##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



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FORM 10-Q

(Mark One)

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|(checkbox |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter ended September 30, 2001                              
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|(box      |  | Transition report pursuant to Section 13 or 15(d)) of the Securities Exchange Act of 1934
For Transition Period from __________________ to ___________________
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|          |  |                                                                                                                                                               
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|          |  | 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. Employer Identification No.)
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|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  (checkbox) No  (box)

The number of shares of the issuers Common Stock, $1.00 par value,
outstanding at November 2, 2001 was 1,133,588.



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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                           
|FORWARD-LOOKING STATEMENTS  
|PART II   OTHER INFORMATION
|SIGNATURES                  



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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 |  |                                                                                      |    |                                                                                                         
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|Item 1.                      |  | Financial
Statements                                                                 |    |                                                                                                          |    | 
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|                             |  |                                                                                      |    | Condensed Consolidated Balance Sheet  September 30, 2001 and December 31, 2000                          |    |  | 1    | 
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|                             |  |                                                                                      |    | Condensed Consolidated Statement of Income  Three and Nine Months
Ended September 30, 2001 and 2000     |    |  | 2    | 
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|                             |  |                                                                                      |    | Condensed Consolidated Statement of Cash Flows  Three and Nine Months
Ended September 30, 2001 and 2000 |    |  | 3    | 
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|                             |  |                                                                                      |    | Notes to Condensed Consolidated Financial Statements                                                     |    |  | 4    | 
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|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition
And Results of Operation |    |                                                                                                          | 8  | 
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|Item 3.                      |  | Quantitative and Qualitative Disclosures about Market Risk                           |    |                                                                                                          | 20 | 
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|FORWARD-LOOKING STATEMENTS   |  |                                                                                      | 21 |                                                                                                         
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|PART II OTHER INFORMATION    |  |                                                                                      | 21 |                                                                                                         
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|Signatures                   |  |                                                                                      | 22 |                                                                                                         

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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,
|                     |                                                                                                                                           |                     |                                            |        |               |         |             
|                     |                                                                                                                                           |                     |                                            |        | 2001          |         | 2000        
|                     |                                                                                                                                           |                     |                                            |        |               |         |             
|ASSETS               |                                                                                                                                           |                     |                                            |        |               |         |              |       
|                    
|                    
|                    
|                    
|                     | Cash and due from banks                                                                                                                   |                     | $                                          | 5,276  |               |         | $            | 4,466  |        
|                    
|                    
|                    
|                    
|                     | Interest-bearing deposits with banks                                                                                                      |                     |                                            | 21,302 |               |         |              | 10,123 |        
|                    
|                    
|                    
|                    
|                     | Securities available-for-sale                                                                                                             |                     |                                            | 31,267 |               |         |              | 30,483 |        
|                    
|                    
|                    
|                    
|                     | Securities held-to-maturity                                                                                                               |                     |                                            |        |               |         |              | 279    |        
|                    
|                    
|                    
|                    
|                     | Federal Home Loan Bank stock                                                                                                              |                     |                                            | 471    |               |         |              | 447    |        
|                     |                                                                                                                                           |                     |                                            |        |               |         |              |       
|                     |                                                                                                                                           |                     | 58,316                                     |        |               |         | 45,798       |       
|                    
|                    
|                    
|                    
|                     | Loans                                                                                                                                     |                     |                                            | 98,419 |               |         |              | 94,614 |        
|                    
|                    
|                    
|                    
|                     | Less allowance for loan losses                                                                                                            |                     |                                            | 1,162  |               |         |              | 1,096  |        
|                     |                                                                                                                                           |                     |                                            |        |               |         |              |       
|                     |                                                                                                                                           |                     | Loans, net                                 |        |               | 97,257  |              |        |         | 93,518  | 
|                    
|                    
|                    
|                    
|                     | Accrued interest receivable                                                                                                               |                     |                                            | 860    |               |         |              | 952    |        
|                    
|                    
|                    
|                    
|                     | Premises and equipment, net                                                                                                               |                     |                                            | 5,619  |               |         |              | 5,712  |        
|                    
|                    
|                    
|                    
|                     | Real estate held for investment                                                                                                           |                     |                                            | 224    |               |         |              | 224    |        
|                    
|                    
|                    
|                    
|                     | Other assets                                                                                                                              |                     |                                            | 219    |               |         |              | 565    |        
|                     |                                                                                                                                           |                     |                                            |        |               |         |              |       
|                     |                                                                                                                                           |                     | Total assets                               |        | $             | 162,495 |              |        | $       | 146,769 | 
|                     |                                                                                                                                           |                     |                                            |        |               |         |              |       
|LIABILITIES          |                                                                                                                                           |                     |                                            |        |               |         |              |       
|                    
|                    
|                    
|                    
|                     | Deposits                                                                                                                                  |                     |                                            |        |               |         |              |        |        
|                    
|                    
|                    
|                    
|                     |                                                                                                                                           | Noninterest-bearing |                                            | $      | 25,724        |         |              | $      | 24,140  |        
|                    
|                    
|                    
|                    
|                     |                                                                                                                                           | Interest-bearing    |                                            |        | 114,045       |         |              |        | 100,907 |        
|                     |                                                                                                                                           |                     |                                            |        |               |         |              |       
|                     |                                                                                                                                           |                     | Total deposits                             |        |               | 139,769 |              |        |         | 125,047 | 
|                    
|                    
|                    
|                    
|                     | Other borrowed funds                                                                                                                      |                     |                                            | 509    |               |         |              | 557    |        
|                    
|                    
|                    
|                    
|                     | Accrued interest payable                                                                                                                  |                     |                                            | 528    |               |         |              | 597    |        
|                    
|                    
|                    
|                    
|                     | Other liabilities                                                                                                                         |                     |                                            | 534    |               |         |              | 443    |        
|                     |                                                                                                                                           |                     |                                            |        |               |         |              |       
|                     |                                                                                                                                           |                     | Total liabilities                          |        |               | 141,340 |              |        |         | 126,644 | 
|                     |                                                                                                                                           |                     |                                            |        |               |         |              |       
|STOCKHOLDERS EQUITY |                                                                                                                                           |                     |                                            |        |               |         |              |       
|                    
|                    
|                    
|                    
|                     | Common stock, par value $1 per share; 5,000,000 shares authorized; 1,133,588
shares issued and outstanding in 2001 and 2000, respectively |                     |                                            | 1,134  |               |         |              | 1,134  |        
|                    
|                    
|                    
|                    
|                     | Additional paid-in capital                                                                                                                |                     |                                            | 16,322 |               |         |              | 16,322 |        
|                    
|                    
|                    
|                    
|                     | Retained earnings                                                                                                                         |                     |                                            | 3,259  |               |         |              | 2,613  |        
|                    
|                    
|                    
|                    
|                     | Accumulated other comprehensive income, net of tax                                                                                        |                     |                                            | 440    |               |         |              | 56     |        
|                     |                                                                                                                                           |                     |                                            |        |               |         |              |       
|                     |                                                                                                                                           |                     | Total stockholders equity                 |        |               | 21,155  |              |        |         | 20,125  | 
|                     |                                                                                                                                           |                     |                                            |        |               |         |              |       
|                     |                                                                                                                                           |                     | Total liabilities and stockholders equity |        | $             | 162,495 |              |        | $       | 146,769 | 
|                     |                                                                                                                                           |                     |                                            |        |               |         |              |       

