<PAGE>

                                                                     EXHIBIT 13

                        VALLEY COMMUNITY BANCSHARES, INC.
                               2003 ANNUAL REPORT

<PAGE>
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                        Valley Community Bancshares, Inc.
                                TABLE OF CONTENTS

<TABLE>
<S>                                                                              <C>
THE COMPANY                                                                       1
SELECTED FINANCIAL DATA                                                           3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS                                                                        4
INDEPENDENT AUDITOR'S REPORT                                                     18
CONSOLIDATED FINANCIAL STATEMENTS
     Consolidated Balance Sheet                                                  19
     Consolidated Statement of Income                                            20
     Consolidated Statement of Changes in Stockholders' Equity                   21
     Consolidated Statement of Cash Flows                                        22
     Notes to Consolidated Financial Statements                                  23
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS   40
</TABLE>

<PAGE>

                        Valley Community Bancshares, Inc.
                                   THE COMPANY

FORWARD-LOOKING STATEMENTS

Except for historical financial information contained herein, certain matters
discussed in the Annual Report of Valley Community Bancshares, Inc. constitute
"forward-looking statements" within the meaning of the Securities Exchange Act
of 1934, as amended. Forward-looking statements are subject to risks and
uncertainties that may cause actual future results to differ materially. Such
risks and uncertainties with respect to Valley Community Bancshares, Inc. and
Valley Bank include, but are not limited to, those related to the economic
environment, particularly in the areas in which the Company and the Bank
operate, competitive products and pricing, loan delinquency rates, fiscal and
monetary policies of the U.S. government, changes in governmental regulations
affecting financial institutions, including regulatory fees and capital
requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management and asset/liability
management, the financial and securities markets, and the availability of and
costs associated with sources of liquidity.

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. The Company conducts
its business primarily through Valley Bank. Valley Bank is referred to as the
"Bank" in this Annual Report.

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 sources of the Company's revenue are (i) interest and fees on
loans; (ii) deposit service charges; (iii) merchant credit card processing fees;
(iv) interest-bearing deposits with banks; (v) interest on investments
(principally government securities), and (vi) origination fees on mortgage loans
brokered. The 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
offers 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 that 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 organizers of the Bank commenced formation efforts in 1972 as Puyallup
Valley Bank. Puyallup Valley Bank was formally incorporated on January 9, 1973,
under the laws of the State of Washington after having received approval to
organize from the Division of Banks of the Washington Department of Financial
Institutions (the "Division") and the FDIC, and commenced operations during
October 1973. Puyallup Valley Bank was organized with capital of $400,000
through the sale of 20,000 shares of Common Stock at a sales price of $20 per
share.

The Bank provides full-service banking to businesses and residents within the
Puyallup, Auburn, and Kent communities and the 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 consolidated financial
condition and results of operations of the Company or the Bank. 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.

Valley Bank is a wholly owned subsidiary of the Company.

MARKET AREA

The Company's principal market area is located in south King County and eastern
Pierce County regions of Washington State. King County and Pierce County are the
two most populous counties in Washington State, with nearly 2,500,000 residents.
The economy of the region is dependent upon aerospace, high technology, foreign
trade, and natural resources, including agriculture and timber. The region has
become more diversified over the past decade as a result of the success of
software companies such as Microsoft and the establishment of numerous research
and biotechnology firms. The regional economy generally has experienced strong
growth and stability in recent years. However, during the fourth quarter of 2001
and throughout 2003 the regional economy has slowed significantly, especially in
the aerospace and high technology sectors.

Eastern Pierce County, where the Bank has seven locations, is located
approximately 30 miles southeast of Seattle and 5 miles northeast of Tacoma, the
region's two largest cities. The area encompasses several residential and
agricultural communities, including Puyallup, South Hill, Sumner, Edgewood,
Graham, Orting, and Summit/Fredrickson, and has a population in excess of
150,000 residents. This area is characterized as the Company's principal market
area.

                                        1

<PAGE>

                        Valley Community Bancshares, Inc.
                                   THE COMPANY

South King County, where the Bank has locations in Auburn and Kent, is centrally
located between Seattle and Tacoma and has a population of nearly 300,000
residents. The community is supported by light industry, aerospace, and forest
products industries. The Company considers the Auburn and Kent Valley a natural
area of expansion because of its close proximity to Eastern Pierce County.

BUSINESS STRATEGY

As a locally owned financial institution, the Company emphasizes local banking
needs. The Company seeks to achieve growth in order to establish and then
maintain a strong return on equity. The strategy to accomplish these goals is to
focus on small businesses that traditionally develop an exclusive relationship
with a single bank. The Bank also has the size to give the personal attention
required by businesspeople, and significant credit expertise to help these
businesses meet their goals.

The Bank offers to its customers a full range of deposit services that are
typically available in most banks and savings and loan associations, including
checking accounts, savings accounts, and other time deposits of various types,
ranging from money market accounts to longer-term certificates of deposit. One
major goal in developing the Bank's product mix is to keep the product offerings
as simple as possible, both in terms of the number of products and the features
and benefits of the individual services. The transaction accounts and time
certificates are tailored to the principal market areas at rates competitive in
the area. In addition, retirement accounts such as IRAs (Individual Retirement
Accounts) are available. The FDIC, up to the maximum amount, insures all deposit
accounts. The Bank solicits these accounts from small to medium-sized businesses
in their respective primary trade areas, and from individuals who live and/or
work within these areas.

The Bank offers loans to their diverse markets and communities. The market
consists of South King County and East Pierce County in general and the areas in
and around Puyallup, Auburn, and Kent in particular. Loans are provided to
creditworthy borrowers regardless of their race, color, national origin,
religion, sex, age, marital status, sexual orientation, disability, receipt of
public assistance, or any basis prohibited by law. The Bank intends to fulfill
this commitment while maintaining prudent credit practices. In the course of
fulfilling their obligation to meet the credit needs of the communities that
they serve, the Bank gives consideration to each credit application regardless
of the fact that the applicant may reside in a low to moderate income
neighborhood, and without regard to the geographic location of the residence,
property, or business within their market areas.

The Bank provides innovative, quality financial products that meet the banking
needs of its customers and communities. The loan programs and acceptance of
certain loans may vary from time to time, depending upon funds available and
regulations governing the banking industry. The Bank offers all basic types of
credit to its local communities, including commercial and consumer loans.

                                        2

<PAGE>

                        Valley Community Bancshares, Inc.
                             SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

The following financial data of the Company are derived from the Company's
historical audited financial statements and related footnotes.

VALLEY COMMUNITY BANCSHARES, INC.
SELECTED FINANCIAL DATA (1)

<TABLE>
<CAPTION>
                                                                                   AT AND FOR THE
                                                                                YEAR ENDED DECEMBER 31,
                                                                   (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
                                                             2003          2002          2001          2000          1999
                                                          ----------    ----------    ----------    ----------    ----------
<S>                                                       <C>           <C>           <C>           <C>           <C>
STATEMENT OF INCOME DATA
    Interest income                                       $    9,058    $    9,886    $   10,516    $   10,533    $    8,958
    Interest expense                                           1,268         1,883         3,435         3,715         2,973
                                                          ----------    ----------    ----------    ----------    ----------
          Net interest income                                  7,790         8,003         7,081         6,818         5,985
    Provision for loan losses                                                  213            62           145            84
                                                          ----------    ----------    ----------    ----------    ----------
          Net interest income after provision for
          loan losses                                          7,790         7,790         7,019         6,673         5,901
    Noninterest income                                         1,469         1,004           870           661           589
    Noninterest expense                                        6,247         5,722         5,359         4,998         4,516
                                                          ----------    ----------    ----------    ----------    ----------
       Income before provision for income tax                  3,012         3,072         2,530         2,336         1,974
    Provision for income tax                                     963           954           744           728           580
                                                          ----------    ----------    ----------    ----------    ----------
       Net income                                         $    2,049    $    2,118    $    1,786    $    1,608    $    1,394
                                                          ==========    ==========    ==========    ==========    ==========

PER-SHARE DATA (2)
    Cash dividends                                        $      675    $      675    $      623    $      564    $      135
    Cash dividends per weighted average shares
         outstanding                                      $     0.58    $     0.57    $     0.52    $     0.47    $     0.11
    Basic earnings per share                              $     1.75    $     1.79    $     1.50    $     1.35    $     1.19
    Diluted earnings per share                            $     1.74    $     1.77    $     1.48    $     1.33    $     1.15
    Weighted average shares outstanding                    1,172,561     1,182,840     1,187,256     1,188,058     1,175,769
    Weighted average diluted shares outstanding            1,178,261     1,197,096     1,206,709     1,211,577     1,210,205

BALANCE SHEET DATA
    Total assets                                          $  182,220    $  171,711    $  157,174    $  146,769    $  133,837
    Net loans                                                112,873       103,966        99,599        93,518        77,675
    Deposits                                                 157,231       147,436       134,700       125,047       113,809
    Shareholders' equity                                      23,653        22,455        21,161        20,125        18,724

    Equity to assets ratio                                     12.98%        13.08%        13.46%        13.71%        13.99%

FIVE-YEAR FINANCIAL PERFORMANCE
    Net income                                            $    2,049    $    2,118    $    1,786    $    1,608    $    1,394
    Average assets                                           178,305       164,850       155,828       142,864       132,945
    Average stockholders' equity                              22,885        21,818        20,597        19,084        17,862

    Return on average assets
       (net income divided by average assets)                   1.15%         1.28%         1.15%         1.13%         1.05%
    Return on average equity
       (net income divided by average equity)                   8.95%         9.71%         8.67%         8.43%         7.80%
    Efficiency ratio
       (noninterest expense divided by
       noninterest income plus net interest income)            67.47%        63.53%        67.40%        66.83%        68.69%
    Ratio of noninterest expense to average assets              3.50%         3.47%         3.44%         3.50%         3.40%
</TABLE>

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

(2) The presentation of per-share data prior to 2003 has been restated to
reflect the 5 percent stock dividend distributed in February 2003.

                                        3

<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion is provided for the consolidated operations of the
Company, which include its wholly owned subsidiary. The purpose of this
discussion is to focus on significant factors affecting the Company's financial
condition and results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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.

For additional information, regarding the allowance for loan losses, see
Analysis of the Allowance for Loan Losses in this Management's Discussion and
Allowance for Loan Loss in Note 1 in Notes to the Consolidated Financial
Statements.

RESULTS OF OPERATIONS

The Company earned net income of $2,049,000 in 2003, compared to net income of
$2,118,000 in 2002 and net income of $1,786,000 in 2001. The $69,000 decrease in
net income during 2003 over 2002 is the result of a decrease in net interest
income, an increase in noninterest expense, partially offset by a lower
provision for loan losses and an increase in noninterest income. The $332,000
increase in net income during 2002 over 2001 is the result of a significant
increase in net interest income and an increase in noninterest income, partially
offset by increases in the provision for loan losses, noninterest expense, and
income tax.

Noninterest income, during 2003, included a nonrecurring gain in the amount of
$211,000. The gain was realized on the sale of real estate, which the Company
held for investment. Without the gain the Company's 2003 net income would have
been approximately $1,910,000, or $1.62 diluted earnings per share, a decrease
of $208,000 from the $2,118,000, or $1.77 diluted earnings per share reported in
2002.

The Company opened a new Kent office during the fourth quarter of 2002. As a
result, management experienced higher operating costs during 2003 and
anticipates higher costs in 2004 and beyond as the Kent office eventually
locates to a more costly permanent facility. Therefore, profitability of the
Company may be negatively impacted until the facility generates sufficient
revenue to offset the added costs.

The Bank approved an internet banking product for customers during the fourth
quarter of 2003. The Bank anticipates implementation of this product during the
second quarter of 2004. The Company expects its annual cost to be in excess of
$100,000 per year and anticipates a negative impact to profitability until
revenues, if any, offset the added expense.

As a result of Congress passing the Sarbanes Oxley Act of 2002, the Company will
be subject to many of the Act's onerous provisions. The Company estimates that
during the next two years the Company may incur annual compliance costs in
excess of $100,000. The added expense may have a negative impact on the
Company's future profitability.

Performance Ratios

The following table shows the various performance ratios for the Company for the
past five years:

VALLEY COMMUNITY BANCSHARES, INC.
PERFORMANCE RATIOS (1)

<TABLE>
<CAPTION>
                                                                                 FOR THE YEAR ENDED DECEMBER 31,
                                                                      2003        2002        2001         2000       1999
                                                                    ---------  ----------   ---------   ----------  ---------
<S>                                                                 <C>        <C>          <C>         <C>         <C>
Return on average assets (net income divided by average assets)        1.15%       1.28%       1.15%        1.13%      1.05%
Return on average equity (net income divided by average equity)        8.95%       9.71%       8.67%        8.43%      7.80%
Dividend payout ratio (dividends per share divided by net income
per share)                                                            34.34%      31.91%      34.82%       35.18%      9.64%
Equity to assets ratio (average equity divided by average assets)     12.83%      13.24%      13.22%       13.36%     13.44%
</TABLE>

Net Interest Income

Net interest income is 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 on certain assets are exempt from federal income tax. It is
customary in the financial services industry to analyze changes in net interest
income on a "tax equivalent" (TE) basis. TE is a non-GAAP performance measure
used by management in operating the business, which management believes provides
investors with a more accurate picture of the interest margin for comparative
purposes. Under this method, nontaxable income from loans and investments is
adjusted to an amount that 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 the changes in market values of securities
available for sale.

                                        4

<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

VALLEY COMMUNITY BANCSHARES, INC.
NET INTEREST INCOME, ADJUSTED TO A TAX EQUIVALENT BASIS

(DOLLARS IN THOUSANDS),

<TABLE>
<CAPTION>
                                 FOR THE YEAR ENDED DECEMBER 31,
                                 -------------------------------
                                    2003      2002      2001
                                  -------   -------   -------
<S>                               <C>       <C>       <C>
Interest income, as reported      $ 9,058   $ 9,886   $10,516
    Effect of tax-exempt income       139       152       134
                                  -------   -------   -------
TE interest income                  9,197    10,038    10,650

Interest expense                    1,268     1,883     3,435
                                  -------   -------   -------

TE net interest income            $ 7,929   $ 8,155   $ 7,215
                                  =======   =======   =======
</TABLE>

TE net interest income, divided by average earning assets, is referred to as net
interest margin. For the years ended December 31, 2003, 2002, and 2001, the
Company's net interest margin was 4.78 percent, 5.35 percent, and 5.02 percent,
respectively.

