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Valley Community Bancshares, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
   FORM 10-K
 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 000-30447  VALLEY COMMUNITY BANCSHARES, INC.
  Washington
    
    91-1913479(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)1307 East Main, Puyallup, Washington
    
    98372(Address of principal executive offices)
    
    (Zip Code)
 (253) 848-2316
(Registrants telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $1.00 per share Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [   ] No [X] There is no active trading market for the Registrants voting securities. The
Registrants voting common stock is not listed on any exchange or quoted on
Nasdaq. The aggregate market value of the voting common stock held by
non-affiliates of the Registrant as of February 18, 2004, was $31,808,704
(based on the last sale at $32 per share on February 18, 2004). Number of shares of common stock outstanding as of February 18, 2004:
    
    
    
    
    1,237,080
 DOCUMENTS INCORPORATED BY REFERENCE The information required by Part II of this Report, to the extent not set forth
herein, is incorporated herein by reference from registrants 2003 Annual
Report distributed to shareholders, and attached as an exhibit under Item 15. The information required by Part III of this Report, to the extent not set
forth herein, is incorporated herein by reference from the registrants
definitive proxy statement relating to the annual meeting of stockholders to be
held in 2004, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.




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Valley Community Bancshares, Inc. CROSS REFERENCE TABLE PAGEANNUALREPORT
    
    FORM(1)
    
    10-KPART
IItem 1.
    
    BusinessForward Looking Statements
    
    
    
    
    
    
    2Supervision and Regulation
    
    
    
    
    
    
    5Item 2.
    
    Properties
    
    
    29
    
    
    
    8Item 3.
    
    Legal Proceedings
    
    
    33
    
    
    
    8Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    
    
    
    
    8PART IIItem 5.
    
    Market for Registrants Common Equity and RelatedStockholder Matters
    
    
    40
    
    
    
    8Item 6.
    
    Selected Financial Data
    
    
    3
    
    
    
    8Item 7.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operation
    
    
    4
    
    
    
    8Item 7a.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    16
    
    
    
    9Item 8.
    
    Financial Statements and Supplementary DataItem 9.
    
    Changes and Disagreements with Accountants on Accountingand Financial Disclosure
    
    
    18
    
    
    
    9Item 9A.
    
    Controls and Procedures
    
    
    
    
    
    
    9PART IIIItem 10.
    
    Directors and
Executive Officers of the Registrant
    
    
    
    (2)
    
    
    10Item 11.
    
    Executive
Compensation
    
    
    
    (2)
    
    
    11Item 12.
    
    Security Ownership of
Certain Beneficial Owners andManagement and Related Stockholder Matters
    
    
    
    (2)
    
    
    11Item 13.
    
    Certain Relationships
and Related Transactions
    
    
    
    (2)
    
    
    11Item 14.
    
    Principal Accounting Fees and Services
    
    
    
    (2)
    
    
    11PART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports onForm 8-K
    
    
    
    
    
    
    12
  (1)
    
    Refers to page numbers of the 2003 Annual Report attached as an Exhibit
under Item 15.(2)
    
    The information required by these Items is contained in the following
headings in the registrants definitive proxy statement relating to the
annual meeting of stockholders to be held in 2004:  Item 10: Election of Directors & Compliance withSection 16(a)of the Exchange Act
Item 11: Executive Compensation
Item 12: Security Ownership of Certain Beneficial Owners and Management
Item 13: Interest of Management in Certain Transactions
Item 14: Independent AuditorsEXHIBIT 13EXHIBIT 14EXHIBIT 21EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32 1




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Valley Community Bancshares, Inc. FORWARD-LOOKING STATEMENTS Except for historical financial information contained herein, certain matters
discussed in this Form 10-K of Valley Community Bancshares, Inc. constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. 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, loan delinquency rates, competitive products and pricing, 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. Part I Item 1. Business General Valley Community Bancshares, Inc. (the Company) is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended. The
administrative offices of the Company are located at 1307 East Main Avenue,
Puyallup, Washington 98372, and its telephone number is (253) 848-2316. 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 discussion. The principal sources of the Companys revenue are (i) interest and fees on
loans; (ii) deposit service charges; (iii) merchant credit and debit card
processing fees; (iv) interest on federal funds sold and deposits in the Bank
(funds loaned on a short-term basis to other banks); (v) interest on
investments (principally government securities); and (vi) origination fees on
mortgage loans brokered. The Banks lending activities consist 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, which commenced
operations as Puyallup Valley Bank in October 1973. In January 1999 the
Company opened Valley Bank, a state chartered FDIC insured commercial bank
subsidiary located in Auburn, Washington. On January 17, 2003, in an effort to
consolidate operations, Puyallup Valley Bank and Valley Bank merged and renamed
the resulting institution Valley Bank. The 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 an initial offering price
of $20 per share (a price of $0.92 per share as adjusted for stock dividends
and stock splits). The Bank provides full-service banking to businesses and residents within the
Puyallup, Auburn and Kent communities and its surrounding areas. The Bank
places particular emphasis on serving the small to medium-sized business
segment of the market by making available a line of banking products tailored
to their needs, with those services delivered by experienced professionals
concerned with building long-term relationships. The Bank conducts business out
of eight full-service offices and one drive-up facility. On May 16, 2002, the Bank purchased various tangible and intangible assets of
Puget Sound Mortgage Brokers, Inc., a Washington corporation located in
Puyallup Washington. The purchase price was not material to the 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 the sole wholly owned subsidiary of the Company. Available Information The Company has plans to make available a website at www.vbwa.com beginning the
third quarter of 2004. At that time the Company will make available, free of
charge, on its website its annual report on the Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after such reports are
electronically filed with, or furnished to, the Securities and Exchange
Commission (SEC). The Companys reports filed with, or furnished to, the SEC
are currently available at the SECs website at www.sec.gov. Business Segment Information Beginning January 1999 and through December 2002, the Companys operations were
separated into two bank subsidiaries, Puyallup Valley Bank and Valley Bank.
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,
and converting separated banking systems into a single operation. As a result
of these system and organizational changes, financial information is only
provided for one reportable segment for the year ended December 31, 2003. Market Area The Companys principal market area is located in the 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. 2




