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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



FORM 10-K



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

For the Fiscal Year endedDecember 31, 2005



[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)  
OF THE SECURITIES EXCHANGE ACT OF 1934

For 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)

Principal Executive Offices721 College St. S.E., P.O. Box 3800, Lacey, WA 98509



Registrant's telephone number, including area code (360) 459-1100

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
                                                                                                                                                              
___ YESXNO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
                                                                                                                                                               
___YESXNO

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 5(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
XYES   ___ NO

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K [   ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. 
                                                      Large accelerated filer____         Accelerated filer
____        Non-accelerated filerX

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

There is no active trading market for the Registrant's voting common equity. The Registrant's voting common stock is not listed on any exchange or quoted on NASDAQ or on the OTCBB, or traded or quoted in any market. The
aggregate value of the voting common equity held by non-affiliates as of June 30, 2005 (the last business day of the most recent second quarter), was $100,792,230 based solely on trades between private purchasers and sellers that are reported to
the Registrant.

The number of shares of no par value Common Stock outstanding as of March 15, 2006, was 7,239,940.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement (the "Proxy Statement") for use in connection with the Annual Meeting of Shareholders to be held on May 4, 2006, are incorporated by reference into Part III of this Annual Report on Form
10-K.

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|                                            |  | Venture Financial Group, Inc.                                       |  |   
|------------------------------------------- |  | ------------------------------------------------------------------- |  | --
|                                            |  | FORM 10-K                                                           |  |   
|                                            |  | FOR THE YEAR ENDED DECEMBER 31, 2005                                |  |   
|                                            |  | TABLE OF CONTENTS                                                   |  |   
|                                           
|                                            |  | PART I                                                              |  |   
|ITEM 1. BUSINESS                            |  | Page                                                               
|General                                    |  |                                                                     |  | 3 
|Competition                                |  | 4                                                                  
|Market Area                                |  | 4                                                                  
|Employees                                  |  | 5                                                                  
|Supervision and Regulation                 |  | 5                                                                  
|                                           
|ITEM 1A. RISK FACTORS                       |  | 10                                                                 
|                                           
|ITEM 1B. UNRESOLVED STAFF COMMENTS          |  | 11                                                                 
|                                           
|ITEM 2.                                     |  | PROPERTIES                                                          |  | 11
|                                           
|ITEM 3.                                     |  | LEGAL PROCEEDINGS                                                   |  | 11
|                                           
|ITEM 4.                                     |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                 |  | 12
|                                           
|                                            |  | PART II                                                             |  |   
|                                           
|ITEM 5.                                     |  | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS  |  | 12
|                                            |  | AND ISSUER PURCHASES OF EQUITY SECURITIES                           |  |   
|                                           
|ITEM 6.                                     |  | SELECTED FINANCIAL DATA                                             |  | 14
|                                           
|ITEM 7.                                     |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION         |  |   
|                                            |  | AND RESULTS OF OPERATION                                            |  | 15
|Critical Accounting Policies and Estimates |  | 15                                                                 
|Performance Overview                       |  | 15                                                                 
|Results of Operations                      |  | 16                                                                 
|Liquidity and Financial Condition          |  | 20                                                                 
|Capital Resources                          |  | 27                                                                 
|                                           
|ITEM 7A.                                    |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK          |  | 28
|                                           
|ITEM 8.                                     |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                         |  | 30
|Reports of Independent Auditors            |  | 30                                                                 
|Financial Statements                       |  | 31                                                                 
|Notes to Financial Statements              |  | 38                                                                 
|                                           
|ITEM 9.                                     |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING         |  |   
|                                            |  | AND FINANCIAL DISCLOSURE                                            |  | 79
|                                           
|ITEM 9A.                                    |  | CONTROLS AND PROCEDURES                                             |  | 79
|                                           
|ITEM 9B.                                    |  | OTHER INFORMATION                                                   |  | 79
|                                            |  | PART III                                                            |  |   
|                                           
|ITEM 10.                                    |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH |  |   
|                                            |  | SECTION 16(a) OF THE EXCHANGE ACT                                   |  | 79
|                                           
|ITEM 11.                                    |  | EXECUTIVE COMPENSATION                                              |  | 79
|                                           
|ITEM 12.                                    |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  |  |   
|                                            |  | RELATED STOCKHOLDER MATTERS                                         |  | 79
|                                           
|ITEM 13.                                    |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                      |  | 79
|                                           
|ITEM 14                                     |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                              |  | 79
|                                           
|                                            |  | PART IV                                                             |  |   
|                                           
|ITEM 15.                                    |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                          |  | 80
|Signatures                                 |  | 81                                                                 
|Exhibit Index                              |  | 82                                                                 
|                                           
|                                           
|                                            |  |                                                                     |  |   

2

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PART I

ITEM 1 - BUSINESSGeneral

Venture Financial Group, Inc. ("VFG" or "the Company"), formerly known as First Community Financial Group, was incorporated under the laws of the State of Washington in November 1983 as First Community Bancorp, Inc. and is
a bank holding company. The Company changed its name to First Community Financial Group, Inc. in July 1992 and again in May 2003 to Venture Financial Group, Inc.  In 1984, pursuant to a plan of reorganization, VFG acquired the stock of First
Community Bank of Washington, and in May 2003 the bank changed its name to Venture Bank ("VB" or "Bank"). The Bank, organized in 1979, is a Washington state-chartered banking corporation. The principal offices of VFG and Venture Bank are located in
Lacey, Washington. References to "we", "us", or "our" refer to VFG.

The Company expanded solely through internal growth until 1993 when it began a series of acquisitions to more rapidly expand its market area and to achieve greater economies of scale.

|Acquisition                                           |  | Year Completed
|----------------------------------------------------- |  | --------------
|                                                     
|Citizens First Bank                                   |  | 1993          
|Northwest Community Bank                              |  | 1995          
|Prairie Security Bank                                 |  | 1997          
|Wells Fargo Bank - Four Financial Centers             |  | 1997          
|Harbor Bank, N.A.                                     |  | 2002          
|Washington Commercial Bancorp (Redmond National Bank) |  | 2005          

In addition to growth by acquisition, during the past five years we have opened financial centers in the following areas:

- Meridian-Puyallup (2001)
- West Olympia (2001)
- Tacoma Downtown(2001)
- South Hill: Puyallup (2003 relocation of Meridian-Puyallup)
- Kent (2004)
- Lakewood (2005)

In March 2004, the Bank acquired Washington Asset Management Tacoma, LLC, a financial services and wealth management company. The acquired firm was consolidated with the Bank's existing Investment Services Department and
Venture Wealth Management, a wholly owned subsidiary of Venture Bank, was formed. Venture Wealth Management is headquartered in Olympia Downtown. Please seeNote 2 - Disposition and Acquisitions

In October 2004, the Bank sold seven of its financial centers. These financial centers were located in Grays Harbor (Aberdeen, Elma, Montesano, and Hoquiam), Lewis (Toledo, Winlock) and Thurston (Panorama City) Counties. We
sold $88 million in deposits and $1.8 million in real estate, furniture and fixtures, and realized a $3.5 million gain, net of tax and previously recorded goodwill with respect to the sold financial centers. Please seeNote 2 - Disposition and Acquisitions

In September 2005, the Bank completed its merger with Washington Commercial Bancorp, the holding company of Redmond National Bank. The merger added two additional King County financial centers located in the Redmond area.
Please seeNote 2 - Disposition and Acquisitionsin the Company's consolidated financial statements for a more complete description of this transaction.

The Bank's lending is primarily focused on business lending, commercial real estate lending, and residential real estate lending, The Bank provides a full range of banking services including:

- savings and checking accounts,
- time deposits,
- consumer installment loans and residential real estate loans,
- commercial real estate loans and business loans,
- safe deposit facilities, and
- electronic banking via ATMs, Internet and telephone.

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We offer a broad range of investment services to our consumer and commercial customers, including retirement and estate planning, profit sharing plans and the sale of non-deposit investment products, through Venture Wealth
Management.

Small Loan Segment

From November 2000 until July 2005, the Bank offered small loans (commonly known as "Payday Loans") to customers in Alabama and Arkansas through Marketing and Servicing Agreements with Advance America. Advance America acted
as the Bank's agent in marketing and collecting these loans.

On March 2, 2005, the Federal Deposit Insurance Corporation ("FDIC"),our primary regulator, issued revised payday lending guidelines. The Company
determined that compliance with this guidance would have a negative impact on service to customers and on earnings to the point where the Company decided to discontinue its small loan activity in 2005. Financial highlights on this segment of the
Company are found in Management's Discussion & Analysis of Financial Condition and Results of Operations andNote 21-Business Segment Informationto the Company's
consolidated financial statements.

Competition

Commercial banking in the state of Washington is highly competitive with respect to providing banking services, including making loans and attracting deposits. The Bank competes with other commercial banks, as well as with
savings and loan associations, savings banks, credit unions, mortgage companies, investment banks, insurance companies, securities brokerages, and other financial institutions. Banking in Washington is significantly affected by several large banking
institutions, including U.S. Bank, Wells Fargo Bank, Bank of America, Key Bank, and Washington Mutual Bank, which together account for a majority of the total commercial and savings bank deposits in Washington. These competitors have significantly
greater financial resources and offer a greater number of financial center locations (with statewide financial center networks), higher lending limits, and a variety of services not offered by the Bank. The Bank has positioned itself successfully as
a local alternative to banking conglomerates that may be perceived by customers or potential customers, as impersonal, out-of-touch with the community, or simply not interested in providing banking services to some of the Bank's target customers.
Over the past few years, numerous "community" banks have been formed or moved into the Bank's market areas and have developed a similar focus. This growing number of similar banks and an increased focus by larger institutions on the Bank's market
segments in response to declining market perception or market share has led to intensified competition.

The adoption of the Gramm-Leach-Bliley Act of 1999 intensified competition in the banking industry. The Act eliminated many of the barriers to affiliation among providers of various types of financial services and permits
business combinations among banks, insurance companies, securities and brokerage firms, and other financial service providers. This has led to increased competition in both the market for providing financial services and in the market for
acquisitions in which the Bank also participates. For additional information, see "Business - Supervision and Regulation - Financial Services Modernization." In general, the financial services industry has experienced widespread consolidation over
the last decade. It is anticipated that consolidation among financial institutions in the Company's market area will continue. Other financial institutions, many with substantially greater resources, compete in the acquisition market against the
Bank. Some of these institutions, have greater access to capital markets, larger cash reserves and a more liquid currency. Additionally, the rapid adoption of financial services through the Internet has reduced the barrier to entry by financial
services providers physically located outside the Bank's market area. Although the Bank has been able to compete effectively in the financial services markets to date, there can be no assurance that it will be able to continue to do so in the
future.

Market Area

The Bank engages in general banking business through 17 financial centers in Thurston, Lewis, Pierce, and King counties in Washington state. All four counties experienced economic growth in 2005.

Thurston County
Property values in Thurston County increased on average in 2005 and the County's real estate market was very active. Thurston County's principal industries include government with the state capitol in Olympia and shipping
though the Port of Olympia. The Port of Olympia reported increased shipping activity in 2005.  Several national retailers opened stores and related warehouse distribution centers in the County in 2005 including Home Depot and Lowe's.

Pierce County
In 2005, Pierce County experienced solid economic growth and an active real estate market. In 2005 the City of Tacoma saw continued revitalization of the downtown corridor including development of a new convention center
and hotel. Additionally, the University of Washington's satellite campus in downtown Tacoma continued to grow. The City of DuPont which serves as a bedroom community for both Thurston and Pierce counties experienced population growth in
2005.

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Pierce County is well diversified with the principal industries being shipping through the Port of Tacoma and military employment at Fort Lewis and McChord Air Force Bases.

King County
In 2005, the number of home sales in King County's real estate market, declined from previous years but real estate values substantially increased.

King County is very well diversified with a strong industrial, transportation, and service industry base; including the Port of Seattle, Seattle-Tacoma International airport, and corporate headquarters for Costco,
Microsoft, Weyerhaeuser and Starbucks.

Lewis County
Lewis County has experienced a moderate level of economic growth in 2005. The residential real estate market began to see increased activity as more land is available than in neighboring counties that have experienced
significant growth in recent years. The urban sprawl in the more populous adjacent counties makes Lewis County an attractive alternative. It is anticipated that a glass plant will be developed in Lewis County which increased interest in real estate
development in the County.

Lewis County derives the majority of its economic livelihood from Thurston County, particularly government jobs centered in Olympia.

Employees

VFG and its subsidiaries employed a total of 227 employees, consisting of 200 full time and 27 part time employees at December 31, 2005. A number of benefit programs are available to eligible employees, including group
medical plans, paid time off (PTO), short-term disability, group term life insurance, a 401(k) plan combined with an ESOP (KSOP), deferred compensation plans, and a stock incentive plan. Employees are not represented by a union organization or other
collective bargaining group, and we consider our relationship with employees to be very good.

Supervision and Regulation

The Bank is extensively regulated under federal and state law. These laws and regulations are primarily intended to protect depositors, not shareholders. The discussion below describes and summarizes applicable statutes and
regulations and is qualified in its entirety by reference to the particular statute or regulation. Changes in applicable laws or regulations may have a material effect on the Bank's business and prospects. The Bank's operations may also be affected
by changes in the policies of banking and other government regulators. The nature or extent of the possible future effects on business and earnings of changes in fiscal or monetary policies, or new federal or state laws and regulations cannot
accurately be predicted.

Significant Changes in Banking Laws and Regulations

Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the "Act") to address corporate and accounting fraud. The Act:

- requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (the "SEC");
- imposes new disclosure requirements regarding internal controls, off-balance-sheet transactions, and pro forma (non- GAAP) disclosures;
- accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; and
- requires additional disclosures regarding codes of ethics for senior financial officers, shareholder communication procedures, director nomination procedures, and audit
committees.

|To deter wrongdoing, the Act:
|-----------------------------

- subjects bonuses issued to top executives to disgorgement if a restatement of a company's financial statements was due to corporate misconduct;
- prohibits an officer or director from misleading or coercing an auditor;
- prohibits insider trades during pension fund "blackout periods";
- imposes new criminal penalties for fraud and other wrongful acts; and
- extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.

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As an SEC reporting company, we are subject to the Act's requirements. The SEC continues to adopt and refine regulations implemented pursuant to the Act. We continue to comply with the Act and related rules and regulations
issued by the SEC and expect that SEC regulations that are not currently applicable to us will become applicable in the future. At the present time the Company anticipates that it will incur additional expense as a result of the Act, but we do not
expect that such compliance will have a material impact on business.

|Federal Bank Holding Company Regulation
|---------------------------------------

General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended, and is therefore subject to regulation, supervision and examination by
the Federal Reserve. In general, the Bank Holding Company Act limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. The Company must also file reports and provide
additional information to the Federal Reserve.

Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain
expanded activities deemed financial in nature, such as securities brokerage and insurance underwriting. We have not applied to become a financial holding company.

Holding Company Bank Ownership. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before merging with another
institution or acquiring ownership or control of more than 5% of the voting shares or substantially all of the assets of another bank or bank holding company.

Holding Company Control of Non-Banks. With some exceptions, the Bank Holding Company Act also prohibits a bank holding company from acquiring or retaining direct or indirect ownership
or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or providing services for
its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of
managing or controlling banks.

Transactions with Affiliates. Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company
or its subsidiaries, on investments in their securities, and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company's ability to obtain funds from the Bank for its cash needs,
including funds for payment of dividends, interest, and other operational expenses.

Tying Arrangements. The Company is prohibited from engaging in certain tying arrangements in connection with any extension of credit, sale or lease of property or furnishing of
services. For example, with certain exceptions, neither the Company nor its subsidiaries may condition an extension of credit to a customer on either a requirement that the customer obtain additional services provided by the Company or an agreement
by the customer to refrain from obtaining services from a competitor.

Support of Subsidiary Banks. Under Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to the Bank. This means that the Company is
required to commit, as necessary, resources to support the Bank. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.

|Federal and State Regulation of Venture Bank
|--------------------------------------------

General. The Bank is a Washington chartered commercial bank with deposits insured by the FDIC. As a result, the Bank is subject to supervision and regulation by the Washington
Department of Financial Institutions, Division of Banks and the FDIC. These agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe or unsound banking practices.

Lending Limits. Washington State banking law generally limits the amount of funds that a bank may lend to a single borrower to 20% of the bank's capital and surplus.

Community Reinvestment. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their jurisdiction, the FDIC evaluate the record
of the financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. These factors are also considered in evaluating
mergers, acquisitions, and applications to open new financial centers.

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Insider Credit Transactions. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interests of such persons. Extensions of credit must be made on substantially the same terms as comparable transactions with other customers and must not involve more than the normal risk of repayment or present other
unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, the imposition of a cease and
desist order, and other regulatory sanctions.

Regulation of Management. Federal law sets forth circumstances under which officers or directors of a bank may be removed by the institution's federal supervisory agency. Federal law
also prohibits management personnel of a bank from serving as a director or in a management position of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

Safety and Soundness Standards. Federal law imposes upon banks certain non-capital safety and soundness standards. These standards cover, among other things, internal controls,
information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation and benefits. Additional standards apply to asset quality, earnings and stock valuation. An institution that
fails to meet these standards must develop a plan acceptable to its regulators, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory
sanctions.

|Interstate Banking and Branching
|--------------------------------

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act) permits nationwide interstate banking and branching under certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal restrictions on interstate banking. Currently, bank holding companies may purchase banks in any state, and states may not prohibit these purchases. Additionally, banks are permitted to merge with banks in other states,
as long as the home state of neither merging bank has opted out under the legislation. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area.

FDIC regulations prohibit banks from using their interstate branches primarily for deposit production. The FDIC has implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

Washington enacted "opting in" legislation in accordance with the Interstate Act, allowing banks to engage in interstate merger transactions, subject to certain "aging" requirements. Washington restricts an out-of-state
bank from opening de novo branches. However, once an out-of-state bank has acquired a bank within the state, either through merger or acquisition of all or substantially all of the bank's assets, the out-of-state bank may open additional branches
within the state. We do not have the authority to open de novo branches in any state other than Washington.

|Deposit Insurance
|-----------------

The Bank's deposits are currently insured to a maximum of $100,000 per depositor through the Bank Insurance Fund administered by the FDIC. The Bank is required to pay deposit insurance premiums, which are assessed
semiannually and paid quarterly. The premium amount is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower
levels of capital or a higher degree of supervisory concern. The Bank qualifies for the lowest premium level, and currently pays only the statutory minimum rate.

The FDIC is also empowered to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources or for any other purpose the FDIC deems necessary.

|Dividends
|---------

Along with the periodic issuance of Junior Subordinated Debentures, dividends paid by the Bank provide substantially all of the Company's cash flow. Under Washington law, and the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), the Bank is subject to restrictions on the payment of cash dividends to its parent company. A bank may not pay cash dividends if that payment would reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. In addition, the amount of the dividend may not be greater than retained earnings.

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Regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. We are not currently subject to any regulatory
restrictions on dividends other than those noted above.

|Capital Adequacy
|----------------

Regulatory Capital Guidelines. Federal and state bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The
guidelines are "risk-based," meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives
for holding liquid assets.

If capital falls below the minimum levels established by these guidelines, a holding company or a bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities.

Federal regulations establish minimum requirements for the capital adequacy of depository institutions, such as the Bank. Banks with capital ratios below the required minimums are subject to certain administrative actions,
including prompt corrective action, the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing.

Tier I and Tier II Capital. Under the guidelines, an institution's capital is divided into two broad categories, Tier I capital and Tier II capital.  Tier I capital generally consists
of common stockholders' equity, surplus, undivided profits, and Junior Subordinated Debentures up to 25% of Tier I capital. Tier II capital generally consists of the allowance for loan losses up to 1.25% of risk weighted assets, hybrid capital
instruments, and subordinated debt. The sum of Tier I capital and Tier II capital represents an institution's total capital. The guidelines require that at least 50% of an institution's total capital consist of Tier I capital.

Risk-based Capital Ratios. The adequacy of an institution's capital is gauged primarily with reference to the institution's risk-weighted assets. The guidelines assign risk weightings
to an institution's assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institution's risk-weighted assets are then compared with its Tier I capital and total capital
to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8% to be "adequately-capitalized"
per the regulation. Our ratios are 9.37% and 10.46%, respectively.

Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of total average assets, less intangibles. The principal objective of the leverage
ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however, for all but the most highly rated bank holding companies and for bank holding companies seeking
to expand, regulators expect that at a minimum the ratio will be 4% to be "adequately-capitalized" per the regulation. Our ratio is 12.01% .

Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital
ratio, and leverage ratio, together with certain subjective factors. The capital categories range from "well capitalized" to "critically under-capitalized." Institutions that are "undercapitalized" or lower are subject to certain mandatory
supervisory corrective actions. FDICIA requires federal banking regulators to take "prompt corrective action" with respect to a capital-deficient institution, including requiring a capital restoration plan and restricting certain growth activities
of the institution. The Company could be required to guarantee any such capital restoration plan required of the Bank if the Bank became undercapitalized. Under the regulations, the Bank is "well-capitalized."

|Financial Services Modernization
|--------------------------------

Gramm-Leach-Bliley Act of 1999. The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act, brought about significant changes to the laws affecting
banks and bank holding companies. The Act:

- repealed restrictions on preventing banks from affiliating with securities firms;
- provided a uniform framework for the activities of banks, savings institutions and their holding companies;
- broadened the activities that may be conducted by national banks and banking subsidiaries of bank holding companies;
- provided an enhanced framework for protecting the privacy of consumer information; and
- addressed a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.

8

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Bank holding companies that qualify and elect to become financial holding companies can engage in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and
securities underwriting activities. In addition, in a change from previous law, bank holding companies will be in a position to be owned, controlled or acquired by any company engaged in financially related activities, so long as the company meets
certain regulatory requirements. The act also permits national banks (and, in states with wildcard statutes, certain state banks), either directly or through operating subsidiaries, to engage in certain non-banking financial activities.

The Company does not believe that the act will negatively affect operations in the short term. However, to the extent the legislation permits banks, securities firms and insurance companies to affiliate, the financial
services industry may experience further consolidation. This consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than currently offered, and these companies may be able to
aggressively compete in the markets the Company currently serves.

|Anti-terrorism Legislation
|--------------------------

USA Patriot Act of 2001. On October 26, 2001, President Bush signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
(USA Patriot Act) of 2001. Among other things, the USA Patriot Act:

- prohibits banks from providing correspondent accounts directly to foreign shell banks;
- imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals;
- requires enhanced customer identification procedures;
- requires financial institutions to establish an anti-money-laundering compliance program; and
- eliminates civil liability for persons who file suspicious activity reports.

The Act also increases governmental powers to investigate terrorism, including expanded government access to account records. The Department of the Treasury is empowered to administer and make rules to implement the
Act.

The USA Patriot Act has required a greater use of resources due to the requirement of an enhanced anti-money laundering program. The Company does not believe the enhanced anti-money laundering program will have a material
adverse effect on business and operations.

|Effects of Government Monetary Policy
|-------------------------------------

The Bank's earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and
establishment of reserve requirements against certain deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary
policies and their impact cannot be predicted with certainty.

|Effects of Government Monetary Policy
|-------------------------------------

The Bank's earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and
establishment of reserve requirements against certain deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary
policies and their impact cannot be predicted with certainty.

Cautionary Statement Regarding Forward-Looking Information

Statements appearing in this report which are not historical in nature, including without limitation 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

9

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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 Annual Report. VFG does
not undertake any obligation to update or publicly release any revisions to forward-looking statements contained in this Annual Report, with respect to events or circumstances after the date of this Annual Report, or to reflect the occurrence of
unanticipated events.  Risks and uncertainties with respect to the Company include, among others, risks 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; fiscal and monetary policies of the federal government; changes in government regulations affecting financial
institutions including regulatory fees and capital requirements; changes in prevailing interest rates that could lead to decreased net interest margin; the integration of acquired businesses; credit risk management and asset/liability management;
changes in technology or required investments in technology; and the availability of and costs associated with sources of liquidity. We caution you not to rely on forward-looking statements and to carefully review the "Risk Factors" section in Item
1A below, which is updated from time to time in our filings with the SEC.

|ITEM 1A - RISK FACTORS
|----------------------

We are subject to the risk of borrowers being unwilling or unable to repay loans.

Credit risk, the possibility that borrowers will be unwilling or unable to repay their obligations when due, could profoundly impact our earnings. We maintain a reserve for loan losses to absorb estimated probable loan
losses. The level of our loan loss reserve is based on management's judgments and various assumptions about the loan portfolio. If our assumptions are incorrect, the reserve for loan losses may not be sufficient to cover losses, which could
adversely affect our results of operations. If loans are not repaid and loan losses exceed our loan loss allowance, increased amounts charged to the provision for loan losses would reduce income.

We have a high concentration of real estate collateral securing our loans.

Many of our loans are secured by real estate located in Western Washington, specifically the Puget Sound region. If this region experiences an economic downturn that impacts real estate values and customers' ability to
repay, loan losses may exceed the estimates that are currently included in the reserve for loan losses, which could adversely affect our financial results.

|Changing interest rates could adversely affect our income.
|----------------------------------------------------------

Our earnings depend primarily on net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on
interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of governmental and regulatory agencies. Changes in
monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect our ability to originate
loans and obtain deposits and the fair value of our financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, net interest
income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

|We need to generate liquidity to fund our lending activities.
|-------------------------------------------------------------

We must have adequate cash or borrowing capacity to meet our customers' needs for loans and demands for their deposits. We generate liquidity primarily through new deposits. We also have access to secured borrowings, FHLB
borrowings and various other lines of credit. The inability to increase deposits or to access other sources of funds would have a negative effect on our ability to meet customer needs, could slow loan growth and could adversely affect our results of
operations.

We are subject to extensive government regulation and supervision, which could become more burdensome, increase our costs and make us less competitive compared to unregulated competitors.

We are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors' funds, federal deposit insurance funds and the banking system as a whole, not our
shareholders. These regulations affect, among other things, lending practices, capital structure, investment practices, dividend policy and growth. Failure to comply with any of the relevant statutes and regulations could lead to severe restrictions
on our ability to conduct business or lead to material fines and penalties. The level of regulation has increased in recent years with the adoption of the Bank Secrecy

10

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Act and the privacy requirements of Gramm-Leach-Bliley Act. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Such changes could affect us in
substantial and unpredictable ways and could subject us to additional costs necessary to comply with new rules and regulations, limit the types of financial services and products we may offer or increase the ability of non-banks to offer competing
financial services and products. Proposals that are now receiving attention include consumer protection initiatives relating to bank overdraft practices, security of customer information, marketing practices, the Real Estate Settlement Procedures
Act, nontraditional loan products including option adjustable rate mortgages, credit card lending practices, predatory lending and reform of the housing government-sponsored enterprises including the federal home loan bank system.

We rely on technology to conduct many transactions with our customers.

Our internal and outsourced technology, including communications and information systems, support our business operations. A significant disruption in those systems could adversely affect our ability to deliver products and
services to our customers. A material security breach of our information systems or data could harm our reputation, cause a decrease in the number of customers, and adversely affect our financial condition or results of operations.

|The financial services industry is extremely competitive.
|---------------------------------------------------------

Financial services, in general, and banking, in particular, are mature, highly competitive businesses. There is significant competition for both loans and deposits from a wide array of providers. The industry could become
even more competitive as a result of legislative, regulatory and technological changes. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic
transfer and automatic payment systems. Many of our competitors have greater resources than us that may enable them to offer more products and services, offer lower priced products due to greater economies of scale, maintain more banking locations
and ATMs or conduct more extensive promotional and advertising campaigns. The loss of customers to our competitors could adversely affect our results. Competitors seeking to expand market share or enter our market area often offer lower priced loans
and higher priced deposits, which can have an adverse result on our interest margin as we seek to remain competitive.