The accompanying notes are an integral part of these financial statements

-1-



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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,    
|                          |                                                           |                                                     |     |                    |       |                  
|                          |                                                           |                                                     |     | 2001               |       | 2000              |     | 2001      |       | 2000
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |     
|INTEREST INCOME           |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                         
|                         
|                         
|                         
|                          | Interest and fees on loans                                |                                                     | $   | 2,042              |       |                   | $   | 2,039     |       |      | $     | 6,116     |       |   | $     | 5,816     |      
|                         
|                         
|                         
|                         
|                          | Interest on federal funds sold and deposits in banks      |                                                     |     | 192                |       |                   |     | 226       |       |      |       | 619       |       |   |       | 480       |      
|                         
|                         
|                         
|                         
|                          | Interest on securities                                    |                                                     |     | 438                |       |                   |     | 475       |       |      |       | 1,242     |       |   |       | 1,412     |      
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Total interest income                               |     |                    | 2,672 |                   |     |           | 2,740 |      |       |           | 7,977 |   |       |           | 7,708 | 
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|INTEREST EXPENSE          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                         
|                         
|                         
|                         
|                          | Interest on deposits                                      |                                                     |     | 854                |       |                   |     | 1,006     |       |      |       | 2,768     |       |   |       | 2,644     |      
|                         
|                         
|                         
|                         
|                          | Interest on federal funds and other short-term borrowings |                                                     |     | 3                  |       |                   |     | 8         |       |      |       | 12        |       |   |       | 39        |      
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Total interest expense                              |     |                    | 857   |                   |     |           | 1,014 |      |       |           | 2,780 |   |       |           | 2,683 | 
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Net interest income                                 |     |                    | 1,815 |                   |     |           | 1,726 |      |       |           | 5,197 |   |       |           | 5,025 | 
|                         
|                         
|                         
|                         
|PROVISION FOR LOAN LOSSES |                                                           |                                                     |     |                    |       |                   | 43  |           |       |      | 62    |           |       |   | 102   |          
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |     
|                          |                                                           | Net interest income after provision
for loan losses |     |                    | 1,815 |                   |     |           | 1,683 |      |       |           | 5,135 |   |       |           | 4,923 | 
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|NONINTEREST INCOME        |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                         
|                         
|                         
|                         
|                          | Service charges                                           |                                                     |     | 96                 |       |                   |     | 87        |       |      |       | 284       |       |   |       | 241       |      
|                         
|                         
|                         
|                         
|                          | Gain on sale of investment securities, net                |                                                     |     | 44                 |       |                   |     |           |       |      |       | 54        |       |   |       |           |      
|                         
|                         
|                         
|                         
|                          | Origination fees on mortgage loans brokered               |                                                     |     | 20                 |       |                   |     | 20        |       |      |       | 85        |       |   |       | 25        |      
|                         
|                         
|                         
|                         
|                          | Other operating income                                    |                                                     |     | 92                 |       |                   |     | 84        |       |      |       | 241       |       |   |       | 214       |      
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Total noninterest income                            |     |                    | 252   |                   |     |           | 191   |      |       |           | 664   |   |       |           | 480   | 
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|NONINTEREST EXPENSE       |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                         
|                         
|                         
|                         
|                          | Salaries                                                  |                                                     |     | 541                |       |                   |     | 500       |       |      |       | 1,590     |       |   |       | 1,476     |      
|                         
|                         
|                         
|                         
|                          | Employee benefits                                         |                                                     |     | 129                |       |                   |     | 126       |       |      |       | 411       |       |   |       | 377       |      
|                         
|                         
|                         
|                         
|                          | Occupancy                                                 |                                                     |     | 144                |       |                   |     | 120       |       |      |       | 425       |       |   |       | 349       |      
|                         
|                         
|                         
|                         
|                          | Equipment                                                 |                                                     |     | 126                |       |                   |     | 128       |       |      |       | 385       |       |   |       | 357       |      
|                         
|                         
|                         
|                         
|                          | Other operating expenses                                  |                                                     |     | 381                |       |                   |     | 364       |       |      |       | 1,198     |       |   |       | 1,095     |      
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           | Total noninterest expense                           |     |                    | 1,321 |                   |     |           | 1,238 |      |       |           | 4,009 |   |       |           | 3,654 | 
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|INCOME BEFORE INCOME TAX  |                                                           |                                                     | 746 |                    |       |                   | 636 |           |       |      | 1,790 |           |       |   | 1,749 |          
|                         
|                         
|                         
|                         
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                         
|                         
|                         
|                         
|PROVISION FOR INCOME TAX  |                                                           |                                                     | 220 |                    |       |                   | 202 |           |       |      | 521   |           |       |   | 533   |          
|                         
|                         
|                         
|                         
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|NET INCOME                |                                                           | $                                                   | 526 |                    |       | $                 | 434 |           |       | $    | 1,269 |           |       | $ | 1,216 |          
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                          |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                         
|                         
|                         
|                         
|EARNINGS PER SHARE        |                                                           |                                                     |     |                    |       |                   |     |           |       |      |       |           |       |   |       |          
|                         
|                         
|                         
|                         
|                          | Basic                                                     |                                                     | $   | 0.46               |       |                   | $   | 0.38      |       |      | $     | 1.12      |       |   | $     | 1.08      |      
|                         
|                         
|                         
|                         
|                          | Diluted                                                   |                                                     | $   | 0.46               |       |                   | $   | 0.38      |       |      | $     | 1.10      |       |   | $     | 1.05      |      
|                         
|                         
|                         
|                         
|                          | Weighted average shares outstanding                       |                                                     |     | 1,133,588          |       |                   |     | 1,133,588 |       |      |       | 1,133,588 |       |   |       | 1,130,777 |      
|                         
|                         
|                         
|                         
|                          | Weighted average diluted shares outstanding               |                                                     |     | 1,151,067          |       |                   |     | 1,153,049 |       |      |       | 1,151,971 |       |   |       | 1,154,281 |      

The accompanying notes are an integral part of these financial statements

-2-



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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,    
|                                                  |                                                                            |                                                    |                                    |         |                  
|                                                  |                                                                            |                                                    |                                    |         | 2001              |         | 2000 
|                                                  |                                                                            |                                                    |                                    |         |                   |         |      
|CASH FLOWS FROM OPERATING ACTIVITIES              |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net income                                                                 |                                                    | $                                  | 1,269   |                   |         | $     | 1,216   |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Adjustments to reconcile net income to net cash
from operating activities  |                                                    |                                    |         |                   |         |       |         |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Provisions for loan losses                         |                                    |         | 62                |         |       |         | 102   |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Depreciation                                       |                                    |         | 349               |         |       |         | 317   |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Deferred income tax                                |                                    |         | 2                 |         |       |         | (9    | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Net amortization on securities                     |                                    |         | 47                |         |       |         | 25    |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | FHLB stock dividends                               |                                    |         | (24               | )       |       |         | (21   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Gain on sale of securities available-for-sale      |                                    |         | (54               | )       |       |         |       |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Loss on sale of premises and equipment             |                                    |         | 2                 |         |       |         |       |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Increase (decrease) in accrued interest receivable |                                    |         | 92                |         |       |         | (20   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Increase (decrease) in other assets                |                                    |         | 163               |         |       |         | (8    | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Increase (decrease) in accrued interest payable    |                                    |         | (69               | )       |       |         | 234   |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Increase in other liabilities                      |                                    |         | 74                |         |       |         | 28    |        
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  |                                                                            |                                                    | Net cash from operating activities |         |                   | 1,913   |       |         |       | 1,864   |  
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  | Net increase in interest-bearing deposits with banks                       |                                                    |                                    | (11,179 | )                 |         |       | (8,462  | )    
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of securities available-for-sale                                  |                                                    |                                    | (15,650 | )                 |         |       | (4,273  | )    
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from sales of securities available-for-sale                       |                                                    |                                    | 3,055   |                   |         |       |         |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from maturities of securities available-for-sale                  |                                                    |                                    | 12,679  |                   |         |       | 5,571   |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from maturities of securities held-to-maturity                    |                                                    |                                    |         |                   |         |       | 206     |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net increase in loans                                                      |                                                    |                                    | (3,801  | )                 |         |       | (12,003 | )    
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Additions to premises and equipment                                        |                                                    |                                    | (258    | )                 |         |       | (1,256  | )    
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  |                                                                            |                                                    | Net cash from investing activities |         |                   | (15,154 | )     |         |       | (20,217 | )
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                 
|                                                 
|                                                 
|                                                 
|CASH FLOWS FROM FINANCING ACTIVITIES              |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net increase in deposits                                                   |                                                    |                                    | 14,722  |                   |         |       | 18,689  |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net increase (decrease) in other borrowed funds                            |                                                    |                                    | (48     | )                 |         |       | (30     | )    
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash dividends paid                                                        |                                                    |                                    | (623    | )                 |         |       | (563    | )    
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Stock options exercised                                                    |                                                    |                                    |         |                   |         |       | 44      |      
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            |                                                    | Net cash from financing activities |         |                   | 14,051  |       |         |       | 18,140  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|NET DECREASE IN CASH AND DUE
FROM BANKS           |                                                                            |                                                    | 810                                |         |                   |         | (213  | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                 
|                                                 
|                                                 
|                                                 
|CASH AND DUE FROM BANKS, beginning of year        |                                                                            |                                                    | 4,466                              |         |                   |         | 5,127 |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|CASH AND DUE FROM BANKS, at end of period         |                                                                            | $                                                  | 5,276                              |         |                   | $       | 4,914 |        
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash payments for                                                          |                                                    |                                    |         |                   |         |       |         |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Interest                                           |                                    | $       | 2,849             |         |       | $       | 2,449 |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            | Income taxes                                       |                                    |         | 167               |         |       |         | 562   |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                 
|                                                 
|                                                 
|                                                 
|SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES    |                                                                            |                                                    |                                    |         |                   |         |       |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Unrealized gains (losses) on securities available-for-sale                 |                                                    | $                                  | 582     |                   |         | $     | 173     |      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Deferred tax on unrealized (gains) losses on securities
available-for-sale |                                                    |                                    | (198    | )                 |         |       | (58     | )    
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Held-to-maturity securities transferred to securities available-for-sale   |                                                    |                                    | 279     |                   |         |       |         |      

The accompanying notes are an integral part of these financial statements

-3-



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##### Table of Contents






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, 2001 and September 30, 2000 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, 2000 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, 2001, are not necessarily indicative of the results to be
anticipated for the year ending December 31, 2001.
Certain information and note disclosures normally included in the Companys
annual financial statements prepared in accordance with generally accepted
accounting principles 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, 2000 and notes thereto included in the Companys Form 10-K filed
with the Securities and Exchange Commission. Certain amounts in the 2000
financial statements have been reclassified to conform to the 2001
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, 2001 and
2000 (dollars in thousands, except per share amounts).