TE net interest income during 2003, 2002, and 2001 totaled $7,929,000,
$8,155,000, and $7,215,000, respectively, representing a 2.8 percent decrease in
2003 over 2002, and a 13.0 percent increase in 2002 over 2001. The 2003 over
2002 decrease resulted from a significant decrease in the Company's net interest
margin partially offset by the earnings generated on the 8.7 percent increase in
earning assets. The 2002 over 2001 increase resulted from a 6.0 percent increase
in earning assets, primarily loans, and a significant improvement in the
Company's net interest margin. The net interest margin decreased during 2003
because of lower rates earned on earning assets partially offset by lower
interest rates paid on deposit accounts and higher loan origination fee
amortization, net of cost. The net interest margin increased during 2002 because
of higher loan origination fee amortization, net of cost, and lower interest
rates paid on deposit accounts partially offset by lower interest rates earned
on earning assets.

During 2002 and 2001, market interest rates decreased significantly as a result
of a slow national and regional economy and because of an aggressively
accommodating Federal Reserve monetary policy. During this period the Company's
net interest margin increased significantly from 5.02 percent in 2001 to 5.35
percent in 2002. During this period the interest rate paid to depositors
decreased faster than the decrease in the interest rate earned on investment
securities and loans.

During 2003, market interest rates continued to be at historical lows. As a
result, the Company experienced a compression in net interest margin from 5.35
percent in 2002 to 4.75 percent in 2003. The margin compression occurred as the
interest rate earned on investment securities and loans decreased faster than
the interest rate paid to depositors. During this low interest rate environment
borrowers refinanced their higher rate loans to a lower interest rate. At the
same time, the Company was limited in its ability to decrease the interest rate
paid to depositors with administered interest rates, such as NOW, savings, and
money market accounts. The interest rate paid on such deposits is currently
below 0.75 percent.

In the event of an increase in 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 may be somewhat offset because the rates paid on
deposits with administered interest rates generally do not increase as rapidly
as for accounts 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 continue repricing to the
lower interest rate levels.

TE interest income during 2003, 2002, and 2001 totaled $9,197,000, $10,038,000,
and $10,650,000, respectively, representing an 8.4 percent decrease in 2003 over
2002 and a 5.8 percent decrease in 2002 over 2001. The 2003 and 2002 decreases
were the result of the lower interest rates earned, as discussed above,
partially offset by higher loan origination fee amortization, net of costs.

Interest expense during 2003, 2002, and 2001 totaled $1,268,000, $1,883,000, and
$3,435,000, respectively, representing a 32.7 percent decrease in 2003 over 2002
and a 45.2 percent decrease in 2002 over 2001. The 2003 and 2002 decreases were
the result of the lower interest rates paid, as discussed above.

                                        5

<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

AVERAGE BALANCES AND AN ANALYSIS OF AVERAGE RATES EARNED AND PAID

The following tables show average balances and interest income or interest
expense, with the resulting average yield or rate by category or average earning
asset or interest-bearing liability.

VALLEY COMMUNITY BANCSHARES, INC.

AVERAGE BALANCES AND AN ANALYSIS OF AVERAGE RATES EARNED AND PAID

<TABLE>
<CAPTION>
                                                                          (DOLLARS IN THOUSANDS)
                                                     2003                          2002                          2001
                                          ---------------------------   ---------------------------   ---------------------------
                                           AVERAGE   REVENUE/  YIELD/    AVERAGE   REVENUE/  YIELD/   AVERAGE   REVENUE/   YIELD/
                                           BALANCE   EXPENSE   RATE      BALANCE   EXPENSE   RATE     BALANCE   EXPENSE    RATE
                                          ---------  --------  ------   ---------  --------  ------   --------  --------   ------
<S>                                       <C>        <C>       <C>      <C>        <C>       <C>      <C>       <C>        <C>
ASSETS
Interest-earning assets
   Loans (1), (4)                         $ 110,859  $  7,605    6.86%  $ 106,666  $  8,074    7.57%  $ 96,855  $  8,109     8.37%
   Investment securities - Taxable(3)        28,780       843    2.93%     25,437     1,167    4.59%    23,694     1,347     5.68%
   Investment securities - Tax-
   exempt(2),(3)                              6,497       409    6.30%      6,684       447    6.69%     5,979       395     6.61%
   Other earning assets                      19,674       340    1.73%     13,765       350    2.54%    17,347       799     4.61%
                                          ---------  --------  ------   ---------  --------  ------   --------  --------   ------
    Total interest-earning assets         $ 165,810  $  9,197    5.55%  $ 152,552  $ 10,038    6.58%  $143,875  $ 10,650     7.40%

Non-interest-earning assets                  12,495                        12,298                       11,953
                                          ---------                     ---------                     --------

   TOTAL ASSETS                           $ 178,305                     $ 164,850                     $155,828
                                          =========                     =========                     ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
   Deposits
    Savings, NOW accounts,
     and money markets                    $  77,332  $    445    0.58%  $  69,419  $    664    0.96%  $ 63,244  $  1,207     1.91%
    Time deposits < $100,000                 23,461       456    1.94%     24,936       735    2.95%    24,562     1,241     5.05%
    Time deposits > $100,000                 21,366       362    1.69%     18,951       477    2.52%    20,647       973     4.71%
                                          ---------  --------  ------   ---------  --------  ------   --------  --------   ------
      Total deposits                        122,159     1,263    1.03%    113,306     1,876    1.66%   108,453     3,421     3.15%
   Other borrowed funds                         479         5    1.04%        512         7    1.37%       405        14     3.46%
                                          ---------  --------  ------   ---------  --------  ------   --------  --------   ------
    Total interest-bearing liabilities    $ 122,638  $  1,268    1.03%  $ 113,818  $  1,883    1.65%  $108,858  $  3,435     3.16%
                                                     --------                      --------                     --------

Non-interest-bearing liabilities             32,782                        29,214                       26,373
Stockholders' equity                         22,885                        21,818                       20,597
                                          ---------                     ---------                     --------

   TOTAL LIABILITIES AND
   STOCKHOLDERS' EQUITY                   $ 178,305                     $ 164,850                     $155,828
                                          =========                     =========                     ========

Net interest income                                  $  7,929                      $  8,155                     $  7,215
                                                     ========                      ========                     ========

Margin analysis
   Interest income/earning                           $  9,197    5.55%             $ 10,038    6.58%            $ 10,650     7.40%
   Interest expense/earning assets                      1,268    0.76%                1,883    1.23%               3,435     2.39%
   TE net interest income/earning assets                7,929    4.78%                8,155    5.35%               7,215     5.02%
</TABLE>

(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 percent.

(3) The yield on investment securities is calculated using the historical cost
basis.

(4) Loan fees included in loan revenue totaled $149,000, $122,000, and $23,000
in 2003, 2002, and 2001, respectively.

                                        6

<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

The following table sets forth, on a tax-equivalent basis, a summary of the
changes in net interest income and expense resulting from changes in volume and
rates.

VALLEY COMMUNITY BANCSHARES, INC.
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (1)

<TABLE>
<CAPTION>
                                                (DOLLARS IN THOUSANDS AND IN TAX EQUIVALENT BASIS)
                                               2003 COMPARED TO 2002        2002 COMPARED TO 2001
                                             --------------------------   --------------------------
                                             VOLUME    RATE       NET     VOLUME    RATE       NET
                                             ------   -------   -------   ------   -------   -------
<S>                                          <C>      <C>       <C>       <C>      <C>       <C>
Interest income
     Loans (including fees)(2)               $  304   $  (773)  $  (469)  $  776   $  (811)  $   (35)
     Investment securities - taxable            139      (463)     (324)      94      (274)     (180)
     Investment securities - tax-exempt(3)      (12)      (26)      (38)      48         4        52
     Other interest-earning assets              123      (133)      (10)    (142)     (307)     (449)
                                             ------   -------   -------   ------   -------   -------
            Interest income                     554    (1,395)     (841)     776    (1,388)     (612)

Interest expense
     Deposits
         Savings, NOW accounts, and
            money markets                        69      (288)     (219)     108      (651)     (543)
         Time deposits < $100,000               (41)     (238)     (279)      19      (525)     (506)
         Time deposits > $100,000                55      (170)     (115)     (74)     (422)     (496)
                                             ------   -------   -------   ------   -------   -------
            Total deposits                       83      (696)     (613)      53    (1,598)   (1,545)
     Other borrowed funds                                  (2)       (2)       3       (10)       (7)
                                             ------   -------   -------   ------   -------   -------
            Interest expense                     83      (698)     (615)      56    (1,608)   (1,552)

                                             ------   -------   -------   ------   -------   -------
     TE net interest income                  $  471   $  (697)  $  (226)  $  720   $   220   $   940
                                             ======   =======   =======   ======   =======   =======
</TABLE>

Provision for Loan Losses

Provisions for loan losses reduce net interest income. The provision for loan
losses reflects management's judgment of the expense to be recognized in order
to maintain an adequate allowance for loan losses. For further discussion
regarding the allowance for loan losses see the discussion on allowance for loan
losses under Summary of Loan Loss Experience. The Company provided $0 for loan
losses during 2003 compared to $213,000 in 2002 and $62,000 in 2001. The 2002
and 2001 provisions were primarily related to a significant increase in the
Company's loan portfolio. Management anticipates that growth in the Company's
loan portfolio would require increases in loan loss provisions during the year
2004.

Noninterest Income and Expense

Noninterest income (primarily service charges, and other operating income) and
noninterest expenses (primarily salaries and employee benefits, occupancy,
equipment, and other operating expenses) also impact net income.

Noninterest Income

Noninterest income during 2003, 2002, and 2001 totaled $1,469,000, $1,004,000,
and $870,000, respectively, representing a 46.3 percent increase in 2003 over
2002 and a 15.4 percent increase in 2002 over 2001.

The increase in 2003 was primarily related to higher service charges on deposit
accounts, a significant increase in loan origination fees on mortgage loans
brokered, the amortization of the deferred gain on real estate held for
investment, and other operating income partially offset by lower security gains.
The increase in 2002 was primarily related to increased origination fees on
mortgaged loans brokered and increased service charges on deposit accounts,
partially offset by lower other operating income. The increase in origination
fees on mortgage loans brokered in 2003 and 2002 was the result of borrowers
refinancing their higher-rate one- to four-family home loans at the current low
market interest rates and from the increased volume realized from the operations
of Puget Sound Mortgage Brokers, purchased in 2002. In the event market interest
rates rise, the Company may experience a decrease in origination fees. Other
operating income, during 2002, included a $34,000 write-off of various fixed
assets, which were discarded as a result of the Company's main office remodel.

Noninterest Expense

Noninterest expense during 2003, 2002, and 2001 totaled $6,247,000, $5,722,000,
and $5,359,000, respectively, representing a 9.2 percent increase in 2003 over
2002 and a 6.8 percent increase in 2002 over 2001. The percentage of noninterest
expense to average assets was 3.50 percent in 2003, compared to 3.47 percent and
3.44 percent during 2002 and 2001, respectively.

(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 percent.

                                        7

<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The increase in 2003 was related to increased salaries and employee benefits,
occupancy, operating, and other expenses associated with the opening of the new
Kent and Gig Harbor facilities and the operation of Puget Sound Mortgage
Brokers. Occupancy expense also increased as a result of higher depreciation
expense resulting from the remodel of the Main Office facility during the fourth
quarter of 2002. The increase in professional fees resulted from the merger of
Puyallup Valley Bank and Valley Bank. The increase in 2002 was related to higher
salaries and benefits and other expenses partially offset by lower occupancy and
equipment expenses. Salary and employee benefits increased as a result of the
opening of the Kent facility during September of 2002 and the operation of Puget
Sound Mortgage Brokers beginning mid-May 2002. Occupancy and equipment expense
decreased as a result of lower depreciation expense.

The Bank closed the Gig Harbor facility beginning 2004.

The following table sets forth information concerning the various components of
the Company's noninterest expense for the past three years ended December 31,
2003, 2002, and 2001, respectively:

VALLEY COMMUNITY BANCSHARES, INC.
NONINTEREST EXPENSE

<TABLE>
<CAPTION>
                                                             (DOLLARS IN THOUSANDS)
                                                           --------------------------
                                                            2003      2002      2001
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Noninterest Expense
      Salaries                                             $2,631    $2,419    $2,112
      Employee benefits                                       649       606       586
      Occupancy                                               556       497       551
      Equipment                                               444       462       527
      Operating                                               531       475       443
      Software                                                204       190       191
      Advertising and marketing                               177       138       115
      Professional                                            218       205       163
      Business and occupation tax                             137       146       123
      ATM and debit card                                      141        98        92
      Director                                                112        85        69
      Other                                                   447       401       387
                                                           ------    ------    ------
          Total noninterest expense                        $6,247    $5,722    $5,359
                                                           ======    ======    ======
          Ratio of noninterest expense to average assets     3.50%     3.47%     3.44%
                                                           ======    ======    ======
</TABLE>

The Company's efficiency ratio, which is the ratio of noninterest expense to net
interest income plus noninterest income, was 67.5 percent in 2003, compared to
63.5 percent and 67.4 percent during 2002 and 2001, respectively.

Provision for Income Taxes

The Company's provision for income taxes is a significant reduction of operating
income. The provisions for 2003, 2002, and 2001 were $963,000, $954,000, and
$744,000, respectively. These amounts represent an effective taxing rate of 32
percent during 2003, 31 percent during 2002, and 29 percent during 2001. The
Company's marginal tax rate is currently 34 percent. The difference between the
Company's effective and marginal tax rate is primarily related to investments
made in tax-exempt securities. The 2003 increase in the effective rate is
primarily the result of a reduction in the percentage of interest earned on
tax-exempt securities to taxable income.

CREDIT MANAGEMENT

The Company strives to achieve sound credit-risk management. In order to achieve
this goal the Company has established stringent, centralized credit policies and
uniform underwriting criteria for all loans. The Company emphasizes
diversification in the types of loans offered, regular credit examinations, and
quarterly reviews of large loans and of loans experiencing deterioration in
credit quality. The Company attempts to identify potential problem loans early,
charges off loans promptly, and maintains an adequate allowance for loan loss.
In order to achieve sound credit-risk management, the Company has established
certain credit guidelines for its lending portfolio.

Loan Portfolio

Managing risk is an essential part of successfully operating a financial
institution. The most prominent risk exposures regarding the loan portfolio are
credit quality and interest rate risk. Credit quality risk is the risk of not
collecting interest and/or principal balance of a loan when it is due. Interest
rate risk is the potential reduction of net interest income and changes in the
value of financial instruments as the result of rate movements. The Company's
loan portfolio is originated and managed with these risks in mind.

The Company follows loan and interest-rate risk policies that have been approved
by the Banks' Board of Directors and are overseen by the Executive Loan
Committee, the Asset Liability Committee, and management. These policies
establish lending limits, review and grading criteria, and other guidelines such
as loan administration, the allowance for loan losses, and maturity and
interest-rate repricing criteria. Loan applications are approved by the Bank's
Board of Directors and/or designated officers in accordance with respective
guidelines and underwriting policies of the Company. Loans to one borrower are
limited by applicable state and federal banking laws and are further limited by
internal limits. Credit limits generally vary according to the type of loan and
the individual loan officer's experience.