ITEM 1B - UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2 - PROPERTIES

The Bank owns the property and buildings on which the Kent, Lacey, Yelm, Fircrest, Tacoma Downtown, Pioneer: Gig Harbor, Centralia, Redmond Downtown, and Olympia Downtown financial centers are situated. The Tumwater and
Eatonville financial centers are operated in buildings owned by the Bank that are situated on leased property. The Hawks Prairie, West Olympia, South Hill: Puyallup, Redmond Town Center, Lakewood, and Pt. Fosdick: Gig Harbor financial centers are
operated in leased space. The aggregate monthly rental on all properties leased by the Bank is approximately $71 thousand.

The Lacey office is a one and one-half story building with a basement and a drive-up, which has approximately 17,500 square feet and is fully utilized as a bank financial center, administrative offices, customer care center
and other administrative functions. The Yelm office is a one and one-half story building with a drive-up facility. The South Hill: Puyallup, Tumwater, Eatonville, West Olympia, Centralia, Kent, Lakewood and Pt. Fosdick: Gig Harbor financial centers
are single story structures with drive-up facilities. The Olympia Downtown, Hawks Prairie, Tacoma Downtown, Redmond Downtown and Pioneer: Gig Harbor financial centers are two story structures with drive-up facilities. The Fircrest financial center
is an office condominium, of which the Bank occupies approximately one-half of the space. The Redmond Town Center financial center is located in a retail mall.

In December 2004, the Bank entered into an agreement, upon satisfaction of certain contingencies, to purchase land in DuPont Washington for $2 million to construct a three story, 53,000 square foot corporate office
building. The purchase of this property was finalized on February 17, 2005 and construction of the building commenced immediately after the groundbreaking ceremony on February 22, 2006. On January 31, 2006, the Bank finalized the purchase of land in
Hawks Prairie located in Lacey, Washington for $836 thousand to construct a financial center.

|ITEM 3 - LEGAL PROCEEDINGS
|--------------------------

From time to time in the ordinary course of business, VFG or its subsidiaries may be involved in litigation. At the present time neither VFG nor any of its subsidiaries are involved in any threatened or pending material
litigation.

11

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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of the year ended December 31, 2005, no matters were submitted to the security holders through the solicitation of proxies or otherwise.

PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

|Market Information
|------------------

No broker makes a market in VFG's common stock, and trading has not been extensive. Trades that have occurred cannot be characterized as amounting to an active market. The stock is traded by individuals on a personal basis
and is not listed on any exchange or traded on the over-the-counter market. The following data includes trades between individual investors. It does not include the exercise of stock options nor does it include shares repurchased by the Company as
discussed below.  This information has been adjusted to reflect the three-for-two stock split effective May 16, 2004.

|Period |  |         |  | # of Shares Traded |  | Price Range    
|------ |  | ------- |  | ------------------ |  | ---------------
|      
|2004   |  |         |  |                    |  |                
|1st    |  | Quarter |  | 42,456             |  | $15.17 - $15.67
|2nd    |  | Quarter |  | 49,366             |  | $15.17 - $16.00
|3rd    |  | Quarter |  | 50,082             |  | $15.50 - $16.20
|4th    |  | Quarter |  | 39,294             |  | $15.95 - $23.00
|      
|2005   |  |         |  |                    |  |                
|1st    |  | Quarter |  | 75,100             |  | $20.00 - $22.90
|2nd    |  | Quarter |  | 67,250             |  | $18.00 - $21.00
|3rd    |  | Quarter |  | 23,555             |  | $19.00 - $21.50
|4th    |  | Quarter |  | 53,987             |  | $18.00 - $21.50

At December 31, 2005 options for 402,757 shares of VFG common stock were outstanding. See Note 15 of the consolidated financial statements for additional information.

Number of Equity Holders

As of December 31, 2005, there were 1,753 holders of record of VFG's common stock.

|Dividends
|---------

VFG paid cash dividends of $0.065 on February 11, and $0.07 on May 13, August 12, and November 14, 2005. VFG paid cash dividends of $0.047 on February 13 and May 14, and $0.05 on August 16 and $0.06 on
November 19, 2004. The amounts reported reflect an adjustment for the May 16, 2004 stock split.

Washington law limits the ability of the Bank to pay dividends to the Company. Under these restrictions, a bank may not declare or pay any dividend in an amount greater than its retained earnings without approval of the
Division of Banks. All of the retained earnings of the Bank are available for the payment of dividends to the Company under these restrictions, subject to the federal capital regulations discussed above. See "Business - Supervision and Regulation -
Dividends".

Purchases of Equity Securities by Venture Financial Group, Inc.

On February 19, 2003 the Board approved a stock repurchase program to allow for the repurchase of 131,370 shares of VFG Common Stock in purchases over time in privately negotiated transactions. On September 18, 2003 this
plan was amended and an additional 56,130 shares were added to the plan. On October 15, 2003 this plan was amended again and an additional 225,000 shares were added to this plan bringing the total to 412,500 shares. Under this plan 266,097 shares
were repurchased in 2003 and 146,403 were repurchased in 2004 for a total of $2,226,290. All shares have been adjusted for the three-for-two stock split announced May 6, 2004 and effective May 16, 2004.

12

---

On June 16, 2004 the Board approved a stock repurchase program to allow for the repurchase of 200,000 shares of VFG Common Stock in purchases over time in privately negotiated transactions. Under this plan VFG purchased
167,640 shares for a total of $3,122,808.

On November 15, 2005, the Board approved a stock repurchase program to allow for the repurchase of 200,000 shares of VFG Common Stock in purchases over time in either privately negotiated transactions or through the open
market. Under this plan, no shares have been repurchased.

The following table sets forth the Company's repurchase of its outstanding common stock during the fourth quarter of the year ended December 31, 2005.

|                           |  |                                                |  |                    |  | Total number of     |  |                   
|-------------------------- |  | ---------------------------------------------- |  | ------------------ |  | ------------------- |  | ------------------
|                           |  |                                                |  |                    |  | shares purchased as |  |                   
|                           |  |                                                |  |                    |  | part of publicly    |  | Maximum number    
|                           |  | Total number of                                |  | Average price paid |  | announced plans or  |  | of shares that may
|Period                     |  | shares purchased                               |  | per share          |  |                     |  | programs          
|                          
|Month #1                   |  |                                                |  |                    |  |                     |  |                   
|October 1, 2005 through    |  |                                                |  |                    |  |                     |  |                   
|October 31, 2005           |  | 0                                              |  | $0                 |  |                     |  | 0                 
|                          
|Month #2                   |  |                                                |  |                    |  |                     |  |                   
|November 1, 2005 through   |  |                                                |  |                    |  |                     |  |                   
|November 30, 2005          |  | 24,324                                         |  | $18.34             |  |                     |  | 24,324            
|                          
|Month #3                   |  |                                                |  |                    |  |                     |  |                   
|December 1, 2005 through   |  |                                                |  |                    |  |                     |  |                   
|December 31, 2005          |  | 564                                            |  | $19.50             |  |                     |  | 564               
|                          
|Total                      |  | 24,888                                         |  | $18.36             |  |                     |  | 24,888            
|                          
|                          
|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      
|                          
|Total                      |  |                                                |  | 812,500            |  |                     |  |                   
|                          

13

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Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

|                                                           | Year Ended December 31, 2005                                                                      
|---------------------------------------------------------- | --------------------------------------------------------------------------------------------------
|Plan Category                                              | Number of Shares to 
be Issued Upon
Exercise of
Outstanding Optionsand Restricted Stock
(a)
(1)(2)
|Equity compensation plans approved by security holders     | 402,757 (4)                                                                                       
|Equity compensation plans not approved by security holders | 0                                                                                                 

|(1) | Consists of option shares that are outstanding under the respective plans. The material features of the plans are described below. Share amounts have been adjusted to reflect the two-for-one stock split effective November
15, 2002 and the three-for-two stock split effective May 16, 2004.                                                                                                                                                                        
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes shares that were assumed through mergers and acquisitions. Options assumed in the Washington Commercial Bancorp acquisition include 125,467 in employee options and 69,005 in director options. 5,000 shares of
restricted stock were granted pursuant to Mr. Arneson's employment contract. The options assumed have an average exercise price of $8.78 and the restricted stock has a grant price of $20.85. Option shares were not assumed in prior
mergers.
|(3) | Consists of option shares available for future issuance under the respective plans. The material features of the plans are described below. Share amounts have been adjusted to reflect the two-for-one stock split effective
November 15, 2002 and the three-for-two stock split effective May 16, 2004.                                                                                                                                                               
|(4) | Includes 117,042 shares for Directors and 285,715 shares for Employees.                                                                                                                                                                                                                                                                                                                                                                                                 
|(5) | Shares available for issuance under the 2004 Stock Incentive Plan can be granted to Directors and/or Employees.                                                                                                                                                                                                                                                                                                                                                         
|   

|ITEM 6 - SELECTED FINANCIAL DATA
|--------------------------------

The selected financial data should be read in conjunction with VFG's consolidated financial statements and the accompanying notes presented in this report. The per-share information has been adjusted retroactively for all
stock dividends and splits.

|                                       
|---------------------------------------
|($ in thousands, except per share data)
|                                       
|For the Year                           
|Net interest income after provision    
|for credit losses                      
|Non-interest income                    
|Non-interest expense and taxes         
|                                       
|Net income                             
|                                       
|Per Common Share                       
|Basic Earnings Per Share               
|                                       
|Stock Dividends declared               
|Cash Dividends Paid                    
|                                       
|Balance Sheet Data:                    
|Total Assets                           
|Long-term debt and junior subordinated 
|debentures                             
|Shareholders' equity                   
|                                       

Net income for the years ended December 31, 2004 and 2003 included one-time items as discussed in Item 7 below under the headings "Performance Overview" and "Non-Interest Income."

14

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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion should be read in conjunction with the Company's audited consolidated financial statements and the notes to those statements as of December 31, 2005 and 2004 and for each of the three years in the
period ended December 31, 2005, included in this report.

|Critical Accounting Estimates
|-----------------------------

Companies may apply certain critical accounting estimates requiring management to make subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. The Bank
considers its only material critical accounting estimate to be the allowance for loan losses. We believe that the accounting estimate related to the allowance for loan losses is a "critical accounting estimate" because: (1) it is highly susceptible
to change from period to period because it requires management to make assumptions about future losses on loans; and (2) the impact of a sudden large loss could significantly reduce the allowance and potentially require increased provisions to
replenish the allowance, which would negatively affect earnings.

The allowance for loan losses is established through a provision for loan losses charged against earnings. The balance of the allowance for loan losses is maintained at the amount management believes will be adequate to
absorb known and inherent losses in the loan portfolio. The appropriate balance of the allowance for loan losses is determined by applying estimated loss factors to the credit exposure from outstanding loans. Estimated loss factors are based on
subjective measurements including management's assessment of the internal risk classifications, changes in the nature of the loan portfolio, industry concentrations, and the impact of current local, regional and national economic factors on the
quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Corporation's consolidated financial statements, results of operation, or liquidity.

For additional information regarding the allowance for loan losses, its relation to the provision for loan losses and risk related to asset quality, see Note 4 in the Consolidated Financial Statements for the year ended
December 31, 2005, and "Management's Discussion and Analysis of Financial Condition and Results of Operation - Provision for Loan Losses."

|Critical Accounting Policies
|----------------------------

Various elements of the Company's accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified
several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's financial statements. These policies relate to the methodology for the determination of
the allowance for loan losses, the valuation of real estate owned and deferred tax assets and the impairment of investments. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of
Management's Discussion and Analysis and in the consolidated financial statements and footnotes thereto included in this annual report on Form 10-K for the year ended December 31, 2005. Management believes that the judgments, estimates and
assumptions used in the preparation of the financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other
judgments, estimates and assumptions could result in material differences in the results of operations or financial condition.

|Performance Overview
|--------------------

In 2005, the Company earned $9.0 million of which $2.7 million was earned during the fourth quarter. Excluding one time gains in the fourth quarter 2004 and the third quarter 2003, the $2.7 million represents
the highest quarterly earnings in the Company's history. Net income for the full year ended December 31, 2005 was $9.0 million as compared to $8.2 million for the full year ended December 31, 2004 excluding in 2004 the after tax gain of
$3.5 million on the divestiture of certain financial centers.

|Highlights for 2005 include:
|----------------------------

- During the third quarter of 2005, the Company completed the acquisition of Redmond National Bank and its parent company, Washington Commercial Bancorp.
- As of December 31, 2005, assets totaled $752.8 million, an increase of 35.3% over the $556.2 million in total assets at December 31, 2004. $131.8 million of the asset increase is
a result of the acquisition of Redmond National Bank and its parent company.
- Basic earnings per share for 2005 were $1.33 per share compared to $1.82 per share for 2004 and $1.38 for 2003.

15

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- Total deposits increased by $187.3 million or 57.3% in 2005 to $514 million from $326.7 million as of December 31, 2004. Deposits attributed to the acquisition of Redmond
National Bank in 2005 were $86.9 million.
- Total loans, net of reserves, increased $165.9 million or 39.3% in 2005 to $588.2 million from $422.3 million at December 31, 2004. Loans attributed to the acquisition of Redmond
National Bank were $107.1 million.
- The quality of the Company's assets improved significantly during the year. Nonperforming assets as a percentage of total assets declined to 0.36% on December 31, 2005 from 1.05% on December
31, 2004.
- Securities available for sale decreased $12.4 million in 2005, while cash and Federal Funds Sold increased by a total of $10.5 million and intangible assets increased $17
million.
- Federal Funds Purchased and short term borrowings decreased a total of $40.9 million in 2005 and long term borrowings increased a total of $32.1 million.

On October 8, 2004, the Company sold seven of its financial centers. Of the seven financial centers, one was in Thurston County, two were in Lewis County and four were in Grays Harbor County. Deposits transferred totaled
$88 million. The Company retained all loans originated through the seven financial centers. The Company realized a $3.5 million gain net of tax and recorded goodwill with respect to such financial centers.

The Company continues to move forward with its strategic plan of reallocating resources to the more populated and growing areas in Pierce and King Counties. The Company opened a financial center in Kent in King County in
December 2004 and a financial center in Lakewood in Pierce County in August 2005. In addition, some of the Company's existing financial centers are in the process of being remodeled to better suit the company's branding effort. In December 2004, the
Company entered into an agreement, upon satisfaction of certain contingencies, to purchase land in DuPont in Pierce County Washington for $2 million to construct a corporate office and financial center. The purchase of this property was
finalized February 17, 2005 and the construction commenced immediately following the groundbreaking ceremony on February 22, 2006. Management believes that centralizing administration functions will create long term efficiencies.

The following table sets forth certain operating and capital ratios for the Company at December 31:

|                                       |  | 2005   |  | 2004   |  | 2003   |  | 2002   |  | 2001  
|-------------------------------------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|                                      
|Return on Average Assets               |  | 1.46%  |  | 2.23%  |  | 1.88%  |  | 1.56%  |  | 1.27% 
|Return on Average Equity               |  | 14.87% |  | 22.99% |  | 19.55% |  | 15.13% |  | 12.12%
|Average Equity to Average Assets Ratio |  | 9.82%  |  | 9.95%  |  | 9.67%  |  | 10.28% |  | 10.45%
|Dividend Payout Ratio                  |  | 20.55% |  | 11.25% |  | 11.57% |  | 14.13% |  | 19.70%

Return on Average Assets and Return on Average Equity at December 31, 2004 without the $3.5 million net gain on sales of the seven financial centers would have been 1.56% and 16.32% respectively. Return on average
assets and return on average equity at December 31, 2003 without the $1.4 million net gain on sale of foreclosed real estate would have been 1.59% and 16.55%, respectively.

The Company merged with Redmond National Bank and its parent company Washington Commercial Bancorp on September 2, 2005 in an acquisition accounted for under the purchase method of accounting. This merger continues
Venture's expansion into King County. Total assets, loans and deposits of Redmond National Bank on the date of acquisition were $131.8 million, $107.1 million, and $86.9 million, respectively. The effect on 2005 net income was not
material as the net revenues generated were largely offset by costs related to the acquisition and integration of the organization's personnel and information systems. SeeNote 2- Disposition and Acquisitionsto the consolidated financial statements for more information on this acquisition.

|Results of OperationsNet Interest Income
|----------------------------------------

Net interest income is comprised of the difference between interest income, primarily from loans and investments, and interest expense incurred on interest bearing liabilities, primarily from deposits and borrowed funds.
Changes in net interest income from year to year are influenced by both the volume of the assets and the liabilities, and the rates earned and paid, respectively. The net interest margin is net interest income expressed as a percentage of average
interest-earning assets.

Net interest income in 2005 increased over 2004 net interest income by $3.3 million. Net interest income in 2004 decreased from 2003 by $56 thousand.

16

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In 2005, net interest income increased largely from increased volume in loans coupled with the fact that the volume of assets earning interest increased at a faster rate than the liabilities earning interest in both 2005
and 2004.

Prior to 2004 interest rates were declining. In 2004 and 2005 rates increased rapidly. The prime rate published and updated byThe Wall Street Journalis used by many financial institutions, including the bank, as an interest rate at which banks will lend to their most-favored customers. The published prime rate is also used as a base index on many loan products. In 2004 and 2005 the published
prime rate, this is based on a survey of the 30 largest banks, increased 100 basis points and 200 basis points, respectively. As rates began to increase in 2004, the bank's asset earnings declined. The effect of a rising rate environment did not
impact net interest income until 2005 because the increases in loan rates lagged behind the market rate increases. As market rates increased in 2004 and 2005, rates on liabilities however, increased at a much faster pace than rates on
interest-earning assets. Interest expense increased by $6.2 million in 2005 and $528 thousand in 2004.

During 2005, our interest margin decreased 82 basis points to 4.46% from 5.28% in 2004. This 82 basis point decrease in net interest margin is largely attributable to the shift in the mix of our liabilities from lower rate
core deposits to higher rate time deposits and long term borrowings. This shift in funding sources is a result of selling a low cost funding source of $88 million in deposits in connection with the sale of seven financial centers in late 2004
and replacing it with higher cost funding. The other significant contributors to the decrease in margin were rising market interest rates and loans re-pricing at a much slower pace than the liabilities that funded them. During 2004 our interest
margin decreased by 63 basis points to 5.28% from 5.91% . A portion of this was due to the bank discontinuing small loan originations in 2003. Also, loans that re-priced in 2004 typically re-priced at lower rates.

Interest earned on federal funds sold and interest bearing deposits increased by $386 thousand over the prior year. The most significant reason for this increase was additional volume which increased from an average
volume of $2.2 million to $12.4 million, generating an additional $266 thousand in additional interest income. The yield on federal funds sold increased from 1.08% to 3.32%, generating an additional $120 thousand in interest
income.

Interest earned on investments decreased by $270 thousand over the prior year. The most significant reason for this decrease was a reduction in volume which went from $78.9 million to $71.8 million causing a
decrease in income of $281 thousand. The majority of this decrease in volume is due to $14.7 million principal payments and other investment maturities. The yield on investments increased from 4.05% to 4.08% providing $11 thousand in
interest income.

The largest component of interest income is interest earned on the Bank's loan portfolio. Total interest income earned from loans in 2005 increased by $9.4 million, the net effect of an increase of $7.5 million due
to an increase in the average volume of loans during the year, as well as an increase in the average yield on loans of $1.9 million. The average yield on loans increased from 7.25% in 2004 to 7.72% in 2005. The increase in interest yield is due
primarily to the segment of variable rate loans carried by the Bank tied to a variety of indices affected by the numerous changes in Prime rate that occurred in 2005. The loan rates increased but lagged in comparison to the increase in deposit
rates.

Interest expense on deposits in 2005 increased 86.9% or $3.5 million from 2004. The increase is largely due to the increase in volume and rate of interest paid on time deposits in particular. The average rate increased
on time deposits to 3.28% in 2005 from 2.25% in 2004 which resulted in an increase of $1.3 million in time deposit interest expense. The average year-to-date volume of time deposits increased $53.8 million from the average year-to-date 2004
balance causing an increase in interest expense of $1.5 million. Interest expense on other borrowings increased $2.7 million. The increase in average interest rate to 3.90% from 2.69% cost $1.4 million in interest expense including
junior subordinated debentures which were tied to LIBOR and increased from a weighted average rate of 6.08% in 2004 to 7.66% in 2005. The increase in borrowing volume in 2005 to an average balance of $136.8 million from $97.4 million in 2004
accounted for $1.3 million of the $2.7 million interest expense increase. Short term borrowings decreased $35.3 million or 29% while long term borrowings increased $32.1 million or 93% in 2005. The increase in borrowings is primarily
due to the divestiture of branches in 2004 as well as continued loan volume growth.

Over the two year period of 2004 and 2005, market rates moved up 300 basis points and the Bank's net interest margin declined significantly from 5.91% to 4.46% . Management believes the interest margin level is reasonable,
but the Bank is focused on increasing the net interest margin and at a minimum maintaining the existing margin. If rates continue to rise, the margin will be under pressure to decline.

17

---

|An analysis of the change in net interest income is as follows (dollars in thousands): |  |                            |  |                            |  |       
|-------------------------------------------------------------------------------------- |  | -------------------------- |  | -------------------------- |  | ------
|                                                                                       |  | 2005 compared to 2004      |  | 2004 compared to 2003     
|                                                                                       |  | Increase (decrease) due to |  | Increase (decrease) due to
|                                                                                       |  | Volume                     |  | Rate                       |  | Net   
|                                                                                       |  |                            |  |                            |  |       
|Interest earned on:                                                                    |  |                            |  |                            |  |       
|Loans                                                                                  |  | $7,535                     |  | $1,900                     |  | $9,435
|Federal funds sold and deposits in banks                                               |  | 266                        |  | 120                        |  | 386   
|Investment securities                                                                  |  | (281)                      |  | 11                         |  | (270) 
|                                                                                       |  |                            |  |                            |  |       
|Total interest income                                                                  |  | 7,520                      |  | 2,031                      |  | 9,551 
|                                                                                      
|Interest paid on:                                                                      |  |                            |  |                            |  |       
|Savings, NOW and MMA                                                                   |  | $(78)                      |  | $756                       |  | $678  
|Time deposits                                                                          |  | 1,504                      |  | 1,347                      |  | 2,851 
|Other borrowings                                                                       |  | 1,290                      |  | 1,418                      |  | 2,708 
|                                                                                       |  |                            |  |                            |  |       
|Total Interest expense                                                                 |  | 2,716                      |  | 3,521                      |  | 6,237 
|                                                                                      
|Net interest spread                                                                    |  | $4,804                     |  | $(1,490)                   |  | $3,314

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

18

---

Average consolidated statements of financial position and analysis of net interest spread were as follows(dollars in thousands):

|                         |  |          |  | 2005      |  |         |  |                                       |  | 2004                      |  |                    |  |          |  | 2003     |  |      
|------------------------ |  | -------- |  | --------- |  | ------- |  | ------------------------------------- |  | ------------------------- |  | ------------------ |  | -------- |  | -------- |  | -----
|                         |  |          |  | Interest  |  |         |  |                                       |  | Interest                  |  |                    |  |          |  | Interest |  |      
|                         |  | Average  |  | Income    |  | Average |  | Average                               |  | Income                    |  | Average   
Average |  | Income   |  | Average 
|Assets                   |  | Balance  |  | (Expense) |  | Rates   |  | Balance        (Expense)        Rates |  | Balance         (Expense) |  | Rates             
|Earning Assets:          |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|                         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Loans(1)                 |  | $492,506 |  | $38,043   |  | 7.72%   |  | $394,611                              |  | $28,608                   |  | 7.25%              |  | $364,745 |  | $29,168  |  | 8.00%
|Federal funds sold and   |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|interest bearing         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|deposits in banks        |  | 12,357   |  | 410       |  | 3.32%   |  | 2,220                                 |  | 24                        |  | 1.08%              |  | 7,223    |  | 68       |  | 0.94%
|Investment securities    |  | 71,765   |  | 2,926     |  | 4.08%   |  | 78,870                                |  | 3,196                     |  | 4.05%              |  | 54,046   |  | 2,120    |  | 3.92%
|                         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Total earning assets and |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|interest income          |  | 576,628  |  | 41,379    |  | 7.19%   |  | 475,701                               |  | 31,828                    |  | 6.69%              |  | 426,014  |  | 31,356   |  | 7.36%
|Other Assets:            |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Cash and due from        |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|banks                    |  | 16,611   |  |           |  |         |  | 19,613                                |  |                           |  |                    |  | 24,432   |  |          |  |      
|Bank premises and        |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|equipment                |  | 15,458   |  |           |  |         |  | 12,198                                |  |                           |  |                    |  | 11,650   |  |          |  |      
|Other assets             |  | 25,542   |  |           |  |         |  | 28,875                                |  |                           |  |                    |  | 28,912   |  |          |  |      
|Allowance for credit     |  | (7,631)  |  |           |  |         |  | (7,506)                               |  |                           |  |                    |  | (8,160)  |  |          |  |      
|losses                   |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Total Assets             |  | $626,608 |  |           |  |         |  | $528,881                              |  |                           |  |                    |  | $482,848 |  |          |  |      
|                         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|                        
|Liabilities and          |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Shareholders' Equity     |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Interest bearing         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|liabilities:             |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Deposits:                |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Savings, NOW, and        |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Money Market Deposits    |  | $177,577 |  | $(2,355)  |  | 1.33%   |  | $185,880                              |  | $(1,677)                  |  | .90%               |  | $168,616 |  | $(1,478) |  | 0.88%
|Time deposits            |  | 159,788  |  | (5,237)   |  | 3.28%   |  | 105,940                               |  | (2,386)                   |  | 2.25%              |  | 130,894  |  | (3,113)  |  | 2.38%
|                         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|                        
|Total interest bearing   |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|deposits                 |  | 337,365  |  | (7,592)   |  | 2.25%   |  | 291,820                               |  | (4,063)                   |  | 1.39%              |  | 299,510  |  | (4,591)  |  | 1.53%
|Other borrowings         |  | 136,780  |  | (5,340)   |  | 3.90%   |  | 97,373                                |  | (2,631)                   |  | 2.69%              |  | 54,746   |  | (1,575)  |  | 2.88%
|                         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|                        
|Total interest bearing   |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|liabilities and interest |  | 474,145  |  | (12,932)  |  | 2.73%   |  | 389,193                               |  | (6,694)                   |  | 1.72%              |  | 354,256  |  | (6,166)  |  | 1.74%
|                         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|expense                  |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Non-interest bearing     |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|deposits                 |  | 83,670   |  |           |  |         |  | 85,690                                |  |                           |  |                    |  | 75,953   |  |          |  |      
|Other liabilities        |  | 5,681    |  |           |  |         |  | 2,767                                 |  |                           |  |                    |  | 5,932    |  |          |  |      
|Shareholders' equity     |  | 63,112   |  |           |  |         |  | 51,231                                |  |                           |  |                    |  | 46,707   |  |          |  |      
|                         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Total liabilities,       |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|shareholders' equity     |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|and net interest         |  | $626,608 |  | $28,447   |  |         |  | $528,881                              |  | $25,134                   |  |                    |  | $482,848 |  | $25,190  |  |      
|income                   |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Net interest income as a |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|percentage of            |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|average of earnings      |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|assets:                  |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Interest Income          |  |          |  | 7.19%     |  |         |  |                                       |  | 6.69%                     |  |                    |  |          |  |          |  | 7.36%
|Interest Expense         |  |          |  | 2.73%     |  |         |  |                                       |  | 1.41%                     |  |                    |  |          |  |          |  | 1.45%
|                         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      
|Net Interest Income      |  |          |  | 4.46%     |  |         |  |                                       |  | 5.28%                     |  |                    |  |          |  |          |  | 5.91%
|                         |  |          |  |           |  |         |  |                                       |  |                           |  |                    |  |          |  |          |  |      

_______________________
(1) For purposes of these computations, non-accrual loans are included in the average loan balance outstanding. Loan fees and late charges of $2.3, $1.5, and $1 million, are included in interest income in 2005,
2004, and 2003, respectively.

