~~Endorsement Split-Dollar Life Insurance Agreements (“EITF 06-4”). EITF 06-4 provides for recognition guidance regarding liabilities and related compensation costs for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods. The Company will recognize the effect of applying the consensus through a change in accounting principle with a cumulative-effect adjustment to retained earnings of $411 thousand. Subsequent to the cumulative-effect in the change in accounting principal, more current information was obtained which led to a $222 thousand adjustment to shareholder’s equity. Additional compensation expense is projected to be $65 thousand in 2008.

~~The~~Derivative ~~Company's~~Financial ~~results~~Instruments. ofIn ~~operation~~the ~~are~~ordinary ~~dependent~~course ~~upon~~of ~~its~~business, ~~ability~~the toCompany ~~manage~~enters ~~interest~~into derivative ~~rate~~transactions ~~risk.~~to ~~Management~~manage ~~considers~~its interest rate risk. toAll bederivative ainstruments ~~risk~~ that ~~could~~qualify ~~have~~as a ~~material~~hedge ~~effect~~of on the ~~Company's~~variability ~~financial condition and results~~ of ~~operations.~~cash ~~The~~flows ~~Company~~to ~~does~~be ~~not~~received ~~currently~~or ~~use~~paid ~~derivatives~~related to ~~manage~~a ~~market~~recognized ~~and~~asset ~~interest~~or ~~rate~~liability ~~risk.~~or Aa ~~number~~forecasted oftransaction ~~measures~~(“cash flow” ~~are~~hedge). ~~used~~Changes toin ~~monitor~~the ~~and~~fair ~~manage~~value ~~interest~~of ~~rate~~a ~~risk,~~derivative ~~including~~that ~~income~~is ~~simulations~~highly effective and ~~interest sensitivity~~designated ~~(gap)~~as ~~analyses. An~~a ~~income~~cash ~~simulation~~flow ~~model~~hedge isare ~~the~~recognized ~~primary~~in ~~tool~~other ~~used~~comprehensive toincome ~~assess~~until the ~~direction~~income ~~and~~from ~~magnitude~~the ofcash ~~changes~~flows inof ~~net~~the ~~interest~~hedged ~~income~~item ~~resulting~~is ~~from~~recognized. ~~changes~~The inCompany performs ~~interest~~an ~~rates.~~assessment, ~~Key~~both ~~assumptions~~at in the ~~model~~inception ~~include~~of ~~repayment~~the ~~speeds on~~hedge ~~certain assets, cash flows~~ and ~~maturities~~on ofa ~~other~~monthly ~~investment~~basis ~~securities~~thereafter, ~~loan~~when ~~and~~required, ~~deposit~~to ~~volumes~~determine ~~and~~whether ~~pricing. These~~these ~~assumptions~~derivatives are ~~inherently~~expected ~~uncertain~~to ~~and,~~continue asto abe ~~result,~~highly ~~the~~effective ~~model~~in ~~cannot~~offsetting ~~precisely~~changes ~~estimate~~in ~~net~~the ~~interest~~value ~~income~~of orthe ~~precisely~~hedge ~~predict~~items. ~~the~~Any ~~impact~~change ofin ~~higher~~fair orvalue ~~lower~~resulting ~~interest~~from ~~rates~~hedge onineffectiveness ~~net~~is immediately recorded in non-interest ~~income~~expense.

~~Actual~~If ~~results~~a ~~will~~derivative ~~differ~~designated ~~from~~as ~~simulated~~a ~~results~~cash ~~due~~flow hedge is terminated or ceases to ~~timing~~be highly effective, ~~magnitude~~the ~~and~~gain ~~frequency~~or ofloss ~~interest~~is ~~rate~~amortized ~~changes~~to ~~and~~earnings ~~changes~~over inthe ~~market~~same ~~conditions~~period(s) ~~and~~that ~~management~~the ~~strategies,~~forecasted hedged ~~among~~transactions ~~other~~impact ~~factors~~earnings (cash flow hedge). AtIf ~~March~~the ~~31,~~hedge ~~2005~~item is disposed of, ~~based~~ onor the ~~measures~~forecasted ~~used~~transaction tois ~~monitor~~no ~~and~~longer ~~manage~~probable, ~~interest~~the ~~rate~~derivative ~~risk,~~is ~~there~~recorded ~~has~~at ~~not~~fair ~~been~~value awith ~~material~~any ~~change~~resulting gain or loss included in the ~~Company's~~gain ~~interest~~or ~~rate~~loss ~~risk~~from the ~~since~~disposition ~~December~~of ~~31,~~the ~~2004.~~hedged ~~For~~item ~~additional information~~or, ~~refer~~in to the ~~Company's~~case ~~annual~~of ~~report~~a onforecasted ~~Form~~transaction ~~10-K~~that ~~for the~~is ~~year~~no ~~ended~~longer ~~December 31~~probable, ~~2004~~included in earnings immediately.

Valuation of Goodwill and Intangible Assets. Goodwill and other intangibles with indefinite lives are not amortized but instead are periodically tested for impairment. The Company utilizes an independent third party valuation service for an impairment analysis of the intangible assets with indefinite lives on a periodic basis and determined that there was no impairment as of September 30, 2008. The valuation is determined using discounted cash flows of forecasted earnings, estimated sales price based on recent historical market transactions and market capitalization based on current stock price. If impairment was deemed to exist, a write down of the asset would occur with a charge to earnings. The impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions.

Regulatory Matters

Following our recent annual regulatory examination, we became subject to requirements to provide additional liquidity and credit reports; continue our capital and liquidity planning; and seek approval for dividend payments.

Interest Rate Gap Analysis
March 31, 2005
		After One
	Within	But Within		After
(dollars in thousands)	One Year	Five Years		Five Years		Total
Loans	$ 230,503	$ 165,617			$ 51,613	$ 447,733
Securities:
Available for sale	4,742		11,899		49,990	66,631
Held to maturity	- -		- -		- -	- -
Federal funds sold	- -		- -		- -	- -
Interest bearing deposits in banks	63		- -		- -	63
Total Earning Assets	$ 235,308	$ 177,516		$ 101,603		$ 514,427
Deposits:
Savings, NOW and money market	$ 161,908		$ - -		$ - -	$ 161,908
Time deposits	91,544		29,986		- -	121,530
Short-term borrowings	119,069		- -		- -	119,069
Long-term debt	- -		15,000		19,589	34,589
Total Interest Bearing Liabilities	$ 372,521		$ 44,986		19,589	$ 437,096
Net Interest Rate Sensitivity Gap	($ 137,213)	$ 132,530		$ 82,014		$ 77,331

Results of Operations

~~Management~~Our results of ~~the~~operations ~~Company,~~depend ~~including~~primarily ~~the~~on ~~Chief~~net ~~Executive~~interest ~~Officer~~income, ~~who~~which is ~~also performing~~ the ~~functions~~difference ofbetween ~~the~~interest ~~principal~~income, ~~financial~~primarily ~~officer~~from loans and ~~principal accounting officer~~investments, ~~have~~and ~~conducted~~interest anexpense ~~evaluation~~from interest ofbearing ~~the~~liabilities, ~~Company's disclosure~~primarily ~~controls~~deposits and ~~procedures~~borrowed funds. Changes in ~~accordance~~net ~~with~~interest ~~Rule~~income ~~13a-15~~are ~~under~~influenced by the ~~Securities~~volume ~~Exchange~~of ~~Act~~assets ofand ~~1934~~liabilities asand ofthe ~~March~~rates ~~31,~~earned ~~2005~~and paid respectively. ~~Based~~Other onfactors that ~~evaluation,~~determine the ~~Chief~~level ~~Executive~~of ~~Officer~~net income ~~has~~include ~~concluded~~fee ~~that~~income, asnon-interest ofexpense, the ~~evaluation~~level ~~date~~of non-performing loans and other non-earning assets, and the ~~Company's disclosure~~amount ~~controls~~of non-interest bearing liabilities supporting earning assets. Non-interest income includes service charges and ~~procedures~~other deposit ~~were~~related ~~effective~~fees, inorigination ~~ensuring~~fees ~~that~~and ~~all~~net ~~material~~gains ~~information~~and ~~relating~~losses toon the ~~Company~~sale ~~required~~of toloans beand ~~filed~~securities inand ~~this~~income ~~quarterly~~from ~~report~~bank ~~has~~owned ~~been~~life ~~made~~insurance. ~~known~~Non-interest toexpense ~~him~~consists inprimarily aof ~~timely~~employee ~~manner~~compensation and benefits, occupancy, equipment and depreciation expense, impaired loss on securities and other operating expenses.

There have been no significant changes to the Company's internal controls over financial reporting or in other factors that have or are likely to materially affect those controls.

Comparison of the three months ended September 30, 2008 and September 30, 2007.

	For the three months
	ended September 30,
			Increase/	Percentage
(dollars in thousands except per share data)	2008	2007	(Decrease)	Change

Interest income	$ 17,524	$ 20,829	$ (3,305)	-15.9%
Interest expense	7,412	10,585	(3,173)	-30.0%

Net interest income	10,112	10,244	(132)	-1.3%
Provision for credit losses	10,378	375	10,003	2667.5%

Net interest income (loss) after provision for credit
losses	(266)	9,869	(10,135)	-102.7%
Non-interest income	3,967	3,110	857	27.6%
Non-interest expense	46,711	8,217	38,494	468.5%

Income (loss) before provision for income taxes	(43,010)	4,762	(47,772)	-1003.2%
Provision for income taxes (benefit)	15,270	1,565	(16,835)	-1075.7%

Net income (loss)	$(27,740)	$ 3,197	$ (30,937)	-967.7%


Earnings (loss) per share—basic	$ (3.83)	$ 0.45	$ (4.28)	-951.1%
Earnings (loss) per share—diluted	$ (3.83)	$ 0.44	$ (4.27)	-970.5%
Efficiency ratio	330.93%	61.14%
Return on average equity	-51.62%	14.99%
Return on average assets	-3.09%	1.16%

The decrease in net income for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 is primarily attributable to a $40.1 million pre-tax other-than-temporary impairment (“OTTI”) charge on Fannie Mae and Freddie Mac preferred shares in the third quarter which resulted from the U.S. Government placing Fannie Mae and Freddie Mac into conservatorship. The market value of the Company’s holdings declined following the federal government takeover, which included the elimination of dividends on the preferred shares held, in September 2008. The impairment charge caused non-interest expense to increase by $40.1 million, pre-tax and net income to decrease by $26.1 million, net-of-tax. The other major contributor to the decrease in net income is due to the turbulent economic conditions in the local and regional real estate market in the greater Puget Sound area which caused the Company to increase its provision for credit losses by $10.0 million for the three months ended September 30, 2008 compared to a slight decrease of $25 thousand for the three months ended September 30, 2007.

Aside from these factors, the Company’s net interest income decreased slightly to $10.1 million for the three months ended September 30, 2008 compared to $10.2 million for the three months ended September 30, 2007. Non-interest income increased 27.6% to $4.0 million for the three months ended September 30, 2008 from $3.1 million for the three months ended September 30, 2007. Non-interest expense decreased, exclusive of the OTTI charge, due to the Company cutting costs and decreasing benefits and other non-interest expense.

Net Interest Income and Net Interest Margin. Net interest income remained relatively stable for the period, decreasing by 1.3% or $132 thousand to $10.1 million for the quarter ended September 30, 2008 compared to $10.2 million for the quarter ended September 30, 2007.

The average pre-tax yield on interest-earning assets decreased to 6.64% in the third quarter of 2008 from 8.87% for the same period in 2007, a decrease of 223 basis points. The Prime Rate was 275 basis points, or 35.5% lower at the end of third quarter 2008 compared to the third quarter 2007. The decrease in the average rate earned on our interest-earning assets resulted primarily from a decrease in loan yields including interest and fees, which decreased 223 basis points to 6.43% from 8.11% for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. In the third quarter loan yields would have been 6.95%, a difference of 31 basis points, without the negative impact of non accrual loans. Yields on securities declined 20 basis points to 5.81% for the three months ended September 30, 2008 compared to 6.01% for the three months ended September 30, 2007. The tax equivalent yield on securities for the three months ended September 30, 2008 was 5.86% compared to 6.19% for the three months ended September 30, 2007. The interest rate swap executed at the end of March added 4 basis points to our loan yields.

~~Venture~~The ~~Financial~~cost ~~Group~~of our average interest-bearing deposits decreased to 2.90% for the third quarter of 2008 from 4.52% in the same period in 2007, ~~Inc~~a decrease of 162 basis points or 35.8% . Our average rate on total deposits (including non-interest bearing deposits) decreased to 1.84% for the three months ended September 30, 2008 from 3.94% for the three months ended September 30, 2007, a decrease of 210 basis points or 53.3% . Our borrowing rates declined to 3.13% from 5.14% for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007, a decrease of 201 basis points or 39.1% .

~~PART~~Over IIthe -past ~~OTHER~~year, ~~INFORMATION~~we have funded our incremental earning asset growth with public fund deposits (primarily money market), brokered CDs, retail CDs, and retail money market specials. As of September 30, 2008, public fund deposits were $57.3 million or 5.7% of our total deposits of $999.0 million, compared to $168.8 million, or 19.8% of our total deposits of $854.7 million at September 30, 2007. Wholesale CDs were $353.5 million, or 35.5% of our deposits at September 30, 2008, compared to $140.3 million, or 16.40% of our deposits at September 30, 2007. Our borrowings decreased $55.7 million to $80.8 million at September 30, 2008 from $136.5 million at September 30, 2007, while federal funds purchased decreased from $28.1 million to zero in the same period.