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Valley Community Bancshares, Inc. Eastern Pierce County, where Valley 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 includes 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. South King County, where Valley 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 personal
attention required by business people 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 Bank 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 its 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 its obligation to meet the credit needs of the communities which
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 its 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. The
types of loans within these categories are as follows: Commercial Loans

Commercial loans are typically made to sole proprietorships, partnerships,
corporations, and other business entities, municipalities, and individuals,
where the loan is to be used primarily for business purposes. The types of
loans the Bank offers include:  
    
    Small Business Administration financing programs
    
    operating and working capital loans
    
    loans to finance capital purchases
    
    commercial real estate loans
    
    business lines of credit
    
    term loans
    
    loans to professionals
    
    letters of credit Consumer Loans Consumer loans are typically available to finance consumer purchases, such as
automobiles, household furnishings, boats, and education. Loans are available
on both a secured and an unsecured basis. The following types of consumer loans
are available:  
    
    automobiles and trucks
    
    boats and recreational vehicles
    
    personal loans and lines of credit
    
    home equity lines of credit
    
    home improvement and rehabilitation loans
    
    credit card services
    
    consumer real estate loans Other types of credit programs, such as loans to nonprofit organizations,
public entities, for community development, and other governmental offered
programs, also are available. The Bank offers traditional banking services, such as safe deposit boxes, wire
transfers, direct deposit of payroll and social security checks, automated
teller machines, and offers debit cards to checking account customers. In
addition, the Bank, through Puget Sound Mortgage Brokers, offers single-family
residential loans from mortgage brokers. The Bank also provides other non-bank
products such as mutual funds, annuities, and insurance. Employees At December 31, 2003, the Bank had 57 full-time and 20 part-time employees. The
Company does not have any employees. Management considers its relations with
employees to be satisfactory. 3




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Valley Community Bancshares, Inc. Competition The geographic market area served by the Bank is highly competitive with
respect to both loans and deposits. The Bank competes principally with
commercial banks, savings and loan associations, credit unions, mortgage
companies, and other financial institutions. The major commercial bank
competitors are the regional banks (Columbia State Bank and Frontier Bank) and
national banks (Key Bank National Association, Bank of America National Trust
and Savings Association, U.S. Bank National Association and Wells Fargo Bank)
that have a branch or branches within the Banks primary trade areas.
Washington Mutual Savings Bank is another formidable competitor within the
Banks primary trade area. Among the advantages such larger banks have are
their ability to finance wide-ranging advertising campaigns and to allocate
their investment assets to geographic regions of higher yield and demand. Such
banks offer certain services which are not offered directly by the Bank (but
are often offered indirectly through correspondent institutions); and, by
virtue of their greater total capitalization (legal lending limits to an
individual customer are based upon a percentage of a banks total capital),
such banks have substantially higher lending limits than the Bank. The Bank also competes with the financial markets for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of a commercial bank to attract and hold deposits. Further,
commercial banks compete for available funds with money market instruments and
similar investment vehicles offered by institutions such as brokerage firms,
credit card companies, and retailers (e.g., Sears, Roebuck & Co.). In periods
of high interest rates, such money market funds have provided substantial
competition to the Bank for deposits, and it is anticipated that they may
continue to do so in the future. The Company believes that the principal competitive factors affecting the
Banks markets include interest rates paid on deposits and charged on loans,
the range of banking products available and customer service and support. The
Company believes the Banks products currently compete favorably with respect
to these factors; however, there can be no assurance the Bank can maintain its
competitive position against current and potential competition, especially
those with significantly greater financial resources. In order to compete with the other financial institutions in their primary
trade areas, the Bank uses, to the fullest extent possible, the flexibility,
accorded by its independent status. This includes an emphasis on specialized
services, local promotional activity, convenient offices, and personal contacts
by the Bank officers, directors and employees. The Bank also provides special
services and programs for individuals in their primary trade areas who are
employed in the business and professional fields. The Company anticipates bank competition will continue to change dramatically
over the next several years as the major regional and national banks continue
to consolidate. These larger financial institutions will continue the trend of
consolidating their branch systems and providing incentives to their customers
to use electronic banking instead of visiting branches. It is anticipated that
credit unions, because of their tax benefits, will also continue to show
growth. Changes in technology present formidable competitive challenges to the Bank.
Large banking institutions typically have the ability to devote significant
resources to developing and maintaining technology-based services such as
on-line banking and other banking products over the internet, including deposit
services and loans. Some new banking competitors offer all of their services
on-line. The Bank believes its personal, branch based approach to banking is
currently a competitive advantage over the technology based services offered by
competitors. However, customers preferences may change and the rapid growth of
on-line banking could render the Banks personal, branch based approach
obsolete. The Bank is planning to eventually offer on-line banking services to
customers in order to partially offset this risk, although such service will be
obtained through a third party vendor and therefore will be subject to the
risks inherent in such third party contracts. In addition, the Bank currently
offers 24 hour telephone banking to its customers as added protection. There
can be no assurances that these efforts will be successful in preventing the
loss of customers to competitors. Distribution of Assets, Liabilities and Stockholders Equity; Interest Rates and Interest Differential The section Average Balances and an Analysis of Average Rates Earned and Paid
and Analysis of Changes in Interest Income and Expensecontained in the
Management Discussion and Analysis of Financial Condition and Results of
Operation section of the 2003 Annual Report, which is listed as an exhibit
under Item 15, is incorporated herein by reference. Investment Portfolio The section Investment Portfolio contained in the Management Discussion and
Analysis of Financial Condition and Results of Operation section and the
section Note 2  Investment Securities contained in Notes to the Consolidated
Financial Statements in the 2003 Annual Report, which are both listed as an
exhibit under Item 15, is incorporated herein by reference. Loan Portfolio The sections Types of Loans and Maturities and Sensitivities of Loans to
Changes in Interest Rates contained in the Management Discussion and Analysis
of Financial Condition and Results of Operation and the section Note 3 
Loans contained in Notes to the Consolidated Financial Statements in the 2003
Annual Report, which are both listed as an exhibit under Item 15, is
incorporated herein by reference. Risk Elements The
section Non-Performing Assets, Potential Problem Loans, and Loan
Concentrationscontained in the Management Discussion and Analysis of
Financial Condition and Results of Operation section of the 2003 Annual Report,
which is listed as an exhibit under Item 15, is incorporated herein by
reference. The Company had no foreign loans outstanding during the years ended December
31, 2003, 2002, and 2001. Summary of Loan Loss Experience The sections Summary of Loan Loss Experience, Breakdown of Allowance for
Loans by Category, and Analysis of the Allowance for Loan Losses contained
in the Management Discussion and Analysis of Financial Condition and Results of
Operation section and the section Note 4  Allowance for Loan Losses
contained in Notes to the Consolidated Financial Statements in the 2003 Annual
Report, which are both listed as an exhibit under Item 15, is incorporated
herein by reference. Return on Equity and Assets The section Performance Ratios contained in the Management Discussion and
Analysis of Financial Condition and Results of Operation in the 2003 Annual
Report, which is listed as an exhibit under Item 15, is incorporated herein by
reference. Deposits The section Deposits contained in the Management Discussion and Analysis of
Financial Condition and Results of Operation section and the section Note 6 
Deposits contained in Notes to the Consolidated Financial Statements in the
2003 Annual Report, which are both listed as an exhibit under Item 15, is
incorporated herein by reference. 4




