##### Table of Contents



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



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FORM 10-Q

(Mark One)



|(X) | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Quarter ended September 30, 2002
|--- | ----------------------------------------------------------------------------------------------------------------------------------



|(   ) | Transition report pursuant to Section 13 or 15(d)) of the Securities Exchange Act of 1934
 
For Transition Period from                     to      Commission File Number 000-30447
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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VALLEY COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


|                                                                          |  |                                               
|------------------------------------------------------------------------- |  | ----------------------------------------------
|Washington
(State or other jurisdiction
of incorporation or organization) |  | 91-1913479
(I.R.S. EmployerIdentification No.)

|                                                                              |  |                 
|----------------------------------------------------------------------------- |  | ----------------
|1307 East Main, Puyallup, Washington
(Address of principal executive offices) |  | 98372
(Zip Code)

(253) 848-2316
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes   [X]      No   [   ]

The number of shares of the issuers Common Stock, $1.00 par value,
outstanding at November 1, 2002 was 1,126,866.





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TABLE OF CONTENTS



|                                         |                                                                                               |                                                      |  |  |  |  |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                                         | Item 1. FINANCIAL STATEMENTS                                                                 
|                                         |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEET                
|                                         |                                                                                               | CONDENSED CONSOLIDATED STATEMENT OF INCOME          
|                                         |                                                                                               | CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS      
|                                         |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                         | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                         | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                         | Item 4. CONTROLS AND PROCEDURES                                                              
|PART II   OTHER INFORMATION            
|                                         | Item 1. LEGAL PROCEEDINGS                                                                    
|                                         | Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                                         | Item 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                                         | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                         | Item 5. OTHER INFORMATION                                                                    
|                                         | Item 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                              
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER
|CERTIFICATION OF CHIEF FINANCIAL OFFICER
|EXHIBIT 99.1                            
|EXHIBIT 99.2                            



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##### Table of Contents



VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q

|                           |  |                                                                                      |    |                                                                                                      |    |      |    | 
|-------------------------- |  | ------------------------------------------------------------------------------------ | -- | ---------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                           |  |                                                                                      |    |                                                                                                      |    | Page
|                           |  |                                                                                      |    |                                                                                                      |    |     
|PART I                     |  | FINANCIAL INFORMATION                                                                |    |                                                                                                      |    |     
|                          
|Item 1.                    |  | Financial Statements                                                                 |    |                                                                                                      |    |     
|                          
|                           |  |                                                                                      |    | Condensed Consolidated Balance Sheet  September 30, 2002 and December 31, 2001                      |    |      | 1  | 
|                          
|                           |  |                                                                                      |    | Condensed Consolidated Statement of Income  Three and Nine Months
Ended September 30, 2002 and 2001 |    |      | 2  | 
|                          
|                           |  |                                                                                      |    | Condensed Consolidated Statement of Cash Flows  Nine Months
Ended September 30, 2002 and 2001       |    |      | 3  | 
|                          
|                           |  |                                                                                      |    | Notes to Condensed Consolidated Financial Statements                                                 |    |      | 4  | 
|                          
|Item 2.                    |  | Managements Discussion and Analysis of Financial Condition
And Results of Operation |    |                                                                                                      | 8  |     
|                          
|Item 3.                    |  | Quantitative and Qualitative Disclosures about Market Risk                           |    |                                                                                                      | 20 |     
|                          
|Item 4.                    |  | Controls and Procedures                                                              |    |                                                                                                      | 21 |     
|                          
|FORWARD-LOOKING STATEMENTS |  |                                                                                      | 21 |                                                                                                     
|                          
|PART II                    |  | OTHER INFORMATION                                                                    |    |                                                                                                      | 22 |     
|                          
|                           |  |                                                                                      |    | Signatures                                                                                           |    |      | 23 | 
|                          
|                           |  |                                                                                      |    | Certifications                                                                                       |    |      | 24 | 

i



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##### Table of Contents






Item 1. FINANCIAL STATEMENTS




VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(dollars in thousands)

|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |         |         |         | 
|-------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ------------------------------------------ | ------- | ------------- | ------- | ------------ | ------- | ------- | ------- | 
|                     |                                                                                                                                                                                    |                     |                                            |         | September 30, |         | December 31,
|                     |                                                                                                                                                                                    |                     |                                            |         | 2002          |         | 2001        
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |             
|ASSETS               |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|                     | Cash and due from banks                                                                                                                                                            |                     | $                                          | 6,981   |               |         | $            | 4,584   |        
|                     | Interest-bearing deposits with banks                                                                                                                                               |                     |                                            | 11,231  |               |         |              | 14,083  |        
|                     | Federal funds sold                                                                                                                                                                 |                     |                                            | 1,247   |               |         |              |         |        
|                     | Securities available-for-sale                                                                                                                                                      |                     |                                            | 33,213  |               |         |              | 31,350  |        
|                     | Federal Home Loan Bank stock                                                                                                                                                       |                     |                                            | 398     |               |         |              | 478     |        
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|                     |                                                                                                                                                                                    |                     | 53,070                                     |         |               |         | 50,495       |        
|                     | Loans                                                                                                                                                                              |                     |                                            | 111,655 |               |         |              | 100,755 |        
|                     | Less allowance for loan losses                                                                                                                                                     |                     |                                            | 1,320   |               |         |              | 1,156   |        
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|                     |                                                                                                                                                                                    |                     | Loans, net                                 |         |               | 110,335 |              |         |         | 99,599  | 
|                     | Accrued interest receivable                                                                                                                                                        |                     |                                            | 795     |               |         |              | 777     |        
|                     | Premises and equipment, net                                                                                                                                                        |                     |                                            | 6,065   |               |         |              | 5,831   |        
|                     | Real estate held for investment                                                                                                                                                    |                     |                                            | 224     |               |         |              | 224     |        
|                     | Other assets                                                                                                                                                                       |                     |                                            | 491     |               |         |              | 248     |        
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|                     |                                                                                                                                                                                    |                     | Total assets                               |         | $             | 170,980 |              |         | $       | 157,174 | 
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|LIABILITIES          |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|                     | Deposits                                                                                                                                                                           |                     |                                            |         |               |         |              |         |        
|                     |                                                                                                                                                                                    | Noninterest-bearing |                                            | $       | 29,391        |         |              | $       | 24,770  |        
|                     |                                                                                                                                                                                    | Interest-bearing    |                                            |         | 116,878       |         |              |         | 109,930 |        
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|                     |                                                                                                                                                                                    |                     | Total deposits                             |         |               | 146,269 |              |         |         | 134,700 | 
|                     | Other borrowed funds                                                                                                                                                               |                     |                                            | 616     |               |         |              | 334     |        
|                     | Accrued interest payable                                                                                                                                                           |                     |                                            | 276     |               |         |              | 390     |        
|                     | Other liabilities                                                                                                                                                                  |                     |                                            | 1,462   |               |         |              | 589     |        
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|                     |                                                                                                                                                                                    |                     | Total liabilities                          |         |               | 148,623 |              |         |         | 136,013 | 
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|STOCKHOLDERS EQUITY |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|                     | Common stock, par value $1 per share; 5,000,000 shares authorized; 1,126,866 and 1,126,750
shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively |                     |                                            | 1,127   |               |         |              | 1,127   |        
|                     | Additional paid-in capital                                                                                                                                                         |                     |                                            | 15,955  |               |         |              | 15,953  |        
|                     | Retained earnings                                                                                                                                                                  |                     |                                            | 4,662   |               |         |              | 3,776   |        
|                     | Accumulated other comprehensive income, net of tax                                                                                                                                 |                     |                                            | 613     |               |         |              | 305     |        
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|                     |                                                                                                                                                                                    |                     | Total stockholders equity                 |         |               | 22,357  |              |         |         | 21,161  | 
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        
|                     |                                                                                                                                                                                    |                     | Total liabilities and stockholders equity |         | $             | 170,980 |              |         | $       | 157,174 | 
|                     |                                                                                                                                                                                    |                     |                                            |         |               |         |              |        

The accompanying notes are an integral part of these financial statements

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##### Table of Contents






VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
(dollars in thousands, except for per share amounts)

|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |           |       | 
|------------------------- | --------------------------------------------------------- | --------------------------------------------------- | --- | ------------------ | ----- | ----------------- | --- | --------- | ----- | ---- | ----- | --------- | ----- | - | ----- | --------- | ----- | 
|                          |                                                           |                                                     |     | Three Months Ended |       | Nine Months Ended
|                          |                                                           |                                                     |     | September 30,      |       | September 30,    
|                          |                                                           |                                                     |     |                    |       |                  
|                          |                                                           |                                                     |     | 2002               |       | 2001              |     | 2002      |       | 2001
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |     
|INTEREST INCOME           |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          | Interest and fees on loans                                |                                                     | $   | 2,081              |       |                   | $   | 2,042     |       |      | $     | 6,027     |       |   | $     | 6,116     |      
|                          | Interest on federal funds sold and deposits in banks      |                                                     |     | 87                 |       |                   |     | 192       |       |      |       | 255       |       |   |       | 619       |      
|                          | Interest on securities                                    |                                                     |     | 365                |       |                   |     | 438       |       |      |       | 1,131     |       |   |       | 1,242     |      
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Total interest income                               |     |                    | 2,533 |                   |     |           | 2,672 |      |       |           | 7,413 |   |       |           | 7,977 | 
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|INTEREST EXPENSE          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          | Interest on deposits                                      |                                                     |     | 467                |       |                   |     | 854       |       |      |       | 1,443     |       |   |       | 2,768     |      
|                          | Interest on federal funds and other short-term borrowings |                                                     |     | 2                  |       |                   |     | 3         |       |      |       | 5         |       |   |       | 12        |      
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Total interest expense                              |     |                    | 469   |                   |     |           | 857   |      |       |           | 1,448 |   |       |           | 2,780 | 
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Net interest income                                 |     |                    | 2,064 |                   |     |           | 1,815 |      |       |           | 5,965 |   |       |           | 5,197 | 
|PROVISION FOR LOAN LOSSES |                                                           |                                                     | 76  |                    |       |                   |     |           |       |      | 167   |           |       |   | 62    |          
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Net interest income after provision
for loan losses |     |                    | 1,988 |                   |     |           | 1,815 |      |       |           | 5,798 |   |       |           | 5,135 | 
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|NONINTEREST INCOME        |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          | Service charges                                           |                                                     |     | 121                |       |                   |     | 96        |       |      |       | 344       |       |   |       | 284       |      
|                          | Gain on sale of investment securities, net                |                                                     |     | 1                  |       |                   |     | 44        |       |      |       | 54        |       |   |       | 54        |      
|                          | Origination fees on mortgage loans brokered               |                                                     |     | 40                 |       |                   |     | 20        |       |      |       | 79        |       |   |       | 85        |      
|                          | Other operating income                                    |                                                     |     | 40                 |       |                   |     | 92        |       |      |       | 184       |       |   |       | 241       |      
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Total noninterest income                            |     |                    | 202   |                   |     |           | 252   |      |       |           | 661   |   |       |           | 664   | 
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|NONINTEREST EXPENSE       |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          | Salaries                                                  |                                                     |     | 630                |       |                   |     | 541       |       |      |       | 1,750     |       |   |       | 1,590     |      
|                          | Employee benefits                                         |                                                     |     | 149                |       |                   |     | 129       |       |      |       | 446       |       |   |       | 411       |      
|                          | Occupancy                                                 |                                                     |     | 128                |       |                   |     | 144       |       |      |       | 383       |       |   |       | 425       |      
|                          | Equipment                                                 |                                                     |     | 102                |       |                   |     | 126       |       |      |       | 340       |       |   |       | 385       |      
|                          | Other operating expenses                                  |                                                     |     | 421                |       |                   |     | 381       |       |      |       | 1,231     |       |   |       | 1,198     |      
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Total noninterest expense                           |     |                    | 1,430 |                   |     |           | 1,321 |      |       |           | 4,150 |   |       |           | 4,009 | 
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|INCOME BEFORE INCOME TAX  |                                                           |                                                     | 760 |                    |       |                   | 746 |           |       |      | 2,309 |           |       |   | 1,790 |          
|PROVISION FOR INCOME TAX  |                                                           |                                                     | 257 |                    |       |                   | 220 |           |       |      | 747   |           |       |   | 521   |          
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|NET INCOME                |                                                           | $                                                   | 503 |                    |       | $                 | 526 |           |       | $    | 1,562 |           |       | $ | 1,269 |          
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|EARNINGS PER SHARE        |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          | Basic                                                     |                                                     | $   | 0.45               |       |                   | $   | 0.46      |       |      | $     | 1.39      |       |   | $     | 1.12      |      
|                          | Diluted                                                   |                                                     | $   | 0.44               |       |                   | $   | 0.46      |       |      | $     | 1.37      |       |   | $     | 1.10      |      
|                          | Weighted average shares outstanding                       |                                                     |     | 1,126,777          |       |                   |     | 1,133,588 |       |      |       | 1,126,759 |       |   |       | 1,133,588 |      
|                          | Weighted average diluted shares outstanding               |                                                     |     | 1,137,073          |       |                   |     | 1,151,067 |       |      |       | 1,137,337 |       |   |       | 1,151,971 |      

