|UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
|---------------------------------------------------------------------



|FORM 10-Q
|---------

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



|For the quarterly period endedJune 30, 2008
|-------------------------------------------



|OR
|--



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



|Commission File Number0-24024
|-----------------------------



|VENTURE FINANCIAL GROUP, 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)



|1495 Wilmington Drive, P.O. Box 970, DuPont, WA 98327(Address of Principal Executive Offices)
|---------------------------------------------------------------------------------------------



|Registrants telephone number: (253) 441-4000
|---------------------------------------------

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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:XYes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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. (Check one):

|Large accelerated filer |  | Accelerated filer |  | Non-accelerated filer X |  | Smaller reporting company
|----------------------- |  | ----------------- |  | ----------------------- |  | -------------------------
|                        |  |                   |  |                         |  |                          

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

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

|Title of Class |  | Outstanding at August 13, 2008
|-------------- |  | ------------------------------
|Common Stock   |  | 7,225,687                     



|1
|-

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|                               |  | 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 Income (unaudited)          |  | 4    
|                               |  | Condensed Consolidated Statements of Shareholders Equity and    |  |      
|                               |  | Comprehensive Income (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       |  | 32   
|                               |  |                                                                  |  |      
|Item 4T                        |  | Controls and Procedures                                          |  | 33   
|                               |  |                                                                  |  |      
|PART II - OTHER INFORMATION    |  |                                                                 
|                               |  |                                                                 
|Item 1                         |  | Legal Proceedings                                                |  | 34   
|                               |  |                                                                  |  |      
|Item 1A                        |  | Risk Factors                                                     |  | 34   
|                               |  |                                                                  |  |      
|Item 2                         |  | Unregistered Sales of Equity Securities and Use of Proceeds      |  | 34   
|                               |  |                                                                  |  |      
|Item 6                         |  | Exhibits                                                         |  | 35   
|                               |  |                                                                  |  |      
|SIGNATURES                     |  |                                                                  |  | 36   

2

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|Item 1. Financial Statements
|----------------------------

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

|ASSETS                                                           
|-----------------------------------------------------------------
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Cash and due from banks                                          
|Interest bearing deposits in other banks                         
|                                                                 
|Total cash and cash equivalents                                  
|                                                                 
|                                                                 
|Securities available-for-sale                                    
|Securities held-to-maturity                                      
|Investment in trusts                                             
|FHLB Stock and TIB Stock                                         
|Loans held-for-sale                                              
|                                                                 
|                                                                 
|Loans                                                            
|Allowance for credit losses                                      
|                                                                 
|Net loans                                                        
|                                                                 
|Premises and equipment, net of accumulated depreciation          
|Foreclosed real estate                                           
|Accrued interest receivable                                      
|Cash surrender value of bank owned life insurance                
|Goodwill                                                         
|Other intangible assets                                          
|Other assets                                                     
|                                                                 
|Total assets                                                     
|                                                                 
|                                                                 
|                                                                 
|LIABILITIES AND SHAREHOLDERS EQUITY                             
|Deposits                                                         
|Non-interest bearing checking                                    
|NOW, Savings and MMDA                                            
|Time certificates of deposit                                     
|                                                                 
|Total deposits                                                   
|                                                                 
|Federal funds purchased                                          
|Securities sold under agreements to repurchase                   
|Other borrowings                                                 
|Junior subordinated debentures at fair value                     
|Accrued interest payable                                         
|Other liabilities                                                
|                                                                 
|Total liabilities                                                
|                                                                 
|                                                                 
|SHAREHOLDERS' EQUITY                                             
|Common stock (no par value); 30,000,000 shares authorized, shares
|issued and outstanding: June 30, 2008  7,225,237                
|December 31, 2007 -7,221,787                                     
|Retained earnings                                                
|Accumulated
     other comprehensive loss                        
|                                                                 
|Total shareholders' equity                                       
|                                                                 
|Total liabilities and shareholders' equity                       
|                                                                 
|                                                                 
|                                                                 
|See notes to condensed consolidated financial statements         

3

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

|                                                         |  | For the three months ended |  | For the six months ended
|-------------------------------------------------------- |  | -------------------------- |  | ------------------------
|                                                         |  | June 30,                   |  | June 30,                
|                                                         |  |                            |  |                         
|                                                         |  | 2008                       |  | 2007                    
|INTEREST INCOME                                          |  |                            |  |                         
|Loans                                                    |  | $13,883                    |  | $16,442                 
|Federal funds sold and deposits in banks                 |  | 5                          |  | 32                      
|Investment securities                                    |  |                            |  |                         
|Taxable                                                  |  | 4,934                      |  | 3,093                   
|Non-taxable                                              |  | 67                         |  | 133                     
|Total interest income                                    |  | 18,889                     |  | 19,700                  
|                                                        
|INTEREST EXPENSE                                         |  |                            |  |                         
|Deposits                                                 |  | 5,738                      |  | 7,960                   
|Federal funds purchased                                  |  | 169                        |  | 2                       
|Securities sold under agreement to repurchase            |  | 157                        |  | 439                     
|Other borrowings                                         |  | 1,093                      |  | 1,008                   
|Junior subordinated debentures                           |  | 392                        |  | 498                     
|Total interest expense                                   |  | 7,549                      |  | 9,907                   
|                                                        
|Net interest income                                      |  | 11,340                     |  | 9,793                   
|                                                        
|PROVISION FOR CREDIT LOSSES                              |  | 3,375                      |  | 375                     
|Net interest income after provision for credit losses    |  | 7,965                      |  | 9,418                   
|                                                        
|NON-INTEREST INCOME                                      |  |                            |  |                         
|Service charges on deposit accounts                      |  | 1,062                      |  | 1,009                   
|Origination fees and net gains on sales of loans         |  | 1,149                      |  | 463                     
|Gain (loss) on sale of securities                        |  | 83                         |  | (139)                   
|Change in market value of junior subordinated debentures |  | 170                        |  | 107                     
|Other non-interest income                                |  | 782                        |  | 822                     
|Total non-interest income                                |  | 3,246                      |  | 2,262                   
|                                                        
|NON-INTEREST EXPENSES                                    |  |                            |  |                         
|Salaries and employee benefits                           |  | 4,768                      |  | 3,720                   
|Occupancy                                                |  | 728                        |  | 723                     
|Equipment                                                |  | 689                        |  | 561                     
|Amortization of intangible assets                        |  | 71                         |  | 71                      
|Other non-interest expenses                              |  | 2,463                      |  | 2,158                   
|Total non-interest expenses                              |  | 8,719                      |  | 7,233                   
|                                                        
|Income before provision for income taxes                 |  | 2,492                      |  | 4,447                   
|                                                        
|PROVISION FOR INCOME TAXES                               |  | 682                        |  | 1,277                   
|                                                        
|NET INCOME                                               |  | $ 1,810                    |  | $ 3,170                 
|                                                        
|EARNINGS PER SHARE                                       |  |                            |  |                         
|Basic                                                    |  | $ 0.25                     |  | $ 0.44                  
|Diluted                                                  |  | $ 0.25                     |  | $ 0.44                  
|Weighted average shares outstanding, basic               |  | 7,221,269                  |  | 7,150,658               
|Weighted average shares outstanding, diluted             |  | 7,283,844                  |  | 7,271,374               
|                                                        
|See notes to condensed consolidated financial statements |  |                            |  |                         

4

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VENTURE FINANCIAL GROUP,INC. andSUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTSOFSHAREHOLDERS EQUITYANDCOMPREHENSIVE INCOME (Unaudited)For the Six Months Ended June 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                                                              |  | -         |  | -             |  | 6,364             |  | -                 |  | -                |  | 6,364         
|Other comprehensive income, net of tax                                  |  |           |  |               |  |                   |  |                   |  |                  |  |               
|Change in fair value of securities available for sale, net of tax       |  |           |  |               |  |                   |  |                   |  |                  |  |               
|benefit of ($2,916)                                                     |  | -         |  | -             |  | -                 |  | (5,324)           |  | -                |  | (5,324)       
|Less adjustment for gains on sales of securities included in net income |  | -         |  | -             |  | -                 |  | (90)              |  | -                |  | (90)          
|net of tax expense of $49                                               |  |           |  |               |  |                   |  |                   |  |                  |  |               
|Comprehensive Income                                                    |  |           |  |               |  |                   |  |                   |  |                  |  | 950           
|Stock options exercised                                                 |  | 27,210    |  | 321           |  | -                 |  | -                 |  | -                |  | 321           
|Stock issued for purchase of WAM                                        |  | 1,612     |  | 35            |  | -                 |  | -                 |  | -                |  | 35            
|Common Stock repurchased                                                |  | (17,945)  |  | (391)         |  |                   |  |                   |  |                  |  | (391)         
|Compensation expense for stock options                                  |  | -         |  | 151           |  | -                 |  | -                 |  | -                |  | 151           
|Cash dividends ($0.16 per share)                                        |  | -         |  | -             |  | (1,148)           |  | -                 |  | -                |  | (1,148)       
|Fair value adjustment of junior subordinated debentures, net of tax     |  | -         |  | -             |  | (428)             |  | -                 |  | -                |  | (428)         
|Excess tax benefit from share-based payment arrangements                |  | -         |  | 22            |  | -                 |  | -                 |  | -                |  | 22            
|Compensation expense for unallocated ESOP shares committed to be        |  |           |  |               |  |                   |  |                   |  |                  |  |               
|released                                                                |  | -         |  | 4             |  | -                 |  | -                 |  | -                |  | 4             
|Compensation expense for restricted stock awards                        |  | -         |  | 17            |  | -                 |  | -                 |  | -                |  | 17            
|Balance, June 30, 2007                                                  |  | 7,197,226 |  | $      35,718 |  | $      54,629     |  | $       (4,948)   |  | $        (634)   |  | $      84,765 
|                                                                       
|Balance, December 31, 2007                                              |  | 7,221,787 |  | $      36,507 |  | $      58,798     |  | $       (6,548)   |  | $              - |  | $      88,757 
|Comprehensive Income                                                    |  |           |  |               |  |                   |  |                   |  |                  |  |               
|Net Income                                                              |  | -         |  | -             |  | 4,936             |  | -                 |  | -                |  | 4,936         
|Other comprehensive income, net of tax                                  |  |           |  |               |  |                   |  |                   |  |                  |  |               
|Increase in unrealized loss on securities available-for-sale, net of    |  |           |  |               |  |                   |  |                   |  |                  |  |               
|tax benefit of $4,700                                                   |  | -         |  | -             |  | -                 |  | (8,729)           |  | -                |  | (8,729)       
|Less adjustment for gains on sales of securities included in net        |  |           |  |               |  |                   |  |                   |  |                  |  |               
|income net of tax expense of $273                                       |  | -         |  | -             |  | -                 |  | (506)             |  | -                |  | (506)         
|Change in fair value of Swap, net of tax of benefit                     |  |           |  |               |  |                   |  |                   |  |                  |  |               
|of $382                                                                 |  | -         |  | -             |  | -                 |  | (709)             |  | -                |  | (709)         
|Comprehensive Loss                                                      |  |           |  |               |  |                   |  |                   |  |                  |  | (5,008)       
|Stock options exercised                                                 |  | 3,450     |  | 52            |  | -                 |  | -                 |  | -                |  | 52            
|Cumulative effect adjustment for change in accounting principal for     |  |           |  |               |  |                   |  |                   |  |                  |  |               
|split dollar liability                                                  |  | -         |  | -             |  | (411)             |  | -                 |  | -                |  | (411)         
|Compensation expense for stock options                                  |  | -         |  | 187           |  | -                 |  | -                 |  | -                |  | 187           
|Cash dividends ($0.17 per share)                                        |  | -         |  | -             |  | (1,228)           |  | -                 |  | -                |  | (1,228)       
|Compensation
     expense for restricted stock awards                   |  | -         |  | 13            |  | -                 |  | -                 |  | -                |  | 13            
|Balance, June 30, 2008                                                  |  | 7,225,237 |  | $      36,759 |  | $       62,095    |  | $     (16,492)    |  | $              - |  | $      82,362 
|See notes to condensed consolidated financial statements                |  |           |  |               |  |                   |  |                   |  |                  |  |               