~~Item~~Our ~~1 Legal~~net ~~Proceedings~~interest margin for the three months ended September 30, 2008 was 3.70% down from 3.99% for the three months ended September 30, 2007. After a rapid series of rate cuts by the Federal Reserve through April 30, 2008, the Federal Reserve decided to hold rates steady during the balance of the second and third quarters. The primary factors that decreased net interest margin were higher costs of deposits, reversing accrued dividends on the Fannie Mae and Freddie Mac preferred stock and the increase in our non-accrual loans.

~~Due~~An offsetting factor to the ~~nature~~decrease ofin net interest margin was the ~~banking~~interest ~~business~~rate swap we executed during the first quarter, pursuant to which we ~~are~~exchanged ~~involved~~floating inrate ~~legal~~cash ~~proceedings~~flows for infixed ~~the~~rate ~~ordinary~~cash ~~course~~flows. ofWe ~~business~~pay prime and receive 5.25% Aton ~~this~~a ~~time~~total notional amount of $100 million until March 27, we2010. doThis ~~not~~transaction ~~believe~~benefits ~~that~~net ~~there~~interest isincome ~~pending~~for ~~litigation~~every reduction in the ~~outcome~~prime ofrate ~~which~~below ~~will~~5.25% ~~have~~and aconversely limits net ~~material~~income ~~adverse~~for ~~affect~~every onincrease in the ~~financial~~prime ~~condition,~~rate ~~results~~above 5.25% during the term of ~~operations~~the swap. For additional information on our derivatives, orsee ~~liquidity~~Derivative ofFinancial Instruments under the ~~Company~~Summary of Critical Accounting Estimates and Accounting Policies and Note 9.

~~Item~~The ~~2 Unregistered~~following ~~Sales~~table sets forth a summary of ~~Equity~~average ~~Securities~~balances with corresponding interest income and ~~Use~~interest expense as well as average yield and cost of ~~Proceeds~~ funds for the periods presented. Average balances are derived from daily balances, and non-accrual loans are included as interest earning assets for purposes of this table.

Total number of

shares purchased as

part of publicly

Maximum number of

Total number of

Average price paid

announced plans or

shares that may yet

Period

shares purchased

per share

programs

be purchased

Month #1

January 1, 2005 through

January 31, 2005

149,221

Month #2

February 1, 2005 through

February 29, 2005

48,435

$20.95

48,435

100,786

Month #3

March 1, 2005 through

March 31, 2005

1,808

$21.00

1,808

98,978

Total

50,243

$20.95

50,243

98,978

Date repurchase authorized

Date publicly announced

# of shares authorized

Expiration Date

(1)

February 19, 2003

March 5, 2003

131,370

August 19, 2004

June 18, 2003

June 24, 2003

56,130

December 18, 2004

October 15, 2003

October 17, 2003

225,000

April 15, 2005

June 16, 2004

June 22,2004

200,000

December 31,2005

Total

612,500

Item 6 Exhibits and Reports on Form 8-K

			Three months ended
			September 30,

		2008			2007

		Interest			Interest
	Average	Income	Average	Average	Income	Average
(dollars in thousands)	Balance	(Expense)	Rates (3)	Balance	(Expense)	Rates (3)

Assets
Earning Assets:
Loans (Interest and fees) ⁽¹⁾	$811,629	$13,554	6.64%	$750,479	$16,772	8.87%
Federal funds sold	2,039	10	1.95%	2,928	38	5.15%
Investment securities ⁽²⁾	269,291	3,930	5.81%	265,265	4,019	6.01%

Total earning assets and interest income	1,082,959	17,494	6.43%	1,018,672	20,829	8.11%
Other assets:
Cash and due from banks	12,504			14,785
Bank premises and equipment	34,476			31,579
Other assets	80,247			47,744
Allowance for credit losses	(13,765)			(9,306)

Total assets	$1,196,421			$1,103,474


Liabilities and Shareholders Equity
Interest bearing liabilities:
Deposits:
Savings, NOW, MMDA	$325,673	($1,506)	1.84%	$357,860	($3,555)	3.94%
Time deposits	490,854	(4,436)	3.60%	392,300	(4,997)	5.05%

Total interest bearing deposits	816,527	(5,942)	2.90%	750,160	(8,552)	4.52%
Other borrowings	186,952	(1,469)	3.13%	156,773	(2,033)	5.14%

Total interest bearing liabilities and interest expense	1,003,479	(7,411)	2.94%	906,933	(10,585)	4.63%

Non interest bearing liabilities	111,548			104,831
Other liabilities	9,733			6,381
Shareholders equity	71,661			85,329

Total liabilities and shareholders equity	$1,196,421			$1,103,474


Net interest income		$10,083			$10,244

Net interest margin as a percent of average earning assets			3.70%			3.99%


(1) Average loan balance includes non-accrual loans. Loan fees and late charges of $591 thousand
and $946 thousand are included in interest for the three months ended September 30, 2008 and 2007,
respectively

(2) The yield on investment securities is calculated using historical cost basis. The yield on assets is
calculated on a pre-tax, book value basis which does not consider the effect of tax exempt securities
or the dividend received deduction on preferred stock. The after tax yield on investments for the three
months ended September 30, 2008 and 2007 is 5.86% and 6.19% respectively.

(3) Annualized

		Exhibits
		The following exhibits are filed herewith, and this list constitutes the exhibit index:
		3.1		Amended and Restated Articles of Incorporation
		3.2		(a) Bylaws
		31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
				2002
		31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
				2002
		32		Certification under Section 906 of Sarbanes-Oxley Act of 2002

An analysis of the change in net interest income is set forth on the following table. Changes due to both rate and volume are allocated in proportion to the relationship of the absolute dollar amounts of the change in each. Balances of non-accrual loans, if any, and related income recognized have been included for purposes of this table.

(a) Incorporated by reference to Exhibit 3(b) of the Company Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed on April 1, 2002.

	Three months ended September 30, 2008
(dollars in thousands)	Compared to three months ended September 30, 2007
Interest earned on:	Volume	Rate	Total Change
Loans	$ 7,395	($10,613)	$(3,218)
Federal Funds sold and deposits in banks	(10)	(18)	(28)
Investment Securities	308	(397)	(89)

Total interest income	7,693	(11,028)	(3,335)

Interest paid on:
Savings, NOW, MMDA	(296)	(1,753)	(2,049)
Time Deposits	5,064	(5,625)	(561)
Other Borrowings	1,898	(2,462)	564

Total interest expense	6,666	(9,840)	(3,174)

Net Interest income	$ 1,027	($1,188)	$ (161)

Venture Financial Group, Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		VENTURE FINANCIAL GROUP, INC
		(Registrant)
Date: May 14, 2005		By: /s/ Ken F. Parsons, Sr.
		Ken F. Parsons Sr.
		President, Chief Executive Officer
		(principal executive officer, principal financial officer, principal accounting officer)

~~EXHIBIT~~Provision 3for Credit Losses.1 The provision for credit losses is a charge against earnings in that period. The provision is the amount required to maintain the allowance for credit losses (Allowance) at a level that, in management’s best estimate, is adequate to absorb estimated credit losses inherent in the loan portfolio.

~~SECOND~~The ~~AMENDED~~provision ~~AND~~for ~~RESTATED~~credit ~~ARTICLES~~losses OFfor ~~INCORPORATION~~the OFthree months ended September 30, 2008 was $10.4 million compared to $375 thousand for the three months ended September 30, 2007. Net charge-offs for the three months ended September 30, 2008 totaled $4.5 million compared to $26 thousand in net charge-offs for the same period in 2007.

~~VENTURE~~The ~~FINANCIAL~~increase ~~GROUP~~in provision expense during the third quarter of 2008 compared to the third quarter of 2007 primarily reflects the actual increase in the Bank’s impaired loans, ~~INC~~our assessment of the impact on our region of the general deterioration of the national economy, our concentration in real estate lending, and the growth of the Bank’s loan portfolio. Since 2007, the Bank experienced a significant increase in the deterioration in the general construction portfolio, reflective of some borrowers seeking rate and amortization relief as well as specific declines in market values and real estate sales activity in various segments of the Bank’s market area. Also during the same time period we experienced an increase in delinquencies associated with the areas previously identified.

*Each *of *these *components *influences our assessment of the adequacy of the Allowance, and we elected to increase the provision to ensure the Bank is adequately reserved to account for these factors. Management reviews the adequacy of the Allowance on at least a quarterly basis. The provision is adjusted according to the results of that analysis.

ARTICLE I Name

Non-Interest Income. The following table presents, for the periods indicated, the major categories of non-interest income.


	For the three months ended		Increase/	% Change
	September 30,		(Decrease)	From 2007

(dollars in thousands)	2008	2007


*Non-Interest Income*
Service charges on deposit accounts	$ 1,101	$ 1,040	$ 61	5.9%
Origination fees and gain on sales of loans	1,058	376	682	181.4%
Net (loss) on sale of securities	(489)	-	(489)	-
Change in market value of junior subordinated debentures	1,418	821	597	72.7%
Income from bank owned life insurance	210	186	24	12.9%
Gross income from Venture Wealth Management	21	134	(113)	-84.3%
Other non-interest income	648	553	95	17.2%


*Total Non-Interest Income*	$ 3,967	$ 3,110	$ 857	27.6%

Total non-interest income increased $857 thousand or 27.6% to $4.0 million for the three months ended September 30, 2008 compared to $3.1 million for the three months ended September 30, 2007. The ~~name~~largest component for the change in non-interest income is due primarily to the $682 thousand increase in the origination fees and gain on sales of loans held for sale due to the ~~corporation~~increase ~~shall~~in beloans ~~VENTURE~~held ~~FINANCIAL~~for ~~GROUP~~sale. Net loss on sale of securities increased to $489 thousand for the three months ended September 30, ~~INC~~2008 compared to the same period last year as there were no securities sold in that quarter. The change in the market value of junior subordinated debentures increased $597 thousand or 72.7% to $1.4 million for the three months ended September 30, 2008 compared to $821 thousand for the three months ended September 30, 2007. This is primarily due to the increase in the market spread for the trust preferred debt of 125 basis points. The spread increased 240 basis points for the three months ended September 30, 2008 compared to an increase of 115 basis points for the three months ended September 30, 2007. Due to volatile economic conditions gross income from Venture Wealth Management decreased $113 thousand or 84.3% . All other major categories of non-interest income remained relatively constant for the associated periods.

ARTICLE II Duration

The corporation's period of duration shall be perpetual.

ARTICLE III Purposes

Section 3.1 To engage in business as a bank holding company.

Section 3.2 To carry on any lawful business whatsoever in connection with the foregoing for which corporations may be incorporated under the Washington Business Corporation Act, including any amendments thereto or successor statutes that may hereinafter be enacted.

ARTICLE IV Capital

The aggregate number of shares that the Corporation shall have authority to issue is 30,200,000 shares, 30,000,000 of which shall be common shares with no par value per share, and 200,000 shares of preferred stock with no par value per share. The preferred stock will have such rights and preferences as may be determined by resolution of the Board of Directors.

ARTICLE V No Pre-Emptive Rights

No shareholder shall have the pre-emptive right to acquire unissued shares of the corporation, or securities convertible into shares of any class whatsoever, whether now or hereafter authorized, and whether issued for cash, property, services or otherwise.

ARTICLE VI No Cumulative Voting

Each shareholder entitled to vote at any election for directors shall have the right to vote, in person or by proxy, the number of shares owned by him/her for as many persons as there are directors to be elected and for whose election he/she has a right to vote, and no shareholder shall be entitled to cumulate his/her votes.

ARTICLE VII Power to Amend Bylaws

The Board of Directors shall have full power to adopt, alter, amend or repeal the Bylaws or adopt new Bylaws. Nothing herein, however, shall deny the concurrent power of the shareholders to adopt, alter, amend or repeal the Bylaws.

~~EXHIBIT~~Non-Interest 3Expense.1 The following table presents, for the periods indicated, the major categories of non-interest expense:

ARTICLE VIII Right to Amend

				%
				Change
	For the three months ended		Increase/	From
	September 30,		(Decrease)	2007

(dollars in thousands)	2008	2007


*Non-Interest Expense*
Salaries and employee benefits	$ 2.729	$ 4,444	$ (1,715)	-38.6%
Occupancy and equipment	1,393	1,253	140	11.2%
Loss on impaired securities – OTTI	40,132	-	40,132	N/A
Advertising / public relations	520	506	14	2.8%
Amortization of intangible assets	72	72	-	-
Office supplies, telephone and postage	297	266	31	11.8%
Director fees	31	40	(9)	-22.5%
Expense from foreclosed assets	173	18	155	858.9%
Washington State excise tax	341	340	1	0.3%
Other non-interest expense	1,023	1,278	(255)	-19.9%


*Total Non-Interest Expense*	$ 46,711	$ 8,217	$ 38,494	468.5%

Total non-interest expense increased to $46.7 million for the three months ended September 30, 2008 compared to $8.2 million for the same period in 2007. The ~~corporation~~major ~~reserves~~factor in the ~~right~~increase was the U.S. Government’s actions to ~~amend~~place Fannie Mae and Freddie Mac into conservatorship and suspend payment of dividends on preferred stock we held in Fannie Mae and Freddie Mac. We incurred a $40.1 million, other-than-temporary ~~alter~~charge to income on our shares of preferred stock in Fannie Mae and Freddie Mac. Salaries and benefits decreased to $2.7 million for the three months ended September 30, ~~change~~2008 orcompared ~~repeal~~to ~~any~~$4.4 ~~provision~~million for the three months ended September 30, 2007. This decrease in salaries and employee benefits for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 is a result of ~~its~~the ~~Articles~~Company cutting costs to help offset the decrease in earnings. In the third quarter of ~~Incorporation~~2008 the executive officers and directors as well as a portion of the management team elected to forfeit their unvested outstanding stock options to reduce expenses on behalf of the ~~extent~~Company. ~~permitted~~The byresult of the forfeiture ~~laws~~of unvested options outstanding was to reduce the compensation cost that had been previously charged to income for the pro-rata share of the ~~State~~unvested outstanding options that had not reached the annual anniversary date for vesting in the amount of ~~Washington~~$392 thousand. ~~All~~Also in the third quarter of 2008 the Company determined that the Executive Supplemental Retirement Plan, which requires the Company to meet certain performance ratios, should be suspended. No participant of the ~~rights~~Supplemental Executive Retirement Plan has accrued any benefits since 2006 and is not expected to accrue any additional benefits in the foreseeable future. As a consequence, the Plan is now a frozen defined benefit plan effective December 31, 2006 and $854 thousand in previously recognized unfunded obligations have been reversed in the current period. The Board of ~~shareholders~~Directors has elected to suspend all directors’ fees which contributed to the decrease in other non-interest expense. The Company employed 247 FTE’s at September 30, 2008 as compared to 258 FTE’s at September 30, 2007. All other categories are ~~granted~~remaining ~~subject~~relatively comparable to ~~this~~prior ~~reservation~~periods.

