UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


(X)		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


		For the Quarter ended September 30, 2003


( )		Transition report pursuant to Section 13 or 15(d)) of the Securities Exchange Act of 1934


		For Transition Period from to

		Commission File Number 000-30447

VALLEY COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

Yes [X] No [ ]

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

Yes [ ] No [X]

The number of shares of the issuer’s Common Stock, $1.00 par value, outstanding at November 3, 2003 was 1,173,352.

TABLE OF CONTENTS


	Item 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEET
		CONDENSED CONSOLIDATED STATEMENT OF INCOME
		CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 4. CONTROLS AND PROCEDURES
	FORWARD-LOOKING STATEMENTS
PART II — OTHER INFORMATION
	Item 1. LEGAL PROCEEDINGS
	Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	Item 3. DEFAULTS UPON SENIOR SECURITIES
	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	Item 5. OTHER INFORMATION
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

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


PART I		FINANCIAL INFORMATION


		Page
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheet – September 30, 2003 and December 31, 2002		1
	Condensed Consolidated Statement of Income – Three and Nine Months Ended September 30, 2003 and 2002		2
	Condensed Consolidated Statement of Cash Flows – Nine Months Ended September 30, 2003 and 2002		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition And Results of Operation		8
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		21
Item 4.	Controls and Procedures		22
FORWARD-LOOKING STATEMENTS			22
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		23
Item 2.	Changes in Securities and Use of Proceeds		23
Item 3.	Defaults upon Senior Securities		23
Item 4.	Submission of Matters to a Vote of Security Holders		23
Item 5.	Other Information		23
Item 6.	Exhibits and Reports on Form 8-K		23
	Signatures		24
	Certifications		25

Item 1. FINANCIAL STATEMENTS

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


				September 30,		December 31,

				2003		2002

ASSETS
	Cash and due from banks			$	6,673	$	4,847
	Interest-bearing deposits with banks				15,127		22,191
	Federal funds sold				5,727		1,734
	Securities available-for-sale				40,475		31,069
	Federal Home Loan Bank stock				372		398

					68,374		60,239
	Loans				112,235		105,354
	Less allowance for loan losses				1,388		1,388

			Loans, net		110,847		103,966
	Accrued interest receivable				720		727
	Premises and equipment, net				5,929		6,096
	Real estate held for investment						224
	Other assets				405		459

			Total assets	$	186,275	$	171,711

LIABILITIES
	Deposits
		Noninterest-bearing		$	32,990	$	29,119
		Interest-bearing			127,582		118,317

			Total deposits		160,572		147,436
	Other borrowed funds				618		750
	Accrued interest payable				189		295
	Other liabilities				1,645		775

			Total liabilities		163,024		149,256

STOCKHOLDERS’ EQUITY
	Common stock, par value $1 per share; 5,000,000 shares authorized; 1,173,352 and 1,115,994 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively				1,173		1,116
	Additional paid-in capital				16,883		15,527
	Retained earnings				4,755		5,219
	Accumulated other comprehensive income, net of tax				440		593

			Total stockholders’ equity		23,251		22,455

			Total liabilities and stockholders’ equity	$	186,275	$	171,711

The accompanying notes are an integral part of these financial statements

-1-

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


			Three Months Ended				Nine Months Ended
			September 30,				September 30,

			2003		2002		2003		2002

INTEREST INCOME
	Interest and fees on loans		$	1,897	$	2,081	$	5,743	$	6,027
	Interest on federal funds sold and deposits in banks			83		87		269		255
	Interest on securities			266		365		821		1,131

		Total interest income		2,246		2,533		6,833		7,413

INTEREST EXPENSE
	Interest on deposits			296		467		1,003		1,443
	Interest on federal funds and other short-term borrowings			1		2		4		5

		Total interest expense		297		469		1,007		1,448

		Net interest income		1,949		2,064		5,826		5,965
PROVISION FOR LOAN LOSSES						76				167

		Net interest income after provision for loan losses		1,949		1,988		5,826		5,798

NONINTEREST INCOME
	Service charges			114		121		351		344
	Gain on sale of investment securities, net					1		15		54
	Gain on sale of real estate held for investment			173				211
	Origination fees on mortgage loans brokered			119		40		320		79
	Other operating income			54		40		272		184

		Total noninterest income		460		202		1,169		661

NONINTEREST EXPENSE
	Salaries			644		630		1,955		1,750
	Employee benefits			165		149		504		446
	Occupancy			143		128		415		383
	Equipment			115		102		330		340
	Other operating expenses			464		421		1,461		1,231

		Total noninterest expense		1,531		1,430		4,665		4,150

INCOME BEFORE INCOME TAX				878		760		2,330		2,309
PROVISION FOR INCOME TAX				288		257		730		747

NET INCOME			$	590	$	503	$	1,600	$	1,562

EARNINGS PER SHARE
	Basic		$	0.50	$	0.43	$	1.36	$	1.32
	Diluted		$	0.50	$	0.42	$	1.36	$	1.31
	Weighted average shares outstanding			1,173,200		1,183,116		1,172,238		1,183,097
	Weighted average diluted shares outstanding			1,177,992		1,193,927		1,176,972		1,194,204

The accompanying notes are an integral part of these financial statements

-2-

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


				Nine Months Ended
				September 30,

				2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES
	Net income			$	1,600		$	1,562
	Adjustments to reconcile net income to net cash from operating activities:
		Provisions for loan losses						167
		Depreciation			356			268
		Deferred income tax			20			6
		Net amortization on securities			257			136
		FHLB stock dividends			(16	)		(24	)
		Gain on sale of securities available-for-sale			(15	)		(54	)
		Loss on sale of premises and equipment						41
		Amortization of intangible assets			32			18
		Gain on the sale of real estate			(211	)
		Amortization of deferred gain on sale of real estate			211
	Changes in operating assets and liabilities:
		(Increase) decrease in accrued interest receivable			7			(18	)
		Decrease) in accrued interest payable			(106	)		(114	)
		(Increase) decrease in other assets			43			(215	)
		Increase in other liabilities			929			731