5

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VENTURE FINANCIAL GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (Unaudited)For the Six Months Ended June 30, 2008 and 2007 (Dollars in thousands)

|                                                            |  | 2008                      |  | 2007                     
|----------------------------------------------------------- |  | ------------------------- |  | -------------------------
|                                                            |  |                           |  |                          
|CASH FLOWS FROM OPERATING ACTIVITIES                        |  |                           |  |                          
|Net income                                                  |  | $                   4,936 |  | $                   6,364
|Adjustments to reconcile net income to net cash provided    |  |                           |  |                          
|by operating activities:                                    |  |                           |  |                          
|Provision for credit losses                                 |  | 4,900                     |  | 750                      
|Depreciation and amortization                               |  | 1,135                     |  | 905                      
|Increase in cash value of life insurance                    |  | (416)                     |  | (514)                    
|Compensation expense for stock options                      |  | 187                       |  | 151                      
|Compensation expense for unallocated ESOP shares            |  | -                         |  | 4                        
|Restricted stock award compensation                         |  | 13                        |  | 17                       
|Excess tax benefit from share-based payment arrangements    |  | -                         |  | (22)                     
|Gain on sale of securities available for sale               |  | (779)                     |  | (139)                    
|Change in market value of junior subordinated debentures    |  | (612)                     |  | 147                      
|Other                                                       |  | (2,647)                   |  | (3,316)                  
|Origination of loans held-for-sale                          |  | (113,424)                 |  | (47,184)                 
|Proceeds from sales of loans held-for-sale                  |  | 115,300                   |  | 47,889                   
|Origination fees and gains on sales of loans                |  | (2,452)                   |  | (873)                    
|                                                            |  |                           |  |                          
|                                                           
|Net cash from operating activities                          |  | $                  6,141  |  | $                   4,179
|                                                            |  |                           |  |                          
|                                                           
|CASH FLOWS FROM INVESTING ACTIVITIES                        |  |                           |  |                          
|Net (increase) decrease in federal funds sold               |  | -                         |  | 6,790                    
|Activity in securities available-for-sale                   |  |                           |  |                          
|Maturities, prepayments and calls                           |  | 10,981                    |  | 9,402                    
|Sales                                                       |  | 60,836                    |  | 42,532                   
|Purchases                                                   |  | (86,174)                  |  | (123,859)                
|Activity in securities held-to-maturity                     |  |                           |  |                          
|Maturities                                                  |  | 500                       |  | -                        
|Purchases                                                   |  | (489)                     |  | (10,000)                 
|Net increase in loans                                       |  | (38,011)                  |  | (31,296)                 
|Purchase of bank owned life insurance policies              |  | (126)                     |  | -                        
|Proceeds from sales of premises and equipment               |  | -                         |  | 4                        
|Additions to premises and equipment                         |  | (2,472)                   |  | (3,415)                  
|                                                            |  |                           |  |                          
|                                                           
|Net cash used in investing activities                       |  | (54,955)                  |  | (109,842)                
|                                                            |  |                           |  |                          
|                                                            |  |                           |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES                        |  |                           |  |                          
|Net increase in deposits                                    |  | 79,461                    |  | 67,255                   
|Net increase in federal funds purchased                     |  | 34,715                    |  | -                        
|Net increase (decrease) in short-term repurchase agreements |  | (11,242)                  |  | 340                      
|Net increase (decrease) in short-term borrowings            |  | (53,602)                  |  | 60,810                   
|Net increase (decrease) in long-term debt                   |  | -                         |  | (20,000)                 
|Stock issued for purchase of WAM                            |  | -                         |  | 35                       
|Proceeds from exercise of stock options                     |  | 52                        |  | 321                      
|Repurchase of common stock                                  |  | -                         |  | (391)                    
|Excess tax benefits from share-based payment arrangements   |  | -                         |  | 22                       
|Payment of cash dividends                                   |  | (1,228)                   |  | (1,148)                  
|                                                            |  |                           |  |                          
|Net cash from financing activities                          |  | 48,156                    |  | 107,244                  
|                                                            |  |                           |  |                          
|                                                           
|See notes to condensed consolidated financial statements    |  |                           |  |                          

6

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VENTURE FINANCIAL GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (Unaudited)For the Six Months Ended June 30, 2008 and 2007 (Dollars in thousands)

|NET INCREASE (DECREASE) IN CASH AND CASH                           |  | (658)         |  | 1,581     
|------------------------------------------------------------------ |  | ------------- |  | ----------
|EQUIVALENTS                                                        |  |               |  |           
|                                                                  
|CASH AND CASH EQUIVALENTS                                          |  |               |  |           
|Beginning of period                                                |  | 17,725        |  | 17,754    
|                                                                   |  |               |  |           
|                                                                  
|End of period                                                      |  | $ 17,067      |  | $ 19,335  
|                                                                   |  |               |  |           
|                                                                  
|SUPPLEMENTAL INFORMATION:                                          |  |               |  |           
|Cash paid for interest                                             |  | $ 17,553      |  | $ 18,841  
|Cash paid for income taxes                                         |  | $  3,185      |  | $   4,057 
|                                                                  
|NONCASH INVESTING AND FINANCING ACTIVITIES                         |  |               |  |           
|Fair value adjustment of securities available for sale, net of tax |  | $ (8,729)     |  | $ (5,414) 
|Cumulative effect of early adoption of SFAS 159                    |  | $           - |  | $    (428)



|See notes to condensed consolidated financial statements
|--------------------------------------------------------

7

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

1.           Basis of Presentation

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, 2007 consolidated financial statements, including notes thereto, included in Venture Financial Group, Inc.s (the Company, VFG) 2007 Annual Report to Shareholders. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results anticipated for the year ending December 31, 2008.

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.

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

2.           Share-Based Compensation

On June 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 form10K as of December 31, 2007. The compensation cost that has been charged to income year-to-date in 2008 for both stock options and restricted stock grants is $200 thousand. The total income tax benefits recognized in the income statement for share-based compensation cost for the same period ended June 30, 2008 is $70 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 June 30, 2008, 288,850 option shares and 5,750 restricted stock award shares have been granted under the Plan since plan inception. At June 30, 2008, 11,550 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, 517,700 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
| |  | Expected dividends 
| |  | Expected term      
| |  | Risk-free rate     

Options granted by the Company during 2008 are 20% vested on each of the five subsequent anniversaries of the grant date. Stock 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.

8

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A summary of option activity under the Plan as of June 30, 2008, and changes for the six months ended is presented below:

|                               |  |          |  |          |  |          |  | Weighted |  | Weighted    |  | Aggregate
|------------------------------ |  | -------- |  | -------- |  | -------- |  | -------- |  | ----------- |  | ---------
|                               |  |          |  |          |  |          |  |          |  | Average     |  |          
|                               |  |          |  |          |  |          |  | 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                      |  | (750)    |  | (2,700)  |  | ( 3,450) |  | $14.75   |  |             |  |          
|Forfeited or expired           |  | -        |  | (2,050)  |  | (2,050)  |  | $21.19   |  |             |  |          
|Outstanding at June 30, 2008   |  | 64,983   |  | 395,434  |  | 460,417  |  | $16.30   |  | 6.68 years  |  | $ 869    
|                               |  |          |  |          |  |          |  |          |  |             |  |          
|Exercisable at June 30, 2008   |  | 29,493   |  | 197,624  |  | 227,117  |  | $12.77   |  | 4.60 years  |  | $ 857    

The total intrinsic value at June 30, 2008 of options exercised during the second quarter 2008 was $14 thousand. The intrinsic value represents the fair market value of the shares at exercise of $65 thousand (where fair market value is the prior month weighted average price) less the cost to the recipient to exercise which was $52 thousand. The tax benefits created by these exercises are allocated to common stock and goodwill depending on the source of those options and prior accounting for those options. Fair market value for options exercised is calculated differently than for options outstanding and exercisable. The fair market value is the weighted average share price in the previous month of the exercise for timely tax and compensation calculations.

The following summarizes information about stock options outstanding at June 30, 2008:

|                 |  | Options Outstanding |  |              |  | Options Exercisable
|---------------- |  | ------------------- |  | ------------ |  | -------------------
|                 |  |                     |  | Weighted     |  |                    
|                 |  |                     |  | Average      |  | Weighted           
|Range of         |  |                     |  | Remaining    |  | Average            
|Exercise         |  | Number              |  | Contractual  |  | Exercise           
|Prices           |  | Outstanding         |  | Life (Years) |  | Price              
|                
|$7.00 and under  |  | 30,704              |  | 3.52         |  | $ 6.74             
|$7.01 to $10.00  |  | 82,598              |  | 2.01         |  | $ 8.92             
|$10.01 to $15.00 |  | 39,035              |  | 5.74         |  | $13.44             
|$15.01 to $19.00 |  | 37,650              |  | 5.80         |  | $15.33             
|$19.01 to $21.00 |  | 183,580             |  | 8.67         |  | $19.38             
|$21.01 to $25.00 |  | 86,850              |  | 8.82         |  | $21.88             
|                 |  |                     |  |              |  |                    
|                
|                 |  | 460,417             |  | 6.68         |  | $16.30             
|                 |  |                     |  |              |  |                    

A summary of the status of the Companys non-vested shares as of June 30, 2008 and changes for the six months ended is presented below:

|                              |  |          |  |          |  |         |  | 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                        |  | 5,470    |  | 40,580   |  | 46,050  |  | $5.53     
|Forfeited                     |  | -        |  | 1,950    |  | 1,950   |  | $6.09     
|                              |  |          |  |          |  |         |  |           
|                             
|Non-vested at June 30, 2008   |  | 35,490   |  | 197,810  |  | 233,300 |  | $5.33     
|                              |  |          |  |          |  |         |  |           

As of June 30, 2008 there was $799 thousand of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized using graded vesting over a five year vesting period which accelerates the expense to a weighted average period of under 2 years. The Company has granted awards with graded vesting; the awards vest 20% at the end of each year over five years. The Company has elected to treat each vesting tranche as a separate award with compensation cost for each award recognized over its vesting period. This approach results in a greater amount of compensation cost recognized in the earlier periods of the grant with a declining amount recognized in later periods.

9

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Compensation expense for restricted stock is measured based upon the number of shares granted and the stock price at the grant date. Accordingly, compensation expense has been recognized in the condensed consolidated financial statements for employee restricted stock arrangements for the six months ended June 30, 2008. Compensation expense is measured at the grant date of the award at fair value and adjusted to reflect actual forfeitures and the outcome of certain conditions.

3.           Pension and Other Postretirement Benefit Plans

Effective January 1, 2005 we replaced the Companys Salary Continuation Plans and 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 employees. 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 now is accounted for on a group basis. The SERP has no assets.

Net periodic expense for the SERP for the three and six months ending June 30, 2008 is as follows:

| |  |                                              |  | For the three months |  | For the six months 
| |  | -------------------------------------------- |  | -------------------- |  | -------------------
| |  |                                              |  | ended June 30, 2008  |  | ended June 30, 2008
|
| |  | Service cost                                 |  | $137,684             |  | $275,368           
| |  | Interest cost                                |  | 80,900               |  | 161,800            
| |  | Expected return on plan assets               |  | -                    |  | -                  
| |  | Amortization of Net Obligation at Transition |  | -                    |  | -                  
| |  | Amortization of Prior Service Cost           |  | -                    |  | -                  
| |  | Recognized Net Actuarial (Gain)/Loss         |  | -                    |  | -                  
| |  |                                              |  |                      |  |                    
| |  | Net Periodic Benefit Cost                    |  | $218,584             |  | $437,168           
| |  |                                              |  |                      |  |                    
|

4.Basic and Diluted Earnings per Share (EPS)

****Basic and diluted earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share assume all dilutive stock options and restricted stock outstanding are issued such that their dilutive effect is maximized. For the three and six months ended June 30, 2007, unallocated shares of the ESOP are excluded from the weighted average common shares outstanding to the extent they have not been legally released. The restricted share awards are excluded from the weighted average common shares outstanding in the calculation of basic earnings per share to the extent they have not been vested or earned.

|                                      |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|------------------------------------- |  | --------------------------- |  | -------------------------
|                                      |  | 2008                        |  | 2007                     
|Basic EPS computation                 |  | $   1,810                   |  | $   3,170                
|Numerator - Net Income (in thousands) |  |                             |  |                          
|Denominator - Weighted Average        |  | 7,221,269                   |  | 7,150,658                
|common shares outstanding             |  |                             |  |                          
|Basic EPS                             |  | $   .25                     |  | $   .44                  
|                                     
|                                      |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                                      |  | 2008                        |  | 2007                     
|Diluted EPS computation               |  | $   1,810                   |  | $   3,170                
|Numerator - Net Income (in thousands) |  |                             |  |                          
|Denominator - Weighted average        |  | 7,221,269                   |  | 7,150,658                
|common shares outstanding             |  |                             |  |                          
|Effect of dilutive stock options      |  | 62,575                      |  | 120,716                  
|Weighted average common shares        |  | 7,283,844                   |  | 7,271,374                
|and common stock equivalents          |  |                             |  |                          
|Diluted EPS                           |  | $   .25                     |  | $   .44                  

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5.           Cash Dividends

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 will be paid to all shareholders of record as of July 28, 2008. On April 16, 2008, the Board of Directors declared the thirty seventh consecutive quarterly cash dividend, paid on May 8, 2008. The dividend of eight and a half cents per share was paid to all shareholders of record as of April 28, 2008.