The accompanying notes are an integral part of these financial statements

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##### Table of Contents






VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(dollars in thousands, except for per share amounts)

|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |         |       |         |  
|------------------------------------------------- | -------------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------- | ------- | ----------------- | ------- | ----- | ------- | ----- | ------- | -
|                                                  |                                                                            |                                                    |                                    |         | Nine Months Ended
|                                                  |                                                                            |                                                    |                                    |         | September 30,    
|                                                  |                                                                            |                                                    |                                    |         |                  
|                                                  |                                                                            |                                                    |                                    |         | 2002              |         | 2001 
|                                                  |                                                                            |                                                    |                                    |         |                   |         |      
|CASH FLOWS FROM OPERATING ACTIVITIES              |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  | Net income                                                                 |                                                    | $                                  | 1,562   |                   |         | $     | 1,269   |      
|                                                  | Adjustments to reconcile net income to net cash
from operating activities: |                                                    |                                    |         |                   |         |       |         |      
|                                                  |                                                                            | Provisions for loan losses                         |                                    |         | 167               |         |       |         | 62    |        
|                                                  |                                                                            | Depreciation                                       |                                    |         | 268               |         |       |         | 349   |        
|                                                  |                                                                            | Deferred income tax                                |                                    |         | 6                 |         |       |         | 2     |        
|                                                  |                                                                            | Net amortization on securities                     |                                    |         | 136               |         |       |         | 47    |        
|                                                  |                                                                            | FHLB stock dividends                               |                                    |         | (24               | )       |       |         | (24   | )      
|                                                  |                                                                            | Gain on sale of securities available-for-sale      |                                    |         | (54               | )       |       |         | (54   | )      
|                                                  |                                                                            | Loss on sale of premises and equipment             |                                    |         | 41                |         |       |         | 2     |        
|                                                  |                                                                            | Amortization of intangible assets                  |                                    |         | 18                |         |       |         |       |        
|                                                  | Changes in operating assets and liabilities:                               |                                                    |                                    |         |                   |         |       |         |      
|                                                  |                                                                            | Increase (decrease) in accrued interest receivable |                                    |         | (18               | )       |       |         | 92    |        
|                                                  |                                                                            | Increase (decrease) in other assets                |                                    |         | (215              | )       |       |         | 163   |        
|                                                  |                                                                            | Decrease in accrued interest payable               |                                    |         | (114              | )       |       |         | (69   | )      
|                                                  |                                                                            | Increase in other liabilities                      |                                    |         | 731               |         |       |         | 74    |        
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  |                                                                            |                                                    | Net cash from operating activities |         |                   | 2,504   |       |         |       | 1,913   |  
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  | Net increase in federal funds sold                                         |                                                    |                                    | (1,247  | )                 |         |       |         |      
|                                                  | Net decrease (increase) in interest-bearing deposits with banks            |                                                    |                                    | 2,852   |                   |         |       | (11,179 | )    
|                                                  | Purchase of securities available-for-sale                                  |                                                    |                                    | (12,786 | )                 |         |       | (15,650 | )    
|                                                  | Proceeds from sales of securities available-for-sale                       |                                                    |                                    | 5,567   |                   |         |       | 3,055   |      
|                                                  | Proceeds from maturities of securities available-for-sale                  |                                                    |                                    | 5,741   |                   |         |       | 12,679  |      
|                                                  | Federal Home Loan Bank stock redeemed                                      |                                                    |                                    | 104     |                   |         |       |         |      
|                                                  | Net increase in loans                                                      |                                                    |                                    | (10,903 | )                 |         |       | (3,801  | )    
|                                                  | Additions to premises and equipment                                        |                                                    |                                    | (468    | )                 |         |       | (258    | )    
|                                                  | Purchase of intangible assets                                              |                                                    |                                    | (144    | )                 |         |       |         |      
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  |                                                                            |                                                    | Net cash from investing activities |         |                   | (11,284 | )     |         |       | (15,154 | )
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|CASH FLOWS FROM FINANCING ACTIVITIES              |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  | Net increase in deposits                                                   |                                                    |                                    | 11,569  |                   |         |       | 14,722  |      
|                                                  | Net increase (decrease) in short-term borrowed funds                       |                                                    |                                    | 186     |                   |         |       | (48     | )    
|                                                  | Increase in other borrowed money                                           |                                                    |                                    | 96      |                   |         |       |         |      
|                                                  | Stock options exercised                                                    |                                                    |                                    | 2       |                   |         |       |         |      
|                                                  | Cash dividends paid                                                        |                                                    |                                    | (676    | )                 |         |       | (623    | )    
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  |                                                                            |                                                    | Net cash from financing activities |         |                   | 11,177  |       |         |       | 14,051  |  
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|NET INCREASE IN CASH AND DUE
FROM BANKS           |                                                                            |                                                    | 2,397                              |         |                   |         | 810   |        
|CASH AND DUE FROM BANKS, beginning of year        |                                                                            |                                                    | 4,584                              |         |                   |         | 4,466 |        
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|CASH AND DUE FROM BANKS, at end of period         |                                                                            | $                                                  | 6,981                              |         |                   | $       | 5,276 |        
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  | Cash payments for                                                          |                                                    |                                    |         |                   |         |       |         |      
|                                                  |                                                                            | Interest                                           |                                    | $       | 1,562             |         |       | $       | 2,849 |        
|                                                  |                                                                            | Income taxes                                       |                                    |         | 778               |         |       |         | 167   |        
|SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES    |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  | Unrealized gains (losses) on securities available-for-sale                 |                                                    | $                                  | 467     |                   |         | $     | 582     |      
|                                                  | Deferred tax on unrealized (gains) losses on securities
available-for-sale |                                                    |                                    | (159    | )                 |         |       | (198    | )    
|                                                  | Held-to-maturity securities transferred to securities available-for-sale   |                                                    |                                    |         |                   |         |       | 279     |      

The accompanying notes are an integral part of these financial statements

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VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Basis of Presentation

Valley Community Bancshares, Inc. (the Company) has prepared the condensed
consolidated financial statements of the Company for the three-month and
nine-month periods ended September 30, 2002 and September 30, 2001 without
audit by the Companys independent auditors. However, the financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
the Companys management, all adjustments consisting of normal recurring
accruals necessary for a fair presentation of the financial condition and
results of operations for the interim periods included herein have been made.
The consolidated balance sheet of the Company as of December 31, 2001 has been
derived from the audited consolidated balance sheet of the Company as of that
date. The results of operations for the three-months and nine months ended
September 30, 2002, are not necessarily indicative of the results to be
anticipated for the year ending December 31, 2002.

Certain information and note disclosures normally included in the Companys
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. Therefore, these consolidated financial statements and notes thereto
should be read in conjunction with a reading of the financial statements for
the year ended December 31, 2001 and notes thereto included in the Companys
Form 10-K filed with the Securities and Exchange Commission. Certain amounts in
the 2001 financial statements have been reclassified to conform to the 2002
presentation.

Note 2  Earnings per share

Basic earnings per share amounts are computed based on the weighted average
number of shares outstanding during the period after giving retroactive effect
to stock dividends and stock splits. Diluted earnings per share amounts are
computed by determining the number of additional shares that are deemed
outstanding due to stock options under the treasury stock method.

The following table sets forth the computation of basic and diluted earnings
per share for the three-months and nine months ended September 30, 2002 and
2001 (dollars in thousands, except per share amounts).

VALLEY COMMUNITY BANCSHARES, INC.
Earnings Per Share

|                                            |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |           | 
|------------------------------------------- | ----------------------------------------------------------------------- | - | ------------------ | --------- | ----------------- | - | ---- | --------- | ---- | - | ----- | --------- |  | - | ----- | --------- | 
|                                            |                                                                         |   | Three Months Ended |           | Nine Months Ended
|                                            |                                                                         |   | September 30,      |           | September 30,    
|                                            |                                                                         |   |                    |           |                  
|                                            |                                                                         |   | 2002               |           | 2001              |   | 2002 |           | 2001
|                                            |                                                                         |   |                    |           |                   |   |      |           |     
|NUMERATOR:                                  |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|Net income                                  |                                                                         | $ | 503                |           |                   | $ | 526  |           |      | $ | 1,562 |           |  | $ | 1,269 |          
|DENOMINATOR:                                |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|Denominator for basic earnings per share:   |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                            | Weighted average shares                                                 |   |                    | 1,126,777 |                   |   |      | 1,133,588 |      |   |       | 1,126,759 |  |   |       | 1,133,588 | 
|                                            | Effect of diluted securities  stock options                            |   |                    | 10,296    |                   |   |      | 17,479    |      |   |       | 10,578    |  |   |       | 18,383    | 
|Denominator for diluted earnings per share: |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                            | Weighted average shares and assumed
conversion of diluted stock options |   |                    | 1,137,073 |                   |   |      | 1,151,067 |      |   |       | 1,137,337 |  |   |       | 1,151,971 | 
|Basic earnings per share                    |                                                                         | $ | 0.45               |           |                   | $ | 0.46 |           |      | $ | 1.39  |           |  | $ | 1.12  |          
|Diluted earnings per share                  |                                                                         | $ | 0.44               |           |                   | $ | 0.46 |           |      | $ | 1.37  |           |  | $ | 1.10  |          

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Note 3  Investment Securities

Investment securities have been classified according to managements intent.
The carrying amount of securities and their estimated fair values are as
follows (in thousands):

September 30, 2002

Securities Available-For-Sale

|                                                            |  |           |        |            |  |            |     |       |  |   |   |  |  |   |        | 
|----------------------------------------------------------- |  | --------- | ------ | ---------- |  | ---------- | --- | ----- |  | - | - |  |  | - | ------ | 
|                                                            |  |           |        |            |  | Gross      |     | Gross |  |   |   | 
|                                                            |  | Amortized |        | Unrealized |  | Unrealized |     | Fair 
|                                                            |  | Cost      |        | Gains      |  | Losses     |     | Value
|                                                            |  |           |        |            |  |            |     |      
|U.S. Treasury and U.S. Government
corporations and agencies |  | $         | 9,695  |            |  | $          | 234 |       |  | $ |   |  |  | $ | 9,929  | 
|State and political subdivisions                            |  |           | 6,783  |            |  |            | 372 |       |  |   |   |  |  |   | 7,155  | 
|Mortgage-backed securities                                  |  |           | 15,807 |            |  |            | 331 |       |  |   | 9 |  |  |   | 16,129 | 
|                                                            |  |           |        |            |  |            |     |       |  |   |   |  |  |   |        | 
|                                                            |  | $         | 32,285 |            |  | $          | 937 |       |  | $ | 9 |  |  | $ | 33,213 | 
|                                                            |  |           |        |            |  |            |     |       |  |   |   |  |  |   |        | 