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Valley Community Bancshares, Inc. Short-Term Borrowings The section Note 7-Other Borrowed Fundsand Note 8-Credit Arrangements
contained in Notes to the Consolidated Financial Statements in the 2003 Annual
Report, which is listed as an exhibit under Item 15, is incorporated herein by
reference. SUPERVISION AND REGULATION The following generally refers to certain statutes and regulations affecting
the banking industry. These references provide brief summaries and therefore
are not complete and are qualified by the statutes and regulations referenced.
In addition, due to the numerous statutes and regulations that apply to and
regulate the operation of the banking industry, many are not referenced below. The Company and the Bank are subject to extensive federal and Washington State
legislation, regulation, and supervision. These laws and regulations are
primarily intended to protect depositors and the FDIC rather than shareholders
of the Company. The laws and regulations affecting banks and bank holding
companies have changed significantly over recent years, and there is reason to
expect that similar changes will continue in the future. Any change in
applicable laws, regulations, or regulatory policies may have a material effect
on the business, operations, and prospects of the Company. The Company is
unable to predict the nature or the extent of the effects on its business and
earnings that any fiscal or monetary policies or new federal or state
legislation may have in the future. The Company The Company is a bank holding company by virtue of its ownership of the Bank,
and is registered as such with the Board of Governors of the Federal Reserve
(the FRB). The Company is subject to regulation under the Bank Holding
Company Act of 1956, as amended (the BHCA), which subjects the Company and
the Bank to supervision and examination by the FRB. Under the BHCA, the Company
files with the FRB annual reports of its operations and such additional
information as the Federal Reserve may require. The FRB may examine a bank
holding company and any of its subsidiaries and charge the company for the cost
of such an examination. Source of Strength to the Bank.The FRB takes the position that a bank holding
company is required to serve as a source of financial and managerial strength
to its subsidiary bank and may not conduct its operations in an unsafe or
unsound manner. In addition, it is the FRBs position that in serving as a
source of strength to its subsidiary bank, bank holding companies should use
available resources to provide adequate capital funds to its subsidiary bank
during periods of financial stress or adversity and should maintain the
financial flexibility and capital raising capacity to obtain additional
resources for assisting its subsidiary bank. A bank holding companys failure
to meet its obligations to serve as a source of strength to its subsidiary bank
will generally be considered by the FRB to be an unsafe and unsound banking
practice or a violation of the FRBs regulations or both. Federal Reserve Approval.Bank holding companies must obtain FRB approval
before they: (1) acquire direct or indirect ownership or control of any voting
shares of any bank if, after such acquisition, they would own or control,
directly or indirectly, more than 5 percent of the voting shares of such bank;
(2) merge or consolidate with another bank holding company; and (3) acquire
substantially all of the assets of any additional bank. Control of Nonbank.With certain exceptions, the BHCA also prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting shares in any company other than a bank or a bank holding company unless
the FRB finds the companys business to be incidental to the business of
banking. When making this determination, the FRB in part considers whether
allowing a bank holding company to engage in those activities would offer
advantages to the public that would outweigh possible adverse effects. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (Economic
Growth Act) amended the BHCA to eliminate the requirement that a bank holding
company seek FRB approval before engaging de novo in permissible nonbanking
activities, if the holding company is well capitalized and meets certain other
criteria specified in the same statute. A bank holding company meeting the
specifications is now required only to notify the FRB within ten business days
after the activity has begun. Control Transactions.The Change in Bank Control Act of 1978, as amended,
requires a person or group of persons acquiring control of a bank holding
company to provide the FRB with at least 60 days prior written notice of the
proposed acquisition. Following receipt of this notice, the FRB has 60 days to
issue a notice disapproving the proposed acquisition, but the FRB may extend
this time period for up to another 30 days. An acquisition may be completed
before the disapproval period expires if the FRB issues written notice of its
intent not to disapprove the action. Under a rebuttable presumption established
by the FRB, the acquisition of 10 percent or more of a class of voting stock of
a bank holding company with a class of securities registered under Section 12
of the Securities Exchange Act of 1934, as amended (Exchange Act) would,
under the circumstances set forth in the presumption, constitute the
acquisition of control. In addition, any company would be required to obtain
the approval of the FRB under the BHCA before acquiring 25 percent (5 percent
if the company is a bank holding company) or more of the outstanding shares
of the Company, or otherwise obtain control over the Company. Affiliate Transactions.The Company and the Bank are deemed affiliates within
the meaning of the Federal Reserve Act, and transactions between affiliates are
subject to certain restrictions. Generally, Sections 23A and 23B of the Federal
Reserve Act: (1) limit the extent to which the financial institution or its
subsidiaries may engage in covered transactions with an affiliate, as
defined, to an amount equal to 10 percent of such institutions capital and
surplus and an aggregate limit on all such transactions with all affiliates to
an amount equal to 20 percent of such capital and surplus, and (2) require all
transactions with an affiliate, whether or not covered transactions, to be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to nonaffiliates. The term covered transaction
includes the making of loans, purchase of assets, issuance of a guarantee, and
other similar type of transactions. Management Regulation.Federal law: (1) sets forth the circumstances under
which officers or directors of a financial institution may be removed by the
institutions federal supervisory agency; (2) places restraints on lending by
an institution to its executive officers, directors, principal stockholders,
and their related interests; and (3) prohibits management personnel from
serving as a director or in other management positions of another financial
institution whose assets exceed a specified amount or which has an office
within a specified geographic area. Tie-in Limitations.The Company and the Bank are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale or
lease of property, or furnishing of services. For example, with certain
exceptions, neither the Company nor the Bank may condition an extension of
credit on either (1) a requirement that the customer obtain additional services
provided by it or (2) an agreement by the customer to refrain from obtaining
other services from a competitor. Effective April 1997, the Federal Reserve has
adopted significant amendments to its anti-tying rules that: (1) remove Federal
Reserveimposed anti-tying restrictions on bank holding companies and their
non-bank subsidiaries; (2) create exemptions from the statutory restriction on
bank tying arrangements to allow banks greater flexibility to package products
with their affiliates; and (3) establish a safe harbor from the tying
restrictions for certain foreign transactions. 5