                                        8
<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Types of Loans

The following table sets forth the composition of the Company's loan portfolio
for the past five years ending at December 31 (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.

LOAN PORTFOLIO

<TABLE>
<CAPTION>
                                                                 OUTSTANDING BALANCE AT DECEMBER 31,
                                       -------------------------------------------------------------------------------------
                                             2003              2002             2001              2000              1999
                                       ---------------   --------------   ---------------   ---------------   --------------
<S>                                    <C>               <C>              <C>               <C>               <C>
Real estate
    Construction                       $         9,913   $        9,276   $        11,550   $         5,959   $        7,384
    Residential                                 12,095           15,080            14,690            16,701           15,867
    Commercial                                  65,114           55,266            54,187            52,620           40,254
Commercial                                      24,872           23,502            16,477            16,258           12,892
Consumer and other                               2,409            2,339             3,196             2,523            1,864
Lease                                               63               83               745               560              377
                                       ---------------   --------------   ---------------   ---------------   --------------
          Total loans                          114,466          105,546           100,845            94,621           78,638
Unearned income                                   (205)            (192)              (90)               (7)              (4)
                                       ---------------   --------------   ---------------   ---------------   --------------
          Net loans                    $       114,261   $      105,354   $       100,755   $        94,614   $       78,634
                                       ===============   ==============   ===============   ===============   ==============
</TABLE>

The Company's loan portfolio primarily consists of commercial loans, residential
real estate loans, and commercial real estate loans. At December 31, 2003, loans
totaled approximately $114.3 million, which equals approximately 72.7 percent of
total deposits and 62.7 percent of total assets. At December 31, 2003, the
majority of loans were originated directly by the Company to borrowers within
the Company's principal market area. As a result, the Company has significant
risk because of a lack of geographical diversification. The Company mitigates
this risk primarily by diversifying the loan portfolio by industry and customer
and by strong credit underwriting criteria. At December 31, 2003, approximately
41 percent of the Company's loan portfolio had adjustable rate features and
approximately 59 percent were fixed. Approximately 64 percent of adjustable rate
loans adjust within a 12-month period and 90 percent of the Company's fixed-rate
loan portfolio is scheduled to mature within a five-year period.

Commercial loans consist primarily of loans to businesses for various purposes,
including revolving lines of credit, equipment loans, and letters of credit.
These loans generally have short maturities, have either adjustable or fixed
rates, and are unsecured or secured by inventory, accounts receivable,
equipment, and/or real estate. The Company monitors portfolio diversification by
industry and by customer. At December 31, 2003, approximately 78 percent had
adjustable rates and 22 percent had fixed rates.

Real estate loans include various types of loans for which the Company holds
real property as collateral, and consist of loans primarily on single-family
residences and commercial properties. These loans generally are secured by a
first priority lien but may also be secured by a second priority lien. Real
estate loans typically have maturities extending to five years and have fixed or
adjustable rate features. Construction loans are typically made to contractors
to construct single-family residences and commercial buildings and generally
have maturities to 18 months. Currently, the Company does not originate real
estate for sale to the secondary market; however, the Company brokers real
estate loans to other financial institutions for a fee. At December 31, 2003,
approximately 70 percent of the Company's real estate loans were fixed rate and
approximately 30 percent had adjustable rate features. However, 92 percent of
the Company's real estate loans are scheduled to mature and have adjustable
rates within a five-year period.

Consumer loans include various types of loans such as automobiles, boats and
recreational vehicles, personal and home equity lines of credit, and other
consumer orientated loans. At December 31, 2003, approximately 86 percent of the
consumer loan portfolio had fixed rate and approximately 14 percent had
adjustable rate features.

There are no foreign loans outstanding during the years presented.

The interest rates charged on loans vary with the degree of risk, the amount of
the loan, and the maturity of the loan. Competitive pressures, market interest
rates, the availability of funds, and government regulation further influence
them.

                                       9
<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Maturities and Sensitivities of Loans to Changes in Interest Rates

The contractual maturities of the Company's loan portfolio are as shown below.
Actual maturities may differ from contractual maturities because individual
borrowers may have the right to prepay loans with or without prepayment
penalties.

VALLEY COMMUNITY BANCSHARES, INC.

LOANS AS OF DECEMBER 31, 2003 (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                              AFTER ONE
                                                                              YEAR BUT
                                                                WITHIN          WITHIN            AFTER
                                                               ONE YEAR       FIVE YEARS        FIVE YEARS         TOTAL
                                                            ------------   ---------------   --------------   --------------
<S>                                                         <C>            <C>               <C>              <C>
Real estate
     Construction                                           $      5,199   $         4,559   $          155   $        9,913
     Residential                                                   1,858             5,386            4,851           12,095
     Commercial                                                    7,388            43,257           14,469           65,114
Commercial                                                        12,852            10,705            1,315           24,872
Consumer and other                                                   987             1,330               92            2,409
Lease                                                                 22                41                                63
                                                            ------------   ---------------   --------------   --------------
         Total loans                                        $     28,306   $        65,278   $       20,882   $      114,466
                                                            ============   ===============   ==============   ==============

Loan maturities after one year with:
     Fixed rates                                                           $        51,331   $        6,810
     Variable rates                                                                 13,947           14,072
                                                                           ---------------   --------------
                                                                           $        65,278   $       20,882
                                                                           ===============   ==============
</TABLE>

Non-Performing Assets

Non-performing assets consist of: (1) nonaccrual loans; (2) loans 90 days or
more past due; (3) restructured loans for which concessions, including the
reduction of interest rates below a rate otherwise available to that borrower or
the deferral of interest or principal, have been granted due to the borrower's
weakened financial condition; and (4) other real estate owned.

The following table sets forth information concerning the Company's
non-performing assets for the year ended December 31, 2003 (dollars in
thousands).

VALLEY COMMUNITY BANCSHARES, INC.

NON-PERFORMING ASSETS

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                 -------------------------------------------------------------------------------
                                                       2003              2002             2001            2000          1999
                                                 ---------------     ------------   ---------------   ------------   -----------
<S>                                              <C>                 <C>            <C>               <C>            <C>
Non-performing assets:
    Nonaccrual loans                             $            10     $          *   $           129   $          *   $         *
    Accruing loans 90 days or more past due
    Restructured loans                                                                          909
                                                 ---------------     ------------   ---------------   ------------   -----------
                                                              10                *             1,038              *             *
    Other real estate owned
                                                 ---------------     ------------   ---------------   ------------   -----------
          Total nonperforming assets             $            10     $          *   $         1,038   $          *   $         *
                                                 ===============     ============   ===============   ============   ===========
</TABLE>

* For the years ended December 31, 2002, 2000, and 1999 there were no
non-performing assets.

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.

The gross income that would have been recorded on nonaccrual loans if the loans
had been current and in accordance with their original terms during 2003 was
insignificant. In 2002 and 2001 the gross income that would have been recorded
was approximately $3,000 and $16,000, respectively. Interest recognized on the
loan for 2002 was $3,000 and for 2003 and 2001 was insignificant.

                                       10
<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Potential Problem Loans

At December 31, 2003, the Company had two potential problem commercial real
estate loans totaling approximately $2,349,000. These loans are in addition to
those categorized as non-performing listed above. Although these loans are
currently classified as performing, management has information regarding credit
weakness inherent in the loans, which may result in the borrowers' inability to
comply with present loan repayment terms. As of December 31, 2003, the Company
does not anticipate any losses associated with these credits, although there can
be no assurances given in this regard.

Loan Concentrations

In addition to the loan categories discussed under loan types, the Company has
additional loan concentrations exceeding 10 percent of total loans at December
31, 2003. They include loans to medical doctors and dentists in the amount of
approximately $23.2 million and loans to nonresidential building contractors of
approximately $14.8 million.

Summary of Loan Loss Experience

Changes in the Allowance for Loan Losses

The following table sets forth information regarding changes in the Company's
allowance for loan losses for the most recent five years (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.

LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>
                                                              ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
                                                                       YEAR ENDED DECEMBER 31,
                                       -------------------------------------------------------------------------------------
                                             2003              2002             2001              2000              1999
                                       ---------------   --------------   ---------------   ---------------   --------------
<S>                                    <C>               <C>              <C>               <C>               <C>
Balance at beginning of period         $         1,388   $        1,156   $         1,096   $           959   $          883
      Charge-offs:
          Consumer and other                                          5                 6                20                8
                                       ---------------   --------------   ---------------   ---------------   --------------
                                                                      5                 6                20                8

      Recoveries:
          Commercial                                                 17
          Consumer and other                                          7                 4                12
                                       ---------------   --------------   ---------------   ---------------   --------------
                                                                     24                 4                12

      Net charge-offs (recoveries)                                  (19)                2                 8                8
      Provision for loan losses                                     213                62               145               84
                                       ---------------   --------------   ---------------   ---------------   --------------

Balance at end of period               $         1,388   $        1,388   $         1,156   $         1,096   $          959
                                       ===============   ==============   ===============   ===============   ==============

Average loans outstanding              $       110,859   $      106,666   $        96,855   $        87,934   $       72,135

Ratio of net charge-offs during the
period to average loans outstanding               0.00%           -0.02%             0.00%             0.01%            0.01%

Ratio of allowance for loan losses
to average loans outstanding                      1.25%            1.30%             1.19%             1.25%            1.33%
</TABLE>

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 credit
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. 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.

A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.

                                       11
<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The majority of the Company's loan portfolio consists of commercial and
single-family residential loans secured by real estate in the Puyallup and
Pierce County area and also in the Auburn, Kent, and King County area. Real
estate prices in this market are stable at this time. However, the ultimate
collectibility of a substantial portion of the Company's loan portfolio may be
susceptible to change in local market conditions 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.

Breakdown of Allowance for Loan Losses by Category

The following table sets forth information concerning the Company's allocation
of the allowance for loan losses (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.

LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>
                                                      ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
                                                                YEAR ENDED DECEMBER 31,
                            --------------------------------------------------------------------------------------------------
                                   2003                2002                  2001               2000                1999
                            -----------------   ------------------    ----------------    ----------------    ----------------
                               AMOUNT     % *     AMOUNT       % *      AMOUNT     % *      AMOUNT     % *      AMOUNT     % *
                            -----------   ---   ----------     ---    ---------    ---    ---------    ---    ---------    ---
<S>                         <C>           <C>   <C>            <C>    <C>          <C>    <C>          <C>    <C>          <C>
Balance at end of period
applicable to:
    Real estate
        Construction        $       119     9%  $      111       9%   $     116     11%   $      60      6%   $      55     10%
        Residential                  73    11%          90      14%          15     15%          17     18%          16     20%
        Commercial                  781    56%         663      53%         428     54%         184     55%         141     51%
    Commercial                      249    22%         235      22%         165     16%         163     17%         129     16%
    Consumer and other               48     2%          47       2%          64      3%          50      3%          37      2%
    Lease financing                   1                  2                   15      1%          11      1%           4      1%
    Unallocated                     117    NA          240      NA          353     NA          611     NA          577     NA
                            -----------   ---   ----------     ---    ---------    ---    ---------    ---    ---------    ---
                            $     1,388   100%  $    1,388     100%   $   1,156    100%   $   1,096    100%   $     959    100%
                            ===========   ===   ==========     ===    =========    ===    =========    ===    =========    ===
</TABLE>

* Percent of loans in each category to total loans

Analysis of the Allowance for Loan Losses

The allowance for loan losses reflects management's best estimate of probable
losses that have been incurred as of the balance sheet date. 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 and growth of the loan portfolio and its composition.
Non-performing loans and net charge-offs during these periods have been minimal,
demonstrating strong credit quality. Increases in the allowance for loan losses
made through 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 adequacy of allowance for
loan losses. A six-year average historical loan loss rate is calculated. This
experienced 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 affect 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.

                                       12
<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INVESTMENT PORTFOLIO

The following table sets forth the carrying values, by type, of the securities
in the Company's portfolio (in thousands):

VALLEY COMMUNITY BANCSHARES, INC.

INVESTMENT PORTFOLIO

<TABLE>
<CAPTION>
                                                                        OUTSTANDING BALANCE AT DECEMBER 31,
                                                              -----------------------------------------------------
                                                                    2003               2002               2001
                                                              ---------------    ---------------    ---------------
<S>                                                           <C>                <C>                <C>
U.S. Treasury and U.S. Government corporations and agencies   $        13,721    $        10,888    $         9,579
States of the United States and political subdivisions                  7,778              5,727              6,851
Mortgage-backed securities                                             17,061             14,454             14,920
                                                              ---------------    ---------------    ---------------
      Total                                                   $        38,560    $        31,069    $        31,350
                                                              ===============    ===============    ===============
</TABLE>

Investments in States of the United States and political subdivisions represent
purchases of municipal bonds located in Washington State.

The investments below are reported by contractual maturity. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without prepayment penalties.

VALLEY COMMUNITY BANCSHARES, INC.

INVESTMENTS AS OF DECEMBER 31, 2003 (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            AFTER ONE      AFTER FIVE
                                                                             YEAR BUT       YEARS BUT
                                                              WITHIN          WITHIN         WITHIN          AFTER
                                                             ONE YEAR       FIVE YEARS      TEN YEARS      TEN YEARS       TOTAL
                                                          -------------   -------------   -------------   ------------   ----------
<S>                                                       <C>             <C>             <C>             <C>            <C>
U.S. Treasury and U.S. Government
   corporations and agencies                              $       1,001   $      11,225   $       1,075   $        420   $   13,721
States of the United States and political subdivisions              361           2,484           4,933                       7,778
Mortgage-backed securities                                          197           3,094           5,767          8,003       17,061

                                                          -------------   -------------   -------------   ------------   ----------
          Total                                           $       1,559   $      16,803   $      11,775   $      8,423   $   38,560
                                                          =============   =============   =============   ============   ==========

Weighted average yield *
U.S. Treasury and U.S. Government
   corporations and agencies                                       3.41%           2.51%           1.92%          1.74%        2.51%
States of the United States and political subdivisions             4.87%           3.65%           4.00%                       3.93%
Mortgage-backed securities                                         6.60%           3.23%           4.06%          3.41%        3.63%

                                                          -------------   -------------   -------------   ------------   ----------
          Total                                                    4.15%           2.81%           3.84%          3.33%        3.29%
                                                          =============   =============   =============   ============   ==========
</TABLE>

* Yield on tax-exempt obligations has not been computed on a tax-equivalent
basis.

                                       13
<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DEPOSITS

Types of Deposits

The Company's primary source of funds is customer deposits. The Company attempts
to maintain a high percentage of non-interest-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 Bank management based on competitive market factors and the
Company's need for funds. The Company traditionally has not purchased brokered
deposits and does not intend to do so in the future.

The following table sets forth the average balances for each major category of
deposit and the weighted average interest rate paid for deposits during the year
ended December 31 (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.