6.           Purchase of Washington Asset Management Tacoma, LLC

On March 8, 2004 Venture Wealth Management, a wholly owned subsidiary of Venture Bank, purchased Washington Asset Management Tacoma, LLC (WAM). The purchase price was approximately $200,000. $126,000 was paid in cash at closing and the balance was scheduled to be paid in VFG common stock in three equal annual installments. The final payment was made in March 2007.

7.           Recent Accounting Pronouncements

In June 2007, the Financial Accounting Standards Board (FASB) ratified an Emerging Issues Task Force (EITF) consensus regarding Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. This new guidance became effective for the Company on January 1, 2008 and did not have a material effect on the Companys consolidated financial statements upon implementation.

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.

In April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful Lives of Intangible Assets, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of an intangible asset. This interpretation will be effective for the Company beginning January 1, 2009 and must also be applied to interim periods within 2009. The Company is currently evaluating the potential impact of this guidance; however, it is not expected to have a significant impact on the Companys financial condition and results of operations.

In May 2008, the FASB issued FAS 162 The Hierarchy of Generally Accepted Principles (FAS 162) which outlines the order of authority for the 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.

In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entitys non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP will be effective for the Company as of January 1, 2009 and will have to be applied retrospectively to all periods presented. The Company will evaluate the impact of the adoption in the event any instruments that would be subject to this guidance are being considered in the future.

In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments 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, therefore, need to be included in the earnings allocation in computing basic earnings per share (EPS) pursuant to the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. A share-based payment award that contains a non-forfeitable right to receive cash when dividends are paid to common shareholders irrespective of whether that award ultimately vests or remains unvested shall be considered a participating security as these rights to dividends provide a non-contingent transfer of value to the holder of the share-based payment award. Accordingly, these awards should be included in the computation of basic EPS pursuant to the two-class method. The guidance in this FSP is effective for the Company for the fiscal year beginning January 1, 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 Company does not expect EITF 06-3-1 to have an impact on its financial condition and results of operation.

8.           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

11

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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 six months of 2008 and 2007, the Company recognized other operating income totaling $612 thousand and $198 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 $1.9 million.

The following table presents gains and (losses) due to changes in fair value for items measured at fair value pursuant to election of the fair value option for the three months ended June 30, 2008.

| |  | (dollars in thousands) |  | Carrying Value of   |  | Fair Value    |  | Carrying Value of |  | Other non-          |  | Total changes in
| |  | ---------------------- |  | ------------------- |  | ------------- |  | ----------------- |  | ------------------- |  | ----------------
| |  | Instrument at          |  | Measurements at     |  | Instrument at |  | interest (income) |  | fair value included
| |  | January 1, 2008        |  | June 30, 2008 using |  | June 30, 2008 |  | expense           |  | in current period  
| |  |                        |  | significant other   |  |               |  |                   |  | earnings 
     m   
| |  |                        |  | observable inputs   |  |               |  |                   |  |                    
| |  |                        |  | (Level 2)           |  |               |  |                   |  |                    
| |  |                       
| |  | Liabilities            |  |                     |  |               |  |                   |  |                     |  |                 
| |  | FCFG Capital Trust II1 |  | $ 6,187             |  | $(7)          |  | $ 6,180           |  | $(7)                |  | $(7)            
| |  | WCB Capital Trust2     |  | 3,083               |  | (14)          |  | 3,069             |  | (14)                |  | (14)            
| |  | VFG Capital Trust I    |  | 12,496              |  | (591)         |  | 11,905            |  | (591)               |  | (591)           
| |  |                       
| |  | Total                  |  | $21,766             |  | $(612)        |  | $21,154           |  | $(612)              |  | $(612)          
| | 

Fair Value Measurements (SFAS 157)

SFAS 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS 157, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS 157 requires fair value measurement disclosure of all assets and liabilities. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.

The valuation techniques used in SFAS 157 are based upon observable and 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:

 Level 1Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. 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. Level 3Significant unobservable inputs that reflect the reporting entitys own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of the Companys valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring and nonrecurring basis:

Investment securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on an independent grid pricing model for identical or similar assets which may at times include quoted prices. Securities include private collateralized mortgage obligations, municipal securities, asset backed securities, corporate securities and other equity securities.

Junior subordinated debentures at fair value: Junior subordinated debentures are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices 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.

Non-performing loans: A loan is considered to be non-performing when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Non-performing loans are measured at the loans observable fair price, or the fair value of collateral, if repayment of the loan is expected to be provided by the underlying collateral.

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Derivative contract held for purposes other than trading: Derivative contract held for purposes other than trading are recorded at fair value on a recurring basis. Fair value measurement is based on independent pricing models.

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2008.

|                                             |  | Quote Prices in    |  |                   |  | Significant  |  |              
|-------------------------------------------- |  | ------------------ |  | ----------------- |  | ------------ |  | -------------
|                                             |  | Active Markets for |  | Significant Other |  | Unobservable |  | Balance as of
|(dollars in thousands)                       |  | Identical Assets   |  | Observable Inputs |  | Inputs       |  | June 30, 2008
|                                             |  | (Level 1)          |  | (Level 2)         |  | (Level 3)    |  |              
|                                             |  |                   
|Financial Assets and Liabilities             |  |                    |  |                   |  |              |  |              
|Securities available-for-sale                |  |                    |  | $278,347          |  |              |  | $278,347     
|Junior subordinated debentures at fair value |  |                    |  | 21,154            |  |              |  | 21,154       
|Non-performing loans                         |  |                    |  | 38,557            |  |              |  | 38,577       
|Derivative contract held for purposes other  |  |                    |  |                   |  |              |  |              
|than trading                                 |  |                    |  | 1,091             |  |              |  | 1,091        
|                                            



9.            Derivative Instruments

As part of the Companys overall interest rate risk management strategy, the Company has adopted a policy whereby the Company may periodically use derivative instruments to minimize significant fluctuations in earnings caused by interest rate volatility. This interest rate risk management strategy involves the use of interest rate floors, caps and swaps. During the first quarter of 2008, the Company entered into a two-year interest rate swap on $100 million notional value of its prime-based loan portfolio with a maturity date of March 27, 2010. The Company receives 5.25% and we pay Prime. When executed in the first quarter of 2008, the Company recorded an asset of $312 thousand representing the fair value of the swap at the time of purchase. In the second quarter of 2008 the Company recorded a liability of $1.1 million representing the fair value of the swap as of June 30, 2008. The Company has designated this agreement as a cash flow swap pursuant to SFAS No. 133. Accordingly, the change in the fair value of the instrument related to the swaps intrinsic value, or approximately $709 thousand, net of tax is recorded as a loss component of other comprehensive income (OCI) in the consolidated statement of changes in shareholders equity.

10.          Investment Portfolio

The carrying value of our investment securities at June 30, 2008 totaled $295.1 million compared to $297.0 million at December 31, 2007. We purchased $86.6 million in securities in the first six months of 2008, which was offset by maturities, principal pay downs, and sales totaling $72.3 million. The risk weighting of securities are considered in purchase decisions to maximize the 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               
|                       |  |                               |  |                  |  |                    |  |                     
|                       |  | June 30, 2008                 |  |                  |  |                    |  |                     
|                       |  | Securities Available-for-sale |  |                  |  |                    |  |                     
|                       |  | Mortgage-backed securities    |  | $         77,860 |  | $        ( 2,668)  |  | $                  -
|                       |  | Municipal securities          |  | 5,205            |  | (162)              |  | (230)               
|                       |  | Asset-backed securities       |  | 104,270          |  | (2,843)            |  | (11,757)            
|                       |  | Corporate securities          |  | 6,983            |  | (260)              |  | -                   
|                       |  | Equity securities             |  | 43,460           |  | (4,763)            |  | (2,912)             
|                       |  |                               |  |                  |  |                    |  |                     
|                       |  | $       237,778               |  | $       (10,696) |  | $        (14,899)  |  | $        212,183    
|                      
|                       |  | Securities Held-to-maturity   |  |                  |  |                    |  |                     
|                       |  | Corporate Securities          |  | $        16,802  |  | $             (64) |  | $                  -
|                       |  |                               |  |                  |  |                    |  |                     
|                       |  | Total at June 30, 2008        |  | $      254,580   |  | $       (10,760)   |  | $       (14,899)    
|                       |  |                               |  |                  |  |                    |  |                     

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|December 31, 2007           |  |                  |  |                   |  |                    |  |                 
|--------------------------- |  | ---------------- |  | ----------------- |  | ------------------ |  | ----------------
|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 June 30, 2008:

|                                                               |  | June 30, 2008              
|-------------------------------------------------------------- |  | ---------------------------
|(dollars in thousands)                                         |  | Held-to-Maturity Securities
|                                                               |  |                            
|                                                               |  | Amortized                  
|                                                               |  | Cost                       
|                                                               |  |                            
|Due in one year or less                                        |  | $           -              
|Due after one year through five                                |  |                            
|years                                                          |  | -                          
|Due after five years through ten                               |  |                            
|years                                                          |  | -                          
|Due after ten years                                            |  | 16,802                     
|No maturity investment                                         |  | -                          
|Mortgage backed securities                                     |  | -                          
|                                                               |  |                            
|Total                                                          |  | $ 16,802                   
|                                                               |  |                            
|                                                              
|(1)Weighted average yield is reported on tax-equivalent basis. |  |                            

Management has the ability and intent to hold the securities classified as held-to-maturity until they mature, at which time the Company expects to receive full value for the securities. Furthermore, management also has the ability and intent to hold the securities classified as available-for-sale for a period of time sufficient for a recovery of cost. Some 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 purchased even though rates had declined in the general market. The unrealized losses over twelve months are primarily floating rate, middle tranche securities of pools of trust preferred debt securities of financial institutions. The other major portion of unrealized securities losses are losses on preferred stock issued by Freddie Mac and Fannie Mae at tax equivalent yields ranging from 7.54% to 11.30% . 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 securities are impaired due to reasons of credit quality. Accordingly, as of June 30, 2008, management believes the unrealized losses detailed in the table above are temporary and no impairment loss has been realized in the Companys consolidated income statement.