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Valley Community Bancshares, Inc. Securities Registration and Reporting.The Companys common stock is registered
with the Securities and Exchange Commission (SEC) under the Securities
Exchange Act of 1934 and thus the Company is subject to the periodic reporting
and proxy solicitation requirements and the insider trading restrictions of
that Act. The periodic reports, proxy statements, and other information filed
by the Company under that Act can be inspected and copied at or obtained from
the Washington D.C. office of the SEC or via the Internet at www.sec.gov. In
addition, securities issued by the Company are subject to the registration
requirements of the Securities Act of 1933 and applicable state securities laws
unless exemptions are available. Valley Bank Applicable federal and state statutes and regulations governing a banks
operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FDIC has authority to prohibit any bank
under its supervision from engaging in what the FDIC considers to be an unsafe
and unsound practice in conducting business. The Bank is a state-chartered commercial bank subject to extensive regulation
and supervision by the Washington Department of Financial Institutions Division
of Banks (DFI). The Bank is also subject to regulation and examination by the
FDIC, which insures their respective deposits to the maximum extent permitted
by law. The federal laws that apply to the Bank regulate, among other things,
the scope of its business, its investments, its reserves against deposits, the
timing of the availability of deposited funds, and the nature and amount of and
collateral for loans. The laws and regulations governing the Bank generally
have been promulgated to protect depositors and not to protect stockholders of
such institutions or their holding companies. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required federal banking regulators to adopt regulations or guidelines in a
number of areas to ensure bank safety and soundness, including: internal
controls; credit underwriting; asset growth; management compensation; ratios of
classified assets to capital; and earnings. FDICIA also contains provisions
which restrict the activities of state-chartered insured banks; amend various
consumer banking laws; limit the ability of undercapitalized banks to borrow
from the Federal Reserves discount window; and require regulators to perform
periodic on-site bank examinations and set standards for real estate lending.
FDICIA and regulations adopted by the FDIC impose additional requirements for
annual independent audits and reporting when a bank begins a fiscal year with
assets of $500 million or more. Such banks, or their holding companies, are
also required to establish audit committees consisting of directors who are
independent of management. Loans to One Borrower.The Bank is subject to limitations on the aggregate
amount of loans that it can make to any one borrower, including related
entities. Applicable regulations generally limit loans to one borrower to 20
percent of unimpaired capital. The Bank is in compliance with applicable
loans-to-one-borrower requirements. FDIC Insurance.Generally, the FDIC, for up to a maximum amount of $100,000,
insures customer deposit accounts in banks. The FDIC has adopted a risk-based
insurance assessment system under which depository institutions contribute
funds to the Bank Insurance Fund (BIF) and/or the Savings Association
Insurance Fund (SAIF), as applicable, based on their risk classification. In September of 1996, the Deposit Insurance Funds Act of 1996 (Funds Act) was
enacted. The Funds Act provided, among other things, for the recapitalization
of the SAIF through a special assessment on all depository institutions that
hold SAIF insured deposits. The one-time assessment was designed to place the
SAIF at its 1.25 reserve ratio goal. The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law. The
insurance may be terminated permanently, if the institution has no tangible
capital. If deposit insurance is terminated, the accounts at the institution at
the time of the termination, less subsequent withdrawals, will continue to be
insured for a period of six months to two years, as determined by the FDIC. Capital Adequacy Requirements.The Federal Reserve and the FDIC (collectively,
the Agencies) have adopted risk-based capital guidelines for banks and bank
holding companies that are designed to make regulatory capital requirements
more sensitive to differences in risk profiles among banks and bank holding
companies and account for off-balance-sheet items. The guidelines are minimums,
and the federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios in excess of the
minimums. Failure to achieve and maintain adequate capital levels may give rise
to supervisory action through the issuance of a capital directive to ensure the
maintenance of required capital levels. The current guidelines require all federally regulated banks to maintain a
minimum risk-based total capital ratio equal to 8 percent, of which at least 4
percent must be Tier 1 capital. Tier 1 capital includes common shareholders
equity, qualifying perpetual preferred stock, and minority interests in equity
accounts of consolidated subsidiaries, but excludes goodwill and most other
intangibles and the allowance for loan and lease losses. Tier 2 capital
includes the excess of any preferred stock not included in Tier 1 capital,
mandatory convertible securities, hybrid capital instruments, subordinated debt
and intermediate term-preferred stock, 20 percent of unrealized gain of equity
securities, and general reserves for loan and lease losses up to 1.25 percent
of risk-weighted assets. The Bank has not received any notice indicating that
it will be subject to higher capital requirements. Under these guidelines, bank assets are given risk-weights of 0 percent, 20
percent, 50 percent, or 100 percent. Most loans are assigned to the 100 percent
risk category, except for first mortgage loans fully secured by residential
property and, under certain circumstances, residential construction loans (both
carry a 50 percent rating). Most investment securities are assigned to the 20
percent category, except for municipal or state revenue bonds (which have a 50
percent rating) and direct obligations of or obligations guaranteed by the
United States Treasury or United States Government Agencies (which have a 0
percent rating). The Agencies have also implemented a leverage ratio, which is equal to Tier 1
capital as a percentage of average total assets less intangibles, to be used as
a supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to limit the maximum degree to which a bank may leverage its
equity capital base. The minimum required leverage ratio for top-rated
institutions is 3 percent, but most institutions are required to maintain an
additional cushion of at least 100 to 200 basis points. Any institution
operating at or near the 3 percent level is expected to be a strong banking
organization without any supervisory, financial, or operational weaknesses or
deficiencies. Any institutions experiencing or anticipating significant growth
would be expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels. 6




