##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-Q

|           |  |                                                                                        
|---------- |  | ---------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                        
|           |  |                                                                                        
|(X)        |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|           |  | For the Quarter ended March 31, 2003                                                   

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



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VALLEY COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)

Yes [  ] No [X]

The number of shares of the issuers Common Stock, $1.00 par value,
outstanding at May 2, 2003 was 1,171,546.





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TABLE OF CONTENTS



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



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##### Table of Contents



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

|                             |  |                                                                                             |  |     
|---------------------------- |  | ------------------------------------------------------------------------------------------- |  | ----
|                             |  |                                                                                             |  | Page
|PART I FINANCIAL INFORMATION |  |                                                                                            
|Item 1.                      |  | Financial Statements                                                                        |  |     
|                             |  | Condensed Consolidated Balance Sheet  March 31, 2003 and December 31, 2002                 |  | 1   
|                             |  | Condensed Consolidated Statement of Income  Three Months
Ended March 31, 2003 and 2002     |  | 2   
|                             |  | Condensed Consolidated Statement of Cash Flows  Three Months
Ended March 31, 2003 and 2002 |  | 3   
|                             |  | Notes to Condensed Consolidated Financial Statements                                        |  | 4   
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition
And Results of Operation        |  | 8   
|Item 3.                      |  | Quantitative and Qualitative Disclosures about Market Risk                                  |  | 18  
|Item 4.                      |  | Controls and Procedures                                                                     |  | 18  
|FORWARD-LOOKING STATEMENTS   |  | 19                                                                                         
|PART II OTHER INFORMATION    |  |                                                                                            
|Item 1.                      |  | Legal Proceedings                                                                           |  | 21  
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                                   |  | 21  
|Item 3.                      |  | Defaults upon Senior Securities                                                             |  | 21  
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                         |  | 21  
|Item 5.                      |  | Other Information                                                                           |  | 21  
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                            |  | 21  
|                             |  | Signatures                                                                                  |  | 22  
|                             |  | Certifications                                                                              |  | 23  

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##### Table of Contents









Item 1. FINANCIAL STATEMENTS

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

|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |         |         | 
|-------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------- | ------------------------------------------ | ------- | --------- | ------- | ------------ | ------- | ------- | ------- | 
|                     |                                                                                                                                                                                |                     |                                            |         | March 31, |         | December 31,
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |             
|                     |                                                                                                                                                                                |                     |                                            |         | 2003      |         | 2002        
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |             
|ASSETS               |                                                                                                                                                                                |                     |                                            |         |           |         |              |        
|                     | Cash and due from banks                                                                                                                                                        |                     | $                                          | 6,563   |           |         | $            | 4,847   |        
|                     | Interest-bearing deposits with banks                                                                                                                                           |                     |                                            | 13,654  |           |         |              | 22,191  |        
|                     | Federal funds sold                                                                                                                                                             |                     |                                            | 1,866   |           |         |              | 1,734   |        
|                     | Securities available-for-sale                                                                                                                                                  |                     |                                            | 34,818  |           |         |              | 31,069  |        
|                     | Federal Home Loan Bank stock                                                                                                                                                   |                     |                                            | 398     |           |         |              | 398     |        
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |        
|                     |                                                                                                                                                                                |                     | 57,299                                     |         |           |         | 60,239       |        
|                     | Loans                                                                                                                                                                          |                     |                                            | 108,566 |           |         |              | 105,354 |        
|                     | Less allowance for loan losses                                                                                                                                                 |                     |                                            | 1,388   |           |         |              | 1,388   |        
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |        
|                     |                                                                                                                                                                                |                     | Loans, net                                 |         |           | 107,178 |              |         |         | 103,966 | 
|                     | Accrued interest receivable                                                                                                                                                    |                     |                                            | 707     |           |         |              | 727     |        
|                     | Premises and equipment, net                                                                                                                                                    |                     |                                            | 6,024   |           |         |              | 6,096   |        
|                     | Real estate held for investment                                                                                                                                                |                     |                                            | 224     |           |         |              | 224     |        
|                     | Other assets                                                                                                                                                                   |                     |                                            | 407     |           |         |              | 459     |        
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |        
|                     |                                                                                                                                                                                |                     | Total assets                               |         | $         | 171,839 |              |         | $       | 171,711 | 
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |        
|LIABILITIES          |                                                                                                                                                                                |                     |                                            |         |           |         |              |        
|                     | Deposits                                                                                                                                                                       |                     |                                            |         |           |         |              |         |        
|                     |                                                                                                                                                                                | Noninterest-bearing |                                            | $       | 29,903    |         |              | $       | 29,119  |        
|                     |                                                                                                                                                                                | Interest-bearing    |                                            |         | 118,291   |         |              |         | 118,317 |        
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |        
|                     |                                                                                                                                                                                |                     | Total deposits                             |         |           | 148,194 |              |         |         | 147,436 | 
|                     | Other borrowed funds                                                                                                                                                           |                     |                                            | 431     |           |         |              | 750     |        
|                     | Accrued interest payable                                                                                                                                                       |                     |                                            | 303     |           |         |              | 295     |        
|                     | Other liabilities                                                                                                                                                              |                     |                                            | 744     |           |         |              | 775     |        
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |        
|                     |                                                                                                                                                                                |                     | Total liabilities                          |         |           | 149,672 |              |         |         | 149,256 | 
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |        
|STOCKHOLDERS EQUITY |                                                                                                                                                                                |                     |                                            |         |           |         |              |        
|                     | Common stock, par value $1 per share; 5,000,000 shares authorized; 1,171,546 and 1,115,994
shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively |                     |                                            | 1,172   |           |         |              | 1,116   |        
|                     | Additional paid-in capital                                                                                                                                                     |                     |                                            | 16,860  |           |         |              | 15,527  |        
|                     | Retained earnings                                                                                                                                                              |                     |                                            | 3,600   |           |         |              | 5,219   |        
|                     | Accumulated other comprehensive income, net of tax                                                                                                                             |                     |                                            | 535     |           |         |              | 593     |        
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |        
|                     |                                                                                                                                                                                |                     | Total stockholders equity                 |         |           | 22,167  |              |         |         | 22,455  | 
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |        
|                     |                                                                                                                                                                                |                     | Total liabilities and stockholders equity |         | $         | 171,839 |              |         | $       | 171,711 | 
|                     |                                                                                                                                                                                |                     |                                            |         |           |         |              |         |        

The accompanying notes are an integral part of these financial statements

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##### Table of Contents






VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF INCOME
(unaudited)
(dollars in thousands, except for per share amounts)