December 31, 2001

Securities Available-For-Sale

|                                                            |  |           |        |            |  |            |     |       |  |   |    |  |  |   |        | 
|----------------------------------------------------------- |  | --------- | ------ | ---------- |  | ---------- | --- | ----- |  | - | -- |  |  | - | ------ | 
|                                                            |  |           |        |            |  | Gross      |     | Gross |  |   |    | 
|                                                            |  | Amortized |        | Unrealized |  | Unrealized |     | Fair 
|                                                            |  | Cost      |        | Gains      |  | Losses     |     | Value
|                                                            |  |           |        |            |  |            |     |      
|U.S. Treasury and U.S. Government
corporations and agencies |  | $         | 9,383  |            |  | $          | 219 |       |  | $ | 23 |  |  | $ | 9,579  | 
|State and political subdivisions                            |  |           | 6,743  |            |  |            | 115 |       |  |   | 7  |  |  |   | 6,851  | 
|Mortgage-backed securities                                  |  |           | 14,763 |            |  |            | 167 |       |  |   | 10 |  |  |   | 14,920 | 
|                                                            |  |           |        |            |  |            |     |       |  |   |    |  |  |   |        | 
|                                                            |  | $         | 30,889 |            |  | $          | 501 |       |  | $ | 40 |  |  | $ | 31,350 | 
|                                                            |  |           |        |            |  |            |     |       |  |   |    |  |  |   |        | 

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Note 4  Loans

The major classifications of loans at September 30, 2002 and December 31, 2001
are summarized as follows (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.
Loan Portfolio
(dollars in thousands)

|                   |              |             |        |               |         |              |      |        |       |         |        |        |         |  |      |      |       |  
|------------------ | ------------ | ----------- | ------ | ------------- | ------- | ------------ | ---- | ------ | ----- | ------- | ------ | ------ | ------- |  | ---- | ---- | ----- | -
|                   |              |             |        | September 30, |         | December 31,
|                   |              |             |        | 2002          |         | 2001        
|                   |              |             |        |               |         |             
|                   |              |             |        | Amount        |         | Percent      |      | Amount |       | Percent
|                   |              |             |        |               |         |              |      |        |       |        
|Real Estate        |              |             |        |               |         |              |      |        |       |         |        |        |         |  |      |     
|                   | Construction |             | $      | 14,749        |         |              |      | 13.2   | %     |         | $      | 11,550 |         |  |      | 11.5 | %    
|                   | Mortgage     |             |        | 16,164        |         |              |      | 14.5   | %     |         |        | 14,689 |         |  |      | 14.6 | %    
|                   | Commercial   |             |        | 52,237        |         |              |      | 46.7   | %     |         |        | 54,187 |         |  |      | 53.7 | %    
|Commercial         |              |             | 25,725 |               |         |              | 23.0 | %      |       |         | 16,477 |        |         |  | 16.3 | %   
|Consumer and other |              |             | 2,396  |               |         |              | 2.1  | %      |       |         | 3,197  |        |         |  | 3.2  | %   
|Lease financing    |              |             | 493    |               |         |              | 0.4  | %      |       |         | 745    |        |         |  | 0.7  | %   
|                   |              |             |        |               |         |              |      |        |       |         |        |        |         |  |      |     
|                   |              | Total loans |        |               | 111,764 |              |      |        | 100.0 | %       |        |        | 100,845 |  |      |      | 100.0 | %
|                   |              |             |        |               |         |              |      |        |       |         |        |        |         |  |      |     
|Deferred loan fees |              |             | (109   | )             |         |              |      |        |       |         | (90    | )      |         |  |      |     
|                   |              |             |        |               |         |              |      |        |       |         |        |        |         |  |      |     
|                   |              | Net loans   |        | $             | 111,655 |              |      |        |       |         |        | $      | 100,755 |  |      |      |       |  
|                   |              |             |        |               |         |              |      |        |       |         |        |        |         |  |      |     

Note 5  Allowance for Loan Losses

Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is
allocated to each major classification and not specifically reserved while
additional amounts are added for individual loans considered to have specific
loss potential. Loans identified as losses are charged-off. Based on total
allocations, the provision is recorded to maintain the allowance at a level
deemed appropriate by management. While management uses available information
to recognize losses on loans, there can be no assurance that future additions
to the allowance will not be necessary.

The allowance for loan losses at September 30, 2002 totaled $1,320,000
representing a net increase of $164,000 or 14.2% compared to $1,156,000 at
December 31, 2001. The increase is primarily due to the increase in loans
since December 31, 2001 and is not related to any specifically identified
problem loan. Management believes that the allowance for loan losses at
September 30, 2002 adequately reflects the risks in the loan portfolio.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Banks allowance for loan losses. Such agencies may
require the Bank to recognize changes to the allowance based on their judgments
of information available to them at the time of their examination.

The following table summarizes the activity in the allowance for loan losses
(dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.
Loan Loss Experience

|                               |                                 |                |       |                            |   |                           |       |      |     |      |       |     |   |   |       |    |    |  
|------------------------------ | ------------------------------- | -------------- | ----- | -------------------------- | - | ------------------------- | ----- | ---- | --- | ---- | ----- | --- | - | - | ----- | -- | -- | -
|                               |                                 |                |       | Three months September 30, |   | Nine months September 30,
|                               |                                 |                |       |                            |   |                          
|                               |                                 |                |       | 2002                       |   | 2001                      |       | 2002 |     | 2001
|                               |                                 |                |       |                            |   |                           |       |      |     |     
|Balance at beginning of period |                                 | $              | 1,249 |                            |   | $                         | 1,162 |      |     | $    | 1,156 |     |   | $ | 1,096 |   
|                               | Charge-offs                     |                |       | 5                          |   |                           |       |      |     |      |       | 5   |   |   |       |    |   
|                               | Recoveries:                     |                |       |                            |   |                           |       |      |     |      |       | 2   |   |   |       | 4  |   
|                               |                                 |                |       |                            |   |                           |       |      |     |      |       |     |   |   |       |   
|                               |                                 | Net recoveries |       |                            | 5 |                           |       |      | -0- |      |       |     | 3 |   |       |    | (4 | )
|                               | Additions charged to operations |                |       | 76                         |   |                           |       |      |     |      |       | 167 |   |   |       | 62 |   
|                               |                                 |                |       |                            |   |                           |       |      |     |      |       |     |   |   |       |   
|Balance at end of period       |                                 | $              | 1,320 |                            |   | $                         | 1,162 |      |     | $    | 1,320 |     |   | $ | 1,162 |   
|                               |                                 |                |       |                            |   |                           |       |      |     |      |       |     |   |   |       |   

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Note 6  Impact of New Accounting Issues

During the year 2002 the Company adopted the following accounting standards
issued by the Financial Accounting Standard Board.

Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other
Intangible Assets,addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets.It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their acquisition. This Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The Company implemented this statement
effective January 1, 2002. Implementation of this statement did not result in a
material impact on its financial position or results of operation.

Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assetsaddresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of,and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,for
the disposal of a segment of a business(as previously defined in that
Opinion). This Statement also amends ARB No. 51, Consolidated Financial
Statements,to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The Company implemented this statement
effective January 1, 2002. Implementation of this statement did not result in a
material impact on its financial position or results of operation.

Statement of Financial Standard (SFAS) No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt,and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements.This Statement also rescinds FASB Statement No. 44, Accounting
for Intangible Assets of Motor Carriers.This Statement amends FASB Statement
No. 13, Accounting for Leases,to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
implemented this statement effective April 1, 2002. Implementation of this
statement did not result in a material impact on its financial position or
results of operations.

Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, addresses financial accounting and
reporting for the treatment of costs associated with exit or disposal
activities. This Statement improves financial reporting by requiring that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. This
Statement replaces EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. The
provisions of this Statement are to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company does not
expect the Statement will result in a material impact on its financial position
or results of operations.

Statement of Financial Accounting Standard (SFAS) No. 147, Acquisitions of
Certain Financial Institutions  an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9. The provisions of this Statement that relate to
the application of the purchase method of accounting applies to all
acquisitions of financial institutions, except transactions between two or more
mutual enterprises. This Statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. In addition, this Statement amends FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets. This Statement is effective for
acquisitions for which the date of acquisition is on or after October 1, 2002.
The Company does not expect the Statement will result in a material impact on
its financial position or results of operations.

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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Valley Community Bancshares, Inc.

Valley Community Bancshares, Inc. (the Company) is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended. The Company
was organized and incorporated under the laws of the State of Washington as a
holding company for its principal banking subsidiary, Puyallup Valley Bank, a
state chartered, Federal Deposit Insurance Corporation (the FDIC) insured
commercial bank, through a reorganization completed on July 1, 1998. The
Company conducts its business primarily through Puyallup Valley Bank, but in
January 1999 the Company opened Valley Bank, a state chartered FDIC insured
commercial bank subsidiary located in Auburn, Washington. Puyallup Valley Bank
and Valley Bank are referred to as the Banks in this Form 10-Q.

The Companys main office is located in Puyallup, Washington, which also serves
as the main office of Puyallup Valley Bank. Valley Bank is located in Auburn,
Washington. The Banks provide a full range of commercial banking services to
small and medium-sized businesses, professionals and other individuals through
banking offices located in Puyallup, Auburn, and Kent, Washington, and their
environs.

The principal source of the Companys revenue are (i) interest and fees on
loans; (ii) deposit service charges; (iii) merchant credit card processing
fees; (iv) interest bearing deposits with banks; (v) interest on investments
(principally government securities) and (vi) origination fees on mortgage loans
brokered. The Banks lending activity consists of short-to-medium-term
commercial and consumer loans, including operating loans and lines of credit,
equipment loans, automobile loans, recreational vehicle and truck loans,
personal loans or lines of credit, home improvement loans and rehabilitation
loans. The Banks also offer cash management services, merchant credit card
processing, safe deposit boxes, wire transfers, direct deposit of payroll and
social security checks, automated teller machine access, and automatic drafts
for various accounts.

Puyallup Valley Bank

Puyallup Valley Bank is a Washington state-chartered commercial bank, which
commenced operations in October 1973. The Bank provides full-service banking
to businesses and residents within the Puyallup community and its surrounding
area. Puyallup Valley Bank places particular emphasis on serving the small to
medium-sized business segment of the market by making available a line of
banking products tailored to their needs, with those services delivered by
experienced professionals concerned with building long-term relationships.
Puyallup Valley Bank conducts business out of six full-service offices and one
drive-up facility.

On May 16, 2002, Puyallup Valley Bank purchased various tangible and intangible
assets of Puget Sound Mortgage Brokers, Inc., a Washington Corporation located
in Puyallup Washington. The purchase price was not material to Puyallup Valley
Bank or to the consolidated financial condition and results of operations of
the Company. The purchase was made to further enhance the Banks mortgage
banking operations. The mortgage operation will be operated as a division of
the Bank using the name Puget Sound Mortgage Brokers and will operate in a
leased facility.

Valley Bank

Valley Bank is a Washington state-chartered commercial bank, which commenced
operations in January 1999. The Bank provides full-service banking to
businesses and residents within the Auburn and Kent communities and its
surrounding area. Valley Bank offers commercial banking services to small and
medium size businesses, professionals and retail customers in the Banks market
area. Valley Bank conducts business out of two full-service offices.