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Valley Community Bancshares, Inc. Prompt Corrective Action.Regulations adopted by the Agencies as required by
FDICIA impose even more stringent capital requirements. The FDIC and other
Agencies must take certain prompt corrective action when a bank fails to meet
capital requirements. The regulations establish and define five capital levels:
(1) well-capitalized, (2) adequately capitalized, (3) undercapitalized,
(4) significantly undercapitalized and (5) critically undercapitalized. To
qualify as well-capitalized, an institution must maintain at least 10 percent
total risk-based capital, 6 percent Tier 1 risk-based capital, and a leverage
ratio of no less than 5 percent. Increasingly severe restrictions are imposed
on the payment of dividends and management fees, asset growth and other aspects
of the operations of institutions that fall below the category of being
adequately capitalized (which requires at least 8 percent total risk-based
capital, 4 percent Tier 1 risk-based capital, and a leverage ratio of at least
4 percent). Undercapitalized institutions are required to develop and implement
capital plans acceptable to the appropriate federal regulatory agency. Such
plans must require that any company that controls the undercapitalized
institution must provide certain guarantees that the institution will comply
with the plan until it is adequately capitalized. As of the date of this Form
10-K, neither the Company nor their respective subsidiaries were subject to any
regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure. Restrictions on Dividends.Dividends paid to the Company by Valley Bank are the
material source of the Companys cash flow. Various federal and state statutory
provisions limit the amount of dividends banking subsidiaries are permitted to
pay to their holding companies without regulatory approval. FRB policy further
limits the circumstances under which bank holding companies may declare
dividends. For example, a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality, and overall financial
condition. If, in the opinion of the applicable federal banking agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
institution, could include the payment of dividends), the agency may require,
after notice and hearing, that such institution cease and desist from such
practice. In addition, the FRB and the FDIC have issued policy statements,
which provide that insured banks and bank holding companies should generally
pay dividends only out of current operating earnings. Under Washington law, the Bank may not declare or pay a cash dividend on its
capital stock if it would cause its net worth to be reduced below (1) the
amounts required for liquidation accounts or (2) the net worth requirements, if
any, imposed by the Director of DFI. Dividends on the Banks capital stock may
not be paid in an aggregate amount greater than the aggregate retained earnings
of the Bank, without the approval of DFI. Federal Reserve System.The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily checking
accounts) and non-personal time deposits. Currently, reserves of 3 percent must
be maintained against total transaction accounts of $49.8 million or less
(after a $4.2 million exemption), and an initial reserve of 10 percent (subject
to adjustment by the FRB to a level between 8 percent and 14 percent) must be
maintained against that portion of total transaction accounts in excess of such
amount. The Bank is in compliance with applicable requirements. The balances maintained to meet the reserve requirements imposed by the FRB may
be used to satisfy applicable liquidity requirements. Because required reserves
must be maintained in the form of vault cash or a non-interest-bearing account
at a Federal Reserve Bank, the effect of this reserve requirement is to reduce
the earning assets of the Company and its banking subsidiary. Interstate Banking and Branching:The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (Interstate Act) generally permits
nationwide interstate banking and branching by relaxing federal law
restrictions on interstate banking and providing general authorization for
interstate branching. Subject to certain state laws, such as age and
contingency laws, the Interstate Act allows adequately capitalized and
adequately managed bank holding companies to purchase the assets of
out-of-state banks. Additionally, the Interstate Act permits interstate bank
mergers, subject to these state laws, unless the home state of either merging
bank has opted-out of these provisions by enacting opt-out legislation. The
Interstate Act does allow states to impose certain conditions on interstate
bank mergers within their borders; for example, states may require that the
in-state merging bank exist for up to five years before the interstate merger.
Under the Interstate Act, states may also opt-in to de novo branching,
allowing out-of-state Bank to establish de novo branches within the state.