~~ARTICLE~~Provision IXfor Income Taxes. We recorded tax benefit of $15.3 million for the three months ~~Registered~~ended ~~Office~~September 30, 2008 compared to a tax provision $1.6 million for the three months ended September 30, 2007. Our effective tax rate was approximately 35.5% for the three months ended September 30, 2008 and ~~Agent~~approximately 32.9% for three months ended September 30, 2007. We expect our effective tax rate to range between 30% and 36% for the remainder of 2008 depending on our mix of assets.

The address of the initial registered office of the corporation is 721 College Street S.E., P.O. Box 3800, Lacey, Washington 98509-3800. The name of its initial registered agent at that address is Ken F. Parsons.

ARTICLE X Contracts

The corporation may enter into a contract and otherwise transact business as vendor, purchaser or otherwise, with its directors, officers and shareholders, and with corporations, associations, firms and entities in which they are or may become interested as directors, officers, shareholders, members or otherwise, as freely as though such adverse interest did not exist, even though the vote, action or presence of such director, officer or shareholder may be necessary to obligate the corporation upon such contract or transaction; and in the absence of fraud, no such contract or transaction shall be avoided and no such director, officer or shareholder shall be held liable to account to the corporation, by reason of such adverse interest or any fiduciary relationship to the corporation arising out of such office or stock ownership, for any profit or benefit realized by him/her through any such contract or transaction; provided that the nature of the interest of such director, officer or shareholder though not necessarily the details or extent thereof, be disclosed or known to the Board of Directors or shareholders of the corporation, at the meeting thereof at which such contract or transaction is authorized or confirmed. A general notice that a director, officer or shareholder of the corporation is interested in any corporation, association, firm or entity shall be sufficient disclosure as to such director, officer or shareholder with respect to all contracts and transactions with that corporation, association, firm or entity.

ARTICLE XI Capital Surplus

The corporation may use its unreserved and unrestricted capital surplus to purchase its own shares and may, from time to time, distribute to shareholders, cash or property out of its capital surplus.

ARTICLE XII Board Nominations

Nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of stock of the corporation entitled to vote for the election of directors. Nominations, other than those made by the Board of Directors, shall be made in writing and shall be delivered or mailed, U.S. mail, postage prepaid, to the Chairman of the corporation not less than fourteen (14) days nor more than fifty (50) days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than twenty-one (21) days' notice of the meeting is given to shareholders, such nomination shall be delivered or mailed, U.S. mail, postage prepaid, to the Chairman of the corporation not later than the close of business on the seventh (7th) day following the day on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder:

a. The name and address of each proposed nominee; b. The principal occupation of each proposed nominee; c. The total number of shares of stock of the corporation that will be voted for each proposed nominee; d. The name and address of the notifying shareholder; and e. The number of shares of common stock of the corporation owned by the notifying shareholder.

~~EXHIBIT~~Comparison ~~3.1~~of the Nine Months Ended September 30, 2008 and 2007

~~Nominations~~The ~~not~~following ~~made~~discussion inof ~~accordance~~our ~~herewith~~results ~~may,~~of inoperations ~~his/her~~compares ~~discretion, be disregarded by~~ the ~~Chairman~~nine ofmonths ~~the~~ended ~~meeting~~September 30, ~~and~~2008 ~~upon~~to ~~his/her instructions,~~ the ~~vote~~nine ~~teller~~months ~~may~~ended ~~disregard~~September ~~all~~30, ~~votes cast for such nominee~~2007.

ARTICLE XIII Indemnification and Director Liability

	For the nine months ended
	September 30,		Increase/	Percentage
(dollars in thousands except per share data)	2008	2007	(Decrease)	Change

Interest income	$ 55,974	$ 58,967	$(2,993)	-5.1%
Interest expense	24,108	29,422	(5,314)	-18.1%

Net interest income	31,866	29,545	2,321	7.9%
Provision for credit losses	15,278	1,125	14,153	1258.0%

Net interest income after provision for credit losses	16,588	28,420	(11,832)	-41.6%
Non-interest income	11,432	7,940	3,492	44.0%
Non-interest expense	63,925	22,524	41,401	183.8%

Income (loss) before provision for income taxes	(35,905)	13,836	(49,741)	-359.5%
Provision for income taxes	13,100	4,275	(17,375)	-406.4%

Net income (loss)	$(22,805)	$ 9,561	$(32,366)	-338.5%


Earnings / (loss) per share—basic	$ (3.15)	$ 1.34	$ (4.49)	-335.1%
Earnings / (loss) per share—diluted	$ (3.15)	$ 1.31	$ (4.46)	-340.5%
Efficiency ratio	147.13%	59.66%
Return on average equity	-36.32%	14.88%
Return on average assets	-2.55%	1.21%

~~Section~~Net 13loss for the nine months and third quarter of 2008 included a pre-tax $40.1 ~~Definitions~~million other-than-temporary impairment charge related to the Company’s investments in perpetual preferred stock of Fannie Mae and Freddie Mac. AsThe ~~used~~impairment in ~~this~~the ~~Article:~~Company’s holdings of these government sponsored entities resulted from the decline in market value of these shares following the federal government’s takeover of Fannie Mae and Freddie Mac in September of 2008, which included the elimination of dividends on these shares. On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”), which provides, in part, tax relief to banking organizations that suffered losses on preferred holdings of Fannie Mae and Freddie Mac by changing the character of these losses from capital to ordinary for federal income tax purposes. As of September 30, 2008 the ordinary treatment for tax purposes was not available. However, the Company believes that it would have been able to generate capital gains over the requisite periods to offset the capital loss created by Fannie Mae and Freddie Mac preferred stock and therefore did not reserve any portion of its deferred tax asset.

~~(a)~~ The ~~term~~decrease ~~"Egregious~~in ~~Conduct"~~net income for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 is also attributable to an increase in net interest income of $2.3 million offset by aan ~~person~~increase ~~shall~~in ~~mean~~the ~~acts~~provision orfor ~~omissions~~credit ~~that~~losses ~~involve~~of ~~intentional~~$14.2 ~~misconduct~~million. orNon ainterest ~~knowing~~income ~~violation~~increased by $3.5 million for the nine months ended September 30, 2008 compared to the same period in 2007 while non interest expense increased by $49.7 million of ~~law~~which $40.1 million pertains to the other-than-temporary charge discussed above. The increase in net interest income was mainly the result of a 13.4% increase in average earning assets to $1.1 billion at September 30, ~~conduct~~2008 ~~violating~~compared ~~Section~~to ~~23B~~$969.087 million at September 30, 2007.~~310~~ The increase in net interest income was also the result of an interest rate swap entered into at the end of March and funding being re-priced in a lower interest ~~Revised~~rate ~~Code~~environment. Our average interest bearing liabilities of ~~Washington~~$993.6 million at September 30, as2008 ~~amended~~increased from $855.6 million at September 30, or2007 ~~participation~~which was offset by the decrease in ~~any~~average ~~transaction~~rates ~~from~~of ~~which~~3.24% for the ~~person~~nine ~~will~~months ~~personally~~ended September ~~receive~~30, a2008 ~~benefit~~compared into ~~money~~4.60% for the nine months ended September 30, ~~property~~2007. Our return on average equity was -36.32% and return on average assets was -2.55% for the nine months ended September 30, or2008 ~~services~~compared to ~~which~~14.88% and 1.21%, respectively, for the ~~person~~nine ismonths ~~not~~ended ~~legally~~September ~~entitled~~30, 2007.

~~(b)~~Net ~~The~~Interest ~~term~~Income ~~"Finally~~and ~~Adjudged"~~Net ~~shall~~Interest ~~mean~~Margin. ~~stated~~Net ininterest aincome ~~judgment~~increased ~~based~~for ~~upon~~the ~~clear~~period ~~and~~by 8.1% ~~convincing~~or ~~evidence~~$2.4 bymillion ato ~~court~~$31.9 ~~having~~million ~~jurisdiction,~~for ~~from~~nine ~~which~~months ~~there~~ended isSeptember no30, ~~further~~2008 ~~right~~compared to ~~appeal~~ $29.5 million for the nine months ended September 30, 2007.

~~(c)~~ The ~~term~~average ~~"Director"~~pre-tax ~~shall~~yield ~~mean~~on ~~any~~interest-earning ~~person~~assets ~~who~~decreased isto a6.84% ~~director~~in the first nine months of ~~the~~2008 ~~corporation~~from ~~and~~8.13% ~~any~~for ~~person~~the ~~who,~~same ~~while~~period in 2007, a ~~director~~decrease of ~~the~~129 ~~corporation,~~basis ispoints. ~~serving~~The Prime Rate was 275 basis points or 57.9% lower at the ~~request~~end of the ~~corporation~~first as nine months of 2008 compared to the first nine months of 2007. The decrease in the average rate earned on our interest-earning assets resulted primarily from a ~~director,~~decrease ~~officer,~~in ~~partner,~~loan yields ~~trustee,~~including ~~employee~~interest and fees, orwhich ~~agent~~decreased of186 ~~another~~basis ~~foreign~~points orto ~~domestic~~7.04% ~~corporation~~from 8.90% for the nine months ended September 30, ~~limited~~2008 ~~liability~~compared ~~company~~to the nine months ended September 30, ~~partnership~~2007, ~~joint~~respectively. ~~venture,~~In ~~trust~~the nine months ended September 30, or2008 loan ~~other~~yields ~~enterprise~~would have been 7.29%, ora isdifference of 25 basis points without the negative impact of non-accrual loans. This decrease was partially offset by a ~~fiduciary~~10.9% increase or ~~party~~62 inbasis ~~interest~~points, in ~~relation~~yields on securities which increased to ~~any~~6.31% for the ~~employee~~nine ~~benefit~~months ~~plan~~ended ~~covering~~September ~~any~~30, ~~employee~~2008 ofcompared to 5.69% for the ~~corporation~~nine ormonths ofended ~~any~~September ~~employer~~30, in2007. ~~which~~The ittax ~~has~~equivalent anyield ~~ownership~~on ~~interest;~~securities ~~and~~for ~~"conduct~~the asnine amonths ~~Director"~~ended ~~shall~~September ~~include~~30, ~~conduct~~2008 ~~while~~was a6.44% ~~Director~~compared isto ~~acting~~5.88% infor ~~any~~the ofnine ~~such~~months ~~capacities~~ended September 30, 2007.

~~(d)~~ The ~~term~~cost ~~"Officer-Director"~~of ~~shall~~our ~~mean~~average ~~any~~interest-bearing ~~person~~deposits ~~who~~decreased isto ~~simultaneously~~3.18% ~~both~~for ~~an officer and director of~~ the ~~corporation~~nine ~~and~~months ~~any~~ended ~~person~~September ~~who~~30, ~~while~~2008 ~~simultaneously~~from ~~both~~4.44% anfor ~~officer~~the ~~and director~~same ofperiod ~~the~~in ~~corporation~~2007, ~~is serving at the request of the corporation as~~ a ~~director,~~decrease ~~officer, manager, partner, trustee, employee, or agent~~ of ~~another~~126 ~~foreign~~basis points or ~~domestic~~28.4% ~~corporation,~~. ~~limited~~Our ~~liability~~average ~~company,~~rate ~~partnership,~~on ~~joint~~total ~~venture,~~deposits ~~trust, or~~(including ~~other enterprise, or is a fiduciary or party in~~ non-interest inbearing ~~relation~~deposits) decreased to ~~any~~2.18% ~~employee~~for ~~benefit plan covering any employee of~~ the ~~corporation~~nine ormonths ofended ~~any~~September ~~employer~~30, in2008 ~~which~~from it3.85% ~~has~~for anthe ~~ownership~~nine ~~interest;~~months ~~and~~ended ~~"conduct~~September as30, an2007, ~~Officer-Director" shall include conduct while such~~ a ~~person~~decrease ~~is acting as an officer~~ of ~~the~~167 ~~corporation~~basis points or 76.6% in. ~~any~~Our ofborrowing ~~such other capacities.~~rates

(e) The term "Subsidiary Corporation" shall mean any corporation or limited liability company at least eighty percent of the voting interests of which is held beneficially by this corporation.

(f) The term "Subsidiary Outside Director" shall mean any person who, while not principally employed by this corporation or any Subsidiary Corporation, is a director or manager of a Subsidiary Corporation and any such person who, while a director or manager of a Subsidiary Corporation, is serving at the request of such corporation as a director, officer, manager, partner, trustee, employee, or agent of another foreign or domestic corporation, limited liability company, partnership, joint venture, trust, or other enterprise, or is a fiduciary or party in interest in relation to any employee benefit plan covering any employee of such corporation or of any employer in which it has an ownership interest; and "conduct as a Subsidiary Outside Director" shall include conduct while such a person is acting in any of such capacities.