On September 5, 2002 Valley Bank opened a new banking facility in Kent
Washington. The new office will initially operate in a leased facility until a
permanent facility can be located.

Both Puyallup Valley Bank and Valley Bank are wholly owned subsidiaries of the
Company.

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During November 2002, the Board of Directors of both Puyallup Valley Bank and
Valley Bank entered into an agreement to merge the two banks. It is anticipated
the merger will occur during the first quarter of 2003. The banks entered into this
agreement for several reasons, including, better customer
service, operational efficiency, and cost improvement.

Results of Operations

The Company earned net income of $503,000 or $0.44 per diluted share for the
three months ended September 30, 2002, compared to net income of $526,000 or
$0.46 per diluted share, for the three months ended September 30, 2001, an
decrease of 4.4 percent. The Companys return on average assets was 1.19
percent for the three months ended September 30, 2002, compared to 1.30 percent
for the three months ended September 30, 2001.

The Company earned net income of $1,562,000 or $1.37 per diluted share for the
nine months ended September 30, 2002, compared to net income of $1,269,000 or
$1.10 per diluted share, for the nine months ended September 30, 2001, an
increase of 23.1 percent. The Companys return on average assets was 1.29
percent for the nine months ended September 30,2002, compared to 1.10 percent
for the nine months ended September 30, 2001.

The decrease in net income for the three-month period ended September 30, 2002
was primarily the result of lower noninterest income, higher provisions for
loan losses and increased noninterest expense, partially offset by increased
net interest income. The increase in net income for the nine-month period ended
September 30, 2002 was primarily the result of an increase in net interest
income, offset by higher provisions for loan losses and increased noninterest
expense. A significant decrease in the Companys cost of funds favorably impact
net interest income during both the three-month and nine-month periods. The
increased staffing levels of Valley Banks new Kent facility and Puget Sound
Mortgage Brokers significantly increased salaries and employee benefits during
the three-month period.

Because of the new Kent office, management anticipates higher operating costs.
Profitability of the Company will be negatively impacted until the new office
generates sufficient revenue to offset the added operating costs. It is
anticipated the new office will not breakeven until its third year of
operation. The Company further anticipates the Kent office will lose up to
$250,000 during the three-year period.

The Companys net income is derived principally from the operating results of
its banking subsidiaries, namely Puyallup Valley Bank and Valley Bank. Puyallup
Valley Bank is a well-established commercial bank and generates the majority of
the Companys operating income.

Puyallup Valley Bank earned net income of $541,000 and $1,541,000 for the three
and nine months ended September 30, 2002 compared to $476,000 and $1,237,000
for the three and nine months ended September 30, 2001. Puyallup Valley Banks
increase in earnings resulted from an increase in net interest income,
partially offset by lower non-interest income, an increase in the provision for
loan losses and by an increase in the provision for income tax.

Valley Bank incurred a loss of $14,000 for the three months ended September 30,
2002 and earned net income of $46,000 for the nine months ended September 30,
2002 compared to net income of $36,000 and $34,000 for the three and nine
months ended September 30, 2001. Valley Banks earnings were negatively
impacted by the costs of the new Kent facility discussed above.

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The following table shows the various performance ratios for the Company for
the three and nine months ended September 30, 2002 and 2001, respectively:

VALLEY COMMUNITY BANCSHARES, INC.
Selected Financial Data 1
(dollars in thousands, except per share amounts)

|                      |                                                                                               |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|--------------------- | --------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                      |                                                                                               |  | Three Months Ended |         | Nine Months Ended
|                      |                                                                                               |  | September 30,      |         | September 30,    
|                      |                                                                                               |  |                    |         |                  
|                      |                                                                                               |  | 2002               |         | 2001              |  | 2002 |         | 2001
|                      |                                                                                               |  |                    |         |                   |  |      |         |     
|Financial Performance |                                                                                               |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |        
|                      | Net Income                                                                                    |  | $                  | 503     |                   |  | $    | 526     |      |  | $ | 1,562   |   |  | $ | 1,269   |  
|                      | Average Assets                                                                                |  |                    | 168,391 |                   |  |      | 160,707 |      |  |   | 162,316 |   |  |   | 154,430 |  
|                      | Average Stockholders Equity                                                                  |  |                    | 22,145  |                   |  |      | 20,807  |      |  |   | 21,563  |   |  |   | 20,365  |  
|                      | Return on Assets (net income divided by average assets)                                       |  |                    | 1.19    | %                 |  |      | 1.30    | %    |  |   | 1.29    | % |  |   | 1.10    | %
|                      | Return on Equity (net income divided by average equity)                                       |  |                    | 9.01    | %                 |  |      | 10.03   | %    |  |   | 9.69    | % |  |   | 8.33    | %
|                      | Net Interest Margin (net interest income (tax adjusted)
Divided by earning assets)            |  |                    | 5.34    | %                 |  |      | 4.94    | %    |  |   | 5.41    | % |  |   | 4.97    | %
|                      | Efficiency Ratio (noninterest expense divided by
noninterest income plus net interest income) |  |                    | 63.11   | %                 |  |      | 63.91   | %    |  |   | 62.63   | % |  |   | 68.40   | %
|                      | Ratio of noninterest income to average assets                                                 |  |                    | 3.37    | %                 |  |      | 3.26    | %    |  |   | 3.42    | % |  |   | 3.47    | %

Net Interest Income

The component contributing most significantly to the Companys net income is
net interest income, which is the difference between interest earned on earning
assets (primarily loans and investments) and interest paid on interest bearing
liabilities (deposits and borrowings). The volume of and yields earned on
earning assets and the volume of and the rates paid on interest bearing
liabilities determine net interest income. Interest earned and interest paid is
also affected by general economic conditions, particularly changes in market
interest rates, and by government policies and the action of regulatory
authorities. Net interest income, with tax-exempt income adjusted to a
tax-equivalent basis, divided by average earning assets is referred to as net
interest margin. For the three months ended September 30, 2002 the Companys
net interest margin was 5.34 percent compared to 4.94 percent for the three
months ended September 30, 2001. For the nine months ended September 30, 2002
the Companys net interest margin was 5.41 percent compared to 4.97 percent for
the nine months ended September 30, 2001.

Interest income was $2,533,000 for the three months ended September 30, 2002
compared to $2,672,000 for the three months ended September 30, 2001. Interest
income was $7,413,000 for the nine months ended September 30, 2002 compared to
$7,977,000 for the three months ended September 30, 2001. The three-month and
nine month decrease was primarily the result of a significant decrease in the
yield earned on earning assets. The yield on interest-earning assets decreased
to 6.53 percent for the three months ended September 30, 2002 compared to 7.22
percent during the same period a year ago. The yield on interest-earning assets
decreased to 6.70 percent for the nine months ended September 30, 2002 compared
to 7.58 percent during the same period a year ago. The decrease in interest
income was primarily the result of a lower yield realized on interest bearing
deposits with banks, investment securities, and loans. The yield decrease
reflects an overall decline in market interest rates resulting from a soft
economic environment.

Interest expense was $469,000 for the three months ended September 30, 2002
compared to $857,000 for the three months ended September 30, 2001. Interest
expense was $1,448,000 for the nine months ended September 30, 2002 compared to
$2,780,000 for the nine months ended September 30, 2001. The cost of funds
decreased to 1.60 percent for the three months ended September 30, 2002
compared to 3.01 percent during the same period a year ago. The cost of funds
decreased to 1.73 percent for the nine months ended September 30, 2002 compared
to 3.45 percent during the same period a year ago. The decrease for both the
three-month and nine month periods was due to a decrease in the Companys cost
of funds resulting from an overall decline in market interest rates.

During the three and nine months ended September 30, 2002, market interest
rates continue to be at historical lows as a result of a slow national and
regional economy and because of an aggressively accommodating Federal Reserve
monetary policy. During the three and nine month periods ended September 30,
2002, net interest margin increased as a result of cost of funds decreasing
faster than interest earned on interest earning assets. The cost of funds
decrease resulted from certificates of deposit having shorter maturities than
interest earning assets. In addition, the Company lowered the interest rate on
deposits with administrated rates such as NOW, savings, and money market
accounts. In



---

|1 |  | The computation of the ratios is based on the recorded assets and liabilities
after the effect of changes in market values of securities available for sale.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

-10-



---



##### Table of Contents



periods of increasing interest rates, the Companys net interest income and
margin may decrease because the Company has a significant amount of interest
bearing liabilities subject to repricing when compared to interest earning
assets. This maybe somewhat offset because the rate paid on deposits with
administered interest rates generally do not increase as rapidly as an account
whose rates change with market interest rates.

The following table sets forth information concerning the Companys average
balance and average interest rates earned or paid, interest rate spread and net
interest margin:

VALLEY COMMUNITY BANCSHARES, INC.
AVERAGE BALANCES AND INTEREST RATES EARNED/PAID
(dollars in thousands)

|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |      |      |  
|---------------------------- | ------------------------------------------ | ---------------------------------- | - | ---------------------------------------- | ------- | -------- | ----- | ------ | ----- | ------- | ---- | -------- | ---- | ------ | - | ------- | ------- | - | ----- | ----- | ----- |  | ---- | ---- | ---- | -
|                             |                                            |                                    |   | For the Three Months Ended September 30,
|                             |                                            |                                    |   |                                         
|                             |                                            |                                    |   | 2002                                     |         | 2001    
|                             |                                            |                                    |   |                                          |         |         
|                             |                                            |                                    |   | Average                                  |         | Revenue/ |       | Yield/ |       | Average |      | Revenue/ |      | Yield/
|                             |                                            |                                    |   | Balance                                  |         | Expense  |       | Rate   |       | Balance |      | Expense  |      | Rate  
|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |       
|ASSETS                       |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|Interest-earning assets      |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | Loans (including fees) 1                   |                                    | $ | 110,616                                  |         |          | $     | 2,081  |       |         |      | 7.46     | %    |        | $ | 97,747  |         |   | $     | 2,042 |       |  |      | 8.29 | %   
|                             | Investment securities 23                   |                                    |   | 32,215                                   |         |          |       | 404    |       |         |      | 4.97     | %    |        |   | 31,680  |         |   |       | 468   |       |  |      | 5.86 | %   
|                             | Interest bearing deposits with banks       |                                    |   | 12,175                                   |         |          |       | 76     |       |         |      | 2.48     | %    |        |   | 18,933  |         |   |       | 192   |       |  |      | 4.02 | %   
|                             | Federal funds sold                         |                                    |   | 835                                      |         |          |       | 3      |       |         |      | 1.41     | %    |        |   |         |         |   |       |       |       |  |      |      |     
|                             | Federal Home Loan Bank Stock               |                                    |   | 491                                      |         |          |       | 8      |       |         |      | 6.46     | %    |        |   | 462     |         |   |       | 8     |       |  |      | 6.87 | %   
|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             |                                            | Total Interest-earning assets      |   |                                          | 156,332 |          |       |        | 2,572 |         |      |          | 6.53 | %      |   |         | 148,822 |   |       |       | 2,710 |  |      |      | 7.22 | %
|                             | Total noninterest-earning assets           |                                    |   | 12,059                                   |         |          |       |        |       |         |      |          |      |        |   | 11,885  |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | TOTAL ASSETS                               |                                    | $ | 168,391                                  |         |          |       |        |       |         |      |          |      |        | $ | 160,707 |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|Interest-bearing liabilities |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | Deposits                                   |                                    | $ | 115,627                                  |         |          |       | 467    |       |         |      | 1.60     | %    |        | $ | 112,531 |         |   |       | 854   |       |  |      | 3.01 | %   
|                             | Other borrowed funds                       |                                    |   | 496                                      |         |          |       | 2      |       |         |      | 1.60     | %    |        |   | 423     |         |   |       | 3     |       |  |      | 2.81 | %   
|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             |                                            | Total Interest-bearing liabilities |   |                                          | 116,123 |          |       |        | 469   |         |      |          | 1.60 | %      |   |         | 112,954 |   |       |       | 857   |  |      |      | 3.01 | %
|                             | Noninterest-bearing liabilities            |                                    |   | 30,123                                   |         |          |       |        |       |         |      |          |      |        |   | 26,946  |         |   |       |       |       |  |      |      |     
|                             | Stockholders equity                       |                                    |   | 22,145                                   |         |          |       |        |       |         |      |          |      |        |   | 20,807  |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY |                                    | $ | 168,391                                  |         |          |       |        |       |         |      |          |      |        | $ | 160,707 |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|Net interest spread          |                                            |                                    |   |                                          |         | $        | 2,103 |        |       |         | 4.93 | %        |      |        |   |         |         | $ | 1,853 |       |       |  | 4.21 | %   
|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|Margin Analysis              |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | Interest income/earning assets             |                                    |   |                                          |         |          | $     | 2,572  |       |         |      | 6.53     | %    |        |   |         |         |   | $     | 2,710 |       |  |      | 7.22 | %   
|                             | Interest expense/earning assets            |                                    |   |                                          |         |          |       | 469    |       |         |      | 1.19     | %    |        |   |         |         |   |       | 857   |       |  |      | 2.28 | %   
|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | Net interest margin                        |                                    |   |                                          |         |          | $     | 2,103  |       |         |      | 5.34     | %    |        |   |         |         |   | $     | 1,853 |       |  |      | 4.94 | %   
|                             |                                            |                                    |   |                                          |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     