|                          |                                                           |                                                     |     |                    |       |      |     |           |       | 
|------------------------- | --------------------------------------------------------- | --------------------------------------------------- | --- | ------------------ | ----- | ---- | --- | --------- | ----- | 
|                          |                                                           |                                                     |     | Three Months Ended
|                          |                                                           |                                                     |     | March 31,         
|                          |                                                           |                                                     |     |                   
|                          |                                                           |                                                     |     | 2003               |       | 2002
|                          |                                                           |                                                     |     |                    |       |     
|INTEREST INCOME           |                                                           |                                                     |     |                    |       |      |     |          
|                          | Interest and fees on loans                                |                                                     | $   | 1,904              |       |      | $   | 1,940     |      
|                          | Interest on federal funds sold and deposits in banks      |                                                     |     | 92                 |       |      |     | 90        |      
|                          | Interest on securities                                    |                                                     |     | 293                |       |      |     | 386       |      
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|                          |                                                           | Total interest income                               |     |                    | 2,289 |      |     |           | 2,416 | 
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|INTEREST EXPENSE          |                                                           |                                                     |     |                    |       |      |     |          
|                          | Interest on deposits                                      |                                                     |     | 377                |       |      |     | 501       |      
|                          | Interest on federal funds and other short-term borrowings |                                                     |     | 2                  |       |      |     | 2         |      
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|                          |                                                           | Total interest expense                              |     |                    | 379   |      |     |           | 503   | 
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|                          |                                                           | Net interest income                                 |     |                    | 1,910 |      |     |           | 1,913 | 
|PROVISION FOR LOAN LOSSES |                                                           |                                                     |     |                    |       |      | 31  |          
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|                          |                                                           | Net interest income after provision
for loan losses |     |                    | 1,910 |      |     |           | 1,882 | 
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|NONINTEREST INCOME        |                                                           |                                                     |     |                    |       |      |     |          
|                          | Service charges                                           |                                                     |     | 115                |       |      |     | 101       |      
|                          | Gain on sale of investment securities, net                |                                                     |     | 15                 |       |      |     | 44        |      
|                          | Origination fees on mortgage loans brokered               |                                                     |     | 124                |       |      |     | 33        |      
|                          | Other operating income                                    |                                                     |     | 85                 |       |      |     | 66        |      
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|                          |                                                           | Total noninterest income                            |     |                    | 339   |      |     |           | 244   | 
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|NONINTEREST EXPENSE       |                                                           |                                                     |     |                    |       |      |     |          
|                          | Salaries                                                  |                                                     |     | 681                |       |      |     | 539       |      
|                          | Employee benefits                                         |                                                     |     | 176                |       |      |     | 160       |      
|                          | Occupancy                                                 |                                                     |     | 139                |       |      |     | 119       |      
|                          | Equipment                                                 |                                                     |     | 111                |       |      |     | 119       |      
|                          | Other operating expenses                                  |                                                     |     | 497                |       |      |     | 388       |      
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|                          |                                                           | Total noninterest expense                           |     |                    | 1,604 |      |     |           | 1,325 | 
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|INCOME BEFORE INCOME TAX  |                                                           |                                                     | 645 |                    |       |      | 801 |          
|PROVISION FOR INCOME TAX  |                                                           |                                                     | 200 |                    |       |      | 251 |          
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|NET INCOME                |                                                           | $                                                   | 445 |                    |       | $    | 550 |          
|                          |                                                           |                                                     |     |                    |       |      |     |           |      
|EARNINGS PER SHARE        |                                                           |                                                     |     |                    |       |      |     |          
|                          | Basic                                                     |                                                     | $   | 0.38               |       |      | $   | 0.46      |      
|                          | Diluted                                                   |                                                     | $   | 0.38               |       |      | $   | 0.46      |      
|                          | Weighted average shares outstanding                       |                                                     |     | 1,171,546          |       |      |     | 1,183,087 |      
|                          | Weighted average diluted shares outstanding               |                                                     |     | 1,176,251          |       |      |     | 1,194,410 |      

The accompanying notes are an integral part of these financial statements

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

|                                                  |                                                                            |                                                    |                                    |         |                    |       |       |        |     |      |  
|------------------------------------------------- | -------------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------- | ------- | ------------------ | ----- | ----- | ------ | --- | ---- | -
|                                                  |                                                                            |                                                    |                                    |         | Three Months Ended
|                                                  |                                                                            |                                                    |                                    |         | March 31,         
|                                                  |                                                                            |                                                    |                                    |         |                   
|                                                  |                                                                            |                                                    |                                    |         | 2003               |       | 2002 
|                                                  |                                                                            |                                                    |                                    |         |                    |       |      
|CASH FLOWS FROM OPERATING ACTIVITIES              |                                                                            |                                                    |                                    |         |                    |       |       |       
|                                                  | Net income                                                                 |                                                    | $                                  | 445     |                    |       | $     | 550    |    
|                                                  | Adjustments to reconcile net income to net cash
from operating activities: |                                                    |                                    |         |                    |       |       |        |    
|                                                  |                                                                            | Provisions for loan losses                         |                                    |         |                    |       |       |        | 31  |     
|                                                  |                                                                            | Depreciation                                       |                                    |         | 114                |       |       |        | 94  |     
|                                                  |                                                                            | Deferred income tax                                |                                    |         | 4                  |       |       |        | 6   |     
|                                                  |                                                                            | Net amortization on securities                     |                                    |         | 77                 |       |       |        | 34  |     
|                                                  |                                                                            | FHLB stock dividends                               |                                    |         | (7                 | )     |       |        | (7  | )   
|                                                  |                                                                            | Gain on sale of securities available-for-sale      |                                    |         | (15                | )     |       |        | (44 | )   
|                                                  |                                                                            | Loss on sale of premises and equipment             |                                    |         |                    |       |       |        | 7   |     
|                                                  |                                                                            | Amortization of intangible assets                  |                                    |         | 12                 |       |       |        |     |     
|                                                  | Changes in operating assets and liabilities:                               |                                                    |                                    |         |                    |       |       |        |    
|                                                  |                                                                            | (Increase) decrease in accrued interest receivable |                                    |         | 20                 |       |       |        | (55 | )   
|                                                  |                                                                            | Increase (decrease) in accrued interest payable    |                                    |         | 8                  |       |       |        | (12 | )   
|                                                  |                                                                            | (Increase) decrease in other assets                |                                    |         | 23                 |       |       |        | (41 | )   
|                                                  |                                                                            | Increase (decrease) in other liabilities           |                                    |         | (5                 | )     |       |        | 63  |     
|                                                  |                                                                            |                                                    |                                    |         |                    |       |       |        |    
|                                                  |                                                                            |                                                    | Net cash from operating activities |         |                    | 676   |       |        |     | 626  |  
|                                                  |                                                                            |                                                    |                                    |         |                    |       |       |        |    
|                                                  | Net increase in federal funds sold                                         |                                                    |                                    | (132    | )                  |       |       |        |    
|                                                  | Net decrease in interest-bearing deposits with banks                       |                                                    |                                    | 8,537   |                    |       |       | 5,055  |    
|                                                  | Purchase of securities available-for-sale                                  |                                                    |                                    | (12,182 | )                  |       |       | (7,168 | )  
|                                                  | Proceeds from sales of securities available-for-sale                       |                                                    |                                    | 2,672   |                    |       |       | 2,044  |    
|                                                  | Proceeds from maturities of securities available-for-sale                  |                                                    |                                    | 5,611   |                    |       |       | 1,959  |    
|                                                  | Federal Home Loan Bank stock redeemed                                      |                                                    |                                    | 7       |                    |       |       |        |    
|                                                  | Net increase in loans                                                      |                                                    |                                    | (3,212  | )                  |       |       | (2,281 | )  
|                                                  | Additions to premises and equipment                                        |                                                    |                                    | (25     | )                  |       |       | (68    | )  
|                                                  |                                                                            |                                                    |                                    |         |                    |       |       |        |    
|                                                  |                                                                            |                                                    | Net cash from investing activities |         |                    | 1,276 |       |        |     | (459 | )
|                                                  |                                                                            |                                                    |                                    |         |                    |       |       |        |    
|CASH FLOWS FROM FINANCING ACTIVITIES              |                                                                            |                                                    |                                    |         |                    |       |       |       
|                                                  | Net increase in deposits                                                   |                                                    |                                    | 758     |                    |       |       | 1,056  |    
|                                                  | Net increase (decrease) in other borrowed funds                            |                                                    |                                    | (319    | )                  |       |       | 183    |    
|                                                  | Cash dividends paid                                                        |                                                    |                                    | (675    | )                  |       |       | (676   | )  
|                                                  |                                                                            |                                                    |                                    |         |                    |       |       |        |    
|                                                  |                                                                            |                                                    | Net cash from financing activities |         |                    | (236  | )     |        |     | 563  |  
|                                                  |                                                                            |                                                    |                                    |         |                    |       |       |        |    
|NET INCREASE IN CASH AND DUE                      |                                                                            |                                                    |                                    |         |                    |       |       |       
|                                                  | FROM BANKS                                                                 |                                                    |                                    | 1,716   |                    |       |       | 730    |    
|CASH AND DUE FROM BANKS, beginning of year        |                                                                            |                                                    | 4,847                              |         |                    |       | 4,584 |       
|                                                  |                                                                            |                                                    |                                    |         |                    |       |       |        |    
|CASH AND DUE FROM BANKS, at end of period         |                                                                            | $                                                  | 6,563                              |         |                    | $     | 5,314 |       
|                                                  |                                                                            |                                                    |                                    |         |                    |       |       |        |    
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |                                                                            |                                                    |                                    |         |                    |       |       |       
|                                                  | Cash payments for
Interest                                                 |                                                    | $                                  | 371     |                    |       | $     | 544    |    
|SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES    |                                                                            |                                                    |                                    |         |                    |       |       |       
|                                                  | Unrealized gains (losses) on securities available-for-sale                 |                                                    | $                                  | (88     | )                  |       | $     | (167   | )  
|                                                  | Deferred tax on unrealized (gains) losses on securities
available-for-sale |                                                    | $                                  | 30      |                    |       | $     | 57     |    

The accompanying notes are an integral part of these financial statements

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

Note 1 - Basis of Presentation

Valley Community Bancshares, Inc. (the Company) prepared the condensed
consolidated financial statements of the Company for the three-month period
ended March 31, 2003 and March 31, 2002 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, 2002 has been derived from the audited
consolidated balance sheet of the Company as of that date. The results of
operations for the three-months ended March 31, 2003, are not necessarily
indicative of the results to be anticipated for the year ending December 31,
2003.