19

---

|Non-Interest Income
|-------------------

Total non-interest income decreased $5.4 million in 2005 to $8.2 million, a decrease of 39.5% from 2004. This decrease is primarily due to the inclusion of a one-time $5.4 million gain on the sale of seven
financial centers in 2004. Excluding the onetime gain, non-interest income was $8.2 million in 2004. Non-interest income includes service charges on deposit accounts, origination fees and gains on sale of loans, earnings on bank-owned life
insurance, equity fees generated by Venture Wealth, small loan miscellaneous income, and gains on the sale of foreclosed real estate. Service charges on deposit accounts decreased in 2005 by $234 thousand or 6% over 2004 largely due to the
divestiture of seven financial centers in late 2004. Service charges on deposit accounts increased in 2004 by $135 thousand over 2003 due to increases in fees. Service charges on deposit accounts increased in 2003 by $536 thousand, or 17%
over 2002 due to the acquisition of Harbor Bank which brought over an increased number of deposit accounts. Origination fees and gains on sale of loans increased $309 thousand or 23% from 2004 to 2005 and decreased by $2.1 million or 61%
from 2003 to 2004 as market interest rates began to increase in 2004 and a high volume loan producer left the Bank. Other operating income decreased $5.4 million or 64% over 2004 primarily due to the 2004 one time gain on sale from the
divestiture of seven branches. Other operating income in 2004 increased $2.9 million or 53% over 2003 again due to the gain on the sale of branches.

|Non-Interest Expense
|--------------------

Total non-interest expense in 2005 increased 8% or $1.7 million over 2004 and amounted to $22.8 million. Total non-interest expense in 2004 decreased 5% over 2003 and amounted to $21.1 million. Salaries and
benefits, the largest component of non-interest expense, in 2005 increased $1.4 million or 13% over 2004 due largely to the expansion of mortgage loan originators and commission income paid and the effect of the additional employees from Redmond
National Bank. Salaries and benefits in 2004 decreased $1.3 million or 11% over 2003. This decrease is due to a reduction in mortgage commissions and a reduction in salary expense associated with the branch divestiture. Occupancy costs and
equipment expenses increased $293 thousand or 8% in 2005 due primarily to the continued financial center facility branding and remodeling and the opening of two new financial centers. Occupancy costs and equipment expenses increased $87
thousand or 3% in 2004. Other expenses in 2005 increased $11 thousand over 2004 and in 2004 other expenses increased $142 thousand, or 2% over 2003. The increase of other expenses in 2004 is due to a $329 thousand write down on
foreclosed property. In 2003, other expenses decreased from 2002 by $468 thousand or 7% primarily attributed to a reduction in tax expense from a state business tax refund. The impact of the refund in 2003 was reduced by $550 thousand which
was spent on the re-branding effort.

|Liquidity and Financial Condition
|---------------------------------

The Company primarily depends on cash dividends from the Bank to fund interest payments on its junior subordinated debentures, cash dividends to shareholders, and other holding company expenses.

In June 2002 and April 2003, the Company raised $13 million (VFG Capital Trust I) and $6 million (VFG Capital Trust II), respectively through its participation in pooled Junior Subordinated Debentures offerings. The
floating rate Junior Subordinated Debentures issued by VFG Capital Trust I accrue interest at a variable rate of interest, calculated quarterly, at LIBOR plus 3.65% per annum on the outstanding balance. The stated maturity date of this offering is
July 2032. The floating rate Junior Subordinated Debentures issued by VFG Capital Trust II accrue interest at a variable rate of interest, calculated quarterly, at LIBOR plus 3.25% per annum on the outstanding balance. The stated maturity date of
this offering is October 2033. The majority of these funds were utilized for the purchase of Harbor Bank in 2002 and to repurchase Company stock. In December 2003, Washington Commercial Bancorp raised $3 million (Washington Commercial Statutory
Trust I) through its participation in 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 2.85% per annum on the outstanding balance. The stated maturity date of this offering is December 2033. This Junior Subordinated Debenture was acquired by Venture Financial Group upon the merger with Washington Commercial
Bancorp.

Liquidity management at the Bank involves meeting cash flow requirements of customers who may be either depositors withdrawing funds or borrowers advancing on their credit lines. Liquidity to meet these demands is generated
from internal and external sources. Internal sources include assets that can be converted to cash with little or no risk of loss such as overnight investments in federal funds sold and investment securities available for sale, particularly those of
shorter maturity, which are the principal source of asset liquidity. At December 31, 2005, cash, deposits in banks, interest-bearing deposits in banks, federal funds sold and securities available for sale totaled $85.2 million. At December 31,
2004, cash, deposits in banks, interest-bearing deposits in banks, and securities available for sale totaled $87.2 million. External sources refer to the ability to attract new liabilities and capital, including increasing savings and demand
deposits, federal funds purchased, and the issuance of capital and debt securities. At December 31, 2005, overnight and federal funds lines of credit totaled $36.1 million. These credit lines were accessed as a source of funding during 2005 and
had a zero balance at December 31, 2005

20

---

The Bank's primary sources of funds are customer deposits, repurchase agreements with customers and other correspondent banks, online and brokered time deposits, maturities of investment securities, loan sales, loan
participations, loan repayments, net income, advances from the Federal Home Loan Bank of Seattle ("FHLB"), the use of the Federal Funds markets, and long-term borrowings. At December 31, 2005, the Bank's short-term borrowings totaled $68.5
million, including $65 million at the Federal Home Loan Bank.

Total deposits were $514 million at December 31, 2005, up from $326.7 million at December 31, 2004.  As discussed previously, $86.7 million of this increase is attributed to the merger with Redmond National Bank
and the Bank acquired the remaining $100 million through increased core deposits, online deposits, and brokered deposits. The Bank has attempted to attract deposits in its market areas through competitive pricing and delivery of quality products
as well as opening branches in new markets such as south King County and Lakewood.

Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan prepayments are not. Deposit inflows and unscheduled loan prepayments are influenced by general interest rate
levels, interest rates available on other investments, competition, economic conditions, and other factors.

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

Management expects to continue to rely on customer deposits, maturity of investment securities, sales of "Available for Sale" securities, loan sales, loan repayments, net income, Federal Funds markets, advances from FHLB,
and other borrowings to provide liquidity. Management may also consider engaging in further offerings of Junior Subordinated Debentures if the opportunity presents an attractive means of raising funds in the future. Although deposit balances at
times have shown historical growth, such balances may be influenced by changes in the financial services industry, interest rates available on other investments, general economic conditions, competition, customer management of cash resources and
other factors. Borrowings may be used on a short-term and long-term basis to compensate for reductions in other sources of funds. Borrowings may also be used on a long-term basis to support expanded lending activities and to match maturities or
re-pricing intervals of assets. The sources of such funds will include Federal Funds purchased, securities sold under agreements to repurchase and borrowings from the FHLB and other financial institutions.

|Investments
|-----------

In 2005 the Company's securities available for sale and securities held to maturity decreased $12.4 million to $60.9 million available for sale and $0 held to maturity.. This decrease is due to the principal
payments on mortgage-backed securities totaling $13 million, securities maturing and called totaling $1.6 million, offset by the acquisition of Redmond National Bank's investments totaling $1.9 million. Because the available-for-sale
portfolio is carried at fair value, its carrying value fluctuates with changes in market factors, primarily interest rates. The recorded amounts of securities and their fair value at December 31 are found inNote
4-Securities, in the notes to the Company's consolidated financial statements.

The stated maturities and weighted average yield of debt securities were as follows (dollars in thousands):

|                                                            |  | Held-to-Maturity Securities |  | Available-For-Sale Securities
|----------------------------------------------------------- |  | --------------------------- |  | -----------------------------
|                                                            |  |                             |  |                              
|                                                            |  | Amortized                   |  | Fair                         
|                                                            |  | Cost                        |  | Value                        
|                                                           
|Due in one year or less                                     |  | $ - -                       |  | $ - -                        
|Due after one year through five years                       |  | - -                         |  | - -                          
|Due after five years through ten years                      |  | - -                         |  | - -                          
|Due after ten years                                         |  | - -                         |  | - -                          
|No maturity investment                                      |  |                             |  |                              
|Mortgage backed securities                                  |  |                             |  |                              
|                                                            |  | $ - -                       |  | $ - -                        
|Weighted average yield is reported on tax-equivalent basis. |  |                             |  |                              

There was no gross realized gain or loss on sales of securities available for sale in 2005, a gross realized gain of $3 thousand and a gross realized loss of $24 thousand on sales of securities available for sale in
2004, and no gains or losses in 2003.

21

---

Loans

Total loans excluding loans held for sale increased by $167.1 million to $596.6 million in 2005. The composition of the loan portfolio was as follows at December 31(dollars in
thousands):

|             |  | 2005     |  | 2004    |  | 2003     |  | 2002    |  | 2001    
|------------ |  | -------- |  | ------- |  | -------- |  | ------- |  | --------
|             |  | Amount   |  | Percent |  | Amount   |  | Percent |  | Amount  
|            
|Commercial   |  | $74,921  |  | 12.6%   |  | $58,556  |  | 13.6%   |  | $52,515 
|Real estate  |  |          |  |         |  |          |  |         |  |         
|construction |  | 187,514  |  | 31.4%   |  | 101,509  |  | 23.7%   |  | 79,788  
|Real estate  |  |          |  |         |  |          |  |         |  |         
|Commercial   |  | 326,061  |  | 54.6%   |  | 260,362  |  | 60.6%   |  | 221,086 
|Consumer     |  | 8,140    |  | 1.4%    |  | 5,275    |  | 1.2%    |  | 6,946   
|Small loans  |  | --       |  | -%      |  | 3,821    |  | .9%     |  | 3,158   
|            
|Total        |  | $596,636 |  | 100.0%  |  | $429,523 |  | 100.0%  |  | $363,493

The Bank's loan portfolio is concentrated in real estate secured loans which include real estate construction loans and real estate mortgage loans. Real estate mortgage loans primarily consist of commercial loans secured by
real estate. Balances include deferred loan fees. Real estate markets and conditions are discussed monthly at the Board Loan Committee. Additionally, reports are provided to the Board showing the Bank's concentration in real estate lending broken
out by industry and property type.

The following table shows the maturity analysis of commercial, real estate construction, and real estate mortgage loans outstanding as of December 31, 2005(dollars in
thousands):

|                         |  | Within   |  | After One  |  | After   |  |         
|------------------------ |  | -------- |  | ---------- |  | ------- |  | --------
|                         |  | One      |  | But Within |  | Five    |  |         
|                         |  | Year     |  | Five Years |  | Years   |  | Total   
|                        
|Commercial               |  | $49,778  |  | $20,104    |  | $4,751  |  | $74,633 
|Real estate construction |  | 184,659  |  | 4,083      |  | 0       |  | 188,742 
|Real estate mortgage     |  | 100,593  |  | 172,483    |  | 53,736  |  | 326,812 
|                        
|Total                    |  | $335,030 |  | $196,670   |  | $58,487 |  | $590,187

Of the loans maturing after one year, $15.2 million has predetermined or fixed interest rates and $240 million have floating or adjustable interest rates.

|Asset Quality
|-------------

Non-performing assets consist of loans on which interest is no longer accrued, accruing loans past due 90 days or more and foreclosed real estate and other assets. Total non-performing assets amounted to $2.7 million at
December 31, 2005, a decrease of $3.1 million or 53% from December 31, 2004. Non-accrual loans decreased $894 thousand during 2005 from the December 31, 2004 balance of $3.1 million. Loans 90 days past due and still accruing interest
decreased $1.9 million during 2005 from a balance of $2 million. Foreclosed real estate decreased $244 thousand or 34% in 2005 to $474 thousand. Management believes that any anticipated loan losses have been adequately reserved for
in the allowance for credit losses.

Loans will be placed on non-accrual using the following guidelines: (1) a loan will be placed on non-accrual when collection of all principal or all interest is deemed unlikely; and (2) a loan will automatically be placed
on non-accrual when principal or interest is 90 days or more past due unless the loan is both well secured and in the process of being collected. Placing a loan on non-accrual does not diminish the validity of the Company's claims against the
borrower.

|Non-performing assets were as follows at December 31(dollars in thousands): |  |        |  |        |  |       
|--------------------------------------------------------------------------- |  | ------ |  | ------ |  | ------
|                                                                            |  | 2005   |  | 2004   |  | 2003  
|                                                                           
|Non-accrual loans                                                           |  | $2,187 |  | $3,081 |  | $2,204
|Accruing loans past due 90 days or more                                     |  | 41     |  | 2,004  |  | 2     
|Foreclosed real estate                                                      |  | 474    |  | 718    |  | 1,996 
|Other assets                                                                |  | 0      |  | 6      |  | 3     
|                                                                           
|Total                                                                       |  | $2,702 |  | $5,809 |  | $4,205

22

---

Gross interest income of $70 thousand would have been recorded in 2005 if the non-accrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since
origination if held for on a portion of 2005. Interest income on these loans was not included in net income in 2005.

Applicable regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, regulatory examiners have authority to
identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful, and loss. Substandard assets have one or more defined weaknesses and are characterized by the
distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset
of the institution is not warranted. When an insured institution classifies problem assets as either substandard or doubtful, it is required to establish general allowances for credit losses in an amount deemed prudent by management. These
allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities and the risks associated with particular problem assets. When an insured institution classifies problem assets as
loss, it charges off the balance of the asset against the allowance for credit losses. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated as special mention. The Bank's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the FDIC which can order the establishment of additional
loss allowances.

The aggregate amounts of the Bank's classified assets (as determined by the Bank), and of the Bank's allowance for credit losses at the dates indicated, were as follows:

|                            |  | At December 31,
|--------------------------- |  | ---------------
|                            |  |                
|                            |  | 2005           
|                            |  |                
|                            |  |                
|                           
|Doubtful                    |  | $325           
|Substandard                 |  | 3,475          
|Special mention             |  | 14,145         
|Allowance for credit losses |  | 8,434          

The Bank's classified and Special Mention assets decreased $10.1 million or 36% from December 31, 2004 to December 31, 2005.  Of the 2005 decrease; $3 million or 18% was in the Special Mention category, $6.6
million or 65% was in the Substandard category, $477 thousand or 59% was in the Doubtful category.

Substandard loans are classified as those loans that are inadequately protected by the current net worth, and paying capacity of the obligor, or the collateral pledged. Assets classified as substandard have a well-defined
weakness, or weaknesses that jeopardize the repayment of the debt. If the weakness, or weaknesses, is not corrected there is the distinct possibility that some loss will be sustained. FDIC guidelines required the Bank to classify its small loan
portfolio substandard; at December 31, 2004 this portfolio totaled $3.8 million while at December 31, 2005 the bank no longer had a small loan portfolio. In addition two other larger credits that had been previously classified substandard were
removed from the Bank's classified asset listing as their ability to repay the debt became more certain.

Special mention loans are defined as those credits deemed by management to have potential weakness that deserve management's close attention. If left uncorrected these potential weaknesses may result in the deterioration of
the payment prospects of the loan. Assets in this category are not adversely classified and currently do not expose the Bank to sufficient risk to warrant a substandard classification. There were five relationships identified as Special Mention as
of December 31, 2005 aggregating $7.6 million, or 54% of the total Special Mention category, with no other concentrations. The largest credit is one relationship for $2 million secured by a first mortgage on commercial property in King
County, Washington. Management believes none of these relationships will result in a loss for the Bank. Each of these loans is current and paying in accordance with the required loan terms.

We have not identified any other potential problem loans that were not classified as non-performing but for which known information about the borrower's financial condition caused management to have concern about the
ability of the borrowers to comply with the repayment terms of the loans. A decline in the economic conditions in our general market areas or other factors

23

---

could adversely impact individual borrowers or the loan portfolio in general. Accordingly, there can be no assurance that loans will not become 90 days or more past due, become impaired or placed on non-accrual status,
restructured or transferred to other real estate owned in the future.

|Allowance for Credit Losses
|---------------------------

The allowance for credit losses reflects management's current estimate of the amount required to absorb probable losses on existing loans and commitments to extend credit. Loans deemed uncollectible are charged against and
reduce the allowance. Periodically, the provision for credit losses is charged to current expense. This provision acts to replenish the allowance for credit losses and to maintain the allowance at a level that management deems adequate.

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 for credit losses is determined based on management's judgment. 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 borrowers' financial data, together with industry data, the competitive situation, the borrowers' management capabilities and other factors;
- a continuing evaluation of the loan portfolio, including monitoring by lending officers and staff credit personnel of all loans which are identified as being of less than acceptable
quality;
- an in-depth appraisal, on a monthly basis, of all loans judged to present a possibility of loss (if, as a result of such monthly appraisals, the 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.

A formal analysis of the adequacy of the allowance is conducted quarterly and reviewed by the Board of Directors. Based on this analysis, management considers the allowance for credit losses to be adequate.

Grading the Bank's loan portfolio begins at the loan officer level, and requires clear definitions of what goes into assigning a specific grade, with the understanding of those definitions by Bank management and the Board.
Bank policy requires each loan officer to grade all loans in their assigned portfolio, beginning at loan inception, and annually thereafter when financial statements are received.  Grading changes may also occur as new facts are brought to light,
i.e. delinquencies, losses, deterioration of collateral, etc. This insures timely and accurate portfolio quality information for management. Grades range from "Excellent" loans graded a "1" and "Loss" loans graded a "7".

During a regulatory examination during the fourth quarter of 2004, the Bank's federal regulator, the Federal Deposit Insurance Corporation (FDIC), directed the Bank to charge-off all payday loans that had been outstanding
to borrowers for 60 days from the original loan date. The FDIC requested that the Bank charge-off the principal balance of loans meeting the above criteria for the periods of December 31, 2003, September 30, 2004 and December 31, 2004. The Company
believes that under generally accepted accounting principles, a total loss of all payday loans outstanding for 60 days from the origination date is not probable and the specific allowance allocated to the payday lending portfolio together with the
stop-loss provisions in the marketing and servicing agreement with the Company's payday lending partner is adequate.  All actual charge-offs and recoveries for December 31, 2003 and September 30, 2004 have been recognized and run through the
allowance for loan losses as of December 31, 2003 and September 30, 2004. As a result of the regulatory charge-off, the Company has a difference between its regulatory accounting principles (RAP) books and its generally accepted accounting
principles (GAAP) books. The financial entries made for regulatory purposes resulted in a $746 thousand reduction in loan balances with a corresponding reduction in the allowance for loan losses as of December 31, 2003. Additional charge-offs of
$1.2 million and recoveries of $501 thousand were also required for regulatory accounting purposes for the year ended December 31, 2004 and additional charge-offs of $311 thousand and recoveries of $35 thousand were required through
June 30, 2005, as compared to the financial statements presented under GAAP in this Form 10-K. Beginning July 1, 2005 the above accounting difference no longer existed as the Company exited its relationship with payday lending.

Periodic provisions for loan losses are made to maintain the allowance for credit losses at an appropriate level. The provisions are based on an analysis of various factors including historical loss experience for the bank
and for the industry as a whole, based on volumes and types of loans, volumes and trends in delinquencies and non-accrual loans, trends in portfolio volume, results of internal and independent external credit reviews, and anticipated economic
conditions. Provisions for loan losses on

24

---

small loans are made monthly to maintain this segment of the allowance for credit losses at a level sufficient to absorb losses on existing loans. This portion of the allowance is generally maintained at a level sufficient
to cover all small loans that have defaulted, as well as an amount sufficient to absorb the anticipated losses on two small loan operating cycles (approximately one month in duration), based on both the Bank's and the industry's historical loss
experience. Losses in the small loan portfolio are limited by agreement to a percentage of revenue earned from the portfolio by the Bank's agent.

Transactions in the allowance for credit losses for the five years ended December 31, 2005 are as follows(dollars in thousands):

|                                                      |  | 2005    |  | 2004    |  | 2003    |  | 2002    |  | 2001   
|----------------------------------------------------- |  | ------- |  | ------- |  | ------- |  | ------- |  | -------
|                                                     
|Balance at beginning of year                          |  | $7,189  |  | $7,589  |  | $7,947  |  | $4,088  |  | $3,503 
|Provision for credit losses                           |  | 753     |  | 227     |  | 2,329   |  | 2,343   |  | 1,716  
|Transfer from acquisition of Harbor Bank, N.A.        |  | - -     |  | - -     |  | - -     |  | 3,868   |  | - -    
|Transfer from acquisition of Redmond National Bank    |  | 1,241   |  |         |  |         |  |         |  |        
|Charge offs:                                          |  |         |  |         |  |         |  |         |  |        
|Commercial                                            |  | (495)   |  | (148)   |  | (668)   |  | (580)   |  | (60)   
|Real Estate Mortgage and Construction                 |  | (12)    |  | (536)   |  | (516)   |  | (84)    |  | - -    
|Small Loans                                           |  | (888)   |  | (1,165) |  | (1,882) |  | (2,398) |  | (2,051)
|Consumer                                              |  | (188)   |  | (213)   |  | (824)   |  | (212)   |  | (36)   
|                                                      |  |         |  |         |  |         |  |         |  |        
|                                                      |  | (1,583) |  | (2,062) |  | (3,890) |  | (3,274) |  | (2,147)
|                                                      |  |         |  |         |  |         |  |         |  |        
|                                                     
|Recoveries:                                           |  |         |  |         |  |         |  |         |  |        
|Commercial                                            |  | 79      |  | 263     |  | 123     |  | 45      |  | 12     
|Real Estate Mortgage and Construction                 |  | 25      |  | 318     |  | 53      |  | 2       |  | 8      
|Small Loans                                           |  | 646     |  | 737     |  | 935     |  | 862     |  | 983    
|Consumer                                              |  | 84      |  | 117     |  | 92      |  | 13      |  | 13     
|                                                      |  |         |  |         |  |         |  |         |  |        
|                                                      |  | 834     |  | 1,435   |  | 1,203   |  | 922     |  | 1,016  
|                                                      |  |         |  |         |  |         |  |         |  |        
|                                                     
|Net charge-offs                                       |  | (749)   |  | (627)   |  | (2,687) |  | (2,352) |  | (1,131)
|Balance at end of year                                |  | $8,434  |  | $7,189  |  | $7,589  |  | $7,947  |  | $4,088 
|Ratio of net charge-offs to average loans outstanding |  | .15%    |  | .16%    |  | .74%    |  | .75%    |  | .41%   

In 2005, the Bank charged off $888 thousand in small loans, and recovered $646 thousand. The net charge-offs as a percent of total small loan advances for 2005 was 0.77% .

SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition Disclosures, an amendment to SFAS No. 114". The Company measures
impaired loans based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair market value of the collateral if the loan is
collateral dependent. The Company excludes loans that are currently measured at fair value or at the lower of cost or fair value, and certain large groups of smaller balance homogeneous loans that are collectively measured for impairment. The
following table summarizes the Bank's impaired loans at December 31 (dollars in thousands):

|                                          |  | 2005   |  | 2004   |  | 2003   |  | 2002   |  | 2001  
|----------------------------------------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|Total Impaired Loans                      |  | $2,187 |  | $3,081 |  | $2,204 |  | $6,543 |  | $1,830
|Total Impaired Loans with Valuation       |  |        |  |        |  |        |  |        |  |       
|Allowance                                 |  | $279   |  | $2,175 |  | $1,938 |  | $5,795 |  | $928  
|Allocation of Allowance for Credit Losses |  | $211   |  | $530   |  | $869   |  | $908   |  | $528  

25

---

No allocation of the allowance for credit losses was considered necessary for the remaining impaired loans. The balance of the allowance for credit losses in excess of these specific reserves is available to absorb losses
from all loans.

It is the Company's policy to charge-off any loan or portion of a loan that is deemed uncollectible in the ordinary course of business. The entire allowance for credit losses is available to absorb such charge-offs. The
Company allocates its allowance for credit losses primarily on the basis of historical data. Based on certain characteristics of the portfolio, losses can be anticipated for major loan categories.

In the following table, the allowance for credit losses at December 31, 2005, 2004, 2003, 2002 and 2001 has been allocated among major loan categories based on a number of factors including quality, volume, economic outlook
and other business considerations(dollars in thousands):

|                                                                            |  | 2005   |  | 2004   |  | 2003   |  | 2002   |  | 2001  
|--------------------------------------------------------------------------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|                                                                            |  |        |  | % of   |  |        |  | % of   |  |       
|                                                                            |  |        |  | Total  |  |        |  | Total  |  |       
|                                                                            |  | Amount |  | Loans  |  | Amount |  | Loans  |  | Amount
|Commercial                                                                  |  | $2,699 |  | 32.0%  |  | $2,719 |  | 13.6%  |  | $3,036
|Real Estate(1)                                                              |  | 5,630  |  | 66.8%  |  | 3,987  |  | 84.3%  |  | 4,002 
|Consumer                                                                    |  | 105    |  | 1.2%   |  | 83     |  | 1.2%   |  | 310   
|Small Loans                                                                 |  | 0      |  | 0%     |  | 400    |  | 0.9%   |  | 241   
|                                                                           
|Total                                                                       |  | $8,434 |  | 100.0% |  | $7,189 |  | 100.0% |  | $7,589
|                                                                            |  |        |  |        |  |        |  |        |  |       
|(1) Real estate includes real estate mortgage and real estate construction. |  |        |  |        |  |        |  |       

|Deposits
|--------

Total deposits increased by $187.3 million, or 57.3% to $514 million from 2004. Deposits attributed to the acquisition of Redmond National Bank in 2005 were $86.9 million. In 2005 non-interest checking increased
37% or $26.9 million, Negotiable Order of Withdrawal (NOW), savings and Money Market Deposit Accounts (MMDA) which are interest-bearing deposits increased 25% or $38.3 million, and interest bearing time deposits increased 118% or $122.1
million. The $88 million in deposits transferred due to the branch divestiture in 2004 was partially offset by increased deposits of $32.5 million in the remaining fourteen branches.