Section 13.2 Liability of Directors. No Director, Officer-Director, former Director or former Officer-Director shall be personally liable to the corporation or its shareholders for monetary damages for conduct as a Director or Officer-Director occurring after the effective date of this Article unless the conduct is Finally Adjudged to have been Egregious Conduct.

Section 13.3 Liability of Subsidiary Outside Directors. No Subsidiary Outside Director or former Subsidiary Outside Director shall be personally liable in any action brought directly by this corporation as a shareholder of the Subsidiary Corporation or derivatively on behalf of the Subsidiary Corporation (or by any shareholder of this corporation double-derivatively on behalf of this corporation and the Subsidiary Corporation) for monetary damages for conduct as a Subsidiary Outside Director occurring after the effective date of this Article unless the conduct is Finally Adjudged to have been Egregious Conduct.

Section 13.4 Mandatory Indemnification of Directors. Subject to Sections 13.7 and 13.8 of this Article, the corporation shall indemnify any person who is, or is threatened to be made, a party to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and whether formal or informal, and whether by or in the right of the corporation or its shareholders or by any other party, by reason of the fact that the person is or was

~~EXHIBIT~~declined to 3.145% from 5.36% for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007, a decrease of 191 basis points or 35.6% .

aOur ~~Director,~~net ~~Officer-Director,~~interest ormargin ~~Subsidiary~~for ~~Outside~~the ~~Director~~nine ~~against~~months ~~judgments~~ended September 30, ~~penalties~~2008 orwas ~~penalty~~3.89% ~~taxes,~~down ~~fines~~from 4.07% for the nine months ended September 30, ~~settlements~~2007. ~~(even~~The ifincrease ~~paid~~in ornet ~~payable~~interest income for the nine months ended September 30, 2008 compared to the ~~corporation~~same orperiod ~~its~~in ~~shareholders~~2007 orwas due primarily to aan ~~Subsidiary Corporation)~~increase ~~and~~in ~~reasonable~~our ~~expenses,~~interest ~~including~~earning ~~attorneys'~~assets. ~~fees,~~The ~~actually~~decrease ~~incurred~~in net interest margin was the result of the rapid reductions in ~~connection~~the ~~with~~Federal ~~such~~Funds ~~action~~Target Rate. The prime rate decreased 275 basis points from September 18, ~~suit~~2007 orthrough ~~proceeding~~April ~~unless~~30, ~~the~~2008. ~~liability~~The ~~and~~published ~~expenses~~prime ~~were~~rate is used as a base index on ~~account~~many of ~~conduct~~our ~~Finally~~loan ~~Adjudged~~products and therefore our loans tied to beprime ~~Egregious~~re-priced ~~Conduct~~275 basis points lower during that time period. Loans that have floors would not have adjusted as far. Deposits and other borrowings did not re-price as quickly or in the same magnitude as our loan portfolio, which is partially due to competitors maintaining deposit rates at historically higher levels to attract deposits for liquidity purposes.

~~Section~~In ~~13.5~~2008, ~~Advancing~~we ~~Expenses.~~began ~~Except~~using ~~as prohibited~~interest byrate ~~Sections~~derivatives ~~13.7~~to ~~and~~manage ~~13.8~~our ofexposure ~~this~~to ~~Article,~~changes ~~the~~in ~~reasonable~~interest ~~expenses,~~rates. ~~including~~During ~~attorneys'~~the ~~fees,~~first ofquarter awe ~~Director,~~executed ~~Officer-Director,~~an ~~Subsidiary~~interest ~~Outside~~rate ~~Director~~swap, orpursuant ~~person~~to ~~formerly~~which ~~serving~~we exchanged infloating ~~any~~rate ~~such~~cash ~~capacities,~~flows ~~incurred~~for infixed ~~connection~~rate ~~with~~cash ~~an action,~~flows. ~~suit~~We orpay ~~proceeding~~prime inand ~~which~~receive ~~the~~5.25% ~~individual~~on isa ~~entitled~~total tonotional ~~indemnification~~amount ~~under~~of ~~Section~~$100 ~~13.4~~million ~~shall~~until beMarch ~~paid~~27, or2010. ~~reimbursed~~This bytransaction ~~the~~benefits ~~corporation,~~net ~~upon~~income ~~request~~for ofevery ~~such~~reduction ~~person,~~ in ~~advance of~~ the ~~final~~prime ~~disposition~~rate ofbelow ~~such action, suit or proceeding~~5.25% ~~upon~~and ~~receipt~~conversely bylimits ~~the~~net ~~corporation~~income offor aevery ~~written,~~increase ~~unsecured~~in ~~promise by~~ the ~~person~~prime torate ~~repay~~above ~~such~~5.25% ~~amount~~during ifthe itterm ~~shall~~of ~~be Finally Adjudged that~~ the ~~person is not eligible for indemnification~~swap. ~~All~~For ~~expenses~~additional ~~incurred~~information byon ~~such~~our ~~person~~derivatives, insee ~~connection~~Derivative ~~with~~Financial ~~such action,~~Instruments ~~suit~~under orthe ~~proceeding~~Summary ~~shall~~of beCritical ~~considered~~Accounting ~~reasonable~~Estimates ~~unless~~and ~~Finally~~Accounting ~~Adjudged~~Policies toand beNote ~~unreasonable~~9.

~~Section~~The ~~13.6~~following ~~Procedure.~~table ~~Except~~sets asforth ~~required~~a ~~by Sections~~summary ~~13.7 and 13.8~~ of ~~this~~average ~~Article,~~balances nowith ~~action~~corresponding byinterest ~~the~~income ~~Board~~and ofinterest ~~Directors,~~expense ~~the~~as ~~shareholders,~~well ~~independent~~as ~~counsel,~~average oryield ~~any~~and ~~other~~cost ~~person~~of orfunds ~~persons~~for ~~shall be necessary or appropriate to~~ the ~~determination of the corporation's indemnification obligation~~periods ~~under~~presented. ~~this~~Average ~~Article~~balances inare ~~any~~derived ~~specific~~from ~~case~~daily balances, toand ~~the~~non-accrual ~~determination~~loans ofare ~~the~~included ~~reasonableness~~as ofinterest ~~any~~earning ~~expenses~~assets ~~incurred~~for bypurposes aof ~~person entitled to indemnification under~~ this ~~Article, nor to the authorization of indemnification in any specific case~~table.

Section 13.7 Exception for Internal Claims. Notwithstanding anything else in these Articles, the corporation shall not be obligated to indemnify any person for any expenses, including attorneys' fees, incurred to assert any claim against the corporation (except a claim to enforce rights to indemnification) or any person related to or associated with it, including any person who would be entitled hereby to indemnification in connection with the claim.

			Nine months ended
			September 30,

		2008			2007

		Interest			Interest
	Average	Income	Average	Average	Income	Average
(dollars in thousands)	Balance	(Expense)	Rates (3)	Balance	(Expense)	Rates (3)

Assets
Earning Assets:
Loans (Interest and fees) ⁽¹⁾	$794,988	$41,901	7.04%	$738,420	$49,139	8.90%
Loans (Interest and fees) without non-accrual			7.29%			8.91%
Federal funds sold	907	18	2.65%	2,362	92	5.21%
Investment securities ⁽²⁾	295,984	13,978	6.31%	228,929	9,736	5.69%

Total earning assets and interest income	1,091,879	55,897	6.84%	969,711	58,967	8.13%
Other assets:
Cash and due from banks	13,845			14,604
Bank premises and equipment	34,279			30,880
Other assets	66,554			48,202
Allowance for credit losses	(12,770)			(9,293)

Total assets	$1,193,787			$1,054,104


Liabilities and Shareholders Equity
Interest bearing liabilities:
Deposits:
Savings, NOW, MMDA	$359,711	($5,880)	2.18%	$340,282	($9,789)	3.85%
Time deposits	411,498	(12,487)	4.05%	367,484	(13,710)	4.99%

Total interest bearing deposits	771,209	(18,367)	3.18%	707,766	(23,499)	4.44%
Other borrowings	222,345	(5,741)	3.45%	147,846	(5,923)	5.36%

Total interest bearing liabilities and interest expense	993,554	(24,108)	3.24%	855,612	(29,422)	4.60%

Non interest bearing liabilities	107,018			104,358
Other liabilities	9,505			8,433
Shareholders equity	83,710			85,701

Total liabilities and shareholders equity	$1,193,787			$1,054,104

Net interest income		$31,789			$29,545

Net interest margin as a percent of average earning assets			3.89%			4.07%


(1) Average loan balance includes non-accrual loans. Loan fees and late charges of $2,113 thousand
and $2,772 thousand are included in interest for the nine months ended September 30, 2008 and 2007,
respectively

(2) The yield on investment securities is calculated using historical cost basis. The yield on assets is
calculated on a pre-tax, book value basis which does not consider the effect of tax exempt securities or
the dividend received deduction on preferred stock. The after tax yield on investments for the nine
months ended September 30, 2008 and 2007 is 6.44% and 5.88% respectively.

(3) Annualized

Section 13.8 Exception for Regulatory Claims.

(a) Regulatory Proceedings Generally. Notwithstanding anything else in these Articles, indemnification of any Director, Officer-Director or Subsidiary Outside Director, or any person formerly serving in any such capacities, and advancement of expenses in connection with either an administrative proceeding or a civil action instituted by a federal banking agency ("Regulatory Proceedings") shall be governed by this Section.

(b) Banking Regulations Defined. The term "Banking Regulations" shall mean any state or federal laws or regulations applicable to the corporation, or any formal policies adopted by a regulatory agency having jurisdiction over the corporation.

(c) Indemnification in Regulatory Proceedings. The corporation shall provide indemnification and advancement of expenses in connection with Regulatory Proceedings to the extent permitted, and in the manner prescribed by Banking Regulations. Insurance and other means to ensure payment of costs and expenses in Regulatory Proceedings may be obtained or provided to the extent permitted and in the manner prescribed by Banking Regulations.

(d) Federal Deposit Insurance Corporation. Notwithstanding anything else in these Articles, the Articles are subject to the requirements and limitations set forth in state and federal laws, rules, regulations, and orders regarding indemnification and prepayment of legal expenses and liabilities, including Section 18(k) of the Federal Deposit Insurance Act, as amended, and Part 359 of the Federal Deposit Insurance Corporation's Rules and Regulations or any successor regulations. To the extent of any conflict between state and federal law regarding the interpretation and scope of the Articles, federal law shall supercede and control.

Section 13.9 Enforcement of Rights. The corporation shall indemnify any person granted indemnification rights under this Article against any reasonable expenses incurred by the person to enforce such rights.

Section 13.10 Set-off of Claims. Any person granted indemnification rights herein may directly assert such rights in set-off of any claim raised against the person by or in the right of the corporation and shall be entitled to have the same tribunal which adjudicates the corporation's claim adjudicate the person's entitlement to indemnification by the corporation.

Section 13.11 Continuation of Rights. The indemnification rights provided in this Article shall continue as to a person who has ceased to be a Director, Officer-Director, or Subsidiary Outside Director and shall inure to the benefit of the heirs, executors, and administrators of such person.

~~EXHIBIT~~An 3analysis of the change in net interest income is set forth on the following table.1 Changes due to both rate and volume are allocated in proportion to the relationship of the absolute dollar amounts of the change in each. Balances of non-accrual loans, if any, and related income recognized have been included for purposes of this table.

Section 13.12 Effect of Amendment or Repeal. Any amendment or repeal of this Article shall not adversely affect any right or protection of a Director, Officer-Director, or Subsidiary Outside Director or person formerly serving in any of such capacities existing at the time of such amendment or repeal with respect to acts or omissions occurring prior to such amendment or repeal.

	Nine months ended September 30, 2008
(dollars in thousands)	Compared to nine months ended September 30, 2007
Interest earned on:	Volume	Rate	Total Change
Loans	$5,419	$ (12,657)	($7,238)
Federal Funds sold and deposits in banks	(41)	(33)	(74)
Investment Securities	3,088	1,154	4,242

Total interest income	8,466	(11,536)	(3,070)

Interest paid on:
Savings, NOW, MMDA	864	(4,773)	(3,909)
Time Deposits	2,202	(3,425)	(1,223)
Other Borrowings	3,197	(3,379)	(182)

Total interest expense	6,263	(11,577)	(5,314)

Net Interest income	$ 2,203	$ 41	$2,244

~~Section~~Provision ~~13.13~~for ~~Severability~~Credit ~~of Provisions~~Losses. ~~Each of~~The ~~the~~provision ~~substantive~~for ~~provisions~~credit oflosses ~~this Article~~ is ~~separate~~a ~~and~~charge ~~independent~~against ofearnings ~~the others, so~~ in that ifperiod. ~~any~~The provision ~~hereof~~is ~~shall~~the beamount ~~held~~required to bemaintain ~~invalid~~the orallowance ~~unenforceable~~ for ~~any~~credit ~~reason~~losses at a level that, ~~such~~in ~~invalidity~~management’s orjudgment, ~~unenforceability~~is ~~shall~~adequate ~~not~~to ~~affect~~absorb ~~the~~estimated ~~validity or~~credit ~~enforceability~~losses ofinherent in the ~~other~~loan ~~provisions~~portfolio.