Certain information and note disclosures normally included in the Companys
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. Therefore, these consolidated financial statements and notes thereto
should be read in conjunction with a reading of the financial statements for
the year ended December 31, 2002 and notes thereto included in the Companys
Form 10-K filed with the Securities and Exchange Commission. Certain amounts in
the 2002 financial statements have been reclassified to conform to the 2003
presentation.

The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect amounts reported in
the consolidated financial statements. Changes in these estimates and
assumptions are considered reasonably possible and may have a material impact
on the consolidated financial statements and thus actual results could differ
from the amounts reported and disclosed herein. The Company considers the
allowance for loan loss a critical accounting policy subject to estimate.

Stock Option Plan

The Company accounts for the stock option plan under recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees,and related Interpretations using the intrinsic value method. No
stock-based employee compensation cost is reflected in net income, as all
options granted under the plan had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition method as provided under FASB Statement No.
123, Accounting for Stock-Based Compensation,to stock-based employee
compensation.

VALLEY COMMUNITY BANCSHARES,
INC.Stock Option Plan

|                                           |                                                         |                    |     |      |      |   |     |     |      | 
|------------------------------------------ | ------------------------------------------------------- | ------------------ | --- | ---- | ---- | - | --- | --- | ---- | 
|                                           |                                                         | Three Months Ended
|                                           |                                                         | March 31,         
|                                           |                                                         |                   
|In thousands, except for per-share amounts |                                                         | 2003               |     | 2002
|                                           |                                                         |                    |     |     
|Pro forma disclosures:                     |                                                         |                    |     |      |      |   |     |    
|                                           | Net income as reported                                  |                    | $   | 445  |      |   | $   | 550 |     
|                                           | Additional compensation for fair
value of stock options |                    |     | 2    |      |   |     | 3   |     
|                                           |                                                         |                    |     |      |      |   |     |     |     
|Pro forma net income                       |                                                         | $                  | 443 |      |      | $ | 547 |    
|                                           |                                                         |                    |     |      |      |   |     |     |     
|Earnings per share:                        |                                                         |                    |     |      |      |   |     |    
|                                           | Basic                                                   |                    |     |      |      |   |     |     |     
|                                           |                                                         | As reported        |     | $    | 0.38 |   |     | $   | 0.46 | 
|                                           |                                                         | Pro forma          |     | $    | 0.38 |   |     | $   | 0.46 | 
|                                           | Diluted                                                 |                    |     |      |      |   |     |     |     
|                                           |                                                         | As reported        |     | $    | 0.38 |   |     | $   | 0.46 | 
|                                           |                                                         | Pro forma          |     | $    | 0.38 |   |     | $   | 0.46 | 

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##### Table of Contents



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 ended March 31, 2003 and 2002 (dollars in
thousands, except per share amounts):

VALLEY COMMUNITY BANCSHARES, INC.
Earning Per Share

|                                            |            |                                              |                                     |     |           |           |      |     |           |           | 
|------------------------------------------- | ---------- | -------------------------------------------- | ----------------------------------- | --- | --------- | --------- | ---- | --- | --------- | --------- | 
|                                            |            | Three Months Ended                          
|                                            |            | March 31,                                   
|                                            |            |                                             
|                                            |            |                                              |                                     |     | 2003      |           | 2002
|                                            |            |                                              |                                     |     |           |           |     
|NUMERATOR:                                  |            |                                              |                                     |     |           |           |      |    
|                                            | Net income |                                              | $                                   | 445 |           |           | $    | 550 |          
|DENOMINATOR:                                |            |                                              |                                     |     |           |           |      |    
|Denominator for basic earnings per share:   |            |                                              |                                     |     |           |           |      |    
|                                            |            | Weighted average shares                      |                                     |     | 1,171,546 |           |      |     | 1,183,087 |          
|                                            |            | Effect of diluted securities - stock options |                                     |     | 4,705     |           |      |     | 11,323    |          
|Denominator for diluted earnings per share: |            |                                              |                                     |     |           |           |      |    
|                                            |            | Weighted average shares and assumed          |                                     |     |           |           |      |     |           |          
|                                            |            |                                              | conversion of diluted stock options |     |           | 1,176,251 |      |     |           | 1,194,410 | 
|Basic earnings per share                    |            | $                                            | 0.38                                |     |           | $         | 0.46 |    
|Diluted earnings per share                  |            | $                                            | 0.38                                |     |           | $         | 0.46 |    

Note 3  Comprehensive Income

Total comprehensive income, which includes net income and unrealized gains and
losses on the Companys available-for-sale securities, amounted to $387,000 and
$440,000, respectively, for the three months ended March 31, 2003 and 2002,
respectively.

Note 4 - Investment Securities

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

March 31,2003

Securities Available-For Sale

|                                  |                           |           |        |            |       |            |        |       |       |   |    |  |  |   |        |        | 
|--------------------------------- | ------------------------- | --------- | ------ | ---------- | ----- | ---------- | ------ | ----- | ----- | - | -- |  |  | - | ------ | ------ | 
|                                  |                           |           |        |            |       |            |        |       |       |   |    | 
|                                  |                           |           |        |            |       | Gross      |        | Gross |       |   |    | 
|                                  |                           | Amortized |        | Unrealized |       | Unrealized |        | Fair 
|                                  |                           |           | Cost   |            | Gains |            | Losses |       | Value
|                                  |                           |           |        |            |       |            |        |       |      
|U.S. Treasury and U.S. Government |                           |           |        |            |       |            |        |       |       |   |    |  |  |   |        |       
|                                  | corporations and agencies |           | $      | 14,069     |       |            | $      | 203   |       |   | $  |  |  |   | $      | 14,272 | 
|State and political subdivisions  |                           |           | 5,929  |            |       |            | 345    |       |       |   | 2  |  |  |   | 6,272  |       
|Mortgage-backed securities        |                           |           | 14,008 |            |       |            | 274    |       |       |   | 8  |  |  |   | 14,274 |       
|                                  |                           |           |        |            |       |            |        |       |       |   |    |  |  |   |        |        | 
|                                  |                           | $         | 34,006 |            |       | $          | 822    |       |       | $ | 10 |  |  | $ | 34,818 |       
|                                  |                           |           |        |            |       |            |        |       |       |   |    |  |  |   |        |        | 

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December 31, 2002Securities Available-For-Sale

|                                  |                           |           |        |            |       |            |        |       |       |   |   |  |  |   |        |        | 
|--------------------------------- | ------------------------- | --------- | ------ | ---------- | ----- | ---------- | ------ | ----- | ----- | - | - |  |  | - | ------ | ------ | 
|                                  |                           |           |        |            |       | Gross      |        | Gross |       |   |   | 
|                                  |                           | Amortized |        | Unrealized |       | Unrealized |        | Fair 
|                                  |                           |           | Cost   |            | Gains |            | Losses |       | Value
|                                  |                           |           |        |            |       |            |        |       |      
|U.S. Treasury and U.S. Government |                           |           |        |            |       |            |        |       |       |   |   |  |  |   |        |       
|                                  | corporations and agencies |           | $      | 10,662     |       |            | $      | 226   |       |   | $ |  |  |   | $      | 10,888 | 
|State and political subdivisions  |                           |           | 5,404  |            |       |            | 323    |       |       |   |   |  |  |   | 5,727  |       
|Mortgage-backed securities        |                           |           | 14,104 |            |       |            | 350    |       |       |   |   |  |  |   | 14,454 |       
|                                  |                           |           |        |            |       |            |        |       |       |   |   |  |  |   |        |        | 
|                                  |                           | $         | 30,170 |            |       | $          | 899    |       |       | $ |   |  |  | $ | 31,069 |       
|                                  |                           |           |        |            |       |            |        |       |       |   |   |  |  |   |        |        | 

Note 5 - Loans

The major classifications of loans at March 31, 2003 and December 31, 2002 are
summarized as follows (dollars in thousands):