VALLEY COMMUNITY BANCSHARES, INC.
Earnings Per Share

|                                            |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |           | 
|------------------------------------------- | ----------------------------------------------------------------------- | - | ------------------ | --------- | ----------------- | - | ---- | --------- | ---- | - | ----- | --------- |  | - | ----- | --------- | 
|                                            |                                                                         |   | Three Months Ended |           | Nine Months Ended
|                                            |                                                                         |   | September 30,      |           | September 30,    
|                                            |                                                                         |   |                    |           |                  
|                                            |                                                                         |   | 2001               |           | 2000              |   | 2001 |           | 2000
|                                            |                                                                         |   |                    |           |                   |   |      |           |     
|NUMERATOR:                                  |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                           
|                                           
|                                           
|                                           
|Net income                                  |                                                                         | $ | 526                |           |                   | $ | 434  |           |      | $ | 1,269 |           |  | $ | 1,216 |          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                           
|                                           
|                                           
|                                           
|DENOMINATOR:                                |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                           
|                                           
|                                           
|                                           
|Denominator for basic earnings per share:   |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                           
|                                           
|                                           
|                                           
|                                            | Weighted average shares                                                 |   |                    | 1,133,588 |                   |   |      | 1,133,588 |      |   |       | 1,133,588 |  |   |       | 1,130,777 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Effect of diluted securities  stock options                            |   |                    | 17,479    |                   |   |      | 19,461    |      |   |       | 18,383    |  |   |       | 23,504    | 
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                           
|                                           
|                                           
|                                           
|Denominator for diluted earnings per share: |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                           
|                                           
|                                           
|                                           
|                                            | Weighted average shares and assumed
conversion of diluted stock options |   |                    | 1,151,067 |                   |   |      | 1,153,049 |      |   |       | 1,151,971 |  |   |       | 1,154,281 | 
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                           
|                                           
|                                           
|                                           
|Basic earnings per share                    |                                                                         | $ | 0.46               |           |                   | $ | 0.38 |           |      | $ | 1.12  |           |  | $ | 1.08  |          
|                                           
|                                           
|                                           
|                                           
|                                            |                                                                         |   |                    |           |                   |   |      |           |      |   |       |           |  |   |       |          
|                                           
|                                           
|                                           
|                                           
|Diluted earnings per share                  |                                                                         | $ | 0.46               |           |                   | $ | 0.38 |           |      | $ | 1.10  |           |  | $ | 1.05  |          

Note 3  Investment Securities

-4-



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##### Table of Contents



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, 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 |   | $         | 8,007 |            |   | $          | 247 |       |   | $  | 13 |  |   | $      | 8,241 | 
|                                 
|                                 
|                                 
|                                 
|State and political subdivisions  |                           |   | 7,077     |       |            |   | 201        |     |       |   |    |    |  |   | 7,278  |      
|                                 
|                                 
|                                 
|                                 
|Mortgage-backed securities        |                           |   | 14,516    |       |            |   | 231        |     |       |   | 2  |    |  |   | 14,745 |      
|                                 
|                                 
|                                 
|                                 
|Other                             |                           |   | 1,000     |       |            |   | 3          |     |       |   |    |    |  |   | 1,003  |      
|                                  |                           |   |           |       |            |   |            |     |       |   |    |    |  |   |        |      
|                                  |                           | $ | 30,600    |       |            | $ | 682        |     |       | $ | 15 |    |  | $ | 31,267 |      
|                                  |                           |   |           |       |            |   |            |     |       |   |    |    |  |   |        |      

Securities Available-For-Sale

|                                                            |                           |   |           |        |            |   |            |    |       |   |    |    |  |   |        |        | 
|----------------------------------------------------------- | ------------------------- | - | --------- | ------ | ---------- | - | ---------- | -- | ----- | - | -- | -- |  | - | ------ | ------ | 
|                                                            |                           |   |           |        |            |   | Gross      |    | Gross |   |    |    | 
|                                                            |                           |   | Amortized |        | Unrealized |   | Unrealized |    | Fair 
|                                                            |                           |   | Cost      |        | Gains      |   | Losses     |    | Value
|                                                            |                           |   |           |        |            |   |            |    |      
|U.S. Treasury and U.S. Government                           |                           |   |           |        |            |   |            |    |       |   |    |    |  |   |        |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | corporations and agencies |   | $         | 16,652 |            |   | $          | 77 |       |   | $  | 30 |  |   | $      | 16,699 | 
|                                                           
|                                                           
|                                                           
|                                                           
|State and political subdivisions                            |                           |   | 4,710     |        |            |   | 38         |    |       |   | 7  |    |  |   | 4,741  |       
|                                                           
|                                                           
|                                                           
|                                                           
|Mortgage-backed securities                                  |                           |   | 7,531     |        |            |   | 47         |    |       |   | 30 |    |  |   | 7,548  |       
|                                                           
|                                                           
|                                                           
|                                                           
|Other                                                       |                           |   | 1,504     |        |            |   |            |    |       |   | 9  |    |  |   | 1,495  |       
|                                                            |                           |   |           |        |            |   |            |    |       |   |    |    |  |   |        |       
|                                                            |                           |   | 30,397    |        |            |   | 162        |    |       |   | 76 |    |  |   | 30,483 |       
|                                                            |                           |   |           |        |            |   |            |    |       |   |    |    |  |   |        |       
|Securities Held-to-Maturity                                 |                           |   |           |        |            |   |            |    |       |   |    |    |  |   |        |       
|                                                           
|                                                           
|                                                           
|                                                           
|U.S. Treasury and U.S. Government
corporations and agencies |                           |   | 244       |        |            |   | 4          |    |       |   |    |    |  |   | 248    |       
|                                                           
|                                                           
|                                                           
|                                                           
|State and political subdivisions                            |                           |   | 35        |        |            |   |            |    |       |   |    |    |  |   | 35     |       
|                                                            |                           |   |           |        |            |   |            |    |       |   |    |    |  |   |        |       
|                                                            |                           |   | 279       |        |            |   | 4          |    |       |   |    |    |  |   | 283    |       
|                                                            |                           |   |           |        |            |   |            |    |       |   |    |    |  |   |        |       
|                                                            |                           | $ | 30,676    |        |            | $ | 166        |    |       | $ | 76 |    |  | $ | 30,766 |       
|                                                            |                           |   |           |        |            |   |            |    |       |   |    |    |  |   |        |       

-5-



---



##### Table of Contents



Note 4  Loans

The major classifications of loans at September 30, 2001 and December 31, 2000
are summarized as follows (dollars in thousands):

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

|                   |              |             |        |               |        |              |      |        |       |         |        |        |        |  |      |      |       |  
|------------------ | ------------ | ----------- | ------ | ------------- | ------ | ------------ | ---- | ------ | ----- | ------- | ------ | ------ | ------ |  | ---- | ---- | ----- | -
|                   |              |             |        | September 30, |        | December 31,
|                   |              |             |        | 2001          |        | 2000         |     
|                   |              |             |        |               |        |              |     
|                   |              |             |        | Amount        |        | Percent      |      | Amount |       | Percent
|                   |              |             |        |               |        |              |      |        |       |        
|Real Estate        |              |             |        |               |        |              |      |        |       |         |        |        |        |  |      |     
|                  
|                  
|                  
|                  
|                   | Construction |             | $      | 8,444         |        |              |      | 8.6    | %     |         | $      | 5,959  |        |  |      | 6.3  | %    
|                  
|                  
|                  
|                  
|                   | Mortgage     |             |        | 13,775        |        |              |      | 14.0   | %     |         |        | 16,701 |        |  |      | 17.6 | %    
|                  
|                  
|                  
|                  
|                   | Commercial   |             |        | 55,852        |        |              |      | 56.7   | %     |         |        | 52,620 |        |  |      | 55.6 | %    
|                  
|                  
|                  
|                  
|Commercial         |              |             | 16,750 |               |        |              | 17.0 | %      |       |         | 16,258 |        |        |  | 17.2 | %   
|                  
|                  
|                  
|                  
|Consumer and other |              |             | 2,888  |               |        |              | 2.9  | %      |       |         | 2,523  |        |        |  | 2.7  | %   
|                  
|                  
|                  
|                  
|Lease financing    |              |             | 793    |               |        |              | 0.8  | %      |       |         | 560    |        |        |  | 0.6  | %   
|                   |              |             |        |               |        |              |      |        |       |         |        |        |        |  |      |     
|                   |              | Total loans |        |               | 98,502 |              |      |        | 100.0 | %       |        |        | 94,621 |  |      |      | 100.0 | %
|                   |              |             |        |               |        |              |      |        |       |         |        |        |        |  |      |     
|Deferred loan fees |              |             | (83    | )             |        |              |      |        |       |         | (7     | )      |        |  |      |     
|                   |              |             |        |               |        |              |      |        |       |         |        |        |        |  |      |     
|                   |              | Net loans   |        | $             | 98,419 |              |      |        |       |         |        | $      | 94,614 |  |      |      |       |  
|                   |              |             |        |               |        |              |      |        |       |         |        |        |        |  |      |     