DEPOSITS

<TABLE>
<CAPTION>
                                                               AVERAGE DEPOSITS BY TYPE
                               ----------------------------------------------------------------------------------------------
                                     2003              2002                2001                2000                1999
                               ---------------   ----------------   ----------------    ------------------   ----------------
                                 AMOUNT   RATE     AMOUNT    RATE     AMOUNT    RATE       AMOUNT     RATE    AMOUNT     RATE
                               ---------  ----   ----------  ----   ----------  ----    -----------   ----   --------    ----
<S>                            <C>        <C>    <C>         <C>    <C>         <C>     <C>           <C>    <C>         <C>
Non-interest-bearing demand    $  31,609         $   28,001         $   25,092          $    23,484          $ 22,737
Interest-bearing demand           23,389  0.24%      20,070  0.29%      17,982  0.75%        16,345   1.03%    16,279    1.19%
Money market                      38,322  0.82%      35,880  1.33%      34,434  2.58%        30,672   3.60%    28,963    3.26%
Savings                           15,621  0.47%      13,469  0.96%      10,828  1.68%        11,119   1.96%    12,392    2.08%
Time certificates <$100,000       23,461  1.94%      24,936  2.95%      24,562  5.05%        22,699   5.31%    21,019    4.67%
Time certificates >$100,000       21,366  1.69%      18,951  2.52%      20,647  4.71%        17,797   5.48%    12,582    4.59%
                               ---------         ----------         ----------          -----------          --------
                               $ 153,768         $  141,307         $  133,545          $   122,116          $113,972
                               =========         ==========         ==========          ===========          ========
</TABLE>

Certificates of Deposit

The following table shows the amounts and remaining maturities of certificates
of deposit that had balances of more than $100,000 at December 31 (dollars in
thousands):

VALLEY COMMUNITY BANCSHARES, INC.

DEPOSIT MATURITY

<TABLE>
<CAPTION>
                                                                 OUTSTANDING BALANCE AT DECEMBER 31,
                                      -----------------------------------------------------------------------------------
                                            2003              2002             2001             2000            1999
                                      ----------------  ---------------  ---------------  ---------------  --------------
<C>                                   <C>               <C>              <C>              <C>              <C>
3 months or less                      $         12,157  $        10,486  $        10,409  $        10,599  $        7,235
Over 3 through 12 months                         7,986            9,321            7,761            8,696           6,820
Over 12 through 36 months                          888            1,182              255              459             500
Over 36 months                                     626              407
                                      ----------------  ---------------  ---------------  ---------------  --------------
          Total                       $         21,657  $        21,396  $        18,425  $        19,754  $       14,555
                                      ================  ===============  ===============  ===============  ==============
</TABLE>

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 do proceeds
from maturities of securities and increasing customer deposits. As indicated on
the Company's Consolidated Statement of Cash Flows, net cash from operating
activities contributed $2.7 million to liquidity in 2003, $2.7 million in 2002,
and $2.6 million in 2001. The majority of the Company's funding comes from
customer deposits within its operating region. Customer deposits provided $9.8
million in 2003, $12.7 million in 2002 and $9.7 million in 2001. In 2003,
demand, money market and savings accounts provided the majority of the deposit
growth. In 2002, certificates of deposit, demand deposits, and savings deposits
provided the majority of deposit growth. These funds were from local businesses
and consumers and are considered by management as a stable source of funds.

Other important sources of liquidity are investments in federal funds and
interest-bearing deposits with banks, and the Company's Investment Portfolio.
The Company maintains a ladder of securities that provides prepayments and
payments at maturity and a portfolio of available-for-sale securities that could
be converted to cash quickly. Proceeds from maturities of securities provided
$19.2 million in 2003, $9.9 million in 2002, and $15.1 million in 2001.

                                       14
<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Borrowing represents an important long-term and manageable source of liquidity
based on the Company's ability to raise new funds and renew maturing liabilities
in a variety of markets. The Bank is a member of the Federal Home Loan Bank of
Seattle and has committed lines of credit up to 10 percent of assets. In
addition, the Bank has committed line-of-credit agreements totaling
approximately $9.5 million from unaffiliated banks with various maturities.

The Company's total stockholders' equity increased to $23.7 million at December
31, 2003, from $22.5 million at December 31, 2002. At December 31, 2003,
stockholders' equity was 12.98 percent of total assets, compared to 13.08
percent at December 31, 2002. The increase in stockholders' equity was the
result of net income earned in 2003 exceeding dividends paid. The Company may
continue decreasing the equity to total asset ratio through the growth of assets
and through future stock repurchase in order to improve the return on average
equity. At December 31, 2003, the Company held approximately $23.5 million cash
on hand and due from banks, interest-bearing deposits with banks, and federal
funds sold. In addition, at such date $38.6 million of the Company's investments
were classified as available-for-sale.

The capital levels of the Company exceed applicable regulatory guidelines at
December 31, 2003. Management believes the Company's capital will be adequate to
fund any future start-up and related costs associated with any new branches
until they can achieve the deposit and loan levels necessary to be profitable.

The market value of available-for-sale securities was greater than book value at
both December 31, 2003, and December 31, 2002, primarily as a result of low
market interest rates, which resulted in net 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 December 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 $1.3 million net of
federal income tax. Although stockholders' equity would be reduced by
approximately 5.5 percent, the Company would still be well in excess of capital
adequacy requirements in the event the Company would be required to liquidate
these securities for unforeseen liquidity needs.

The primary impact of inflation on the Company's operations is increased asset
yields, deposit costs, and operating overhead. Unlike most industries, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than they would on non-financial
companies. Although interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services, increases in
inflation generally have resulted in increased interest rates. The effects of
inflation can magnify the growth of assets and, if significant, require that
equity capital increase at a faster rate than would be otherwise necessary.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table sets forth the Company's long-term contractual obligations
(dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

<TABLE>
<CAPTION>
                                                                       PAYMENTS DUE PER PERIOD
                                         -------------------------------------------------------------------------------
                                              TOTAL        LESS THAN 1 YEAR     1 - 3 YEARS    3 - 5 YEARS    THEREAFTER
                                         --------------  --------------------  -------------  -------------   ----------
<S>                                      <C>             <C>                   <C>            <C>             <C>
Other borrowed funds                     $          580  $                580  $              $               $
Operating lease commitments                         355                    82            160            113
                                         --------------  --------------------  -------------  -------------   ----------
      Total                              $          935  $                662  $         160  $         113   $
                                         ==============  ====================  =============  =============   ==========
</TABLE>

OFF-BALANCE-SHEET COMMITMENTS

The Bank has commitments to extend credit that 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's
experience suggests customers draw on approximately 75 percent of loan
commitments. Commitments to extend credit at December 31, 2003 and 2002 were
$21.5 and $19.8 million, respectively.

VALLEY COMMUNITY BANCSHARES, INC.

OFF-BALANCE-SHEET COMMITMENTS

<TABLE>
<CAPTION>
                                                               AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
                                       --------------------------------------------------------------------------------------
                                            TOTAL         LESS THAN 1 YEAR      1 - 3 YEARS    3 - 5 YEARS      THEREAFTER
                                       ---------------   -------------------   -------------  -------------  ----------------
<S>                                    <C>               <C>                   <C>            <C>            <C>
Commitments to extend credit           $        21,403   $            16,268   $         578  $         366  $          4,191
Standby letters of credit                          120                    20             100

                                       ---------------   -------------------   -------------  -------------  ----------------
       Total                           $        21,523   $            16,288   $         678  $         366  $          4,191
                                       ===============   ===================   =============  =============  ================
</TABLE>

                                       15
<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTEREST RATE RISK

Interest rate risk refers to the exposure of earnings and capital arising from
changes in interest rates. Management's objectives are to control interest rate
risk and to ensure predictable and consistent growth of earnings and capital.
Interest rate risk management focuses on fluctuations in net interest income
identified through computer simulations to evaluate volatility by varying
interest rate, spread, and volume assumptions. The risk is quantified and
compared against tolerance levels.

The simulation model used by the Company combines the significant factors that
affect interest rate sensitivity into a comprehensive earnings simulation.
Earning assets and interest-bearing liabilities with longer lives may be subject
to more volatility than those with shorter lives. The model accounts for these
differences in its simulations. At December 31, 2003, the simulation modeled the
impact of assumptions that interest rates would increase or decrease 200 basis
points. Results indicated the Company was positioned so equity would not drop
below that point where the Company, for regulatory purposes, would no longer
continue to be classified "well capitalized." It should be emphasized that the
model is static in nature and does not take into consideration possible
management actions to minimize the impact on equity. Management also matches
assets and liabilities on a maturity gap analysis and repricing gap analysis to
assist in interest rate sensitivity measurement.

Interest rate sensitivity is closely related to liquidity because each is
directly affected by the maturity of assets and liabilities. Management
considers any asset or liability that matures, or is subject to repricing over
one year, to be interest sensitive, although continual monitoring is also
performed for other time intervals. The difference between interest-sensitive
assets and liabilities for a defined period of time is known as the
interest-sensitive "gap" and may be either positive or negative. If positive,
more assets reprice before liabilities; if negative, the reverse is true. In
theory, if the gap is positive, a decrease in general interest rates might have
an adverse impact on earnings as interest income decreases faster than interest
expense. This assumes that management adjusts rates equally as general interest
rates fall. Conversely, an increase in interest rates would increase net
interest income as interest income increases faster than interest expense.
However, the exact impact of the gap on future income is uncertain both in
timing and amount because interest rates for the Company's assets and
liabilities can change rapidly as a result of market conditions and customer
patterns.

The simulation model process provides a dynamic assessment of interest rate
sensitivity, whereas a static interest rate gap table is compiled as of a point
in time. The model simulations differ from a traditional gap analysis because a
traditional gap analysis does not reflect the multiple effects of interest-rate
movement on the entire range of assets and liabilities, and ignores the future
impact of new business strategies.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's results of operations are largely dependent upon its ability to
manage market risks. Changes in interest rates can have a significant effect on
the Company's financial condition and results of operation. Other types of
market risk such as foreign currency exchange rate risk and commodity price risk
do not arise in the normal course of the Bank's business activities. The Company
does not use interest rate risk-management products such as interest rate swaps,
hedges, or derivatives, nor does management intend to use such products in the
future. All of the Company's transactions are denominated in U.S. Dollars.
Approximately 41 percent of the Company's loan portfolio has interest rates that
are variable. Fixed-rate loans are generally made with a term of five years or
less.

The following tables (dollars in thousands) set forth the expected maturity of
the Company's interest-earning assets and interest-bearing liabilities. The
expected maturities are presented on a contractual basis, adjusted for expected
prepayments. Actual maturities may differ from expected maturities because of
prepayment, early withdrawal of deposits, and competition.

VALLEY COMMUNITY BANCSHARES, INC.

EXPECTED MATURITY

<TABLE>
<CAPTION>
                                                                OUTSTANDING BALANCE AT DECEMBER 31, 2003
                                                                                                                          ESTIMATED
                                                                                                             CUMULATIVE     FAIR
                                           2004         2005      2006       2007      2008     THEREAFTER      TOTAL       VALUE
                                        ----------   --------   --------   -------   --------   ----------   ----------   ---------
<S>                                     <C>          <C>        <C>        <C>       <C>        <C>          <C>          <C>
Interest-earning assets:
   Interest-bearing deposits with
     banks                              $    6,508   $  1,995   $          $         $          $            $    8,503   $   8,516
     Weighted average interest rate           2.18%      2.13%                                                     2.17%
   Federal funds sold                        9,765                                                                9,765       9,765
     Weighted average interest rate           0.81%                                                                0.81%
   Investment securities (1)
     Fixed rate                              4,905     10,127      3,513     2,009      2,559        6,722       29,835      29,835
        Weighted average interest rate        3.56%      2.72%      3.19%     3.70%      3.82%        3.92%        3.23%
     Variable rate                           1,725      1,448      1,006       778        602        3,166        8,725       8,725
        Weighted average interest rate        3.38%      3.32%      3.38%     3.37%      3.37%        2.83%        3.21%

   Loans
     Fixed rate                             10,045      7,271      9,321    12,522     22,015        6,375       67,549      67,434
        Weighted average interest rate        7.04%      7.20%      7.13%     6.84%      6.32%        6.35%        6.74%
     Variable rate                          25,577      5,126      2,489     1,865      2,294        9,361       46,712      46,803
        Weighted average interest rate        5.68%      5.61%      5.87%     5.93%      5.35%        6.37%        5.81%
   Other earning assets                                                                                372          372         372
     Weighted average interest rate                                                                   5.00%        5.00%
                                        ----------   --------   --------   -------   --------   ----------   ----------   ---------
       Total interest-earning assets    $   58,525   $ 25,967   $ 16,329   $17,174   $ 27,470   $   25,996   $  171,461   $ 171,450
                                        ==========   ========   ========   =======   ========   ==========   ==========   =========
</TABLE>

(1) Yield on tax-exempt obligations has not been computed on a tax-equivalent
basis.

                                       16
<PAGE>

                        Valley Community Bancshares, Inc.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

VALLEY COMMUNITY BANCSHARES, INC.
EXPECTED MATURITY

<TABLE>
<CAPTION>
                                                                 OUTSTANDING BALANCE AT DECEMBER 31, 2003
                                                                                                                          ESTIMATED
                                                                                                             CUMULATIVE     FAIR
                                         2004         2005        2006     2007        2008    THEREAFTER       TOTAL       VALUE
                                      ----------    --------    -------   -------    -------   ----------    ----------   ---------
<S>                                   <C>           <C>         <C>       <C>        <C>       <C>           <C>          <C>
Interest-bearing liabilities:
   Interest-bearing demand            $   24,110    $           $         $          $         $             $   24,110   $  24,110
    Weighted average interest rate          0.19%                                                                  0.19%
   Savings and money market               55,518                                                                 55,518      55,518
    Weighted average interest rate          0.60%                                                                  0.60%
   Time deposits < $100,000               18,764       1,437        153       738        164           15        21,271      21,286
    Weighted average interest rate          1.26%       1.89%      2.92%     4.68%      2.97%        1.48%         1.45%
   Time deposits > $100,000               20,159         690        203       414        191                     21,657      21,737
    Weighted average interest rate          1.05%       2.65%      3.34%     4.81%      3.37%                      1.22%
   Other borrowed funds                      580                                                                    580         580
    Weighted average interest rate          0.91%                                                                  0.91%
                                      ----------    --------    -------   -------    -------   ----------    ----------   ---------
     Total interest-bearing
       liabilities                    $  119,131    $  2,127    $   356   $ 1,152    $   355   $       15    $  123,136   $ 123,231
                                      ==========    ========    =======   =======    =======   ==========    ==========   =========
</TABLE>

There are certain shortcomings inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities, they may react differently to changes in market
interest rates. Also, interest rates on assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
assets and liabilities may follow changes in market interest rates.
Additionally, certain assets have features that restrict changes in the interest
rates of such assets, both on a short-term basis and over the lives of such
assets.