~~Section~~The ~~13.14~~provision ~~Application~~for tocredit ~~Officers~~losses for the nine months ended September 30, ~~Employees~~2008 ~~and~~was ~~Agents~~$15.2 Bymillion ~~resolution,~~compared to $1.1 million for the ~~Board~~nine ~~of Directors~~months ~~may~~ended ~~extend~~September 30, 2007. Net charge-offs for the ~~provisions~~nine ofmonths ~~this~~ended ~~Article~~September 1330, 2008 totaled $7.0 million compared to ~~any~~$626 ~~officers,~~thousand ~~employees~~in ornet ~~agents~~charge-offs offor the ~~corporation~~same period in 2007.

~~ARTICLE~~The ~~XIV~~increase in provision expense during the first nine months of 2008 compared to the first nine months of 2007 primarily reflects the actual increase in the Bank’s impaired ~~Directors~~loans, our assessment of the impact on our region of the general deterioration of the national economy, our concentration in real estate lending, and the growth of the Bank’s loan portfolio. Since 2007, the Bank experienced a significant increase in the deterioration of the general construction portfolio reflective of some borrowers seeking rate and amortization relief as well as specific declines in market values and real estate sales activity in various segments of the Bank’s market area. Also during the same time period we experienced an increase in delinquencies associated with the areas previously identified.

~~The~~Each ~~board~~ of ~~directors~~these ~~shall~~components beinfluences ~~divided~~our ~~into~~assessment ~~three~~of ~~classes:~~the ~~Class~~adequacy 1,of ~~Class~~the 2Allowance, and ~~Class~~we 3,elected ~~which~~to ~~shall~~increase bethe ~~nearly~~provision ~~equal~~to inensure ~~number~~we asare ~~possible.~~adequately ~~Each~~reserved ~~director~~to ~~shall~~account ~~serve~~ for ~~a term ending on~~these ~~the~~factors. ~~date~~Management ofreviews the ~~third~~adequacy ~~annual meeting~~ of the ~~shareholders~~allowance ~~following~~on ~~the annual meeting~~ at ~~which~~least ~~such~~a ~~director~~quarterly ~~was~~basis. ~~elected;~~The ~~provided,~~provision ~~however,~~is ~~that~~adjusted ~~each~~according ~~initial~~to ~~director in Class 1 shall hold office until~~ the ~~annual~~results ~~meeting~~ of ~~shareholders~~that in 1988, each initial director in Class 2 shall hold office until the annual meeting of shareholders in 1989; and each initial director in Class 3 shall hold office until the annual meeting of shareholders in 1990analysis.

ARTICLE XV Incorporator

Non-Interest Income. The following table presents, for the periods indicated, the major categories of non-interest income.

	For the nine months ended		Increase/	% Change
	September 30,		(Decrease)	From 2007

(dollars in thousands)	2008	2007


*Non-Interest Income*
Service charges on deposit accounts	$ 3,204	$2,995	$ 209	7.0%
Origination fees and gain on sales of loans	3,510	1,241	2,269	182.8%
Net gain on sale of securities	290	139	151	108.6%
Change in market value of junior subordinated debentures	2,030	1,029	1,001	97.3%
Income from bank owned life insurance	626	701	(75)	-10.7%
Gross income from Venture Wealth Management	254	462	(208)	-45.0%
Other non-interest income	1,518	1,373	145	10.6%


*Total Non-Interest Income*	$ 11,432	$ 7,940	$ 3,492	44.0%

Total non-interest income increased $3.5 million or 44.0% to $11.4 million for the nine months ended September 30, 2008 compared to $7.9 million for the nine months ended September 30, 2007. The ~~name~~largest component for the change in non-interest income is due primarily to the $2.3 million increase in the origination fees and ~~address~~gain on sales of loans held for sale due to the ~~incorporator~~increase isof ~~George~~loans Woriginated and subsequently sold as a direct result of the expansion of the mortgage department compared to the prior period. ~~Bowen~~The change in the market value of junior subordinated debentures created $1.0 million in revenue in the nine months ended September 30, ~~3033~~2008 ~~Carpenter~~compared ~~Loop~~to Sthe nine months ended September 30, 2007.E Because the debentures are liabilities, declines in the fair value result in an increase in the Company's non-interest income. The debentures are floating rate, ~~Lacey~~tied to LIBOR, ~~Washington~~whose changes ~~98503~~in value are almost entirely influenced by changes in credit spreads of such instruments. General market spread widening led to price declines in the debentures and the resulting increase in non-interest income for the Company. Due to volatile economic conditions gross income from Venture Wealth Management decreased $208 thousand or 45.0% . All other major categories of non-interest income remained relatively constant for the associated periods.

ARTICLE XVI Evaluating Offers

The Board of Directors of the corporation, when evaluating any offer of another party to (a) make a tender or exchange offer for any equity security of the corporation, (b) merge or consolidate the corporation with another corporation, or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the corporation and its stockholders, give due consideration to all relevant factors, including without limitation the social and economic effects on the community, employees, customers, and other constituents of the corporation and its subsidiary.

ARTICLE XVII Fair Price Provision

Section 17.1 In addition to the requirements of any applicable statute, and notwithstanding any other provisions of any other articles of these Articles of Incorporation, the affirmative vote of not less than 90% of the total shares which are entitled to be voted in an election of directors shall be required for the approval of any Business Combination (as defined below).

Section 17.2 The approval requirements of Section 17.1 shall not apply if either:

(a) The Business Combination is approved by at least 66 2/3% of the Directors of the Corporation;

(b) Both of the following conditions are satisfied:

(i) The cash or fair market value of the property, securities or other consideration to be received per share in the Business Combination by holders of the common stock of the corporation is not less than the highest price per share (including brokerage commissions, soliciting dealers' fees and dealer-management compensation) paid by such offeror in acquiring any of its holdings of the corporation's common stock; and

~~EXHIBIT~~Non-Interest 3Expense.1 The following table presents, for the periods indicated, the major categories of non-interest expense:

(ii) A proxy statement responsive to the requirements of the Securities Exchange Act of 1934, whether or not the corporation is then subject to such requirements, shall be mailed to the stockholders of the corporation for the purpose of soliciting stockholder approval of such Business Combination.

				%
	For the nine months ended		Increase/	Change
	September 30,		(Decrease)	From
				2007

(dollars in thousands)	2008	2007


*Non-Interest Expense*
Salaries and employee benefits	$ 12,424	$ 12,238	$ 186	1.5%
Loss on impaired securities	40,132	-	40,132	N/A
Occupancy and equipment	4,142	3,545	597	16.8%
Advertising / public relations	1,604	1,569	35	2.2%
Amortization of intangible assets	215	215	-	-
Office supplies, telephone and postage	866	767	99	13.0%
Director fees	122	117	5	4.2%
Expense from foreclosed assets	259	29	230	792.5%
Washington State excise tax	1,067	1,026	41	4.0%
Other non-interest expense	3,094	3,018	76	2.5%


*Total Non-Interest Expense*	$ 63,925	$ 22,524	$ 41,401	183.8%

Total non-interest expense increased to $63.9 million for the nine months ended September 30, 2008 compared to $22.5 million for the same period in 2007. Of this increase ~~Section~~$40.1 17million was directly attributable to the OTTI charge on the Fannie Mae and Freddie Mac preferred shares.3 Had the U.S. Government not placed these Company’s into conservatorship, the Bank’s other non-interest expense would have ~~For~~been $23.8 million, or increased by $1.3 million or 5.8% for the ~~purposes~~nine ofmonths ~~this~~ended ~~Article~~September 1730, 2008 compared to $22.5 million for the nine months ended September 30, 2007.

~~(a)~~Staffing ~~The~~reductions ~~term~~in ~~"Business~~the ~~Combination"~~second ~~shall~~and ~~mean~~third ~~(i)~~quarters ~~any~~of ~~merger~~2008 or(which ~~consolidation~~occurred ofbefore the ~~corporation,~~Fannie ~~(ii~~Mae and Freddie Mac preferred stock impairments) ~~any~~reduced ~~sale,~~the ~~lease~~number of FTE’s to 247 at September 30, ~~exchange~~2008 compared to 258 at September 30, ~~transfer~~2007 orand ~~other~~275 ~~disposition~~at December 31, ~~including~~2007. ~~without limitation~~The aCompany ~~mortgage~~also orreduced ~~any~~future ~~other~~salaries ~~security~~and ~~device,~~benefit ofexpense ~~all~~as orrelated ~~any~~to ~~Substantial~~the ~~Part~~executive (officers and directors as ~~defined~~well ~~below)~~as a portion of the ~~assets~~management team electing to forfeit their unvested outstanding options. The result of the ~~corporation~~forfeiture ~~(including~~of ~~without~~unvested ~~limitation~~options ~~any~~outstanding ~~voting~~was ~~securities~~to ofreduce athe ~~subsidiary)~~compensation orcost ofthat ahad ~~subsidiary,~~been ~~(iii)~~previously ~~any~~charged ~~merger~~to ~~or consolidation~~income ~~with~~on orall ~~into~~unvested aoutstanding ~~corporation~~options orin ~~its~~the ~~subsidiary~~amount of $392 thousand. Also, ~~(iv)~~in the ~~issuance~~third quarter of ~~any~~2008 ~~securities~~the ofCompany determined that the ~~corporation~~Executive orSupplemental aRetirement ~~subsidiary~~Plan, ofwhich requires the ~~corporation~~Company to ~~any~~meet ~~person~~certain orperformance ~~entity~~ratios, orshould ~~(v)~~be suspended. No participant of the Supplemental Executive Retirement Plan has accrued any ~~agreement,~~benefits ~~contract~~since or2006 ~~other~~and ~~arrangement~~is ~~providing~~not ~~for~~expected to accrue any of additional benefits in the ~~transactions~~foreseeable ~~described~~future. As a consequence, the Plan is now a frozen defined benefit plan effective December 31, 2006 and $854 thousand in ~~this~~previously ~~definition~~recognized ofunfunded ~~Business~~obligations ~~Combination;~~have been reversed in the current period.

~~(b)~~Occupancy ~~The~~and ~~term~~equipment ~~"Substantial~~costs ~~Part"~~increased ~~shall~~$597 ~~mean~~thousand ~~more~~or ~~than 10~~16.8% offor the ~~total~~nine ~~assets~~months ofended September 30, 2008 compared to the ~~corporation~~nine inmonths ~~question~~ended September 30, as2007 due to the relocation of the ~~end~~administrative offices, the addition of ~~its~~two ~~most~~financial ~~recent~~centers ~~fiscal~~in ~~year~~2007 ~~prior~~and the related increase in real estate property taxes and depreciation expenses. Expenses from foreclosed assets has increased $230 thousand for the nine months ended September 30, 2008 compared to the ~~time~~nine ~~determination~~months isended September 30, 2007 due to the real estate market and economic conditions. All other major categories of non-interest expense have remained relatively stable and are decreasing with ~~being~~the ~~made;~~related cuts in expenditures.

~~(c)~~Provision ~~Without~~for ~~limitation,~~Income ~~any~~Taxes. ~~shares~~We ofrecorded ~~common~~tax ~~stock~~benefit of ~~the~~$13.1 ~~corporation~~million ~~which~~for ~~any~~the ~~person~~nine ~~has~~months ended ~~the~~September ~~right~~30, 2008 compared to ~~acquire~~a attax ~~any~~provision ~~time~~of ~~pursuant~~$4.3 tomillion ~~any~~for ~~agreement~~the nine months ended September 30, or2007. ~~upon~~Our ~~exercise~~effective oftax ~~conversion~~rate ~~right, warrants~~was orapproximately ~~options~~36.5% for the nine months ended September 30, or2008 ~~otherwise~~and 30.9% for the nine months ended September 30, ~~shall~~2007. beWe ~~deemed~~expect ~~outstanding~~our ~~and~~effective ~~beneficially~~tax ~~owned~~rate byto ~~such~~range ~~person~~between 30% and 36% for ~~purposes~~the remainder of ~~this~~2008 ~~Article~~depending ~~17;~~on ~~and~~our mix of assets.

~~(d)~~Financial For the purposes of Section 17.2(b)(i) of this Article, the phrase "other consideration to be received" shall include, without limitation, common stock of the corporation retained by its existing stockholders in the event of a Business Combination in which the corporation is the surviving corporationCondition

~~Section~~Our ~~17.4~~total ~~For~~consolidated ~~the~~assets ~~purposes~~at ofSeptember ~~this Article 17~~30, a2008 ~~majority~~were of$1.17 ~~the~~billion ~~Directors~~compared ~~shall have the power and duty~~ to ~~determine~~$1.18 onbillion ~~the~~at ~~basis~~December ~~of information known to them (a) whether a proposed transaction is subject to the provisions of this Article 17~~31, ~~(b)~~2007. ~~the~~Total ~~amount~~deposits ofat ~~shares~~September ~~of the corporation Beneficially Owned by any person~~30, ~~(c)~~2008 ~~whether~~increased ato $999.0 ~~person~~million isfrom an$837.1 ~~Affiliate~~million orat ~~Associate~~December ~~of another~~31, ~~and~~ ~~(d) such other matters as to which a determination may be required by the provisions of this Article 17~~2007.

Section 17.5 The provisions set forth in this Article 17 may not be repealed or amended in any respect or in any manner including any merger or consolidation of the corporation with any other corporation unless the surviving corporation's Articles of Incorporation contain an article to the same effect as this Article 17, except by the affirmative vote of the holders of not less than 90% of the outstanding shares of common stock of the corporation.Loans

~~ARTICLE~~Total ~~XVIII Special~~loans ~~Meeting~~and loans held for sale at September 30, 2008 and December 31, 2007 were $792.3 million and $783.1 million respectively, an increase of ~~Shareholders~~$9.2 million or 1.2% . Our loan growth has been focused in commercial real estate and real estate construction lending.

Special meetings of the shareholders may be called at any time by the President, a majority of the Board of Directors, or by shareholders owning in the aggregate not less than fifty percent (50%) of the shares entitled to vote at the special meeting.