			Net cash from operating activities		3,107			2,504

	Net increase in federal funds sold				(3,993	)		(1,247	)
	Net decrease in interest-bearing deposits with banks				7,064			2,852
	Purchase of securities available-for-sale				(28,626	)		(12,786	)
	Proceeds from sales of securities available-for-sale				2,672			5,567
	Proceeds from maturities of securities available-for-sale				16,074			5,741
	Federal Home Loan Bank stock redeemed				42			104
	Net increase in loans				(6,881	)		(10,903	)
	Additions to premises and equipment				(210	)		(468	)
	Purchase of intangible assets							(144	)
	Sale of real estate held for investment				224

			Net cash from investing activities		(13,634	)		(11,284	)

CASH FLOWS FROM FINANCING ACTIVITIES
	Net increase in deposits				13,136			11,569
	Net increase (decrease) in other borrowed funds				(84	)		186
	Increase in other borrowed money							96
	Payment on other borrowed money				(48	)
	Cash dividends paid				(675	)		(676	)
	Stock options exercised				24			2

			Net cash from financing activities		12,353			11,177

NET INCREASE IN CASH AND DUE FROM BANKS					1,826			2,397
CASH AND DUE FROM BANKS, beginning of year					4,847			4,584

CASH AND DUE FROM BANKS, at end of period				$	6,673		$	6,981

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
	Cash payments for
		Interest		$	1,113		$	1,562
		Income taxes			691			778
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
	Unrealized gains (losses) on securities available-for-sale			$	(232	)	$	467
	Deferred tax on unrealized (gains) losses on securities available-for-sale				79			(159	)

The accompanying notes are an integral part of these financial statements

-3-

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

Note 1 — Basis of Presentation

Valley Community Bancshares, Inc. (the “Company”) prepared the condensed consolidated financial statements of the Company for the three-month and nine-month periods ended September 30, 2003 and September 30, 2002 without audit by the Company’s independent auditors. However, the financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of the Company’s management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the financial condition and results of operations for the interim periods included herein have been made. The consolidated balance sheet of the Company as of December 31, 2002 has been derived from the audited consolidated balance sheet of the Company as of that date. The results of operations for the three-months and nine-months ended September 30, 2003, are not necessarily indicative of the results to be anticipated for the year ending December 31, 2003.

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

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

Stock Option Plan

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


VALLEY COMMUNITY BANCSHARES, INC.			Three Months Ended				Nine Months Ended
Stock Option Plan			September 30,				September 30,

In thousands, except for per-share amounts			2003		2002		2003		2002

Pro forma disclosures:
	Net income as reported		$	590	$	503	$	1,600	$	1,562
	Additional compensation for fair value of stock options			3		3		7		8

Pro forma net income			$	587	$	500	$	1,593	$	1,554

Earnings per share:
	Basic
		As reported	$	0.50	$	0.43	$	1.36	$	1.32
		Pro forma	$	0.50	$	0.42	$	1.36	$	1.31
	Diluted
		As reported	$	0.50	$	0.42	$	1.36	$	1.31
		Pro forma	$	0.50	$	0.42	$	1.35	$	1.30

-4-

Note 2 — Earnings per share

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

The following table sets forth the computation of basic and diluted earnings per share for the three-months and nine-months ended September 30, 2003 and 2002 (dollars in thousands, except per share amounts):


VALLEY COMMUNITY BANCSHARES, INC.			Three Months Ended				Nine Months Ended
Earnings Per Share			September 30,				September 30,

			2003		2002		2003		2002

NUMERATOR:
	Net income		$	590	$	503	$	1,600	$	1,562
DENOMINATOR:
Denominator for basic earnings per share:
		Weighted average shares		1,173,200		1,183,116		1,172,238		1,183,097
Effect of diluted securities — stock options				4,792		10,811		4,734		11,107
Denominator for diluted earnings per share:
		Weighted average shares and assumed conversion of diluted stock options		1,177,992		1,193,927		1,176,972		1,194,204
Basic earnings per share			$	0.50	$	0.43	$	1.36	$	1.32
Diluted earnings per share			$	0.50	$	0.42	$	1.36	$	1.31

Note 3 –Comprehensive Income

Total comprehensive income, which includes net income and unrealized gains and losses on the Company’s available-for-sale securities, amounted to $479,000 and $634,000, respectively, for the three months ended September 30, 2003 and 2002, respectively. Total comprehensive income amounted to $1,447,000 and $1,870,000, respectively, for the nine months ended September 30, 2003 and 2002, respectively.