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11.            Nonperforming Assets and Analysis of Allowance for Credit Losses

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.

| |  | June 30.                                       |  | December 31,
| |  | ---------------------------------------------- |  | ------------
| |  | (dollars in thousands)                         |  | 2008        
| |  |                                                |  |             
| |  | Non-accrual loans                              |  | $ 38,533    
| |  | Accruing loans past due 90 days or more        |  | 24          
| |  |                                                |  |             
| |  | Total non-performing loans (NPLs)              |  | 38,577      
| |  | Foreclosed real estate                         |  | 185         
| |  |                                                |  |             
| |  | Total non-performing assets (NPAs)             |  | $ 38,742    
| |  |                                                |  |             
| |  | Selected ratios                                |  |             
| |  | NPLs to total loans                            |  | 4.71%       
| |  | NPAs to total loans and foreclosed real estate |  | 4.74%       
| |  | NPAs to total assets                           |  | 3.16%       

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

| |  | (dollars in thousands)                                            |  | Six Months Ended |  | Year Ended
| |  | ----------------------------------------------------------------- |  | ---------------- |  | ----------
| |  | June 30,                                                          |  | December 31,    
| |  | 2008                                                              |  | 2007            
| |  | Balance at beginning of period                                    |  | $10,975          |  | $8,917    
| |  | Provision for credit losses                                       |  | 4,900            |  | 3,600     
| |  |                                                                   |  |                 
| |  | Charge-offs:                                                      |  |                  |  |           
| |  | Commercial                                                        |  | (530)            |  | (568)     
| |  | Real Estate Mortgage and Construction                             |  | (2,101)          |  | (999)     
| |  | Consumer                                                          |  | (29)             |  | (54)      
| |  |                                                                   |  |                 
| |  | Total charge-offs                                                 |  | (2,660)          |  | (1,621)   
| |  |                                                                   |  |                 
| |  |                                                                   |  |                  |  |           
| |  | Recoveries:                                                       |  |                  |  |           
| |  | Commercial                                                        |  | 76               |  | 30        
| |  | Real Estate Mortgage and Construction                             |  | 77               |  | 37        
| |  | Consumer                                                          |  | 18               |  | 12        
| |  |                                                                   |  |                 
| |  | Total recoveries                                                  |  | 171              |  | 79        
| |  |                                                                   |  |                 
| |  | Net charge-offs                                                   |  | (2,489)          |  | (1,542)   
| |  |                                                                   |  |                 
| |  | Transfer to reserve for unfunded commitments                      |  | (119)            |  | -         
| |  |                                                                   |  |                 
| |  | Balance at end of period                                          |  | $13,267          |  | $10,975   
| |  | Gross loans                                                       |  | $818,032         |  | $783,117  
| |  | Average loans                                                     |  | $786,585         |  | $746,498  
| |  | Non-performing loans                                              |  | $38,577          |  | $3,117    
| |  |                                                                   |  |                 
| |  | Selected ratios:                                                  |  |                  |  |           
| |  |                                                                   |  |                 
| |  | Net charge-offs to average loans                                  |  | 0.32%            |  | 0.21%     
| |  |                                                                   |  |                 
| |  | Allowance for credit losses to average loans                      |  | 1.69%            |  | 1.48%     
| |  |                                                                   |  |                 
| |  | Allowance for credit losses to loans outstanding at end of period |  | 1.66%            |  | 1.43%     
| |  |                                                                   |  |                 
| |  | Allowance for credit losses to non-performing loans               |  | 34.41%           |  | 352.1%    
| |  |                                                                   |  |                 

15

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

You should read the following discussion and analysis of our Results of Operations and Financial Condition together with our financial statements and related notes appearing elsewhere in this report and our Form 10-K for the year ended December 31, 2007. After Forward-Looking Information and the Summary of Critical Accounting Estimates and Accounting Policies, the analysis of the Results of Operations and Financial Condition will be discussed. The analysis includes a comparison of the three and six months ended June 30, 2008 and 2007.

Forward-Looking Information

In 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 allowance for 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 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 date of this Quarterly Report. 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 of this Report, or to reflect the occurrence of unanticipated events.

Risks and uncertainties with respect to the Company include, among others, those set forth in Item 1A of our Annual Report on Form 10-K filed with the SEC and updated as appropriate and 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; 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; and the availability of and costs associated with sources of liquidity. Our actual results may differ materially from those anticipated in forward-looking statements as a result of such risk factors.

Summary of Critical Accounting Estimates and Accounting Policies

Our accounting policies are integral to understanding our financial results. Our most critical accounting estimates and policies require management to make subjective, complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. Management has identified several accounting estimates and policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. These estimates and policies relate to items such as the methodology for the determination of the allowance for credit losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, income taxes, the impairment of AFS secruities and goodwill, share-based compensation, employers accounting for defined benefit pension and other post-retirement plans, and fair value measurements. Our significant accounting policies are set forth in Note 1 to our Audited Consolidated Financial Statements for the year ended December 31, 2007.

Defined 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 Postretirement Benefit Aspects of 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. Additional compensation expense is projected to be $65 thousand in 2008.

Derivative Financial Instruments. In the ordinary course of business, the Company enters into derivative transactions to manage its interest rate risk. All derivative instruments that qualify as a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability or a forecasted transaction (cash flow hedge). Changes in the fair value of a derivative that is highly effective and designated as a cash flow hedge are recognized in other comprehensive income until the income from the cash flows of the hedged item is recognized. The Company performs an assessment, both at the inception of the hedge and on a monthly basis thereafter, when required, to determine whether these derivatives are expected to continue to be highly effective in offsetting changes in the value of the hedge items. Any change in fair value resulting from hedge ineffectiveness is immediately recorded in non-interest expense.

If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss is amortized to earnings over the same period(s) that the forecasted hedged transactions impact earnings (cash flow hedge). If the hedge item is disposed of, or the forecasted transaction is no longer probable, the derivative is recorded at fair value with any resulting gain or loss included in the gain or loss from the disposition of the hedged item or, in the case of a forecasted transaction that is no longer probable, included in earnings immediately.

Results of Operations

Our results of operations depend primarily on net interest income, which is the difference between interest income, primarily from loans and investments, and interest expense from interest bearing liabilities, primarily deposits and borrowed funds. Changes in net interest income are influenced by the volume of assets and liabilities and the rates earned and paid respectively. Other factors that determine the level of net income include fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes service charges and other deposit related fees, origination fees and net gains and losses on the sale of loans and securities and income from bank owned life insurance. Non-interest expense consists primarily of employee compensation and benefits, occupancy, equipment and depreciation expense and other operating expenses.

16

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The following discussion of our results of operations compares the three months ended June 30, 2008 to the three months ended June 30, 2007.

|For the three months                                 
|-----------------------------------------------------
|ended June 30,                                       
|                                                     
|(dollars in thousands except per share data)         
|                                                     
|                                                     
|Interest income                                      
|Interest expense                                     
|                                                     
|Net interest income                                  
|Provision for credit losses                          
|                                                     
|Net interest income after provision for credit losses
|Non-interest income                                  
|Non-interest expense                                 
|                                                     
|Income before provision for income taxes             
|Provision for income taxes                           
|                                                     
|Net income                                           
|                                                     
|                                                     
|Earnings per sharebasic                             
|Earnings per sharediluted                           
|Efficiency ratio                                     
|Return on average equity                             
|Return on average assets                             

The 42.9% decrease in net income for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 is attributable primarily to an increase in net interest income of $1.6 million offset by an increase in the provision for loan losses of $3.0 million. Non interest income increased by $984 thousand for the three months ended June 30, 2008 compared to the same period in 2007 while non interest expense increased by $1.5 million for the same period. The increase in net interest income was mainly the result of a 13.2% increase in average earning assets to $1.1 billion at June 30, 2008 compared to $971.5 million at June 30, 2007. The increase in net interest income was also the result of improving loan pricing, an interest rate swap entered into at the end of March and funding being re-priced in a lower interest rate environment. Our average interest bearing liabilities of $1.0 billion at June 30, 2008 increased from $856.9 million at June 30, 2007. Our return on average equity was 8.20% and return on average assets was 0.60% for the three months ended June 30, 2008 compared to 14.67% and 1.20%, respectively, for the three months ended June 30, 2007.

Net Interest Income and Net Interest Margin. Net interest income increased for the period by 15.8% or $1.6 million to $11.3 million for the quarter ended June 30, 2008 compared to $9.7 million for the quarter ended June 30, 2007.

The average pre-tax yield on interest-earning assets decreased to 6.80% in the second quarter of 2008 from 8.13% for the same period in 2007, a decrease of 133 basis points. The Prime Rate was 325 basis points, or 39.3% lower at the end of second quarter 2008 compared to second 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 199 basis points to 6.94% from 8.93% for the three months ended June 30, 2008 compared to the three months ended June 30, 2007, respectively. In the second quarter loan yields would have been 7.18%, a difference of 24 basis points without the negative impact of non accrual loans. This decrease was partially offset by an increase in yields on securities which increased 86 basis points to 6.47% for the three months ended June 30, 2008 compared to 5.61% for the three months ended June 30, 2007. The tax equivalent yield on securities for the three months ended June 30, 2008 was 6.62% compared to 5.78% for the three months ended June 30, 2007. The interest rate swap executed at the end of March added 3 basis points to our loan yields.

The cost of our average interest-bearing deposits decreased to 2.99% for the second quarter of 2008 from 4.45% in the same period in 2007, a decrease of 146 basis points or 32.8% . Our average rate on total deposits (including non-interest bearing deposits) decreased to 2.62% for the three months ended June 30, 2008 from 3.88% for the three months ended June 30, 2007, a decrease of 126 basis points or 32.5% . Our borrowing rates declined to 3.07% from 5.58% for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007, a decrease of 251 basis points or 45.0% . The Federal Funds Target Rate was 325 basis points or 61.9% lower this year compared to the same time period last year.

Over the past year, 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 June 30, 2008, public fund deposits were $163.2 million or 17.8% of our total deposits of $916.9 million, compared to $166.7 million, or 19.9% of our total deposits of $838.9 million at June 30, 2007. Wholesale CDs were $234.6 million, or 25.6% of our deposits at June 30, 2008, compared to $136.8 million, or 16.31% of our deposits at June 30, 2007. Our borrowings increased $44 million from $115.2 million at June 30, 2007 to $159.2 million at June 30, 2008 while federal funds purchased increased from $13.1 million to $34.7 million in the same period.

Our net interest margin for the three months ended June 30, 2008 was 4.08% up from 4.04% for the three months ended June 30, 2007. This was due in part to a pause in the Feds rate-cutting campaign which helped stabilize loan yields and at the same time allowed us to re-price maturing deposits to lower current market rates.

17

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A contributing factor to the increase in net interest margin was the interest rate swap we executed during the first quarter, where we exchanged floating rate cash flows for fixed rate cash flows. We pay prime and receive 5.25% on a total notional amount of $100 million until March 27, 2010. This transaction benefits net interest income for every reduction in the prime rate below 5.25% and conversely limits net income for every increase in the prime rate above 5.25% during the term of the swap. For additional information on our derivatives, see theDerivative Financial Instrumentsunder the Summary of Critical Accounting Estimates and Accounting Policies and Note 9.

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost of 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.

|                                                           |  | Three months ended
|---------------------------------------------------------- |  | ------------------
|                                                           |  | June 30,          
|                                                           |  |                   
|                                                           |  | 2008              
|                                                           |  |                   
|                                                           |  |                   
|                                                           |  | Average           
|(dollars in thousands)                                     |  | Balance           
|                                                           |  |                   
|Assets                                                     |  |                   
|Earning Assets:                                            |  |                   
|Loans (Interest and fees)(1)                               |  | $802,939          
|Federal funds sold                                         |  | 920               
|Investment securities(2)                                   |  | 309,877           
|                                                           |  |                   
|Total earning assets and interest income                   |  | 1,113,736         
|Other assets:                                              |  |                   
|Cash and due from banks                                    |  | 10,430            
|Bank premises and equipment                                |  | 34,650            
|Other assets                                               |  | 58,322            
|Allowance for credit losses                                |  | (12,547)          
|                                                           |  |                   
|Total assets                                               |  | $1,204,591        
|                                                           |  |                   
|                                                          
|Liabilities and Shareholders Equity                        |  |                   
|Interest bearing liabilities:                              |  |                   
|Deposits:                                                  |  |                   
|Savings, NOW, MMDA                                         |  | $378,484          
|Time deposits                                              |  | 391,291           
|                                                           |  |                   
|Total interest bearing deposits                            |  | 769,775           
|Other borrowings                                           |  | 236,504           
|                                                           |  |                   
|Total interest bearing liabilities and interest expense    |  | 1,006,279         
|Non interest bearing liabilities                           |  | 109,077           
|Other liabilities                                          |  | 975               
|Shareholders equity                                        |  | 88,260            
|                                                           |  |                   
|Total liabilities and shareholders equity                  |  | $1,204,591        
|                                                           |  |                   
|Net interest income                                        |  |                   
|                                                           |  |                   
|Net interest margin as a percent of average earning assets |  |                   
|                                                           |  |                   

(1) Average loan balance includes non-accrual loans. Loan fees and late charges of $643 thousand and $935 thousand are included in interest for the three months ended June 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 June 30, 2008 and 2007 is 6.62% and 5.78% respectively.

(3) Annualized

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.

18

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|                                         |  | Three months ended June 30, 2008            
|---------------------------------------- |  | --------------------------------------------
|(dollars in thousands)                   |  | Compared to three months ended June 30, 2007
|Interest earned on:                      |  | Total Change                                
|Loans                                    |  | $ (2,559)                                   
|Federal Funds sold and deposits in banks |  | (27)                                        
|Investment Securities                    |  | 1,775                                       
|                                         |  |                                             
|Total interest income                    |  | (811)                                       
|                                        
|Interest paid on:                        |  |                                             
|Savings, NOW, MMDA                       |  | (1,580)                                     
|Time Deposits                            |  | (642)                                       
|Other Borrowings                         |  | (136)                                       
|                                         |  |                                             
|Total interest expense                   |  | (2,358)                                     
|                                         |  |                                             
|Net Interest income                      |  | $ 1,547                                     
|                                         |  |                                             

Provision for Loan Losses.The provision for loan 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 judgment, is adequate to absorb estimated loan losses inherent in the loan portfolio.