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

|                   |              |             |           |        |              |         |      |        |       |         |        |        |         |  |      |      |       |  
|------------------ | ------------ | ----------- | --------- | ------ | ------------ | ------- | ---- | ------ | ----- | ------- | ------ | ------ | ------- |  | ---- | ---- | ----- | -
|                   |              |             | March 31, |        | December 31,
|                   |              |             |           |        |              |        
|                   |              |             | 2003      |        | 2002        
|                   |              |             |           |        |              |        
|                   |              |             |           | Amount |              | Percent |      | Amount |       | Percent
|                   |              |             |           |        |              |         |      |        |       |        
|Real Estate        |              |             |           |        |              |         |      |        |       |         |        |        |         |  |      |     
|                   | Construction |             | $         | 11,430 |              |         |      | 10.5   | %     |         | $      | 9,276  |         |  |      | 8.8  | %    
|                   | Mortgage     |             |           | 13,077 |              |         |      | 12.0   | %     |         |        | 15,080 |         |  |      | 14.3 | %    
|                   | Commercial   |             |           | 58,207 |              |         |      | 53.5   | %     |         |        | 55,266 |         |  |      | 52.3 | %    
|Commercial         |              |             | 23,546    |        |              |         | 21.7 | %      |       |         | 23,502 |        |         |  | 22.3 | %   
|Consumer and other |              |             | 2,428     |        |              |         | 2.2  | %      |       |         | 2,339  |        |         |  | 2.2  | %   
|Lease financing    |              |             | 78        |        |              |         | 0.1  | %      |       |         | 83     |        |         |  | 0.1  | %   
|                   |              |             |           |        |              |         |      |        |       |         |        |        |         |  |      |      |      
|                   |              | Total loans |           |        | 108,766      |         |      |        | 100.0 | %       |        |        | 105,546 |  |      |      | 100.0 | %
|                   |              |             |           |        |              |         |      |        |       |         |        |        |         |  |      |     
|Deferred loan fees |              |             | (200      | )      |              |         |      |        |       |         | (192   | )      |         |  |      |     
|                   |              |             |           |        |              |         |      |        |       |         |        |        |         |  |      |     
|                   |              | Net loans   |           | $      | 108,566      |         |      |        |       |         |        | $      | 105,354 |  |      |      |       |  
|                   |              |             |           |        |              |         |      |        |       |         |        |        |         |  |      |     

Note 6  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 March 31, 2003 and December 31, 2002, totaled
$1,388,000, respectively. Management believes that the allowance for loan
losses at March 31, 2003 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.

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

VALLEY COMMUNITY BANCSHARES, INC.Loan Loss Experience

|                               |                                 |                        |       |      |  |      |       |    |   | 
|------------------------------ | ------------------------------- | ---------------------- | ----- | ---- |  | ---- | ----- | -- | - | 
|                               |                                 | Three months March 31,
|                               |                                 |                        |       |     
|                               |                                 |                        |       | 2003 |  | 2002
|                               |                                 |                        |       |      |  |     
|Balance at beginning of period |                                 | $                      | 1,388 |      |  | $    | 1,156 |   
|                               | Charge-offs                     |                        |       |      |  |      |       |    |  
|                               | Recoveries:                     |                        |       |      |  |      |       | 1  |  
|                               |                                 |                        |       |      |  |      |       |   
|                               |                                 | Net recoveries         |       |      |  |      |       |    | 1 | 
|                               | Additions charged to operations |                        |       |      |  |      |       | 31 |  
|                               |                                 |                        |       |      |  |      |       |   
|Balance at end of period       |                                 | $                      | 1,388 |      |  | $    | 1,188 |   
|                               |                                 |                        |       |      |  |      |       |   

Note 7  Business Segment Information

Beginning January 1999 and through December 2002, the Company owned two
community-banking institutions, Puyallup Valley Bank and Valley Bank. These
banks were managed at the subsidiary bank level. Each subsidiary bank had a
board of directors and an executive management team responsible for the
operation and performance of the respective subsidiary bank.

On January 17, 2003, the Company merged the subsidiary banks into one community
bank named Valley Bank. In addition, the company consolidated its board of
directors and executive management team into a new organizational structure,
while converting separated banking systems into a single operation. As a result
of these system and organizational changes, the financial information that is
used by the chief operating decision maker in allocating resources and
assessing performance is only provided for one reportable segment for the three
month period ended March 31, 2003.

Note 8  Impact of New Accounting Issues

During the first quarter of 2003 the Financial Accounting Standard Board
(FASB) issued the following new accounting pronouncements.

In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Interpretation elaborates on the disclosures to be
made by sellers or guarantors of products and services, as well as those
entities guaranteeing the financial performance of others. The Interpretation
further clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the obligations it has undertaken in issuing
the guarantee. The initial recognition and initial measurement provisions of
the Interpretation are effective on a prospective basis to guarantees issued or
modified after December 31, 2002, and the disclosure requirements are effective
for financial statements of periods ending after December 15, 2002.
Implementation of the Interpretation did not result in a material impact on the
Companys financial position or results of operations.

In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities(VIE). It defined a VIE as a corporation, partnership,
trust, or any other legal structure used for the business purpose that either
a) does not have equity investors with voting rights or b) has equity investors
that do not provide sufficient financial resources for the entity to support
its activities. This interpretation will require a VIE to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
VIEs activities or entitled to receive a majority of the entitys residual
return. The provisions of interpretation No. 46 are required to be applied
immediately to VIEs created after January 31, 2003. The Company does not have
any VIE and accordingly the implementation of the Interpretation did not result
in an impact on its financial position or results of operations.

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

Valley Community Bancshares, Inc.

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

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

The principal source of the Companys revenue are (i) interest and fees on
loans; (ii) deposit service charges; (iii) merchant credit card processing
fees; (iv) interest bearing deposits with Bank; (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 Bank 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.

Valley Bank

Valley Bank is a Washington state-chartered commercial bank, which commenced
operations as Puyallup Valley Bank in October 1973. In January 1999 the
Company opened Valley Bank, a state chartered FDIC insured commercial bank
subsidiary located in Auburn, Washington. On January 17, 2003, in an effort to
consolidate operations, Puyallup Valley Bank and Valley Bank merged and renamed
the resulting institution Valley Bank.

The Bank provides full-service banking to businesses and residents within the
Puyallup, Auburn and Kent communities and its surrounding areas. The 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. The Bank conducts business out
of eight full-service offices and one drive-up facility.

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

On September 5, 2002 the Bank opened a new banking facility in Kent Washington.
The new office operates in a leased facility until a permanent facility can be
located.

On March 19, 2003 The Banks Board of Directors approved the expansion into Gig
Harbor, Washington. The new office opened in April 2003as a loan production
office in a leased facility until a permanent banking facility can be located.
The Bank hired Mr. Tom Leander, founder and President of the former Harbor Bank
in Gig Harbor to initiate the expansion.

Valley Bank is a wholly owned subsidiary of the Company.

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Results of Operations

The Company earned net income of $445,000 or $0.38 per diluted share for the
three months ended March 31, 2003, compared to net income of $550,000 or $0.46
per diluted share, for the three months ended March 31, 2002, a decrease of 19
percent. The Companys return on average assets was 1.04 percent for the three
months ended March 31, 2003, compared to 1.42 percent for the three months
ended March 31, 2002.

The decrease in net income for the three-month period ended March 31, 2003 was
primarily the result of increased noninterest expense, partially offset by
increased noninterest income, a lower provision for loan losses and reduced
income tax. The increased staffing levels of the Banks new Kent facility and
Puget Sound Mortgage Brokers significantly increased salaries and employee
benefits and occupancy during the three-month period. A decrease in the
Companys net interest margin also negatively impacted earnings during the
three-month period.

Management anticipates higher operating costs as a result of opening the new
Kent and Gig Harbor offices. Profitability of the Company will continue to be
negatively impacted until the new offices generate sufficient revenues to
offset the added operating costs. It is anticipated the new offices will not
breakeven until after 2003.