The Bank's average deposits for the years ended December 31 are summarized as follows (dollars in thousands):

|                        |  |          |  | 2005  |  |          |  |          |  | 2004  |  |          |  |          |  | 2003  |  |         
|----------------------- |  | -------- |  | ----- |  | -------- |  | -------- |  | ----- |  | -------- |  | -------- |  | ----- |  | --------
|                        |  |          |  |       |  | Weighted |  |          |  |       |  | Weighted |  |          |  |       |  | Weighted
|                        |  |          |  |       |  | Average  |  |          |  |       |  | Average  |  |          |  |       |  | Average 
|                        |  | Amount   |  | %     |  | Rate     |  | Amount   |  | %     |  | Rate     |  | Amount   |  | %     |  | Rate    
|                       
|Non-interest checking   |  | $83,670  |  | 19.9  |  | - -      |  | $85,690  |  | 22.7  |  | - -      |  | $75,953  |  | 20.2  |  | - -     
|Interest bearing demand |  | 152,539  |  | 36.2  |  | 1.48%    |  | 153,793  |  | 40.7  |  | 1.11%    |  | 136,073  |  | 36.2  |  | .96%    
|Savings Accounts        |  | 25,038   |  | 5.9   |  | 0.51%    |  | 32,087   |  | 8.5   |  | 0.51%    |  | 32,543   |  | 8.7   |  | .53%    
|Other time deposits     |  | 159,788  |  | 38.0  |  | 3.72%    |  | 105,940  |  | 28.1  |  | 2.50%    |  | 130,894  |  | 34.9  |  | 2.38%   
|                       
|Total                   |  | $421,035 |  | 100.0 |  |          |  | $377,510 |  | 100.0 |  |          |  | $375,463 |  | 100.0 |  |         

Time deposits outstanding at December 31, 2005 are scheduled to mature as follows (dollars in thousands):

|             |  |          |  | Under     |  | $100,000 |  |        |  |  
|------------ |  | -------- |  | --------- |  | -------- |  | ------ |  | -
|             |  | $100,000 |  | and over  |  |          |  | Total 
|             |  |          |  |           |  |         
|0-90 days    |  |          |  | $  25,332 |  | $        |  | 23,196 |  | $
|91-180 days  |  |          |  | 20,644    |  |          |  | 18,623 |  |  
|181-365 days |  |          |  | 40,347    |  |          |  | 44,184 |  |  
|Over 1 year  |  |          |  | 22,318    |  |          |  | 30,804 |  |  
|             |  | $108,641 |  | $116,807  |  | $225,448

26

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|Capital Resources
|-----------------

Consolidated capital of VFG increased $18.3 million during 2005 to $76.2 million. The purchase of Washington Commercial Bancorp provided the largest increase to capital of $13.4 million. Net earnings of $9
million also increased capital while exercising of stock options provided $1.7 million. In 2005, decreases to capital were $2.5 million in stock repurchased by the Company and cash dividends totaling $0.28 per share, or $1.9 million.
Cash dividends totaling $0.20 per share were paid in 2004 and $0.16 in 2003.

There are regulatory constraints placed upon capital adequacy, and it is necessary to maintain an appropriate ratio between capital and assets. Regulations require banks and holding companies to maintain a minimum
"leverage" ratio (primary capital ratio) of total assets. For the most highly rated holding companies this ratio must be at least 3%, and for others it must be 4% to 5%. At December 31, 2005, the Company's leverage ratio was 12.01%, compared to
12.94% at year-end 2004. For regulatory purposes, any goodwill and other intangible assets are treated as a reduction of capital. In addition, holding companies are required to meet minimum risk-based capital guidelines under which risk percentages
are assigned to various categories of assets and off-balance-sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common stockholders' equity, less goodwill and other intangible assets, while Tier II capital
includes the allowance for credit losses, subject to 1.25% limitation of risk-adjusted assets. The rules require Tier II capital of 4% of risk-adjusted assets and total capital (combined Tier I and Tier II) of 8%. At December 31, 2005, the Tier I
risk based capital ratio was 9.37%, and total risk based capital was 10.46% . The similar ratios at December 31, 2004 were a Tier I risk based capital ratio of 12.24% and a total risk based capital ratio of 13.49% . For additional information, see
"Item 1-Business-Supervision and Regulation-Capital Adequacy".

|Borrowings
|----------

Information concerning short-term borrowings is summarized as follows(dollars in thousands):

|                                          |  | 2005     |  | 2004     |  | 2003   
|----------------------------------------- |  | -------- |  | -------- |  | -------
|Average balance during the year           |  | $75,253  |  | $61,588  |  | $23,443
|Average interest rate during the year     |  | 3.4%     |  | 1.6%     |  | 1.1%   
|Maximum month-end balance during the year |  | $115,104 |  | $123,128 |  | $34,394
|Weighted average rate at December 31      |  | 3.4%     |  | 2.2%     |  | .9%    
|Balance at end of year                    |  | $87,798  |  | $123,128 |  | $34,394

Short-term borrowings represent demand notes from the U.S. Treasury, two repurchase agreements with Citigroup, advances from the FHLB, and customer repurchase agreements, normally maturing within one year.

Long-term borrowings include junior subordinated debentures, term advances from the FHLB, and one repurchase agreement with Citigroup.

The following table shows the long-term borrowing and contractual obligations as of December 31, 2005 (dollars in thousands):

Payments Due by PeriodAfter OneLess than
	
	But Within
	
	After Three
	
	More ThanOne Year
	
	Three
	
	But Within
	
	FiveContractual Obligations
	
	
	
	Years
	
	Five Years
	
	Years
	
	TotalDemand Note issued to US Treasury
	
	$3,489
	
	
	
	
	
	
	
	
	
	$3,489Citigroup Repurchase Agreements
	
	$5,000
	
	$14,000
	
	$             - -
	
	$
	
	- -
	
	$19,000FHLB Term Advances
	
	$65,000
	
	$30,000
	
	- -
	
	
	
	- -
	
	$95,000Overnight repurchase agreementswith customers
	
	$14,309
	
	- -
	
	- -
	
	
	
	- -
	
	$14,309Junior Subordinated Debentures
	
	- -
	
	- -
	
	- -
	
	$22,682
	
	$22,682Premise Leases
	
	$846
	
	$1,396
	
	$1,534
	
	
	
	$804
	
	$4,580Total Contractual Obligations
	
	$88,644
	
	$45,396
	
	$1,534
	
	$23,486
	
	$159,060


27

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|Off-Balance Sheet Arrangements
|------------------------------

Information concerning Off-Balance Sheet Arrangements is found inNote 12 - Commitments and Contingent Liabilities,in the Companies consolidated
financial statements.

|Supplementary Quarterly Data (Unaudited)
|----------------------------------------

|(dollars in thousands, except per share |  |         |  |         |  |         |  |               |  |         |  |         |  |                    |  |        
|--------------------------------------- |  | ------- |  | ------- |  | ------- |  | ------------- |  | ------- |  | ------- |  | ------------------ |  | -------
|amounts)                                |  |         |  |         |  |         |  | Quarter Ended |  |         |  |         |  |                   
|                                        |  | Dec     |  | Sept    |  | June    |  | March         |  | Dec     |  | Sept    |  | June         March
|                                        |  | 2005    |  | 2005    |  | 2005    |  | 2005          |  | 2004    |  | 2004    |  | 2004               |  | 2004   
|Interest income                         |  | $12,683 |  | $10,419 |  | $9,491  |  | $8,786        |  | $8,545  |  | $8,159  |  | $7,563             |  | $7,561 
|Interest expense                        |  | (4,347) |  | (3,439) |  | (2,823) |  | (2,323)       |  | (2,025) |  | (1,650) |  | (1,522)            |  | (1,497)
|Net interest income                     |  | 8,336   |  | 6,980   |  | 6,668   |  | 6,463         |  | 6,520   |  | 6,509   |  | 6,041              |  | 6,064  
|                                       
|Provision for credit losses             |  | (39)    |  | (161)   |  | (338)   |  | (215)         |  | 330     |  | (282)   |  | (143)              |  | (132)  
|Non-interest income                     |  | 1,977   |  | 2,180   |  | 2,003   |  | 2,050         |  | 7,679   |  | 2,106   |  | 1,988              |  | 1,796  
|Non-interest expense                    |  | (6,248) |  | (5,831) |  | (5,390) |  | (5,331)       |  | (5,687) |  | (5,342) |  | (5,123)            |  | (4,926)
|Income taxes                            |  | (1,367) |  | (868)   |  | (907)   |  | (934)         |  | (3,050) |  | (804)   |  | (873)              |  | (894)  
|                                       
|Net income                              |  | $2,659  |  | $2,300  |  | $2,036  |  | $2,033        |  | $5,792  |  | $2,187  |  | $1,890             |  | $1,908 
|                                       
|Basic earnings per share                |  | $.37    |  | $.34    |  | $.31    |  | $.31          |  | $.89    |  | $.34    |  | $.29               |  | $.30   
|Diluted earnings per share              |  | $.36    |  | $.33    |  | $.31    |  | $.30          |  | $.86    |  | $.33    |  | $.28               |  | $.28   

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's assets and liabilities are managed to maximize long-term shareholder returns by optimizing net interest income within the constraints of maintaining high credit quality, conservative interest rate risk
disciplines and prudent levels of liquidity. The Asset/Liability Committee meets regularly to monitor the composition of the balance sheet, to assess current and projected interest rate trends, and to formulate strategies consistent with established
objectives for liquidity, interest rate risk and capital adequacy.

Interest rate sensitivity is closely related to liquidity, as each is directly affected by the maturity of assets and liabilities. The Company's net interest margin is affected by changes in the level of market interest
rates. Management's objectives are to monitor and control interest rate risk and ensure predictable and consistent growth in net interest income. See "Management's Discussion and Analysis - Liquidity and Financial Condition - Results of Operations -
Net Interest Income".

Management considers any asset or liability that matures, or is subject to repricing within one year to be interest sensitive, although continual monitoring is performed for other time intervals as well. The difference
between interest sensitive assets and liabilities for a defined period of time is known as the interest sensitivity "gap", and may be either positive or negative. If positive, more assets reprice before liabilities. If negative, the reverse is true.
A Static Gap analysis as presented below provides a general measure of interest rate risk but does not address complexities such as prepayment risk, interest rate floors and ceilings imposed on financial instruments, interest rate dynamics and
customers' response to interest rate changes. The Bank's static interest sensitivity gap is negative within one year. However, this assumes that general market interest rate changes affect the repricing of assets and liabilities in equal
magnitudes.

28

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|Interest Rate Gap Analysis                       
|-------------------------------------------------
|December 31, 2005                                
|                                                 
|                                                 
|(dollars in thousands)                           
|Loans                                            
|Securities:                                      
|Available for sale                               
|Held to maturity                                 
|Federal Funds Sold                               
|Interest bearing deposits with banks             
|Total Earning Assets                             
|                                                 
|Deposits:                                        
|Savings, NOW and money market                    
|Time deposits                                    
|Short-term borrowings and repurchase agreements  
|Federal Funds Purchased                          
|Long-term debt and junior subordinated debentures
|                                                 
|Total Interest Bearing Liabilities               
|                                                 
|Net Interest Rate Sensitivity Gap                
|Cumulative Interest Rate Sensitivity Gap         
|Cumulative Gap as a Percent of Earning Assets    

The Company's market risk is impacted by changes in interest rates. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's
business.

29

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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

|To the Board of Directors and ShareholdersVenture Financial Group, Inc.
|-----------------------------------------------------------------------

We have audited the accompanying consolidated balance sheets of Venture Financial Group, Inc. and its subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income,
shareholders' equity and comprehensive income, and cash flows for the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board of the United States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Venture Financial Group, Inc. and its subsidiaries as of December 31, 2005 and
2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

|See accompanying notes. |  | 30
|----------------------- |  | --

---

|                                                                  |  | VENTURE FINANCIAL GROUP, INC.
|----------------------------------------------------------------- |  | -----------------------------
|                                                                  |  | CONSOLIDATED BALANCE SHEET   
|                                                                  |  |                              
|                                                                 
|                                                                 
|ASSETS                                                            |  |                              
|                                                                 
|                                                                  |  |                              
|                                                                  |  |                              
|                                                                  |  |                              
|                                                                  |  |                              
|Cash and due from banks                                           |  | $                            
|Interest bearing deposits in other banks                          |  |                              
|Federal funds sold                                                |  |                              
|Securities available-for-sale                                     |  |                              
|Investment in trusts                                              |  |                              
|Federal Home Loan Bank stock, at cost                             |  |                              
|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                                                          |  |                              
|Demand deposits and non-interest bearing                          |  | $                            
|Savings and interest bearing demand                               |  |                              
|Time certificates of deposit                                      |  |                              
|                                                                  |  |                              
|Total deposits                                                    |  |                              
|                                                                 
|Federal funds purchased                                           |  |                              
|Securities sold under agreement to repurchase                     |  |                              
|Short-term borrowings                                             |  |                              
|Accrued interest payable                                          |  |                              
|Long-term debt                                                    |  |                              
|Junior subordinated debentures                                    |  |                              
|Other liabilities                                                 |  |                              
|                                                                  |  |                              
|Total liabilities                                                 |  |                              
|                                                                  |  |                              
|                                                                 
|SHAREHOLDERS' EQUITY                                              |  |                              
|Common stock (no par value); 10,000,000 shares authorized, shares |  |                              
|issued and outstanding: 2005 - 7,218,152; 2004 - 6,527,507        |  |                              
|Additional paid-in capital                                        |  |                              
|Retained earnings                                                 |  |                              
|Unearned employee stock award                                     |  |                              
|Advance to KSOP                                                   |  |                              
|Accumulated other comprehensive income (loss)                     |  |                              
|                                                                  |  |                              
|Total shareholders' equity                                        |  |                              
|                                                                  |  |                              
|                                                                 
|Total liabilities and shareholders' equity                        |  | $                            
|                                                                  |  |                              



|See accompanying notes. |  | 31
|----------------------- |  | --

---

|VENTURE FINANCIAL GROUP, INC.                         |  |                         |  |         |  |        
|----------------------------------------------------- |  | ----------------------- |  | ------- |  | -------
|CONSOLIDATED STATEMENT OF INCOME                      |  |                         |  |         |  |        
|(dollars in thousands, except per share data)         |  |                         |  |         |  |        
|                                                     
|                                                     
|                                                      |  | YEAR ENDED DECEMBER 31,
|                                                      |  |                        
|                                                      |  | 2005                    |  | 2004    |  | 2003   
|                                                      |  |                         |  |         |  |        
|INTEREST INCOME                                       |  |                         |  |         |  |        
|Loans                                                 |  | $38,043                 |  | $28,608 |  | $29,168
|Federal funds sold and deposits in banks              |  | 410                     |  | 24      |  | 68     
|Investment securities                                 |  |                         |  |         |  |        
|Taxable                                               |  | 2,663                   |  | 2,905   |  | 1,811  
|Non-taxable                                           |  | 263                     |  | 291     |  | 309    
|                                                      |  |                         |  |         |  |        
|                                                     
|Total interest income                                 |  | 41,379                  |  | 31,828  |  | 31,356 
|                                                      |  |                         |  |         |  |        
|                                                     
|INTEREST EXPENSE                                      |  |                         |  |         |  |        
|Deposits                                              |  | 7,592                   |  | 4,063   |  | 4,591  
|Federal funds purchased                               |  | 35                      |  | -       |  | -      
|Short-term repurchase agreements and borrowings       |  | 469                     |  | 994     |  | 250    
|Long-term repurchase agreements and debt              |  | 4,836                   |  | 1,637   |  | 1,325  
|                                                      |  |                         |  |         |  |        
|                                                     
|Total interest expense                                |  | 12,932                  |  | 6,694   |  | 6,166  
|                                                      |  |                         |  |         |  |        
|                                                     
|Net interest income                                   |  | 28,447                  |  | 25,134  |  | 25,190 
|                                                     
|PROVISION FOR CREDIT LOSSES                           |  | 753                     |  | 227     |  | 2,329  
|                                                      |  |                         |  |         |  |        
|Net interest income after provision for credit losses |  | 27,694                  |  | 24,907  |  | 22,861 
|                                                      |  |                         |  |         |  |        
|                                                     
|NON-INTEREST INCOME                                   |  |                         |  |         |  |        
|Service charges on deposit accounts                   |  | 3,569                   |  | 3,803   |  | 3,668  
|Origination fees and gain on sales of loans           |  | 1,634                   |  | 1,325   |  | 3,380  
|Gain on branch divestiture                            |  | -                       |  | 5,462   |  | -      
|Other operating income                                |  | 3,007                   |  | 2,979   |  | 5,512  
|                                                      |  |                         |  |         |  |        
|                                                     
|Total non-interest income                             |  | 8,210                   |  | 13,569  |  | 12,560 
|                                                      |  |                         |  |         |  |        
|                                                     
|NON-INTEREST EXPENSES                                 |  |                         |  |         |  |        
|Salaries and employee benefits                        |  | 12,093                  |  | 10,675  |  | 12,018 
|Occupancy                                             |  | 1,907                   |  | 1,627   |  | 1,552  
|Equipment                                             |  | 1,847                   |  | 1,834   |  | 1,822  
|Amortization of intangible assets                     |  | 155                     |  | 110     |  | 111    
|Other                                                 |  | 6,798                   |  | 6,832   |  | 6,689  
|                                                      |  |                         |  |         |  |        
|                                                     
|Total non-interest expenses                           |  | 22,800                  |  | 21,078  |  | 22,192 
|                                                      |  |                         |  |         |  |        
|                                                     
|Income before provision for income taxes              |  | 13,104                  |  | 17,398  |  | 13,229 
|                                                     
|PROVISION FOR INCOME TAXES                            |  | 4,076                   |  | 5,621   |  | 4,173  
|                                                      |  |                         |  |         |  |        
|                                                     
|NET INCOME                                            |  | $ 9,028                 |  | $11,777 |  | $ 9,056
|                                                      |  |                         |  |         |  |        
|                                                     
|EARNINGS PER SHARE                                    |  |                         |  |         |  |        
|Basic                                                 |  | $ 1.33                  |  | $ 1.82  |  | $ 1.38 
|Diluted                                               |  | 1.30                    |  | 1.77    |  | 1.32   



|See accompanying notes. |  | 32
|----------------------- |  | --

---

|VENTURE FINANCIAL GROUP, INC.                                           |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|----------------------------------------------------------------------- |  | --------- |  | ------ |  | ------- |  | ---------- |  | ------------- |  | -------- |  | ----------- |  | -------- |  | ------- |  |  |  | - |  | -------
|CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME |  |           |  |        |  |         |  |            |  |              
|(dollars in thousands)                                                  |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|                                                                       
|                                                                        |  |           |  |        |  |         |  |            |  |               |  |          |  | Accumulated |  | Unearned |  |         |  |  |  |  
|                                                                        |  | Shares of |  |        |  |         |  | Additional |  |               |  | Other    |  |             |  | Employee |  | Advance |  |  |  |  
|                                                                        |  | Common    |  | Common |  | Paid-in |  | Retained   |  | Comprehensive |  | Stock    |  | to          |  |          |  |        
|                                                                        |  | Stock     |  | Stock  |  | Capital |  | Earnings   |  | Income (Loss) |  | Award    |  | KSOP        |  |          |  | Total  
|                                                                        |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |         
|                                                                       
|Balance, December 31, 2002                                              |  | 4,389,236 |  | $      |  | 5,487   |  | $          |  | 22,943        |  | $ 15,246 |  | $           |  | 533      |  |         |  |  |  | $ |  | 44,209 
|                                                                       
|Comprehensive income                                                    |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|Net income                                                              |  |           |  |        |  |         |  |            |  |               |  | 9,056    |  |             |  |          |  |         |  |  |  |   |  | 9,056  
|Other comprehensive income, net of tax                                  |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|Change in fair value of securities                                      |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|available-for-sale net of tax (benefit)                                 |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|of ($207)                                                               |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  | (403)    |  |         |  |  |  |   |  | (403)  
|                                                                       
|Comprehensive income                                                    |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  | 8,653  
|                                                                       
|Stock options exercised                                                 |  | 173,898   |  |        |  | 217     |  |            |  | 1,391         |  |          |  |             |  |          |  |         |  |  |  |   |  | 1,608  
|Stock repurchased                                                       |  | (246,971) |  |        |  | (309)   |  |            |  | (4,519)       |  |          |  |             |  |          |  |         |  |  |  |   |  | (4,828)
|Cash dividends paid ($.16 per share)                                    |  |           |  |        |  |         |  |            |  |               |  | (1,048)  |  |             |  |          |  |         |  |  |  |   |  | (1,048)
|Income tax benefit from exercise of stock                               |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|options                                                                 |  |           |  |        |  |         |  |            |  | 79            |  |          |  |             |  |          |  |         |  |  |  |   |  | 79     
|                                                                        |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |         
|                                                                       
|Balance, December 31, 2003                                              |  | 4,316,163 |  | $      |  | 5,395   |  | $          |  | 19,894        |  | $ 23,254 |  | $           |  | 130      |  |         |  |  |  | $ |  | 48,673 
|                                                                       
|Comprehensive income                                                    |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|Net income                                                              |  |           |  |        |  |         |  |            |  |               |  | 11,777   |  |             |  |          |  |         |  |  |  |   |  | 11,777 
|Other comprehensive loss, net of tax                                    |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|Change in fair value of securities                                      |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|available-for-sale net of tax $57                                       |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  | 113      |  |         |  |  |  |   |  | 113    
|                                                                       
|Comprehensive income                                                    |  |           |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  | 11,890 
|                                                                       
|3 for 2 stock split                                                     |  | 2,154,212 |  |        |  |         |  |            |  |               |  |          |  |             |  |          |  |         |  |  |  |   |  |        
|Stock options exercised                                                 |  | 228,775   |  |        |  | 209     |  |            |  | 1,255         |  |          |  |             |  |          |  |         |  |  |  |   |  | 1,464  
|Stock repurchased                                                       |  | (171,643) |  |        |  | (186)   |  |            |  | (2,821)       |  |          |  |             |  |          |  |         |  |  |  |   |  | (3,007)

33

---

|VENTURE FINANCIAL GROUP, INC.                                                       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(continued) |  | 
|(dollars in thousands)                                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|                                                                                   



|                                          |  |           |  |        |  |            |  |          |  | Accumulated   |  | Unearned |  |         |  |        
|----------------------------------------- |  | --------- |  | ------ |  | ---------- |  | -------- |  | ------------- |  | -------- |  | ------- |  | -------
|                                          |  | Shares of |  |        |  | Additional |  |          |  | Other         |  | Employee |  | Advance |  |        
|                                          |  | Common    |  | Common |  | Paid-in    |  | Retained |  | Comprehensive |  | Stock    |  | to      |  |        
|                                          |  | Stock     |  | Stock  |  | Capital    |  | Earnings |  | Income (Loss) |  | Award    |  | KSOP    |  | Total  
|                                          |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        
|                                         
|Cash dividends paid ($.20 per share)      |  |           |  |        |  |            |  | (1,325)  |  |               |  |          |  |         |  | (1,325)
|Income tax benefit from exercise of stock |  |           |  |        |  | 145        |  |          |  |               |  |          |  |         |  | 145    
|options                                   |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        
|                                          |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        
|                                         
|Balance, December 31, 2004                |  | 6,527,507 |  | $5,418 |  | $18,473    |  | $33,706  |  | $243          |  |          |  |         |  | $57,840
|Comprehensive income                      |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        
|Net income                                |  |           |  |        |  |            |  | 9,028    |  |               |  |          |  |         |  | 9,028  
|Other comprehensive income, net of tax    |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        
|Change in fair value of securities        |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        
|available-for-sale net of tax (benefit)   |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        
|of ($251)                                 |  |           |  |        |  |            |  |          |  | (894)         |  |          |  |         |  | (894)  
|Minimum pension liability adjustment,     |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        
|net of tax (benefit) of ($205)            |  |           |  |        |  |            |  |          |  | (382)         |  |          |  |         |  | (382)  
|                                         
|Comprehensive income                      |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  | 7,752  
|                                         
|WCB Acquisition                           |  | 574,559   |  | 477    |  | 12,962     |  |          |  |               |  |          |  |         |  | 13,439 
|WAM Acquisition                           |  | 1,612     |  | 1      |  | 32         |  |          |  |               |  |          |  |         |  | 33     
|Stock options exercised                   |  | 232,041   |  | 193    |  | 1,520      |  |          |  |               |  |          |  |         |  | 1,713  
|Unearned Employee Stock Award             |  | 5,000     |  | 4      |  | 100        |  |          |  |               |  | (104)    |  |         |  | -      
|Stock repurchased                         |  | (122,567) |  | (102)  |  | (2,353)    |  |          |  |               |  |          |  |         |  | (2,455)
|Cash dividends paid ($.28 per share)      |  |           |  |        |  |            |  | (1,855)  |  |               |  |          |  |         |  | (1,855)
|Advance to KSOP                           |  |           |  |        |  |            |  |          |  |               |  |          |  | (493)   |  | (493)  
|Income tax benefit from exercise of stock |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        
|options                                   |  |           |  |        |  | 180        |  |          |  |               |  |          |  |         |  | 180    
|                                          |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        
|                                         
|Balance, December 31, 2005                |  | 7,218,152 |  | $5,991 |  | $30,914    |  | $40,879  |  | $(1,033)      |  | $(104)   |  | $(493)  |  | $76,154
|                                          |  |           |  |        |  |            |  |          |  |               |  |          |  |         |  |        

|See accompanying notes. |  | 34
|----------------------- |  | --

---

|VENTURE FINANCIAL GROUP, INC.                                                       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(continued) |  | 
|(dollars in thousands)                                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|                                                                                   



|                                              |  |   |  | Years Ended December 31, |  |         
|--------------------------------------------- |  | - |  | ------------------------ |  | --------
|Comprehensive Income                          |  |   |  | 2005                     |  | 2004    
|                                              |  |   |  |                          |  |         
|                                             
|Net income                                    |  | $ |  | 9,028                    |  | $ 11,777
|Increase in unrealized gains (losses) on      |  |   |  |                          |  |         
|securities available for sale, net of tax     |  |   |  |                          |  |         
|expense                                       |  |   |  |                          |  |         
|(benefit) of $(251), $64, $(57)               |  |   |  | (894)                    |  | 127     
|Less minimum pension liability adjustment net |  |   |  |                          |  |         
|of tax expense (benefit) $(205)               |  |   |  | (382)                    |  |         
|Less reclassification adjustment for gains    |  |   |  |                          |  |         
|included in net income, net of tax expense    |  |   |  |                          |  |         
|(benefit) of $(7)                             |  |   |  | -                        |  | (14)    
|                                              |  |   |  |                          |  |         
|                                             
|Comprehensive Income                          |  | $ |  | 7,752                    |  | $ 11,890
|                                              |  |   |  |                          |  |         