The provision for loan losses for the three months ended June 30, 2008 was $3.4 million compared to $375 thousand for the three months ended June 30, 2007. Net charge-offs for the three months ended June 30, 2008 totaled $2.4 million compared to $555 thousand in net charge-offs for the same period in 2007.

The increase in provision expense during the second quarter of 2008 compared to the second quarter of 2007 primarily reflects the actual increase in the Banks impaired 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 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. While not centered in any one borrower, project, or geographic area, we believe we will continue to see an elevated number of borrowers with cash-flow and liquidity problems.

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.

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 
|-------------------------------------------------------- |  | -------------------------- |  | ---------- |  | ---------
|                                                         |  | June 30,                   |  | (Decrease) |  | From 2007
|                                                         |  |                           
|(dollars in thousands)                                   |  | 2008                       |  | 2007       |  |          
|                                                         |  |                           
|Non-Interest Income                                      |  |                            |  |            |  |          
|Service charges on deposit accounts                      |  | $ 1,062                    |  | $ 1,009    |  | $ 53     
|Origination fees and gain on sales of loans              |  | 1,149                      |  | 463        |  | 686      
|Net gain / (loss) on sale of securities                  |  | 83                         |  | (139)      |  | 222      
|Change in market value of junior subordinated debentures |  | 170                        |  | 107        |  | 63       
|Income from bank owned life insurance                    |  | 206                        |  | 170        |  | 36       
|Gross income from Venture Wealth Management              |  | 121                        |  | 118        |  | 3        
|Other non-interest income                                |  | 455                        |  | 534        |  | (79)     
|                                                         |  |                           
|Total Non-Interest Income                                |  | $ 3,246                    |  | $ 2,262    |  | 984      
|                                                         |  |                           

Total non-interest income increased $984 thousand or 43.5% to $3.3 million for the three months ended June 30, 2008 compared to $2.3 million for the three months ended June 30, 2007. The largest component for the change in non-interest income is due primarily to the $686 thousand increase in the origination fees and gain on sales of loans held for sale due to the expansion of the mortgage department. Net gain / (loss) on sale of securities increased from a loss of $139 thousand to a gain of $83 thousand for the three months ended June 30, 2007 and June 30, 2008, respectively. Other non-interest income decreased by $79 thousand for the three months ended June 30, 2008 compared due to two one time payments we received in 2007 that we did not receive in 2008. The largest of which was a $75 thousand payment received on an insurance settlement. All other major categories of non-interest income remained relatively constant for the associated periods.

19

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

| |  |                                        |  |                            |  |            |  |         |  | %      
| |  | -------------------------------------- |  | -------------------------- |  | ---------- |  | ------- |  | -------
| |  |                                        |  | For the three months ended |  | Increase/  |  | Change 
| |  |                                        |  | June 30,                   |  | (Decrease) |  | From   
| |  |                                        |  |                            |  |            |  |         |  | 2007   
| |  |                                        |  |                           
| |  | (dollars in thousands)                 |  | 2008                       |  | 2007       |  |         |  |        
| |  |                                        |  |                           
| |  |                                       
| |  | Non-Interest Expense                   |  |                            |  |            |  |         |  |        
| |  | Salaries and employee benefits         |  | $ 4,768                    |  | $ 3,720    |  | $ 1,048 |  | 28.2%  
| |  | Occupancy and equipment                |  | 1,417                      |  | 1,284      |  | 133     |  | 10.4%  
| |  | Advertising / public relations         |  | 622                        |  | 802        |  | (180)   |  | -22.4% 
| |  | Amortization of intangible assets      |  | 71                         |  | 71         |  | -       |  | -      
| |  | Office supplies, telephone and postage |  | 297                        |  | 253        |  | 44      |  | 17.3%  
| |  | Director fees                          |  | 46                         |  | 51         |  | (5)     |  | -9.9%  
| |  | Expense from foreclosed assets         |  | 52                         |  | 2          |  | 50      |  | 2509.3%
| |  | Washington State excise tax            |  | 354                        |  | 381        |  | (27)    |  | -7.2%  
| |  | Other non-interest expense             |  | 1,092                      |  | 669        |  | 423     |  | 63.2%  
| |  |                                        |  |                           
| |  |                                       
| |  | Total Non-Interest Expense             |  | $ 8,719                    |  | $ 7,233    |  | 1,486   |  | 20.5%  
| |  |                                        |  |                           

Total non-interest expense increased 20.5% or $1.5 million to $8.7 million for the three months ended June 30, 2008 compared to $7.2 million for the same period in 2007. The following components of non-interest expense (salaries and benefits, occupancy and other non-interest expense) increased for the three months ended June 30, 2008 compared to the same period ending June 30, 2007. The increases in salaries and benefits are due primarily to the expansion of our mortgage department which also included the hiring of nine additional mortgage representatives in Pierce County in the last quarter of 2007. The number of full time equivalent employees increased to 272 at June 30, 2008 compared to 250 at June 30, 2007. Occupancy and equipment costs increased $133 thousand or 10.4% for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 due to the new location of the administrative offices, the addition of two financial centers and the related increase in real estate property taxes and depreciation expenses. Other non-interest expense increased $423 thousand or 63.2% to $1.1 million for the three months ended June 30, 2008 from $669 thousand for the same period last year.

Provision for Income Taxes.We recorded tax provisions of $682 thousand for the three months ended June 30, 2008 compared to $1.3 million for the three months ended June 30, 2007. Our effective tax rate was approximately 27.3% for the three months ended June 30, 2008 and approximately 28.7% for three months ended June 30, 2007. We expect our effective tax rate to range between 30% and 34% for the remainder of 2008 depending on our mix of assets.

Comparison of the Six Months Ended June 30, 2008 and 2007

The following discussion of our results of operations compares the six months ended June 30, 2008 to the six months ended June 30, 2007.

| |  |                                                       |  | For the six months ended |  |          |  |           
| |  | ----------------------------------------------------- |  | ------------------------ |  | -------- |  | ----------
| |  |                                                       |  | June 30,                 |  |          |  |           
| |  | (dollars in thousands except per share data)          |  | 2008                     |  | 2007     |  | Increase/ 
| |  |                                                       |  |                          |  |          |  | (Decrease)
| |  | Interest income                                       |  | $ 38,450                 |  | $ 38,138 |  | $ 312     
| |  | Interest expense                                      |  | 16,696                   |  | 18,837   |  | (2,141)   
| |  |                                                       |  |                          |  |          |  |           
| |  | Net interest income                                   |  | 21,754                   |  | 19,301   |  | 2,453     
| |  | Provision for credit losses                           |  | 4,900                    |  | 750      |  | 4,150     
| |  |                                                       |  |                          |  |          |  |           
| |  | Net interest income after provision for credit losses |  | 16,854                   |  | 18,551   |  | (1,697)   
| |  | Non-interest income                                   |  | 7,465                    |  | 4,830    |  | 2,635     
| |  | Non-interest expense                                  |  | 17,214                   |  | 14,307   |  | 2,907     
| |  |                                                       |  |                          |  |          |  |           
| |  | Income before provision for income taxes              |  | 7,105                    |  | 9,074    |  | (1,969)   
| |  | Provision for income taxes                            |  | 2,169                    |  | 2,710    |  | (541)     
| |  |                                                       |  |                          |  |          |  |           
| |  | Net income                                            |  | $ 4,936                  |  | $ 6,364  |  | $ (1,428) 
| |  |                                                       |  |                          |  |          |  |           
| |  |                                                      
| |  | Earnings per sharebasic                              |  | $ 0.68                   |  | $ 0.89   |  | $ (0.21)  
| |  | Earnings per sharediluted                            |  | $ 0.68                   |  | $ 0.88   |  | $ (0.20)  
| |  | Efficiency ratio                                      |  | 58.71%                   |  | 60.21%   |  |           
| |  | Return on average equity                              |  | 10.99%                   |  | 13.58%   |  |           
| |  | Return on average assets                              |  | 0.83%                    |  | 1.09%    |  |           

20

---

The 22.4% decrease in net income for the six months ended June 30, 2008 compared to the six months ended June 30, 2007 is attributable primarily to an increase in net interest income of $2.5 million offset by an increase in the provision for loan losses of $4.2 million. Non interest income increased by $2.6 million for the six months ended June 30, 2008 compared to the same period in 2007 while non interest expense increased by $2.9 million for the same period. The increase in net interest income was mainly the result of a 17.0% increase in average earning assets to $1.1 billion at June 30, 2008 compared to $940.5 million at June 30, 2007. 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 rate environment. Our average interest bearing liabilities of $988.7 million at June 30, 2008 increased from $829.6 million at June 30, 2007. Our return on average equity was 10.99% and return on average assets was 0.83% for the six months ended June 30, 2008 compared to 13.58% and 1.09%, respectively, for the six months ended June 30, 2007.

Net Interest Income and Net Interest Margin.Net interest income increased for the period by 13.0% or $2.5 million to $21.8 million for six months ended June 30, 2008 compared to $19.3 million for the six months ended June 30, 2007.

The average pre-tax yield on interest-earning assets decreased to 7.05% in the first six months of 2008 from 8.18% for the same period in 2007, a decrease of 113 basis points. The Prime Rate was 325 basis points, or 39.4% lower at the end of the first six months 2008 compared to the first six months of 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 166 basis points to 7.25% from 8.91% for the six months ended June 30, 2008 compared to the six months ended June 30, 2007, respectively. In the second quarter loan yields would have been 7.47%, a difference of 22 basis points without the negative impact of non accrual loans. This decrease was partially offset by a 17.2% increase or a 96 basis point increase in yields on securities which increased to 6.56% for the six months ended June 30, 2008 compared to 5.60% for the six months ended June 30, 2007. The tax equivalent yield on securities for the six months ended June 30, 2008 was 6.72% compared to 5.80% for the six months ended June 30, 2007. The interest rate swap executed at the end of March 2008 added 3 basis points to our loan yields.

The cost of our average interest-bearing deposits decreased to 3.34% for the six months ended June 30, 2008 from 4.39% in the same period in 2007, a decrease of 105 basis points or 23.9% . Our average rate on total deposits (including non-interest bearing deposits) decreased to 2.92% for the six months ended June 30, 2008 from 3.79% for the six months ended June 30, 2007, a decrease of 87 basis points or 23.0% . Our borrowing rates declined to 3.58% from 5.47% for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007, a decrease of 189 basis points or 34.6% . The Federal Funds Target Rate was 325 basis points, or 61.9% lower this year compared to the same time period last year.

Our net interest margin for the six months ended June 30, 2008 was 3.99% down from 4.14% for the six months ended June 30, 2007. This was due in part to lower loan yields that were the result of our prime loans re-pricing lower after the Federal Reserve cut interest rates by 200 basis points during the first quarter of 2008 and 25 basis points during the second quarter of 2008. Margin compression also resulted from the inability to re-price deposits as fast as loans. Strong competition and term Certificates of Deposits were two factors that hindered our ability to re-price deposits as fast as loans.

In 2008 we began using interest rate derivatives to manage our exposure to changes in interest rates. During the first quarter we executed an interest rate swap, where we exchanged floating rate cash flows for fixed rate cash flows. We pay prime and receive 5.25% on a total notional amount of $100 million until March 27, 2010. This transaction benefits net income for every reduction in the prime rate below 5.25% and conversely limits net income for every increase in the prime rate above 5.25% during the term of the swap. For additional information on our derivatives, see theDerivative Financial Instrumentsunder the Summary of Critical Accounting Estimates and Accounting Policies and Note 9.

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost of 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.