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

The following table shows the various performance ratios for the Company for
the three months ended March 31, 2003 and 2002, respectively:

VALLEY COMMUNITY BANCSHARES, INC.Selected Financial Data1(dollars in thousands, except per share amounts)

|                      |                                                                                               |                              |      |         |      |  |   |         |  
|--------------------- | --------------------------------------------------------------------------------------------- | ---------------------------- | ---- | ------- | ---- |  | - | ------- | -
|                      |                                                                                               | Three Months Ended March 31,
|                      |                                                                                               |                             
|                      |                                                                                               |                              | 2003 |         | 2002
|                      |                                                                                               |                              |      |         |     
|Financial Performance |                                                                                               |                              |      |         |      |  |   |        
|                      | Net Income                                                                                    |                              | $    | 445     |      |  | $ | 550     |  
|                      | Average Assets                                                                                |                              |      | 172,730 |      |  |   | 156,876 |  
|                      | Average Stockholders Equity                                                                  |                              |      | 22,112  |      |  |   | 21,107  |  
|                      | Return on Assets (net income divided by average assets)                                       |                              |      | 1.04    | %    |  |   | 1.42    | %
|                      | Return on Equity (net income divided by average equity)                                       |                              |      | 8.16    | %    |  |   | 10.57   | %
|                      | Net Interest Margin (net interest income (tax adjusted)
Divided by earning assets)            |                              |      | 4.92    | %    |  |   | 5.46    | %
|                      | Efficiency Ratio (noninterest expense divided by
noninterest income plus net interest income) |                              |      | 71.32   | %    |  |   | 61.43   | %
|                      | Ratio of noninterest income to average assets                                                 |                              |      | 3.77    | %    |  |   | 3.43    | %

Net Interest Income

Net interest income it the most significant component contributing to net
income. It 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.

The earnings from certain assets are exempt from federal income tax, and it is
customary in the financial services industry to analyze changes in net interest
income on a tax equivalent (TE) basis. Under this method, nontaxable income
from loans and investments is adjusted to an amount, which would have been
earned if such income were subject to federal income tax.



---

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

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The discussion below presents an analysis based on tax equivalent amounts at a
34% tax rate.

VALLEY COMMUNITY BANCSHARES, INC.Net Interest Income, adjusted to a Tax Equivalent Basis(dollars in thousands),

|                                 |                              |      |       |      |  |   |       | 
|-------------------------------- | ---------------------------- | ---- | ----- | ---- |  | - | ----- | 
|                                 | Three Months Ended March 31,
|                                 |                             
|                                 |                              | 2003 |       | 2002
|                                 |                              |      |       |     
|Net interest income, as reported |                              | $    | 2,289 |      |  | $ | 2,416 | 
|Effect of tax exempt income      |                              |      | 32    |      |  |   | 39    | 
|                                 |                              |      |       |      |  |   |       | 
|TE interest income               |                              |      | 2,321 |      |  |   | 2,455 | 
|Interest expense                 |                              |      | 379   |      |  |   | 503   | 
|                                 |                              |      |       |      |  |   |       | 
|TE net interest income           |                              | $    | 1,942 |      |  | $ | 1,952 | 
|                                 |                              |      |       |      |  |   |       | 

Tax equivalent net interest income, divided by average earning assets is
referred to as net interest margin. For the three months ended March 31, 2003
the Companys net interest margin was 4.92 percent compared to 5.46 percent for
the three months ended March 31, 2002.

TE interest income was $2,321,000 for the three months ended March 31, 2003
compared to $2,455,000 for the three months ended March 31, 2002. The
three-month decrease was primarily the result of a significant decrease in the
yield earned on earning assets. The yield on interest-earning assets decreased
to 5.88 percent for the three months ended March 31, 2003 compared to 6.86
percent during the same period a year ago. The decrease in TE interest income
was primarily the result of a lower yield realized on interest bearing deposits
with Bank, investment securities, and loans. The yield decrease reflects an
overall decline in market interest rates resulting from a soft economic
environment.

Interest expense was $379,000 for the three months ended March 31, 2003
compared to $503,000 for the three months ended March 31, 2002. The cost of
funds decreased to 1.28 percent for the three months ended March 31, 2003
compared to 1.88 percent during the same period a year ago. The decrease for
the three-month period was due to a decrease in the Companys cost of funds
resulting from an overall decline in market interest rates.

Market interest rates continue to be at historical lows as a result of a slow
national and regional economy and because of an aggressively accommodating
Federal Reserve monetary policy. The decrease in market interest rates during
2002 had a positive impact on the Companys net interest margin. Because of the
Companys liability sensitive position at that time, the Company experienced a
greater reduction in deposit costs in comparison to the reduction in the
earnings on loans and investments. During 2003, market interest remained
relatively low resulting in a greater reduction in the earnings on loans and
investments compared to the reduction in deposit costs.

In the event of an increase market interest rates, the Companys TE net
interest income and margin may decrease because the Company has a significant
amount of interest bearing liabilities subject to repricing when compared to
interest earning assets. This maybe somewhat offset because the rate paid on
deposits with administered interest rates generally do not increase as rapidly
as an account whose rates change with market interest rates. In the event of
continued low market interest rates, the Company anticipates a further decrease
in net interest margin as interest-earning assets reprice to the lower interest
rate levels.

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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 March 31, |       |         |      |         
|                             |                                            |                                    |   |         |         |          |       | 2003                                 |       |         |      |          |      |        |   |         |         | 2002 |       |       |       | 
|                             |                                            |                                    |   |        
|                             |                                            |                                    |   | Average |         | Revenue/ |       | Yield/                               |       | Average |      | Revenue/ |      | Yield/
|                             |                                            | Balance                            |   | Expense |         | Rate     |       | Balance                              |       | Expense |      | Rate    
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |         
|ASSETS                       |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|Interest-earning assets      |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|                             | Loans (including fees)1                    |                                    | $ | 106,906 |         |          | $     | 1,904                                |       |         |      | 7.22     | %    |        | $ | 101,309 |         |      | $     | 1,940 |       |  |      | 7.77 | %   
|                             | Investment
securities2 3                   |                                    |   | 31,626  |         |          |       | 318                                  |       |         |      | 4.08     | %    |        |   | 31,063  |         |      |       | 418   |       |  |      | 5.46 | %   
|                             | Interest bearing deposits with banks       |                                    |   | 19,549  |         |          |       | 87                                   |       |         |      | 1.80     | %    |        |   | 12,274  |         |      |       | 90    |       |  |      | 2.97 | %   
|                             | Federal funds sold                         |                                    |   | 1,678   |         |          |       | 5                                    |       |         |      | 1.21     | %    |        |   |         |         |      |       |       |       |  |      |      |     
|                             | Federal Home Loan Bank Stock               |                                    |   | 393     |         |          |       | 7                                    |       |         |      | 7.22     | %    |        |   | 479     |         |      |       | 7     |       |  |      | 5.93 | %   
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|                             |                                            | Total Interest-earning assets      |   |         | 160,152 |          |       |                                      | 2,321 |         |      |          | 5.88 | %      |   |         | 145,125 |      |       |       | 2,455 |  |      |      | 6.86 | %
|                             | Total noninterest-earning assets           |                                    |   | 12,578  |         |          |       |                                      |       |         |      |          |      |        |   | 11,751  |         |      |       |       |       |  |      |      |     
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|                             | TOTAL ASSETS                               |                                    | $ | 172,730 |         |          |       |                                      |       |         |      |          |      |        | $ | 156,876 |         |      |       |       |       |  |      |      |     
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|Interest-bearing liabilities |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|                             | Deposits                                   |                                    | $ | 119,163 |         |          |       | 377                                  |       |         |      | 1.28     | %    |        | $ | 108,223 |         |      |       | 501   |       |  |      | 1.88 | %   
|                             | Other borrowed funds                       |                                    |   | 484     |         |          |       | 2                                    |       |         |      | 1.68     | %    |        |   | 433     |         |      |       | 2     |       |  |      | 1.86 | %   
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|                             |                                            | Total Interest-bearing liabilities |   |         | 119,647 |          |       |                                      | 379   |         |      |          | 1.28 | %      |   |         | 108,656 |      |       |       | 503   |  |      |      | 1.88 | %
|                             | Noninterest-bearing liabilities            |                                    |   | 30,971  |         |          |       |                                      |       |         |      |          |      |        |   | 27,113  |         |      |       |       |       |  |      |      |     
|                             | Stockholders equity                       |                                    |   | 22,112  |         |          |       |                                      |       |         |      |          |      |        |   | 21,107  |         |      |       |       |       |  |      |      |     
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|                             | TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY |                                    | $ | 172,730 |         |          |       |                                      |       |         |      |          |      |        | $ | 156,876 |         |      |       |       |       |  |      |      |     
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|Net interest spread          |                                            |                                    |   |         |         | $        | 1,942 |                                      |       |         | 4.59 | %        |      |        |   |         |         | $    | 1,952 |       |       |  | 4.98 | %   
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|Margin Analysis              |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|                             | TE interest income/ earning assets         |                                    |   |         |         |          | $     | 2,321                                |       |         |      | 5.88     | %    |        |   |         |         |      | $     | 2,455 |       |  |      | 6.86 | %   
|                             | Interest expense/earning assets            |                                    |   |         |         |          |       | 379                                  |       |         |      | 0.96     | %    |        |   |         |         |      |       | 503   |       |  |      | 1.41 | %   
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     
|                             | Net interest margin                        |                                    |   |         |         |          | $     | 1,942                                |       |         |      | 4.92     | %    |        |   |         |         |      | $     | 1,952 |       |  |      | 5.46 | %   
|                             |                                            |                                    |   |         |         |          |       |                                      |       |         |      |          |      |        |   |         |         |      |       |       |       |  |      |     