---

|1 |  | Average loan balance includes nonaccrual loans, if any. Interest income on
nonaccrual loans has been included.
|- |  | --------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|2 |  | Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 34%.               
| 
| 
| 
| 
|3 |  | The yield on investment securities is calculated using historical cost basis.                                 

-11-



---



##### Table of Contents



The following table sets forth information concerning the Companys average
balance and average interest rates earned or paid, interest rate spread and net
interest margin:

VALLEY COMMUNITY BANCSHARES, INC.
AVERAGE BALANCES AND INTEREST RATES EARNED/PAID
(dollars in thousands)

|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |      |      |  
|---------------------------- | ------------------------------------------ | ---------------------------------- | - | --------------------------------------- | ------- | -------- | ----- | ------ | ----- | ------- | ---- | -------- | ---- | ------ | - | ------- | ------- | - | ----- | ----- | ----- |  | ---- | ---- | ---- | -
|                             |                                            |                                    |   | For the Nine Months Ended September 30,
|                             |                                            |                                    |   |                                        
|                             |                                            |                                    |   | 2002                                    |         | 2001    
|                             |                                            |                                    |   |                                         |         |         
|                             |                                            |                                    |   | Average                                 |         | Revenue/ |       | Yield/ |       | Average |      | Revenue/ |      | Yield/
|                             |                                            |                                    |   | Balance                                 |         | Expense  |       | Rate   |       | Balance |      | Expense  |      | Rate  
|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |       
|ASSETS                       |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|Interest-earning assets      |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | Loans (including fees) 1                   |                                    | $ | 105,546                                 |         |          | $     | 6,027  |       |         |      | 7.63     | %    |        | $ | 96,030  |         |   | $     | 6,116 |       |  |      | 8.52 | %   
|                             | Investment securities 23                   |                                    |   | 32,363                                  |         |          |       | 1,247  |       |         |      | 5.15     | %    |        |   | 29,228  |         |   |       | 1,316 |       |  |      | 6.02 | %   
|                             | Interest bearing deposits with banks       |                                    |   | 11,559                                  |         |          |       | 230    |       |         |      | 2.66     | %    |        |   | 16,742  |         |   |       | 619   |       |  |      | 4.94 | %   
|                             | Federal funds sold                         |                                    |   | 282                                     |         |          |       | 3      |       |         |      | 1.42     | %    |        |   |         |         |   |       |       |       |  |      |      |     
|                             | Federal Home Loan Bank Stock               |                                    |   | 485                                     |         |          |       | 22     |       |         |      | 6.06     | %    |        |   | 455     |         |   |       | 23    |       |  |      | 6.67 | %   
|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             |                                            | Total Interest-earning assets      |   |                                         | 150,235 |          |       |        | 7,529 |         |      |          | 6.70 | %      |   |         |         |   |       |       |       |  |      |      | 7.58 | %
|                             | Total noninterest-earning assets           |                                    |   | 12,081                                  |         |          |       |        |       |         |      |          |      |        |   | 11,975  |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | TOTAL ASSETS                               |                                    | $ | 162,316                                 |         |          |       |        |       |         |      |          |      |        | $ | 154,430 |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|Interest-bearing liabilities |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | Deposits                                   |                                    | $ | 111,786                                 |         |          |       | 1,443  |       |         |      | 1.73     | %    |        | $ | 107,419 |         |   |       | 2,768 |       |  |      | 3.45 | %   
|                             | Other borrowed funds                       |                                    |   | 423                                     |         |          |       | 5      |       |         |      | 1.58     | %    |        |   | 393     |         |   |       | 12    |       |  |      | 4.08 | %   
|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             |                                            | Total Interest-bearing liabilities |   |                                         | 112,209 |          |       |        | 1,448 |         |      |          | 1.73 | %      |   |         | 107,812 |   |       |       | 2,780 |  |      |      | 3.45 | %
|                             | Noninterest-bearing liabilities            |                                    |   | 28,544                                  |         |          |       |        |       |         |      |          |      |        |   | 26,253  |         |   |       |       |       |  |      |      |     
|                             | Stockholders equity                       |                                    |   | 21,563                                  |         |          |       |        |       |         |      |          |      |        |   | 20,365  |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY |                                    | $ | 162,316                                 |         |          |       |        |       |         |      |          |      |        | $ | 154,430 |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|Net interest spread          |                                            |                                    |   |                                         |         | $        | 6,081 |        |       |         | 4.97 | %        |      |        |   |         |         | $ | 5,294 |       |       |  | 4.13 | %   
|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|Margin Analysis              |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | Interest income/earning assets             |                                    |   |                                         |         |          | $     | 7,529  |       |         |      | 6.70     | %    |        |   |         |         |   | $     | 8,074 |       |  |      | 7.58 | %   
|                             | Interest expense/earning assets            |                                    |   |                                         |         |          |       | 1,448  |       |         |      | 1.29     | %    |        |   |         |         |   |       | 2,780 |       |  |      | 2.61 | %   
|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     
|                             | Net interest margin                        |                                    |   |                                         |         |          | $     | 6,081  |       |         |      | 5.41     | %    |        |   |         |         |   | $     | 5,294 |       |  |      | 4.97 | %   
|                             |                                            |                                    |   |                                         |         |          |       |        |       |         |      |          |      |        |   |         |         |   |       |       |       |  |      |     



---

|1 |  | Average loan balance includes nonaccrual loans, if any. Interest income on
nonaccrual loans has been included.
|- |  | --------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|2 |  | Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 34%.               
| 
| 
| 
| 
|3 |  | The yield on investment securities is calculated using historical cost basis.                                 

-12-



---



##### Table of Contents



The following table sets forth information concerning the Companys change in
net interest income for the periods that are attributable to changes in
interest rate and changes in volume for the three month period ended September
30, 2002 compared to the three months ended September 30, 2001 and for the nine
month period ended September 30, 2002 compared to the nine months ended
September 30, 2001:

VALLEY COMMUNITY BANCSHARES, INC.
Volume/Rate Analysis1 For the Three Months ended September 30,
(dollars in thousands)

|                             |                                      |                                    |   |                       |     |      |   |      |      |   |   |      |      |  
|---------------------------- | ------------------------------------ | ---------------------------------- | - | --------------------- | --- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|                             |                                      |                                    |   | 2002 Compared to 2001
|                             |                                      |                                    |   |                      
|                             |                                      |                                    |   | Volume                |     | Rate |   | Net 
|                             |                                      |                                    |   |                       |     |      |   |     
|Interest income              |                                      |                                    |   |                       |     |      |   |      |      |   |   |     
|                             | Loans (including fees) 2             |                                    | $ | 254                   |     |      | $ | (215 | )    |   | $ | 39   |     
|                             | Investment securities 3              |                                    |   | 8                     |     |      |   | (72  | )    |   |   | (64  | )   
|                             | Interest bearing deposits with banks |                                    |   | (56                   | )   |      |   | (60  | )    |   |   | (116 | )   
|                             | Federal funds sold                   |                                    |   | 3                     |     |      |   |      |      |   |   | 3    |     
|                             |                                      |                                    |   |                       |     |      |   |      |      |   |   |     
|                             |                                      | Total Interest-earning assets      |   |                       | 209 |      |   |      | (347 | ) |   |      | (138 | )
|Interest-bearing liabilities |                                      |                                    |   |                       |     |      |   |      |      |   |   |     
|                             | Total deposits                       |                                    |   | 23                    |     |      |   | (410 | )    |   |   | (387 | )   
|                             | Other borrowed funds                 |                                    |   |                       |     |      |   | (1   | )    |   |   | (1   | )   
|                             |                                      |                                    |   |                       |     |      |   |      |      |   |   |     
|                             |                                      | Total Interest-bearing liabilities |   |                       | 23  |      |   |      | (411 | ) |   |      | (388 | )
|                             |                                      |                                    |   |                       |     |      |   |      |      |   |   |     
|                             |                                      | Net interest income                |   | $                     | 186 |      |   | $    | 64   |   |   | $    | 250  |  
|                             |                                      |                                    |   |                       |     |      |   |      |      |   |   |     

VALLEY COMMUNITY BANCSHARES, INC.
Volume/Rate Analysis1 For the Nine Months ended September 30,
(dollars in thousands)

|                             |                                       |                                    |   |                       |     |      |   |        |        |   |   |        |        |  
|---------------------------- | ------------------------------------- | ---------------------------------- | - | --------------------- | --- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                             |                                       |                                    |   | 2002 Compared to 2001
|                             |                                       |                                    |   |                      
|                             |                                       |                                    |   | Volume                |     | Rate |   | Net   
|                             |                                       |                                    |   |                       |     |      |   |       
|Interest income              |                                       |                                    |   |                       |     |      |   |        |        |   |   |       
|                             | Loans (including fees) 2              |                                    | $ | 575                   |     |      | $ | (664   | )      |   | $ | (89    | )     
|                             | Investment securities 3               |                                    |   | 132                   |     |      |   | (201   | )      |   |   | (69    | )     
|                             | Interest bearing deposits with banks  |                                    |   | (156                  | )   |      |   | (233   | )      |   |   | (389   | )     
|                             | Federal funds sold                    |                                    |   | 3                     |     |      |   |        |        |   |   | 3      |       
|                             | Federal Home Loan Bank Stock dividend |                                    |   | 1                     |     |      |   | (2     | )      |   |   | (1     | )     
|                             |                                       |                                    |   |                       |     |      |   |        |        |   |   |       
|                             |                                       | Total Interest-earning assets      |   |                       | 555 |      |   |        | (1,100 | ) |   |        | (545   | )
|Interest-bearing liabilities |                                       |                                    |   |                       |     |      |   |        |        |   |   |       
|                             | Total deposits                        |                                    |   | 108                   |     |      |   | (1,433 | )      |   |   | (1,325 | )     
|                             | Other borrowed funds                  |                                    |   | 1                     |     |      |   | (8     | )      |   |   | (7     | )     
|                             |                                       |                                    |   |                       |     |      |   |        |        |   |   |       
|                             |                                       | Total Interest-bearing liabilities |   |                       | 109 |      |   |        | (1,441 | ) |   |        | (1,332 | )
|                             |                                       |                                    |   |                       |     |      |   |        |        |   |   |       
|                             |                                       | Net interest income                |   | $                     | 446 |      |   | $      | 341    |   |   | $      | 787    |  
|                             |                                       |                                    |   |                       |     |      |   |        |        |   |   |       



---

|1 |  | The change in interest due to both volume and yield/rate has been allocated
to change due to volume and change due to yield/rate in proportion to the
absolute value of the change in each.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|2 |  | Balances of nonaccrual loans, if any, and related income recognized have been
included for computational purposes.                                                                         
| 
| 
| 
| 
|3 |  | Tax-exempt income has been converted to a tax-equivalent basis using an
incremental rate of 34%.                                                                                           

-13-



---



##### Table of Contents



Provision for loan losses

Provisions for loan losses reduce net interest income. The Company provided
$76,000 for loan losses for the three months ended September 30, 2002 compared
to $0 during the same three-month period last year. The Company provided
$167,000 for loan losses for the nine months ended September 30, 2002 compared
to $62,000 during the same nine-month period last year. The provision was made
as a result of increasing loans.