21

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|                                                           |  |            |  |           |  | Six months ended |  |            |  |          
|---------------------------------------------------------- |  | ---------- |  | --------- |  | ---------------- |  | ---------- |  | ---------
|                                                           |  |            |  |           |  | June 30,         |  |            |  |          
|                                                           |  |           
|                                                           |  |            |  | 2008      |  |                  |  |            |  | 2007     
|                                                           |  |           
|                                                           |  |            |  | Interest  |  |                  |  |            |  | Interest 
|                                                           |  | Average    |  | Income    |  | Average          |  | Average    |  | Income   
|(dollars in thousands)                                     |  | Balance    |  | (Expense) |  | Rates (3)        |  | Balance    |  | (Expense)
|                                                           |  |            |  |           |  |                  |  |            |  |          
|Assets                                                     |  |            |  |           |  |                  |  |            |  |          
|Earning Assets:                                            |  |            |  |           |  |                  |  |            |  |          
|Loans (Interest and fees)(1)                               |  | $786,585   |  | $28,347   |  | 7.25%            |  | $732,290   |  | $32,367  
|Federal funds sold                                         |  | 476        |  | 9         |  | 3.80%            |  | 2,360      |  | 54       
|Investment securities(2)                                   |  | 309,303    |  | 10,094    |  | 6.56%            |  | 205,870    |  | 5,717    
|                                                           |  |            |  |           |  |                  |  |            |  |          
|Total earning assets and interest income                   |  | 1,096,364  |  | 38,450    |  | 7.05%            |  | 940,520    |  | 38,138   
|Other assets:                                              |  |            |  |           |  |                  |  |            |  |          
|Cash and due from banks                                    |  | 14,382     |  |           |  |                  |  | 14,511     |  |          
|Bank premises and equipment                                |  | 34,180     |  |           |  |                  |  | 30,525     |  |          
|Other assets                                               |  | 53,510     |  |           |  |                  |  | 52,747     |  |          
|Allowance for credit losses                                |  | (12,266)   |  |           |  |                  |  | (9,286)    |  |          
|                                                           |  |            |  |           |  |                  |  |            |  |          
|Total assets                                               |  | $1,186,170 |  |           |  |                  |  | $1,029,017 |  |          
|                                                           |  |            |  |           |  |                  |  |            |  |          
|                                                          
|Liabilities and Shareholders Equity                        |  |            |  |           |  |                  |  |            |  |          
|Interest bearing liabilities:                              |  |            |  |           |  |                  |  |            |  |          
|Deposits:                                                  |  |            |  |           |  |                  |  |            |  |          
|Savings, NOW, MMDA                                         |  | $377,041   |  | ($4,634)  |  | 2.47%            |  | $331,345   |  | ($6,233) 
|Time deposits                                              |  | 371,383    |  | (7,790)   |  | 4.22%            |  | 354,872    |  | (8,714)  
|                                                           |  |            |  |           |  |                  |  |            |  |          
|Total interest bearing deposits                            |  | 748,424    |  | (12,424)  |  | 3.34%            |  | 686,217    |  | (14,947) 
|Other borrowings                                           |  | 240,236    |  | (4,272)   |  | 3.58%            |  | 143,334    |  | (3,890)  
|                                                           |  |            |  |           |  |                  |  |            |  |          
|Total interest bearing liabilities and interest expense    |  | 988,660    |  | (16,696)  |  | 3.40%            |  | 829,551    |  | (18,837) 
|Non interest bearing liabilities                           |  | 104,727    |  |           |  |                  |  | 104,117    |  |          
|Other liabilities                                          |  | 2,976      |  |           |  |                  |  | 9,459      |  |          
|Shareholders equity                                        |  | 89,807     |  |           |  |                  |  | 85,890     |  |          
|                                                           |  |            |  |           |  |                  |  |            |  |          
|Total liabilities and shareholders equity                  |  | $1,186,170 |  |           |  |                  |  | $1,029,017 |  |          
|                                                           |  |            |  |           |  |                  |  |            |  |          
|Net interest income                                        |  |            |  | $21,754   |  |                  |  |            |  | $19,301  
|                                                           |  |            |  |           |  |                  |  |            |  |          
|Net interest margin as a percent of average earning assets |  |            |  |           |  | 3.99%            |  |            |  |          
|                                                           |  |            |  |           |  |                  |  |            |  |          

(1) Average
loan balance includes non-accrual loans. Loan fees and late charges of $1,522
thousand and $1,826 thousand are included in interest for the six months ended June 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 six months ended June 30, 2008 and 2007 is 6.69% and 5.80% respectively. (3) Annualized

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.

| |  |                                          |  | Six months ended June 30, 2008            
| |  | ---------------------------------------- |  | ------------------------------------------
| |  | (dollars in thousands)                   |  | Compared to six months ended June 30, 2007
| |  | Interest earned on:                      |  | Total Change                              
| |  | Loans                                    |  | $ (4,020)                                 
| |  | Federal Funds sold and deposits in banks |  | (45)                                      
| |  | Investment Securities                    |  | 4,377                                     
| |  |                                          |  |                                           
| |  | Total interest income                    |  | 312                                       
| |  |                                         
| |  | Interest paid on:                        |  |                                           
| |  | Savings, NOW, MMDA                       |  | (1,599)                                   
| |  | Time Deposits                            |  | (924)                                     
| |  | Other Borrowings                         |  | 382                                       
| |  |                                          |  |                                           
| |  | Total interest expense                   |  | (2,141)                                   
| |  |                                          |  |                                           
| |  | Net Interest income                      |  | $ 2,453                                   
| |  |                                          |  |                                           

Provision for Loan Losses.The provision for loan losses is a charge against earnings in that period. The provision is the amount required to maintain the allowance for credit losses at a level that, in managements judgment, is adequate to absorb estimated loan losses inherent in the loan portfolio.

The provision for loan losses for the six months ended June 30, 2008 was $4.9 million compared to $750 thousand for the six months ended June 30, 2007. Net charge-offs for the six months ended June 30, 2008 totaled $2.5 million compared to $599 thousand in net charge-offs for the same period in 2007.

22

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The increase in provision expense during the first six months of 2008 compared to the first six months of 2007 primarily reflects the actual increase in the Banks impaired 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 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. While not centered in any one borrower, project, or geographic area, management believes we will continue to see an increased number of borrowers with cash-flow and liquidity problems.

Each of these components influences our assessment of the adequacy of the Allowance, and we elected to increase the provision to ensure we are adequately reserved to account for these factors. Management reviews the adequacy of the allowance on at least a quarterly basis; the analysis includes a minimum, midpoint and maximum level for reserve adequacy. The provision is adjusted according to the results of that analysis

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

|                                                        
|--------------------------------------------------------
|                                                        
|                                                        
|                                                        
|dollars in thousands)                                   
|                                                        
|                                                        
|Non-Interest Income                                     
|Service charges on deposit accounts                     
|Origination fees and gain on sales of loans             
|Net gain on sale of securities                          
|Change in market value of junior subordinated debentures
|Income from bank owned life insurance                   
|Gross income from Venture Wealth Management             
|Other non-interest income                               
|                                                        
|                                                        
|Total Non-Interest Income                               
|                                                        

Total non-interest income increased $2.6 million or 54.6% to $7.5 million for the six months ended June 30, 2008 compared to $4.8 million for the six months ended June 30, 2007. The largest component for the change in non-interest income is due primarily to the $1.6 million increase in the origination fees and gain on sales of loans held for sale due to the increase of loans originated and subsequently sold as a direct result of the expansion of the mortgage department. Net gains on sale of securities increased by $640 thousand to $779 thousand for the six months ended June 30, 2008 compared to $139 thousand for the same period in 2007 due primarily to favorable market conditions and were sold for liquidity purposes. The change in the market value of junior subordinated debentures created $414 thousand more in revenue in the six months ended June 30, 2008 compared to the six months ended June 30, 2007.

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

| |  |                                        |  |                          |  |            |  |        |  | %     
| |  | -------------------------------------- |  | ------------------------ |  | ---------- |  | ------ |  | ------
| |  |                                        |  | For the six months ended |  | Increase/  |  | Change
| |  |                                        |  | June 30,                 |  | (Decrease) |  | From  
| |  |                                        |  |                          |  |            |  |        |  | 2007  
| |  |                                        |  |                         
| |  | (dollars in thousands)                 |  | 2008                     |  | 2007       |  |        |  |       
| |  |                                        |  |                         
| |  |                                       
| |  | Non-Interest Expense                   |  |                          |  |            |  |        |  |       
| |  | Salaries and employee benefits         |  | $ 9,695                  |  | $ 7,794    |  | 1,901  |  | 24.4% 
| |  | Occupancy and equipment                |  | 2,749                    |  | 2,292      |  | 457    |  | 19.9% 
| |  | Advertising / public relations         |  | 1,084                    |  | 1,064      |  | 20     |  | 1.9%  
| |  | Amortization of intangible assets      |  | 143                      |  | 143        |  | -      |  | -     
| |  | Office supplies, telephone and postage |  | 569                      |  | 481        |  | 88     |  | 18.3% 
| |  | Director fees                          |  | 91                       |  | 87         |  | 4      |  | 5.1%  
| |  | Expense from foreclosed assets         |  | 86                       |  | 12         |  | 74     |  | 618.4%
| |  | Washington State excise tax            |  | 726                      |  | 686        |  | 40     |  | 5.8%  
| |  | Other non-interest expense             |  | 2,071                    |  | 1,748      |  | 323    |  | 18.5% 
| |  |                                        |  |                          |  |            |  |        |  |       
| |  |                                       
| |  | Total Non-Interest Expense             |  | $ 17,214                 |  | $ 14,307   |  | 2,907  |  | 20.3% 
| |  |                                        |  |                         

23

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Total non-interest expense increased 20.3% or $2.9 million to $17.2 million for the six months ended June 30, 2008 compared to $14.3 million for the same period in 2007. All major components of non-interest expense (salaries and benefits, occupancy and equipment, advertising) increased for the six months ended June 30, 2008 compared to the same period ending June 30, 2007. The increases in salaries and benefits are due primarily to the expansion of our infrastructure which also included the hiring of nine additional mortgage representatives in Pierce County in the last quarter of 2007. The number of full time equivalent employees increased to 272 at June 30, 2008 compared to 250 at June 30, 2007. Occupancy and equipment costs increased $457 thousand or 19.9% for the six months ended June 30, 2008 compared to the six months ended June 30, 2007 due to the new location of the administrative offices, the addition of two financial centers and the related increase in real estate property taxes and depreciation expenses. Other non-interest expense increased $323 thousand or 18.5% to $2.1 million for the six months ended June 30, 2008 from $1.5 million for the same period last year. This increase is primarily due to an increase in FDIC insurance expense of $175 thousand for the six months ended June 30, 2008. The FDIC insurance expense increase was a result of increasing deposits and increasing deposit insurance rates and the expiration of an assessment credit the Company finished receiving in 2007. Increased legal and appraisal costs associated with monitoring the loan portfolio also contributed to the increase in other expenses.

Provision for Income Taxes.We recorded tax provisions of $2.2 million for the six months ended June 30, 2008 compared to $2.7 million for the six months ended June 30, 2007. Our effective tax rate was approximately 30.5% for the six months ended June 30, 2008 and 29.9% for the six months ended June 30, 2007. We expect our effective tax rate to range between 30% and 34% for the remainder of 2008 depending on our mix of assets.

Financial Condition

Our total consolidated assets at June 30, 2008 were $1.22 billion and $1.18 billion at December 31, 2007 an increase of 3.39% . Total deposits at June 30, 2008 increased to $916.6 million from $837.1 million at December 31, 2007.

LoansTotal loans and loans held for sale at June 30, 2008 and December 31, 2007 were $818.0 million and $783.1 million respectively, an increase of $34.9 million or 4.5% . Our loan growth has been focused in commercial real estate and real estate construction lending.