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, 2001 totaled $1,162,000
representing a net increase of $66,000 or 6% compared to $1,096,000 at December
31, 2000. The increase is primarily due to the increase in loans since
December 31, 2000 and is not related to any specifically identified problem
loan. Management believes that the allowance for loan losses at September 30,
2001 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 Sept. 30, |     | Nine months ended Sept. 30,
|                               |                                 |                 |       |                        |     |                            
|                               |                                 |                 |       | 2001                   |     | 2000                        |       | 2001 |    | 2000
|                               |                                 |                 |       |                        |     |                             |       |      |    |     
|Balance at beginning of period |                                 | $               | 1,162 |                        |     | $                           | 1,018 |      |    | $    | 1,096 |    |    | $ | 959   |    
|                              
|                              
|                              
|                              
|                               | Charge-offs                     |                 |       |                        |     |                             |       | 21   |    |      |       |    |    |   |       | 21  |   
|                              
|                              
|                              
|                              
|                               | Recoveries:                     |                 |       |                        |     |                             |       |      |    |      |       | 4  |    |   |       |     |   
|                               |                                 |                 |       |                        |     |                             |       |      |    |      |       |    |    |   |       |    
|                               |                                 | Net charge-offs |       |                        | -0- |                             |       |      | 21 |      |       |    | (4 | ) |       |     | 21 | 
|                              
|                              
|                              
|                              
|                               | Additions charged to operations |                 |       |                        |     |                             |       | 43   |    |      |       | 62 |    |   |       | 102 |   
|                               |                                 |                 |       |                        |     |                             |       |      |    |      |       |    |    |   |       |    
|Balance at end of period       |                                 | $               | 1,162 |                        |     | $                           | 1,040 |      |    | $    | 1,162 |    |    | $ | 1,040 |    
|                               |                                 |                 |       |                        |     |                             |       |      |    |      |       |    |    |   |       |    

-6-



---



##### Table of Contents



Note 6  Impact of New Accounting Issues

During the year 2001 the Company adopted the following accounting standards
issued by the Financial Accounting Standard Board.

Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and
138, which established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company implemented this statement
effective January 1, 2001. Implementation of the statement did not result in a
material impact on its financial position or results of operations. As
permitted by the statement the Company reclassified approximately $279,000 in
securities held-to-maturity with a market value of $284,000 to securities
available-for-sale.

Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
as a replacement SFAS No. 125, which has the same title. SFAS No. 140 revises
the standards for accounting for securitizations and other transfers of
financial assets and collateral, but carries over most of the provisions of
SFAS No. 125 without change. The Company implemented this statement effective
April 1, 2001. Implementation of the statement did not result in a material
impact on its financial position or results of operations.

During the year 2001 the Financial Accounting Standard Board issued the
following accounting standards. The Company does not expect these statements
will result in a material impact on its financial position or results of
operations.

Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinationsrequires that all business combinations initiated after June 30,
2001 be accounted for by use of the purchase method. The use of the
pooling-of-interest method for those business combinations is prohibited. SFAS
No. 141 also changes the requirements for recognizing intangibles assets as
assets apart from goodwill in business combinations accounted for by the
purchase method for which date of acquisition is July 1, 2001, or later.

Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible. This new standard addresses how intangible assets that are acquired
individually or with a group of other assets (but not in a business
combination) should be accounted for upon their acquisition. It also explains
how goodwill and other intangible assets should be accounted for after they
have been acquired. Under SFAS No. 142, goodwill acquired in a business
combination for which the acquisition date is after June 30, 2001, should not
be amortized, but should be tested for impairment in accordance with the
provisions of this accounting standard. Goodwill acquired in a business
combination for which the acquisition date is before July 1, 2001, should
continue to be amortized until an institution first applies all of the
provisions of SFAS No. 142 in accordance with the effective date of the
standard which is for fiscal years beginning after December 15, 2001.

-7-



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##### Table of Contents






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, 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 and Auburn, 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.

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 community 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 one full-service office.

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

Results of Operations

The Company earned net income of $526,000 or $0.46 per diluted share for the
three months ended September 30, 2001, compared to net income of $434,000 or
$0.38 per diluted share, for the three months ended September 30, 2000, an
increase of 21 percent. The Companys return on average assets was 1.30 percent
for the three months ended September 30, 2001, compared to 1.16 percent for the
three months ended September 30, 2000.

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The Company earned net income of $1,269,000 or $1.10 per diluted share for the
nine months ended September 30, 2001, compared to net income of $1,216,000, or
$1.05 per diluted share, for the nine months ended September 30, 2000, an
increase of 4 percent. The Companys return on average assets was 1.10 percent
for the nine months ended September 30, 2001, compared to 1.15 percent for nine
months ended September 30, 2000.

The increase in net income for both the three-month and nine-month periods
ended September 30, 2001 was primarily the result of an increase in net
interest income, lower provision for loan losses, and an increase in
non-interest income (primarily gain on sale of investment securities).
Improving operations at Valley Bank favorably impacted net interest income and
non-interest income. The increase was partially offset by increases in
non-interest expense which reflects the higher operating costs associated with
Valley Banks new banking facility that began operations in June 2000.

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 $476,000 and $1,237,000 for the three
and nine months ended September 30, 2001, respectively compared to $470,000 and
$1,312,000 for the three and nine months ended September 30, 2000. Puyallup
Valley Banks increase in earnings resulted from lower provision for loan
losses and from gains on the sale of investment securities, partially offset by
increased operating costs.

Valley Bank earned net income of $36,000 and $34,000 for the three and nine
months ended September 30, 2001, respectively compared to a net loss $33,000
and $75,000 for the three and nine months ended September 30, 2000,
respectively. Valley Bank began contributing positive earnings to the Company
during the second quarter of 2001, which continued during the third quarter of
2001.

The following table shows the various performance ratios for the Company for
the three and nine months ended September 30, 2001 and 2000, respectively:

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

|                      |                                                                                               |  |                              |         |                             |  |      |         |      |  |   |         |   |  |   |         |  
|--------------------- | --------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | --------------------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                      |                                                                                               |  | Three Months Ended Sept. 30, |         | Nine Months Ended Sept. 30,
|                      |                                                                                               |  |                              |         |                            
|                      |                                                                                               |  | 2001                         |         | 2000                        |  | 2001 |         | 2000
|                      |                                                                                               |  |                              |         |                             |  |      |         |     
|Financial Performance |                                                                                               |  |                              |         |                             |  |      |         |      |  |   |         |   |  |   |        
|                     
|                     
|                     
|                     
|                      | Net Income                                                                                    |  | $                            | 526     |                             |  | $    | 434     |      |  | $ | 1,269   |   |  | $ | 1,216   |  
|                     
|                     
|                     
|                     
|                      | Average Assets                                                                                |  |                              | 160,707 |                             |  |      | 148,080 |      |  |   | 154,430 |   |  |   | 140,791 |  
|                     
|                     
|                     
|                     
|                      | Average Stockholders Equity                                                                  |  |                              | 20,807  |                             |  |      | 19,323  |      |  |   | 20,365  |   |  |   | 18,821  |  
|                     
|                     
|                     
|                     
|                      | Return on Assets (net income divided by average assets)                                       |  |                              | 1.30    | %                           |  |      | 1.16    | %    |  |   | 1.10    | % |  |   | 1.15    | %
|                     
|                     
|                     
|                     
|                      | Return on Equity (net income divided by average equity)                                       |  |                              | 10.03   | %                           |  |      | 8.91    | %    |  |   | 8.33    | % |  |   | 8.61    | %
|                     
|                     
|                     
|                     
|                      | Net Interest Margin (net interest income (tax adjusted)
Divided by earning assets)            |  |                              | 4.94    | %                           |  |      | 5.11    | %    |  |   | 4.97    | % |  |   | 5.26    | %
|                     
|                     
|                     
|                     
|                      | Efficiency Ratio (noninterest expense divided by
noninterest income plus net interest income) |  |                              | 63.91   | %                           |  |      | 64.58   | %    |  |   | 68.40   | % |  |   | 66.38   | %
|                     
|                     
|                     
|                     
|                      | Ratio of noninterest income to average assets                                                 |  |                              | 3.26    | %                           |  |      | 3.32    | %    |  |   | 3.47    | % |  |   | 3.46    | %

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, 2001, the Companys
net interest margin was 4.94 percent compared to 5.11 percent for the three
months ended September 30, 2000. For the nine months ended September 30, 2001,
the Companys net interest margin was 4.97 percent compared to 5.26 percent for
the nine months ended September 30, 2000.