Note 4 — Investment Securities

Investment securities have been classified as available-for-sale in according with management’s intent. The carrying amount of securities and their estimated fair values are as follows (in thousands):


September 30, 2003
Securities Available-For-Sale			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

U.S. Treasury and U.S. Government corporations and agencies	$	14,823	$	196	$		$	15,019
State and political subdivisions		6,988		366		9		7,345
Mortgage-backed securities		17,997		176		62		18,111

	$	39,808	$	738	$	71	$	40,475

-5-


December 31, 2002
Securities Available-For-Sale			Gross		Gross
	Amortized		Unrealized		Unrealized	Fair
	Cost		Gains		Losses	Value

U.S. Treasury and U.S. Government corporations and agencies	$	10,662	$	226	$	$	10,888
State and political subdivisions		5,404		323			5,727
Mortgage-backed securities		14,104		350			14,454

	$	30,170	$	899	$	$	31,069

Note 5 — Loans

The major classifications of loans at September 30, 2003 and December 31, 2002 are summarized as follows (dollars in thousands):


VALLEY COMMUNITY BANCSHARES, INC.
Loan Portfolio
(dollars in thousands)			September 30,						December 31,

			2003						2002

			Amount			Percent			Amount			Percent

Real Estate
	Construction		$	11,735			10.4	%	$	9,276			8.8	%
	Mortgage			12,014			10.7	%		15,080			14.3	%
	Commercial			61,371			54.6	%		55,266			52.3	%
Commercial				24,919			22.1	%		23,502			22.3	%
Consumer and other				2,318			2.1	%		2,339			2.2	%
Lease financing				69			0.1	%		83			0.1	%

		Total loans		112,426			100.0	%		105,546			100.0	%

Deferred loan fees				(191	)					(192	)

		Net loans	$	112,235					$	105,354

Note 6 – Allowance for Loan Losses

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

The allowance for loan losses at September 30, 2003 and December 31, 2002, totaled $1,388,000. Management believes that the allowance for loan losses at September 30, 2003 adequately reflects the risks in the loan portfolio. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments of information available to them at the time of their examination.

-6-

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


VALLEY COMMUNITY BANCSHARES, INC.
Loan Loss Experience
			Three months September 30,				Nine months September 30,

			2003		2002		2003		2002

Balance at beginning of period			$	1,388	$	1,249	$	1,388	$	1,156
	Charge-offs					5				5
	Recoveries:									2

		Net recoveries		-0-		5		-0-		3
	Additions charged to operations					76				167

Balance at end of period			$	1,388	$	1,320	$	1,388	$	1,320

Note 7 – Business Segment Information

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

On January 17, 2003, the Company merged the subsidiary banks into one community bank named Valley Bank. In addition, the company consolidated its board of directors and executive management team into a new organizational structure, while converting separated banking systems into a single operation. As a result of these system and organizational changes, the financial information that is used by the chief operating decision maker in allocating resources and assessing performance is only provided for one reportable segment for the three-month and nine-month period ended September 30, 2003.

Note 8 – Change in Accounting Estimate

During the second quarter ended June 30, 2003, the Company sold real estate held for investment at a profit of $211,000. Because the buyer’s initial investment was inadequate the Company accounted for the transaction using the installment sales method, as permitted by Financial Accounting Standard No. 66 “Accounting for Real Estate”. At that time $38,000 was recorded as income and the remaining $173,000 was deferred. During the third quarter ended September 30, 2003, the buyer made additional payments to the Company resulting in an adequate investment. As a result, as permitted by FAS-66, the Company changed to the full accrual accounting method and recognized the remaining deferred gross profit.

Note 9 – Impact of New Accounting Issues

During the third quarter of 2003 the Financial Accounting Standard Board (“FASB”) did not issue any new accounting pronouncements.

-7-


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

Valley Community Bancshares, Inc.

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

The Company’s main office is located in Puyallup, Washington, which also serves as the main office of Valley Bank. The Bank provides a full range of commercial banking services to small and medium-sized businesses, professionals and other individuals through eight 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 Bank; (v) interest on investments (principally government securities) and (vi) origination fees on mortgage loans brokered. The Bank’s lending activity consists of short-to-medium-term commercial and consumer loans, including operating loans and lines of credit, equipment loans, automobile loans, recreational vehicle and truck loans, personal loans or lines of credit, home improvement loans and rehabilitation loans. The Bank also offer cash management services, merchant credit card processing, safe deposit boxes, wire transfers, direct deposit of payroll and social security checks, automated teller machine access, and automatic drafts for various accounts.

Valley Bank

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

The Bank provides full-service banking to businesses and residents within the Puyallup, Auburn and Kent communities and its surrounding areas. The Bank places particular emphasis on serving the small to medium-sized business segment of the market by making available a line of banking products tailored to their needs, with those services delivered by experienced professionals concerned with building long-term relationships. The Bank conducts business out of eight full-service offices and one drive-up facility.

On May 16, 2002, the Bank purchased various tangible and intangible assets of Puget Sound Mortgage Brokers, Inc., a Washington Corporation located in Puyallup Washington. The purchase price was not material to the 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.

On September 5, 2002, the Bank opened a new banking facility in Kent Washington. The office operates in a temporary leased facility until a permanent facility can be constructed, which should occur during the third quarter of 2004.

During April 2003 the Bank opened a loan production office in Gig Harbor Washington. The new office operates in a leased facility until a permanent banking facility can be located.

Valley Bank is a wholly owned subsidiary of the Company.

-8-

Results of Operations

The Company earned net income of $590,000 or $0.50 per diluted share for the three months ended September 30, 2003, compared to net income of $503,000 or $0.42 per diluted share, for the three months ended September 30, 2002, an increase of 17.3 percent. The Company’s return on average assets was 1.29 percent for the three months ended September 30, 2003, compared to 1.19 percent for the three months ended September 30, 2002.

The Company earned net income of $1,600,000 or $1.36 per diluted share for the nine months ended September 30, 2003, compared to net income of $1,562,000 or $1.31 per diluted share, for the nine months ended September 30, 2002, an increase of 2.4 percent. The Company’s return on average assets was 1.21 percent for the nine months ended September 30, 2003, compared to 1.29 percent for the nine months ended September 30, 2002.