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

| |  |                                     |  | June 30, 2008 |  | December 31, 2007 |  | % Change 
| |  | ----------------------------------- |  | ------------- |  | ----------------- |  | ---------
| |  | (dollars in thousands)              |  |               |  |                   |  |          
| |  |                                    
| |  | Commercial                          |  | $ 80,479      |  | 9.8%              |  | $80,975  
| |  | Real Estate                         |  |               |  |                   |  |          
| |  | Residential 1-4                     |  | 39,462        |  | 4.8%              |  | 38,926   
| |  | Commercial                          |  | 274,571       |  | 33.6%             |  | 259,660  
| |  | Construction                        |  | 395,521       |  | 48.4%             |  | 375,137  
| |  | Consumer                            |  | 10,034        |  | 1.2%              |  | 11,030   
| |  |                                     |  |               |  |                  
| |  | Total Loans                         |  | 800,067       |  | 97.8%             |  | 765,728  
| |  | Loans Held for Sale                 |  | 17,965        |  | 2.2%              |  | 17,389   
| |  |                                     |  |               |  |                  
| |  | Total Loans and Loans Held for Sale |  | $ 818,032     |  | 100.0%            |  | $ 783,117
| |  |                                     |  |               |  |                  

The following tables show the amounts of loans as of June 30, 2008 and December 31, 2007. Of the loans maturing after one year, as of June 30, 2008, $113.2 million had fixed interest rates and $274.2 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 June 30, 2008, 62.0% of our floating rate loans were tied to the prime rate.



| | As of June 30, 2008:
| | --------------------

| |  | (dollars in thousands) |  |           |  | Maturity   |  |           |  |         
| |  | ---------------------- |  | --------- |  | ---------- |  | --------- |  | --------
| |  |                        |  | Within    |  | After One  |  | After     |  |         
| |  |                        |  | One       |  | But Within |  | Five      |  | Total   
| |  |                        |  | Year      |  | Five Years |  | Years     |  |         
| |  |                       
| |  | Commercial             |  | $ 40,879  |  | $ 36,281   |  | $ 3,319   |  | $ 80,479
| |  | Real Estate            |  |           |  |            |  |           |  |         
| |  | Residential 1-4        |  | 23,467    |  | 5,215      |  | 28,745    |  | 57,427  
| |  | Commercial             |  | 50,399    |  | 65,792     |  | 158,380   |  | 274,571 
| |  | Construction           |  | 312,388   |  | 73,328     |  | 9,805     |  | 395,521 
| |  | Consumer and other     |  | 3,553     |  | 2,595      |  | 3,886     |  | 10,034  
| |  |                        |  |           |  |            |  |           |  |         
| |  | Total                  |  | $ 430,686 |  | $ 183,211  |  | $ 204,135 |  | $818,032
| |  |                        |  |           |  |            |  |           |  |         

24

---

|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
|                         |  |           |  |            |  |           |  |          

Concentrations. As of June 30, 2008, in managements judgment, a concentration of loans existed in real estate related loans. At June 30, 2008, our portfolio was centered in real estate loans with construction loans at 48.4% of the portfolio, commercial real estate loans at 33.6% and residential 1-4 family units at 4.8% . 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, or 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.

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.

| |  |                                                |  | June 30. |  | December 31,
| |  | ---------------------------------------------- |  | -------- |  | ------------
| |  | (dollars in thousands)                         |  | 2008     |  | 2007        
| |  |                                                |  |          |  |             
| |  | Nonaccrual loans                               |  | $ 38,533 |  | $ 3,007     
| |  | Accruing loans past due 90 days or more        |  | 24       |  | 110         
| |  |                                                |  |          |  |             
| |  | Total non-performing loans (NPLs)              |  | 38,577   |  | 3,117       
| |  | Foreclosed real estate                         |  | 185      |  | 68          
| |  |                                                |  |          |  |             
| |  | Total non-performing assets (NPAs)             |  | $ 38,742 |  | $ 3,185     
| |  |                                                |  |          |  |             
| |  | Selected ratios                                |  |          |  |             
| |  | NPLs to total loans                            |  | 4.71%    |  | 0.40%       
| |  | NPAs to total loans and foreclosed real estate |  | 4.74%    |  | 0.41%       
| |  | NPAs to total assets                           |  | 3.16%    |  | 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 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.

During the six months ending June 30, 2008 nonaccrual loans increased $35.5 million, bringing total nonaccrual loans to $38.5 million, comprised of 62 loans, inclusive of the following: 42 single family speculative / 1-4 family building lots loans totaling $11.5 million (the largest with a balance of $2.2 million and located in Kirkland, WA); ten land development loans totaling $16.3 million (the largest with a balance of $4.6 million and located in Monroe, WA); four lot inventory loans for $7.8 million (the largest with a balance of $3.3 million located in Lacey, WA); and six other miscellaneous loans including consumer, residential real estate and commercial. The increase in nonaccrual loans compared to the first quarter of 2008 was attributable to four credit relationships totaling $18.6 million comprised of 25 single family speculative loans to four borrowers with properties located in Kelso, Lacey, Puyallup and

25

---

Montesano, WA; three lot inventory loans totaling $7.2 million located in Kelso, Lacey and Tacoma, WA; and two land development loan for $6.7 million located in Puyallup, WA and Monroe, 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 on their loans, causing the Bank to place them on nonaccrual.

The following 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.

| |  |                                                 |  | At June 30, |  | At December 31,
| |  | ----------------------------------------------- |  | ----------- |  | ---------------
| |  |                                                 |  | 2008        |  | 2007           
| |  | Total nonaccrual loans                          |  | $38,533     |  | $3,007         
| |  |                                                 |  |             |  |                
| |  |                                                
| |  | Nonaccrual loan with valuation allowance:       |  |             |  |                
| |  | Construction Residential Real Estate            |  | $8,860      |  | $1,868         
| |  | Commercial Real Estate                          |  | 4,718       |  | 80             
| |  | Land Development (Residential Lots)             |  | 7,602       |  | -              
| |  | Commercial (Non Real Estate)                    |  | 191         |  | 170            
| |  | Residential Real Estate                         |  | 181         |  | 40             
| |  | Consumer (Non Real Estate)                      |  | 7           |  | 8              
| |  | Lot Inventory                                   |  | 7,762       |  | -              
| |  |                                                 |  |             |  |                
| |  | Total nonaccrual loans with valuation allowance |  | $29,321     |  | $2,166         
| |  |                                                 |  |             |  |                

| |  | Allocation of allowance for credit losses on    |  |        |  |     
| |  | ----------------------------------------------- |  | ------ |  | ----
| |  | nonaccrual loans identified above:              |  |        |  |     
| |  | Construction Residential Real Estate            |  | 1,252  |  | 584 
| |  | Commercial Real Estate                          |  | 111    |  | 18  
| |  | Land Development (Residential Lots)             |  | 1,220  |  | 0   
| |  | Commercial (Non Real Estate)                    |  | 125    |  | 100 
| |  | Residential Real Estate                         |  | 31     |  | 16  
| |  | Consumer (Non Real Estate)                      |  | 7      |  | 8   
| |  | Lot Inventory                                   |  | 912    |  | 0   
| |  |                                                 |  |        |  |     
| |  | Total allocation of allowance for credit losses |  | $3,658 |  | $726
| |  |                                                 |  |        |  |     

Gross interest income of $533 thousand and $855 would have been recorded for the three months ended June 30, 2008 and six months ended June 30, 2008, respectively, if the nonaccrual loans had been current in accordance with their original terms and conditions. Interest income on these loans was not included in net income for the three months ended June, 2008 and the six months ended June 30, 2008.

Management closely reviews the loan portfolio on an quarterly basis, 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 are considered grade 5 (Watch). Management monitors these loans closely and reviews their performance on a regular basis.

As of June 30, 2008 the Company had classified as potential problem loans 82 loans aggregating $75.8 million. The largest relationship totals 14 loans aggregating $12.8 million. The largest single loan is $5.6 million.

26

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Foreclosed Real Estate.As of June 30, 2008, we held three foreclosed properties, represented by three single family residential building lots. The carrying value of the properties aggregated $185 thousand. 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 typically 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.

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 loan losses relating to the loans outstanding as of each reporting period.

Every loan in the loan portfolio has some measure of the Allowance for Loan Losses attributed to it. The Allowance consists of two parts: a general reserve (as described below) for loans that are graded 1 through 4 and a specific allocation (as described below) for every loan that is graded 5 through 8. 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:All loans that are graded 1 through 4 are reviewed on a group basis, not on a loan by loan basis to determine a general allocation of dollars necessary to provide an adequate Allowance. 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 loans. 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 each of its Watch list loans for potential loss exposure. The Banks Watch list consists of all loans that are grade 5 (Watch), grade 6 (Substandard), grade 7 (Doubtful), and grade 8 (Loss). We use an analysis similar to the FAS 114 analysis to determine the specific amount that must be included in the Allowance for each loan on the Watch list that is grade 5. Management considers all grade 5 loans as potential problem loans. Grade 5 loans do not have specifically identified weaknesses and are not considered to be impaired for FAS 114 purposes. For instance, grade 5 loans may have a potential weakness because the loan belongs to a certain troubled industry, because the collateral is located in a troubled geographic location, or other potential weaknesses. At quarter end, management has identified $75.8 million in grade 5 credits or potential problem loans.

Grade 6, 7, and 8 loans have specifically identified weaknesses within the individual credit. Grade 6, 7, and 8 credits are considered to be impaired and 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 specific valuation allowance based upon managements analysis of the collateral providing sufficient coverage for the loan.

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

27

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| |  | (dollars in thousands)                                            |  | Six Months Ended |  | Year Ended  
| |  | ----------------------------------------------------------------- |  | ---------------- |  | ------------
| |  |                                                                   |  | June 30,         |  | December 31,
| |  |                                                                   |  |                  |  |             
| |  |                                                                   |  | 2008             |  | 2007        
| |  |                                                                   |  |                  |  |             
| |  | Balance at beginning of period                                    |  | $10,975          |  | $8,917      
| |  |                                                                   |  |                  |  |             
| |  | Provision for credit losses                                       |  | 4,900            |  | 3,600       
| |  |                                                                  
| |  | Charge-offs:                                                      |  |                  |  |             
| |  | Commercial                                                        |  | (530)            |  | (568)       
| |  | Real Estate Mortgage and Construction                             |  | (2,101)          |  | (999)       
| |  | Consumer                                                          |  | (29)             |  | (54)        
| |  |                                                                   |  |                  |  |             
| |  | Total charge-offs                                                 |  | (2,660)          |  | (1,621)     
| |  |                                                                   |  |                  |  |             
| |  | Recoveries:                                                       |  |                  |  |             
| |  | Commercial                                                        |  | 76               |  | 30          
| |  | Real Estate Mortgage and Construction                             |  | 77               |  | 37          
| |  | Consumer                                                          |  | 18               |  | 12          
| |  |                                                                   |  |                  |  |             
| |  | Total recoveries                                                  |  | 171              |  | 79          
| |  |                                                                   |  |                  |  |             
| |  | Net charge-offs                                                   |  | (2,489)          |  | (1,542)     
| |  |                                                                   |  |                  |  |             
| |  | Transfer to reserve for unfunded commitments                      |  | (119)            |  | -           
| |  |                                                                   |  |                  |  |             
| |  | Balance at end of period                                          |  | $13,267          |  | $10,975     
| |  | Gross loans                                                       |  | $818,032         |  | $783,117    
| |  | Average loans                                                     |  | $786,585         |  | $746,498    
| |  | Non-performing loans                                              |  | $38,577          |  | $3,117      
| |  |                                                                  
| |  |                                                                  
| |  | Selected ratios:                                                  |  |                  |  |             
| |  |                                                                   |  |                  |  |             
| |  | Net charge-offs to average loans                                  |  | 0.32%            |  | 0.21%       
| |  |                                                                   |  |                  |  |             
| |  | Allowance for credit losses to average loans                      |  | 1.69%            |  | 1.48%       
| |  |                                                                   |  |                  |  |             
| |  | Allowance for credit losses to loans outstanding at end of period |  | 1.66%            |  | 1.43%       
| |  |                                                                   |  |                  |  |             
| |  | Allowance for credit losses to non-performing loans               |  | 34.41%           |  | 352.1%      
| |  |                                                                   |  |                  |  |             

We allocate the Allowance by assigning general percentages to our major loan categories (construction, commercial real estate, residential real estate, C&I and consumer), and assign specific percentages to each category of loans. 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:

| |  |              |  | June 30, |  | December 31,
| |  | ------------ |  | -------- |  | ------------
| |  | (dollars in  |  | 2008     |  | 2007        
| |  | thousands)   |  |          |  |             
| |  |              |  | Amount   |  | % of Total  
| |  |              |  |          |  | Allowance   
| |  |             
| |  | Commercial   |  | $1,189   |  | 8.9%        
| |  | Real Estate  |  |          |  |             
| |  | Commercial   |  | 6,655    |  | 50.2%       
| |  | Construction |  | 5,196    |  | 39.2%       
| |  | Residential  |  | 185      |  | 1.4%        
| |  | Consumer     |  | 42       |  | 0.3%        
| |  | Unallocated  |  | -        |  | -           
| |  |              |  |          |  |             
| |  | Total        |  | $13,267  |  | 100.0%      
| |  |              |  |          |  |             

28

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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 9.8% of our total loans as of June 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 enhanced risks generally encountered with construction loans. We also 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 on time and 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 $916.6 million at June 30, 2008 compared to $837.1 million at December 31, 2007. The balance of our public funds deposits decreased by $15.8 million in the first six months of 2008 from $179.0 million at December 31, 2007 to $163.2 million at June 30, 2008. Brokered deposits increased by $132.4 million and retail deposits decreased by $37.1 million for the same time period.