To more accurately predict the Company's interest rate exposure, a financial
analysis to analyze the change in the net interest margin from a changing rate
environment is provided below. This estimate of interest rate sensitivity takes
into account the differing time intervals and rate- change increments of each
type of interest-sensitive asset and liability. It then measures the projected
impact of changes in market interest rates on the Company's net interest income,
net interest margin, and return on equity.

Based on a financial analysis performed as of December 31, 2003, which takes
into account how the specific interest rate scenario would be expected to affect
each interest-earning asset and each interest-bearing liability, the Company
estimates that changes in the prime interest rate would affect the Company's
performance as follows.

VALLEY COMMUNITY BANCSHARES, INC.

FINANCIAL ANALYSIS

<TABLE>
<CAPTION>
                                                                                 INCREASE (DECREASE) IN
                                                         ------------------------------------------------------------------
                                                             NET INTEREST                 NET INTEREST            RETURN ON
                                                               INCOME                      MARGIN (1)              EQUITY
                                                         -------------------          ----------------------      ---------
                                                                                      (DOLLARS IN THOUSANDS)
<S>                                                      <C>                          <C>                         <C>
(Current prime rate is 4.00%)
Prime rate increase of:
       100 basis points to 5.00%                         $              (229)                 -0.17%                -0.61%
       200 basis points to 6.00%                         $              (237)                 -0.20%                -0.63%
Prime rate decrease of:
       100 basis points to 3.00%                         $               (75)                 -0.10%                -0.20%
       200 basis points to 2.00%                         $              (106)                 -0.14%                -0.29%
</TABLE>

No assurances can be given that the actual net interest margin (percentage) or
net interest income would increase or decrease by such amounts in a 100 or 200
basis point increase or decrease in the prime rate. In addition, the above
analysis assumes an instantaneous interest rate change in the prime rate.
Generally, the prime interest rate changes occur over longer periods of time,
which may have a significant impact on the above analysis.

                                       17
<PAGE>

                        Valley Community Bancshares, Inc.
                          INDEPENDENT AUDITOR'S REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
VALLEY COMMUNITY BANCSHARES, INC.

We have audited the accompanying consolidated balance sheet of Valley Community
Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Valley Community
Bancshares, Inc. and subsidiary as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.

/s/ Moss Adams LLP
-----------------------
Moss Adams LLP

Everett, Washington
February 6, 2004

                                       18
<PAGE>

                        Valley Community Bancshares, Inc.
                        CONSOLIDATED FINANCIAL STATEMENTS
                           CONSOLIDATED BALANCE SHEET
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                         ---------------------
                                                                                           2003         2002
                                                                                         --------     --------
<S>                                                                                      <C>          <C>
ASSETS
       Cash and due from banks                                                           $  5,199     $  4,847
       Interest-bearing deposits with banks                                                 8,503       22,191
       Federal funds sold                                                                   9,765        1,734
       Securities available-for-sale                                                       38,560       31,069
       Federal Home Loan Bank stock                                                           372          398
                                                                                         --------     --------

                                                                                           62,399       60,239

       Loans                                                                              114,261      105,354
       Less allowance for loan  losses                                                      1,388        1,388
                                                                                         --------     --------

                   Loans, net                                                             112,873      103,966
                                                                                         --------     --------

       Accrued interest receivable                                                            681          727
       Premises and equipment, net                                                          5,850        6,096
       Real estate held for investment                                                                     224
       Other assets                                                                           417          459
                                                                                         --------     --------

                   Total assets                                                          $182,220     $171,711
                                                                                         ========     ========

 LIABILITIES
       Deposits
             Non-interest-bearing                                                        $ 34,675     $ 29,119
             Interest-bearing                                                             122,556      118,317
                                                                                         --------     --------

                   Total deposits                                                         157,231      147,436

       Other borrowed funds                                                                   580          750
       Accrued interest payable                                                               145          295
       Other liabilities                                                                      611          775
                                                                                         --------     --------

                   Total liabilities                                                      158,567      149,256
                                                                                         --------     --------

 STOCKHOLDERS' EQUITY
       Common stock, par value $1 per share; 5,000,000 shares authorized;
             1,175,267 and 1,115,994 shares issued and outstanding in 2003 and 2002,
             respectively                                                                   1,175        1,116
       Additional paid-in capital                                                          16,903       15,527
       Retained earnings                                                                    5,204        5,219
       Accumulated other comprehensive income, net of tax                                     371          593
                                                                                         --------     --------

                   Total stockholders' equity                                              23,653       22,455
                                                                                         --------     --------

                   Total liabilities and stockholders' equity                            $182,220     $171,711
                                                                                         ========     ========
</TABLE>

   The accompanying notes are an integral part of these consolidated financial
                                   statements.

                                       19
<PAGE>

                        Valley Community Bancshares, Inc.
                        CONSOLIDATED FINANCIAL STATEMENTS
                        CONSOLIDATED STATEMENT OF INCOME
               (DOLLARS IN THOUSANDS EXCEPT FOR PER-SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                                         ----------------------------------------
                                                                            2003           2002           2001
                                                                         ----------     ----------     ----------
<S>                                                                      <C>            <C>            <C>
INTEREST INCOME
       Interest and fees on loans                                        $    7,605     $    8,074     $    8,109
       Interest on federal funds sold and deposits in banks                     319            322            767
       Securities available-for-sale                                          1,113          1,462          1,608
       Dividends on Federal Home Loan Bank stock                                 21             28             32
                                                                         ----------     ----------     ----------

                 Total interest income                                        9,058          9,886         10,516
                                                                         ----------     ----------     ----------

INTEREST EXPENSE
       Interest on deposits                                                   1,263          1,876          3,421
       Interest on federal funds and other short-term borrowings                  5              7             14
                                                                         ----------     ----------     ----------

                 Total interest expense                                       1,268          1,883          3,435
                                                                         ----------     ----------     ----------

                 Net interest income                                          7,790          8,003          7,081

PROVISION FOR LOAN LOSSES                                                                      213             62
                                                                         ----------     ----------     ----------

                 Net interest income after provision for loan losses          7,790          7,790          7,019
                                                                         ----------     ----------     ----------

NONINTEREST INCOME
       Service charges                                                          473            465            387
       Gain on sale of investment securities, net                                36             54             54
       Gain on sale of real estate held for investment                          211
       Origination fees on mortgage loans brokered                              375            189            114
       Other operating income                                                   374            296            315
                                                                         ----------     ----------     ----------

                 Total noninterest income                                     1,469          1,004            870
                                                                         ----------     ----------     ----------

NONINTEREST EXPENSE
       Salaries                                                               2,631          2,419          2,112
       Employee benefits                                                        649            606            586
       Occupancy                                                                556            497            551
       Equipment                                                                444            462            527
       Other operating expenses                                               1,967          1,738          1,583
                                                                         ----------     ----------     ----------

                 Total noninterest expense                                    6,247          5,722          5,359
                                                                         ----------     ----------     ----------

INCOME BEFORE INCOME TAX                                                      3,012          3,072          2,530

PROVISION FOR INCOME TAX                                                        963            954            744
                                                                         ----------     ----------     ----------

NET INCOME                                                               $    2,049     $    2,118     $    1,786
                                                                         ==========     ==========     ==========

EARNINGS PER SHARE
       Basic                                                             $     1.75     $     1.79     $     1.50
       Diluted                                                           $     1.74     $     1.77     $     1.48
       Weighted average shares outstanding                                1,172,561      1,182,840      1,187,256
       Weighted average diluted shares outstanding                        1,178,261      1,197,096      1,206,709
</TABLE>

   The accompanying notes are an integral part of these consolidated financial
                                   statements.

                                       20
<PAGE>

                        Valley Community Bancshares, Inc.
                        CONSOLIDATED FINANCIAL STATEMENTS
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                         ACCUMULATED
                             COMMON STOCK     ADDITIONAL                                    OTHER            TOTAL
                         ------------------     PAID-IN    COMPREHENSIVE   RETAINED     COMPREHENSIVE     STOCKHOLDERS'
                          SHARES     AMOUNT    CAPITAL        INCOME       EARNINGS   INCOME (LOSS), NET      EQUITY
                         ---------  -------   ----------   -------------   --------   ------------------  -------------
<S>                      <C>        <C>       <C>          <C>             <C>        <C>                 <C>
BALANCE, 12/31/2000      1,133,588  $ 1,134   $   16,322                   $  2,613     $          56     $      20,125

Net income                                                 $       1,786      1,786                               1,786

Other comprehensive income
  Unrealized gain on securities,
  Net of $128 tax                                                    249                          249               249
                                                           -------------

Comprehensive income                                       $       2,035
                                                           =============

Common stock redeemed      (20,239)     (20)        (486)                                                          (506)

Cash dividend                                                                  (623)                               (623)

Common stock exercised
  Under stock option plan   13,401       13          117                                                            130
                         ---------  -------   ----------                   --------     -------------     -------------

BALANCE, 12/31/2001      1,126,750    1,127       15,953                      3,776               305            21,161

Net income                                                 $       2,118      2,118                               2,118

Other comprehensive income
  Unrealized gain on securities,
  Net of $149 tax                                                    288                          288               288
                                                           -------------

Comprehensive income                                       $       2,406
                                                           =============

Common stock redeemed      (21,824)     (22)        (524)                                                          (546)

Cash dividend                                                                  (675)                               (675)

Common stock exercised
  Under stock option plan   11,068       11           98                                                            109
                         ---------  -------   ----------   -------------   --------     -------------     -------------

BALANCE, 12/31/2002      1,115,994    1,116       15,527                      5,219               593            22,455

Net income                                                 $       2,049      2,049                               2,049

Other comprehensive income
  Unrealized loss on securities,
  Net of $115 tax benefit                                           (222)                        (222)             (222)
                                                           -------------

Comprehensive income                                       $       1,827
                                                           =============

Cash dividend                                                                  (675)                               (675)

Stock dividend              55,552       55        1,334                     (1,389)

Common stock exercised
  Under stock option plan    3,721        4           42                                                             46

                         ---------  -------   ----------                   --------     -------------     -------------
BALANCE, 12/31/2003      1,175,267  $ 1,175   $   16,903                   $  5,204     $         371     $      23,653
                         =========  =======   ==========                   ========     =============     =============
</TABLE>

   The accompanying notes are an integral part of these consolidated financial
                                   statements.

                                       21
<PAGE>

                        Valley Community Bancshares, Inc.
                        CONSOLIDATED FINANCIAL STATEMENTS
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                  YEAR ENDED DECEMBER 31,
                                                                                             -------------------------------
                                                                                               2003        2002       2001
                                                                                             ---------   --------   --------
<S>                                                                                          <C>         <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
        Net income                                                                           $   2,049   $  2,118   $  1,786
        Adjustments to reconcile net income to net cash from operating activities:
              Provisions for loan losses                                                                      213         62
              Depreciation and software amortization                                               470        362        462
              Deferred income tax                                                                   11          4         36
              Net amortization on securities                                                       354        200         83
              FHLB stock dividends                                                                 (21)       (28)       (31)
              Gain on sale of securities available-for-sale                                        (36)       (54)       (54)
              Loss on sale of premises and equipment                                                           41          5
              Gain on sale of real estate held for investment                                      211
              Amortization of deferred gain on sale of real estate held for investment            (211)
              Amortization on intangibles                                                           42         29
        Changes in operating assets and liabilities:
              Decrease in accrued interest receivable                                               46         50        175
              Decrease (increase) in other assets                                                    1       (195)       153
              Decrease in accrued interest payable                                                (150)       (95)      (207)
              Increase (decrease) in other liabilities                                             (60)        57        146
                                                                                             ---------   --------   --------
                    Net cash from operating activities                                           2,706      2,702      2,616
                                                                                             ---------   --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES
        Net increase in federal funds sold                                                      (8,031)    (1,734)
        Net increase in interest-bearing deposits with banks                                    13,688     (8,108)    (3,960)
        Purchase of securities available-for-sale                                              (34,983)   (14,848)   (18,365)
        Proceeds from sales of securities available-for-sale                                     7,607      5,567      3,055
        Proceeds from maturities of securities available-for-sale                               19,230      9,853     15,070
        Redemption of stock in FHLB                                                                 47        108
        Net increase in loans                                                                   (8,907)    (4,580)    (6,143)
        Additions to premises and equipment                                                       (225)      (593)      (586)
        Purchase of intangibles                                                                              (144)
        Proceeds from the sale of real estate held for investment                                  224
                                                                                             ---------   --------   --------
                    Net cash from investing activities                                         (11,350)   (14,479)   (10,929)
                                                                                             ---------   --------   --------

CASH FLOWS FROM FINANCING ACTIVITIES
        Net increase in deposits                                                                 9,795     12,736      9,653
        Net increase (decrease) in other borrowed funds                                           (122)       416       (223)
        Payment on other borrowed money                                                            (48)
        Cash dividends paid                                                                       (675)      (675)      (623)
        Common stock redeemed                                                                                (546)      (506)
        Stock options exercised                                                                     46        109        130
                                                                                             ---------   --------   --------
                    Net cash from financing activities                                           8,996     12,040      8,431
                                                                                             ---------   --------   --------

NET INCREASE IN CASH AND DUE FROM BANKS                                                            352        263        118

CASH AND DUE FROM BANKS, beginning of year                                                       4,847      4,584      4,466
                                                                                             ---------   --------   --------
CASH AND DUE FROM BANKS, end of year                                                         $   5,199   $  4,847   $  4,584
                                                                                             =========   ========   ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
        Cash payments for
              Interest                                                                       $   1,418   $  1,978   $  3,642
                                                                                             =========   ========   ========
              Income taxes                                                                         878        971        661
                                                                                             =========   ========   ========

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
        Distribution of five percent stock dividend                                          $   1,389   $          $
                                                                                             =========   ========   ========
        Unrealized gains (losses) on securities available-for-sale                                (337)       437        377
                                                                                             =========   ========   ========
        Deferred tax on unrealized gains (losses) on securities available-for-sale                 115       (149)      (128)
                                                                                             =========   ========   ========
        Held-to-maturity securities transferred to securities available-for-sale                                         279
                                                                                             =========   ========   ========
</TABLE>

   The accompanying notes are an integral part of these consolidated financial
                                   statements.

                                       22
<PAGE>

                        Valley Community Bancshares, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

The Company is a Washington State bank holding company headquartered in
Puyallup, Washington. The Company conducts its business primarily through its
wholly owned bank subsidiary, Valley Bank.

The Company's main office is located in Puyallup, Washington, which also serves
as the main office of Valley Bank. The Company 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.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Valley Community
Bancshares, Inc. (the "Company") and its wholly owned subsidiary Valley Bank
(the "Bank"). All significant intercompany transactions and balances have been
eliminated in consolidation.