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##### Table of Contents



Interest income was $2,672,000 for the three months ended September 30, 2001
compared to $2,740,000 for the three months ended September 30, 2000. Interest
income was $7,977,000 for the nine months ended September 30, 2001 compared to
$7,708,000 for the nine months ended September 30, 2000. The three-month
decrease was the result of a significant decrease in the yield earned on
earning assets partially offset by earning asset growth. The nine-month
increase was due to growth in interest earning assets partially offset by a
lower yield earned thereon. The yield on interest-earning assets decreased to
7.22 percent for the three months ended September 30, 2001 compared to 8.07
percent during the same period a year ago. The yield on interest-earning assets
decreased to 7.58 percent for the nine months ended September 30, 2001 compared
to 8.02 percent during the same period a year ago. The decrease in yields was
the result of a lower yield realized on interest bearing deposits with banks
and loans. The yield decrease reflects an overall decline in market interest
rates resulting from a soft economic environment.

Interest expense was $857,000 for the three months September 30, 2001 compared
to $1,014,000 for the three months ended September 30, 2000. Interest expense
was $2,780,000 for the nine months ended September 30, 2001 compared to
$2,683,000 for the nine months ended September 30, 2000. The cost of funds
decreased to 3.01 percent for the three months ended September 30, 2001
compared to 3.87 percent during the same period a year ago. The cost of funds
decreased to 3.45 percent for the nine months ended September 30, 2001 compared
to 3.66 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, partially offset by the growth in interest bearing liabilities.
Falling interest rates are anticipated to decrease the Companys cost of funds
further during the balance of 2001 as high rate certificates of deposit reprice
to a lower interest rate.

During the three months and nine months ended September 30, 2001, market
interest rates decreased significantly and may decrease further during the
balance of the year as a result of a slower national and regional economy and
because of an aggressively accommodating Federal Reserve monetary policy. In
periods of falling interest rates, the Companys net interest income and margin
may decrease because the Company has a significant amount of earning assets
subject to repricing when compared to interest bearing liabilities. This maybe
amplified as loan customers refinance their higher yielding loans to a lower
interest rate. In addition, in a slowing economy, the demand for loans may
decrease resulting in a higher percentage of the Companys earning assets
invested in lower yielding securities. In addition, the rate paid on other
deposits with administered interest rates such as NOW, savings and money market
accounts generally do not decrease as rapidly as market interest rates.

-10-



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##### 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 Three Months Ended September 30,
|                             |                                            |                                    |   |                                         
|                             |                                            |                                    |   | 2001                                     |         | 2000     
|                             |                                            |                                    |   |                                          |         |          
|                             |                                            |                                    |   | Average                                  |         | Revenue/  |       | Yield/ |       | Average   |      | Revenue/  |      | Yield/
|                             |                                            |                                    |   | Balance 1                                |         | Expense 2 |       | Rate   |       | Balance 1 |      | Expense 2 |      | Rate  
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |       
|ASSETS                       |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                            
|                            
|                            
|                            
|Interest-earning assets     
|                             | Loans (including fees)                     |                                    | $ | 97,747                                   |         |           | $     | 2,042  |       |           |      | 8.29      | %    |        | $ | 89,601  |         |   | $     | 2,039 |       |  |      | 9.03 | %   
|                            
|                            
|                            
|                            
|                             | Investment securities                      |                                    |   | 31,680                                   |         |           |       | 468    |       |           |      | 5.86      | %    |        |   | 32,381  |         |   |       | 498   |       |  |      | 6.12 | %   
|                            
|                            
|                            
|                            
|                             | Interest bearing deposits with banks       |                                    |   | 18,933                                   |         |           |       | 192    |       |           |      | 4.02      | %    |        |   | 14,171  |         |   |       | 226   |       |  |      | 6.34 | %   
|                            
|                            
|                            
|                            
|                             | Federal Home Loan Bank Stock               |                                    |   | 462                                      |         |           |       | 8      |       |           |      | 6.87      | %    |        |   | 433     |         |   |       | 7     |       |  |      | 6.43 | %   
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                             |                                            | Total Interest-earning assets      |   |                                          | 148,822 |           |       |        | 2,710 |           |      |           | 7.22 | %      |   |         | 136,586 |   |       |       | 2,770 |  |      |      | 8.07 | %
|                            
|                            
|                            
|                            
|                             | Total noninterest-earning assets           |                                    |   | 11,885                                   |         |           |       |        |       |           |      |           |      |        |   | 11,494  |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |  
|                             | TOTAL ASSETS                               |                                    | $ | 160,707                                  |         |           |       |        |       |           |      |           |      |        | $ | 148,080 |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|Interest-bearing liabilities
|                             | Deposits                                   |                                    | $ | 112,531                                  |         |           |       | 854    |       |           |      | 3.01      | %    |        | $ | 103,458 |         |   |       | 1,006 |       |  |      | 3.86 | %   
|                            
|                            
|                            
|                            
|                             | Other borrowed funds                       |                                    |   | 423                                      |         |           |       | 3      |       |           |      | 2.81      | %    |        |   | 768     |         |   |       | 8     |       |  |      | 4.14 | %   
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                             |                                            | Total Interest-bearing liabilities |   |                                          | 112,954 |           |       |        | 857   |           |      |           | 3.01 | %      |   |         | 104,226 |   |       |       | 1,014 |  |      |      | 3.87 | %
|                            
|                            
|                            
|                            
|                             | Noninterest-bearing liabilities            |                                    |   | 26,946                                   |         |           |       |        |       |           |      |           |      |        |   | 24,531  |         |   |       |       |       |  |      |      |     
|                            
|                            
|                            
|                            
|                             | Stockholders equity                       |                                    |   | 20,807                                   |         |           |       |        |       |           |      |           |      |        |   | 19,323  |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |  
|                            
|                            
|                            
|                            
|                             | TOTAL
LIABILITIES AND
STOCKHOLDERS EQUITY |                                    | $ | 160,707                                  |         |           |       |        |       |           |      |           |      |        | $ | 148,080 |         |   |       |       |       |  |      |      |     
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |      |     
|Net interest spread          |                                            |                                    |   |                                          |         | $         | 1,853 |        |       |           | 4.21 | %         |      |        |   |         |         | $ | 1,756 |       |       |  | 4.20 | %   
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                            
|                            
|                            
|                            
|Margin Analysis              |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                            
|                            
|                            
|                            
|                             | Interest income/ earning assets            |                                    |   |                                          |         |           | $     | 2,710  |       |           |      | 7.22      | %    |        |   |         |         |   | $     | 2,770 |       |  |      | 8.07 | %   
|                            
|                            
|                            
|                            
|                             | Interest expense/earning assets            |                                    |   |                                          |         |           |       | 857    |       |           |      | 2.28      | %    |        |   |         |         |   |       | 1,014 |       |  |      | 2.95 | %   
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                             | Net interest margin                        |                                    |   |                                          |         |           | $     | 1,853  |       |           |      | 4.94      | %    |        |   |         |         |   | $     | 1,756 |       |  |      | 5.11 | %   
|                             |                                            |                                    |   |                                          |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     



---

|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%.               