Management believes the amount of the allowance for loan losses to be adequate
to absorb losses in the current portfolio. This statement is based upon
managements continuing evaluation of inherent risks in the current loan
portfolio, current levels of classified assets, and economic factors. The
Company will continue to monitor the allowance and make future adjustments to
the allowance as conditions dictate. For further discussion regarding the
allowance for loan losses, see the discussion on allowance for loan losses
under Risk Elements.

Noninterest income and expense

Net income is also affected by noninterest income (primarily service charges,
and other operating income) and noninterest expenses (primarily salaries and
employee benefits, occupancy, equipment, and other operating expenses).

Noninterest income was $202,000 for the three months ended September 30, 2002,
a 19.8 percent decrease from $252,000 for the three months ended September 30,
2001. Noninterest income was $661,000 for the nine months ended September 30,
2002, a slight decrease from $664,000 for the nine months ended September 30,
2001. The decrease in noninterest income for the three month period ended
September 30, 2002 was the result of lower other operating income and lower
security gains partially offset by higher service charges on deposit accounts
and increase loan origination fees on mortgage loans brokered. A $34,000 loss
resulting from the write down of various fixed assets discarded during the
Companys main office remodel was included in other operating expenses. The
decrease in noninterest income for the nine-month period ended September 30,
2002 was the result of a decrease in other operating income discussed above
partially offset by higher service charges on deposit accounts.

Noninterest expense was $1,430,000 for the three months ended September 30,
2002, an 8.3 percent increase from $1,321,000 for the three months ended
September 30, 2001. Noninterest expense was $4,150,000 for the nine months
ended September 30, 2002, a 3.5 percent increase from $4,009,000 for the nine
months ended September 30, 2001. The increase in noninterest expense for the
three month and nine month periods ended September 30, 2002 was the result of
increased salaries and employee benefits and other operating expenses partially
offset by lower occupancy and equipment expenses. Salary and employee benefits
increased as a result of the opening of the new Kent facility and the operation
of Puget Sound Mortgage Brokers. Occupancy and equipment expense decreased as a
result of lower depreciation expense. Occupancy and equipment expense is
expected to increase when the Company completes its main office remodel during
the fourth quarter of 2002. The percentage of noninterest expense to average
assets was 3.42 percent for the nine months ended September 30, 2002, compared
to 3.47 percent during the same period last year.

The Companys efficiency ratio, which is the ratio of noninterest expense to
net interest income plus noninterest income, was 63.1 percent for the three
months ended September 30, 2002 compared to 63.9 percent for the three months
ended September 30, 2001. The Companys efficiency ratio was 62.6 percent for
the nine months ended September 30, 2002 compared to 68.4 percent for the nine
months ended September 30, 2001. The decrease in the ratio was primarily due to
a significant improvement in net interest income, partially offset by a
decrease in noninterest income and an increase in noninterest expense.

Provision for income tax

The Companys provision for income tax is a significant reduction of operating
income. The provision for the three months September 30, 2002, was $257,000
compared to $220,000 for the three month ended September 30, 2001. The
provision for the nine months September 30, 2002, was $747,000 compared to
$521,000 for the nine months ended September 30, 2001. The provision represents
an effective tax rate of approximately 32 percent during 2002 and 29 percent
during 2001. The Companys marginal tax rate is currently 34 percent. The
difference between the Companys effective and marginal tax rate is primarily
related to investments made in tax-exempt securities. Last years effective
rate was lower than the current year rate primarily as a result of a higher
than anticipated year 2000 tax refund.

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Financial Condition

The Companys total consolidated assets were $171.0 million as of September 30,
2002, compared to $157.2 million as of December 31, 2001. The 8.8 percent
increase in assets was primarily in investment securities, federal funds sold,
and loans, funded by increasing deposits and a decrease in interest bearing
deposits with banks. Stockholders equity increased as a result of earnings
during the nine-month period ended September 30, 2002 and an increase in other
comprehensive income, partially offset by dividends paid.

Investment Portfolio

The major classifications of investments at September 30, 2002 and December 31,
2001, are summarized in Note 3  Investment Securities in the Notes to
Condensed Consolidated Financial Statements.

At September 30, 2002, the Company had $33.2 million of securities
available-for-sale, compared to $31.4 million as of December 31, 2001. Although
investment securities increased by $1.8 million during 2002, the Company
purchased approximately $12.8 million in securities this year. They were funded
primarily with $11.3 million of securities either maturing or sold during 2002
along with a decrease in interest bearing deposits with banks. The result was a
change in the mix of the investment portfolio favoring mortgage-backed
securities and securities issued by state and political subdivisions rather
than the U.S. Government, corporations, and agencies.

At September 30, 2002, all of the Companys securities were classified as
available-for-sale. Management believes that that holding securities as
available-for-sale provides greater flexibility to respond to interest rate
changes and liquidity needs to fund loan growth.

Loan Portfolio

The major classifications of loans at September 30, 2002 and December 31, 2001,
are summarized in Note 4  Loans in the Notes to Condensed Consolidated
Financial Statements.

In addition to the major classifications of loans summarized in Note 4, the
Company has additional loan concentrations exceeding 10 percent of total loans
at September 30, 2002. They include loans to medical doctors and dentists in
the amount of approximately $20.4 million.

Loans were $111.7 million as of September 30, 2002, compared to $100.8 million
as of December 31, 2001. The increase was primarily in real estate
construction, real estate mortgage, and commercial loans partially offset by a
decrease in commercial real estate loans. The percentage of loans to total
assets was 65.3 percent and 64.1 percent at September 30, 2002 and December 31,
2001, respectively. It continues to be managements intent to grow the loan
portfolio and to increase the percent of loans to assets, which potentially
could improve the Companys net interest margin.

Risk Elements

The following table sets forth information concerning the Companys
non-performing assets as of the dates indicated (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.
Non-performing Assets

|                       |                                |                             |    |               |    |              |       |     |       | 
|---------------------- | ------------------------------ | --------------------------- | -- | ------------- | -- | ------------ | ----- | --- | ----- | 
|                       |                                |                             |    | September 30, |    | December 31,
|                       |                                |                             |    | 2002          |    | 2001        
|                       |                                |                             |    |               |    |             
|Non-performing assets: |                                |                             |    |               |    |              |       |    
|                       | Nonaccrual loans               |                             | $  | 18            |    |              | $     | 129 |      
|                       | Loans 90 days or more past due |                             |    |               |    |              |       |     |      
|                       | Restructured loans             |                             |    |               |    |              |       | 909 |      
|                       |                                |                             |    |               |    |              |       |    
|                       |                                |                             | 18 |               |    |              | 1,038 |    
|                       | Other real estate owned        |                             |    |               |    |              |       |     |      
|                       |                                |                             |    |               |    |              |       |    
|                       |                                | Total non-performing assets |    | $             | 18 |              |       | $   | 1,038 | 
|                       |                                |                             |    |               |    |              |       |    

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As of September 30, 2002, the Company had $18,000 in nonperforming assets,
which include nonaccrual loans, loans 90 days or more past due and still
accruing interest, and restructured loans. The Company had $1,038,000 in
nonperforming assets as of December 31, 2001. The $909,000 restructured loan,
at December 31, 2001, was repaid during the first three months of 2002.

The accrual of interest on nonaccrual and other impaired loans is discontinued
at 90 days or when, in the opinion of management, the borrower may be unable to
meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received. Interest income on restructured
loans is recognized pursuant to the terms of the new loan agreement. Interest
income on other impaired loans is monitored and based upon the terms of the
underlying loan agreement. However, the recorded net investment in impaired
loans, including accrued interest, is limited to the present value of the
expected cash flows of the impaired loan or the observable fair market value of
the loans collateral.

During the three-month and nine-month period ended September 30, 2002 there was
one commercial loan on nonaccrual status. The gross income that would have been
recorded for the nine-month period ended September 30, 2002 if the nonaccrual
loan had been current and in accordance with its original term approximates
$3,000. Interest recognized on the loan for the year was insignificant. The
Company does not anticipate any loss with respect to this credit.

During the three-month and nine-month period ended September 30, 2001 there was
one commercial loan on nonaccrual status. The gross income that would have been
recorded for the three and nine month period ended September 30, 2001 if the
nonaccrual loan had been current and in accordance with its original term
approximates $5,000 and $10,000, respectively. Interest recognized on the loan
for the year was insignificant.

Potential Problem Loans

At September 30, 2002 and December 31, 2001, the Company had two potential
problem commercial real estate loans totaling approximately $2,378,000. The
Company believes that the loans are secured by sufficient collateral to repay
the loans, although there can be no assurances given with respect to potential
losses in these credits. These loans are in addition to those categorized as
non-performing listed above. Although these loans are currently classified as
performing, management has information regarding credit weakness inherent in
the loans, which may result in the borrowers inability to comply with present
loan repayment terms.

Summary of Loan Loss Experience

Changes in the Allowance for Loan Losses

The activity in the allowance for loan losses is summarized in Note 5 -
Allowance for Loan Losses in the Notes to Condensed Consolidated Financial
Statements.

The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries), and established through a provision for
loan losses charged to expense. Loans are charged against the allowance for
credit losses when management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans, commitments to extend
credit and standby letters of credit based on evaluations of collectibility and
prior loss experience of loans, commitments to extend credit and standby
letters of credit. The evaluations take into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio quality,
loan concentrations, specific problem loans, commitments, standby letters of
credit and current economic conditions that may affect the borrowers ability
to pay.

The majority of the Companys loan portfolio consists of commercial loans and
single-family residential loans secured by real estate in the Puyallup and
Pierce County areas and also in the Auburn and King County areas. Real estate
prices in this market are stable at this time but may weaken as a result of a
slowing local and national economy. Therefore, the ultimate collectibility of a
substantial portion of the Companys loan portfolio may be susceptible to
change as local market conditions change in the future.

While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an

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integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgment about information available to them at the time
of their examination.