In 1996, Washington enacted opting-in legislation authorizing interstate
mergers pursuant to the Interstate Act. Accordingly, an out-of-state bank
holding company may acquire more than 5 percent of the voting shares of a
Washington-based bank, regardless of reciprocity, provided such bank or its
predecessor has been doing business for at least five years prior to the
acquisition. Further, an out-of-state bank may engage in banking in Washington
if the requirements of Washingtons interstate banking statute are met, and the
bank either (1) was lawfully engaged in banking in Washington on June 6, 1996,
(2) resulted from an interstate combination pursuant to Washington law, (3)
resulted from a relocation of a head office of a state bank or a main office of
a national bank pursuant to federal law, or (4) resulted from the establishment
of a savings bank branch in compliance with applicable Washington law.
Additionally, the Director of the DFI may approve interstate combinations if
the basis for such approval does not discriminate against out-of-state banks,
out-of-state holding companies, or their subsidiaries. The Agencies adopted
regulations under which banks are prohibited from using their interstate
branches primarily for deposit production, and have implemented a
loan-to-deposit ratio screen to ensure compliance with this prohibition. Community Development. Further effects on the Company and the Bank result from
the Riegle Community Development and Regulatory Improvement Act of 1994 (the
Community Development Act). The Community Development Act (i) establishes and
funds institutions that are focused on investing in economically distressed
areas, and (ii) streamlines the procedures for certain transactions by
financial institutions with federal banking agencies. Among other things, the Community Development Act requires the federal banking
agencies to (i) consider the burdens that are imposed on financial institutions
when new regulations are issued or new compliance burdens are created, and (ii)
coordinate their examinations of financial institutions when more than one
agency is involved. The Community Development Act also streamlines the
procedures for forming certain one-bank holding companies and engaging in
authorized non-banking activities. Regulatory Developments Congress has enacted significant federal banking legislation in recent years.
In 1999, the Gramm-Leach-Bliley Act was enacted, which: (1) repealed historical
restrictions on preventing banks from affiliating with securities firms, (2)
broadens the activities that may be conducted by national banks and banking
subsidiaries of holding companies, and (3) provides an enhanced framework for
protecting the privacy of consumers information. In addition, bank holding
companies may be owned, controlled, or acquired by any company engaged in
financially related activities, as long as such company meets regulatory
requirements. 7




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Valley Community Bancshares, Inc. Disclosure Controls and Procedures The Sarbanes-Oxley Act of 2002 and related rulemaking by the SEC, which effect
sweeping corporate disclosure and financial reporting reform, generally require
public companies to focus on their disclosure controls and procedures. As a
result, public companies such as the Company now must have disclosure controls
and procedures in place and make certain disclosures about them in their
periodic SEC reports (i.e., Forms 10-K and 10-Q) and their Chief Executive and
Chief Financial Officers must certify in these filings that they are
responsible for developing and evaluating disclosure controls and procedures
and disclose the results of an evaluation conducted by them within the 90-day
period preceding the filing of the relevant report, among other things. The
Company is monitoring the status of other related ongoing rulemaking by the SEC
and other regulatory entities. Currently, management believes that the Company
is in compliance with the rulemaking promulgated to date. However, management
believes that the Company has incurred and will continue to incur material
costs to comply with the Sarbanes-Oxley Act of 2002, both in terms of internal
expenditures and professional fees (particularly audit fees). Regulatory Enforcement Authority The enforcement powers available to federal banking regulators are substantial
and include, among other things, the ability to assess civil monetary
penalties, to issue cease-and-desist or removal orders, and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions, or inactions, may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities. Applicable
law also requires public disclosure of final enforcement actions by the federal
banking agencies. NATIONAL MONETARY POLICIES In addition to being affected by general economic conditions, the earnings and
growth of the Bank are affected by the policies of regulatory authorities,
including the Board of Governors of the Federal Reserve System (the FRB). An
important function of the FRB is to regulate the money supply, credit
conditions, and interest rates. Among the instruments used to implement these
objectives are open market operations in U.S. Government securities, changes in
reserve requirements against bank deposits, and the Federal Reserve Discount
Rate, which is the rate charged to member banks to borrow from the Federal
Reserve Bank. These instruments are used in varying combinations to influence
overall growth and distribution of credit, bank loans, investments, and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. The monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to do so in the
future. Also important in terms of effect on banks are controls on interest
rates paid by banks on deposits and types of deposits that may be offered by
banks. The Depository Institutions Deregulation Committee, created by Congress
in 1980, phased out ceilings on the rate of interest that may be paid on
deposits by commercial banks and savings and loan associations, with the result
that the differentials between the maximum rates banks and savings and loans
can pay on deposit accounts have been eliminated. The effect of deregulation of
deposit interest rates has been to increase banks cost of funds and to make
banks more sensitive to fluctuations in market rates. Item 2. Properties The section Note 5  Premises and Equipment contained in Notes to the
Consolidated Financial Statements in the 2003 Annual Report, which is listed as
an exhibit under Item 15, and the related information contained in Item 1,
reported under the caption Valley Bank is incorporated herein by reference. Item 3. Legal Proceedings The section Note 11  Commitments and Contingent Liabilities (c) Legal
Proceedings contained in Notes to the Consolidated Financial Statements in the
2003 Annual Report, which is listed as an exhibit under Item 15, is
incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders None Part II Item 5. Market for Registrants Common Equity and Related Stockholder Matters The section Market Price of and Dividends on Common Equity and Related
Stockholder Matters in the 2003 Annual Report, which is listed as an exhibit
under Item 15, is incorporated herein by reference. Item 6. Selected Financial Data The section Selected Financial Data in the 2003 Annual Report, which is
listed as an exhibit under Item 15, is incorporated herein by reference. Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation The section Managements Discussion and Analysis of Financial Condition and
Results of Operationin the 2003 Annual Report, which is listed as an exhibit
under Item 15, is incorporated herein by reference. 8




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Valley Community Bancshares, Inc. Item 7A. Quantitative and Qualitative Disclosure about Market Risk The section Quantitative and Qualitative Disclosure about Market Risk
contained in Management Discussion and Analysis of Financial Condition and
Results of Operation in the 2003 Annual Report, which is listed as an exhibit
under Item 15, is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements contained in the 2003 Annual Report,
which is listed as an exhibit under Item 15, is incorporated herein by
reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Companys disclosure controls and procedures (as defined in Section 13(a)-14(c)
of the Securities Exchange Act of 1934 (the Act)) was carried out under the
supervision and with the participation of the Companys Chief Executive
Officer, Chief Financial Officer and several other members of the Companys
senior management as of December 31, 2003. The Companys Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures as currently in effect are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Act is (i) accumulated and communicated to the Companys
management (including the Chief Executive Officer and Chief Financial Officer)
in a timely manner, and (ii) recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. (b) Changes in Internal Controls: In the fourth quarter ended December 31,
2003, the Company did not make any significant changes in, nor take any
corrective actions regarding, its internal controls or other factors that has
materially affected, or is reasonably likely to materially affect these
controls. Disclosure Controls and Internal Controls.Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to
be disclosed in our reports filed under the Securities Exchange Act of 1934
(Exchange Act), such as this Annual Report, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commissions (SEC) rules and forms. Disclosure Controls are also designed with
the objective of ensuring that such information is accumulated and communicated
to our management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Internal Controls are procedures
which are designed with the objective of providing reasonable assurance that
(1) our transactions are properly authorized; (2) our assets are safeguarded
against unauthorized or improper use; and (3) our transactions are properly
recorded and reported, all to permit the preparation of our financial
statements in conformity with generally accepted accounting principles. Limitations on the Effectiveness of Controls.The Companys management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected. 9