The increase in net income for the three and nine-month periods ended September 30, 2003 was primarily related to increased noninterest income and a lower provision for loan losses, partially offset by increased noninterest expense. The increase in noninterest income resulted from a significant increase in origination fees on mortgage loans brokered and from the amortization of the deferred gain on the sale of real estate held for investment. The increase in noninterest expense resulted from the increased staffing levels of the Bank’s new Kent and Gig Harbor offices and Puget Sound Mortgage Brokers, which significantly increased salaries and employee benefits and occupancy expenses during the three and nine-month periods. A decrease in the Company’s net interest margin also negatively impacted earnings during the three and nine-month period.

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

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

The following table shows the various performance ratios for the Company for the three and nine months ended September 30, 2003 and 2002, respectively:

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

Financial Performance
	Net Income	$	590		$	503		$	1,600		$	1,562
	Average Assets		182,057			168,391			176,651			162,316
	Average Stockholders’ Equity		22,781			22,145			22,494			21,563
	Return on Assets (net income divided by average assets)		1.29	%		1.19	%		1.21	%		1.29	%
	Return on Equity (net income divided by average equity)		10.27	%		9.01	%		9.51	%		9.69	%
	Net Interest Margin (net interest income (tax adjusted) Divided by earning assets)		4.64	%		5.34	%		4.83	%		5.41	%
	Efficiency Ratio (noninterest expense divided by noninterest income plus net interest income)		63.55	%		63.11	%		66.69	%		62.63	%
	Ratio of noninterest income to average assets		3.34	%		3.37	%		3.53	%		3.42	%

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

-9-

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, which would have been earned if such income were subject to federal income tax.

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

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2003		2002		2003		2002

Interest income, as reported	$	2,246	$	2,533	$	6,833	$	7,413
Effect of tax exempt income		36		39		102		116

TE interest income		2,282		2,572		6,935		7,529
interest expense		297		469		1,007		1,448

TE net interest income	$	1,985	$	2,103	$	5,928	$	6,081

TE net interest income, divided by average earning assets is referred to as net interest margin. For the three months ended September 30, 2003 the Company’s net interest margin was 4.64 percent compared to 5.34 percent for the three months ended September 30, 2002. For the nine months ended September 30, 2003 the Company’s net interest margin was 4.83 percent compared to 5.41 percent for the nine months ended September 30, 2002.

TE interest income was $2,282,000 for the three months ended September 30, 2003 compared to $2,572,000 for the three months ended September 30, 2002. The three-month decrease was primarily the result of a significant decrease in the yield earned on earning assets. The yield on interest-earning assets decreased to 5.34 percent for the three months ended September 30, 2003 compared to 6.53 percent during the same period a year ago. The yield decrease reflects an overall decline in market interest rates.

TE interest income was $6,935,000 for the nine months ended September 30, 2003 compared to $7,529,000 for the nine months ended September 30, 2002. The nine-month decrease was primarily the result of a significant decrease in the yield earned on earning assets. The yield on interest-earning assets decreased to 5.65 percent for the nine months ended September 30, 2003 compared to 6.70 percent during the same period a year ago. The yield decrease reflects an overall decline in market interest rates.

Interest expense was $297,000 for the three months ended September 30, 2003 compared to $469,000 for the three months ended September 30, 2002. The cost of funds decreased to 0.94 percent for the three months ended September 30, 2003 compared to 1.60 percent during the same period a year ago. The decrease for the three-month period was due to a decrease in the Company’s cost of funds resulting from an overall decline in market interest rates.

Interest expense was $1,007,000 for the nine months ended September 30, 2003 compared to $1,448,000 for the nine months ended September 30, 2002. The cost of funds decreased to 1.11 percent for the nine months ended September 30, 2003 compared to 1.73 percent during the same period a year ago. The decrease for the nine-month period was due to a decrease in the Company’s cost of funds resulting from an overall decline in market interest rates.

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

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

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continued low market interest rates, the Company anticipates a further decrease in net interest margin as interest-earning assets reprice to the lower interest rate levels.

The following table sets forth information concerning the Company’s average balance and average interest rates earned or paid, interest rate spread and net interest margin for the three months ended September 30, 2003 and 2002:

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


			For the Three Months Ended September 30,

			2003							2002

			Average		Revenue/		Yield/			Average		Revenue/		Yield/
ASSETS			Balance		Expense		Rate			Balance		Expense		Rate

Interest-earning assets
	Loans (including fees) ¹		$	112,349	$	1,897		6.70	%	$	110,616	$	2,081		7.46	%
	Investment securities ^{2 3}			36,473		302		3.28	%		32,215		404		4.97	%
	Interest bearing deposits with banks			15,848		67		1.68	%		12,175		76		2.48	%
	Federal funds sold			4,604		11		0.95	%		835		3		1.41	%
	Federal Home Loan Bank Stock			367		5		5.40	%		491		8		6.46	%

		Total Interest-earning assets		169,641		2,282		5.34	%		156,332		2,572		6.53	%
	Total noninterest-earning assets			12,416							12,059

	TOTAL ASSETS		$	182,057						$	168,391

Interest-bearing liabilities
	Deposits		$	124,798		296		0.94	%	$	115,627		467		1.60	%
	Other borrowed funds			483		1		0.82	%		496		2		1.60	%

		Total Interest-bearing liabilities		125,281		297		0.94	%		116,123		469		1.60	%
	Noninterest-bearing liabilities			33,995							30,123
	Stockholders’ equity			22,781							22,145

	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	182,057						$	168,391

Net interest spread					$	1,985		4.40	%			$	2,103		4.92	%

Margin Analysis
	TE interest income/ earning assets				$	2,282		5.34	%			$	2,572		6.53	%
	Interest expense/earning assets					297		0.69	%				469		1.19	%

	Net interest margin				$	1,985		4.64	%			$	2,103		5.34	%

¹		Average loan balance includes nonaccrual loans, if any. Interest income on nonaccrual loans has been included.

²		Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34%.