USE OF ESTIMATES

The preparation of the consolidated financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions. These assumptions and
estimates affect the reported amounts of assets and liabilities, and disclosures
of contingent assets and liabilities at the date of the consolidated financial
statements. They also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, and amounts due from banks. Cash and cash equivalents have an original
maturity of three months or less.

INTEREST-BEARING DEPOSITS WITH BANKS

Interest-bearing deposits with banks include interest-bearing deposits at the
Federal Home Loan Bank and certificates of deposit in financial institutions
located throughout the United States of America. All certificates of deposit are
under the FDIC insurance limit.

INVESTMENT SECURITIES

Investment securities are classified into one of three categories: (1)
held-to-maturity, (2) available-for-sale, or (3) trading. Investment securities
are categorized as held-to-maturity when the Company has the positive intent and
ability to hold those securities to maturity. Securities that are
held-to-maturity are stated at cost and adjusted for amortization of premiums
and accretion of discounts, which are recognized as adjustments to interest
income.

Investment securities categorized as available-for-sale are generally held for
investment purposes (to maturity), although unanticipated future events may
result in the sale of some securities. Available-for-sale securities are
recorded at estimated fair value, with the net unrealized gain or loss included
in comprehensive income, net of the related tax effect. Realized gains or losses
on dispositions are based on the net proceeds and the adjusted carrying amount
of securities sold, using the specific identification method.

Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary are recognized by
write-downs of the individual securities to their fair value. Such write-downs
would be included in earnings as realized losses.

Premiums and discounts are recognized in interest income using the interest
method over the period to maturity. The Company had no trading securities at
December 31, 2003 and 2002.

FEDERAL HOME LOAN BANK STOCK

The Company's investment in Federal Home Loan Bank (the FHLB) stock is carried
at par value ($100 per share), which reasonably approximates its fair value. As
a member of the FHLB system, the Company is required to maintain a minimum level
of investment in FHLB stock based on specified percentages of its outstanding
FHLB advances. The Company may request redemption at par value of any stock in
excess of the amount the Company is required to hold. Stock redemptions are at
the discretion of the FHLB.

LOANS

Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off, are reported at their outstanding
principal, and are adjusted for any charge-offs, the allowance for loan losses,
and any deferred fees or costs on originated loans and unamortized premiums or
discounts on purchased loans. Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of the yield
of the related loan.

The accrual of interest on impaired loans is discontinued when, in management's
opinion, 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, or the fair market value of the
loan's collateral.

                                       23
<PAGE>

                        Valley Community Bancshares, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

ALLOWANCE FOR LOAN LOSS

The allowance for loan loss is management's best estimate of loan losses
incurred at the balance sheet date. 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 credit 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. 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.

A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.

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 area and also in the Auburn, Kent, and King County area. Real
estate prices in this market are stable at this time. However, the ultimate
collectibility of a substantial portion of the Company's loan portfolio may be
susceptible to change in local market conditions 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.

Management determines the adequacy 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 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.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost, less accumulated amortization and
depreciation. Leasehold improvements are amortized on a straight-line basis over
the lives of the respective leases. Depreciation is computed on the
straight-line method over the following estimated useful lives:

<TABLE>
<S>                                 <C>
Building and improvements           10 - 40 years
Furniture, fixtures, and equipment  3 - 10 years
</TABLE>

REAL ESTATE HELD FOR INVESTMENT

Real estate held for investment is property that was acquired for resale. The
property is recorded at the lower of cost or fair value and is periodically
evaluated to determine that the carrying value does not exceed the fair value of
the property. The property was sold during 2003.

INCOME TAX

The Company records its provision for income taxes using the liability method.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.

RESTRICTED ASSETS

Federal Reserve Board Regulations require maintenance of certain minimum reserve
balances on deposit with the Federal Reserve Bank. The amounts of such balances
on deposit were approximately $2,039,000 and $1,090,000 at December 31, 2003 and
2002, respectively.

COMPREHENSIVE INCOME

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

RECLASSIFICATION

Certain amounts in the 2002 and 2001 consolidated financial statements have been
reclassified to conform to the 2003 presentation. These reclassifications had no
effect on net income.

                                       24
<PAGE>

                        Valley Community Bancshares, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

STOCK OPTION PLAN

The Company recognizes the financial effects of stock options in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Stock options are issued at a price that approximates the fair value
of the Company's stock as of the grant date. Under APB 25, options issued in
this manner do not result in the recognition of employee compensation in the
Company's financial statements.

At December 31, 2003, the Company has a stock-based employee compensation plan,
which is described more fully in Note 14. The Company accounts for the 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.

In thousands, except for per-share amounts

<TABLE>
<CAPTION>
                                                                  2003      2002      2001
                                                                 ------    ------    ------
<S>                                                              <C>       <C>       <C>
Pro forma disclosures
     Net income as reported                                      $2,049    $2,118    $1.786

     Additional compensation for fair value of stock options        (12)      (10)       (8)
                                                                 ------    ------    ------

Pro forma net income                                             $2,037    $2,108    $1,778
                                                                 ======    ======    ======

Earnings per share
     Basic
        As reported                                              $ 1.75    $ 1.79    $ 1.50
                                                                 ======    ======    ======

        Pro forma                                                $ 1.74    $ 1.78    $ 1.50
                                                                 ======    ======    ======
     Diluted
        As reported                                              $ 1.74    $ 1.77    $ 1.48
                                                                 ======    ======    ======

        Pro forma                                                $ 1.73    $ 1.76    $ 1.47
                                                                 ======    ======    ======
</TABLE>

FINANCIAL INSTRUMENTS

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

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.

ADVERTISING COSTS

The Company expenses advertising costs as they are incurred. The amounts
expensed during 2003, 2002, and 2001 were $177,000, $138,000, and $115,000,
respectively.

                                       25
<PAGE>

                        Valley Community Bancshares, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

IMPACT OF NEW ACCOUNTING ISSUES

During the year 2003 the Financial Accounting Standard Board issued the
following accounting standards:

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.

In April 2003, FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement is effective for contracts entered into or modified after June
30, 2003. Adoption of the Statement did not result in an impact on the Company's
statement of financial position or results of operations.

In May 2003, FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatory redeemable financial instruments of nonpublic
entities. Adoption of the Statement did not result in an impact on the Company's
statement of financial position or results of operations.

                                       26
<PAGE>

                        Valley Community Bancshares, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - INVESTMENT SECURITIES

At December 31, 2003, there are approximately 20 investment securities that have
fair values less than amortized cost and therefore contain unrealized losses.
The Company has evaluated these securities and has determined that the decline
in value is temporary and is related to the change in market interest rates
since purchase. The decline in value is not related to any company or industry
specific event. The Company anticipates full recovery of amortized cost with
respect to these securities at maturity or sooner in the event of a more
favorable market interest rate environment.

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

DECEMBER 31, 2003

<TABLE>
<CAPTION>
                                                            GROSS      GROSS UNREALIZED LOSSES    ESTIMATED
                                          AMORTIZED       UNREALIZED   LESS THAN      12 MONTHS      FAIR
SECURITIES AVAILABLE-FOR-SALE               COST            GAINS      12 MONTHS       OR MORE      VALUE
                                          ---------       ----------   ---------      ---------   ---------
<S>                                       <C>             <C>          <C>            <C>         <C>
U.S. Treasury and U.S. Government
   corporations and agencies              $  13,614        $    109     $     2       $           $  13,721
State and political subdivisions              7,421             361           4                       7,778
Mortgage-backed securities                   16,964             151          54                      17,061
                                          ---------        --------     -------       ---------   ---------

                                          $  37,999        $    621     $    60       $           $  38,560
                                          =========        ========     =======       =========   =========
</TABLE>

DECEMBER 31, 2002

<TABLE>
<CAPTION>
                                                            GROSS      GROSS UNREALIZED LOSSES    ESTIMATED
                                          AMORTIZED       UNREALIZED   LESS THAN      12 MONTHS      FAIR
SECURITIES AVAILABLE-FOR-SALE               COST            GAINS      12 MONTHS       OR MORE      VALUE
                                          ---------       ----------   ---------      ---------   ---------
<S>                                       <C>             <C>          <C>            <C>         <C>
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
                                          =========       ==========   =========      =========   =========
</TABLE>

At December 31, 2003, there are approximately 96 investment securities with an
estimated fair value of $30,457,000 and with estimated unrealized gains of
$621,000.

The amortized cost and estimated market value of securities available-for-sale
at December 31, 2003, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without prepayment penalties.

<TABLE>
<CAPTION>
                                             AVAILABLE-FOR-SALE
                                         ----------------------------
                                                           ESTIMATED
                                          AMORTIZED          FAIR
                                             COST            VALUE
                                          ---------       ----------
<S>                                       <C>             <C>
Due in one year or less                   $   1,548       $    1,559
Due from one to five years                   16,579           16,803
Due from five to ten years                   11,476           11,775
Due after ten years                           8,396            8,423
                                          ---------       ----------

      Totals                              $  37,999       $   38,560
                                          =========       ==========
</TABLE>

Proceeds from sales of available-for-sale investment securities were $7,607,000,
$5,567,000, and $3,055,000, in 2003, 2002, and 2001, respectively.

Gross gains from the sales of available-for-sale investment securities were
$65,000, $64,000, and $54,000 in 2003, 2002, and 2001, respectively. The Company
incurred gross losses of $29,000, $10,000, and $0 in 2003, 2002 and 2001,
respectively.

Investments in state and political subdivisions represent purchases of municipal
bonds located in Washington State. The debt obligations were all within the
credit ratings acceptable under the Company's investment policy.

Investment securities with a book value of $3,484,000 and $3,398,000 at 2003 and
2002, respectively, have been pledged to secure public deposits, as required by
law, and other purposes. The estimated fair value of these pledged securities
was $3,584,000 and $3,518,000 at December 31, 2003 and 2002, respectively.

                                       27
<PAGE>


                        Valley Community Bancshares, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - LOANS

The major classifications of loans at December 31 are summarized as follows
(dollars in thousands):

<TABLE>
<CAPTION>
                                              2003               2002
                                           --------           --------
<S>                                        <C>                <C>
Real estate
      Construction                         $  9,913           $  9,276
      Residential                            12,095             15,080
      Commercial                             65,114             55,266
Commercial                                   24,872             23,502
Consumer and other                            2,409              2,339
Lease                                            63                 83
                                           --------           --------

                                            114,466            105,546
Less deferred loan fees, net                   (205)              (192)
                                           --------           --------

      Totals                               $114,261           $105,354
                                           ========           ========
</TABLE>

Contractual maturities of loans as of December 31, 2003, are as shown below.
Actual maturities may differ from contractual maturities because individual
borrowers may have the right to prepay loans with or without prepayment
penalties.

<TABLE>
<CAPTION>
                                           WITHIN 1 YEAR   1 - 5 YEARS   AFTER 5 YEARS    TOTAL
                                           -------------   -----------   -------------   --------
<S>                                        <C>             <C>           <C>             <C>
Commercial                                   $  12,852     $   10,705     $    1,315     $ 24,872
Real estate, commercial                          7,388         43,257         14,469       65,114
Real estate, construction                        5,199          4,559            155        9,913
Real estate, residential                         1,858          5,386          4,851       12,095
Consumer and other                                 987          1,330             92        2,409
Lease                                               22             41                          63
                                             ---------     ----------     ----------     --------

                                             $  28,306     $   65,278     $   20,882     $114,466
                                             =========     ==========     ==========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                                  1 - 5 YEARS     AFTER 5 YEARS
                                                                  -----------     -------------
<S>                                                               <C>             <C>
Loans maturing after one year with:
        Fixed rates                                                $ 51,331        $    6,810
        Variable rates                                               13,947            14,072
                                                                   --------        ----------

                                                                   $ 65,278        $   20,882
                                                                   ========        ==========
</TABLE>

The Company has no loans classified as impaired at December 31, 2003 and 2002,
respectively. Therefore, no allocation of the allowance for possible credit
losses was considered necessary to allocate to impaired loans at December 31,
2003 and 2002.

                                       28
<PAGE>

                        Valley Community Bancshares, Inc.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are summarized as follows (dollars in
thousands):

<TABLE>
<CAPTION>
                               2003        2002        2001
                             --------    --------    -------
<S>                          <C>         <C>         <C>
Balance, beginning of year   $  1,388    $  1,156    $ 1,096
Provision for loan losses                     213         62
Additions from recoveries                      24          4
Loans charged off                              (5)        (6)
                             --------    --------    -------

Balance, end of year         $  1,388    $  1,388    $ 1,156
                             ========    ========    =======
</TABLE>

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment at December 31 consisted of the following (dollars in
thousands):

<TABLE>
<CAPTION>
                                        2003          2002
                                     ----------    ----------
<S>                                  <C>           <C>
Equipment, furniture, and fixtures   $    2,736    $    2,700
Land and buildings                        6,409         6,360
                                     ----------    ----------
                                          9,145         9,060
Less accumulated depreciation            (3,295)       (2,964)
                                     ----------    ----------

                                     $    5,850    $    6,096
                                     ==========    ==========
</TABLE>

Depreciation expense on premises and equipment totaled $392,000 in 2003,
$362,000 in 2002, and $462,000 in 2001.

NOTE 6 - DEPOSITS

Interest-bearing deposits at December 31 consisted of the following (dollars in
thousands):

<TABLE>
<CAPTION>
                                           2003          2002
                                        ----------    -----------
<S>                                     <C>           <C>
Demand accounts                         $   24,110    $    21,733
Money market accounts                       39,018         35,506
Savings accounts                            16,500         14,343
Certificates of deposit over $100,000       21,657         21,340
Other certificates of deposit               21,271         25,395
                                        ----------    -----------

                                        $  122,556    $   118,317
                                        ==========    ===========
</TABLE>

At December 31, 2003, the scheduled maturities of certificates of deposit are as
follows (dollars in thousands):

<TABLE>
<S>     <C>
2004    $  38,881
2005        2,128
2006          346
2007        1,189
2008          384
        ---------

        $  42,928
        =========
</TABLE>

                                       29
<PAGE>

                        Valley Community Bancshares, Inc.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - OTHER BORROWED FUNDS

Other borrowed funds at December 31 consist of the following (dollars in
thousands):

<TABLE>
<CAPTION>
                              2003        2002
                             -------    --------
<S>                          <C>        <C>
Treasury tax and loan note   $   532    $    654
Other borrowed money              48          96
                             -------    --------

                             $   580    $    750
                             =======    ========
</TABLE>

Other borrowed money represents a borrowing arrangement made in connection with
the purchase of various assets from Puget Sound Mortgage Brokers during 2002.
The obligation is unsecured and is scheduled to be repaid in two equal annual
installments plus interest at a rate of 2.88 percent.