DATED this _____ of May 2003. /s/ Ken F. Parsons, Sr. Ken F. Parsons, Sr. President and C.E.O.

~~EXHIBIT~~The ~~31.1~~following table sets forth the relative composition of our loan portfolio at the end of the periods indicated:

CERTIFICATION UNDER SECTION 302 OF SARBANES-OXLEY ACT OF 2002

	September 30, 2008		December 31, 2007		% Change
(dollars in thousands)

Commercial	$ 73,860	9.3%	$80,975	10.3%	-9.6%
Real Estate
Residential 1-4	48,032	6.1%	38,926	5.0%	18.9%
Commercial	255,559	32.3%	259,660	33.2%	-1.6%
Construction	396,337	50.0%	375,137	47.9%	5.3%
Consumer	7,957	1.0%	11,030	1.4%	-38.6%

Total Loans	781,745	98.7%	765,728	97.8%	2.0%
Loans Held for Sale	10,545	1.3%	17,389	2.2%	-64.9%

Total Loans and Loans Held for Sale	$ 792,290	100.0%	$ 783,117	100.0%	1.2%

I The following tables show the amounts of loans as of September 30, ~~Ken~~2008 Fand December 31, 2007. ~~Parsons~~Of the loans maturing after one year, Sras of September 30, 2008, $120.9 ~~certify~~million ~~that:~~had fixed interest rates and $282.1 million had adjustable interest rates, and as of December 31, 2007, $118.9 million had predetermined or fixed interest rates and $239.1 million had floating or adjustable interest rates. As of September 30, 2008, 60.8% of our floating rate loans were tied to the prime rate.

1.	I have reviewed this quarterly report on Form 10-Q of Venture Financial Group, Inc. (the "registrant");
As of September 30, 2008:
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(dollars in thousands)			Maturity
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
		Within	After One	After
4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
		One	But Within	Five	Total
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
		Year	Five Years	Years
	(b)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Commercial		$37,430	$ 32,343	$ 4,088	$ 73,860
	(c)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's first fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
Real Estate
5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
Residential 1-4		17,395	16,300	24,883	58,577
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Commercial		36,941	69,913	148,704	255,559
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Construction		294,957	90,749	10,632	396,337
Consumer and other		2,547	2,362	3,048	7,957
Total		$ 389,269	$ 211,666	$ 191,355	$792,290
As of December 31, 2007:
(dollars in thousands)			Maturity
		Within	After One	After
		One	But Within	Five	Total
		Year	Five Years	Years
Commercial		$ 61,417	$14,862	$ 4,696	$ 80,975
Real Estate
Residential 1-4		17,119	7,085	32,111	56,315
Commercial		47,240	70,714	141,706	259,660
Construction		295,000	69,225	10,912	375,137
Consumer and other		4,297	2,660	4,073	11,030
Total		$ 425,073	$ 164,546	$ 193,498	$ 783,117

Date: May 14, 2005
		/s/ Ken F. Parsons, Sr.
		Ken F. Parsons, Sr.
		President, Chief Executive Officer and Chairman of the Board (principal executive officer)

Concentrations. As of September 30, 2008, in management’s judgment, a concentration of loans existed in real estate related loans. At September 30, 2008, our portfolio was centered in real estate loans with construction loans at 50.0% of the portfolio, commercial real estate loans at 32.3% and residential 1-4 family units at 6.1% . Although management believes the loans within the real estate related concentration have no more than the normal risk of ability to collect, a substantial decline in the performance of the economy, in general, a decline in real estate values in our market areas, in particular, has had an adverse impact on collection ability, have had and could continue to have an increase in the level of real estate related non-performing loans, and have had other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Asset Quality. Generally, loans are placed on nonaccrual status when they become 90 days or more past due or at such earlier time as management determines timely recognition of interest to be in doubt. Accrual of interest is discontinued on a loan when management believes collection of interest or principal is unlikely after considering economic and business conditions and collection efforts.

~~EXHIBIT~~The 31following table summarizes our non-performing assets, which consist of loans on which interest is no longer accrued, accruing loans past due 90 days or more, foreclosed real estate and other assets.2

CERTIFICATION UNDER SECTION 302 OF SARBANES-OXLEY ACT OF 2002

	September 30.	December 31,
(dollars in thousands)	2008	2007

Nonaccrual loans	$ 53,792	$ 3,007
Accruing loans past due 90 days or more	-	110

Total non-performing loans (NPLs)	53,792	3,117
Foreclosed real estate	3,858	68

Total non-performing assets (NPAs)	$ 57,650	$ 3,185

Selected ratios
NPLs to total loans	6.79%	0.40%
NPAs to total loans and foreclosed real estate	7.24%	0.41%
NPAs to total assets	4.94%	0.27%

I Impaired and Nonaccrual Loans. These loans are generally loans for which it is probable that we will not collect all amounts due according to the original contractual terms of the loan agreement. We typically classify these loans as Substandard, ~~Ken~~Doubtful, For Loss. ~~Parsons~~Impaired loans, Srspecifically Substandard or Doubtful loans may not be on nonaccrual status as we continue to accrue interest if borrowers continue to make payments and if we expect them to continue to make payments. ~~certify~~The ~~that:~~category “impaired loan” is broader than the category “nonaccrual loan,” although the two categories overlap. Nonaccrual loans are those loans on which the accrual of interest is discontinued when the ability to collect principal and interest is uncertain or payments of principal or interest have become contractually past due 90 days. Management may choose to categorize a loan as impaired due to payment delinquency or if collection is uncertain, and will closely monitor the loan to ensure performance and collection of amounts due in accordance with the original contractual terms of the loan.

1.	I have reviewed this quarterly report on Form 10-Q of Venture Financial Group, Inc. (the "registrant");
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(c)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's first fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

During the nine months ending September 30, 2008 nonaccrual loans increased $50.8 million, bringing total nonaccrual loans to $53.8 million, comprised of 76 loans, inclusive of the following: 48 single family speculative / 1-4 family building lots loans totaling $17.1 million (the largest with a balance of $2.2 million and located in Kirkland, WA); one land development loan totaling $4.8 million located in Monroe, WA; five lot inventory loans for $12.3 million (the largest with a balance of $3.3 million located in Lacey, WA); eight custom construction loans for a total of $3.5 million (the largest with a balance of $1.2 million located in Lake Tapps, WA); seven commercial real estate loans for $13.6 million (the largest with a balance of $5.7 million located in Ellensburg, WA); and seven other miscellaneous loans including consumer, residential real estate and commercial. The increase in nonaccrual loans in the third quarter 2008 was primarily attributed to five credit relationships totaling $29.0 million comprised of 23 single family speculative/1-4 family building lots loans totaling $6.6 million to three borrowers with properties located in Kelso, Lacey, Puyallup and Montesano, WA; three lot inventory loans totaling $7.1 million located in Kelso, Lacey and Tacoma, WA; and one relationship comprised of four CRE loans and three commercial loans totaling $9.5 million located in Milton, WA.

Date: May 14, 2005
		/s/ Ken F. Parsons, Sr.
		Ken F. Parsons, Sr.
		President, Chief Executive Officer and Chairman of the Board (principal executive officer)

A decrease in real estate values has occurred in the Bank’s market area, up to 25% in certain areas. The affected borrowers have seen a decrease in the underlying values of their properties, combined with a general slowdown in home sales throughout the market area. It is this slowdown in home sales, and the resultant impact on cash-flows that have caused these borrowers to either fall behind on, or curtail payments on their loans, causing the Bank to place them on nonaccrual.

~~EXHIBIT~~The 32following table summarizes our nonaccrual loans at the periods indicated. Nonaccrual loans with valuation allowance refers to the portion of our total nonaccrual loans that have been identified as having loss exposure and have a specific amount set aside for them in the Allowance. We refer to the specific amount set aside for these loans as the allocation of the Allowance.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

	At September 30,	At December 31,
(dollars in thousands)	2008	2007

Total nonaccrual loans	$ 53,792	$ 3,007

Nonaccrual loan with valuation allowance:
Construction Residential Real Estate	$4,159	$1,868
Commercial Real Estate	5,731	80
Land Development (Residential Lots)	8,693	-
Commercial (Non Real Estate)	-	170
Residential Real Estate	232	40
Consumer (Non Real Estate)	-	8
Lot Inventory	8,998	-

Total nonaccrual loans with valuation allowance	$27,813	$2,166

~~This~~Allocation ~~certification is furnished by the undersigned Chief Executive Officer and acting Chief Financial Officer~~ of ~~Venture~~ ~~Financial~~allowance ~~Group, Inc. (the "Registrant") pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Each of the undersigned hereby certifies, with respect to the Registrant's quarterly report of Form 10-Q~~ for ~~the~~credit ~~period~~losses ~~ended March 31, 2005 as filed with the Securities and Exchange Commission~~ on ~~the date~~ ~~hereof~~ nonaccrual ~~(the~~loans ~~"Report"),~~identified ~~that~~above:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Registrant.


Construction Residential Real Estate	480	584
Commercial Real Estate	282	18
Land Development (Residential Lots)	1,015	0
Commercial (Non Real Estate)	-	100
Residential Real Estate	1	16
Consumer (Non Real Estate)	-	8
Lot Inventory	1,000	0

Total allocation of allowance for credit losses	$2,778	$726

~~/s/~~Gross ~~Ken~~interest F.income ~~Parsons,~~of Sr$1.0 ~~Ken~~million Fand $1.5 ~~Parsons~~million would have been recorded for the three months ended September 30, ~~Sr.~~2008 and nine months ended September 30, 2008, ~~President~~respectively, ~~Chief~~if ~~Executive~~the ~~Officer~~nonaccrual loans had been current in accordance with their original terms and ~~Chairman~~conditions. ofInterest income on these loans was not included in net income for the ~~Board (principal~~three ~~executive~~months ~~officer,~~ended ~~principal~~September ~~financial~~30, ~~officer~~2008 and ~~principal~~the ~~accounting~~nine ~~officer)~~months ended September 30, 2008.

~~May~~Management 14closely reviews the loan portfolio on a quarterly basis, ~~2005~~and will continue to identify and evaluate all loans where there are defined weaknesses, including declines in collateral value and borrower difficulties complying with loan repayment terms.

Potential Problem Loans. Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about related economic conditions, weaknesses in their specific industries or issues related to geographic locations. These loans are identified through our internal risk grading processes and management monitors these loans closely and reviews their performance on a regular basis.

As of September 30, 2008 the Company had classified as potential problem loans 77 loans aggregating $62.7 million. Within this are six loans with balances greater than $2.0 million aggregating $24.5 million. The largest single loan is $6.1 million.

Foreclosed Real Estate. As of September 30, 2008, we held seven foreclosed properties, represented by three single family residential building lots, three single family residences and one plat development. The carrying value of the properties aggregated $3.6 million. As of December 31, 2007, we held two foreclosed properties, represented by two single family residential building lots. The carrying value of the properties aggregated $68 thousand. Valuation of the property occurs when it is foreclosed upon, and at least annually thereafter. We use the lesser of cost or fair market value less costs to sell to establish the carrying values. For the properties noted, we have used fair market value less cost to sell.

Allowance for Credit Losses

We must maintain an adequate allowance for credit losses (“the Allowance”) based on a comprehensive methodology that assesses the estimated losses inherent in our loan portfolio. The Allowance reflects our current estimate of the amount required to absorb probable losses on existing loans. There is no precise method of predicting specific credit losses or amounts that ultimately may be charged off on segments of the loan portfolio. The determination that a loan may become uncollectible, in whole or in part, is a matter of judgment. Similarly, the adequacy of the Allowance is determined based on management’s judgment, and on the analysis of various factors including historical loss experience based on volumes and types of loans; volumes and trends in delinquencies and nonaccrual loans; trends in portfolio volume; results of internal credit reviews; and economic conditions.

Management conducts a full review of the Allowance on a regular basis, including:

consideration of economic conditions and the effect on particular industries and specific borrowers;
a review of borrower financial data, together with industry data, the market(s) in which it operates, the borrower’s management capabilities and other factors;
a continuing evaluation of the loan portfolio, including monitoring by lending officers and staff, of all loans which are identified as having a higher level of risk;
an in-depth evaluation, on a monthly basis, of all loans judged to present a possibility of loss (if, as a result of such monthly assessments, a loan is judged to be not fully collectible, the carrying value of the loan is reduced to that portion considered collectible); and
an evaluation of the underlying collateral for secured lending, including the use of independent appraisals of real estate properties securing loans.

Our quarterly analysis of the adequacy of the Allowance is presented and reviewed by our Board of Directors. We consider the Allowance to be adequate to cover estimated credit losses relating to the loans outstanding as of each reporting period.

Every loan in the loan portfolio has some measure of the Allowance for Credit Losses attributed to it. The Allowance consists of two parts: a general reserve (as described below) for loans determined not to be impaired as defined in FAS 114 “Accounting by Creditors for Impairment of a Loan” and a specific allocation (as described below) for every loan that is determined to be impaired. Grades range from “excellent” loans graded a “1” to “loss” loans graded an “8”. Losses on loans are charged against and reduce the Allowance in the period in which such loans, or portions thereof, in our opinion, become uncollectible. Recoveries during the period are credited to the Allowance. Periodically, a provision for credit losses is charged to current income. This provision acts to replenish the Allowance and to maintain the Allowance at a level that management deems adequate.