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.

|                       |  |           |  | June 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  |  | $ 104,727 |  | 12.4%         |  | -            |  | $ 104,287 |  | 12.7%             |  | -           
|NOW and MMDA           |  | 353,593   |  | 41.4%         |  | 1.87%        |  | 323,838   |  | 39.6%             |  | 3.51%       
|Savings accounts       |  | 23,448    |  | 2.7%          |  | 0.22%        |  | 22,900    |  | 2.8%              |  | 0.34%       
|Time deposits          |  | 371,383   |  | 43.5%         |  | 3.39%        |  | 367,273   |  | 44.9%             |  | 4.87%       
|                       |  |           |  |               |  |              |  |           |  |                   |  |             
|Total                  |  | $ 853,151 |  | 100.0%        |  |              |  | $ 818,298 |  | 100.0%            |  |             
|                       |  |           |  |               |  |              |  |           |  |                   |  |             

The following table shows the maturities of our time deposits:

| |  |                        |  |           |  | June 30, 2008 |  |          
| |  | ---------------------- |  | --------- |  | ------------- |  | ---------
| |  | (dollars in thousands) |  | Under     |  | $100,000      |  |          
| |  |                        |  | $100,000  |  | and over      |  | Total    
| |  |                        |  |           |  |               |  |          
| |  | 0-90 days              |  | $ 43,544  |  | $ 152,400     |  | $ 195,944
| |  | 91-180 days            |  | 20,131    |  | 64,143        |  | 84,274   
| |  | 181-365 days           |  | 34,183    |  | 62,799        |  | 96,982   
| |  | Over 1 year            |  | 18,590    |  | 33,365        |  | 51,955   
| |  |                        |  |           |  |               |  |          
| |  |                        |  | $ 116,448 |  | $ 312,707     |  | $ 429,155
| |  |                        |  |           |  |               |  |          

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Borrowings and Repurchase Agreements

Short term borrowings decreased $30.1 million, or 17.3%, to $143.9 million in the six months ended June 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: |  |              
|----------------------------------------------------------------------------------------------------- |  | -------------
|                                                                                                      |  |              
|                                                                                                      |  | June 30, 2008
|                                                                                                      |  |              
|Average balance during period                                                                         |  | $ 167,037    
|Average interest rate during period                                                                   |  | 3.25%        
|Maximum month-end balance during the year                                                             |  | 247,393      
|Weighted average rate at period end                                                                   |  | 3.13%        
|Balance at period end                                                                                 |  | $ 143,911    

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 June 30, 2008:

| |  |                                                |  |           |  |                    |  | June 30, 2008          |  |                      |  |          
| |  | ---------------------------------------------- |  | --------- |  | ------------------ |  | ---------------------- |  | -------------------- |  | ---------
| |  | (dollars in thousands)                         |  |           |  |                    |  | Payments Due by Period |  |                      |  |          
| |  |                                                |  | Less Than |  | After One          |  | After Three            |  | More Than            |  |          
| |  | Contractual Obligations                        |  | One Year  |  | But Within         |  | But Within             |  | Five                 |  | Total    
| |  |                                                |  |           |  | Three Years        |  | Five Years             |  | Years                |  |          
| |  |                                                |  |           |  |                    |  |                        |  |                      |  |          
| |  | Federal funds purchased                        |  | $ 34,715  |  | $                - |  | $                  -   |  | $                  - |  | $ 34,715 
| |  | Demand note issued to US Treasury              |  | 25,089    |  | -                  |  | -                      |  | -                    |  | 25,089   
| |  | FHLB overnight borrowings                      |  | 67,067    |  | -                  |  | -                      |  | -                    |  | 67,067   
| |  | FHLB Term Advances                             |  | -         |  | -                  |  | 40,000                 |  | 10,000               |  | 50,000   
| |  | Overnight repurchase agreements with customers |  | 17,040    |  | -                  |  | -                      |  | -                    |  | 17,040   
| |  | Junior subordinated debentures (at fair value) |  | -         |  | -                  |  | -                      |  | 21,154               |  | 21,154   
| |  | Premise leases                                 |  | 846       |  | 1,698              |  | 1,725                  |  | 8,135                |  | 12,404   
| |  |                                                |  |           |  |                    |  |                        |  |                      |  |          
| |  | Total contractual obligations                  |  | $144,757  |  | $ 1,698            |  | $ 41,725               |  | $ 39,289             |  | $ 227,469
| |  |                                                |  |           |  |                    |  |                        |  |                      |  |          

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)                |  | June 30,  |  | December 31,
| |  | ------------------------------------- |  | --------- |  | ------------
| |  |                                       |  | 2008      |  | 2007        
| |  |                                       |  |           |  |             
| |  | Unfunded commitments to extend credit |  |           |  |             
| |  | Real estate secured                   |  | $ 89,479  |  | $ 135,545   
| |  | Credit card lines                     |  | 2,857     |  | 3,018       
| |  | Other                                 |  | 67,389    |  | 61,258      
| |  |                                       |  |           |  |             
| |  | Total commitments to extend credit    |  | $ 159,725 |  | $ 199,821   
| |  |                                       |  |           |  |             
| |  |                                      
| |  | Standby letters of credit             |  | $ 2,020   |  | $ 1,953     
| |  |                                       |  |           |  |             

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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   |  |                             |  |             
| |  | ----------------------------- |  | ------------------------- |  | --------------------------- |  | ------------
| |  |                               |  | (Greater than or equal to |  |                             |  |             
| |  |                               |  | stated percentage)        |  | Actual at June 30, 2008    
| |  |                               |  |                           |  |                            
| |  |                              
| |  |                               |  | Adequately                |  |                             |  |             
| |  |                               |  | Capitalized               |  | Well Capitalized            |  | Venture Bank
| |  |                               |  |                           |  |                             |  |             
| |  |                              
| |  | Tier 1 leverage capital ratio |  | 4.00 %                    |  | 5.00 %                      |  | 7.67 %      
| |  | Tier 1 risk-based capital     |  | 4.00 %                    |  | 6.00 %                      |  | 8.94 %      
| |  | Total risk-based capital      |  | 8.00 %                    |  | 10.00 %                     |  | 10.20 %     
| |  |                               |  |                           |  |                             |  |             
| |  |                               |  | Regulatory Requirements   |  |                             |  |             
| |  |                               |  | (Greater than or equal to |  |                             |  |             
| |  |                               |  | stated percentage)        |  | Actual at December 31, 2007
| |  |                               |  |                           |  |                            
| |  |                              
| |  |                               |  | Adequately                |  |                             |  |             
| |  |                               |  | Capitalized               |  | Well Capitalized            |  | Venture Bank
| |  |                               |  |                           |  |                             |  |             
| |  |                              
| |  | Tier 1 leverage capital ratio |  | 4.00 %                    |  | 5.00 %                      |  | 8.18 %      
| |  | Tier 1 risk-based capital     |  | 4.00 %                    |  | 6.00 %                      |  | 9.15 %      
| |  | Total risk-based capital      |  | 8.00 %                    |  | 10.00 %                     |  | 10.31 %     

We were well capitalized at both Venture Bank and Venture Financial Group, Inc. at June 30, 2008 and December 31, 2007 for federal regulatory purposes.

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 June 30, 2008 and carrying value of $21.8 million at December 31, 2007. At June 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 of 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. We retain the ability to issue additional junior subordinated debentures and have such securities qualify as Tier 1 Capital under the new rules.

LiquidityLiquidity 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.

31

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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 loan funding and deposit withdrawals.

At June 30, 2008, cash and cash equivalents, federal funds sold and all securities available for sale totaled $295.4 million of which $278.3 million was pledged. The securities are pledged at more than 100% of the borrowing that is being secured so that liquidation of the borrowing creates excess securities. 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 June 30, 2008 short and long term borrowing lines of credit totaled $265.9 million. These credit facilities are being used regularly as a source of funds. At June 30, 2008, $176.9 million was borrowed against these lines of credit in the form of short and long term debt.

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 our correspondent banks as well as the Federal Home Loan Bank, or other borrowing sources. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments and deposit withdrawals. All of 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 $818.0 million as of June 30, 2008 and $783.1 million for the year ended December 31, 2007. Investment securities were $278.3 million at June 30, 2008 and $280.1 million at December 31, 2007. At June 30, 2008 we had outstanding loan commitments of $159.7 million and outstanding letters of credit of $2.0 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 $79.5 million for the six months ended June 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 June 30, 2008 was adequate to fund ongoing operations.

Item 3Quantitative 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 4TControls and ProceduresEvaluation 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

32

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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 second quarter ended June 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

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.

|Item 2                                                                        |  | Unregistered Sales of Equity Securities and Use of Proceeds |  |                         |  |                        |  |                 |  |                         
|----------------------------------------------------------------------------- |  | ----------------------------------------------------------- |  | ----------------------- |  | ---------------------- |  | --------------- |  | ------------------------
|                                                                             
|(c)                                                                           |  | Issuer Purchases of Equity Securities                       |  |                         |  |                        |  |                 |  |                         
|                                                                             
|                                                                              |  |                                                             |  |                         |  |                        |  |                 |  | Total number of shares  
|                                                                              |  |                                                             |  |                         |  |                        |  |                 |  | purchased as part of    
|                                                                              |  |                                                             |  |                         |  |                        |  |                 |  | publicly announced plans
|                                                                              |  |                                                             |  | Total number of shares  |  | Average price paid per |  | or programs     |  | shares that may yet be  
|                                                                              |  | Period                                                      |  | purchased               |  | share                  |  |                 |  | purchased               
|                                                                             
|                                                                             
|                                                                              |  | Month #1                                                    |  |                         |  |                        |  |                 |  |                         
|                                                                              |  | April 1, 2008 through                                       |  |                         |  |                        |  |                 |  |                         
|                                                                              |  | April 30, 2008                                              |  | - -                     |  | - -                    |  | - -             |  | 200,000                 
|                                                                             
|                                                                              |  | Month #2                                                    |  |                         |  |                        |  |                 |  |                         
|                                                                              |  | May 1, 2008 through                                         |  |                         |  |                        |  |                 |  |                         
|                                                                              |  | May 31, 2008                                                |  | - -                     |  | - -                    |  | - -             |  | 200,000                 
|                                                                             
|                                                                              |  | Month #3                                                    |  |                         |  |                        |  |                 |  |                         
|                                                                              |  | June 1, 2008 through                                        |  |                         |  |                        |  |                 |  |                         
|                                                                              |  | June 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 4.                                                                       |  | Submission of Matters to a Vote of Security Holders         |  |                         |  |                        |  |                 |  |                         

|(a) | The Company held its annual meeting of shareholders on May 13, 2008 at the Lacey Community Center, 6729 Pacific Avenue SE, Lacey, Washington.                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) | At the annual meeting three directors were elected at the meeting-- James F. Arneson, Lowell (Sonny) E. Bridges, and Linda E. Buckner. The following directors terms of office continued following the meeting: Jewell C. Manspeaker, Patrick L. Martin, Ken F. Parsons, Sr., Keith W.                                                                                                                                              
|   
|    | Brewe, A. Richard Panowicz, and Larry J. Schorno.                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(c) | The only matters voted upon at the annual meeting were the election of three directors to three year terms and amendments to the 2004 Stock Incentive Plan to increase the number of shares available for grant under the Plan by 500,000 shares and to increase the number of shares that may be granted to an existing or newly hired employee or existing or newly appointed Director in any calendar year from 10,000 to 15,000..
|   

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The following table indicates the votes for and votes withheld for each of the three nominees:

| |  |                           |  | VOTES FOR |  | VOTES WITHHELD
| |  | ------------------------- |  | --------- |  | --------------
| |  | James F. Arneson          |  | 5,482,935 |  | 36,570        
| |  | Lowell (Sonny) E. Bridges |  | 5,449,548 |  | 69,957        
| |  | Linda E. Buckner          |  | 5,467,249 |  | 52,256        

There were 4,841,433 votes for the amendments to the 2004 Stock Incentive Plan, 315,829 votes against and 362,243 abstentions.



Item 6Exhibits



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.                                                                                                                              
|    

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| | 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: August 14, 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

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