The following table sets forth other information regarding the allowance for
loan losses for the dates indicated (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.
Loan Loss Experience

|                                                                        |  |                           |         |                           |  |               |        |               |  |   |         |   |  |   |        |  
|----------------------------------------------------------------------- |  | ------------------------- | ------- | ------------------------- |  | ------------- | ------ | ------------- |  | - | ------- | - |  | - | ------ | -
|                                                                        |  | Analysis of the Allowance |         | Analysis of the Allowance
|                                                                        |  | for Loan Losses           |         | for Loan Losses          
|                                                                        |  | Three months ended        |         | Nine months ended        
|                                                                        |  |                           |         |                          
|                                                                        |  | September 30,             |         | September 30,             |  | September 30, |        | September 30,
|                                                                        |  | 2002                      |         | 2001                      |  | 2002          |        | 2001         
|                                                                        |  |                           |         |                           |  |               |        |              
|Average Allowance for Loan Losses                                       |  | $                         | 1,278   |                           |  | $             | 1,164  |               |  | $ | 1,216   |   |  | $ | 1,168  |  
|Average Loans Outstanding                                               |  | $                         | 110,616 |                           |  | $             | 97,747 |               |  | $ | 105,546 |   |  | $ | 96,030 |  
|Ratio of net charge-offs during the
period to average loans outstanding |  |                           | 0.01    | %                         |  |               | 0.00   | %             |  |   | 0.01    | % |  |   | 0.00   | %
|Ratio of average allowance for loan losses
to average loans outstanding |  |                           | 1.16    | %                         |  |               | 1.19   | %             |  |   | 1.15    | % |  |   | 1.22   | %

There were $5,000 in loan charge-offs during the three and nine months ended
September 30, 2002 and 2001. The charge-off was in the Companys consumer loan
portfolio. The ratio of the average allowance for loan losses to average loans
outstanding totaled 1.16 percent and 1.15 percent for the three and nine months
ended September 30, 2002 compared to 1.19 percent and 1.22 percent during the
same periods last year, respectively. The decrease results from the loan
portfolio increasing faster than the allowance for loan losses during both the
three and nine month periods. At September 30, 2002, the allowance for loan
losses as a percent of loans totaled 1.18 percent compared to 1.15 percent at
December 31, 2001.

Analysis of the Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered adequate by
management to provide for loan losses inherent in the loan portfolio based on
managements assessment of various factors affecting the loan portfolio,
including, local economic conditions, growth of the loan portfolio and its
composition. Non-performing loans and net charge-offs during the periods
presented have been minimal demonstrating strong credit quality. Increases in
the allowance for loan losses made though provisions were primarily a result of
loan growth.

Management determines the amount of the allowance for loan losses by utilizing
a loan grading system to determine risk in the loan portfolio and by
considering the results of credit reviews. The loan portfolio is separated by
quality and then by loan type. Loans of acceptable quality are evaluated as a
group, by loan type, with a specific loss rate assigned to the total loans in
each type, but unallocated to any individual loan. Conversely, each adversely
classified loan is individually analyzed, to determine an estimated loss
amount. A valuation allowance is also assigned to these adversely classified
loans, but at a higher loss rate due to the greater risk of loss. For those
loans where the estimated loss is greater than the background percentage, the
estimated loss amount is considered specifically allocated to the allowance.
Although management has allocated a portion of the allowance to the loan
categories using the method described above, the adequacy of the allowance must
be considered as a whole. To mitigate the imprecision in most estimates of
expected loan losses, the allocated component of the allowance is supplemented
by an unallocated component. The unallocated portion includes managements
judgmental determination of the amounts necessary for qualitative factors such
as the consideration of new products and policies, economic conditions,
concentrations of credit risk, and the experience and abilities of lending
personnel. Loan concentrations, quality, terms and basic underlying assumptions
remained substantially unchanged during the period.

The Company uses the historical loss experience method in conjunction with the
specific identification method for calculation of the amount of allowance for
loan losses. A nine-year average historical loan loss rate is calculated. This
experience loss rate is applied to graded loans that are not adversely
classified for a subtotal of needed allowance.

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Loans adversely classified are analyzed for potential loss on an individual
basis. This subtotal is added to the experience subtotal and the total is
compared to the allowance for loan losses.

The Company also evaluates current conditions and may adjust the historical
loss estimate by qualitative factors that effect loan repayment. These factors
may include levels of, and trends in, delinquencies and non-accruals; trends in
volume and terms of loans; effects of any changes in lending policies;
experience, ability and depth of management and lending staff; national and
local economic trends; concentrations of credit; and any legal and regulatory
requirements.

Deposits

The Companys primary source of funds is customer deposits. The Company
attempts to maintain a high percentage of noninterest-bearing deposits, which
are a low cost funding source. In addition, the Company offers a variety of
interest-bearing accounts designed to attract both short-term and longer-term
deposits from customers. Interest-bearing accounts earn interest at rates
established by management based on competitive market factors and the Companys
need for funds. The Company traditionally has not purchased brokered deposits
and does not intend to do so in the future.

Deposits increased to $146.3 million as of September 30, 2002, compared to
$134.7 million as of December 31, 2001. The increase occurred in all categories
of deposits during the nine-month period.

The following table sets forth the balances for each major category of deposit
by amount and percent during the periods indicated:

VALLEY COMMUNITY BANCSHARES, INC.
Deposits
(dollars in thousands)

|                                    |  |                    |         |                   |  |        |       |         |  |   |         |  |  |  |       |  
|----------------------------------- |  | ------------------ | ------- | ----------------- |  | ------ | ----- | ------- |  | - | ------- |  |  |  | ----- | -
|                                    |  | Period ended,     
|                                    |  |                   
|                                    |  | September 30, 2002 |         | December 31, 2001
|                                    |  |                    |         |                  
|                                    |  | Amount             |         | Percent           |  | Amount |       | Percent
|                                    |  |                    |         |                   |  |        |       |        
|Noninterest bearing demand deposits |  | $                  | 29,391  |                   |  |        | 20.1  | %       |  | $ | 24,770  |  |  |  | 18.4  | %
|Interest bearing demand deposits    |  |                    | 20,694  |                   |  |        | 14.1  | %       |  |   | 18,997  |  |  |  | 14.1  | %
|Money market deposits               |  |                    | 37,141  |                   |  |        | 25.4  | %       |  |   | 36,424  |  |  |  | 27.0  | %
|Savings deposits                    |  |                    | 14,004  |                   |  |        | 9.6   | %       |  |   | 11,987  |  |  |  | 8.9   | %
|Time certificates < $100,000        |  |                    | 25,998  |                   |  |        | 17.8  | %       |  |   | 24,097  |  |  |  | 17.9  | %
|Time certificates > $100,000        |  |                    | 19,041  |                   |  |        | 13.0  | %       |  |   | 18,425  |  |  |  | 13.7  | %
|                                    |  |                    |         |                   |  |        |       |         |  |   |         |  |  |  |       |  
|                                    |  | $                  | 146,269 |                   |  |        | 100.0 | %       |  | $ | 134,700 |  |  |  | 100.0 | %
|                                    |  |                    |         |                   |  |        |       |         |  |   |         |  |  |  |       |  

Liquidity and Capital Resources

Management actively analyzes and manages the Companys liquidity position. The
objective of liquidity management is to ensure the availability of sufficient
cash flows to meet all financial commitments and to capitalize on opportunities
for profitable business expansion. Management believes that the Companys cash
flow will be sufficient to support its existing operations for the foreseeable
future.

Cash flows from operations contribute significantly to liquidity as well as
proceeds from maturities of securities and increasing customer deposits. As
indicated on the Companys Condensed Consolidated Statement of Cash Flows, net
cash from operating activities for the nine months ended September 30, 2002
contributed $2.5 million to liquidity compared to $1.9 million for the nine
months ended September 30, 2001. The majority of the Companys funding comes
from customer deposits within its operating region. Customer deposits provided
$11.6 million for the nine months ended September 30, 2002 compared to $14.7
million for the nine months ended September 30, 2001. For the nine months ended
September 30, 2002, non-interest bearing deposits, savings deposits, and
certificates of deposit provided the majority of the deposit growth. Another
important source of liquidity is investments in federal funds and
interest-bearing deposits with banks and the Companys securities portfolio.
The Company maintains a ladder of securities that provides prepayments and
payments at maturity and a portfolio of available-for-sale securities that
could be converted to cash quickly. Proceeds from maturity and sale of
securities provided $11.3 million for the nine months September 30, 2002
compared to $15.7 million for the nine months ended September 30, 2001.

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At September 30, 2002, the Company held cash and due from banks, interest
bearing deposits with banks, and federal funds sold of approximately $19.5
million. In addition, at such date $33.2 million of the Companys investments
were classified as available for sale.

The Banks have capacity to borrow funds, up to ten percent of assets, from the
Federal Home Loan Bank of Seattle (FHLB) through pre-approved credit lines as
a secondary source of liquidity. However, these credit lines have pledge
requirements whereby the Banks must maintain unencumbered collateral with a
value at least equal to the outstanding balance. In addition to the FHLB credit
line, the Banks have committed line of credit agreements totaling approximately
$7.5 million from unaffiliated banks. At September 30, 2002, the Banks had no
advances outstanding to the FHLB or from unaffiliated banks.

The Banks have commitments to extend credit, which may have a impact on the
Companys liquidity position. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition
established in the commitment. Commitments generally have fixed expiration
dates. Since some commitments are expected to expire without being drawn upon,
the total commitment amounts do not represent future cash requirements. The
Company experience suggests customers draw on approximately 75 percent of loan
commitments. Commitments to extend credit at September 30, 2002 and December
31, 2001 were $18.5 and $13.5 million, respectively.

Other commitments include agreements between Puyallup Valley Bank and several
contractors for the remodel of its main office facility in Puyallup. It is
anticipated the remodel project will be completed during the fourth quarter of
2002 and at a cost of approximately $555,000.

The Companys total stockholders equity increased to $22.4 million at
September 30, 2002 from $21.2 million at December 31, 2001. The increase was
the result of higher unrealized gains recorded on securities available for
sale, net of income tax and by net income earned during the nine months ended
September 30, 2002, partially offset by a $.60 dividend per share paid to
stockholders of record on December 31, 2001. At September 30, 2002,
stockholders equity was 13.1 percent of total assets, compared to 13.5 percent
at December 31, 2001.

The market value of available for sale securities was greater than book value
at both September 30, 2002 and December 31, 2001, primarily as a result of low
market interest rates, which resulted in unrealized gains in the investment
portfolio. In the event market interest rates increase, the market value of the
Companys investment portfolio may decrease. Because changes in the market
value of available-for-sale securities are a component of other comprehensive
income, within stockholders equity, a decrease in market value of securities
would negatively impact stockholders equity. At September 30, 2002, the
Company performed a simulation analysis of changes in the market value of the
investment portfolio given a 300 basis point increase in interest rates. The
analysis indicated a decrease in market value of approximately $905,000 net of
federal income tax. Although stockholders equity would be reduced by
approximately 4 percent, the Company would still be well in excess on capital
adequacy requirements in the event the Company would be required to liquidate
these securities for unforeseen liquidity needs.

Capital Adequacy Requirements

The Federal Reserve and the FDIC have adopted risk-based capital guidelines for
banks and bank holding companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and
bank holding companies and account for off-balance sheet items. The guidelines
are minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios in excess
of the minimums. Failure to achieve and maintain adequate capital levels may
give rise to supervisory action through the issuance of a capital directive to
ensure the maintenance of required capital levels.

The current guidelines require all federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must
be Tier 1 capital. Tier 1 capital includes common shareholders equity,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles
and the allowance for loan and lease losses. Tier 2 capital includes the
excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term-preferred stock, 20% of unrealized gain of equity securities,
and general reserves for loan and lease losses up to 1.25% of risk-weighted
assets. Neither of the Banks has received any notice indicating that it will
be subject to higher capital requirements.