---

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

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##### Table of Contents



The following table sets forth information concerning the Companys change in
TE net interest income for the periods that are attributable to changes in
interest rate and changes in volume for the three month period ended March 31,
2003 compared to the three months ended March 31, 2002:

VALLEY COMMUNITY BANCSHARES, INC.
Volume/Rate Analysis1 - For the Three Months ended March 31,
(dollars in thousands)

|                             |                                      |                                    |   |                       |     |      |   |      |      |   |   |      |      |  
|---------------------------- | ------------------------------------ | ---------------------------------- | - | --------------------- | --- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|                             |                                      |                                    |   | 2003 Compared to 2002
|                             |                                      |                                    |   |                      
|                             |                                      |                                    |   | Volume                |     | Rate |   | Net 
|                             |                                      |                                    |   |                       |     |      |   |     
|TE Interest income           |                                      |                                    |   |                       |     |      |   |      |      |   |   |     
|                             | Loans (including fees)2              |                                    | $ | 104                   |     |      | $ | (140 | )    |   | $ | (36  | )   
|                             | Investment securities 3              |                                    |   | 7                     |     |      |   | (107 | )    |   |   | (100 | )   
|                             | Interest bearing deposits with banks |                                    |   | 41                    |     |      |   | (44  | )    |   |   | (3   | )   
|                             | Federal funds sold                   |                                    |   | 5                     |     |      |   |      |      |   |   | 5    |     
|                             | Federal Home Loan Bank Stock         |                                    |   | (1                    | )   |      |   | 1    |      |   |   |      |     
|                             |                                      |                                    |   |                       |     |      |   |      |      |   |   |      |     
|                             |                                      | Total Interest-earning assets      |   |                       | 156 |      |   |      | (290 | ) |   |      | (134 | )
|Interest-bearing liabilities |                                      |                                    |   |                       |     |      |   |      |      |   |   |     
|                             | Total deposits                       |                                    |   | 47                    |     |      |   | (171 | )    |   |   | (124 | )   
|                             |                                      |                                    |   |                       |     |      |   |      |      |   |   |      |     
|                             | Other borrowed funds                 |                                    |   |                       |     |      |   |      |      |   |   |      |     
|                             |                                      | Total Interest-bearing liabilities |   |                       | 47  |      |   |      | (171 | ) |   |      | (124 | )
|                             |                                      |                                    |   |                       |     |      |   |      |      |   |   |      |     
|                             |                                      | TE net interest income             |   | $                     | 109 |      |   | $    | (119 | ) |   | $    | (10  | )
|                             |                                      |                                    |   |                       |     |      |   |      |      |   |   |      |     

Provision for loan losses

Provisions for loan losses reduce net interest income. The Company provided $0
for loan losses for the three months ended March 31, 2003 compared to $31,000
during the same three-month period last year. The 2002 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 increased by noninterest income (primarily service charges,
origination fees on mortgage loans brokered, and other operating income) and
reduced by noninterest expenses (primarily salaries and employee benefits,
occupancy, equipment, and other operating expenses).

Noninterest income was $339,000 for the three months ended March 31, 2003, a 39
percent increase from $244,000 for the three months ended March 31, 2002. The
increase in noninterest income for the three month period ended March 31, 2003
was the result of higher service charges, increased loan origination fees on
mortgage loans brokered, and other operating income partially offset by lower
security gains.

Noninterest expense was $1,604,000 for the three months ended March 31, 2003, a
21 percent increase from $1,325,000 for the three months ended March 31, 2002.
The increase in noninterest expense for the three-month period ended March 31,
2003 was primarily the result of increased salaries and employee benefits,
occupancy, operating expenses associated with the opening of the new Kent
facility and the operation of Puget Sound Mortgage Brokers.



---

|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



Occupancy expense
also increased as a result of higher depreciation expense resulting from the
recently completed remodel of the Main Office facility. The increase in professional fees resulted
from the merger of Puyallup Valley Bank and Valley Bank. The percentage of
noninterest expense to average assets was 3.78 percent for the three months
ended March 31, 2003, compared to 3.43 percent during the same period last
year.

The following table sets forth information concerning the various components of
the Companys noninterest expense for the three months ended March 31, 2003 and
2002, respectively:

VALLEY COMMUNITY BANCSHARES, INC.
Noninterest Expense
(dollars in thousands)

|                    |                              |                           |      |     |       |  |   |     |       | 
|------------------- | ---------------------------- | ------------------------- | ---- | --- | ----- |  | - | --- | ----- | 
|                    | Three Months Ended March 31,
|                    |                             
|                    |                              |                           | 2003 |     | 2002 
|                    |                              |                           |      |     |      
|Noninterest Expense |                              |                           |      |     |       |  |   |    
|                    | Salaries                     |                           | $    | 681 |       |  | $ | 539 |      
|                    | Employee benefits            |                           |      | 176 |       |  |   | 160 |      
|                    | Occupancy                    |                           |      | 139 |       |  |   | 119 |      
|                    | Equipment                    |                           |      | 111 |       |  |   | 119 |      
|                    | Operating                    |                           |      | 139 |       |  |   | 107 |      
|                    | Software                     |                           |      | 53  |       |  |   | 48  |      
|                    | Advertising and marketing    |                           |      | 31  |       |  |   | 27  |      
|                    | Professional                 |                           |      | 81  |       |  |   | 49  |      
|                    | Business and occupation tax  |                           |      | 33  |       |  |   | 28  |      
|                    | Other                        |                           |      | 160 |       |  |   | 129 |      
|                    |                              |                           |      |     |       |  |   |     |      
|                    |                              | Total noninterest expense |      | $   | 1,604 |  |   | $   | 1,325 | 
|                    |                              |                           |      |     |       |  |   |     |      

The Companys efficiency ratio, which is the ratio of noninterest expense to
net interest income plus noninterest income, was 71.3 percent for the three
months ended March 31, 2003 compared to 61.4 percent for the three months ended
March 31, 2002. The increase in the ratio was primarily due to a significant
increase in noninterest expense, partially offset by an increase in 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 March 31, 2003, was $200,000
compared to $251,000 for the three month ended March 31, 2002. The provision
represents an effective tax rate of approximately 31 percent during 2003 and
2002, respectively. The Companys marginal tax rate is currently 34 percent.
The difference between the Companys effective and marginal tax rate is
primarily related to investments made in tax-exempt securities.

Financial Condition

The Companys total consolidated assets were $171.8 million as of March 31,
2003, compared to $171.7 million as of December 31, 2002. The Company
increased its percentage of assets in investment securities and loans by
decreasing interest bearing deposits with banks. Deposits increased slightly
during the three-month period and stockholders equity decreased as a result of
paying a 60¢ per share cash dividend to stockholders and a decrease in other
comprehensive income, partially offset by the earnings results of the
three-month period ended March 31, 2003.

Investment Portfolio

The major classifications of investments at March 31, 2003 and December 31,
2002, are summarized in Note 4  Investment Securities in the Notes to
Condensed Consolidated Financial Statements.

At March 31, 2003, the Company had $34.8 million of securities
available-for-sale, compared to $31.1 million as of December 31, 2002. Although
investment securities increased by $3.7 million during 2003, the Company
purchased approximately $12.2 million in securities this year. They were funded
primarily with $8.3 million of securities either maturing or sold during 2003
along with a decrease in interest bearing deposits with banks. The result was a
change in the mix of the investment portfolio favoring U.S. Government
corporation and agencies securities and securities issued by state and
political subdivisions.

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##### Table of Contents



At March 31, 2003, all of the Companys securities were classified as
available-for-sale. Management believes that holding securities as
available-for-sale provides greater flexibility to respond to interest rate
changes and liquidity needs to fund loan growth.

Loan Portfolio

The major classifications of loans at March 31, 2003 and December 31, 2002, are
summarized in Note 5  Loans in the Notes to Condensed Consolidated Financial
Statements.

In addition to the major classifications of loans summarized in Note 5, the
Company has additional loan concentrations exceeding 10 percent of total loans
at March 31, 2003. They include loans to medical doctors and dentists in the
amount of approximately $18.9 million.