|See accompanying notes. |  | 35
|----------------------- |  | --

---

|VENTURE FINANCIAL GROUP, INC.                                 |  |   |  |                         |  |                    |  |                  
|------------------------------------------------------------- |  | - |  | ----------------------- |  | ------------------ |  | -----------------
|STATEMENT OF CASH FLOWS                                       |  |   |  |                         |  |                    |  |                  
|(dollars in thousands)                                        |  |   |  |                         |  |                    |  |                  
|                                                             
|                                                             
|                                                              |  |   |  | YEAR ENDED DECEMBER 31,
|                                                              |  |  
|                                                              |  |   |  | 2005                    |  | 2004               |  | 2003             
|                                                              |  |   |  |                         |  |                   
|CASH FLOWS FROM OPERATING ACTIVITIES                          |  |   |  |                         |  |                    |  |                  
|Net income                                                    |  | $ |  | 9,028                   |  | $           11,777 |  | $           9,056
|Adjustments to reconcile net income to net cash               |  |   |  |                         |  |                    |  |                  
|from operating activities                                     |  |   |  |                         |  |                    |  |                  
|Provision for credit losses                                   |  |   |  | 753                     |  | 227                |  | 2,329            
|Depreciation and amortization                                 |  |   |  | 1,608                   |  | 1,559              |  | 1,479            
|Deferred income taxes (benefit)                               |  |   |  | (197)                   |  | (1,120)            |  | (500)            
|Stock dividends received                                      |  |   |  | (120)                   |  | (130)              |  | (279)            
|Amortization of other intangible assets                       |  |   |  | 155                     |  | 110                |  | 111              
|Origination of loans held-for-sale                            |  |   |  | (59,583)                |  | (40,910)           |  | (133,358)        
|Proceeds from sales of loans held-for-sale                    |  |   |  | 58,636                  |  | 43,255             |  | 140,032          
|Origination fees and gain on sale of loans                    |  |   |  | (1,634)                 |  | (1,325)            |  | (3,380)          
|Increase in cash value of life insurance                      |  |   |  | (403)                   |  | (318)              |  | (470)            
|Gain on sales of foreclosed real estate                       |  |   |  | (300)                   |  | -                  |  | (2,373)          
|Increase in minimum employee pension liability                |  |   |  | (382)                   |  | -                  |  | -                
|(Increase) decrease in accrued interest receivable            |  |   |  | (1,033)                 |  | (260)              |  | 60               
|Increase (decrease) in accrued interest payable               |  |   |  | 668                     |  | 446                |  | (141)            
|Other, net                                                    |  |   |  | 7,145                   |  | 5,990              |  | 2,215            
|                                                              |  |   |  |                         |  |                   
|                                                             
|Net cash from operating activities                            |  |   |  | 14,341                  |  | 19,301             |  | 14,781           
|                                                              |  |   |  |                         |  |                   
|                                                             
|CASH FLOWS FROM INVESTING ACTIVITIES                          |  |   |  |                         |  |                    |  |                  
|Acquisition, net of cash acquired                             |  |   |  | (9,553)                 |  | -                  |  | -                
|Net (increase) decrease in interest bearing deposits in banks |  |   |  | (1,243)                 |  | 148                |  | (137)            
|Net (increase) decrease in federal funds sold                 |  |   |  | (6,230)                 |  | 5,530              |  | 1,470            
|Activity in securities available-for-sale                     |  |   |  |                         |  |                    |  |                  
|Maturities, prepayments and calls                             |  |   |  | 14,680                  |  | 26,586             |  | 16,318           
|Purchases                                                     |  |   |  | (3,896)                 |  | (15,005)           |  | (68,480)         
|Activity in securities held-to-maturity                       |  |   |  |                         |  |                    |  |                  
|Maturities, prepayments and calls                             |  |   |  | -                       |  | 504                |  | -                
|Purchase of FHLB stock                                        |  |   |  | (560)                   |  | (2,746)            |  | -                
|Net increase in loans                                         |  |   |  | (168,917)               |  | (67,045)           |  | (6,414)          
|Purchase of life insurance policies                           |  |   |  | (2,821)                 |  | -                  |  | (3,780)          
|Proceeds from sales of foreclosed assets                      |  |   |  | 690                     |  | 730                |  | 7,556            
|Proceeds from sales of premises and equipment                 |  |   |  | 7                       |  | 3,451              |  | -                
|Additions to premises and equipment                           |  |   |  | (8,941)                 |  | (4,645)            |  | (2,826)          
|                                                              |  |   |  |                         |  |                   
|                                                             
|Net cash from investing activities                            |  |   |  | (186,784)               |  | (52,492)           |  | (56,293)         
|                                                              |  |   |  |                         |  |                   

|See accompanying notes. |  | 36
|----------------------- |  | --

---

VENTURE FINANCIAL GROUP, INC.
STATEMENT OF CASH FLOWS (continued)
(dollars in thousands)

|
|
|



|                                                            |  |   |  | YEAR ENDED DECEMBER 31,
|----------------------------------------------------------- |  | - |  | -----------------------
|                                                            |  |  
|                                                            |  |   |  | 2005                   
|                                                            |  |   |  |                        
|CASH FLOWS FROM FINANCING ACTIVITIES                        |  |   |  |                        
|Net increase (decrease) in deposits                         |  |   |  | 187,307                
|Net increase (decrease) in federal funds purchased          |  |   |  | (5,575)                
|Net increase (decrease) in short-term repurchase agreements |  |   |  |                        
|and borrowings                                              |  |   |  | (5,656)                
|Net increase (decrease) in short term-borrowings            |  |   |  | (20,674)               
|Proceeds from exercise of stock options                     |  |   |  | 1,746                  
|Proceeds from long-term repurchase agreements and debt      |  |   |  | 37,093                 
|Repayment of long-term repurchase agreements and debt       |  |   |  | (14,000)               
|Repurchase of common stock                                  |  |   |  | (2,455)                
|Increase in advance to employee retirement plan             |  |   |  | (493)                  
|Cash dividends paid on common stock                         |  |   |  | (1,855)                
|                                                            |  |   |  |                        
|                                                           
|Net cash from financing activities                          |  |   |  | 175,438                
|                                                            |  |   |  |                        
|                                                           
|NET INCREASE IN CASH AND DUE FROM BANKS                     |  |   |  | 2,995                  
|                                                           
|CASH AND DUE FROM BANKS                                     |  |   |  |                        
|Beginning of year                                           |  |   |  | 13,796                 
|                                                            |  |   |  |                        
|                                                           
|End of year                                                 |  | $ |  | 16,791                 
|                                                            |  |   |  |                        
|                                                           
|SUPPLEMENTAL INFORMATION                                    |  |   |  |                        
|Cash paid for interest                                      |  | $ |  | 12,264                 
|Cash paid for income taxes                                  |  | $ |  | 7,644                  
|                                                           
|NONCASH INVESTING AND FINANCING ACTIVITIES                  |  |   |  |                        
|Foreclosed real estate acquired in settlement of loans      |  | $ |  | -                      
|Deconsolidation of trust preferred securities               |  | $ |  | -                      
|Fair value of assets acquired in acquisition                |  | $ |  | 129,038                
|Fair value of liabilities assumed in acquisition            |  | $ |  | 106,046                
|Issuance of stock in acquisition (Note 2)                   |  | $ |  | 13,439                 

|See accompanying notes. |  | 37
|----------------------- |  | --

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 1 - Organization and Summary of Significant Accounting Policies

Nature of operations- Venture Financial Group, Inc. (the Company) provides commercial banking services in Washington State through 17 offices concentrated in and around Thurston,
Pierce, Lewis and King Counties. The Company provides loan and deposit services to customers who are predominately small and middle-market businesses and individuals in Western Washington. The Company also provides real estate mortgage lending
services through its branch network and the sale of non-deposit investment products through Venture Wealth Management (VWM).  The Bank offered small loans (commonly known as "Payday Loans") to customers in Alabama (from November 2000 through July
2003) and Arkansas (from April 2001 through June 2005) through Marketing and Servicing Agreements with Advance America. Advance America acted as the Bank's agent in marketing and collecting these loans.

Principles of consolidation- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Venture Bank (the Bank) and the Bank's
wholly-owned subsidiary, Venture Wealth Management and excludes the trusts formed to issue trust preferred securities (Note 10). All significant intercompany transactions and balances have been eliminated.

Consolidated financial statement presentation- The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America and practices within the banking industry. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities, as of the date of the balance sheet, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly 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.

Certain prior year amounts have been reclassified to conform to the 2005 presentation. The reclassifications had no effect on net income or retained earnings as previously reported. All dollar amounts, except per share
information, are stated in thousands.

Securities available-for-sale- Securities available-for-sale consist of debt securities the Company intends to hold for an indefinite period, but not necessarily to maturity, and
certain equity securities. Such securities may be sold to implement the Company's asset/liability management strategies and in response to changes in interest rates and similar factors. Securities available-for-sale are reported at fair value.
Unrealized gains and losses, net of the related deferred tax effect, are reported as a net amount in a separate component of stockholders' equity entitled "accumulated other comprehensive income (loss)." Realized gains and losses on securities
available-for-sale, determined using the specific identification method, are included in earnings. Accretion of discounts is recognized in interest income over the period to maturity. Amortization of premiums is recognized in interest income over
the period to call date.

Securities held-to-maturity- Debt securities for which the Company has the positive intent and ability to hold-to-maturity are reported at cost, adjusted for amortization of premiums
and accretion of discounts which are recognized in interest income over the period to maturity.

38

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Declines in the fair value of individual securities held-to-maturity and available-for-sale below their cost that are other than temporary result in write-downs of the individual securities to their fair value. Such
write-downs are included in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition
and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of
securities are recorded on the trade date and are determined using the specific identification method.

Federal Home Loan Bank stock- The Bank's investment in Federal Home Loan Bank (FHLB) stock is carried at par value ($100 per share), which reasonably approximates its fair value.
As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specified percentages of its outstanding FHLB advances. The Bank may request redemption at par value of any stock in excess of the
amount the Bank is required to hold. Stock redemptions are at the discretion of the FHLB. During 2002, the FHLB revised its capital structure from the issuance of one class of stock to two, B (1) and B (2) stock. B (1) stock can be sold back to the
FHLB at cost, but is restricted as to purchase, sale and redemption. Class B (2) is not a required investment for institutions and is not restricted to purchase and sale, but has the same redemption restrictions as class B (1) stock. The Bank has
all class B (1) stock as of December 31, 2005 and 2004.

Loans- Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances
adjusted for charge-offs, deferred loan origination fees or costs and an allowance for credit losses. Interest on loans is accrued daily based on the principal amount outstanding. Interest on small loans is recognized when the loan is repaid by the
borrower. The Bank discontinued small loan operations effective June 30, 2005. Generally, the accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due or when they are
past due 90 days as to either principal or interest, unless they are well secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued interest is reversed against current income. If management determines that
the ultimate collectibility of principal is in doubt, cash receipts on nonaccrual loans are applied to reduce the principal balance on a cash-basis method, until the loans qualify for return to accrual status. Loans are returned to accrual status
when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as an adjustment to
the yield of the related loan using the interest method.

39

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Allowance for credit losses- The allowance for credit losses is maintained at a level considered adequate to provide for probable losses on existing loans based on evaluating known
and inherent risks in the loan portfolio. The allowance is reduced by loans charged off, and increased by provisions charged to earnings and recoveries on loans previously charged off. The allowance is based on management's periodic, systematic
evaluation of factors underlying the quality of the loan portfolio including changes in the size and composition of the loan portfolio, the estimated value of any underlying collateral, actual loan loss experience, current economic conditions, and
detailed analysis of individual loans for which full collectibility may not be assured. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While
management uses the best information available to make its estimates, future adjustments to the allowance may be necessary if there is a significant change in economic conditions.

When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged off against the allowance for credit losses. The existence of some or all of the following criteria
will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not evidenced the ability or intent to bring the loan current; the Bank has no recourse to the borrower, or if it does, the borrower has
insufficient assets to pay the debt; the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement. Losses in the small loan portfolio are limited to a
percentage of revenue earned from the portfolio by the Bank's agent as stated in the Marketing and Servicing agreement. The Bank discontinued its small loan operations effective June 30, 2005, all credit losses have been recognized.

When management determines that it is probable that a borrower will be unable to repay all amounts due according to the terms of the loan agreement, including scheduled interest payments, the loan is considered impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment
shortfalls are generally not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of shortfall in relation to the principal and interest owed. The amount of impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or, when the primary source of repayment is provided by real estate collateral, at the fair value of the collateral less estimated selling costs. In addition, regulatory
agencies, as an integral part of their examination process, periodically review the Bank's allowance for credit losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the
time of their examinations.

The ultimate recovery of all loans is susceptible to future market factors beyond the Bank's control. These factors may result in losses or recoveries differing significantly from those provided for in the financial
statements.

40

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Transfers of financial assets- Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank
does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and equipment- Premises and equipment are stated at cost less accumulated depreciation, which is computed on the straight-line method over the estimated useful lives of the
assets, land is carried at cost. Leasehold improvements are amortized over the term of the lease or the estimated useful life of the improvement, whichever is less. Gains or losses on dispositions are reflected in earnings.

Goodwilland other intangibles -Net assets of companies acquired in purchase transactions are recorded at
fair value at the date of acquisition. Identified intangibles are amortized on an accelerated basis over the period benefited. Goodwill is not amortized but is reviewed for potential impairment during the fourth quarter on an annual basis, or if
events or circumstances indicate a potential impairment, at the reporting unit level. The impairment test is performed in two phases. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying
amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional
procedure must be performed. That additional procedure compares the implied fair value of the reporting unit's goodwill (as defined in SFAS No. 142, "Goodwill and Other Intangible Assets", with the carrying amount of that goodwill. An impairment
loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company tested its goodwill and found no impairment during 2005.

Intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on undiscounted cash flow projections. At December 31, 2005,
intangible assets included on the consolidated balance sheets consist of core deposit intangibles that are amortized under the straight line method over an estimated life of approximately five to seven years. The core deposit premium was acquired in
the purchase of Harbor Bank, NA and Redmond National Bank the wholly owned subsidiary of Washington Commercial Bancorp (see Note 2). The core deposit premium is being amortized on the straight-line method over seven years for Harbor Bank and five
years for Redmond National Bank.

41

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Amortization expense for the years ended December 31, 2005, 2004 and 2003 was approximately $155,000, $111,000 and $111,000, respectively. The Company estimates amortization expense for the next five years to be
as follows:

|Year Ended |  | Amortization Expense
|---------- |  | --------------------
|2006       |  | $287,000            
|2007       |  | $287,000            
|2008       |  | $287,000            
|2009       |  | $258,000            
|2010       |  | $132,000            
|TOTAL      |  | $1,251,000          

Foreclosed assets- Assets acquired through, or in lieu of, foreclosure are initially recorded at the lower of cost or fair value less estimated costs of disposal. Any write-down to
fair value at the time of transfer or within a reasonable period thereafter is charged to the allowance for credit losses. Properties are evaluated regularly to ensure that the recorded amounts are supported by their current fair values, and that
valuation allowances to reduce the recorded amounts to fair value less estimated costs to dispose are recorded as necessary. Any subsequent reductions in carrying values, and revenue and expense from the operations of properties are charged to
operations.

Bank Owned Life Insurance (BOLI) -The carrying amount of bank owned life insurance approximates its fair value, net of any surrender charges. Fair value of bank owned life insurance
is estimated using the cash surrender value.

Income taxes- Deferred tax assets and liabilities result from differences between financial statement recorded amounts and the tax bases of assets and liabilities, and are reflected
at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled under the liability method. The deferred tax provision represents the difference between the net
deferred tax asset/liability at the beginning and end of the year. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The Company files a consolidated tax return with the Bank. The Bank provides for tax on a separate company basis and remits to the Company amounts due.

42

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

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

The Company has one stock-based employee and director compensation plan. At December 31, 2003, the Company had two stock-based employee and director compensation plans (Note 15). The Company accounts for the plans under the
recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based compensation
cost is reflected in net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation, to stock-based compensation awards for the effects of
all options granted on or after January 1, 1995 for the years ended December 31:

|                                             |  |   |  | 2005  |  |   |  | 2004   |  |   |  | 2003 
|-------------------------------------------- |  | - |  | ----- |  | - |  | ------ |  | - |  | -----
|                                             |  |   |  |       |  |  
|                                            
|Net income, as reported                      |  | $ |  | 9,028 |  | $ |  | 11,777 |  | $ |  | 9,056
|Less total stock-based compensation          |  |   |  |       |  |   |  |        |  |   |  |      
|expense determined under fair value          |  |   |  |       |  |   |  |        |  |   |  |      
|method for all qualifying awards, net of tax |  |   |  | 221   |  |   |  | 203    |  |   |  | 127  
|                                             |  |   |  |       |  |  
|                                            
|Pro forma net income                         |  | $ |  | 8,807 |  | $ |  | 11,574 |  | $ |  | 8,929
|                                             |  |   |  |       |  |  
|                                            
|Earnings per share                           |  |   |  |       |  |   |  |        |  |   |  |      
|Basic                                        |  |   |  |       |  |   |  |        |  |   |  |      
|As reported                                  |  | $ |  | 1.33  |  | $ |  | 1.82   |  | $ |  | 1.38 
|Pro forma                                    |  | $ |  | 1.30  |  | $ |  | 1.78   |  | $ |  | 1.36 
|Diluted                                      |  |   |  |       |  |   |  |        |  |   |  |      
|As reported                                  |  | $ |  | 1.30  |  | $ |  | 1.77   |  | $ |  | 1.32 
|Pro forma                                    |  | $ |  | 1.27  |  | $ |  | 1.74   |  | $ |  | 1.31 

Fair value of financial instruments- The following methods and assumptions were used by the Company in estimating the fair values of financial instruments:

Cash and due from banks, interest-bearing deposits in other banks and federalfunds sold- The recorded
amounts of cash and due from banks, interest-bearing deposits at other financial institutions, and federal funds sold approximates their fair value.

Securities available-for-sale- Fair values for securities available-for-sale are based on quoted market prices.

Federal Home Loan Bank stock- The carrying value of Federal Home Loan Bank stock approximates its fair value.

43

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Loans held-for-sale- Mortgage loans originated for sale in the foreseeable future in the secondary market are carried at the lower of aggregate cost or estimated market value. Gains
and losses on sales of loans are recognized at settlement date and are determined by the difference between the sales proceeds and the carrying value of the loans. Loans held-for-sale are sold with the following recourse provisions: the borrower
defaults on the payment or refinances the loan within the investor established timeframes. In these instances, depending upon the investor agreement, the Bank must repurchase the loan and/or refund the service release premium and/or pay a penalty to
the investor. Net unrealized losses are recognized as charges to income.  Mortgage loans held for sale are generally sold with the mortgage servicing rights released or sold.

Loans- For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on recorded values. Fair values for fixed rate loans are
estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of loans held-for-sale are based on their estimated market prices. Fair
values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits- The fair value of deposits with no stated maturity date is included at the amount payable on demand. The fair value of fixed maturity certificates of deposit is estimated
by discounting future cash flows using rates currently offered by the Bank for deposits of similar remaining maturities.

Federal funds purchased, short-term borrowings, and short-term repurchase agreements- The recorded amounts of federal funds purchased and short-term borrowings maturing within 90
days approximate their fair values. Fair values of other short-term borrowings and short-term repurchase agreements are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.

Long-term debt, long-term repurchase agreements, and junior subordinated debentures- The fair values of the Company's long-term, fixed rate debt, long-term repurchase agreements, and
variable rate junior subordinated debentures are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The recorded amounts of variable rate debt
approximate their fair value.

Accrued interest- The carrying amounts of accrued interest approximate their fair values.

Off-balance sheet instruments- The fair value of commitments to extend credit and standby letters of credit was estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the customers. Since the majority of the Bank's off-balance sheet instruments consist of non-fee producing, variable-rate commitments, the Bank
has determined they do not have a distinguishable fair value.

Cash and cash equivalents- The Company considers all amounts included in the balance sheet caption "Cash and due from banks" to be cash equivalents. Cash and cash equivalents all
have maturities of three months or less. Cash flows from loans, federal funds purchased and sold, deposits and short-term borrowings are reported net.

44

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Earnings per share- Basic earnings per share exclude dilution and are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings
per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options and restricted stock under the Company's stock incentive plans under the treasury stock method.

Advertising costs- The Company expenses advertising costs as they are incurred (see Note 19).

Comprehensive income -Comprehensive income includes net income and other comprehensive income which refers to unrealized gains and losses that under accounting principles generally
accepted in the United States of America are excluded from net income.

Financial instruments- In the ordinary course of business the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, commercial letters of credit, and standby letters of credit.  Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Recent accounting pronouncements- In December 2004, the Financial Accounting Standards Board (FASB) adopted Statement of Financial Accounting Standards (SFAS) No. 123(R),Share-Based Payment,which is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation.Statement 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25,

Accounting for Stock Issued to Employees,and amends FASB Statement No. 95,Statement of Cash Flows.Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123.  However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. This statement will be adopted on January 1, 2006.

As permitted by Statement 123, the Company currently accounts for share-based payments to employees using intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. The impact
of adoption of Statement 123(R) cannot be fully predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.  This requirement will reduce net operating cash flows and increase net financing cash flows in periods
after adoption. In addition, the accounting for performance based shares on the balance sheet is modified and will eliminate the unearned compensation line item from equity. This adjustment will not change the total equity balance.

45

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 2 - Disposition and Acquisitions

Disposition

The Company sold seven of its financial centers on October 8, 2004. Of the seven financial centers, one was in Thurston County, two were in Lewis County and four were in Grays Harbor County. The Company sold $88 million
in deposits and $1.8 million in real estate, furniture and fixtures, and recorded a $5.2 million gain on the sale of deposits, and a $200 thousand gain on the sale of real estate, furniture and fixtures. The Company retained all loans
originated through the seven financial centers. The Company realized a $3.5 million gain net of tax and previously recorded goodwill with respect to such financial centers.

Acquisitions

Washington Asset Management Tacoma, LLC

On March 1, 2004, Venture Wealth Management (VWM), a wholly owned subsidiary of the Bank was formed. On March 8, 2004, VWM purchased Washington Asset Management Tacoma, LLC (WAM). The purchase was made to expand the breadth
of the services offered by VWM. The purchase was accounted for under the purchase method of accounting. The results of operations of VWM have been included in the consolidated financial statements since March 8, 2004.

The purchase price was $200 thousand. $126 thousand was paid in cash at closing and the balance of $74 thousand is scheduled to be paid in three equal annual installments of 1,075 shares per year for a total of
3,225 shares of undiluted common stock of VFG valued at $22.95 ($15.30 as adjusted for subsequent 3 for 2 stock split) per share based on the average sales price for the period of February 1, 2004 through March 7, 2004.

Washington Commercial Bancorp

To expand the Company's market presence in King County, on September 2, 2005 the Company purchased all of the common stock of Washington Commercial Bancorp (WCB), parent company of Redmond National Bank, in an acquisition
accounted for under the purchase method of accounting. The results of operations of WCB have been included in the consolidated financial statements since September 2, 2005.

Under the terms of the merger agreement, each shareholder could elect to receive VFG common stock, cash, or a combination of both. Common stock was exchanged at a rate of 2.0739 shares of VFG for every share of WCB stock.
Fractional shares were cashed out. Cash per share was paid at a price of $43.43 per share. Outstanding WCB stock options were converted at a rate of 2.0465 shares of VFG stock options for every WCB stock option. Fractional option shares were not
converted or rounded.

The fair value of VFG common stock and stock options was derived using an average market price per share of VFG common stock of $19.73, which was based on VFG's average stock price for the month of April 2005, which was
the month that the terms of the acquisition were announced.

46

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 2 - Disposition and Acquisitions (continued)

The aggregate purchase price was $26 million. The following table summarizes the components of the purchase price:

|Purchase Price at Fair Value(in thousands)                          |  |        
|------------------------------------------------------------------- |  | -------
|Total value of the Company's common stock exchanged                 |  | $11,336
|Total value of WCB stock options replaced by fully vested VFG stock |  | $2,103 
|options (1)                                                         |  |        
|                                                                   
|Cash portion of purchase                                            |  | $12,355
|Direct acquisition costs (capitalized and included in Goodwill)     |  | $678   
|Total estimated purchase price                                      |  | $26,472

|(1) | The estimated fair value of VFG stock options issued as of September 2, 2005 in exchange for the WCB outstanding stock options was calculated using the Black-Scholes option pricing model modified for dividends, with model
assumptions estimated as of April, 2005, and a VFG stock price of $19.73.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 2 - Disposition & Acquisitions (continued)

The purchase price allocation was based on an estimate of the fair value of assets acquired and liabilities assumed at the acquisition date as summarized in the following table:

Allocation of WCB purchase price (in thousands)

WCB shareholder equity                                                        $11,690

Estimated adjustments to reflect assets acquired and liabilities assumed at fair value:

|Cash and due from banks                     |  |  |  | 2,802     
|------------------------------------------- |  |  |  | ----------
|Securities available-for-sale               |  |  |  | 1,889     
|Investments in trusts                       |  |  |  | 93        
|Federal Home Loan Bank stock, at cost       |  |  |  | 545       
|Loans                                       |  |  |  | 107,133   
|Allowance for credit losses                 |  |  |  | (1,241)   
|Premises and equipment                      |  |  |  | 2,502     
|Core deposit intangible                     |  |  |  | 880       
|Goodwill                                    |  |  |  | 16,295    
|Other assets                                |  |  |  | 942       
|                                            |  |  |  |           
|                                           
|Total assets acquired                       |  |  |  | 131,840   
|                                            |  |  |  |           
|                                           
|Total deposits                              |  |  |  | 86,894    
|Short-term borrowing                        |  |  |  | 14,412    
|Junior subordinated debentures              |  |  |  | 3,093     
|Other liabilities                           |  |  |  | 1,647     
|                                            |  |  |  |           
|                                           
|Total liabilities                           |  |  |  | 106,046   
|                                            |  |  |  |           
|                                           
|Estimated fair value of net assets acquired |  |  |  | $ 25,794  
|                                            |  |  |  |           
|                                           
|Merger related costs                        |  |  |  | $      678
|Total purchase price                        |  |  |  | $ 26,472  

48

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 2 - Disposition and Acquisitions (continued)

The following unaudited pro forma condensed consolidated financial information represents the results of operation of the Company had the acquisition taken place on January 1, 2004. Unaudited Pro Forma Condensed
Consolidated Financial Information

|                                                     |  |           |  | 2005      |  |   |  | 2004  
|---------------------------------------------------- |  | --------- |  | --------- |  | - |  | ------
|                                                     |  |           |  |          
|Net interest income                                  |  | $         |  | 31,932    |  | $ |  | 30,201
|Provision for loan losses                            |  |           |  | 1,343     |  |   |  | 687   
|Non-interest income                                  |  |           |  | 8,342     |  |   |  | 13,836
|Non-interest expense                                 |  |           |  | 24,490    |  |   |  | 24,326
|Income before income tax                             |  |           |  | 14,441    |  |   |  | 19,024
|                                                     |  |           |  |          
|Net income                                           |  |           |  | 9,949     |  |   |  | 12,851
|                                                     |  |           |  |          
|Per common share information                         |  |           |  |           |  |   |  |       
|Earnings per share basic                             |  | $         |  | 1.47      |  | $ |  | 1.83  
|Earnings per share diluted                           |  | $         |  | 1.44      |  | $ |  | 1.78  
|Average common shares issued and outstanding         |  | 6,769,481 |  | 7,041,221
|Average diluted common shares issued and outstanding |  | 6,931,784 |  | 7,232,680

The pro forma results presented above include amortization of purchase premiums and discounts of approximately $126 thousand for the year ended December 31, 2005.

Excluded from the pro forma results are the acquisition related expenses of approximately $1.2 million paid by WCB prior to the merger.

Goodwill of approximately $16.3 million and core deposit intangible of approximately $880 thousand were recorded as a result of the acquisition. The goodwill is not being amortized, but is subject to annual
impairment tests with the other goodwill recorded in the Company's financial statements. An impairment test was performed by management as of December 31, 2005, and no adjustment to goodwill was necessary. None of the goodwill will be deductible for
income tax purposes. The core deposit intangible is being amortized on a straight-line basis over 5 years.

Note 3 - Restricted Assets

Federal Reserve Board regulations require that the Bank maintain reserves in the form of cash on hand and deposit balances with the Federal Reserve Bank. The amount of such balances for the years ended December 31, 2005 and
2004 was $994 thousand and $1.4 million, respectively.