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

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


			For the Nine Months Ended September 30,

			2003							2002

			Average		Revenue/		Yield/			Average		Revenue/		Yield/
ASSETS			Balance		Expense		Rate			Balance		Expense		Rate

Interest-earning assets
	Loans (including fees) ¹		$	109,874	$	5,743		6.99	%	$	105,546	$	6,027		7.63	%
	Investment securities ^{2 3}			33,850		923		3.65	%		32,363		1,247		5.15	%
	Interest bearing deposits with banks			17,194		231		1.80	%		11,559		230		2.66	%
	Federal funds sold			2,808		22		1.05	%		282		3		1.42	%
	Federal Home Loan Bank Stock			379		16		5.64	%		485		22		6.06	%

		Total Interest-earning assets		164,105		6,935		5.65	%		150,235		7,529		6.70	%
	Total noninterest-earning assets			12,546							12,081

	TOTAL ASSETS		$	176,651						$	162,316

Interest-bearing liabilities
	Deposits		$	121,331		1,003		1.11	%	$	111,786		1,443		1.73	%
	Other borrowed funds			476		4		1.12	%		423		5		1.58	%

		Total Interest-bearing liabilities		121,807		1,007		1.11	%		112,209		1,448		1.73	%
	Noninterest-bearing liabilities			32,350							28,544
	Stockholders’ equity			22,494							21,563

	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	176,651						$	162,316

Net interest spread					$	5,928		4.54	%			$	6,081		4.98	%

Margin Analysis
	TE interest income/ earning assets				$	6,935		5.65	%			$	7,529		6.70	%
	Interest expense/earning assets					1,007		0.82	%				1,448		1.29	%

	Net interest margin				$	5,928		4.83	%			$	6,081		5.41	%

¹		Average loan balance includes nonaccrual loans, if any. Interest income on nonaccrual loans has been included.

²		Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34%.

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

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The following table sets forth information concerning the Company’s change in TE net interest income for the periods that are attributable to changes in interest rate and changes in volume for the three and nine month period ended September 30, 2003 compared to the three and nine month period ended September 30, 2002:

VALLEY COMMUNITY BANCSHARES, INC.
Volume/Rate Analysis ¹ — For the Three Months ended September 30,
(dollars in thousands)


		2003 Compared to 2002

		Volume			Rate			Net

TE Interest income
	Loans (including fees) ²	$	32		$	(216	)	$	(184	)
	Investment securities ³		48			(150	)		(102	)
	Interest bearing deposits with banks		19			(28	)		(9	)
	Federal funds sold		9			(1	)		8
	Federal Home Loan Bank Stock		(2	)		(1	)		(3	)

			106			(396	)		(290	)
Interest-bearing liabilities
	Total deposits		35			(206	)		(171	)
	Other borrowed funds					(1	)		(1	)

			35			(207	)		(172	)

		$	71		$	(189	)	$	(118	)

VALLEY COMMUNITY BANCSHARES, INC.
Volume/Rate Analysis ¹ — For the Nine Months ended September 30,
(dollars in thousands)


			2003 Compared to 2002

			Volume			Rate			Net

TE Interest income
	Loans (including fees) ²		$	240		$	(524	)	$	(284	)
	Investment securities ³			55			(379	)		(324	)
	Interest bearing deposits with banks			90			(89	)		1
	Federal funds sold			20			(1	)		19
	Federal Home Loan Bank Stock			(5	)		(1	)		(6	)

		Total Interest-earning assets		400			(994	)		(594	)
Interest-bearing liabilities
	Total deposits			115			(555	)		(440	)
	Other borrowed funds			1			(2	)		(1	)

		Total Interest-bearing liabilities		116			(557	)		(441	)

		TE net interest income	$	284		$	(437	)	$	(153	)

¹		The change in interest due to both volume and yield/rate has been allocated to change due to volume and change due to yield/rate in proportion to the absolute value of the change in each.

²		Balances of nonaccrual loans, if any, and related income recognized have been included for computational purposes.

³		Tax-exempt income has been converted to a tax-equivalent basis using an incremental rate of 34%.

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Provision for loan losses

Provisions for loan losses reduce net interest income. The Company provided $0 for loan losses for the three months ended September 30, 2003 compared to $76,000 during the same three-month period last year. The Company provided $0 for loan losses for the nine months ended September 30, 2003 compared to $167,000 during the same nine-month period last year. The 2002 provision was made as a result of increasing loans.

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

Noninterest income and expense

Net income is increased by noninterest income (primarily service charges, origination fees on mortgage loans brokered, and other operating income) and reduced by noninterest expenses (primarily salaries and employee benefits, occupancy, equipment, and other operating expenses).

Noninterest income was $460,000 for the three months ended September 30, 2003, a 127.7 percent increase from $202,000 for the three months ended September 30, 2002. The increase in noninterest income for the three-month period ended September 30, 2003 was the result of increased 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 service charges.

Noninterest income was $1,169,000 for the nine months ended September 30, 2003, a 76.9 percent increase from $661,000 for the nine months ended September 30, 2002. The increase in noninterest income for the nine month period ended September 30, 2003 was the result of higher service charges, increased 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 purchase of Puget Sound Mortgage Brokers resulted in a significant increase in the volume of mortgage loans brokered and increased loan origination fees.

Noninterest expense was $1,531,000 for the three months ended September 30, 2003, a 7.1 percent increase from $1,430,000 for the three months ended September 30, 2002. The increase in noninterest expense for the three-month period ended September 30, 2003 was primarily the result of increased salaries and employee benefits, operating, and other expenses associated with the opening of the new Kent and Gig Harbor facilities and the operation of Puget Sound Mortgage Brokers. The percentage of noninterest expense to average assets was 3.34 percent for the three months ended September 30, 2003, compared to 3.37 percent during the same period last year.