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Valley Community Bancshares, Inc. Part III Item 10. Directors and Executive Officers of the Registrant For information about Valley Community Bancshares directors and executive
officers, see the discussion under Election of Directors and Compliance With
Section 16(a) of the Exchange Act, in the definitive Proxy Statement for
Valley Community Bancshares Annual Meeting of Shareholders to be held on April
29, 2004, filed with the Securities and Exchange Commission (the Proxy
Statement), incorporated herein by reference. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information about the executive officers
of the Company. Has Served as ExecutiveofficerName
    
    Age
    
    Position with the Company
    
    of the Company SinceDavid H. Brown
    
    
    58
    
    
    Director, President and CEO
    
    
    1989Joseph E. Riordan
    
    
    50
    
    
    Executive Vice President and CFO
    
    
    1997Roy W. Thompson
    
    
    61
    
    
    Executive Vice President and Credit Administrator
    
    
    1989Richard D. Pickett
    
    
    54
    
    
    Executive Vice President and Commercial Loan Officer
    
    
    1999
 The principal occupation or business and experience of the Executive Officers
of the Company for the past five years are set forth below. All officers are
elected by the Board of Directors and serve at the pleasure of the Board for an
unspecified term. DAVID H. BROWNhas been the President and Chief Executive Officer of the
Company since its formation and the President and Chief Executive Officer of
Valley Bank since 1989. Prior to joining Valley Bank, Mr. Brown was an
executive officer with Seafirst Bank for twenty years, beginning as a
Management Trainee and concluding his tenure at Seafirst as Manager of
Southwest Corporate Banking. Mr. Brown is a graduate of Pacific Coast Banking
School and holds a BA from Washington State University. JOSEPH E. RIORDANis Executive Vice President and Chief Financial Officer of
the Company and Valley Bank. Mr. Riordan was Senior Vice President and Chief
Financial Officer of the Company since its formation and Senior Vice President
and Chief Financial Officer of Valley Bank since 1997. In January 2001, Mr.
Riordan was named Executive Vice President of the Company and Valley Bank.
Prior to joining the Company and Valley Bank, Mr. Riordan was Vice President of
Finance InterWest Bancorp, Inc. From 1985 through 1996, Mr. Riordan was Vice
President and Secretary-Treasurer of Central Bancorporation. Mr. Riordans
career in the banking industry spans over twenty five years. Mr. Riordan is a
Certified Public Accountant, a Certified Management Accountant, and holds a BA
in Business Administration from Central Washington University. ROY W. THOMPSONis Executive Vice President and Credit Administrator of the
Company and Valley Bank. Mr. Thompson has been Senior Vice President of the
Company since its formation and Senior Vice President and Credit Administrator
of Valley Bank since 1989. In January 2001, Mr. Thompson was named Executive
Vice President of the Company and Valley Bank. Prior to joining Valley Bank,
Mr. Thompson was Vice President and Account Officer of U.S. Bank of Washington
in Private Banking. From 1983 through 1988, Mr. Thompson was Vice President and
Credit Administrator of Seattle-First National Bank. Mr. Thompsons career in
the banking industry spans over twenty five years. Mr. Thompson is a graduate
of Pacific Coast Banking School, holds an MBA in Finance from the United States
International University and a BS in Business from the University of Southern
California. RICHARD D. PICKETTwas President of Valley Bank  Auburn until the merger of
Valley Bank with Puyallup Valley Bank in January 2003. Mr. Pickett was made
Executive Vice President and Commercial Loan Officer in December 2003. Mr.
Pickett resigned from the Company in February 2004. Prior to joining Valley
Bank, Mr. Pickett was an officer with Seafirst Bank for over twenty-five years,
beginning as a Management Trainee and concluding his tenure at Seafirst as
Commercial Banking Team Leader. Mr. Pickett is a graduate of Pacific Coast
Banking School, the University of Southern California Executive Leadership
School, and holds a BA from Washington State University. Code of Ethics The Company has adopted a Code of Ethics within the meaning of Item 406(b) of
Regulation S-K. This Code of Ethics applies to the Chief Executive Officer,
Chief Financial Officer and the Credit Administrator of the Company. The Code
of Ethics is attached as exhibit 14 to this Form 10-K. If the Company makes
substantive amendments to this Code of Ethics or grants any waiver, including
any implicit waiver, the Company will disclose the nature of such amendment or
waiver in a report on Form 8-K within five days of such amendment or waiver to
the extent then required by applicable securities laws. Audit Committee Financial Expert The Board of Directors of the Company has determined that at least one person
serving on the Audit Committee is an audit committee financial expert as
defined under Item 401(h) of Regulation S-K. William E. Fitchitt is an audit
committee financial expert and is independent as defined under applicable SEC
rules. For a description of Mr. Fitchitts background, see the discussion
under Election of Directors in the Proxy Statement. Item 11. Executive Compensation The information contained under the section captioned Executive Compensation
in the definitive Proxy Statement is incorporated herein by reference. 10




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Valley Community Bancshares, Inc. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information contained under the section captioned Security Ownership of
Certain Beneficial Owners and Management in the Proxy Statement. The following table sets forth information regarding outstanding options and
shares reserved for future issuance under the equity compensation plans as of
December 31, 2003. Number of Shares to be
    