49

---



|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 4 - Securities

> Securities have been classified according to management's intent. The recorded amounts of securities and their fair value at December 31 were as follows:

|                               |  |           |  |            |  |           |  |           |  |            |  |       |  |            |  | Gross |  |   |  |       
|------------------------------ |  | --------- |  | ---------- |  | --------- |  | --------- |  | ---------- |  | ----- |  | ---------- |  | ----- |  | - |  | ------
|                               |  |           |  |            |  |           |  |           |  |            |  | Gross |  | Unrealized |  |       |  |  
|                               |  |           |  |            |  |           |  |           |  | Unrealized |  |       |  | Losses     |  |       |  |  
|                               |  |           |  |            |  | Gross     |  | Losses    |  | Greater    |  |       |  |           
|                               |  | Amortized |  | Unrealized |  | Less Than |  | Than      |  | Fair      
|Securities Available-for-Sale  |  |           |  | Cost       |  | Gains     |  | 12 Months |  | 12 Months  |  | Value
|                               |  |           |  |            |  |           |  |           |  |           
|                              
|December 31, 2005              |  |           |  |            |  |           |  |           |  |            |  |       |  |            |  |       |  |   |  |       
|U.S. Government and            |  |           |  |            |  |           |  |           |  |            |  |       |  |            |  |       |  |   |  |       
|agency securities              |  | $         |  | 7,226      |  | $         |  | -         |  | $          |  | 41    |  | $          |  | 38    |  | $ |  | 7,147 
|Corporate securities           |  |           |  | 2,005      |  |           |  | -         |  |            |  | 41    |  |            |  | -     |  |   |  | 1,964 
|Mortgage backed securities     |  |           |  | 43,941     |  |           |  | -         |  |            |  | -     |  |            |  | 854   |  |   |  | 43,087
|State and municipal securities |  |           |  | 5,403      |  |           |  | 94        |  |            |  | -     |  |            |  | -     |  |   |  | 5,497 
|Equity securities              |  |           |  | 3,293      |  |           |  | -         |  |            |  | 77    |  |            |  | -     |  |   |  | 3,216 
|                               |  |           |  |            |  |           |  |           |  |           
|                              
|                               |  | $         |  | 61,868     |  | $         |  | 94        |  | $          |  | 159   |  | $          |  | 892   |  | $ |  | 60,911
|                               |  |           |  |            |  |           |  |           |  |           
|                              
|December 31, 2004              |  |           |  |            |  |           |  |           |  |            |  |       |  |            |  |       |  |   |  |       
|U.S. Government and            |  |           |  |            |  |           |  |           |  |            |  |       |  |            |  |       |  |   |  |       
|agency securities              |  | $         |  | 6,830      |  | $         |  | 51        |  | $          |  | -     |  | $          |  | 14    |  | $ |  | 6,867 
|Corporate securities           |  |           |  | 3,058      |  |           |  | 1         |  |            |  | 16    |  |            |  | -     |  |   |  | 3,043 
|Mortgage backed securities     |  |           |  | 54,569     |  |           |  | 257       |  |            |  | 5     |  |            |  | 154   |  |   |  | 54,667
|State and municipal securities |  |           |  | 5,294      |  |           |  | 260       |  |            |  | -     |  |            |  | -     |  |   |  | 5,554 
|Equity securities              |  |           |  | 3,173      |  |           |  | -         |  |            |  | 13    |  |            |  | -     |  |   |  | 3,160 
|                               |  |           |  |            |  |           |  |           |  |           
|                              
|                               |  | $         |  | 72,924     |  | $         |  | 569       |  | $          |  | 34    |  | $          |  | 168   |  | $ |  | 73,291
|                               |  |           |  |            |  |           |  |           |  |           

Certain investment securities shown above currently have fair values less than amortized cost and therefore contain unrealized losses. The Company has evaluated these securities and has determined that the decline in value
is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any company or industry specific event. At December 31, 2005 and 2004 there were approximately 21 and 8 investment securities,
respectively, with unrealized losses. The Company anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment.

50

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 4 - Securities (continued)

Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine whether the impairment is temporary or other-than-temporary. Management has determined that no
investment security is other-than-temporarily impaired. The unrealized losses are due solely to interest rate changes and the Company has the ability to hold all investment securities with identified impairments resulting from interest rate changes
to the earlier of the forecasted recovery or the maturity of the underlying investment security.

The contractual maturities of securities available-for-sale at December 31, 2005 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay
obligations, with or without call or prepayment penalties. Therefore, the mortgage backed securities have been classified separately in the maturity table.

|                                       |  |           |  | Available-for-Sale
|-------------------------------------- |  | --------- |  | ------------------
|                                       |  |          
|                                       |  | Amortized |  | Fair              
|                                       |  | Cost      |  | Value             
|                                       |  |           |  |                   
|                                      
|Due in one year or less                |  | $         |  | 7,716             
|Due after one year through five years  |  |           |  | 5,528             
|Due after five years through ten years |  |           |  | 1,390             
|Due after ten years                    |  |           |  | -                 
|No maturity investment                 |  |           |  | 3,293             
|Mortgage backed securities             |  |           |  | 43,941            
|                                       |  |           |  |                   
|                                      
|                                       |  | $         |  | 61,868            
|                                       |  |           |  |                   

Securities recorded at approximately $50,366 at December 31, 2005 and $64,814 at December 31, 2004 were pledged to secure public deposits, FHLB Borrowings, Treasury, Tax and Loan Deposits, Citigroup repurchase
agreements and customer repurchase agreements and for other purposes required or permitted by law.

Proceeds from sales of available-for-sale investment securities were $0, $5,584, and $0 in 2005, 2004, and 2003, respectively.

Gross gains from the sales of available-for-sale investment securities were $0, $3, and $0 for the years ended December 31, 2005, 2004, and 2003, respectively. The Company incurred gross losses of $0,
$24, and $0 for the years ended December 31, 2005, 2004, and 2003, respectively.

51

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|                                              
|----------------------------------------------
|                                              
|                                              
|Note 5 - Loans                                
|                                              
|Loans at December 31 consist of the following:
|                                              
|                                              
|                                              
|                                              
|                                              
|                                              
|                                              
|Commercial                                    
|Real estate                                   
|Residential 1- 4 family                       
|Commercial                                    
|Construction                                  
|Consumer                                      
|Small loans                                   
|                                              
|                                              
|Loans, net of unearned income                 
|                                              
|Unearned income                               
|Allowance for credit losses                   
|                                              
|                                              
|Total loans, net                              
|                                              

Changes in the allowance for credit losses for the years ended December 31 are as follows:

|                                                      |  |   |  | 2005  |  |   |  | 2004    |  |   |  | 2003   
|----------------------------------------------------- |  | - |  | ----- |  | - |  | ------- |  | - |  | -------
|                                                      |  |   |  |       |  |  
|Balance at beginning of year                          |  | $ |  | 7,189 |  | $ |  | 7,589   |  | $ |  | 7,947  
|Provision charged (credited) to operations            |  |   |  | 753   |  |   |  | 227     |  |   |  | 2,329  
|Transfer from Redmond National Bank                   |  |   |  | 1,241 |  |   |  | -       |  |   |  | -      
|Charge-offs (community banking)                       |  |   |  | (695) |  |   |  | (897)   |  |   |  | (2,008)
|Recoveries (community banking)                        |  |   |  | 188   |  |   |  | 698     |  |   |  | 268    
|Charge-offs (small loans)                             |  |   |  | (888) |  |   |  | (1,165) |  |   |  | (1,882)
|Recoveries (small loans)                              |  |   |  | 646   |  |   |  | 737     |  |   |  | 935    
|                                                      |  |   |  |       |  |  
|Net charge-offs                                       |  |   |  | (749) |  |   |  | (627)   |  |   |  | (2,687)
|                                                      |  |   |  |       |  |  
|Balance at end of year                                |  | $ |  | 8,434 |  | $ |  | 7,189   |  | $ |  | 7,589  
|                                                      |  |   |  |       |  |  
|Ratio of net charge-offs to average loans outstanding |  |   |  | 0.15% |  |   |  | 0.16%   |  |   |  | 0.74%  

52

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 5 - Loans (continued)                                          |  |   |  |       |  |   |  |       |  |   |  |      
|------------------------------------------------------------------- |  | - |  | ----- |  | - |  | ----- |  | - |  | -----
|                                                                   
|Following is a summary of information pertaining to impaired loans: |  |   |  |       |  |  
|                                                                   
|                                                                    |  |   |  | 2005  |  |   |  | 2004  |  |   |  | 2003 
|                                                                    |  |   |  |       |  |  
|December 31                                                         |  |   |  |       |  |   |  |       |  |   |  |      
|Impaired loans without a valuation allowance                        |  | $ |  | 1,908 |  | $ |  | 906   |  | $ |  | 266  
|Impaired loans with a valuation allowance                           |  |   |  | 279   |  |   |  | 2,175 |  |   |  | 1,938
|                                                                    |  |   |  |       |  |  
|                                                                   
|Total impaired loans                                                |  | $ |  | 2,187 |  | $ |  | 3,081 |  | $ |  | 2,204
|                                                                    |  |   |  |       |  |  
|                                                                   
|Valuation allowance related to impaired loans                       |  | $ |  | 211   |  | $ |  | 530   |  | $ |  | 869  
|                                                                    |  |   |  |       |  |  
|                                                                   
|Years ended December 31                                             |  |   |  |       |  |   |  |       |  |   |  |      
|Average investment in impaired loans                                |  | $ |  | 4,486 |  | $ |  | 1,746 |  | $ |  | 3,870
|Interest income recognized on a cash                                |  |   |  |       |  |   |  |       |  |   |  |      
|basis on impaired loans                                             |  | $ |  | -     |  | $ |  | -     |  | $ |  | -    

At December 31, 2005, there were no commitments to lend additional funds to borrowers whose loans were impaired. Loans over 90 days past due still accruing interest were $41 thousand and $2 million at December 31,
2005 and 2004, respectively.

Certain related parties of the Company, principally Bank directors and their associates, were loan customers of the Bank in the ordinary course of business during 2005 and 2004. Total loans outstanding at December 31, 2005
and 2004 to key officers and directors were $7.9 million and $6.7 million, respectively. During 2005, advances totaled $3.2 million and repayments totaled $2 million on these loans. In the opinion of management, these related party
loans were made on substantially the same terms, including interest rates and collateral requirements, as those terms prevailing at the date these loans were made. During 2005 and 2004, there were no loans to related parties that were considered to
be classified or impaired.

|Note 6 - Premises and Equipment
|-------------------------------

The components of premises and equipment at December 31 are as follows:

|                                               |  |  |  | 2005          |  |  |  | 2004         
|---------------------------------------------- |  |  |  | ------------- |  |  |  | -------------
|                                               |  |  |  |              
|Land                                           |  |  |  | $       3,850 |  |  |  | $ 
1,336     
|Buildings and leasehold improvements           |  |  |  | 16,136        |  |  |  | 9,939        
|Equipment, furniture and fixtures              |  |  |  | 10,989        |  |  |  | 9,131        
|Construction in progress                       |  |  |  | 572           |  |  |  | 568          
|                                               |  |  |  |              
|Total cost                                     |  |  |  | 31,547        |  |  |  | 20,974       
|Less accumulated depreciation and amortization |  |  |  | 12,513        |  |  |  | 9,245        
|                                               |  |  |  |              
|Premises and equipment                         |  |  |  | $     19,034  |  |  |  | $      11,729
|                                               |  |  |  |              

53

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 6 - Premises and Equipment (continued)

Depreciation and amortization expense was $1.6 million, $1.6 million and $1.5 million in 2005, 2004 and 2003, respectively.

The Bank leases premises and equipment under operating leases. Rental expense of leased premises and equipment was $824, $666 and $672 thousand for 2005, 2004 and 2003, respectively, which is included in
occupancy expense. Subsequent to year-end, the Company purchased property in the Hawks Prairie area of Lacey, Washington for $836 thousand for future use as a financial center. This transaction closed on January 31, 2006.

Minimum net rental commitments under noncancelable leases having an original or remaining term of more than one year for future years ending December 31 are as follows:

|Years Ending |  |          |  | 
|------------ |  | -------- |  | 
|December 31  |  | Amount   |  | 
|            
|2006         |  | $ 
847   |  | 
|2007         |  | 704      |  | 
|2008         |  | 692      |  | 
|2009         |  | 754      |  | 
|2010         |  | 780      |  | 
|Thereafter   |  | 804      |  | 
|             |  |         
|            
|             |  | $ 
4,581 |  | 
|             |  |         

> Certain leases contain renewal options of five years and escalation clauses based on increases in property taxes and other costs.

|Note 7 - Foreclosed Assets
|--------------------------

> Foreclosed assets consisted of the following at December 31:

|                                          |  | 2005 |  | 2004
|----------------------------------------- |  | ---- |  | ----
|                                          |  |      |  |     
|                                         
|Real estate acquired through foreclosure  |  | $    |  | 474 
|Allowance for losses                      |  |      |  | -   
|Other assets acquired through foreclosure |  |      |  | -   
|                                          |  |      |  |     
|                                         
|Total foreclosed assets                   |  | $    |  | 474 
|                                          |  |      |  |     

> Changes in the allowance for losses on foreclosed assets for the years ended December 31 are as follows:

|                           |  | 2005 |  | 2004 |  | 2003
|-------------------------- |  | ---- |  | ---- |  | ----
|                           |  |      |  |      |  |     
|Balance, beginning of year |  | $    |  | -    |  | $   
|Provision for losses       |  |      |  | -    |  |     
|                           |  |      |  |      |  |     
|Balance, end of year       |  | $    |  | -    |  | $   
|                           |  |      |  |      |  |     

54

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 8 - Deposits                                         |  |   |  |         |  |   |  |        
|--------------------------------------------------------- |  | - |  | ------- |  | - |  | -------
|                                                         
|The composition of deposits at December 31 is as follows: |  |   |  |         |  |   |  |        
|                                                         
|                                                          |  |   |  | 2005    |  |   |  | 2004   
|                                                          |  |   |  |        
|                                                         
|Demand deposits non-interest bearing                      |  | $ |  | 99,161  |  | $ |  | 72,250 
|NOW and money market accounts                             |  |   |  | 161,675 |  |   |  | 128,133
|Savings deposits                                          |  |   |  | 27,744  |  |   |  | 23,020 
|Time certificates, $100,000 or more                       |  |   |  | 108,641 |  |   |  | 50,951 
|Other time certificates                                   |  |   |  | 116,807 |  |   |  | 52,367 
|                                                          |  |   |  |        
|                                                         
|Total                                                     |  | $ |  | 514,028 |  | $ |  | 326,721
|                                                          |  |   |  |        

> Scheduled maturities of time deposits for future years ending December 31 are as follows:

|Years Ending |  |   |  |        
|------------ |  | - |  | -------
|December 31  |  |   |  | Amount 
|            
|2006         |  | $ |  | 172,009
|2007         |  |   |  | 33,684 
|2008         |  |   |  | 17,668 
|2009         |  |   |  | 2,087  
|2010         |  |   |  | -      
|             |  |  
|            
|             |  | $ |  | 225,448
|             |  |  

Certain related parties of the Company, principally Bank directors and executive officers, were deposit customers of the Bank in the ordinary course of business during 2005 and 2004. Total deposit account dollars at
December 31, 2005 and 2004 to key officers and directors were $4.1 million and $3.2 million, respectively. In the opinion of management, these related party deposits were made on substantially the same terms, including interest rates, as
those terms prevailing at the date these accounts were opened.

55

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 9 - Federal Funds Purchased, Short-Term Repurchase Agreements, and Short-Term Borrowings

Federal funds purchased generally mature within one to four days from the transaction date. Federal funds purchased were $5.6 million as of December 31, 2004 which was an advance from a Key Bank line of credit with an
available borrowing limit of $15 million. The Company had no federal funds purchased at December 31, 2005.

Short-term repurchase agreements and short-term borrowings (excluding federal funds purchased) at December 31 are as follows:

|                                                                     |  |   |  | 2005   |  |   |  | 2004   
|-------------------------------------------------------------------- |  | - |  | ------ |  | - |  | -------
|                                                                     |  |   |  |       
|Overnight Cash Management Advances with the Federal Home Loan        |  |   |  |        |  |   |  |        
|Bank. The advances are secured by a blanket pledge of assets         |  |   |  |        |  |   |  |        
|and bears interest at a rate of 2.35% on December 31, 2004.          |  | $ |  | -      |  | $ |  | 6,100  
|                                                                    
|Demand note issued to U.S. Treasury, bearing interest at the         |  |   |  |        |  |   |  |        
|federal funds rate less .25% (4.0% and 2.0% at December 31,          |  |   |  |        |  |   |  |        
|2005 and 2004 respectively), due on demand, secured by securities    |  |   |  |        |  |   |  |        
|pledged to the Federal Reserve Bank of San Francisco in              |  |   |  |        |  |   |  |        
|the amount of $3,376 in 2004 and $3,729 in 2005.                     |  |   |  | 3,489  |  |   |  | 2,463  
|                                                                    
|Short-term repurchase agreement to Citigroup, maturing August 2005;  |  |   |  |        |  |   |  |        
|principal and interest due upon maturity at a rate of 2.15%. This is |  |   |  |        |  |   |  |        
|secured by securities pledged to Citigroup in the amount of $8,640.  |  |   |  | -      |  |   |  | 8,000  
|                                                                    
|Short-term repurchase agreement to Citigroup, maturing May 2005;     |  |   |  |        |  |   |  |        
|interst payable quarterly at a rate of 2.10%. This is secured by     |  |   |  |        |  |   |  |        
|securities pledged to Citigroup in the amount of $15,582.            |  |   |  | -      |  |   |  | 14,700 
|                                                                    
|Short-term repurchase agreement to Citigroup, maturing August 2006;  |  |   |  |        |  |   |  |        
|interst payable quarterly at a rate of 2.84%. This is secured by     |  |   |  |        |  |   |  |        
|securities pledged to Citigroup in the amount of $5,500.             |  |   |  | 5,000  |  |   |  | -      
|                                                                    
|Short-term borrowings with the FHLB. Borrowings are fully            |  |   |  |        |  |   |  |        
|collateralized by a separate portfolio of securities and commercial  |  |   |  |        |  |   |  |        
|real estate loans pledged to FHLB in the amount of $103,511.         |  |   |  |        |  |   |  |        
|Borrowings mature beginning in January 2006 and ending in            |  |   |  |        |  |   |  |        
|March 2006. The weighted average interest rate for 2005 and 2004     |  |   |  |        |  |   |  |        
|are 4.33% and 2.23%, respectively.                                   |  |   |  | 65,000 |  |   |  | 80,600 
|                                                                    
|Overnight repurchase agreements with customers. Balances of          |  |   |  |        |  |   |  |        
|repurchase agreements fully collateralized by a separate portfolio   |  |   |  |        |  |   |  |        
|of securities pledged to Federal Home Loan Bank of Seattle in the    |  |   |  |        |  |   |  |        
|amount of $15,171 and $15,307at December 31, 2005 and 2004,          |  |   |  |        |  |   |  |        
|respectively. The weighted average interest rate on these            |  |   |  |        |  |   |  |        
|agreements was 3.55% and .96% at December 31, 2005 and 2004,         |  |   |  | 14,309 |  |   |  | 11,265 
|                                                                     |  |   |  |       
|respectively.                                                        |  |   |  |        |  |   |  |        
|                                                                     |  | $ |  | 87,798 |  | $ |  | 123,128
|                                                                     |  |   |  |       

56

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 9 - Federal Funds Purchased, Short-Term Repurchase Agreements, and Short-Term Borrowings (continued)

> Information concerning short-term borrowings is summarized as follows:

|                                          |  |   |  | 2005    |  |   |  | 2004    |  |   |  | 2003  
|----------------------------------------- |  | - |  | ------- |  | - |  | ------- |  | - |  | ------
|                                          |  |   |  |         |  |  
|                                         
|Average balance during the year           |  | $ |  | 75,253  |  | $ |  | 61,588  |  | $ |  | 23,443
|Average interest rate during the year     |  |   |  | 3.4%    |  |   |  | 1.6%    |  |   |  | 1.1%  
|Maximum month-end balance during the year |  | $ |  | 115,104 |  | $ |  | 123,128 |  | $ |  | 34,394
|Weighted average rate at December 31      |  |   |  | 3.4%    |  |   |  | 2.2%    |  |   |  | 0.9%  

Note 10 - Long-Term Debt, Long-Term Repurchase Agreements, and Junior Subordinated Debentures

| | Long-term debt at December 31 is as follows:
| | --------------------------------------------

|                                                                                     |  |   |  | 2005   |  |   |  | 2004  
|------------------------------------------------------------------------------------ |  | - |  | ------ |  | - |  | ------
|                                                                                     |  |   |  |       
|Term advances from Federal Home Loan Bank of Seattle, maturing December 2007;        |  |   |  |        |  |   |  |       
|two advances of $5,000, each interest-only, monthly payments prior to maturity,      |  |   |  |        |  |   |  |       
|fixed interest rates on advances are 3.78% and 3.58%.                                |  | $ |  | 10,000 |  | $ |  | 10,000
|                                                                                    
|Term advances from Federal Home Loan Bank of Seattle, maturing June 2007 and 2008;   |  |   |  |        |  |   |  |       
|two advances of $10,000 each, interest-only, monthly payments prior to maturity,     |  |   |  |        |  |   |  |       
|fixed interest rates on advances are 4.04% and 4.14%.                                |  |   |  | 20,000 |  |   |  | -     
|                                                                                    
|Term repurchase agreement to Citigroup, maturing May 2008; interest due              |  |   |  |        |  |   |  |       
|quarterly at a rate of 4.10%. This is secured by securities pledged to               |  |   |  |        |  |   |  |       
|Citigroup in the amount of $15,400.                                                  |  |   |  | 14,000 |  |   |  | -     
|                                                                                    
|Term repurchase agreement to Citigroup, maturing August 2006; interest due           |  |   |  |        |  |   |  |       
|quarterly at a rate of 2.84% . This is secured by securities pledged to Citigroup in |  |   |  |        |  |   |  |       
|the amount of $5,500. Transferred to short-term borrowings in 2005 (see Note 9).     |  |   |  | -      |  |   |  | 5,000 
|                                                                                    
|Junior subordinated debentures issued December 2003, maturing December 2033;         |  |   |  |        |  |   |  |       
|Interest-only payments due quarterly at a rate of LIBOR plus 2.85%                   |  |   |  |        |  |   |  |       
|(7.35% at December 31, 2005).                                                        |  |   |  | 3,093  |  |   |  | -     
|                                                                                    
|Junior subordinated debentures issued April 2003, maturing October 2033; interest-   |  |   |  |        |  |   |  |       
|only payments due quarterly at a rate of LIBOR plus 3.25%                            |  |   |  |        |  |   |  |       
|(7.50% at December 31, 2005).                                                        |  |   |  | 6,186  |  |   |  | 6,186 
|                                                                                    
|Junior subordinated debentures issued July 2002, maturing October 2032; interest-    |  |   |  |        |  |   |  |       
|only payments due quarterly at a rate of LIBOR plus 3.65%                            |  |   |  |        |  |   |  |       
|(7.80% at December 31, 2005).                                                        |  |   |  | 13,403 |  |   |  | 13,403
|                                                                                     |  |   |  |       
|                                                                                     |  | $ |  | 66,682 |  | $ |  | 34,589
|                                                                                     |  |   |  |       

57

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 10 - Long-Term Debt, Long-Term Repurchase Agreements, and Junior Subordinated Debentures (continued)

Junior subordinated debentures- On July 11, 2002, $13 million of floating rate capital securities were issued by VFG Capital Trust I (the Trust I). The Trust I is a business
trust organized in 2002, owned 100% by the Company. The proceeds of the offering were invested by the Trust in junior subordinated debentures of the Company. The debentures held by the Trust are the sole assets of the Trust. Distributions on the
capital securities issued by the Trust are payable quarterly at a floating rate, calculated quarterly, of LIBOR plus 3.65% per annum, which is equal to the interest rate being earned by the Trust on the debentures held by the Trust. At the Company's
option, the debentures will not mature earlier than July 7, 2007 and not later than October 7, 2032. After July 7, 2007, the debenture can be redeemed, in whole or in part, at 100% of the principal amount of the debt securities being redeemed plus
any accrued and unpaid interest.

On April 10, 2003, $6 million of floating rate capital securities was issued by VFG Capital Trust II (the Trust II). The Trust II is a business trust organized in 2003, owned 100% by the Company. The proceeds of the
offering were invested by the Trust in junior subordinated debentures of the Company. The debentures held by the Trust are the sole assets of the Trust. Distributions on the capital securities issued by the Trust are payable quarterly at a floating
rate, calculated quarterly, of LIBOR plus 3.25% per annum, which is equal to the interest rate being earned by the Trust on the debentures held by the Trust. At the Company's option, the debentures will not mature earlier than April 24, 2008 and not
later than October 24, 2033. After April 24, 2008, the debenture can be redeemed, in whole or in part, at 100% of the principal amount of the debt securities being redeemed plus any accrued and unpaid interest.

As part of the acquisition of Washington Commercial Bancorp the Company acquired $3 million of floating rate capital securities issued by Washington Commercial Statutory Trust I. This is a trust organized in 2003, by
WCB and now owned 100% by the Company. The proceeds of the offering were invested by the Trust in junior subordinated debentures of the Company. The debentures held by the Trust are the sole assets of the Trust. Distributions on the capital
securities issued by the Trust are payable quarterly at a floating rate, calculated quarterly, of LIBOR plus 2.85% per annum, which is equal to the interest rate being earned by the Trust on the debentures held by the Trust. At the Company's option
the debentures will not mature earlier than December 17, 2008 and not later than December 17, 2033. After December 17, 2008 the debenture can be redeemed, in whole or in part, at 100% of the principal amount of the debt securities being redeemed
plus any accrued and unpaid interest.

The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Company entered into the agreements which, taken collectively, fully and unconditionally guarantee the
capital securities subject to the terms of each of the guarantees. The Company used the proceeds for general corporate purposes including the acquisition of Harbor Bank and stock repurchases. The capital securities qualify as Tier I capital,
provided they do not exceed 25% of total Tier I capital, under the capital guidelines of the Federal Reserve Board.

58

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 10 - Long-Term Debt, Long-Term Repurchase Agreements, and Junior Subordinated Debentures (continued)

Scheduled maturities of long-term debt for future years ending December 31 are as follows:

|           |  |  |  | Parent                | Consolidated
|---------- |  |  |  | --------------------- | ------------
|          
|2007       |  |  |  | $                   - | $           
|2008       |  |  |  | -                     |             
|Thereafter |  |  |  | 22,682                |             
|           |  |  |  |                       |             
|           |  |  |  | $          22,682     | $           
|           |  |  |  |                       |             

|Note 11 - Income Taxes
|----------------------

Income taxes are comprised of the following for the years ended December 31:

|                   |  | 2005 |  |       |  | 2004 |  |         |  | 2003
|------------------ |  | ---- |  | ----- |  | ---- |  | ------- |  | ----
|                   |  |      |  |       |  |     
|Current            |  | $    |  | 3,879 |  | $    |  | 6,741   |  | $   
|Deferred (benefit) |  |      |  | 197   |  |      |  | (1,120) |  |     
|                   |  |      |  |       |  |     
|                   |  | $    |  | 4,076 |  | $    |  | 5,621   |  | $   
|                   |  |      |  |       |  |     

The following reconciliation is between the statutory and the effective federal income tax rate for the years ended December 31:

|                           |  |        |  | 2005   |  |            |  | 2004   |  |        |  | 2003      
|-------------------------- |  | ------ |  | ------ |  | ---------- |  | ------ |  | ------ |  | ----------
|                           |  |        |  |        |  |           
|                           |  |        |  |        |  | Percent of |  |        |  |        |  | Percent of
|                           |  |        |  |        |  | Pretax     |  |        |  |        |  | Pretax    
|                           |  | Amount |  | Income |  | Amount     |  | Income |  | Amount |  | Income    
|                           |  |        |  |        |  |            |  |        |  |        |  |           
|                          
|Income tax based           |  |        |  |        |  |            |  |        |  |        |  |           
|on statutory rate          |  | $      |  | 4,586  |  | 35.0       |  | $      |  | 6,089  |  | 35.0      
|Adjustments resulting from |  |        |  |        |  |            |  |        |  |        |  |           
|Tax-exempt income          |  |        |  | (110)  |  | (0.8)      |  |        |  | (123)  |  | (0.7)     
|Life insurance income      |  |        |  | (232)  |  | (1.8)      |  |        |  | (111)  |  | (0.6)     
|Tax credits                |  |        |  | (115)  |  | (0.9)      |  |        |  | (115)  |  | (0.7)     
|Other                      |  |        |  | (53)   |  | (0.4)      |  |        |  | (119)  |  | (0.6)     
|                           |  |        |  |        |  |            |  |        |  |        |  |           
|                          
|Total income taxes         |  | $      |  | 4,076  |  | 31.1       |  | $      |  | 5,621  |  | 32.4      
|                           |  |        |  |        |  |            |  |        |  |        |  |           

59

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 11 - Income Taxes (continued)

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31 are:

|                                                 |  | 2005 |  | 2004 
|------------------------------------------------ |  | ---- |  | -----
|                                                 |  |      |  |      
|Deferred tax assets                              |  |      |  |      
|Allowance for credit losses                      |  | $    |  | 2,359
|Unrealized loss on securities available-for-sale |  |      |  | 307  
|Deferred compensation                            |  |      |  | 1,480
|                                                 |  |      |  |      
|                                                
|Total deferred tax assets                        |  | $    |  | 4,146
|                                                 |  |      |  |      
|                                                
|Deferred tax liabilities                         |  |      |  |      
|Deferred income                                  |  | $    |  | 747  
|Unrealized gain on securities available-for-sale |  |      |  | -    
|Intangibles                                      |  |      |  | 767  
|Accumulated depreciation                         |  |      |  | 685  
|Other deferred tax liabilities                   |  |      |  | 628  
|                                                 |  |      |  |      
|                                                
|Total deferred tax liabilities                   |  | $    |  | 2,827
|                                                 |  |      |  |      
|                                                
|Net deferred tax assets                          |  | $    |  | 1,319
|                                                 |  |      |  |      

Note 12 - Commitments and Contingent Liabilities

The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. The financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated balance sheets.