Noninterest expense was $4,665,000 for the nine months ended September 30, 2003, a 12.4 percent increase from $4,150,000 for the nine months ended September 30, 2002. The increase in noninterest expense for the nine-month period ended September 30, 2003 was primarily the result of 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 recently completed remodel of the Main Office facility. The increase in professional fees resulted from the merger of Puyallup Valley Bank and Valley Bank. The percentage of noninterest expense to average assets was 3.53 percent for the nine months ended September 30, 2003, compared to 3.42 percent during the same period last year.

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The following table sets forth information concerning the various components of the Company’s noninterest expense for the three and nine months ended September 30, 2003 and 2002, respectively:

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


			Three Months Ended				Nine Months Ended
			September 30,				September 30,

			2003		2002		2003		2002

Noninterest Expense
	Salaries		$	644	$	630	$	1,955	$	1,750
	Employee benefits			165		149		504		446
	Occupancy			143		128		415		383
	Equipment			115		102		330		340
	Operating			126		108		404		337
	Software			46		45		151		140
	Advertising and marketing			49		40		124		98
	Professional			37		43		169		145
	Business and occupation tax			34		46		101		104
	Other			172		139		512		407

		Total noninterest expense	$	1,531	$	1,430	$	4,665	$	4,150

The Company’s efficiency ratio, which is the ratio of noninterest expense to net interest income plus noninterest income, was 63.6 percent for the three months ended September 30, 2003 compared to 63.1 percent for the three months ended September 30, 2002. The Company’s efficiency ratio was 66.7 percent for the nine months ended September 30, 2003 compared to 62.6 percent for the nine months ended September 30, 2002. The increase in the ratio was primarily due to a significant increase in noninterest expense, partially offset by an increase in noninterest income.

Provision for income tax

The Company’s provision for income tax is a significant reduction of operating income. The provision for the three months September 30, 2003, was $288,000 compared to $257,000 for the three month ended September 30, 2002. The provision for the nine months September 30, 2003, was $730,000 compared to $747,000 for the nine month ended September 30, 2002. The provision represents an effective tax rate of 31 and 32 percent during 2003 and 2002, respectively. The Company’s marginal tax rate is currently 34 percent. The difference between the Company’s effective and marginal tax rate is primarily related to investments made in tax-exempt securities.

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Financial Condition

The Company’s total consolidated assets increased 8.5 percent to $186.3 million as of September 30, 2003, compared to $171.7 million as of December 31, 2002. Loans and deposits increased 6.5 percent and 8.9 percent, respectively during the nine month period ended September 30, 2003. The deposits not invested in loans were invested in securities available-for-sale along with the funds provided from the decrease in interest bearing deposits with banks. The result was an increase in the percentage of securities held for investment to total assets. Stockholders’ equity increased 3.5 percent as a result of earnings during the nine-month period ended September 30, 2003, partially offset by the payment of a 60¢ per share cash dividend to stockholders and a decrease in other comprehensive income.

Investment Portfolio

The major classifications of investments at September 30, 2003 and December 31, 2002, are summarized in Note 4 – Investment Securities in the Notes to Condensed Consolidated Financial Statements.

At September 30, 2003, the Company had $40.5 million of securities available-for-sale, compared to $31.1 million as of December 31, 2002. The Company purchased approximately $28.6 million in securities this year, although investment securities increased by $9.4 million during 2003, They were funded primarily with $18.8 million of securities either maturing or sold during 2003 along with a decrease in interest bearing deposits with banks and from excess deposits. All sectors of the portfolio increased during the nine month period.

At September 30, 2003, all of the Company’s securities were classified as available-for-sale. Management believes that holding securities as available-for-sale provides greater flexibility to respond to interest rate changes and liquidity needs to fund loan growth.

Loan Portfolio

The major classifications of loans at September 30, 2003 and December 31, 2002, are summarized in Note 5 – Loans in the Notes to Condensed Consolidated Financial Statements.

In addition to the major classifications of loans summarized in Note 5, the Company has additional loan concentrations exceeding 10 percent of total loans at September 30, 2003. They include loans to medical doctors and dentists in the amount of approximately $23.5 million.

Loans were $112.2 million as of September 30, 2003, compared to $105.4 million as of December 31, 2002, an increase of 6.45 percent. The increase was primarily in real estate construction and real estate commercial loans, partially offset by a decrease in real estate mortgage loans. The percentage of loans to total assets decreased slightly to 60.6 percent at September 30, 2003 compared to 61.4 percent at December 31, 2002. It continues to be management’s intent to grow the loan portfolio and to increase the percent of loans to assets, which potentially could improve the Company’s net interest margin.

Risk Elements

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

VALLEY COMMUNITY BANCSHARES, INC.
Non-performing Assets


			September 30,		December 31,
			2003		2002

Non-performing assets:
	Nonaccrual loans		$	153	$
	Loans 90 days or more past due
	Restructured loans

				153		-0-
	Other real estate owned

		Total non-performing assets	$	153	$	-0-

-16-

As of September 30, 2003, the Company had $153,000 in nonperforming assets, which include nonaccrual loans, loans 90 days or more past due and still accruing interest, and restructured loans. The Company had $0 in nonperforming assets as of December 31, 2002.

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

During the three-month period ended September 30, 2003 there were two loans on nonaccrual status. During the nine-month period ended September 30, 2003 there were three commercial loans on nonaccrual status. The gross income that would have been recorded for the nine-month period ended September 30, 2003 if the nonaccrual loan had been current and in accordance with its original term approximates $3,000. Interest recognized on the loan for the year was approximately $3,000.