Loans were $108.6 million as of March 31, 2003, compared to $105.4 million as
of December 31, 2002. The increase was primarily in real estate construction
and real estate commercial loans, partially offset by a decrease in real estate
mortgage loans. The percentage of loans to total assets was 63.2 percent and
61.4 percent at March 31, 2003 and December 31, 2002, respectively. It
continues to be managements intent to grow the loan portfolio and to increase
the percent of loans to assets, which potentially could improve the Companys
net interest margin.

Risk Elements

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

VALLEY COMMUNITY BANCSHARES,
INC.
Non-performing Assets

|                       |                                |                             |   |              |   |      |   |     |     | 
|---------------------- | ------------------------------ | --------------------------- | - | ------------ | - | ---- | - | --- | --- | 
|                       |                                |                             |   |              |   |      |   |    
|                       |                                | March 31,                   |   | December 31,
|                       |                                |                             |   | 2003         |   | 2002
|                       |                                |                             |   |              |   |     
|Non-performing assets: |                                |                             |   |              |   |      |   |    
|                       | Nonaccrual loans               |                             | $ | 9            |   |      | $ |     |    
|                       | Loans 90 days or more past due |                             |   |              |   |      |   |     |    
|                       |                                |                             |   |              |   |      |   |     |    
|                       | Restructured loans             |                             |   | 9            |   |      |   | -0- |    
|                       | Other real estate owned        |                             |   |              |   |      |   |     |    
|                       |                                |                             |   |              |   |      |   |     |    
|                       |                                | Total non-performing assets |   | $            | 9 |      |   | $   | -0- | 
|                       |                                |                             |   |              |   |      |   |     |    

As of March 31, 2003, the Company had $9,000 in nonperforming assets, which
include nonaccrual loans, loans 90 days or more past due and still accruing
interest, and restructured loans. The Company had $0 in nonperforming assets as
of December 31, 2002.

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

During the three-month period ended March 31, 2003 there was one commercial
loan on nonaccrual status. The gross income that would have been recorded for
the three-month period ended March 31, 2002 if the nonaccrual loan had been
current and in accordance with its original term and the interest recognized on
the loan for the year was insignificant.

During the three-month period ended March 31, 2002 there was one commercial
loan on nonaccrual status. The gross income that would have been recorded for
the three-month period ended March 31, 2002 if the nonaccrual loan had been
current and in accordance with its original term approximates $2,000. Interest
recognized on the loan for the year was insignificant.

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##### Table of Contents



Potential Problem Loans

At March 31, 2003 and December 31, 2002, the Company had two potential problem
commercial real estate loans totaling approximately $2,363,000 and $2,464,000,
respectively. The Company believes that the loans are secured by sufficient
collateral and guarantor financial strength to repay the loans, although there
can be no assurances given with respect to potential losses in these credits.
These loans are in addition to those categorized as non-performing listed
above. Although these loans are currently classified as performing, management
has information regarding credit weakness inherent in the loans.

Summary of Loan Loss Experience

Changes in the Allowance for Loan Losses

The activity in the allowance for loan losses is summarized in Note 6 -
Allowance for Loan Losses in the Notes to Condensed Consolidated Financial
Statements.

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

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

While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
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       
|                                                                        |  |                          
|                                                                        |  | March 31,                 |         | March 31,
|                                                                        |  | 2003                      |         | 2002     
|                                                                        |  |                           |         |          
|Average Allowance for Loan Losses                                       |  | $                         | 1,388   |           |  | $ | 1,188   |  
|Average Loans Outstanding                                               |  | $                         | 106,906 |           |  | $ | 101,309 |  
|Ratio of net charge-offs during the
period to average loans outstanding |  |                           | 0.00    | %         |  |   | 0.00    | %
|Ratio of average allowance for loan losses
to average loans outstanding |  |                           | 1.30    | %         |  |   | 1.17    | %

-15-



---



##### Table of Contents



There were no loan charge-offs during the three months ended March 31, 2003 and
2002. The ratio of the average allowance for loan losses to average loans
outstanding totaled 1.30 percent for the three months ended March 31, 2003
compared to 1.17 percent during the same period last year. The increase in the
ratio results from loan recoveries added to the allowance during the fourth
quarter of 2002 and also a significant reduction in the loan portfolio during
the fourth quarter of 2002. At March 31, 2003, the allowance for loan losses as
a percent of loans totaled 1.28 percent compared to 1.32 percent at December
31, 2002.

Analysis of the Allowance for Loan Losses

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

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

The Company uses the historical loss experience method in conjunction with the
specific identification method for calculation of the amount of allowance for
loan losses. A 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.

Deposits increased slightly to $148.2 million as of March 31, 2003, compared to
$147.4 million as of December 31, 2002. The increase occurred primarily
noninterest bearing demand and savings deposits during the three-month period.

-16-



---



##### Table of Contents



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, 
|                                    |  |               
|                                    |  | March 31, 2003 |         | December 31, 2002
|                                    |  |                |         |                  
|                                    |  | Amount         |         | Percent           |  | Amount |       | Percent
|                                    |  |                |         |                   |  |        |       |        
|Noninterest bearing demand deposits |  | $              | 29,903  |                   |  |        | 20.2  | %       |  | $ | 29,119  |  |  |  | 19.8  | %
|Interest bearing demand deposits    |  |                | 21,938  |                   |  |        | 14.8  | %       |  |   | 21,733  |  |  |  | 14.7  | %
|Money market deposits               |  |                | 35,622  |                   |  |        | 24.0  | %       |  |   | 35,506  |  |  |  | 24.1  | %
|Savings deposits                    |  |                | 15,193  |                   |  |        | 10.3  | %       |  |   | 14,343  |  |  |  | 9.7   | %
|Time certificates < $100,000        |  |                | 24,446  |                   |  |        | 16.5  | %       |  |   | 25,395  |  |  |  | 17.2  | %
|Time certificates > $100,000        |  |                | 21,092  |                   |  |        | 14.2  | %       |  |   | 21,340  |  |  |  | 14.5  | %
|                                    |  |                |         |                   |  |        |       |         |  |   |         |  |  |  |       |  
|                                    |  | $              | 148,194 |                   |  |        | 100.0 | %       |  | $ | 147,436 |  |  |  | 100.0 | %
|                                    |  |                |         |                   |  |        |       |         |  |   |         |  |  |  |       |  

Liquidity and Capital Resources

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

Cash flows from operations contribute significantly to liquidity as well as
proceeds from maturities of securities and increasing customer deposits. As
indicated on the Companys Condensed Consolidated Statement of Cash Flows, net
cash from operating activities for the three months ended March 31, 2003
contributed $.7 million to liquidity compared to $.6 million for the three
months ended March 31, 2002. The majority of the Companys funding comes from
customer deposits within its operating region. Customer deposits provided $.8
million for the three months ended March 31, 2003 compared to $1.1 million for
the three months ended March 31, 2002. For the three months ended March 31,
2003, non-interest and savings deposits provided the majority of the deposit
growth. Another important source of liquidity is investments in federal funds
and interest-bearing deposits with banks and the Companys securities
portfolio. The Company maintains a ladder of securities that provides
prepayments and payments at maturity and a portfolio of available-for-sale
securities that could be converted to cash quickly. Proceeds from maturity and
sale of securities provided $8.3 million for the three months March 31, 2003
compared to $4.0 million for the three months ended March 31, 2002.

At March 31, 2003, the Company held cash and due from banks, interest-bearing
deposits with banks, and federal funds sold of approximately $22.1 million. In
addition, at such date $34.8 million of the Companys investments were
classified as available for sale.

The Bank has the 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 Bank must maintain unencumbered collateral with
a value at least equal to the outstanding balance. In addition to the FHLB
credit line, the Bank has committed line of credit agreements totaling
approximately $9.5 million from unaffiliated banks. At March 31, 2003, the Bank
had no advances outstanding to the FHLB or from unaffiliated banks.

The Banks have commitments to extend credit, which may have an impact on the
Companys liquidity position. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition
established in the commitment. Commitments generally have fixed expiration
dates. Since some commitments are expected to expire without being drawn upon,
the total commitment amounts do not represent future cash requirements. The
Company experience suggests customers draw on approximately 75 percent of loan
commitments. Commitments to extend credit at March 31, 2003 and December 31,
2002 were $19.8 million, respectively.