In addition, the Company participates in the Treasury Tax and Loan Investment
Program of the Federal Reserve Bank. In accordance with federal regulation the
Bank is permitted to borrow Treasury Tax and Loan funds by executing an
open-ended interest-bearing note to the Federal Reserve Bank of San Francisco.
Interest is payable weekly, and is computed at 0.25 percent below the Federal
Fund interest rate. The note is secured by U.S. Government obligations with a
par value of $1,000,000.

NOTE 8 - CREDIT ARRANGEMENTS

The Bank is a member of the Federal Home Loan Bank of Seattle. As a member, the
Bank has a committed line of credit up to 10 percent of total assets. Borrowings
generally provide for interest at the then-current published rates. There were
no borrowings outstanding at December 31, 2003 and 2002. During 2002, the
maximum amount of borrowings outstanding totaled $395,000. The average amount of
borrowings outstanding during 2002 was $16,000. The average weighted interest
rate paid on those borrowings was 2.21 percent during 2002. There were no
borrowings outstanding during 2003 and 2001.

At December 31, 2003, committed line-of-credit agreements totaling approximately
$9,500,000 were available to the Company from unaffiliated banks with maturities
that range from June 2004 to July 2004. Such lines generally provide for
interest at the then-existing federal funds rate. There were no borrowings
outstanding under these credit arrangements at December 31, 2003 and 2002. There
were no borrowings outstanding during 2003, 2002, and 2001.

NOTE 9 - INCOME TAXES

The components of the provision for federal income tax expense for the years
ended December 31, are as follows (dollars in thousands):

<TABLE>
<CAPTION>
            2003     2002     2001
           ------   ------   -----
<S>        <C>      <C>      <C>
Current    $  952   $  950   $ 708
Deferred       11        4      36
           ------   ------   -----

           $  963   $  954   $ 744
           ======   ======   =====
</TABLE>

A reconciliation of the effective income tax rate with the federal statutory
rate is as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                2003                2002               2001
                         -----------------    ----------------    ---------------
                           AMOUNT     RATE     AMOUNT     RATE    AMOUNT     RATE
                         ----------   ----    --------    ----    -------    ----
<S>                      <C>          <C>     <C>         <C>     <C>        <C>
Federal income tax at
      statutory rates    $    1,023     34%   $  1,044      34%   $   860      34%

Effect of tax-exempt
      interest income           (89)    -3%        (95)     -3%       (89)     -4%
Other                            29      1%          5                (27)     -1%
                         ----------   ----    --------    ----    -------    ----
                         $      963     32%   $    954      31%   $   744      29%
                         ==========   ====    ========    ====    =======    ====
</TABLE>

                                       30
<PAGE>

                        Valley Community Bancshares, Inc.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - INCOME TAXES (CONTINUED)

The following are the significant components of deferred tax assets and
liabilities at December 31 (dollars in thousands):

<TABLE>
<CAPTION>
                                         2003      2002
                                       -------    ------
<S>                                    <C>        <C>
Deferred tax assets
      Allowance for loan losses        $   398    $  401
      Deferred compensation                100        85
      Other                                 22        15
                                       -------    ------

                                           520       501
                                       -------    ------
Deferred tax liabilities
      Accumulated depreciation             271       240
      Unrealized gain on securities
      available-for-sale                   191       306
      Other                                 80        81
                                       -------    ------

                                           542       627
                                       -------    ------

 Net deferred tax asset (liability)    $   (22)   $ (126)
                                       =======    ======
</TABLE>

The Company believes, based on available information, that all deferred tax
assets will be realized in the normal course of business; therefore, these
assets have not been reduced by a valuation allowance.

NOTE 10 - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL

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

Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2003, that the
Company meets all capital adequacy requirements to which it is subject.

As of December 31, 2003, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.

                                       31
<PAGE>

                        Valley Community Bancshares, Inc.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL (CONTINUED)

The Company's actual capital amounts and ratios are also presented in the table
(dollars in thousands):

<TABLE>
<CAPTION>
                                                                                                          TO BE WELL
                                                                                                       CAPITALIZED UNDER
                                                                                                            PROMPT
                                                                              FOR CAPITAL              CORRECTIVE ACTION
                                                  ACTUAL                   ADEQUACY PURPOSES              PROVISIONS
                                          ----------------------         ---------------------         -----------------
                                            AMOUNT       RATIO             AMOUNT      RATIO            AMOUNT     RATIO
                                          ----------   ---------         ----------   --------         ---------   -----
<S>                                       <C>          <C>               <C>          <C>              <C>         <C>
As of December 31, 2003:
Total Capital
     (to Risk-weighted assets)
        Valley Community Bancshares       $   24,597   18.70% > or =     $   10,524   8.00% > or =     $  13,154   10.00%
        Valley Bank                       $   22,928   17.43% > or =     $   10,524   8.00% > or =     $  13,154   10.00%

Tier I Capital
     (to Risk-weighted assets)
        Valley Community Bancshares       $   23,209   17.64% > or =     $    5,262   4.00% > or =     $   7,893    6.00%
        Valley Bank                       $   21,540   16.37% > or =     $    5,262   4.00% > or =     $   7,893    6.00%

Tier I Capital
     (to Average assets)
        Valley Community Bancshares       $   23,209   12.68% > or =     $    7,324   4.00% > or =     $   9,155    5.00%
        Valley Bank                       $   21,540   11.76% > or =     $    7,324   4.00% > or =     $   9,155    5.00%

As of December 31, 2002:
Total Capital
     (to Risk-weighted assets)
        Valley Community Bancshares       $   23,135   19.09% > or =     $    9,965   8.00% > or =     $  12,119   10.00%
        Puyallup Valley Bank              $   15,925   16.01% > or =     $    7,960   8.00% > or =     $   9,950   10.00%
        Valley Bank                       $    4,113   20.84% > or =     $    1,579   8.00% > or =     $   1,973   10.00%

Tier I Capital
     (to Risk-weighted assets)
        Valley Community Bancshares       $   21,747   17.94% > or =     $    4,848   4.00% > or =     $   7,271    6.00%
        Puyallup Valley Bank              $   14,750   14.82% > or =     $    3,980   4.00% > or =     $   5,970    6.00%
        Valley Bank                       $    3,900   19.76% > or =     $      789   4.00% > or =     $   1,184    6.00%

Tier I Capital
     (to Average assets)
        Valley Community Bancshares       $   21,747   12.64% >or=       $    6,881   4.00% > or =     $   8,601    5.00%
        Puyallup Valley Bank              $   14,750    9.94% >or=       $    5,933   4.00% > or =     $   7,417    5.00%
        Valley Bank                       $    3,900   17.96% >or=       $      869   4.00% > or =     $   1,086    5.00%
</TABLE>

                                       32
<PAGE>

                        Valley Community Bancshares, Inc.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES

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

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

<TABLE>
<CAPTION>
                                  2003         2002
                                ---------    --------
<S>                             <C>          <C>
Commitments to extend credit    $  21,403    $ 19,767
Standby letters of credit             120          10
                                ---------    --------

                                $  21,523    $ 19,777
                                =========    ========
</TABLE>

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company's experience has been that customers draw
upon approximately 75 percent of loan commitments. While approximately all of
commercial letters of credit are utilized, a significant portion of such
utilization is on an immediate payment basis. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property and equipment,
and income-producing properties.

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

(b) OPERATING LEASE COMMITMENTS - The Company leases its operating facilities
under agreements, which expire between January 2004 and May 2008, subject to the
Company's option to extend the lease term under those agreements. The agreements
require the Company to pay certain operating expenses. The approximate annual
commitment for rental space under these operating leases is summarized as
follows (dollars in thousands):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S>            <C>
    2004       $  82
    2005          80
    2006          80
    2007          80
    2008          33
               -----

               $ 355
               =====
</TABLE>

Rental expense charged to operations was $111,000, $80,000, and $102,000 for the
years ended December 31, 2003, 2002, and 2001, respectively.

(c) LEGAL PROCEEDINGS - The Company and its subsidiary are from time to time
defendants in and are threatened with various legal proceedings arising from
their regular business activities. Management, after consulting with legal
counsel, is of the opinion that the ultimate liability, if any, resulting from
these and other pending or threatened actions and proceedings will not have a
material effect on the financial position or results of operation of the Company
and its subsidiary.

                                       33
<PAGE>

                        Valley Community Bancshares, Inc.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - RELATED PARTY TRANSACTIONS

Certain directors, executive officers, principal stockholders, and companies in
which they have a beneficial interest, are loan customers of the Company. All
loans and loan commitments were made in compliance with applicable laws and
regulations on substantially the same terms (including interest rates and
collateral) as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of collectibility or
present any other unfavorable features.

Such loans had aggregate balances and activity during 2003, 2002, and 2001 as
follows (dollars in thousands):

<TABLE>
<CAPTION>
                                   2003         2002          2001
                                ----------   ----------    ----------
<S>                             <C>          <C>           <C>
Balance at beginning of year    $    2,355   $    2,926    $    2,550
New loans or advances                  730        1,071         3,366
Repayments                          (1,399)      (1,642)       (2,990)
                                ----------   ----------    ----------

Balance at end of year          $    1,686   $    2,355    $    2,926
                                ==========   ==========    ==========
</TABLE>

Deposits from related parties totaled approximately $1,600,000, $1,605,000, and
$5,332,000 at December 31, 2003, 2002, and 2001, respectively.

NOTE 13 - EMPLOYEE BENEFITS

The Company has a 401(k) defined contribution plan for those employees who meet
the eligibility requirements set forth in the plan. Contributions to the plan,
adopted in January 1987, are at the discretion of the Company's Board of
Directors. Eligible employees can contribute up to the lesser of $13,000 or 100
percent of compensation. The Company made no contributions to the plan in 2003,
2002, or 2001.

The Company also has a noncontributory profit-sharing plan covering
substantially all employees. Contributions to the plan are at the discretion of
the Company's Board of Directors, and totaled $122,900, $127,100, and $107,500
in 2003, 2002, and 2001, respectively.

NOTE 14 - STOCK OPTION PLAN

The Company has a qualified incentive stock option plan that provides for the
awarding of stock options to certain officers and employees of the Company. The
awarding of stock options is at the discretion of the Board of Directors.
Options granted under the plan vest under a schedule determined by the Board of
Directors and expire up to ten years from the date of the grant. The exercise
price of all options granted under the plan is equal to the fair value of the
common stock on the date of the grant. Average exercise price per share, number
of shares authorized, available for grant, granted, exercised, outstanding, and
currently exercisable reflect the dilutive effect of stock dividends and stock
splits.

The pro forma information, as reported in Note 1 under the caption Stock Option
Plan, regarding net income and earnings per share, is required by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
as amended. The pro forma information recognizes, as compensation, the estimated
fair value of stock options granted using an option valuation model known as the
Black-Scholes model. Pro forma earnings per share amounts reflect an adjustment
as if the fair value of the options were recognized as compensation for the
period.

For the most part, variables and assumptions are used in the model. For the
periods 2003, 2002, and 2001, respectively, the risk-free interest rate averaged
3.14 percent, 4.97 percent, and 4.75 percent, the dividend yield rate was 2.0
percent, 2.4 percent, and 2.2 percent, the price volatility was 15.6 percent in
2003 and was not meaningful in 2002 and 2001, and the weighted average expected
life of the options has been measured at five years during 2003 and seven years
during 2002 and 2001.

The fair value of options issued in 2003, 2002, and 2001 was estimated at
$82,000, $35,000, and $5,000, respectively. The remaining unrecognized
compensation for fair value of stock options was approximately $105,000 as of
December 31, 2003.

Management believes that the variables and assumptions used in the
options-pricing model are subjective and represent only one estimate of possible
value.

                                       34
<PAGE>

                        Valley Community Bancshares, Inc.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 - STOCK OPTION PLAN (CONTINUED)

Information with respect to option transactions is summarized as follows:

<TABLE>
<CAPTION>
                                              EXERCISE     CURRENTLY       OPTIONS
                                AUTHORIZED     PRICE       EXERCISED     OUTSTANDING    EXERCISABLE
                                ----------   ----------    ----------    -----------    -----------
<S>                             <C>          <C>           <C>           <C>            <C>
Balance, December 31, 2000       259,070     $    19.78       117,304         56,714         31,964

     Granted                                      28.00                        5,000
     Exercised                                     9.70        13,401        (13,401)       (13,401)
     Expired and forfeitures
     Vested
                                 -------     ----------       -------        -------        -------

Balance, December 31, 2001       259,070          23.43       130,705         48,313         18,563

     Granted                                      26.00                       13,000
     Exercised                                     9.88        11,068        (11,068)       (11,068)
     Expired and forfeitures
     Vested                                                                                  15,250
                                 -------     ----------       -------        -------        -------

Balance, December 31, 2002       259,070          27.08       141,773         50,245         22,745

     Granted                                      30.00                       18,376
     Stock dividend                2,510                                       2,510          1,384
     distributed
     Exercised                                    12.46         3,721         (3,721)        (3,721)
     Expired and forfeitures                                                 (20,476)       (15,750)
     Vested                                                                                  18,650
                                 -------     ----------       -------        -------        -------

Balance, December 31, 2003       261,580     $    25.63       145,494         46,934         23,308
                                 =======     ==========       =======        =======        =======
</TABLE>

Additional financial data pertaining to outstanding stock options is as follows:

<TABLE>
<CAPTION>
                                        WEIGHTED AVERAGE                                             WEIGHTED AVERAGE
                                           REMAINING         WEIGHTED AVERAGE        NUMBER         EXERCISE PRICE OF
   RANGE OF              NUMBER OF         CONTRACTUAL       EXERCISE PRICE OF     EXERCISABLE         EXERCISABLE
EXERCISE PRICES        OPTION SHARES     LIFE (IN YEARS)       OPTION SHARES      OPTION SHARES       OPTION SHARES
---------------        -------------    ----------------     -----------------    -------------     -----------------
<C>                    <C>              <C>                  <C>                  <C>               <C>
$ 11.75 - 11.78             4,146              0.07          $           11.76        4,146         $           11.76
          22.68             5,512              3.89                      22.68        5,512                     22.68
          24.76            13,650              8.46                      24.76
          26.67             5,250              7.07                      26.67
          30.00            18,376              5.71                      30.00       13,650                     30.00
                       ----------       -----------          -----------------    ---------         -----------------

                           46,934              5.95          $           25.63       23,308         $           25.02
                       ==========       ===========          =================    =========         =================
</TABLE>

NOTE 15 - EARNINGS PER SHARE

The numerators and denominators of basic and fully diluted earnings per share
are as follows:

Dollars in thousands, except for per-share amounts:

<TABLE>
<CAPTION>
                                                     2003          2002          2001
                                                 ------------  ------------  ------------
<S>                                              <C>           <C>           <C>
Net income (numerator)                           $      2,049  $      2,118  $      1,786
                                                 ============  ============  ============

Shares used in the calculation (denominator)
    Weighted average shares outstanding             1,172,561     1,182,840     1,187,256
    Effect of dilutive stock options                    5,700        14,256        19,453
    Fully diluted shares                            1,178,261     1,197,096     1,206,709
                                                 ============  ============  ============

Basic earnings per share                         $       1.75  $       1.79  $       1.50
                                                 ============  ============  ============

Diluted earnings per share                       $       1.74  $       1.77  $       1.48
                                                 ============  ============  ============
</TABLE>

                                       35
<PAGE>

                        Valley Community Bancshares, Inc.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures About Fair
Value of Financial Instruments. The Company, using available market information
and appropriate valuation methodologies, has determined the estimated fair value
amounts. However, considerable judgment is necessary to interpret market data in
the development of the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. The fair value of commitments to customers is not considered
material since they are for relatively short periods of time and subject to
customary credit terms. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value:

(a) CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH BANKS, OTHER
BORROWED FUNDS, AND FEDERAL FUNDS SOLD - For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.