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##### 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,
|                                                |                                            |                                    |   |                                        
|                                                |                                            |                                    |   | 2001                                    |         | 2000     
|                                                |                                            |                                    |   |                                         |         |          
|                                                |                                            |                                    |   | Average                                 |         | Revenue/  |       | Yield/ |       | Average   |      | Revenue/  |      | Yield/
|                                                |                                            |                                    |   | Balance 1                               |         | Expense 2 |       | Rate   |       | Balance 1 |      | Expense 2 |      | Rate  
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |       
|ASSETS                                          |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                                               
|                                               
|                                               
|                                               
|Interest-earning
assets                        
|                                               
|                                               
|                                               
|                                               
|                                                | Loans (including fees)                     |                                    | $ | 96,030                                  |         |           | $     | 6,116  |       |           |      | 8.52      | %    |        | $ | 86,254  |         |   | $     | 5,816 |       |  |      | 9.01 | %   
|                                               
|                                               
|                                               
|                                               
|                                                | Investment securities                      |                                    |   | 29,228                                  |         |           |       | 1,316  |       |           |      | 6.02      | %    |        |   | 33,297  |         |   |       | 1,482 |       |  |      | 5.95 | %   
|                                               
|                                               
|                                               
|                                               
|                                                | Interest bearing deposits with banks       |                                    |   | 16,742                                  |         |           |       | 619    |       |           |      | 4.94      | %    |        |   | 9,937   |         |   |       | 480   |       |  |      | 6.45 | %   
|                                               
|                                               
|                                               
|                                               
|                                                | Federal Home Loan Bank Stock               |                                    |   | 455                                     |         |           |       | 23     |       |           |      | 6.76      | %    |        |   | 427     |         |   |       | 21    |       |  |      | 6.57 | %   
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                                                |                                            | Total Interest-earning assets      |   |                                         | 142,455 |           |       |        | 8,074 |           |      |           | 7.58 | %      |   |         | 129,915 |   |       |       | 7,799 |  |      |      | 8.02 | %
|                                               
|                                               
|                                               
|                                               
|                                                | Total noninterest-earning assets           |                                    |   | 11,975                                  |         |           |       |        |       |           |      |           |      |        |   | 10,876  |         |   |       |       |       |  |      |      |     
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                                                | TOTAL ASSETS                               |                                    | $ | 154,430                                 |         |           |       |        |       |           |      |           |      |        | $ | 140,791 |         |   |       |       |       |  |      |      |     
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|LIABILITIES AND STOCKHOLDERS EQUITY            |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                                               
|                                               
|                                               
|                                               
|Interest-bearing liabilities                    |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                                               
|                                               
|                                               
|                                               
|                                                | Deposits                                   |                                    | $ | 107,419                                 |         |           |       | 2,768  |       |           |      | 3.45      | %    |        | $ | 96,989  |         |   |       | 2,644 |       |  |      | 3.64 | %   
|                                               
|                                               
|                                               
|                                               
|                                                | Other borrowed funds                       |                                    |   | 393                                     |         |           |       | 12     |       |           |      | 4.08      | %    |        |   | 853     |         |   |       | 39    |       |  |      | 6.11 | %   
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                                                |                                            | Total Interest-bearing liabilities |   |                                         | 107,812 |           |       |        | 2,780 |           |      |           | 3.45 | %      |   |         | 97,842  |   |       |       | 2,683 |  |      |      | 3.66 | %
|                                               
|                                               
|                                               
|                                               
|                                                | Noninterest-bearing liabilities            |                                    |   | 26,253                                  |         |           |       |        |       |           |      |           |      |        |   | 24,128  |         |   |       |       |       |  |      |      |     
|                                               
|                                               
|                                               
|                                               
|                                                | Stockholders equity                       |                                    |   | 20,365                                  |         |           |       |        |       |           |      |           |      |        |   | 18,821  |         |   |       |       |       |  |      |      |     
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                                                | TOTAL
LIABILITIES AND
STOCKHOLDERS EQUITY |                                    | $ | 154,430                                 |         |           |       |        |       |           |      |           |      |        | $ | 140,791 |         |   |       |       |       |  |      |      |     
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|Net interest spread                             |                                            |                                    |   |                                         |         | $         | 5,294 |        |       |           | 4.13 | %         |      |        |   |         |         | $ | 5,116 |       |       |  | 4.36 | %   
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|Margin Analysis
Interest income/
earning assets |                                            |                                    |   |                                         |         | $         | 8,074 |        |       |           | 7.58 | %         |      |        |   |         |         | $ | 7,799 |       |       |  | 8.02 | %   
|                                               
|                                               
|                                               
|                                               
|                                                | Interest expense/earning assets            |                                    |   |                                         |         |           |       | 2,780  |       |           |      | 2.61      | %    |        |   |         |         |   |       | 2,683 |       |  |      | 2.76 | %   
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     
|                                                | Net interest margin                        |                                    |   |                                         |         |           | $     | 5,294  |       |           |      | 4.97      | %    |        |   |         |         |   | $     | 5,116 |       |  |      | 5.26 | %   
|                                                |                                            |                                    |   |                                         |         |           |       |        |       |           |      |           |      |        |   |         |         |   |       |       |       |  |      |     

---

|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%.               

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##### 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, 2001 compared to the three months ended September 30, 2000 and for the nine
month period ended September 30, 2001 compared to the nine months ended
September 30, 2000:

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

|                             |                                       |                                    |   |                       |     |        |   |      |      |   |   |      |      |  
|---------------------------- | ------------------------------------- | ---------------------------------- | - | --------------------- | --- | ------ | - | ---- | ---- | - | - | ---- | ---- | -
|                             |                                       |                                    |   | 2001 Compared to 2000
|                             |                                       |                                    |   |                      
|                             |                                       |                                    |   | Volume 1              |     | Rate 1 |   | Net 
|                             |                                       |                                    |   |                       |     |        |   |     
|Interest income              |                                       |                                    |   |                       |     |        |   |      |      |   |   |     
|                            
|                            
|                            
|                            
|                             | Loans (including fees) 2              |                                    | $ | 190                   |     |        | $ | (187 | )    |   | $ | 3    |     
|                            
|                            
|                            
|                            
|                             | Investment securities 3               |                                    |   | (7                    | )   |        |   | (23  | )    |   |   | (30  | )   
|                            
|                            
|                            
|                            
|                             | Interest bearing deposits with banks  |                                    |   | 63                    |     |        |   | (97  | )    |   |   | (34  | )   
|                            
|                            
|                            
|                            
|                             | Federal Home Loan Bank Stock dividend |                                    |   |                       |     |        |   | 1    |      |   |   | 1    |     
|                             |                                       |                                    |   |                       |     |        |   |      |      |   |   |      |     
|                             |                                       | Total Interest-earning assets      |   |                       | 246 |        |   |      | (306 | ) |   |      | (60  | )
|                            
|                            
|                            
|                            
|Interest-bearing liabilities |                                       |                                    |   |                       |     |        |   |      |      |   |   |     
|                            
|                            
|                            
|                            
|                             | Total deposits                        |                                    |   | 74                    |     |        |   | (226 | )    |   |   | (152 | )   
|                            
|                            
|                            
|                            
|                             | Other borrowed funds                  |                                    |   | (3                    | )   |        |   | (2   | )    |   |   | (5   | )   
|                             |                                       |                                    |   |                       |     |        |   |      |      |   |   |     
|                             |                                       | Total Interest-bearing liabilities |   |                       | 71  |        |   |      | (228 | ) |   |      | (157 | )
|                             |                                       |                                    |   |                       |     |        |   |      |      |   |   |      |     
|                            
|                            
|                            
|                            
|                             |                                       | Net interest income                |   | $                     | 175 |        |   | $    | (78  | ) |   | $    | 97   |  
|                             |                                       |                                    |   |                       |     |        |   |      |      |   |   |     

Volume/Rate Analysis  For the Nine Months ended September 30,
(dollars in thousands)

|                             |                                       |                                    |     |                       |     |        |      |      |      |   |     |      |     | 
|---------------------------- | ------------------------------------- | ---------------------------------- | --- | --------------------- | --- | ------ | ---- | ---- | ---- | - | --- | ---- | --- | 
|                             |                                       |                                    |     | 2001 Compared to 2000
|                             |                                       |                                    |     |                      
|                             |                                       |                                    |     | Volume 1              |     | Rate 1 |      | Net 
|                             |                                       |                                    |     |                       |     |        |      |     
|Interest income             
|                             | Loans (including fees) 2              |                                    | $   | 592                   |     |        | $    | (292 | )    |   | $   | 300  |    
|                            
|                            
|                            
|                            
|                             | Investment securities 3               |                                    |     | (177                  | )   |        |      | 11   |      |   |     | (166 | )  
|                            
|                            
|                            
|                            
|                             | Interest bearing deposits with banks  |                                    |     | 271                   |     |        |      | (132 | )    |   |     | 139  |    
|                            
|                            
|                            
|                            
|                             | Federal Home Loan Bank Stock dividend |                                    |     | 1                     |     |        |      | 1    |      |   |     | 2    |    
|                             |                                       |                                    |     |                       |     |        |      |      |      |   |     |     
|                             |                                       | Total Interest-earning assets      |     |                       | 687 |        |      |      | (412 | ) |     |      | 275 | 
|                            
|                            
|                            
|                            
|Interest-bearing liabilities
|                            
|                            
|                            
|                            
|Total deposits               |                                       |                                    | 306 |                       |     |        | (182 | )    |      |   | 124 |     
|                            
|                            
|                            
|                            
|                             | Other borrowed funds                  |                                    |     | (17                   | )   |        |      | (10  | )    |   |     | (27  | )  
|                             |                                       |                                    |     |                       |     |        |      |      |      |   |     |     
|                             |                                       | Total Interest-bearing liabilities |     |                       | 289 |        |      |      | (192 | ) |     |      | 97  | 
|                             |                                       |                                    |     |                       |     |        |      |      |      |   |     |     
|                             |                                       | Net interest income                |     | $                     | 398 |        |      | $    | (220 | ) |     | $    | 178 | 
|                             |                                       |                                    |     |                       |     |        |      |      |      |   |     |     



---

|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%                                                                                            

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##### Table of Contents



Provision for loan losses

Provisions for loan losses reduce net interest income. The Company provided $0
for loan losses for the three months ended September 30, 2001 compared to
$43,000 during the same three-month period last year. The decrease in the
three-month provision was made as a result of slower than anticipated loan
growth. The Company provided $62,000 for loan losses for the nine months ended
September 30, 2001 compared to $102,000 during the same nine-month period last
year. The nine-month 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 $252,000 for the three months ended September 30, 2001,
a 32 percent increase from $191,000 for the three months ended September 30,
2000. Noninterest income was $664,000 for the nine months ended September 30,
2001, a 38 percent increase from $480,000 for the nine months ended September
30, 2000. The increase in noninterest income for the three months and nine
months periods ended September 30, 2001 was the result of higher origination
fees on mortgage loans brokered, income received on newly issued bank debit
cards, and gains on the sale of investment securities. Based on the current
lower interest rate environment, the Company anticipates that mortgage loans
brokered will remain high during the remainder of the year 2001 compared to the
levels realized in 2000 as borrowers refinance their higher rate mortgage
loans. The Company may continue to sell investment securities. Noninterest
income may also be positively impacted during the fourth quarter of 2001 or
first quarter of 2002 as a result of the Company actively marketing the sale of
the Banks real estate held for investment at a price significantly higher than
its recorded book value.