General Allocation: Loans not recognized as impaired are reviewed on a portfolio segment basis rather than on a loan by loan basis to determine a general allocation of dollars necessary to provide an adequate Allowance. Each portfolio segment is divided by grade into two categories, grades 1-4 and grades 5 and 6. General reserve allocation factors reflect management’s estimate of risk by grade within each portfolio segment. Consideration is given to those segments of the loan portfolio which management deems to pose the greatest likelihood of loss. In an economic downturn, such as the region has experienced since late 2007, management believes the Banks’ greatest exposure of risk is in the construction and land development portfolios. Management increased the loss reserve factor for the construction, land development and commercial real estate segments of the Bank’s general portfolio to correspond with the risk associated with this type of lending. A low, mid-point, and high range of exposure to loss in various loan types is determined on a quarterly basis.

Specific Allocations: The Bank specifically evaluates all impaired loans for potential loss exposure. A loan is determined to be impaired when management becomes aware that any loss of principal or interest exists. At this point the loan is classified as impaired and an analysis is performed to determine if a write-down to the allowance is necessary. The estimate of loss reserves on impaired loans is determined based on Financial Accounting Standard 114 (FAS 114). Management estimates the loss or valuation allowances on impaired loans based on one of the three measurement methods described in Statement of Financial Accounting Standard No. 114, Accounting by Creditors for Impairment of a Loan (SFAS 114), as amended,: (1) the loan’s observable fair price, (2) discounted cash flow analysis, or (3) the fair value of collateral, if repayment of the loan is expected to be provided by underlying collateral. In some instances loans may be determined to be impaired, but not require a write-down or a specific valuation allowance based upon management’s analysis of the collateral providing sufficient coverage for the loan. If a loss of principal is determined a charge is taken against the allowance and a specific reserve is established if additional costs exist to liquidate the loan.

The following table sets forth activity in the allowance for credit losses for the periods indicated:

(dollars in thousands)	Nine Months	Year Ended
	Ended	December 31,
	September 30,
	2008	2007

Balance at beginning of period	$10,975	$8,917

Provision for credit losses	15,278	3,600

Charge-offs:
Commercial	(853)	(568)
Real Estate Mortgage and Construction	(6,255)	(999)
Consumer	(46)	(54)

Total charge-offs	(7,154)	(1,621)


Recoveries:
Commercial	77	30
Real Estate Mortgage and Construction	85	37
Consumer	28	12

Total recoveries	190	79


Net charge-offs	(6,964)	(1,542)
Transfer to reserve for unfunded commitments	(119)	-
Balance at end of period	$19,170	$10,975

Gross loans	$792,290	$783,117
Average loans	$794,988	$746,498
Non-performing loans	$53,792	$3,117

Selected ratios:

Net charge-offs to average loans	0.88%	0.21%

Allowance for credit losses to average loans	2.41%	1.48%

Allowance for credit losses to loans outstanding at end of period	2.42%	1.43%

Allowance for credit losses to non-performing loans	35.64%	352.1%
(dollars in thousands)

We allocate the Allowance by assigning general allocations to our major loan categories (construction, commercial real estate, residential real estate, C&I and consumer). We also make specific allocations on individual loans when factors are present requiring a greater reserve, typically the result of reviews of updated appraisals, or other collateral analysis.

The following table indicates management’s allocation of the allowance for credit losses among major loan categories:

	September 30,		December 31,
(dollars in	2008		2007
thousands)
	Amount	% of Total	Amount	% of Total
		Allowance		Allowance

Commercial	$1.479	7.7%	$1,085	9.9%
Real Estate
Commercial	6,799	35.5%	3,329	30.3%
Construction	10,254	53.5%	5,738	52.3%
Residential	505	2.6%	348	3.2%
Consumer	89	0.5%	45	0.4%
Unallocated	44	0.2%	430	3.9%


Total	$19,170	100.0%	$10,975	100.0%

We consider many factors to determine the amount and allocation of the Allowance, centered in overall portfolio performance by loan category/type, local and national economic trends, and assessments of categories of collateral. This information is measured against the current allocation and our historical loss record for the previous seven-year period to aid in assessing the adequacy of the Allowance. We weight loan types for risk in the general portion of the reserve at a low, mid and high point based on perceived risk from past experience and from expected risk of loss. As previously discussed specifically identified credits and their specific allocation of the reserve are also included above in the total allowance.

Our grading system allows our loan portfolio, including real estate, to be ranked across four “pass” risk grades, i.e. 1 (Excellent) through 4 (Monitored). Generally, the real estate loan portfolio is graded either a 3, or 4, reflective of the overall quality of the existing portfolio, notwithstanding the various risks inherent in the real estate portfolio, such as large size and complexity of individual credits, and overall concentration of credit risk.

For commercial banks, the Commercial and Industrial (C&I) loans that are not secured by real estate have historically represented the highest risk category based on our past experience. This portfolio made up approximately 9.3% of our total loans as of September 30, 2008. While the majority of our historical loan charge-offs have occurred in this portfolio, we believe the current Allowance allocation is adequate.

Our commercial real estate loans are a mixture of new and seasoned properties, generally retail, office, warehouse, and some industrial properties. Loans on properties are generally underwritten at a loan-to-value ratio of up to 80% with a minimum debt coverage ratio of 1.20:1.

Our construction portfolio reflects some borrower concentration risk, and also carries the risks generally encountered with construction loans. We finance contractors who construct homes or commercial properties that are not pre-sold. These construction loans are generally more risky than permanent mortgage loans because they are dependent upon the borrower’s ability to complete the construction within budget and then to generate cash to service the loan by selling or leasing the project. The value of the collateral depends on project completion when market conditions may have changed. Given the decline in the economic conditions as well as the downturn in the real estate market, management elected to increase the risk factor for residential construction and land development loans to more closely mirror the current risk environment.

We have been engaged in an ongoing and active initiative to ensure we are compliant with both the spirit and letter of the commercial real estate guidelines promulgated by the regulatory agencies. Our practices include active and ongoing senior management involvement, including informed oversight by the Board of Directors.

Deposits

Total deposits were $999.0 million at September 30, 2008 compared to $837.1 million at December 31, 2007. The balance of our public funds deposits decreased by $121.7 million in the first nine months of 2008 to $57.3 million at September 30, 2008 from $179.0 million at December 31, 2007. Brokered deposits increased by $248.9 million in the first nine months of 2008 to $353.5 million compared to $104.6 million at December 31, 2007. Retail deposits increased by $37.1 million to $588.2 million for the nine months ended September 30, 2008 compared to $353.6 million at December 31, 2007.

The following table presents average balances not total balances as discussed above. Our average balances of deposits and average interest rates paid for the periods indicated are summarized in the following table.

	September 30, 2008			December 30, 2007
(dollars in thousands)	Average	% of	Weighted	Average	% of	Weighted
	Balance	Total	Average Rate	Balance	Total	Average Rate

Non-interest checking	$ 107,018	12.2%	-	$ 104,287	12.7%	-
NOW and MMDA	335,747	38.2%	1.78%	323,838	39.6%	3.51%
Savings accounts	23,964	2.7%	0.62%	22,900	2.8%	0.34%
Time deposits	411,498	46.9%	3.68%	367,273	44.9%	4.87%

Total	$ 878,227	100.0%		$ 818,298	100.0%



The following table shows the maturities of our time deposits:

				September 30, 2008
	(dollars in thousands)		Under	$100,000
			$100,000	and over		Total

	0-90 days		$ 29,803	$ 99,893		$ 129,695
	91-180 days		27,452	55,332		82,784
	181-365 days		58,403	58,465		116,868
	Over 1 year		92,173	217,594		307,767

			$ 207,830	$ 431,283		$ 639,114

Borrowings and Repurchase Agreements

Short term borrowings decreased $143.1 million, or 82.2%, to $30.9 million in the nine months ended September 30, 2008 compared to $174.0 million at December 31, 2007. Short-term borrowings represent Federal Funds Purchased, borrowings from the U.S. Treasury, repurchase agreements with Citigroup, advances from the FHLB, and customer repurchase agreements, all of which are normally maturing within one year.

The following table sets forth information concerning short-term borrowings at the periods indicated:
	September 30,	December 31, 2007
	2008

Average balance during period	$ 155,716	$ 122,698
Average interest rate during period	3.34%	4.62%
Maximum month-end balance during the year	247,393	175,922
Weighted average rate at period end	2.83%	4.58%
Balance at period end	$ 30,847	$ 174,040

Contractual Obligations and Off-Balance Sheet Arrangements

Long-term borrowings include junior subordinated debentures. The following tables show the long-term borrowings and contractual obligations as of September 30, 2008:

			September 30, 2008
(dollars in thousands)			Payments Due by Period
	Less Than	After One	After Three	More Than
	One Year	But Within	But Within	Five
Contractual Obligations		Three Years	Five Years	Years	Total

Demand note issued to US Treasury	$ 8,060	$ -	$ -	$ -	$ 8,060
FHLB Term Advances	-	-	40,000	10,000	50,000
Overnight repurchase agreements with customers	22,787	-	-	-	22,787
Junior subordinated debentures (at fair value)	-	-	-	19,734	19,734
Premise leases	835	1,744	1,715	7,895	12,189

Total contractual obligations	$ 31,682	$ 1,744	$ 41,715	$ 37,629	$ 112,770

We are party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These instruments include unfunded commitments to extend credit and standby letters of credit. The following table summarizes our commitments at the periods indicated:

(dollars in thousands)	September 30,	December 31,
	2008	2007

Unfunded commitments to extend credit
Real estate secured	$ 75,008	$ 135,545
Credit card lines	2,621	3,018
Other	63,700	61,258

Total commitments to extend credit	$ 141,329	$ 199,821


Standby letters of credit	$ 1,940	$ 1,953

Capital

Current risk-based regulatory capital standards require banks and bank holding companies to maintain a minimum ratio of “core” or “Tier I” capital (consisting principally of common equity) to risk-weighted assets of at least 4%, a ratio of Tier I capital to adjusted total assets (leverage ratio) of at least 4% and a ratio of total capital (which includes Tier I capital plus certain forms of subordinated debt, a portion of the allowance for credit losses and preferred stock) to risk-weighted assets of at least 8% to be adequately capitalized. Risk-weighted assets are calculated by multiplying the balance in each category of assets by a risk factor, which ranges from zero for cash assets and certain government obligations to 100% for some types of loans, and adding the products together.

	Regulatory Requirements			Actual percentage at
	(Greater than or equal to stated percentage)			September 30, 2008

	Under	Adequately	Well		Venture Financial Group,
	Capitalized	Capitalized	Capitalized	Venture Bank	Inc.
Tier 1 leverage capital ratio	< 4.00%	4.00%	5.00%	5.60%	5.73%
Tier 1 risk-based capital	< 4.00%	4.00%	6.00%	6.53%	6.79%
Total risk-based capital	< 8.00%	8.00%	10.00%	7.79%	8.05%

	Regulatory Requirements			Actual percentage at
	(Greater than or equal to stated percentage)			December 31, 2007

	Under	Adequately	Well		Venture Financial Group,
	Capitalized	Capitalized	Capitalized	Venture Bank	Inc.
Tier 1 leverage capital ratio	< 4.00%	4.00%	5.00%	8.18%	8.37%
Tier 1 risk-based capital	< 4.00%	4.00%	6.00%	9.15%	9.34%
Total risk-based capital	< 8.00%	8.00%	10.00%	10.31%	10.50%

The $26.1 million net of tax OTTI charge on the Freddie Mac and Fannie Mae preferred shares and the ensuing decrease in retained earnings from that charge, resulted in a reduction of regulatory capital for both Venture Bank and Venture Financial Group. The Company is considered adequately capitalized for its total risk-based capital as of September 30, 2008 versus well-capitalized as of December 31, 2007.

The Bank is considered under capitalized for its total risk-based capital as of September 30, 2008 versus well-capitalized as of December 31, 2007. Although the current capitalization ratio is sufficient for current ongoing operations, management is committed to bringing the Company and the Bank back to a well-capitalized status. Although management intends to become well-capitalized in the near future, there are many factors that could cause regulatory capital to decline even further. These factors include, but are not limited to; credit deterioration in the Banks securities portfolio, particularly in the Level 3 securities which could trigger an other than temporary impairment, and a larger than normal increase in the provision for credit losses due to ongoing credit concerns.

On August 25, 2008 the Company sold 160,000 newly issued shares of common stock of which, the ESOP purchased 110,000 shares at $13.00 per share for total proceeds of $1.4 million and the KSOP purchased 50,000 shares at $13.00 per share for total proceeds of $650 thousand. This resulted in a net increase to capital in the amount of $2.1 million.

In order to manage our capital position more efficiently, we have formed statutory trusts for the sole purpose of issuing trust preferred securities. We had junior subordinated debentures with a fair value of $21.2 million at September 30, 2008 and carrying value of $21.8 million at December 31, 2007. At September 30, 2008, 100% of the total issued amount, had interest rates that were adjustable on a quarterly basis based on a spread over LIBOR. In July 2007, we called $13.4 million of junior subordinated debentures originally issued by FCFG Capital Trust I in 2002. We immediately replaced these with a new issuance in the same amount by VFG Capital Trust I. Our capital did not change as a result of this transaction. We paid quarterly interest payments at the 3-month LIBOR rate plus 365 basis points on the FCFG Capital Trust I issuance. The rate on the new issuance is the 3-Month LIBOR rate plus 145 basis points, which re-prices quarterly, and will provide a significant savings. The stated maturity date of this issuance is September 2037, and the debentures may be prepaid without penalty beginning September 2012.