(b) SECURITIES - For securities, fair values are based on quoted market prices
or dealer quotes, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.

(c) FEDERAL HOME LOAN BANK STOCK - The carrying amount is a reasonable estimate
of fair value.

(d) LOANS - The fair value of loans generally is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
For certain homogeneous categories of loans, such as Small Business
Administration guaranteed loans, fair value is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan
characteristics.

(e) DEPOSITS - The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of similar
remaining maturities.

(f) LIMITATIONS - The fair value estimates presented herein are based on
pertinent information available to management as of the applicable date.

(g) OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - Commitments to extend credit and
letters of credit represent the principal categories of off-balance-sheet
instruments (Note 11). The fair value of these commitments is not material since
they are for a short period of time and subject to customary credit terms.

The estimated fair values of the Company's financial instruments at December 31
are as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                             2003                    2002
                                                  ------------------------   ----------------------
                                                   CARRYING        FAIR      CARRYING     FAIR
                                                    AMOUNT        VALUE       AMOUNT      VALUE
                                                  ----------   -----------   ---------   ----------
<S>                                               <C>          <C>           <C>         <C>
Financial assets:
     Cash and due from banks, interest-bearing
     deposits
        with banks, and federal funds sold        $   23,467   $    23,480   $  28,772   $   28,772
     Securities                                       38,560        38,560      31,069       31,069
     Federal Home Loan Bank stock                        372           372         398          398
     Loans                                           114,261       114,237     105,354      107,261
Financial liabilities:
     Deposits                                        157,231       157,326     147,436      147,674
     Other borrowed funds                                580           580         750          750
</TABLE>

                                       36
<PAGE>

                        Valley Community Bancshares, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION

Condensed balance sheet at December 31, 2003 and 2002 (dollars in thousands):

<TABLE>
<CAPTION>
                                                                          2003          2002
                                                                        ---------     ---------
<S>                                                                     <C>           <C>
ASSETS
             Cash and due from Bank                                     $   1,675     $   1,168
             Investment in Bank                                            21,983        19,358
             Other assets                                                                 1,970
                                                                        ---------     ---------
                     Total assets                                       $  23,658     $  22,496
                                                                        =========     =========
LIABILITIES
             Accounts payable                                           $       5     $      41
                                                                        ---------     ---------
                     Total liabilities                                          5            41
TOTAL STOCKHOLDERS' EQUITY                                                 23,653        22,455
                                                                        ---------     ---------
                     Total liabilities and stockholders' equity         $  23,658     $  22,496
                                                                        =========     =========
</TABLE>

Condensed statement of income for the years ended December 31, 2003, 2002, and
2001 (dollars in thousands):

<TABLE>
<CAPTION>
                                                          2003          2002       2001
                                                       --------       -------    ---------
<S>                                                    <C>            <C>        <C>
INCOME
         Dividend from Bank                           $  1,200       $ 1,200    $   1,200
         Other income                                       25            62           77
                                                      --------       -------    ---------
                   Total income                          1,225         1,262        1,277
                                                      --------       -------    ---------
EXPENSES
         Other expenses                                     76           114           99
                                                      --------       -------    ---------
                   Total expenses                           76           114           99
NET INCOME BEFORE FEDERAL INCOME TAX AND
         EQUITY IN UNDISTRIBUTED INCOME OF BANK          1,149         1,148        1,178
INCOME TAX BENEFIT                                          17             3           22
                                                      --------       -------    ---------
NET INCOME BEFORE EQUITY IN UNDISTRIBUTED
         INCOME OF BANK                                  1,166         1,151        1,200
EQUITY IN UNDISTRIBUTED INCOME OF BANK                     883           967          586
                                                      --------       -------    ---------
NET INCOME                                            $  2,049       $ 2,118    $   1,786
                                                      ========       =======    =========
</TABLE>

                                       37
<PAGE>

                        Valley Community Bancshares, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (CONTINUED)

Condensed statement of cash flows for the years ended December 31, 2003, 2002,
and 2001 (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                        2003        2002       2001
                                                                                       -------    -------    --------
<S>                                                                                    <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
        Net income                                                                     $ 2,049    $ 2,118    $  1,786
        Adjustments to reconcile net income to net cash from operating activities
               Distributions received in excess of subsidiary bank income                 (883)      (967)       (586)
               Other operating activities                                                  (30)        67          36
                                                                                       -------    -------    --------

               Net cash from operating activities                                        1,136      1,218       1,236
                                                                                       -------    -------    --------

CASH FLOWS FROM INVESTING ACTIVITIES
        Purchase of premises and equipment                                                                         (6)
                                                                                       -------    -------    --------

               Net cash from investing activities                                                                  (6)
                                                                                       -------    -------    --------
CASH FLOWS FROM FINANCING ACTIVITIES
        Sale of common stock                                                                46        109         130
        Repurchase of common stock                                                                   (546)       (506)
        Dividend                                                                          (675)      (675)       (623)
                                                                                       -------    -------    --------

               Net cash from financing activities                                         (629)    (1,112)       (999)

NET INCREASE IN CASH                                                                       507        106         231

CASH, beginning of year                                                                  1,168      1,062         831
                                                                                       -------    -------    --------
CASH, end of year                                                                      $ 1,675    $ 1,168    $  1,062
                                                                                       =======    =======    ========
</TABLE>

NOTE 18 - BUSINESS SEGMENTS

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 year ended
December 31, 2003. Prior periods have been restated to reflect the change in
segment reporting.

NOTE 19 - SUBSEQUENT EVENTS

DIVIDENDS - On January 22, 2004, the Board of Directors of the Company declared
a cash dividend of $0.60 per share and a 5 percent stock dividend. The dividends
were paid during February 2004 to those shareholders of record on December 31,
2003. The cash dividend was approximately $705,000 and the stock dividend was
approximately 58,700 shares.

                                       38
<PAGE>

                        Valley Community Bancshares, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION - UNAUDITED

Quarterly financial information for the years ended December 31, 2003 and 2002
is summarized as follows:

VALLEY COMMUNITY BANCSHARES, INC.
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                      FIRST          SECOND         THIRD         FOURTH      YEAR ENDED
                     2003                            QUARTER        QUARTER        QUARTER       QUARTER      DECEMBER 31,
                     ----                          -----------    ------------    ----------    ----------    ------------
<S>                                                <C>            <C>             <C>           <C>           <C>
STATEMENT OF INCOME DATA
   Interest income                                 $     2,289    $      2,298    $    2,246    $    2,225    $      9,058
   Interest expense                                        379             331           297           261           1,268
                                                   -----------    ------------    ----------    ----------    ------------
       Net interest income                               1,910           1,967         1,949         1,964           7,790
   Provision for loan losses
                                                   -----------    ------------    ----------    ----------    ------------
       Net interest income after provision for
        loan losses                                      1,910           1,967         1,949         1,964           7,790
   Noninterest income                                      339             332           460           338           1,469
   Noninterest expense                                   1,604           1,530         1,531         1,582           6,247
                                                   -----------    ------------    ----------    ----------    ------------
    Income before provision for income tax                 645             769           878           720           3,012
   Provision for income tax                                200             242           288           233             963
                                                   -----------    ------------    ----------    ----------    ------------
    Net income                                     $       445    $        527    $      590    $      487    $      2,049
                                                   ===========    ============    ==========    ==========    ============

PER-SHARE DATA
   Basic earnings per share                        $      0.38    $       0.45    $     0.50    $     0.42    $       1.75
   Diluted earnings per share                      $      0.38    $       0.45    $     0.50    $     0.41    $       1.74
   Weighted average shares outstanding               1,171,546       1,171,968     1,173,200     1,173,530       1,172,561
   Weighted average diluted shares outstanding       1,176,251       1,176,673     1,177,992     1,182,128       1,178,261
</TABLE>

<TABLE>
<CAPTION>
                                                      FIRST         SECOND         THIRD         FOURTH        YEAR ENDED
                     2002                            QUARTER        QUARTER        QUARTER       QUARTER      DECEMBER 31,
                     ----                          -----------    ------------    ----------    ----------    ------------
<S>                                                <C>            <C>             <C>           <C>           <C>
STATEMENT OF INCOME DATA
   Interest income                                 $     2,416    $      2,464    $    2,533    $    2,473    $      9,886
   Interest expense                                        503             477           469           434           1,883
                                                   -----------    ------------    ----------    ----------    ------------
     Net interest income                                 1,913           1,987         2,064         2,039           8,003
   Provision for loan losses                                31              60            76            46             213
                                                   -----------    ------------    ----------    ----------    ------------
     Net interest income after provision for
      loan losses                                        1,882           1,927         1,988         1,993           7,790
   Noninterest income                                      244             215           202           343           1,004
   Noninterest expense                                   1,325           1,395         1,430         1,572           5,722
                                                   -----------    ------------    ----------    ----------    ------------
     Income before provision for income tax                801             747           760           764           3,072
   Provision for income tax                                251             239           257           207             954
                                                   -----------    ------------    ----------    ----------    ------------
     Net income                                    $       550    $        508    $      503    $      557    $      2,118
                                                   ===========    ============    ==========    ==========    ============

PER-SHARE DATA
   Basic earnings per share                        $      0.46    $       0.43    $     0.43    $     0.47    $       1.79
   Diluted earnings per share                      $      0.46    $       0.43    $     0.42    $     0.46    $       1.77
   Weighted average shares outstanding               1,183,088       1,183,088     1,183,116     1,182,068       1,182,840
   Weighted average diluted shares outstanding       1,194,410       1,194,275     1,193,927     1,205,771       1,197,096
</TABLE>

                                       39
<PAGE>

                        Valley Community Bancshares, Inc.
                 MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY
                         AND RELATED STOCKHOLDER MATTERS

MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Nature of Trading Market

At February 13, 2004, the Company had approximately 725 shareholders of record.
The stock is not traded on any exchange or automated quotation system, and there
is no firm that makes a market in the stock. Shareholders who typically purchase
stock for investment have held the stock. Therefore, there is no active trading
market for the stock and no assurance can be given that an active trading market
for the stock will develop. During 2003, there were 39 transfers known to the
Company. These transfers involved a total of 9,872 shares. Sales prices have
been from $25 to $32 per share during 2003 to the Company's best knowledge. The
last trade occurred on December 4, 2003, and was for 100 shares of Common Stock
at a price of $32 per share. This price is not necessarily indicative of the
fair market value of the stock, nor is the Company necessarily aware of all
transfers or the price of those transfers.

On November 21, 2002, the Company adopted a plan to repurchase up to $1,000,000
of its shares. As of December 31, 2002, the Company had repurchased 17,664
shares under this plan at an aggregate price of $441,000 (an average price of
$25 per share).

On October 17, 2001, the Company adopted a plan to repurchase up to $1,000,000
of its shares. As of December 31, 2001, the Company had repurchased 20,239
shares under this plan at an aggregate price of $506,000 (an average price of
$25 per share).

Dividend History

The Company (Puyallup Valley Bank prior to July 1, 1998) has paid, since
Puyallup Valley Bank's inception in 1973, a combination of stock and cash
dividends to its shareholders. Since 1993, Puyallup Valley Bank has paid a stock
dividend of 5 percent per year and a cash dividend of 50(cent) per share per
year. Since July 1, 1998, the Company paid a cash dividend of 38(cent) during
1998, a 12(cent) dividend during 1999, a 50(cent) dividend during 2000, a
55(cent) dividend during 2001, a 60(cent) dividend during 2002, and a 60(cent)
dividend and a 5 percent stock dividend during 2003. On January 21, 2004, the
Board of Directors of the Company declared a cash dividend of 60(cent) per share
and a 5 percent stock dividend, which was paid during February 2004 to those
shareholders of record on December 31, 2003.

Although the Company intends to continue its policy of paying cash dividends on
its Common Stock in amounts not less than those paid in recent periods, the
ability of the Company to continue to pay such dividends will depend primarily
upon the earnings of Valley Bank and its ability to pay dividends to the
Company, as to which there can be no assurance.

The ability of the Bank to pay dividends is governed by various statutes. These
statutes provide that no bank shall declare or pay any dividend in an amount
greater than its retained earnings, without approval from the Director. The
Director shall, in his or her discretion, have the power to require any bank to
suspend the payment of any and all dividends until all requirements that may
have been made by the Director shall have been complied with, and upon such
notice to suspend dividends, no bank shall thereafter declare or pay any
dividends until such notice has been rescinded in writing.

ANNUAL MEETING

The Company will hold its annual meeting of stockholders on April 29, 2004, at
7:00 p.m., in the Georgian Room at the Best Western Park Plaza Hotel, in
Puyallup, Washington.

COPIES OF FORM 10-K

The Company will send the Valley Community Bancshares Annual Report on Form 10-K
(including the financial statements filed with the Securities and Exchange
Commission) without charge to any shareholder who asks for a copy in writing.
Stockholders also can ask for copies of any exhibits to the Form 10-K. Please
send requests to:

Corporate Secretary
Valley Community Bancshares, Inc.
P.O. Box 578, Puyallup, WA 98371

NOTICE OF AVAILABILITY

Financial information about this holding company and its banking subsidiaries is
available to our shareholders, customers, and other interested parties upon
request.

In accordance with federal regulations to facilitate more informed
decision-making by depositors, we will provide an Annual Disclosure Statement
containing financial information for the last two years. This information will
be updated each year-end and be available by March 31. To obtain a copy of the
Annual Disclosure Statement, please write to:

Corporate Secretary
Valley Community Bancshares Inc.
P.O. Box 578, Puyallup, WA 98371

[FDIC LOGO]

This annual report is furnished to shareholders and customers of the Company
pursuant to the requirements of the Federal Deposit Insurance Corporation (FDIC)
to provide an annual disclosure statement. This statement has not been reviewed
or confirmed for accuracy or relevance by the FDIC.

                                       40