Noninterest expense was $1,321,000 for the three months ended September 30,
2001, a 7 percent increase from $1,238,000 for the three months ended
September 30, 2000. Noninterest expense was $4,009,000 for the nine months
ended September 30, 2001, a 10 percent increase from $3,654,000 for the nine
months ended September 30, 2000. Noninterest expense continues to be impacted
by higher salary and employee benefits, occupancy and equipment, and other
operating expenses associated with the operation of the holding company and the
new Valley Bank main office that opened in June 2000. The Companys higher 2001
marketing and advertising budget also impacted noninterest expense. The
percentage of noninterest expense to average assets was 3.47 percent for the
nine months ended September 30, 2001, compared to 3.46 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 63.9 percent for the three
months ended September 30, 2001 compared to 64.6 percent for the three months
ended September 30, 2000. The Companys efficiency ratio was 68.4 percent for
the nine months ended September 30, 2001 compared to 66.4 percent for the nine
months ended September 30, 2000. The increase in the ratio was primarily due to
a greater increase in noninterest expense when compared to increases in net
interest income and noninterest income.

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, 2001, was $220,000
compared to $202,000 for the three month ended September 30, 2000. The
provision for the nine months ended September 30, 2001, was $521,000 compared
to $533,000 for the nine months ended September 30, 2000. The provision
represents an effective tax rate of approximately 29 percent during 2001 and 30
percent during 2000. The Companys marginal tax rate is currently 34 percent.
The difference between the

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##### Table of Contents



Companys effective and marginal tax rate is primarily related to investments
made in tax-exempt securities. The decrease in the Companys effective tax rate
results from an increase in the amount of tax-exempt securities held for the
nine months ended September 30, 2001, compared to the same period a year ago.

Financial Condition

The Companys total consolidated assets were $162.5 million as of September 30,
2001, compared to $146.8 million as of December 31, 2000. The 11 percent
increase in assets was primarily in interest bearing deposits with banks and
loans, funded by increasing deposits. The increase in interest bearing deposits
with banks represents the temporary investment of funds received from several
large depositors. These funds may be withdrawn during the fourth quarters of
2001. Valley Bank also positively impacted the growth in deposits.

Investment Portfolio

The major classifications of investments at September 30, 2001 and December 31,
2000, are summarized in Note 3  Investment Securities in the Notes to
Condensed Consolidated Financial Statements.

At September 30, 2001, the Company had $31.3 million of securities
available-for-sale, compared to $30.5 million as of December 31, 2000. Although
investment securities increased only by $.8 million during 2001, the Company
purchased approximately $15.7 million in securities this year. They were funded
primarily with $12.7 million of securities maturing during 2001 and with $3.1
million of securities sold during the year. 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.

As of September 30, 2001, all of the Companys securities were classified as
available-for-sale. As permitted by the SFAS No. 133, as amended, the Company
reclassified approximately $279,000 securities held-to-maturity with a market
value of $284,000 to securities available-for-sale. Management believes that
securities classified 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, 2001 and December 31, 2000,
are summarized in Note 4  Loans in the Notes to Condensed Consolidated
Financial Statements.

Loans were $98.4 million as of September 30, 2001, compared to $94.6 million as
of December 31, 2000. The increase was primarily in real estate construction
and commercial real estate loans partially offset by a decrease in real estate
mortgage loans. The percentage of loans to total assets was 60.1 percent and
64.4 percent at September 30, 2001 and December 31, 2000, respectively. It is
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. However, the decrease in the percentage of loans to total assets during
the quarter was the result of decreased loan originations and increasing loan
refinances resulting from a slower local economy and lower interest rates.

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##### Table of Contents



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,
|                       |                                                   |                             |     | 2001          |     | 2000        
|                       |                                                   |                             |     |               |     |             
|Non-performing assets: |                                                   |                             |     |               |     |              |     |    
|                      
|                      
|                      
|                      
|                       | Nonaccrual loans                                  |                             | $   | 179           |     |              | $   | -0- |    
|                      
|                      
|                      
|                      
|                       | Loans 90 days or more past due
Restructured loans |                             |     |               |     |              |     |     |    
|                       |                                                   |                             |     |               |     |              |     |    
|                       |                                                   |                             | 179 |               |     |              | -0- |    
|                      
|                      
|                      
|                      
|                       | Other real estate owned                           |                             |     |               |     |              |     |     |    
|                       |                                                   |                             |     |               |     |              |     |    
|                       |                                                   | Total non-performing assets |     | $             | 179 |              |     | $   | -0- | 
|                       |                                                   |                             |     |               |     |              |     |    

As of September 30, 2001, the Company had $179,000 in nonperforming assets,
which include nonaccrual loans, loans 90 days or more past due and still
accruing interest, and restructured loans. The Company had no nonperforming
assets as of December 31, 2000.

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 nine-month period ended September 30, 2001 there was one commercial
loan placed on nonaccrual status. The gross income that would have been
recorded for the three and nine month periods 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.

During the three-month and nine-month period ended September 30, 2000 there
were two loans placed on nonaccrual status, and subsequently charged-off in the
amount of $21,000. The gross income that would have been recorded for the nine
months ended September 30, 2000 if the nonaccrual loan had been current and in
accordance with its original term approximates $1,000. Interest recognized on
the loan for the year was insignificant.

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.

-16-



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##### Table of Contents



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
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 for Loan Losses
|                                                                        |  | Three months ended Sept. 30,              |        | Nine months ended Sept. 30,
|                                                                        |  |                                           |        |                            
|                                                                        |  | 2001                                      |        | 2000                        |  | 2001 |        | 2000
|                                                                        |  |                                           |        |                             |  |      |        |     
|Balance at end of period                                                |  | $                                         | 1,162  |                             |  | $    | 1,040  |      |  | $ | 1,162  |   |  | $ | 1,040  |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |  |                                           |        |                             |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Average Loans Outstanding                                               |  | $                                         | 97,747 |                             |  | $    | 89,601 |      |  | $ | 96,030 |   |  | $ | 86,254 |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |  |                                           |        |                             |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Ratio of net charge-offs during the
period to average loans outstanding |  |                                           | 0.00   | %                           |  |      | 0.02   | %    |  |   | 0.00   | % |  |   | 0.02   | %
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |  |                                           |        |                             |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Ratio of allowance for loan losses
to average loans outstanding         |  |                                           | 1.19   | %                           |  |      | 1.16   | %    |  |   | 1.21   | % |  |   | 1.21   | %

There were no charge-off loans during the three and nine months ended September
30, 2001. There were $21,000 in charge-offs during the three months and nine
months ended September 30, 2000. The ratio of the allowance for loan losses to
average loans outstanding increased from 1.20 percent at December 31, 2000 to
1.21 percent during the nine months ended September 30, 2001. The increase was
the result of growth in the allowance for loan losses exceeding loan growth.
The ratio is anticipated to decrease during the balance of the year 2001, as a
result of increased loan growth.

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

-17-



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##### Table of Contents



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 six-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. 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.

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, 2001 |         | December 31, 2000
|                                    |  |                    |         |                  
|                                    |  | Amount             |         | Percent           |  | Amount |       | Percent
|                                    |  |                    |         |                   |  |        |       |        
|Noninterest bearing demand deposits |  | $                  | 25,724  |                   |  |        | 18.4  | %       |  | $ | 24,140  |  |  |  | 19.3  | %
|                                   
|                                   
|                                   
|                                   
|Interest bearing demand deposits    |  |                    | 18,577  |                   |  |        | 13.3  | %       |  |   | 17,417  |  |  |  | 13.9  | %
|                                   
|                                   
|                                   
|                                   
|Money market deposits               |  |                    | 39,647  |                   |  |        | 28.4  | %       |  |   | 29,841  |  |  |  | 23.9  | %
|                                   
|                                   
|                                   
|                                   
|Savings deposits                    |  |                    | 10,986  |                   |  |        | 7.9   | %       |  |   | 10,320  |  |  |  | 8.3   | %
|                                   
|                                   
|                                   
|                                   
|Time certificates < $100,000        |  |                    | 24,657  |                   |  |        | 17.6  | %       |  |   | 23,575  |  |  |  | 18.8  | %
|                                   
|                                   
|                                   
|                                   
|Time certificates > $100,000        |  |                    | 20,178  |                   |  |        | 14.4  | %       |  |   | 19,754  |  |  |  | 15.8  | %
|                                    |  |                    |         |                   |  |        |       |         |  |   |         |  |  |  |       |  
|                                    |  | $                  | 139,769 |                   |  |        | 100.0 | %       |  | $ | 125,047 |  |  |  | 100.0 | %
|                                    |  |                    |         |                   |  |        |       |         |  |   |         |  |  |  |       |  

Deposits increased to $139.8 million as of September 30, 2001, compared to
$125.0 million as of December 31, 2000. The increase in money market deposits
was the result of large deposits by several commercial customers. These funds
are considered temporary and are anticipated to be withdrawn during the fourth
quarter of 2001. Management believes the increase in time certificates resulted
from investors seeking more stable investments as compared to common stocks and
mutual funds.