During the three-month and nine-month period ended September 30, 2002 there was one commercial loan on nonaccrual status. The gross income that would have been recorded for the nine-month period ended September 30, 2002 if the nonaccrual loan had been current and in accordance with its original term approximates $3,000. Interest recognized on the loan for the year was insignificant.

Potential Problem Loans

At September 30, 2003 and December 31, 2002, the Company had two potential problem commercial real estate loans totaling approximately $2,353,000 and $2,464,000, respectively. The Company believes that the loans are secured by sufficient collateral and guarantor financial strength to repay the loans, although there can be no assurances given with respect to potential losses in these credits. These loans are in addition to those categorized as non-performing listed above. Although these loans are currently classified as performing, management has information regarding credit weakness inherent in the loans.

Summary of Loan Loss Experience

Changes in the Allowance for Loan Losses

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

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

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

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

-17-

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

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

VALLEY COMMUNITY BANCSHARES, INC.
Loan Loss Experience


	Analysis of the Allowance for Loan Losses

	Three months ended						Nine months ended

	September 30,			September 30,			September 30,			September 30,
	2003			2002			2003			2002

Average Allowance for Loan Losses	$	1,388		$	1,278		$	1,388		$	1,216
Average Loans Outstanding	$	112,349		$	110,616		$	109,874		$	105,546
Ratio of net charge-offs during the period to average loans outstanding		0.00	%		0.01	%		0.00	%		0.01	%
Ratio of average allowance for loan losses to average loans outstanding		1.24	%		1.16	%		1.26	%		1.15	%

There were no loan charge-offs during the three and nine months ended September 30, 2003. There were $5,000 in loan charge-offs during the three and nine months ended September 30, 2002. The charge-off was in the Company’s consumer loan portfolio. The ratio of the average allowance for loan losses to average loans outstanding totaled 1.26 percent for the nine months ended September 30, 2003 compared to 1.15 percent during the same period last year. The increase in the ratio results from loan recoveries added to the allowance during the fourth quarter of 2002 and also a significant reduction in the loan portfolio during the fourth quarter of 2002. At September 30, 2003, the allowance for loan losses as a percent of loans totaled 1.24 percent compared to 1.32 percent at December 31, 2002.

Analysis of the Allowance for Loan Losses

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

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

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

-18-

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

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

Deposits

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

Deposits increased 8.9 percent to $160.6 million as of September 30, 2003, compared to $147.4 million as of December 31, 2002. The increase occurred in demand deposits, money market deposits, and savings deposits during the nine-month period, partially offset by a reduction in time certificates of deposit.

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

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


	Period ended,

	September 30, 2003					December 31, 2002

	Amount		Percent			Amount		Percent

Noninterest bearing demand deposits	$	33,017	$	20.6	%	$	29,119		19.8	%
Interest bearing demand deposits		23,189		14.4	%		21,733		14.7	%
Money market deposits		43,893		27.3	%		35,506		24.1	%
Savings deposits		16,495		10.3	%		14,343		9.7	%
Time certificates < $100,000		22,195		13.8	%		25,395		17.2	%
Time certificates > $100,000		21,783		13.6	%		21,340		14.5	%

	$	160,572	$	100.0	%	$	147,436		100.0	%

Liquidity and Capital Resources

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

Cash flows from operations contribute significantly to liquidity as well as proceeds from maturities of securities and increasing customer deposits. As indicated on the Company’s Condensed Consolidated Statement of Cash Flows, net cash from operating activities for the nine months ended September 30, 2003 contributed $3.1 million to liquidity compared to $2.5 million for the nine months ended September 30, 2002. The majority of the Company’s funding comes from customer deposits within its operating region. Customer deposits provided $13.1 million for the nine months ended September 30, 2003 compared to $11.6 million for the nine months ended September 30, 2002. For the nine months ended September 30, 2003, demand deposits, money market deposits and savings deposits provided the majority of the deposit growth. Another important source of liquidity is investments in federal funds and interest-bearing deposits with banks and the Company’s securities portfolio. The Company maintains a ladder of securities that provides prepayments and payments at maturity and a portfolio of available-for-sale securities that could be converted to cash quickly. Proceeds from maturity and sale of securities provided $18.7 million for the nine months ended September 30, 2003 compared to $11.3 million for the nine months ended September 30, 2002.

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At September 30, 2003, the Company held cash and due from banks, interest-bearing deposits with banks, and federal funds sold of approximately $27.5 million. In addition, at such date $40.55 million of the Company’s investments were classified as available for sale.

The Bank has the capacity to borrow funds, up to ten percent of assets, from the Federal Home Loan Bank of Seattle (“FHLB”) through pre-approved credit lines as a secondary source of liquidity. However, these credit lines have pledge requirements whereby the Bank must maintain unencumbered collateral with a value at least equal to the outstanding balance. In addition to the FHLB credit line, the Bank has committed line of credit agreements totaling approximately $9.5 million from unaffiliated banks. At September 30, 2003, the Bank had no advances outstanding to the FHLB or from unaffiliated banks.

The Bank has commitments to extend credit, which may have an impact on the Company’s liquidity position. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not represent future cash requirements. The Company experience suggests customers draw on approximately 75 percent of loan commitments. Commitments to extend credit at September 30, 2003 and December 31, 2002 were $21.1 and $19.8 million, respectively.

The Company’s total stockholders’ equity increased to $23.3 million at September 30, 2003 from $22.5 million at December 31, 2002. The 3.5 percent increase was the result net income earned during the nine months ended September 30, 2003, partially offset by a 60¢ dividend per share paid to stockholders of record on December 31, 2002 and lower unrealized gains recorded on securities available for sale, net of income tax. At September 30, 2003, stockholders’ equity was 12.6 percent of total assets, compared to 13.1 percent at December 31, 2002.