The Companys total stockholders equity decreased to $22.2 million at March
31, 2003 from $22.5 million at December 31, 2002. The decrease was the result
of a 60¢ dividend per share paid to stockholders of record on December 31, 2002
and lower unrealized gains recorded on securities available for sale, net of
income tax, partially

-17-



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##### Table of Contents



offset by net income earned during the three months ended
March 31, 2003. At March 31, 2003, stockholders equity was 12.9 percent of
total assets, compared to 13.1 percent at December 31, 2002.

The market value of available for sale securities was greater than book value
at both March 31, 2003 and December 31, 2002, primarily as a result of low
market interest rates, which resulted in unrealized gains in the investment
portfolio. In the event market interest rates increase, the market value of the
Companys investment portfolio may decrease. Because changes in the market
value of available-for-sale securities are a component of other comprehensive
income, within stockholders equity, a decrease in market value of securities
would negatively impact stockholders equity. At March 31, 2003, the Company
performed a simulation analysis of changes in the market value of the
investment portfolio given a 300 basis point increase in interest rates. The
analysis indicated a decrease in market value of approximately $1.0 million net
of federal income tax. Although stockholders equity would be reduced by
approximately 4.6 percent, the Company would still be well in excess on capital
adequacy requirements in the event the Company would be required to liquidate
these securities for unforeseen liquidity needs.

Capital Adequacy Requirements

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

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

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 Bank are qualified as well-capitalized at March 31,
2003. Management believes that under the current regulations the Bank will
continue to meet well-capitalized capital requirements in the foreseeable
future. However, events beyond the control of the Bank such as a downturn in
the economy where the Bank have most of their loans, could adversely affect
future earnings and, consequently, the ability of the Bank to meet future
well-capitalized capital requirements.

-18-



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##### Table of Contents



The capital amounts and ratios for the Company and the Bank as of March 31,
2003, are presented in the following table (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.
Capital

|                  |                           |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                   |  |       |     |   |  |                   |   |  |  |   |        |  |  |  |      |   |  | 
|----------------- | ------------------------- | ------------ |  | ----- | ------ | ------ |  |  | ---- | ------ |  | ----------------- | - |  |  | - | ----- | ----------------- |  | ----- | --- | - |  | ----------------- | - |  |  | - | ------ |  |  |  | ---- | - |  | 
|                  |                           |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                   |  |       |     |   |  | To Be Well       
|                  |                           |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                   |  |       |     |   |  | Capitalized Under
|                  |                           |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       | For Capital       |  |       |     |   |  | Prompt Corrective
|                  |                           |              |  |       |        | Actual |  |  |      |        |  | Adequacy Purposes |   |  |  |   |       | Action Provisions
|                  |                           |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                  
|As March 31, 2003 |                           | Amount       |  | Ratio |        |        |  |  |      | Amount |  | Ratio             |   |  |  |   |       | Amount            |  | Ratio
|                  |                           |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                   |  |      
|Total Capital     |                           |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                   |  |       |     |   |  |                   |   |  |  |   |        |  |  |  |      |  
|                  | (to Risk-Weighted Assets) |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                   |  |       |     |   |  |                   |   |  |  |   |        |  |  |  |     
|                  |                           | Consolidated |  | $     | 22,917 |        |  |  | 18.5 | %      |  |                   | ≥ |  |  | $ | 9,901 |                   |  |       | 8.0 | % |  |                   | ≥ |  |  | $ | 12,376 |  |  |  | 10.0 | %
|                  |                           | Valley Bank  |  | $     | 22,278 |        |  |  | 18.0 | %      |  |                   | ≥ |  |  | $ | 9,900 |                   |  |       | 8.0 | % |  |                   | ≥ |  |  | $ | 12,375 |  |  |  | 10.0 | %
|Tier I Capital    |                           |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                   |  |       |     |   |  |                   |   |  |  |   |        |  |  |  |      |  
|                  | (to Risk-Weighted Assets) |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                   |  |       |     |   |  |                   |   |  |  |   |        |  |  |  |     
|                  |                           | Consolidated |  | $     | 21,529 |        |  |  | 17.4 | %      |  |                   | ≥ |  |  | $ | 4,950 |                   |  |       | 4.0 | % |  |                   | ≥ |  |  | $ | 7,426  |  |  |  | 6.0  | %
|                  |                           | Valley Bank  |  | $     | 20,890 |        |  |  | 16.9 | %      |  |                   | ≥ |  |  | $ | 4,950 |                   |  |       | 4.0 | % |  |                   | ≥ |  |  | $ | 7,425  |  |  |  | 6.0  | %
|Tier I Capital    |                           |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                   |  |       |     |   |  |                   |   |  |  |   |        |  |  |  |      |  
|                  | (to Average Assets)       |              |  |       |        |        |  |  |      |        |  |                   |   |  |  |   |       |                   |  |       |     |   |  |                   |   |  |  |   |        |  |  |  |     
|                  |                           | Consolidated |  | $     | 21,529 |        |  |  | 12.5 | %      |  |                   | ≥ |  |  | $ | 6,905 |                   |  |       | 4.0 | % |  |                   | ≥ |  |  | $ | 8,631  |  |  |  | 5.0  | %
|                  |                           | Valley Bank  |  | $     | 20,890 |        |  |  | 12.2 | %      |  |                   | ≥ |  |  | $ | 6,841 |                   |  |       | 4.0 | % |  |                   | ≥ |  |  | $ | 8,551  |  |  |  | 5.0  | %




Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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 March 31,2003, based on the
measures used to monitor and manage interest rate risk, there has not been a
material change in the Companys interest rate risk since December 31, 2002.
For additional information, refer to the Companys annual report on Form 10-K
for the year ended December 31, 2002.




Item 4. CONTROLS AND PROCEDURES

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

(b)  Changes in Internal Controls: In the quarter ended March 31, 2003, the
Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.

-19-



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##### Table of Contents



Limitations on the Effectiveness of Controls.The companys management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.




FORWARD-LOOKING STATEMENTS

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

-20-



---



##### Table of Contents






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                                                                                      
|3.1 Articles of Incorporation of Valley Community Bancshares, Inc. *                              
|3.2 Restated Bylaws of Valley Community Bancshares, Inc. ^                                        
|10. Material contracts of Valley Community Bancshares, Inc.                                       
|10.1 Severance agreement for Mr. Brown *                                                          
|10.2 Severance agreement for Mr. Thompson *                                                       
|10.3 Severance agreement for Mr. Riordan *                                                        
|10.4 Severance agreement for Mr. Pickett *                                                        
|10.5 Deferred Compensation Agreement for Mr. Brown *                                              
|10.6 Deferred Compensation Agreement for Mr. Thompson #                                           
|10.7 1998 Stock Option Plan *                                                                     
|10.8 401(k) Defined Contribution Plan and Noncontributory Profit Sharing Plan Adoption Agreement *
|Additional Exhibits                                                                               
|99.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                     

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



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

The Company filed a current report on Form 8-K on January 24, 2003. The report
included under Item 5 of Form 8-K a press release announcing fourth quarter and
year 2002 financial results, the approval of a 60¢ per share cash dividend and
a 5% stock dividend payable to shareholders of record on December 31, 2002, and
the completion of the merger between the Companys two bank subsidiaries
Puyallup Valley Bank and Valley Bank.

-21-



---



##### Table of Contents






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: May 5, 2003                              | By | /s/ | David H. Brown                                                        
| |                                                |    |    
| |                                                |    |     | David H. Brown
President and
Chief Financial Officer                  
| |                                                |    |    
| | Date: May 5, 2003                              | By | /s/ | Joseph E. Riordan                                                     
| |                                                |    |     |                                                                       
| |                                                |    |     | Joseph E. Riordan
Executive Vice President and
Chief Financial Officer

-22-



---



##### Table of Contents






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

I, David H. Brown, certify that:



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



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



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



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



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

|                  |  |    |     |                                                     
|----------------- |  | -- | --- | ----------------------------------------------------
|Date: May 5, 2003 |  |    |     |                                                     
|                  |  | By | /s/ | David H. Brown                                      
|                  |  |    |    
|                  |  |    |     | David H. Brown
President and
Chief Executive Officer

-23-



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##### Table of Contents



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

I, Joseph E. Riordan, certify that:



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



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



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



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



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

|                  |  |    |     |                                                                       
|----------------- |  | -- | --- | ----------------------------------------------------------------------
|Date: May 5, 2003 |  |    |     |                                                                       
|                  |  | By | /s/ | Joseph E. Riordan                                                     
|                  |  |    |    
|                  |  |    |     | Joseph E. Riordan
Executive Vice President and
Chief Financial Officer

-24-