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.

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##### Table of Contents



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, 2001
contributed $1.9 million to liquidity compared to $1.9 million for the nine
months ended September 30, 2000. The majority of the Companys funding comes
from customer deposits within its operating region. Customer deposits provided
$14.7 million for the nine months ended September 30, 2001 compared to $18.7
million for the nine months ended September 30, 2000. For the nine months
ended September 30, 2001, money market 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 maturities of securities provided $12.7 million for the nine
months September 30, 2001 compared to $5.8 million for the nine months ended
September 30, 2000.

At September 30, 2001, the Company held cash and due from banks and interest
bearing deposits with banks of approximately $26.6 million. In addition, at
such date $31.3 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. At September 30, 2001, the
Banks had no advances outstanding to the FHLB. In addition to the FHLB credit
line, the Banks have committed line of credit agreements totaling approximately
$7.1 million from unaffiliated banks.

The Companys total stockholders equity increased to $21.2 million at
September 30, 2001 from $20.1 December 31, 2000. The increase was the result of
net income earned during the nine months ended September 30, 2001 and an
increase in unrealized gains recorded on securities available for sale, net of
income tax, partially offset by a $.55 dividend paid to stockholders of record
on December 31, 2000. At September 30, 2001, stockholders equity was 13.0
percent of total assets, compared to 13.7 percent at December 31, 2000.

The market value of available for sale securities was greater than book value
at both September 30, 2001 and December 31, 2000, primarily as a result of
decreasing interest rates, which resulted in an unrealized gain in the
investment portfolio. Management may continue to sell securities in order to
supplement earnings but management does not believe the resulting sale would
materially affect the overall condition of the Company.

On October 17, 2001, the Company adopted a plan to repurchase up to $1,000,000
of the Companys common shares. The Company does not anticipate that the
repurchase of theses shares will have any material negative impact on the
Companys financial condition or results of operations.

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

-19-



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##### Table of Contents



indicating that it will be subject to higher capital requirements.

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,
2001. 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, 2001, 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
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                  
|                      |                           |                      |  | Amount |        | Ratio |  |  |      |                   |  | Amount |   | Ratio |  |                   |       |  |  | Amount |     | Ratio            
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                  
|As September 30, 2001 |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                     
|                     
|                     
|                     
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                     
|                     
|                     
|                     
|Total Capital         |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                     
|                     
|                     
|                     
|                      | (to Risk-Weighted Assets) |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  |  |     
|                     
|                     
|                     
|                     
|                      |                           | Consolidated         |  | $      | 21,877 |       |  |  | 19.5 | %                 |  |        | > |       |  | $                 | 8,992 |  |  |        | 8.0 | %                 |  |  | > |  |  | $                 | 11,240 |  |  |  | 10.0 | %
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                      |                           | Puyallup Valley Bank |  | $      | 14,746 |       |  |  | 14.9 | %                 |  |        | > |       |  | $                 | 7,915 |  |  |        | 8.0 | %                 |  |  | > |  |  | $                 | 9,893  |  |  |  | 10.0 | %
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                      |                           | Valley Bank          |  | $      | 3,998  |       |  |  | 29.7 | %                 |  |        | > |       |  | $                 | 1,078 |  |  |        | 8.0 | %                 |  |  | > |  |  | $                 | 1,348  |  |  |  | 10.0 | %
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                     
|                     
|                     
|                     
|Tier I Capital        |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                     
|                     
|                     
|                     
|                      | (to Risk-Weighted Assets) |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  |  |     
|                     
|                     
|                     
|                     
|                      |                           | Consolidated         |  | $      | 20,715 |       |  |  | 18.4 | %                 |  |        | > |       |  | $                 | 4,496 |  |  |        | 4.0 | %                 |  |  | > |  |  | $                 | 6,744  |  |  |  | 6.0  | %
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                      |                           | Puyallup Valley Bank |  | $      | 13,741 |       |  |  | 13.9 | %                 |  |        | > |       |  | $                 | 3,957 |  |  |        | 4.0 | %                 |  |  | > |  |  | $                 | 5,936  |  |  |  | 6.0  | %
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                      |                           | Valley Bank          |  | $      | 3,841  |       |  |  | 28.5 | %                 |  |        | > |       |  | $                 | 539   |  |  |        | 4.0 | %                 |  |  | > |  |  | $                 | 809    |  |  |  | 6.0  | %
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                     
|                     
|                     
|                     
|Tier I Capital        |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                     
|                     
|                     
|                     
|                      | (to Average Assets)       |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  |  |     
|                     
|                     
|                     
|                     
|                      |                           | Consolidated         |  | $      | 20,715 |       |  |  | 12.9 | %                 |  |        | > |       |  | $                 | 6,428 |  |  |        | 4.0 | %                 |  |  | > |  |  | $                 | 8,035  |  |  |  | 5.0  | %
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                      |                           | Puyallup Valley Bank |  | $      | 13,741 |       |  |  | 9.6  | %                 |  |        | > |       |  | $                 | 5,747 |  |  |        | 4.0 | %                 |  |  | > |  |  | $                 | 7,184  |  |  |  | 5.0  | %
|                      |                           |                      |  |        |        |       |  |  |      |                   |  |        |   |       |  |                   |       |  |  |        |     |                   |  |  |   |  |  |                   |        |  |  | 
|                      |                           | Valley Bank          |  | $      | 3,871  |       |  |  | 25.4 | %                 |  |        | > |       |  | $                 | 605   |  |  |        | 4.0 | %                 |  |  | > |  |  | $                 | 759    |  |  |  | 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

-20-



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##### Table of Contents



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.

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, 2001, based on
the measures used to monitor and manage interest rate risk, the Company has
become more asset sensitive to changes in interest rates. Increased asset
sensitivity is the result of the significant increase in interest-bearing
deposits with banks funded by the significant increase in money market deposit
accounts. Based on past experience, interest-bearing deposits with banks
reprice more quickly than money market deposit accounts which results in
greater profitability during market interest rates increases and less
profitability when market interest rates decrease. For additional information,
refer to the Companys annual report on Form 10-K for the year ended December
31, 2000.

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;
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.




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



| |  |  | Not applicable
| |  |  | --------------

Item 6. EXHIBITS AND REPORTS ON FORM 8-K



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

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##### Table of Contents



|    |  |                                                                                                                                                                                                           |  |                                                                                            
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------
|3.1 |  | Articles of Incorporation of Valley Community Bancshares,
Inc. (incorporated by reference to Exhibit 3.1 to the registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 2000).    
|   
|   
|   
|   
|    |  |                                                                                                                                                                                                           |  |                                                                                            
|   
|   
|   
|   
|3.2 |  | Bylaws of Valley Community Bancshares, Inc. (incorporated by
reference to Exhibit 3.2 to the registrants Annual Report on Form
10-K for the fiscal year ended December 31, 2000).                       
|   
|   
|   
|   
|    |  |                                                                                                                                                                                                           |  |                                                                                            
|   
|   
|   
|   
|10. |  | Material contracts of Valley Community Bancshares, Inc.
(incorporated by reference to Exhibits 10.1 through 10.8 to
registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
|   
|   
|   
|   
|    |  |                                                                                                                                                                                                           |  |                                                                                            
|   
|   
|   
|   
|    |  | 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



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| |  |  | Valley Community Bancshares, Inc. filed no report on Form 8-K during the
three months ending September 30, 2001.
| |  |  | ----------------------------------------------------------------------------------------------------------------




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 2, 2001                         |  | By /s/         | David H. Brown               |  | 
| |                                                |  | David H. Brown |                              | 
|
|
|
|
| |                                                |  |                | President and                |  | 
|
|
|
|
| |                                                |  |                | Chief Executive Officer      |  | 
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Date: November 2, 2001                         |  | By /s/         | Joseph E. Riordan            |  | 
| |                                                |  |                | Joseph E. Riordan            |  | 
|
|
|
|
| |                                                |  |                | Executive Vice President and |  | 
|
|
|
|
| |                                                |  |                | Chief Financial Officer      |  | 

-22-