The Bank's exposure to credit risk loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount
of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Bank's commitments at December 31 is as follows:

|                                   |  | 2005 |  | 2004   
|---------------------------------- |  | ---- |  | -------
|                                   |  |      |  |        
|Commitments to extend credit       |  |      |  |        
|Real estate secured                |  | $    |  | 99,873 
|Credit card lines                  |  |      |  | 3,145  
|Other                              |  |      |  | 124,028
|                                   |  |      |  |        
|                                  
|Total commitments to extend credit |  | $    |  | 227,046
|                                   |  |      |  |        
|                                  
|Standby letters of credit          |  | $    |  | 2,587  
|                                   |  |      |  |        

60

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 12 - Commitments and Contingent Liabilities (continued)

Commitments to extend credit are agreements to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements. The Bank's experience has been that approximately 70% of loan commitments are drawn upon by customers. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory,
property and equipment, residential real estate, and income-producing commercial properties.

Unfunded commitments under commercial lines-of-credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers.  These lines-of-credit are
uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above, and is required in instances where the Bank deems
necessary.

Contingencies- Because of the nature of its activities, the Company is subject to various pending and threatened legal actions which arise in the ordinary course of business. In the
opinion of management, liabilities arising from these claims, if any, will not have a material effect on the financial position of the Company.

The Company has entered into contracts with certain of its executives and others, which provide for contingent payments subject to future events.

Note 13 - Significant Concentrations of Credit Risk

The Bank has concentrated credit risk exposure, including off-balance-sheet credit risk exposure, related to real estate loans as disclosed in Notes 5 and 12. The ultimate collectibility of a substantial portion of the loan
portfolio is susceptible to changes in economic and market conditions in the region. The Bank generally requires collateral on all real estate lending arrangements and typically maintains loan-to-value ratios of no greater than 80%.

Investments in state and municipal securities generally involve governmental entities within Washington State. Loans are generally limited, by state banking regulation, to 20% of the Bank's stockholders' equity, excluding
accumulated other comprehensive income (loss). The Bank, as a matter of practice, generally does not extend credit to any single borrower or group of related borrowers in excess of $15 million.

The contractual amounts of credit-related financial instruments such as commitments to extend credit, credit-card arrangement, and letters of credit represent the amounts of potential accounting loss should the contract be
fully drawn upon, the customer defaults, and the value of any existing collateral becomes worthless.

61

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 14 - Benefit Plans
|-----------------------

Employee stock ownership plan- The Company has a combined employee stock ownership plan and profit sharing plan with 401(k) provisions (KSOP) which covers substantially all employees
who have completed at least one year of service. The Company accounts for the KSOP in accordance with Statement of Position 93-6,Employers' Accounting for Employee Stock Ownership Plans.

Eligible employees are unlimited in the amount they may defer of their annual compensation on a pre-tax basis subject to certain IRS limits. The Company contributes to the plan one-half the employees' contributions up to 3%
of the employees' compensation. Profit sharing contributions to the plan may also be made at the discretion of the Board of Directors. Company contributions to this plan totaled $410 thousand, $472 thousand and $562 thousand in 2005,
2004 and 2003, respectively. Dividends paid on allocated shares are distributed to the employee account.

In October 2005 the Company approved a $1 million revolving line of credit to the KSOP. In the fourth quarter of 2005, the KSOP borrowed $493 thousand from the line of credit from the Company to purchase common
stock of the Company. The loan will be repaid principally from the Bank's contributions to the KSOP. There is no repayment required except that the balance is due in full at the end of 5 years. The interest rate on the loan is 0% per
annum.

The KSOP allocated shares were 602,502, 699,157 and 690,228 as of December 31, 2005, 2004 and 2003, respectively. Unallocated shares based on the purchase price of the shares, were 28,580, 0 and 0 as of December 31, 2005,
2004 and 2003, respectively. Unallocated shares are those shares that have been purchased with borrowings of the KSOP and will not be allocated until the debt is repaid on those shares. When the shares are allocated, they will be allocated at the
then current fair market value.

For the year ended December 31, 2005, the 401(k) KSOP is committed to release 0 shares of the Company's common stock to participants. At December 31, 2005, the 401(k) KSOP had 28,580 unallocated shares remaining to be
released. The fair value based on the previous 30 day weighted average of the unallocated shares held by the KSOP trust was $573.6 thousand at December 31, 2005.

To the extent permitted by applicable law, any cash dividends on allocated and/or unallocated Company Stock may be used to repay a loan to the KSOP which meets the requirements of Code Section 4975 and the Regulations there
under. The decision as to whether cash dividends on Company Stock will be distributed to participants, used to repay a loan to the KSOP, or held in the Trust shall be made in the sole discretion of the Trustee, and the Trustee may request the
Company to pay such dividends directly to participants.

Upon termination from the plan, a participant may choose to have his account distributed in Company stock, to the extent of his investment in stock, or in cash. Certain participants may also be eligible to diversify a
certain percentage of their accounts. A distribution of stock in the event of termination or diversification requires the Company to issue put options to the participant. This permits the participant to sell the stock to the Company at fair value at
any time during the option periods, which can be as long as 18 months. At December 31, 2005, 2004 and 2003, outstanding put options were not material.

62

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 14 - Benefit Plans (continued)
|-----------------------------------

Incentive compensation plan- Incentive compensation is awarded to a management group which includes officers and qualified employees. For some individuals in the plan, their
incentive is based totally on the performance of the Company. For other individuals in the plan, their incentive is based on a combination of the performance of the Company and attainment of growth, income, or other objectives. Awards under the
plan, referral and other fees for 2005, 2004, and 2003 totaled $692 thousand, $853 thousand, and $1.3 million, respectively.

There is one other incentive award received by all employees based on a predetermined performance goal of the Company. It is not a part of the incentive compensation plan and is not included above for 2005, 2004, 2003, this
award totaled $0, $118 thousand, and $90 thousand, respectively.

Long-term care insurance plan- In 2003, the Company purchased long-term care insurance on certain management personnel. Benefits under this plan vest over ten years from the
agreement date. In 2002, the Company purchased long-term care insurance on certain board members and management personnel. Benefits under this plan vest over ten years from the date of initial service to the Company. Expense associated with these
plans was $89 thousand, $14 thousand and $0 in 2005, 2004 and 2003 respectively. In addition to the expense for existing employees in the plan in 2005, $71 thousand of the $89 thousand expense recognized in 2005 was for employees
who are no longer in the plan.

Supplemental Executive Retirement Plan -The Bank, prior to 2005, maintained a noncontributory defined benefit pension plan called the Salary Continuation Plan ("SCP") for certain
management personnel. The SCP was provided to supplement a participating officer's retirement benefits received from social security and targets a certain level of compensation on an annual basis for a period of years after retirement. The SCP Plan
was established in 2001 and was a successor plan to the "Executive Supplemental Income Plan" or "ESI" Plan described below.  The SCP agreements replaced the previous ESI agreements with employees.

Effective January 1, 2005 the SCP plan was revised and is now called the "Supplemental executive retirement plan" (SERP).  The revised SERP plan is a single master plan for our nonqualified retirement plan. The program is a
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, SCP, and ESI Plans may utilize "Bank Owned Life Insurance" or "BOLI" policies to assist in meeting the obligations agreed to in the individual employee agreements however, the BOLI policies are not assets
belonging to the SERP, SCP, or ESI Plan.

63

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 14 - Benefit Plans (continued)

The date used to determine the Plan measurements was December 31, 2005. Weighted-average assumptions used in accounting for the SERP were as follows:

|                              |  | 2005
|----------------------------- |  | ----
|Assumed discount rate         |  | 6.0%
|Rate of compensation increase |  | N/A 
|Expected return on assets     |  | N/A 

The rate of compensation increase and the expected return on assets in the plan was not utilized in 2005 in the actuarial determination of accrued pension cost. The dollar amount of the benefit is fixed so compensation
increases are not necessary to be utilized. There are no assets set aside specifically for these benefits in trust so this does not apply. This is an unfunded plan under SFAS 87.

The accumulated benefit obligation was $4.3 million at December 31, 2005 and $3 million at December 31, 2004.  Changes in the projected benefit obligation were as follows(dollars
in thousands):

|                                                                          |  | 2005    
|------------------------------------------------------------------------- |  | --------
|Projected benefit obligation, beginning of year                           |  | $(3,019)
|Service cost                                                              |  | $456    
|Interest cost                                                             |  | $222    
|Actuarial loss (gain)                                                     |  | $754    
|Benefits paid                                                             |  | $(101)  
|                                                                         
|Projected benefit obligation, end of year                                 |  | $(4,350)
|                                                                         
|                                                                         
|Reconciliations of funded status were as follows:                         |  |         
|                                                                         
|                                                                          |  | 2005    
|Funded status                                                             |  | $(4,350)
|Unrecognized loss/(gain)                                                  |  | $587    
|                                                                         
|Actual funded status                                                      |  | $(3,763)
|                                                                         
|                                                                         
|Net periodic expense for the defined benefit pension plan was as follows: |  |         
|                                                                         
|                                                                          |  | 2005    
|Service cost                                                              |  | $456    
|Interest cost                                                             |  | $222    
|Amortization of gain or loss                                              |  | $168    
|                                                                         
|Net periodic expense                                                      |  | $846    

64

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 14 - Benefit Plans (continued)
|-----------------------------------

The benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter are as follows:

|Plan Year Ended December 31 |  | Projected Benefit Payments
|--------------------------- |  | --------------------------
|2006                        |  | $122                      
|2007                        |  | $116                      
|2008                        |  | $126                      
|2009                        |  | $165                      
|2010                        |  | $534                      
|2011-2015                   |  | $2,570                    

The amounts recognized in the statements of financial condition are as follows:

|                                        |  | 2005    
|--------------------------------------- |  | --------
|Prepaid (accrued) benefit cost          |  | $(3,763)
|Accumulated other comprehensive expense |  | $(587)  
|                                       
|Net amount recognized                   |  | $(4,350)

> Expenses related to this plan totaled $846 thousand, $851 thousand and $496 thousand in 2005, 2004 and 2003, respectively.

Executive supplemental income plan- The Company provided an Executive Supplemental Income (ESI) plan covering certain management personnel. This plan has been superseded by the
Salary Continuation Plan and then subsequently the Supplemental Executive Retirement Plan (see above for 2005). SERP accounting beginning in 2005 covers ESI agreements also. Former employees are currently receiving benefits under this plan. Expenses
related to this plan totaled $19 thousand and $21 thousand in 2004 and 2003, respectively. Liabilities to employees under this plan were $254 thousand at December 31, 2004. Benefits to employees may be funded by life insurance policies
purchased by the Company, which had cash surrender values of $12.4 million at December 31, 2004.  Liabilities to employees were being accrued under a discounted cash flow method using discount rates of 7% to 8% over their expected time to
retirement were $2.8 million at December 31, 2004.

Director benefits- The following is a description of all benefits received by the Company's directors.

Director and Committee Fees -Outside VFG directors receive amonthlyretainer fee of$750. Outside Venture Bank directors receive a monthly retainer fee of $500 and a board attendance fee of $600
per meeting. Committee fees are $200 per meeting, with the exception of the Audit Committee, which receives $250 per meeting. Special situations include the following: Directors are allotted a one-time call-in fee of $300 for attending a
board meeting by conference call, which is 50% of the "in person" fee of $600. For special meetings of the board by conference call that lasts longer than 30 minutes, Directors get paid $100; if less than 30 minutes, Directors do not get
paid. For a committee meeting held on the same day as the board meeting, Directors receive 50% of the committee fee; for

65

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 14 - Benefit Plans (continued)

two or more committee meetings held on the same day Directors are paid 100% of the first committee meeting fee and 50% of all other committee meeting fees.

DDI- In 1992 the Board of Directors approved a plan under which a Director could elect to defer receipt of Director fees for five years from
1992 to 1997 and at retirement receive those fees plus accrued interest over a ten year period. The plan also provides that the deferred fees plus the accrued interest benefit payment accelerates in the event of death to the Directors'
beneficiaries. Accrued liabilities to Directors at December 31, 2005 and 2004 totaled $321 thousand and $323 thousand, respectively. Expenses associated with this plan were $20 thousand in both 2005 and 2004 and $14 thousand in 2003.
This benefit may be funded with Bank Owned Life Insurance or from the earnings of the Company.

In 1989, the Board of Directors approved a plan under which a director could elect to defer receipt of directors fees for ten years beginning February 1, 1989 and at retirement receive those fees plus accrued interest. One
director is on this plan. This director deferred $400 per month for 120 months and is entitled to receive $2,193 payable for a period of 120 months upon reaching age 62. In the event of his death prior to reaching age 62 would received
$1,462 payable for a period of 240 months.

Split Dollar Insurance- The Company owns life insurance policies issued on the lives of its Directors ("the Participants"). The Company has entered into Agreements that provide for
the insurance companies to pay the designated beneficiaries of the Participants up to $100,000 from the "net at risk proceeds" of these policies. The "net at risk proceeds" of these policies is the amount in excess of the total required in order
for the Company to recover all its original investment as well as all accumulated interest in the policies. While the company incurs no expenses associated with this Plan, Participants are required to pay income taxes on the value of the benefits
provided under this Plan and a total of $2 thousand each year for 2005, 2004 and 2003 was reported as compensation to the Participants.

Long-Term Care Insurance -In 2002, the Company purchased Long-Term Care Insurance for each of its board members. Each participant is eligible to begin receiving benefits after being
certified by a licensed Health Care Practitioner as chronically ill. The policy provides for a $130 to $200 per day lifetime benefit for facility care, and home and community services. Benefits vest 10% per year over a ten-year period, with
acceleration upon a change in control. If the participant's service terminates for reasons other than death, disability, or termination after ten years of service, then the participant is required to reimburse a portion of the premium based on the
years of service completed. Expense related to this plan was $0 for 2005 and 2004 and $29 thousand for 2003.

|Note 15 - Stock Option Plans
|----------------------------

The Company maintains non-qualified stock option plans for non-employee members of the Board of Directors and incentive stock option plans for key employees. The exercise price of the stock options under the plans is
usually not less than the fair market value of the stock at the date of grant. The Company has the first right of refusal to purchase any shares issued under the plans prior to their sale on the open market.

66

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|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 15 - Stock Option Plans (continued)
|----------------------------------------

The fair value of each option grant is estimated on the date of grant, based on the Black-Scholes option pricing model and using the following weighted average assumptions:

|                        |  | 2005    |  | 2004    |  | 2003   
|----------------------- |  | ------- |  | ------- |  | -------
|                        |  |         |  |         |  |        
|                       
|Dividend yield          |  | 2.3%    |  | 1.6%    |  | 1.8%   
|Expected life           |  | 7 years |  | 7 years |  | 7 years
|Risk-free interest rate |  | 4.4%    |  | 3.9%    |  | 3.6%   
|Expected volatility     |  | 24.3%   |  | 19.4%   |  | 22.6%  

The weighted average fair value of options granted during 2005, 2004 and 2003 was $5.02, $3.70 and $3.41, respectively. In the opinion of management, the assumptions used in the option pricing model are
subjective and represent only one estimate of possible value, as there is no active market for Company options granted.

Options granted during 2005, 2004 and 2003 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, and are as follows:

|                                         |  |           |  |          |  |           |  | Average 
|---------------------------------------- |  | --------- |  | -------- |  | --------- |  | --------
|                                         |  | Employee  |  | Director |  | Total     |  | Exercise
|                                         |  | Options   |  | Options  |  | Options   |  | Price   
|                                         |  |           |  |          |  |           |  |         
|                                        
|Under option at December 31, 2002        |  | 787,887   |  | 97,256   |  | 885,143   |  | $       
|Granted                                  |  | 37,500    |  | 13,500   |  | 51,000    |  |         
|Exercised                                |  | (256,046) |  | (4,800)  |  | (260,846) |  |         
|Forfeited                                |  | (56,651)  |  | -        |  | (56,651)  |  |         
|                                         |  |           |  |          |  |           |  |         
|                                        
|Under option at December 31, 2003        |  | 512,690   |  | 105,956  |  | 618,646   |  | $       
|Granted                                  |  | 71,250    |  | 5,250    |  | 76,500    |  |         
|Exercised                                |  | (206,990) |  | (43,504) |  | (250,494) |  |         
|Forfeited                                |  | (5,105)   |  | (3,502)  |  | (8,607)   |  |         
|                                         |  |           |  |          |  |           |  |         
|                                        
|Under option at December 31, 2004        |  | 371,845   |  | 64,200   |  | 436,045   |  |         
|Granted                                  |  | 38,800    |  | 4,200    |  | 43,000    |  |         
|Exercised-VFG                            |  | (144,335) |  | (7,950)  |  | (152,285) |  |         
|Exercised-WCB                            |  | (67,343)  |  | (12,413) |  | (79,756)  |  |         
|Non-vested and Forfeited (non-WCB)       |  | (36,770)  |  | -        |  | (36,770)  |  |         
|Vested and forfeited-VFG                 |  | (900)     |  | -        |  | (900)     |  |         
|Vested and forfeited-WCB                 |  | (1,049)   |  | -        |  | (1,049)   |  |         
|WCB options assumed                      |  | 125,467   |  | 69,005   |  | 194,472   |  |         
|                                         |  |           |  |          |  |           |  |         
|                                        
|Under option at December 31, 2005        |  | 285,715   |  | 117,042  |  | 402,757   |  | $       
|                                         |  |           |  |          |  |           |  |         
|                                        
|Options exercisable at December 31, 2005 |  | 183,965   |  | 82,392   |  | 266,357   |  | $       
|                                         |  |           |  |          |  |           |  |         

67

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 15 - Stock Option Plans (continued)
|----------------------------------------

Options becoming exercisable under both stock option plans in future years ending December 31 are as follows:

2006- 42,550;2007- 38,800;2008-
27,100;2009- 19,450; and2010- 8,500.

Options outstanding at December 31, 2005 were granted under the 1994 director and 1999 employee stock option plans. These plans were superseded in 2004 with the 2004 Stock Incentive Plan and accordingly no further options
will be granted under the 1994 and 1999 plans. Options for 252,500 shares remain available under the 2004 plan at December 31, 2005.

Each outstanding option issued pursuant to the Washington Commercial Bancorp Stock Option and Stock Grant Plan, 1999 Washington Commercial Bancorp Employee Stock Option Plan, 1999 Washington Commercial Bancorp Director
Stock Option Plan and 2002 Washington Commercial Bancorp Director Stock Option Plan is no longer exercisable for shares of WCBcommon stock, but instead, constitutes an option to acquire, on
the same terms and conditions as were applicable under such option immediately prior to consummation of the merger, that number of shares of Venture common stock equal to the product of the number of shares of WCB common stock for which such option
was exercisable plus 2.0465. The exercise price for each option shall be equal to the exercise price per share for such option immediately prior to the effective time of the merger divided by 2.0465.

The following summarizes information about stock options outstanding at December 31, 2005:

|                  |  | Options Outstanding |  |              |  | Options Exercisable
|----------------- |  | ------------------- |  | ------------ |  | -------------------
|                  |  |                    
|                  |  |                     |  | Weighted     |  |                    
|                  |  |                     |  | Average      |  | Weighted           
|Range of Exercise |  |                     |  | Remaining    |  | Average            
|Prices            |  | Number              |  | Contractual  |  | Exercise           
|                  |  | Outstanding         |  | Life (Years) |  | Price              
|                  |  |                    
|                 
|Under $7.00       |  | 92,244              |  | 4.36         |  | $ 6.58             
|$7.46 to $9.31    |  | 109,453             |  | 3.45         |  | 8.10               
|$10.00            |  | 39,000              |  | 3.15         |  | 10.00              
|$13.19 to $13.67  |  | 67,360              |  | 6.94         |  | 13.43              
|$15.33            |  | 52,200              |  | 8.30         |  | 15.33              
|$19.25            |  | 42,500              |  | 9.31         |  | 19.25              
|                  |  |                     |  |              |  |                    
|                 
|                  |  | 402,757             |  |              |  |                    
|                  |  |                     |  |              |  |                    

|Restricted stock
|----------------

Restricted stock was granted to an employee for the first time in 2005. 5,000 shares were granted at a fair market value of $20.85 per share. These shares vest over a four year period at the rate of 25% per year. Unlike
stock options, the employee is taxed on the fair market value of the restricted stock at the time the stock vests. The restricted stock is outstanding and has voting rights from the date it is granted. However, it may not be traded by the grantee
until it is vested.

68

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 16 - Condensed Financial Information - Parent Company Only |  |          |  |   |  |          |  |  
|--------------------------------------------------------------- |  | -------- |  | - |  | -------- |  | -
|                                                               
|Condensed Balance Sheets - December 31                          |  |          |  |   |  |          |  |  
|                                                                |  |          |  |   |  | 2005     |  |  
|                                                                |  |          |  |   |  |         
|Assets                                                          |  |          |  |   |  |          |  |  
|Cash                                                            |  |          |  | $ |  | 1,446    |  | $
|Investment in the Bank                                          |  |          |  |   |  | 96,140   |  |  
|Other assets                                                    |  |          |  |   |  | 1,879    |  |  
|                                                                |  |          |  |   |  |         
|                                                               
|Total assets                                                    |  |          |  | $ |  | 99,465   |  | $
|                                                                |  |          |  |   |  |         
|                                                               
|Liabilities and Stockholders' Equity                            |  |          |  |   |  |          |  |  
|                                                               
|Liabilities                                                     |  |          |  |   |  |          |  |  
|Junior subordinated debentures                                  |  |          |  | $ |  | 22,682   |  | $
|Other liabilities                                               |  |          |  |   |  | 629      |  |  
|                                                                |  |          |  |   |  |         
|                                                               
|Total liabilities                                               |  |          |  |   |  | 23,311   |  |  
|                                                               
|Shareholders' Equity                                            |  |          |  |   |  | 76,154   |  |  
|                                                                |  |          |  |   |  |         
|                                                               
|Total liabilities and shareholders' equity                      |  |          |  | $ |  | 99,465   |  | $
|                                                                |  |          |  |   |  |         
|                                                               
|Condensed Statement of Income -                                 |  |          |  |   |  |          |  |  
|Years Ended December 31                                         |  |          |  |   |  |          |  |  
|                                                                |  | 2005     |  |   |  | 2004     |  |  
|                                                                |  |          |  |   |  |         
|Operating Income                                                |  |          |  |   |  |          |  |  
|Dividends from the Bank                                         |  | $ 15,500 |  | $ |  | -        |  | $
|Interest                                                        |  | 42       |  |   |  | 31       |  |  
|                                                                |  |          |  |   |  |         
|                                                               
|Total operating income                                          |  | 15,542   |  |   |  | 31       |  |  
|                                                               
|Operating Expenses                                              |  |          |  |   |  |          |  |  
|Interest                                                        |  | 1,556    |  |   |  | 1,024    |  |  
|Other                                                           |  | 133      |  |   |  | 216      |  |  
|                                                                |  |          |  |   |  |         
|                                                               
|Total operating expenses                                        |  | 1,689    |  |   |  | 1,240    |  |  
|                                                                |  |          |  |   |  |         
|                                                               
|Income (loss) before income taxes and                           |  |          |  |   |  |          |  |  
|equity in undistributed income of the Bank                      |  | 13,853   |  |   |  | (1,209)  |  |  
|                                                               
|Income Tax Benefit                                              |  | (545)    |  |   |  | (363)    |  |  
|                                                                |  |          |  |   |  |         
|                                                               
|Income (loss) before equity in undistributed                    |  |          |  |   |  |          |  |  
|income of the Bank                                              |  | 14,398   |  |   |  | (846)    |  |  
|                                                               
|Equity in Undistributed Income of the Bank                      |  | (5,370)  |  |   |  | 12,623   |  |  
|                                                               
|Net income                                                      |  | $  9,028 |  |   |  | $ 11,777 |  |  
|                                                                |  |          |  |   |  |         

69

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 16 - Condensed Financial Information - Parent Company Only (continued)

|Condensed Statement of Cash                       |  |   |  |          |  |   |  |          |  |   |  |        
|------------------------------------------------- |  | - |  | -------- |  | - |  | -------- |  | - |  | -------
|Flows - Years Ended December 31                   |  |   |  |          |  |   |  |          |  |   |  |        
|                                                  |  |   |  | 2005     |  |   |  | 2004     |  |   |  | 2003   
|                                                  |  |   |  |          |  |  
|Cash Flows from Operating Activities              |  |   |  |          |  |   |  |          |  |   |  |        
|Net income                                        |  | $ |  | 9,028    |  | $ |  | 11,777   |  | $ |  | 9,056  
|Adjustments to reconcile net income to net        |  |   |  |          |  |   |  |          |  |   |  |        
|cash from operating activities                    |  |   |  |          |  |   |  |          |  |   |  |        
|Equity in undistributed income (loss) of the Bank |  |   |  | 5,370    |  |   |  | (12,623) |  |   |  | (9,660)
|Other - net                                       |  |   |  | (37)     |  |   |  | 883      |  |   |  | (143)  
|                                                  |  |   |  |          |  |  
|                                                 
|Net cash from operating activities                |  |   |  | 14,361   |  |   |  | 37       |  |   |  | (747)  
|                                                  |  |   |  |          |  |  
|                                                 
|Cash Flows from Investing Activities              |  |   |  |          |  |   |  |          |  |   |  |        
|Cash investment in (return from) the Bank         |  |   |  | (15,500) |  |   |  | (893)    |  |   |  | 691    
|                                                  |  |   |  |          |  |  
|                                                 
|Cash Flows from Financing Activities              |  |   |  |          |  |   |  |          |  |   |  |        
|Proceeds from exercise of stock options           |  |   |  | 1,746    |  |   |  | 1,464    |  |   |  | 1,608  
|Advance to KSOP                                   |  |   |  | (493)    |  | - |  |          |  | - |  |        
|Repurchase of common stock                        |  |   |  | (2,455)  |  |   |  | (3,007)  |  |   |  | (4,828)
|Proceeds from long-term debt                      |  |   |  | 3,093    |  |   |  | -        |  |   |  | 6,186  
|Payments on long-term debt                        |  |   |  | -        |  |   |  | -        |  |   |  | (1,000)
|Payment of dividends                              |  |   |  | (1,855)  |  |   |  | (1,325)  |  |   |  | (1,048)
|                                                  |  |   |  |          |  |  
|                                                 
|Net cash from financing activities                |  |   |  | 36       |  |   |  | (2,868)  |  |   |  | 918    
|                                                  |  |   |  |          |  |  
|                                                 
|Net increase (decrease) in cash                   |  |   |  | (1,103)  |  |   |  | (3,724)  |  |   |  | 862    
|                                                 
|Cash, beginning of year                           |  |   |  | 2,549    |  |   |  | 6,273    |  |   |  | 5,411  
|                                                  |  |   |  |          |  |  
|                                                 
|Cash, end of year                                 |  | $ |  | 1,446    |  | $ |  | 2,549    |  | $ |  | 6,273  
|                                                  |  |   |  |          |  |  

|Note 17 - Regulatory Matters
|----------------------------

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines on the regulatory framework for prompt corrective action,
the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's
capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

70

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 17 - Regulatory Matters (continued)
|----------------------------------------

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier I capital (as defined in the
regulations) to total average assets (as defined), and minimum ratios of Tier I and total capital (as defined) to risk-weighted assets (as defined).