The market value of available-for-sale securities was greater than book value at both September 30, 2003 and December 31, 2002, primarily as a result of low market interest rates, which resulted in unrealized gains in the investment portfolio. In the event market interest rates increase, the market value of the Company’s investment portfolio may decrease. Because changes in the market value of available-for-sale securities are a component of other comprehensive income, within stockholders’ equity, a decrease in market value of securities would negatively impact stockholders’ equity. At September 30, 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 $1.5 million net of federal income tax. Although stockholder’s equity would be reduced by approximately 6.5 percent, the Company would still be well in excess on capital adequacy requirements in the event the Company would be required to liquidate these securities for unforeseen liquidity needs.

Capital Adequacy Requirements

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

The current guidelines require all federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common shareholders’ equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, 20% of unrealized gain of equity securities, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets. 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%, 20%, 50% or 100%. Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstances, residential construction loans (both carry a 50% rating). Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds (which have a 50% rating) and direct obligations of or

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obligations guaranteed by the United States Treasury or United States Government Agencies (which have a 0% rating). The Agencies have also implemented a leverage ratio, which is equal to Tier 1 capital as a percentage of average total assets less intangibles, to be used as a supplement to the risk-based guidelines. The principal objective of the leverage ratio is to limit the maximum degree to which a bank may leverage its equity capital base. The minimum required leverage ratio for top-rated institutions is 3%, but most institutions are required to maintain an additional cushion of at least 100 to 200 basis points. Any institution operating at or near the 3% level is expected to be a strong banking organization without any supervisory, financial or operational weaknesses or deficiencies. Any institutions experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.

The capital levels of the Company currently exceed applicable regulatory guidelines, and the Bank is qualified as “well-capitalized” at September 30, 2003. Management believes that under the current regulations the Bank will continue to meet well-capitalized capital requirements in the foreseeable future. However, events beyond the control of the Bank such as a downturn in the economy where the Bank have most of their loans, could adversely affect future earnings and, consequently, the ability of the Bank to meet future well-capitalized capital requirements.

The capital amounts and ratios for the Company and the Bank as of September 30, 2003, are presented in the following table (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.
Capital


															To Be Well
															Capitalized Under
									For Capital						Prompt Corrective
			Actual						Adequacy Purposes						Action Provisions

As of September 30, 2003			Amount		Ratio				Amount		Ratio				Amount		Ratio

Total Capital
	(to Risk-Weighted Assets)
		Consolidated	$	24,116		18.4	%	>	$	10,470		8.0	%	>	$	13,087		10.0	%
		Valley Bank	$	22,765		17.4	%	>	$	10,470		8.0	%	>	$	13,087		10.0	%
Tier I Capital
	(to Risk-Weighted Assets)
		Consolidated	$	22,728		17.4	%	>	$	5,235		4.0	%	>	$	7,852		6.0	%
		Valley Bank	$	21,377		16.3	%	>	$	5,235		4.0	%	>	$	7,852		6.0	%
Tier I Capital
	(to Average Assets)
		Consolidated	$	22,728		12.5	%	>	$	7,279		4.0	%	>	$	9,099		5.0	%
		Valley Bank	$	21,377		11.8	%	>	$	7,272		4.0	%	>	$	9,091		5.0	%

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. At September 30, 2003, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company’s interest rate risk since December 31, 2002. For additional information, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2002.

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Item 4. CONTROLS AND PROCEDURES

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

(b) Changes in Internal Controls: In the quarter ended September 30, 2003, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls.

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

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements about the future operations of the Company. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry significantly increasing; increases in the interest rate environment reducing margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; loan delinquency rates; changes in business conditions; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets. Because of these uncertainties, actual future results may be materially different from the results indicated by these forward-looking statements. In addition, the Company’s past results do not necessarily indicate its future results. See also the risk factors in the Company’s 2002 Annual Report on Form 10-K.

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PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

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

Not applicable

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

3.1

Articles of Incorporation of Valley Community Bancshares, Inc. *

3.2

Restated Bylaws of Valley Community Bancshares, Inc. ^

10.

Material contracts of Valley Community Bancshares, Inc.

10.1

Severance agreement for Mr. Brown *

10.2

Severance agreement for Mr. Thompson *

10.3

Severance agreement for Mr. Riordan *

10.4

Severance agreement for Mr. Pickett *

10.5

Deferred Compensation Agreement for Mr. Brown *

10.6

Deferred Compensation Agreement for Mr. Thompson #

10.7

1998 Stock Option Plan *

10.8

401(k) Defined Contribution Plan and Noncontributory Profit Sharing Plan Adoption Agreement *

31.

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.1

Certification of Chief Executive Officer

31.2

Certification of Chief Financial Officer

32.

Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*		Incorporated by reference to the Exhibits set forth on Registrant’s Amended Registration Statement on Form 10 filed with the Securities and Exchange Commission on September 6, 2000.

#		Incorporated by reference to the Exhibits set forth on Registrant’s 2000 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2001.

^		Incorporated by reference to the Exhibits set forth on Registrant’s June 2002 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2002.

(b)

Reports on Form 8-K

The Company filed a current report on Items 7 and 12 of Form 8-K on August 1, 2003. The report included a press release announcing second quarter 2003 financial results.

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SIGNATURES

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


	VALLEY COMMUNITY BANCSHARES, INC.
	(Registrant)

Date:	November 3, 2003	By	/s/ David H. Brown

			David H. Brown
			President and Chief Executive Officer

Date:	November 3, 2003	By	/s/ Joseph E. Riordan

			Joseph E. Riordan
			Executive Vice President and Chief Financial Officer

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VALLEY COMMUNITY BANCSHARES INC 10-Q