    Weighted Average
    
    Number of sharesIssued Upon Exercise of
    
    Exercise Price of
    
    Remaining AvailablePlan Category
    
    Outstanding Options
    
    Outstanding Options
    
    for Future IssuanceEquity compensation plans approved by stockholders (a)
    
    
    48,849
    
    
    $
    25.09
    
    
    
    68,276Equity Compensation plans not approved by stockholders
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Total
    
    
    48,849
    
    
    $
    25.09
    
    
    
    68,276
   (a)
    
    Consists of two Company Plans: 1986 Stock Option Plan, as amended in 1996,
and the 1998 Stock Option Plan. Item 13. Certain Relationships and Related Transactions The information contained under the section captioned Interest of Management
in Certain Transactions in the definitive Proxy Statement is incorporated
herein by reference. Item 14. Principal Accounting Fees and Services The information contained under the section captioned Independent Auditors in
the definitive Proxy Statement is incorporated herein by reference. 11




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Valley Community Bancshares, Inc. Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K The following exhibits are either filed herewith or have been previously filed
with the Securities and Exchange Commission and are filed herewith by
incorporation by reference: (a)
    
    
    (1)
    
    
    Consolidated Financial Statements(i)
    
    Independent Auditors Report(ii)
    
    Consolidated Balance Sheet as of December 31, 2003, and 2002(iii)
    
    Consolidated Statement of Income for Years Ended December 31, 2003, 2002, and 2001(iv)
    
    Consolidated Statement of Changes in Stockholders Equity for Years Ended December 31, 2003, 2002, and 2001(v)
    
    Consolidated Statement of Cash Flows for the Years Ended December 31, 2003, 2002, and 2001(vi)
    
    Notes to Consolidated Financial Statements(2)
    
    
    All required financial statement schedules are included in the Notes
to Consolidated Financial Statements.Consolidated Financial Statements and Notes to Consolidated Financial
Statements are included in Exhibit 13 herein.(b)
    
    Reports on Form 8-K:The Company filed a current report on Items 7 and 12 of Form 8-K on October 27,
2003. The report included a press release announcing third quarter 2003
financial results.(c)
    
    
    3.1
    
    
    Articles of Incorporation of the Company *3.2
    
    
    Bylaws of the Company ^10
    
    
    Material contracts of Valley Community Bancshares, Inc.10.1
    
    
    Severance agreement for Mr. Brown *10.2
    
    
    Severance agreement for Mr. Thompson *10.3
    
    
    Severance agreement for Mr. Riordan *10.4
    
    
    Severance agreement for Mr. Pickett *10.5
    
    
    Deferred Compensation Agreement for Mr. Brown *10.6
    
    
    Deferred Compensation Agreement for Mr. Thompson #10.7
    
    
    1998 Stock Option Plan *10.8
    
    
    401(k) Defined Contribution Plan and Noncontributory Profit Sharing Plan Adoption Agreement *13
    
    
    2003 Annual Report to Shareholders14
    
    
    Code of Ethics21
    
    
    Subsidiary of the Company24
    
    
    Power of Attorney is set forth on the signature page of this Registration Statement31
    
    
    Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.1
    
    
    Certification of Chief Executive Officer31.2
    
    
    Certification of Chief Financial Officer32
    
    
    Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *
    
    Incorporated by reference to the Exhibits set forth on Registrants
Amended Registration Statement on Form 10 filed with the Securities and
Exchange Commission on September 6, 2000.#
    
    Incorporated by reference to the Exhibits set forth on Registrants 2000
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 27, 2001.  ^
    
    Incorporated by reference to the Exhibits set forth on Registrants June
2002 Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 9, 2002.   12




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Valley Community Bancshares, Inc. SIGNATURES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 8th day of March
2004. VALLEY COMMUNITY BANCSHARES, INC.(Registrant)By: /s/ DAVID H. BROWNDavid H. BrownPresident and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf by the
registrant and in the capacities indicated, on the 8th day of March 2004.Principal Executive OfficerBy: /s/ DAVID H. BROWNDavid H. BrownPresident and Chief Executive OfficerPrincipal Financial OfficerBy: /s/ JOSEPH E. RIORDANJoseph E. RiordanExecutive Vice President andChief Financial OfficerDavid H. Brown, pursuant to a power of attorney, which is being filed with this
Form 10-K, has signed this report on March 8, 2004 as attorney in fact for the
following directors who constitute a majority of the Board.Thomas R. AbsherRonald E. ClaudonWarren D. HuntA. Eugene HammermasterWilliam E. FitchittDavid K. HamryRoger L. KnutsonThomas M. Pasquier/s/ DAVID H. BROWNDavid H. Brown

       Attorney-in-fact

       March 8, 2003
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Valley Community Bancshares, Inc. POWER OF ATTORNEY We, the undersigned directors of Valley Community Bancshares, Inc., do
hereby severally constitute and appoint David H. Brown our true and lawful
attorney and agent to execute on our names in our capacities as directors and
to file the Form 10-K and any amendments thereto on behalf of Valley Community
Bancshares, Inc. to enable Valley Community Bancshares, Inc. to comply with the
rules, regulations and requirements of the Securities and Exchange Commission. /s/ Roger L. Knutson
Roger L. Knutson
    
    Chairman of the Board
    
    February 12, 2004/s/ David H. Brown
David H. Brown
    
    Director/President/CEO
    
    February 12, 2004/s/ Thomas R. Absher
Thomas R. Absher
    
    Director
    
    February 12, 2004/s/ A. Eugene Hammermaster
A. Eugene Hammermaster
    
    Director
    
    February 12, 2004/s/ William E. Fitchitt
William E. Fitchett
    
    Director
    
    February 12, 2004/s/ David K. Hamry
David K. Hamry
    
    Director
    
    February 12, 2004/s/ Ronald E. Claudon
Ronald E. Claudon
    
    Director
    
    February 12, 2004/s/ Warren D. Hunt
Warren D. Hunt
    
    Director
    
    February 12, 2004/s/ Thomas M. Pasquier
Thomas M. Pasquier
    
    Director
    
    February 12, 2004
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