As of December 31, 2005, the most recent notification from the Bank's regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.

|The actual capital amounts and ratios are as follows: |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  |                 
|----------------------------------------------------- |  | -------- |  | ----------------- |  | ------ |  | ----------------- |  | ----- |  | ---------- |  | - |  | ----------------
|                                                     
|                                                      |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  | To Be           
|                                                      |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  | Well Capitalized
|                                                      |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  | Under Prompt    
|                                                      |  |          |  |                   |  |        |  | For Capital       |  |       |  | Corrective
|                                                      |  | Actual   |  | Adequacy Purposes |  |        |  | Action Provisions
|                                                      |  |          |  |                   |  |       
|                                                      |  | Amount   |  | Ratio             |  | Amount |  |                   |  | Ratio |  | Amount     |  |   |  | Ratio           
|                                                      |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  |                 
|As of December 31, 2005:                              |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  |                 
|Tier I capital (to average assets):                   |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  |                 
|Consolidated                                          |  | $ 72,251 |  | 12.01%            |  | $      |  | 24,098            |  | >     |  | 4.00%      |  |   |  | N/A             
|Venture Bank                                          |  | 70,205   |  | 11.65%            |  |        |  | 24,098            |  | >     |  | 4.00%      |  | $ |  | 30,123          
|                                                     
|Tier I capital (to risk-weighted assets):             |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  |                 
|Consolidated                                          |  | 72,251   |  | 9.37%             |  |        |  | 30,845            |  | >     |  | 4.00%      |  |   |  | N/A             
|Venture Bank                                          |  | 70,205   |  | 9.12%             |  |        |  | 30,797            |  | >     |  | 4.00%      |  |   |  | 46,195          
|                                                     
|Total capital (to risk-weighted assets):              |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  |                 
|Consolidated                                          |  | 80,685   |  | 10.46%            |  |        |  | 61,690            |  | >     |  | 8.00%      |  |   |  | N/A             
|Venture Bank                                          |  | 78,639   |  | 10.21%            |  |        |  | 61,593            |  | >     |  | 8.00%      |  |   |  | 76,911          
|                                                     
|                                                     
|As of December 31, 2004:                              |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  |                 
|Tier I capital (to average assets):                   |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  |                 
|Consolidated                                          |  | $ 67,110 |  | 12.94%            |  | $      |  | 20,745            |  | >     |  | 4.00%      |  |   |  | N/A             
|Venture Bank                                          |  | 64,327   |  | 11.90%            |  |        |  | 21,626            |  | >     |  | 4.00%      |  | $ |  | 27,032          
|                                                     
|Tier I capital (to risk-weighted assets):             |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  |                 
|Consolidated                                          |  | 67,110   |  | 12.24%            |  |        |  | 21,931            |  | >     |  | 4.00%      |  |   |  | N/A             
|Venture Bank                                          |  | 64,327   |  | 11.76%            |  |        |  | 21,884            |  | >     |  | 4.00%      |  |   |  | 32,827          
|                                                     
|Total capital (to risk-weighted assets):              |  |          |  |                   |  |        |  |                   |  |       |  |            |  |   |  |                 
|Consolidated                                          |  | 73,966   |  | 13.49%            |  |        |  | 43,863            |  | >     |  | 8.00%      |  |   |  | N/A             
|Venture Bank                                          |  | 71,170   |  | 13.01%            |  |        |  | 43,769            |  | >     |  | 8.00%      |  |   |  | 54,711          

Restrictions on retained earnings- The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2005,
the Bank could pay dividends to its parent of up to $1.7 million and still be well capitalized under prompt corrective action provisions.

71

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 17 - Regulatory Matters (continued)

Purchases of equity securities by Venture Financial Group, Inc.

On February 19, 2003 the Board approved a stock repurchase program to allow for the repurchase of 131,370 shares of VFG Common Stock in purchases over time in privately negotiated transactions. On September 18, 2003 this
plan was amended and an additional 56,130 shares were added to the plan. On October 15, 2003 this plan was amended again and an additional 225,000 shares were added to this plan bringing the total to 412,500 shares.  Under this plan 266,097 shares
were repurchased in 2003 and 146,403 were repurchased in 2004 for a total of $2.2 million. All shares have been adjusted for the three-for-two stock split announced May 6, 2004 and effective May 16, 2004.

On June 16, 2004 the Board approved a stock repurchase program to allow for the repurchase of 200,000 shares of VFG Common Stock in purchases over time in privately negotiated transactions. Under this plan VFG purchased
167,640 shares for a total of $3.1 million.

On November 15, 2005, the Board approved a stock repurchase program to allow for the repurchase of 200,000 shares of VFG Common Stock in purchases over time in either privately negotiated transactions or through the open
market. Under this plan, no shares have been repurchased.

72

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|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 18 - Fair Values of Financial Instruments
|----------------------------------------------

The estimated fair values of the Company's financial instruments at December 31 were as follows:

|                                     |  |          |         |         |   | 2005     |  |         |  |         |  |         |         | 2004 |         |        
|------------------------------------ |  | -------- | ------- | ------- | - | -------- |  | ------- |  | ------- |  | ------- | ------- | ---- | ------- | -------
|                                     |  |          |         |        
|                                     |  | Recorded |         | Fair    |   | Recorded |  | Fair   
|                                     |  | Amount   |         | Value   |   | Amount   |  | Value  
|                                     |  |          |         |         |   |          |  |        
|Financial Assets                     |  |          |         |         |   |          |  |         |  |         |  |         |         |      |         |        
|Cash and due from banks, interest-   |  |          |         |         |   |          |  |         |  |         |  |         |         |      |         |        
|bearing deposits in other banks, and |  |          |         |         |   |          |  |         |  |         |  |         |         |      |         |        
|federal funds sold                   |  | $        |         | 18,099  |   | $        |  | 18,099  |  | $       |  | 13,861  |         | $    |         | 13,861 
|FHLB stock                           |  | $        |         | 4,490   |   | $        |  | 4,490   |  | $       |  | 3,930   |         | $    |         | 3,930  
|Securities available-for-sale        |  | $        |         | 60,911  |   | $        |  | 60,911  |  | $       |  | 73,291  |         | $    |         | 73,291 
|Loans held-for-sale                  |  | $        |         | 5,699   |   | $        |  | 5,699   |  | $       |  | 3,118   |         | $    |         | 3,118  
|Loans receivable, net                |  | $        |         | 588,202 |   | $        |  | 586,602 |  | $       |  | 422,334 |         | $    |         | 419,982
|Accrued interest receivable          |  | $        |         | 3,117   |   | $        |  | 3,117   |  | $       |  | 2,084   |         | $    |         | 2,084  
|                                    
|Financial Liabilities                |  |          |         |         |   |          |  |         |  |         |  |         |         |      |         |        
|Deposits                             |  | $        | 514,028 |         | $ | 513,556  |  | $       |  | 326,721 |  | $       | 327,078
|Federal funds purchased              |  | $        |         | -       |   | $        |  | -       |  | $       |  | 5,575   |         | $    |         | 5,575  
|Short-term borrowings                |  | $        |         | 87,798  |   | $        |  | 87,798  |  | $       |  | 123,128 |         | $    | 123,128
|Long-term debt                       |  | $        |         | 44,000  |   | $        |  | 41,300  |  | $       |  | 15,000  |         | $    |         | 14,824 
|Junior subordinated debentures       |  | $        |         | 22,682  |   | $        |  | 22,682  |  | $       |  | 19,589  |         | $    |         | 19,589 
|Accrued interest payable             |  | $        |         | 1,288   |   | $        |  | 1,288   |  | $       |  | 620     |         | $    |         | 620    

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company's financial instruments will change when
interest rate levels change and that change may either be favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities, and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by
investing in securities with terms that mitigate the Company's overall interest rate risk.

73

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 19 - Other Operating Income and Expenses

Other operating income and expenses include the following amounts which are in excess of 1% of the total of interest income and non-interest income for the years ended December 31:

|                                         |  | 2005 |  | 2004 |  | 2003
|---------------------------------------- |  | ---- |  | ---- |  | ----
|                                         |  |      |  |      |  |     
|Other operating income                   |  |      |  |      |  |     
|Commission on sale of non-deposit        |  |      |  |      |  |     
|investment products                      |  | $    |  | 507  |  | $   
|Earnings on bank-owned life insurance    |  | $    |  | 530  |  | $   
|Gain on sale of foreclosed real estate   |  | $    |  | -    |  | $   
|Small loan miscellaneous income          |  | $    |  | -    |  | $   
|                                        
|Other operating (income) expense         |  |      |  |      |  |     
|State taxes                              |  | $    |  | 708  |  | $   
|Advertising and marketing                |  | $    |  | 913  |  | $   
|Expenses of salary continuation plan and |  |      |  |      |  |     
|executive supplemental income plan       |  | $    |  | 846  |  | $   
|Consulting fees                          |  | $    |  | -    |  | $   

|Note 20 - Earnings Per Share Disclosures
|----------------------------------------

In May 2004, the Company's Board of Directors approved a 3 for 2 stock split to shareholders of record on May 16, 2004. The earnings per share, the shares used for purposes of recalculating earnings per share, and the
option amounts and prices for the years ended December 31, 2004 and 2003, have been retroactively adjusted for the split.

74

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 20 - Earnings Per Share Disclosures (continued)

Following is information regarding the calculation of basic and diluted earnings per share for the years indicated:

|                              |  | Net Income  |  | Shares        |  |           |  | Per Share
|----------------------------- |  | ----------- |  | ------------- |  | --------- |  | ---------
|                              |  | (Numerator) |  | (Denominator) |  |           |  | Amount   
|                              |  |             |  |               |  |          
|Year ended December 31, 2005  |  |             |  |               |  |           |  |          
|Basic earnings per share      |  |             |  |               |  |           |  |          
|Net income                    |  | $           |  | 9,028         |  | 6,768,229 |  | $        
|Effect of dilutive securities |  |             |  |               |  |           |  |          
|Options                       |  |             |  |               |  | 162,304   |  |          
|                              |  |             |  |               |  |          
|                             
|Diluted earnings per share    |  |             |  |               |  |           |  |          
|Net income                    |  | $           |  | 9,028         |  | 6,930,533 |  | $        
|                              |  |             |  |               |  |          
|                             
|Year ended December 31, 2004  |  |             |  |               |  |           |  |          
|Basic earnings per share      |  |             |  |               |  |           |  |          
|Net income                    |  | $           |  | 11,777        |  | 6,487,613 |  | $        
|Effect of dilutive securities |  |             |  |               |  |           |  |          
|Options                       |  |             |  |               |  | 164,526   |  |          
|                              |  |             |  |               |  |          
|                             
|Diluted earnings per share    |  |             |  |               |  |           |  |          
|Net income                    |  | $           |  | 11,777        |  | 6,652,139 |  | $        
|                              |  |             |  |               |  |          
|                             
|Year ended December 31, 2003  |  |             |  |               |  |           |  |          
|Basic earnings per share      |  |             |  |               |  |           |  |          
|Net income                    |  | $           |  | 9,056         |  | 6,560,403 |  | $        
|Effect of dilutive securities |  |             |  |               |  |           |  |          
|Options                       |  |             |  |               |  | 294,939   |  |          
|                              |  |             |  |               |  |          
|                             
|Diluted earnings per share    |  |             |  |               |  |           |  |          
|Net income                    |  | $           |  | 9,056         |  | 6,855,342 |  | $        
|                              |  |             |  |               |  |          

The number of shares shown for "options" is the number of incremental shares that would result from exercise of options and use of the proceeds to repurchase shares at the average market price during the year.

75

---

|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 21 - Business Segment Information
|--------------------------------------

The Company is managed along two major lines of business: community banking, its core business, and the small loan division, which was entered into late in the fourth quarter of 2000. Community banking consists of all
lending, deposit and administrative operations conducted through its 17 offices in Washington State. The small loan division provided small, short-term consumer loans to customers in Arkansas. Effective July 1, 2005 the Bank terminated its
relationship with Advance America and no longer offered small short-term consumer loans.

Prior to 2001, the Company was managed as a whole, not by discrete operating segments. When the Company began offering small loans, its operating results were segregated in the general ledger system to better manage
financial performance. The financial performance of the business lines is measured by the Company's profitability reporting process, which utilizes various management accounting techniques to more accurately reflect each business line's financial
results. Revenues and expenses are primarily assigned directly to business lines.

The organizational structure of the Company and its business line financial results are not necessarily comparable across companies. As such, the Company's business line performance may not be directly comparable with
similar information from other financial institutions.

Financial highlights by line of business as of, and for the years ended December 31, were as follows:

|                                                      |  | Community |  |         |  | Small |  |       |  |        
|----------------------------------------------------- |  | --------- |  | ------- |  | ----- |  | ----- |  | -------
|                                                      |  | Banking   |  |         |  | Loans |  |       |  | Total  
|                                                      |  |           |  |         |  |      
|December 31, 2005                                     |  |           |  |         |  |       |  |       |  |        
|Net interest income after provision for credit losses |  | $         |  | 26,951  |  | $     |  | 743   |  | $      
|Non-interest income                                   |  |           |  | 8,201   |  |       |  | 9     |  |        
|Non-interest expense                                  |  |           |  | 22,728  |  |       |  | 72    |  |        
|Income taxes                                          |  |           |  | 3,879   |  |       |  | 197   |  |        
|                                                      |  |           |  |         |  |      
|                                                     
|Net income                                            |  | $         |  | 8,545   |  | $     |  | 483   |  | $      
|                                                      |  |           |  |         |  |      
|                                                     
|Total assets                                          |  | $ 752,793 |  | $       |  | -     |  | $     |  | 752,793
|                                                      |  |           |  |         |  |      
|                                                     
|Total loans                                           |  | $ 596,636 |  | $       |  | -     |  | $     |  | 596,636
|                                                      |  |           |  |         |  |      
|                                                     
|December 31, 2004                                     |  |           |  |         |  |       |  |       |  |        
|Net interest income after provision for credit losses |  | $         |  | 23,167  |  | $     |  | 1,740 |  | $      
|Non-interest income                                   |  |           |  | 13,582  |  |       |  | (13)  |  |        
|Non-interest expense                                  |  |           |  | 20,973  |  |       |  | 105   |  |        
|Income taxes                                          |  |           |  | 5,126   |  |       |  | 495   |  |        
|                                                      |  |           |  |         |  |      
|                                                     
|Net income                                            |  | $         |  | 10,650  |  | $     |  | 1,127 |  | $      
|                                                      |  |           |  |         |  |      
|                                                     
|Total assets                                          |  | $         |  | 549,797 |  | $     |  | 6,419 |  | $      
|                                                      |  |           |  |         |  |      
|                                                     
|Total loans                                           |  | $         |  | 425,702 |  | $     |  | 3,821 |  | $      
|                                                      |  |           |  |         |  |      

76

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|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

|Note 21 - Business Segment Information (continued)    |  |   |  |         |  |   |  |       |  |   |  |        
|----------------------------------------------------- |  | - |  | ------- |  | - |  | ----- |  | - |  | -------
|                                                     
|                                                     
|December 31, 2003                                     |  |   |  |         |  |   |  |       |  |   |  |        
|Net interest income after provision for credit losses |  | $ |  | 20,058  |  | $ |  | 2,803 |  | $ |  | 22,861 
|Non-interest income                                   |  |   |  | 11,551  |  |   |  | 1,009 |  |   |  | 12,560 
|Non-interest expense                                  |  |   |  | 21,848  |  |   |  | 344   |  |   |  | 22,192 
|Income taxes                                          |  |   |  | 2,994   |  |   |  | 1,179 |  |   |  | 4,173  
|                                                      |  |   |  |         |  |  
|                                                     
|Net income                                            |  | $ |  | 6,767   |  | $ |  | 2,289 |  | $ |  | 9,056  
|                                                      |  |   |  |         |  |  
|                                                     
|Total assets                                          |  | $ |  | 506,844 |  | $ |  | 7,056 |  | $ |  | 513,900
|                                                      |  |   |  |         |  |  
|                                                     
|Total loans                                           |  | $ |  | 364,473 |  | $ |  | 3,158 |  | $ |  | 367,631
|                                                      |  |   |  |         |  |  

|Note 22 - Subsequent Event
|--------------------------

> On January 18, 2006, the Company declared a dividend in the amount of $.07 per share to be paid on February 10, 2006 for shareholders of record as of January 30, 2006.

77

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|VENTURE FINANCIAL GROUP, INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------
|                                                                         

Note 23 - Selected Quarterly Financial Data (Unaudited)

> The following selected financial data are presented for the quarters ended (dollars in thousands, except per share amounts):

|                             |  | December 31 |  | September 30 |  | June 30 |  | March 31
|---------------------------- |  | ----------- |  | ------------ |  | ------- |  | --------
|                             |  |             |  |              |  |         |  |         
|Year ended December 31, 2005 |  |             |  |              |  |         |  |         
|Interest income              |  | $           |  | 12,683       |  | $       |  | 10,419  
|Interest expense             |  |             |  | (4,347)      |  |         |  | (3,439) 
|                             |  |             |  |              |  |         |  |         
|                            
|Net interest income          |  |             |  | 8,336        |  |         |  | 6,980   
|                            
|Provision for credit losses  |  |             |  | (39)         |  |         |  | (161)   
|Noninterest income           |  |             |  | 1,977        |  |         |  | 2,180   
|Noninterest expenses         |  |             |  | (6,248)      |  |         |  | (5,831) 
|                             |  |             |  |              |  |         |  |         
|                            
|Income before provision      |  |             |  | 4,026        |  |         |  | 3,168   
|for income taxes             |  |             |  |              |  |         |  |         
|                            
|Provision for income taxes   |  |             |  | (1,367)      |  |         |  | (868)   
|                             |  |             |  |              |  |         |  |         
|                            
|Net income                   |  | $           |  | 2,659        |  | $       |  | 2,300   
|                             |  |             |  |              |  |         |  |         
|                            
|Earnings per share           |  |             |  |              |  |         |  |         
|Basic                        |  | $           |  | 0.37         |  | $       |  | 0.34    
|Diluted                      |  | $           |  | 0.36         |  | $       |  | 0.33    
|                            
|Year ended December 31, 2004 |  |             |  |              |  |         |  |         
|Interest income              |  | $           |  | 8,545        |  | $       |  | 8,159   
|Interest expense             |  |             |  | (2,025)      |  |         |  | (1,650) 
|                             |  |             |  |              |  |         |  |         
|                            
|Net interest income          |  |             |  | 6,520        |  |         |  | 6,509   
|                            
|Provision for credit losses  |  |             |  | 330          |  |         |  | (282)   
|Noninterest income           |  |             |  | 7,679        |  |         |  | 2,106   
|Noninterest expenses         |  |             |  | (5,687)      |  |         |  | (5,342) 
|                             |  |             |  |              |  |         |  |         
|                            
|Income before provision      |  |             |  | 8,842        |  |         |  | 2,991   
|for income taxes             |  |             |  |              |  |         |  |         
|                            
|Provision for income taxes   |  |             |  | (3,050)      |  |         |  | (804)   
|                             |  |             |  |              |  |         |  |         
|                            
|Net income                   |  | $           |  | 5,792        |  | $       |  | 2,187   
|                             |  |             |  |              |  |         |  |         
|                            
|Earnings per share           |  |             |  |              |  |         |  |         
|Basic                        |  | $           |  | 0.89         |  | $       |  | 0.34    
|Diluted                      |  | $           |  | 0.86         |  | $       |  | 0.33    

78

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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no changes in and disagreements with accountants on accounting and financial disclosures.

|ITEM 9A - CONTROLS 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"), is
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, 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 Chief Financial Officer have concluded that VFG's disclosure controls and procedures are effective in bringing to their
attention, on a timely basis, information required to be disclosed by VFG reports that it files or submits under the Exchange Act. Also, since the date of their evaluation, there have not been any significant changes in VFG's internal controls or in
other factors that could significantly affect those controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Changes in Internal Controls
|----------------------------

In the year ended December 31, 2005, the Company did not make any significant change in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls. The
Company also continued to implement suggestions from its internal auditor and independent auditors on ways to strengthen existing controls.

|ITEM 9B - Other Information
|---------------------------

|None.
|-----

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Incorporated by reference to the sections entitledElection of Directors - Information with Respect to Nominees and Directors Whose Terms Continue, Management, and Section 16(a)
Beneficial Ownership Reporting Compliance,as set forth in the Proxy Statement for the Company's 2006 Annual Meeting of Shareholders.

|ITEM 11 - EXECUTIVE COMPENSATION
|--------------------------------

Incorporated by reference to the sections entitledInformation Regarding the Board of Directors and its Committees -Director Compensation and Executive Compensation, as set forth in the Proxy Statement.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Incorporated by reference to the sections entitledElection of Directors - Information with Respect to Nominees and Directors Whose Terms Continue, and Security Ownership of Certain
Beneficial Owners and Management, as set forth in the Proxy Statement.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to the section entitledCertain Relationships and Related Transactions, as set forth in the Proxy Statement.

ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference to the section entitledIndependent Auditors, as set forth in the Proxy Statement.

79

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PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

|The following documents are filed as part of this report:
|---------------------------------------------------------

|(a)(1)Financial Statements.Index to Consolidated Financial Report
|-----------------------------------------------------------------

Report of Moss Adams LLP, Independent Registered Public Accounting Firm

Consolidated balance sheets as of December 31, 2005 and 2004

|Consolidated statements of income for the years endedDecember 31, 2005, 2004 and 2003
|-------------------------------------------------------------------------------------

Consolidated statements of shareholders' equity and comprehensive income for the years ended December 31, 2005, 2004 and 2003

|Consolidated statements of cash flows for the years endedDecember 31, 2005, 2004 and 2003Notes to Consolidated Financial Statements(2)Financial Statement Schedules.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------

Schedules are omitted for the reason that they are not required or are not applicable, or the required information is shown in the Consolidated Financial Statements or notes thereto.

(3) The exhibits listed on the Exhibit Index following signature page. Management contracts and compensatory plans are listed as Items 10.1 to 10.4.

|(b) |  | Exhibits.                      |  | See Exhibit Index following signature page
|--- |  | ------------------------------ |  | ------------------------------------------
|(c) |  | Financial Statement Schedules: |  | None                                      

80

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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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, on the
15THday of March, 2006.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 15THday of March, 2006.

|Signatures                                        |  | 
|------------------------------------------------- |  | 
|                                                 
|                                                  |  | 
|                                                 
|/s/ Ken F. Parsons, Sr.                           |  | 
|Ken F. Parsons, Sr.                               |  | 
|Chief Executive Officer and Chairman of the Board |  | 
|(principal executive officer)                     |  | 

|                                                                |  | 
|--------------------------------------------------------------- |  | 
|                                                               
|/s/ Sandra L. Sager, CPA                                        |  | 
|Sandra L. Sager, CPA                                            |  | 
|EVP/Chief Financial Officer                                     |  | 
|(principal financial officer; and principal accounting
officer) |  | 



|Remaining Directors:         |  |         
|---------------------------- |  | --------
|                            
|/s/ James F. Arneson         |  | Director
|James F. Arneson             |  |         
|                            
|/s/ Keith W. Brewe           |  | Director
|Keith W. Brewe               |  |         
|                            
|/s/ Lowell E.(Sonny) Bridges |  | Director
|Lowell E. (Sonny) Bridges    |  |         
|                            
|/s/ Linda E. Buckner         |  | Director
|Linda E. Buckner             |  |         
|                            
|/s/ Jewell C. Manspeaker     |  | Director
|Jewell C. Manspeaker         |  |         
|                            
|                             |  | Director
|Patrick L. Martin            |  |         
|                            
|/s/ A. Richard Panowicz      |  | Director
|A. Richard Panowicz          |  |         
|                            
|/s/ Lawrence J. Schorno      |  | Director
|Lawrence J. Schorno          |  |         

81

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EXHIBIT INDEX

Exhibit

|3.1  | (a) Amended and Restated Articles of Incorporation.                                                                 
|---- | --------------------------------------------------------------------------------------------------------------------
|    
|3.2  | (b) Bylaws.                                                                                                         
|    
|10.1 | (c) Employment Contract for Ken F. Parsons, Sr.                                                                     
|    
|10.2 | (d) Employment Contract for James Arneson.                                                                          
|    
|10.3 | (e) Form of Long-Term Care Agreement.                                                                               
|    
|10.4 | (f) Executive Supplemental Income Plan.                                                                             
|    
|10.5 | (g) 1999 Stock Option and Restricted Award Plan and form of agreements.                                             
|    
|10.6 | (h) 1994 Stock Option Plan for Non-employee Directors.                                                              
|    
|10.7 | (i) 2004 Stock Incentive Plan                                                                                       
|    
|10.8 | (j) Amended and Restated First Community Financial Group, Inc. Employee Stock Ownership Plan with 401(k) Provisions.
|    

|10.9  | (k) Employment Contract for Sandra Sager.                                                                                           
|----- | ------------------------------------------------------------------------------------------------------------------------------------
|     
|10.10 | (l) Dupont Real Estate Purchase and Sale Agreement                                                                                  
|     
|10.11 | (l) Lakewood Shopping Center Lease Agreement                                                                                        
|     
|10.12 | (m) Supplemental Executive Retirement Plan                                                                                          
|     
|21.1  | Subsidiaries of the Registrant.                                                                                                     
|     
|23.1  | Consent of Independent Registered Public Accounting Firm (Moss Adams, LLP).                                                         
|     
|31.1  | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                       
|     
|31.2  | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                       
|     
|32    | Certification of Chief Executive Officer and Principal Accounting Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|     
|      |                                                                                                                                     
|     
|      | (a)                                                                                                                                 
|     
|      | (b)                                                                                                                                 
|     
|      | (c)                                                                                                                                 
|     
|      | (d)                                                                                                                                 
|     
|      | (e)                                                                                                                                 
|     
|      | (f)                                                                                                                                 
|     
|      | (g)                                                                                                                                 
|     
|      | (h)                                                                                                                                 
|     
|      | (i)                                                                                                                                 
|     
|      | (j)                                                                                                                                 
|     
|      | (k)                                                                                                                                 
|     
|      | (l)                                                                                                                                 
|     
|      | (m)                                                                                                                                 
|     

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83

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