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Under these guidelines, banks assets are given risk-weights of 0%, 20%, 50% or
100%. Most loans are assigned to the 100% risk category, except for first
mortgage loans fully secured by residential property and, under certain
circumstances, residential construction loans (both carry a 50% rating). Most
investment securities are assigned to the 20% category, except for municipal or
state revenue bonds (which have a 50% rating) and direct obligations of or
obligations guaranteed by the United States Treasury or United States
Government Agencies (which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to Tier 1
capital as a percentage of average total assets less intangibles, to be used as
a supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to limit the maximum degree to which a bank may leverage its
equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an
additional cushion of at least 100 to 200 basis points. Any institution
operating at or near the 3% level is expected to be a strong banking
organization without any supervisory, financial or operational weaknesses or
deficiencies. Any institutions experiencing or anticipating significant growth
would be expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels.

The capital levels of the Company currently exceed applicable regulatory
guidelines, and the Banks are qualified as well-capitalized at September 30,
2002. Management believes that under the current regulations the Banks will
continue to meet well-capitalized capital requirements in the foreseeable
future. However, events beyond the control of the Banks such as a downturn in
the economy where the Banks have most of their loans, could adversely affect
future earnings and, consequently, the ability of the Banks to meet future
well-capitalized capital requirements.

The capital amounts and ratios for the Company and the Banks as of September
30, 2002, are presented in the following table (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.
Capital

|                                         |                      |        |        |        |  |  |                   |        |   |       |                   |   |             |        |  |       |                   |     |   |  |  |   |                   |        |  |  |  |      |  
|---------------------------------------- | -------------------- | ------ | ------ | ------ |  |  | ----------------- | ------ | - | ----- | ----------------- | - | ----------- | ------ |  | ----- | ----------------- | --- | - |  |  | - | ----------------- | ------ |  |  |  | ---- | -
|                                         |                      |        |        |        |  |  |                   |        |   |       |                   |   |             |        |  |       |                   |     |   |  |  |   | To Be Well       
|                                         |                      |        |        |        |  |  |                   |        |   |       |                   |   |             |        |  |       |                   |     |   |  |  |   | Capitalized Under
|                                         |                      |        |        |        |  |  |                   |        |   |       |                   |   | For Capital |        |  |       | Prompt Corrective
|                                         |                      |        | Actual |        |  |  | Adequacy Purposes |        |   |       | Action Provisions
|                                         |                      |        |        |        |  |  |                   |        |   |       |                  
|As September 30, 2002                    |                      | Amount |        | Ratio  |  |  |                   | Amount |   | Ratio |                   |   |             | Amount |  | Ratio
|                                         |                      |        |        |        |  |  |                   |        |   |       |                   |   |             |        |  |      
|Total Capital
(to Risk-Weighted Assets)  |                      |        |        |        |  |  |                   |        |   |       |                   |   |             |        |  |       |                   |     |   |  |  |   |                   |        |  |  |  |     
|                                         | Consolidated         |        | $      | 22,938 |  |  |                   | 18.3   | % |       |                   | > | $           | 10,037 |  |       |                   | 8.0 | % |  |  | > | $                 | 12,546 |  |  |  | 10.0 | %
|                                         | Puyallup Valley Bank |        | $      | 15,571 |  |  |                   | 14.5   | % |       |                   | > | $           | 8,614  |  |       |                   | 8.0 | % |  |  | > | $                 | 10,768 |  |  |  | 10.0 | %
|                                         | Valley Bank          |        | $      | 4,107  |  |  |                   | 25.9   | % |       |                   | > | $           | 1,267  |  |       |                   | 8.0 | % |  |  | > | $                 | 1,584  |  |  |  | 10.0 | %
|Tier I Capital
(to Risk-Weighted Assets) |                      |        |        |        |  |  |                   |        |   |       |                   |   |             |        |  |       |                   |     |   |  |  |   |                   |        |  |  |  |     
|                                         | Consolidated         |        | $      | 21,618 |  |  |                   | 17.2   | % |       |                   | > | $           | 5,018  |  |       |                   | 4.0 | % |  |  | > | $                 | 7,527  |  |  |  | 6.0  | %
|                                         | Puyallup Valley Bank |        | $      | 14,449 |  |  |                   | 13.4   | % |       |                   | > | $           | 4,307  |  |       |                   | 4.0 | % |  |  | > | $                 | 6,461  |  |  |  | 6.0  | %
|                                         | Valley Bank          |        | $      | 3,909  |  |  |                   | 24.7   | % |       |                   | > | $           | 633    |  |       |                   | 4.0 | % |  |  | > | $                 | 950    |  |  |  | 6.0  | %
|Tier I Capital
(to Average Assets)       |                      |        |        |        |  |  |                   |        |   |       |                   |   |             |        |  |       |                   |     |   |  |  |   |                   |        |  |  |  |     
|                                         | Consolidated         |        | $      | 21,618 |  |  |                   | 12.8   | % |       |                   | > | $           | 6,731  |  |       |                   | 4.0 | % |  |  | > | $                 | 8,413  |  |  |  | 5.0  | %
|                                         | Puyallup Valley Bank |        | $      | 14,449 |  |  |                   | 9.7    | % |       |                   | > | $           | 5,958  |  |       |                   | 4.0 | % |  |  | > | $                 | 7,448  |  |  |  | 5.0  | %
|                                         | Valley Bank          |        | $      | 3,909  |  |  |                   | 22.6   | % |       |                   | > | $           | 693    |  |       |                   | 4.0 | % |  |  | > | $                 | 867    |  |  |  | 5.0  | %




Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Companys results of operation are dependent upon its ability to manage
interest rate risk. Management considers interest rate risk to be a significant
risk that could have a material effect on the Companys financial condition and
results of operations. The Company does not currently use derivatives to manage
market and interest rate risk.

A number of measures are used to monitor and manage interest rate risk,
including income simulations and interest sensitivity (gap) analyses. An
income simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in interest
rates. Key assumptions in the model include repayment speeds on certain
assets, cash flows and maturities of other investment securities, loan and
deposit volumes and pricing. These assumptions are inherently uncertain and,
as a result, the model cannot precisely estimate net interest income or
precisely predict the impact of higher or lower interest rates on net interest
income.

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Actual results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes and changes in market conditions and
management strategies, among other factors. At September 30, 2002, based on
the measures used to monitor and manage interest rate risk, there has not been
a material change in the Companys interest rate risk since December 31, 2001.
For additional information, refer to the Companys annual report on Form 10-K
for the year ended December 31, 2001.




Item 4. CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures: An evaluation of the
Companys disclosure controls and procedures (as defined in Section 13(a)-14(c)
of the Securities Exchange Act of 1934 (the Act)) was carried out under the
supervision and with the participation of the Companys Chief Executive
Officer, Chief Financial Officer and several other members of the Companys
senior management within the 90-day period preceding the filing date of this
quarterly report. The Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures as
currently in effect are effective in ensuring that the information required to
be disclosed by the Company in the reports it files or submits under the Act is
(i) accumulated and communicated to the Companys management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms.

(b)  Changes in Internal Controls: In the quarter ended September 30, 2002, the
Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements about
the future operations of the Company. These forward-looking statements involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry significantly increasing; changes
in the interest rate environment reducing margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting
in, among other things, a deterioration in credit quality and an increase in
the provision for possible loan losses; changes in the regulatory environment;
loan delinquency rates; changes in business conditions; volatility of rate
sensitive deposits; operational risks including data processing system failures
or fraud; asset/liability matching risks and liquidity risks; and changes in
the securities markets. Because of these uncertainties, actual future results
may be materially different from the results indicated by these forward-looking
statements. In addition, the Companys past results do not necessarily
indicate its future results.

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PART II   OTHER INFORMATION




Item 1. LEGAL PROCEEDINGS

The Company faces ordinary routine litigation arising in the normal course of
business. In the opinion of management, liabilities (if any) arising from such
claims will not have a material adverse effect upon the business, results of
operations or financial condition of the Company.




Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable




Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable




Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.




Item 5. OTHER INFORMATION

During November 2002, the Board of Directors of both Puyallup Valley Bank and
Valley Bank entered into an agreement to merge the two banks. It is anticipated
the merger will occur during the first quarter of 2003.




Item 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------



| | 3.1 |  | Articles of Incorporation of Valley Community Bancshares,
Inc. *
| | --- |  | ----------------------------------------------------------------
|
| | 3.2 |  | Restated Bylaws of Valley Community Bancshares, Inc. ^          
|
| | 10. |  | Material contracts of Valley Community Bancshares, Inc.         



| | 10.1 |  | Severance agreement for Mr. Brown *                                                          
| | ---- |  | ---------------------------------------------------------------------------------------------
|
| | 10.2 |  | Severance agreement for Mr. Thompson *                                                       
|
| | 10.3 |  | Severance agreement for Mr. Riordan *                                                        
|
| | 10.4 |  | Severance agreement for Mr. Pickett *                                                        
|
| | 10.5 |  | Deferred Compensation Agreement for Mr. Brown *                                              
|
| | 10.6 |  | Deferred Compensation Agreement for Mr. Thompson #                                           
|
| | 10.7 |  | 1998 Stock Option Plan *                                                                     
|
| | 10.8 |  | 401(k) Defined Contribution Plan and Noncontributory Profit Sharing
Plan Adoption Agreement *



| | 99. |  | Additional Exhibits
| | --- |  | -------------------



| | 99.1 |  | Certification Of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | --------------------------------------------------------------------------------------------------
|
| | 99.2 |  | Certification Of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002



---

|* |  | Incorporated by reference to the Exhibits set forth on Registrants
Amended Registration Statement on Form 10 filed with the Securities and
Exchange Commission on September 6, 2000.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|# |  | Incorporated by reference to the Exhibits set forth on Registrants 2000
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 27, 2001.             
| 
| 
| 
| 
|^ |  | Incorporated by reference to the Exhibits set forth on Registrants June
2002 Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 9, 2002.     

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| | (b) |  | Reports on Form 8-K                                                                                             
| | --- |  | ----------------------------------------------------------------------------------------------------------------
|
| |     |  | Valley Community Bancshares, Inc. filed no report on Form 8-K during the
three months ending September 30, 2002.




SIGNATURES

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

|                          |  |                                               |  |     |  |                                                                       
|------------------------- |  | --------------------------------------------- |  | --- |  | ----------------------------------------------------------------------
|                          |  | VALLEY COMMUNITY BANCSHARES, INC.(Registrant)
|                          |  |                                               |  |     |  |                                                                       
|                          |  |                                               |  |     |  |                                                                       
|Date:    November 1, 2002 |  | By                                            |  | /s/ |  | David H. Brown                                                        
|                          |  |                                               |  |    
|                          |  |                                               |  |     |  | David H. Brown
President and Chief Executive Officer                  
|                          |  |                                               |  |     |  |                                                                       
|                          |  |                                               |  |     |  |                                                                       
|Date:    November 1, 2002 |  | By                                            |  | /s/ |  | Joseph E. Riordan                                                     
|                          |  |                                               |  |    
|                          |  |                                               |  |     |  | Joseph E. Riordan
Executive Vice President and
Chief Financial Officer

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##### Table of Contents






CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David H. Brown, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Valley Community
Bancshares, Inc.;                                                                                                                                                                                                                                      
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: October 31, 2002

| |  |    |  |     |  |                                                     
| |  | -- |  | --- |  | ----------------------------------------------------
| |  | By |  | /s/ |  | David H. Brown                                      
| |  |    |  |    
| |  |    |  |     |  | David H. Brown
President and Chief Executive Officer

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##### Table of Contents






CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph E. Riordan, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Valley Community
Bancshares, Inc.;                                                                                                                                                                                                                                      
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: October 31, 2002

| |  |    |  |     |  |                                                                       
| |  | -- |  | --- |  | ----------------------------------------------------------------------
| |  | By |  | /s/ |  | Joseph E. Riordan                                                     
| |  |    |  |    
| |  |    |  |     |  | Joseph E. Riordan
Executive Vice President and
Chief Financial Officer

-25-