In April 2003, we raised $6.2 million (FCFG Capital Trust II) through a participation in a pooled junior subordinated debentures offering. The floating rate junior subordinated debentures issued by FCFG Capital Trust II accrue interest at a variable rate of interest, calculated quarterly, at LIBOR plus 325 basis points per annum on the outstanding balance. The stated maturity date this issuance is October 2033, and the debentures may be prepaid without penalty. The majority of these funds were utilized for the purchase of Harbor Bank in 2002 and to repurchase our common stock. In December 2003, Washington Commercial Bancorp raised $3.1 million (Washington Commercial Statutory Trust I) through its participation in a pooled junior subordinated debentures offering. The floating rate junior subordinated debentures issued by Washington Commercial Statutory Trust I accrue interest at a variable rate of interest, calculated quarterly at LIBOR plus 285 basis points per annum on the outstanding balance. The stated maturity date of this issuance is December 2033, and

these debentures may be prepaid without penalty beginning December 2008. We acquired the Washington Commercial Bancorp junior subordinated debentures upon completion of our merger.

On March 5, 2005 the Federal Reserve adopted regulations that mandate the maximum amount of junior subordinated debentures that may be included in our Tier 1 Capital calculation. Our capital ratios are calculated in accordance with this regulation and the entire issued amount of junior subordinated debentures qualified as Tier 1 Capital for regulatory capital purposes.

In accordance with the provisions of the related indentures, we intend to notify the trustees of the Trusts that the payment of dividends will be deferred effective with the distributions scheduled for the fourth quarter of 2008, until further notice. The Company has the right to defer distributions for up to 20 consecutive quarters, although it will continue to accrue the cost of the preferred dividends at the normal interest rate on a compounded basis until such time as the deferred arrearage has been paid current.

Liquidity

Liquidity management involves the ability to meet cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Liquidity is generated from both internal and external sources. Internal sources are those assets that can be converted to cash with little or no risk of loss. In this turbulent market environment where credit spreads are abnormally wide, assets may be difficult to convert to cash with or without a loss. Internal sources include overnight investments in interest bearing deposits in banks, federal funds sold and all or a portion of available for sale investment securities.

We have a formal liquidity policy, and in the opinion of management, our liquid assets are considered adequate to meet our anticipated cash flow needs for deposit withdrawals.

At September 30, 2008, cash and cash equivalents, federal funds sold and all securities available for sale totaled $266.5 million of which $181.6 million was pledged. The securities are pledged at more than 100% of the secured borrowing so that repayment of the borrowing creates excess liquidity due to the full value of the securities being realized. External sources refer to the ability to access new deposits, new borrowings and capital and include increasing savings and demand deposits, certificates of deposit, federal funds purchased, re-purchase agreements, short and long term debt, and the issuance of capital and debt securities. At September 30, 2008 short and long term borrowing lines of credit totaled $139.9 million. These credit facilities are being used regularly as a source of funds. At September 30, 2008, $50 million was borrowed against these lines of credit in the form of long term debt, compared to $151.8 million borrowed at June 30, 2008.

We will manage our liquidity by changing the relative distribution of our asset portfolios, i.e., reducing investment or loan volumes, or selling or encumbering assets. Further, we will increase liquidity by soliciting higher levels of deposit accounts through promotional activities or borrowing from the Federal Home Loan Bank, Federal Reserve Discount Window or other borrowing sources. At the current time, our long-term liquidity needs primarily relate to funds required to meet deposit withdrawals. These needs can currently be met by cash flows from investment payments and maturities, and investment or loan sales if the need arises. Future sources of liquidity, if necessary, to fund our future growth could be the issuance of capital instruments such as preferred stock, additional common stock and trust preferred securities.

Our primary investing activities are the origination of real estate, commercial and consumer loans and purchase of securities. Gross loans including loans held for sale were $792.3 million as of September 30, 2008 and $783.1 million for the year ended December 31, 2007. Investment securities were $228.9 million at September 30, 2008 and $280.1 million at December 31, 2007. At September 30, 2008 we had outstanding loan commitments of $141.3 million and outstanding letters of credit of $1.9 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided by financing activities has been impacted by an increase in deposit levels of $161.9 million for the nine months ended September 30, 2008. For the twelve months ended December 31, 2007 total deposits increased by $65.9 million.

Management believes that the Company's liquidity position at September 30, 2008 was adequate to fund ongoing operations.

Item 3 Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending, investment, and deposit taking activities. To that end, management actively monitors and manages our interest rate risk exposure. We do not have any market risk sensitive instruments entered into for trading purposes. We manage our interest rate sensitivity by managing the repricing opportunities on our earning assets and those on our funding liabilities on an overall bank basis.

Management uses various asset/liability strategies to manage the repricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of our securities, are used to reduce mismatches in interest rate repricing opportunities of portfolio assets and their funding sources.

Interest Rate Risk. Interest rate risk is the current and prospective risk to earnings or capital arising from movements in interest rates. Changes in interest rates affect income earned from assets and the cost of funding those assets. We structure our balance sheet in such a manner that earnings will be relatively stable regardless of current or prospective movements in interest rates. We monitor interest rate risk by analyzing the potential impact on the economic value of equity and net interest income from potential changes in interest rates, and consider the impact of alternative strategies or changes in balance sheet structure.

Our exposure to interest rate risk is reviewed on at least a quarterly basis by our Board Asset Liability Committee, or Board ALCO, which is comprised of three independent directors. Our Chief Financial Officer works closely with the Board ALCO Committee. Our Chief Financial Officer develops and implements policies and procedures that translate the Board’s goals, objectives, and risk limits, and chairs the Management ALCO committee, which meets to assist in formulating and implementing operating strategies to execute the Board ALCO policies. On a day-to-day basis, the monitoring of interest rate risk and management of our balance sheet to stay within Board policy limits is the responsibility of our Chief Financial Officer and Treasury staff. The Management ALCO committee members represent various areas of our operations and participate in product creation, product pricing, and implementation of asset/liability strategies.

Item 4T Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s disclosure controls and procedures are designed to ensure that information VFG must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are recorded, processed, summarized, and reported on a timely basis. The Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO have concluded that VFG’s disclosure controls and procedures are effective in bringing to their attention, on a timely basis, information required to be disclosed by VFG reports that it files or submits under the Exchange Act

Changes in Internal Controls

In the third quarter ended September 30, 2008, the Company did not make any change in, nor take any corrective actions regarding, its internal controls or other factors that has materially affected, or is reasonably likely to materially affect the internal controls over the financial reporting. The Company continued to implement suggestions from its internal auditor and independent auditors on ways to strengthen existing controls.

Venture Financial Group, Inc.

PART II - OTHER INFORMATION

Item 1 Legal Proceedings

Due to the nature of banking, we are involved in legal proceedings in the ordinary course of business. At this time, we do not believe that there is pending litigation the outcome of which will have a material adverse affect on the financial condition, results of operations, or liquidity of the Company.

Item 1A Risk Factors

Other than as set forth below, there are no material changes to the Company’s risk factors from what was previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2007.

Difficult market conditions have adversely affected the financial services industry. The capital and credit markets have been experiencing unprecedented volatility and disruption for more than twelve months. In recent weeks, the volatility and disruption has reached unprecedented levels. Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures and unemployment have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected the Bank’s business, financial condition and results of operations. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on the Bank and others in the financial institutions industry. In particular, the Bank may face the following risks in connection with these events:

Increased regulation of our industry, including as a result of the Emergency Economic Stabilization Act of 2008. Compliance with such regulation may increase the Bank’s costs and limit its ability to pursue business opportunities.
The Bank’s ability to assess the creditworthiness of our customers may be impaired if the models and approaches the Bank uses to select, manage, and underwrite its customers become less predictive of future behaviors.
The process the Bank uses to estimate losses inherent in its credit exposure requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of the Bank’s borrowers to repay their loans, which may no longer be capable of accurate estimation which may, in turn, impact the reliability of the process.

The Bank may be required to pay significantly higher Federal Deposit Insurance Corporation premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.
There may be downward pressure on the Company’s stock price.
The Bank’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions and government sponsored entities.
The Bank may face increased competition due to intensified consolidation of the financial services industry.

If current levels of market disruption and volatility continue or worsen, there can be no assurance that the Company will not experience an adverse effect, which may be material, on its ability to access capital and on its business, financial condition and results of operations.

We may be limited in our access to funding to meet our liquidity needs. Liquidity is essential to the Bank’s business. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a substantial negative effect on the Bank’s liquidity. The Bank’s access to funding sources in amounts adequate to finance its activities could be impaired by factors that affect the Bank specifically or the financial services industry in general. Factors that could detrimentally impact the Bank’s access to liquidity sources include a decrease in the level of business activity due to a market down turn or adverse regulatory action against the Bank. The Bank’s ability to borrow could also be impaired by factors that are nonspecific to the Bank, such as severe disruption of the financial markets or negative use and expectations about the prospects for the financial services industry as a whole as evidenced by recent turmoil in the domestic and worldwide credit markets. As a result of the Bank’s regulatory capital falling below the requirements for well-capitalized status as of September 30, 2008, the Bank is unable to issue brokered certificates of deposit. Brokered certificates of deposit aggregating $84.1 million, which represent approximately 8.4% of total deposits, mature prior to December 31, 2008.

The Bank’s wholesale funding sources may prove insufficient to replace deposits at maturity and support our future growth. The Bank must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of its liquidity management, the Bank uses a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As the Bank continues to grow, it is likely to become more dependent on these sources, which include Federal Home Loan Bank advances, proceeds from the sale of loans and liquidity resources at the Company. At September 30, 2008, the Bank had approximately $50 million of Federal Home Loan Bank advances outstanding. The Company’s financial flexibility will be severely constrained if the Bank is unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If the Bank is required to rely more heavily on more expensive funding sources to support future growth, revenues may not increase proportionately to cover costs, and profitability would be adversely affected.

Federal and state governments could pass legislation responsive to current credit conditions. The Bank could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount the Bank's borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Bank could experience higher credit losses because of federal or state legislation or regulatory action that limits the Bank's ability to foreclose on property or other collateral or makes foreclosure less economically feasible.

Changes in accounting standards may impact how we report our financial condition and results of operations. Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time the Financial Accounting Standards Board (“FASB”) changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in a restatement of prior period financial statements.

The value of securities in our investment securities portfolio may be negatively affected by continued disruptions in securities markets. The market for some of the investment securities held in our portfolio has become extremely volatile over the past twelve months. Volatile market conditions may detrimentally affect the value of these securities, such as through reduced valuations due to the perception of heightened credit and liquidity risks. There can be no assurance that the declines in market value associated with these disruptions will not result in other than temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

There can be no assurance that recently enacted legislation authorizing the U.S. government to inject capital into financial institutions and purchase assets from financial institutions will help stabilize the U.S. financial system. On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”). The legislation was the result of a proposal by Treasury Secretary Henry Paulson to the U.S. Congress on September 20, 2008 in response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions. Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, invest in preferred stock of financial institutions and purchase mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. There can be no assurance, however, as to the actual impact that the EESA will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of the EESA to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

If the Bank is unable to pay cash dividends to the holding company to meet the holding company’s cash obligations, the business, financial condition, results of operations and prospects will be adversely affected. Dividends paid by the bank to the holding company provide cash flow used to service the interest payments on trust preferred securities. Various statutory provisions restrict the amount of dividends the Bank can pay to the holding company without regulatory approval: the Bank’s payment of dividends is subject to receipt of the prior written consent of the Director of Banks for the State of Washington and the Company may not be able to receive his consent. It is possible that, depending upon the financial condition of the Bank and other factors, the applicable regulatory authorities could assert that payment of dividends or other payments, including payments to the holding company, is an unsafe or unsound practice. If the Bank is unable to pay dividends to the holding company, it may not be able to service the debt or pay its obligations. The inability to receive dividends from the Bank would adversely affect the business, financial condition, results of operations and prospects and could lead to a deferral of interest on existing trust preferred securities.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

(a)	On August 25, 2008 the Company sold 160,000 newly issued shares of common stock in private placement transactions (Section 4(2) of the Securities Act) to its affiliated benefit plans—the Employee Stock Ownership Plan or ESOP (110,000 shares) and 401K Stock Ownership Plan or KSOP (50,000 shares) at $13.00 per share.

(c)	Issuer Purchases of Equity Securities

Total number of shares

purchased as part of

Maximum number of

Total number of shares

Average price paid per

publicly announced plans

shares that may yet be

Period

purchased

or programs

purchased

Month #1

July 1, 2008 through

July 31, 2008

- -

200,000

Month #2

August 1, 2008 through

August 31, 2008

- -

200,000

Month #3

September 1, 2008 through

September 30, 2008

- -

200,000

Date repurchase authorized

Date publicly announced

# of shares authorized

Expiration Date

February 19, 2003

March 5, 2003

131,370

August 19, 2004

September 18, 2003

September 24, 2003

56,130

December 18, 2004

October 15, 2003

October 17, 2003

225,000

April 15, 2005

June 16, 2004

June 22, 2004

200,000

December 31, 2005

November 15, 2005

February 27, 2006

200,000

May 15, 2007

August 29, 2007

September 5, 2007

200,000

February 29, 2009

Share counts reflect a three-for-two stock dividend declared on May 16, 2004.

Item 6 Exhibits

The following is a list of exhibits to this Form 10-Q and constitutes the EXHIBIT INDEX:

3.1	Second Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005; SEC Accession No. 0000896595-05-000206, filed May 16, 2005.

3.2	Amended Bylaws (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed June 25, 2007, SEC Accession No. 0000896595-07-000295)

31.1	Certifications of the Chief Executive Officer.

31.2	Certifications of the Chief Financial Officer.

32	Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of Sarbanes-Oxley Act of 2002.

Venture Financial Group, Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	VENTURE FINANCIAL GROUP, INC. (Registrant)
Date: November 19, 2008	By: /s/ Ken F. Parsons, Sr. Ken F. Parsons, Sr. Chief Executive Officer and Chairman of the Board

	By: /s/ Sandra L. Sager Sandra L. Sager, CPA EVP, Chief Financial Officer

Filing Compare · VENTURE FINANCIAL GROUP INC