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 June 30, 2004


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

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

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

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

Yes [X] No [ ]

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

Yes [ ] No [X]

The number of shares of the issuer’s Common Stock, $1.00 par value, outstanding at August 3, 2004 was 1,238,083.

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


		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheet June 30, 2004 and December 31, 2003		1
	Condensed Consolidated Statement of Income – Three Months and Six Months Ended June 30, 2004 and 2003		2
	Condensed Consolidated Statement of Cash Flows – Three Months and Six Months Ended June 30, 2004 and 2003		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		19
Item 4.	Controls and Procedures		19
FORWARD-LOOKING STATEMENTS			20
PART II OTHER INFORMATION
Item 1.	Legal Proceedings		20
Item 2.	Changes in Securities and Use of Proceeds		20
Item 3.	Defaults upon Senior Securities		20
Item 4.	Submission of Matters to a Vote of Security Holders		20
Item 5.	Other Information		20
Item 6.	Exhibits and Reports on Form 8-K		21
	Signatures		22
	Certifications		23
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

Item 1. FINANCIAL STATEMENTS

VALLEY COMMUNITY BANCSHARES, INC.
AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
(dollars in thousands)


	June 30,			December 31,
	2004			2003
ASSETS
Cash and due from banks	$	6,047		$	5,199
Interest-bearing deposits with banks		8,960			8,503
Federal funds sold		6,069			9,765
Securities available-for-sale		34,002			38,560
Federal Home Loan Bank stock		375			372

		55,453			62,399
Loans		118,878			114,261
Less allowance for loan losses		1,388			1,388

Loans, net		117,490			112,873
Accrued interest receivable		590			681
Premises and equipment, net		5,790			5,850
Other assets		572			417

Total assets	$	179,895		$	182,220

LIABILITIES
Deposits
Noninterest-bearing	$	35,611		$	34,675
Interest-bearing		119,616			122,556

Total deposits		155,227			157,231
Other borrowed funds		534			580
Accrued interest payable		128			145
Other liabilities		516			611

Total liabilities		156,405			158,567

STOCKHOLDERS’ EQUITY
Common stock, par value $1 per share; 5,000,000 shares authorized; 1,238,083 and 1,175,267 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively.		1,238			1,175
Additional paid-in capital		18,760			16,903
Retained earnings		3,540			5,204
Accumulated other comprehensive income (loss), net of tax		(48	)		371

Total stockholders’ equity		23,490			23,653

Total liabilities and stockholders’ equity	$	179,895		$	182,220

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				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
INTEREST INCOME
Interest and fees on loans	$	1,873	$	1,942	$	3,716	$	3,846
Interest on federal funds sold and deposits in banks		64		94		129		186
Interest on securities		257		262		542		555

Total interest income		2,194		2,298		4,387		4,587

INTEREST EXPENSE
Interest on deposits		231		330		451		707
Interest on federal funds and other short-term borrowings		2		1		3		3

Total interest expense		233		331		454		710

Net interest income		1,961		1,967		3,933		3,877
PROVISION FOR LOAN LOSSES
Net interest income after provision for loan losses		1,961		1,967		3,933		3,877

NONINTEREST INCOME
Service charges		102		122		207		237
Gain on sale of investment securities, net		7				49		15
Origination fees on mortgage loans brokered		50		77		78		201
Other operating income		96		133		197		218

Total noninterest income		255		332		531		671

NONINTEREST EXPENSE
Salaries		631		630		1,297		1,311
Employee benefits		159		163		336		339
Occupancy		145		133		285		272
Equipment		121		104		236		215
Other operating expenses		500		500		974		997

Total noninterest expense		1,556		1,530		3,128		3,134

INCOME BEFORE INCOME TAX		660		769		1,336		1,414
PROVISION FOR INCOME TAX		206		242		414		442

NET INCOME	$	454	$	527	$	922	$	972

EARNINGS PER SHARE
Basic	$	0.37	$	0.43	$	0.75	$	0.79
Diluted	$	0.36	$	0.43	$	0.74	$	0.79
Weighted average shares outstanding		1,238,083		1,230,566		1,237,180		1,230,345
Weighted average diluted shares outstanding		1,246,818		1,235,507		1,246,061		1,235,285

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)


	Six Months Ended
	June 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	922		$	972
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		233			229
Deferred income tax		(23	)		(7	)
Net amortization on securities		142			151
FHLB stock dividends		(7	)		(11	)
Gain on sale of securities available-for-sale		(49	)		(15	)
Amortization of intangible assets		19			23
Deferred gain on the sale of real estate					211
Amortization of deferred gain on sale of real estate					(38	)
Changes in operating assets and liabilities:
Decrease in accrued interest receivable		91			39
Increase in accrued interest payable		(17	)		(79	)
Decrease in other assets		33			3
Decrease in other liabilities		(73	)		(41	)

Net cash from operating activities		1,271			1,437

Net decrease (increase) in federal funds sold		3,696			(1,914	)
Net decrease (increase) in interest-bearing deposits with banks		(457	)		8,306
Purchase of securities available-for-sale		(5,684	)		(17,107	)
Proceeds from sales of securities available-for-sale		2,579			2,672
Proceeds from maturities of securities available-for-sale		6,935			9,462
Federal Home Loan Bank stock redeemed		4			37
Net increase in loans		(4,617	)		(4,842	)
Additions to premises and equipment		(163	)		(80	)
Sale of real estate held for investment					224

Net cash from investing activities		2,293			(3,242	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits		(2,004	)		4,164
Net increase (decrease) in other borrowed funds		2			(129	)
Payment on other borrowed money		(48	)		(48	)
Cash dividends paid		(715	)		(675	)
Stock options exercised		49			11

Net cash from financing activities		(2,716	)		3,323

NET INCREASE IN CASH AND DUE FROM BANKS		848			1,518
CASH AND DUE FROM BANKS, beginning of year		5,199			4,847

CASH AND DUE FROM BANKS, at end of period	$	6,047		$	6,365

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for
Interest	$	471		$	789
Income taxes		464			317
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Unrealized losses on securities available-for-sale	$	(635	)	$	(64	)
Deferred tax on unrealized losses on securities available-for-sale		216			22
Distribution of five percent stock dividend		1,871			1,389

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 – Description of Business and Basis of Presentation

Description of Business

Valley Community Bancshares, Inc. (the “Company”) is a Washington State bank holding company headquartered in Puyallup, Washington. The Company conducts its business primarily through its wholly owned bank subsidiary, Valley Bank. 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 the 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 Bank also provides mortgage banking services to its customers through Puget Sound Mortgage Brokers, a division of the Bank.

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 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.

Basis of Presentation

The condensed consolidated financial statements have been prepared by the Company, for the three months and six months ended June 30, 2004 and June 30, 2003, 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, 2003 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 six months ended June 30, 2004, are not necessarily indicative of the results to be anticipated for the year ending December 31, 2004.

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, 2003 and notes thereto included in the Company’s Form 10-K filed with the Securities and Exchange Commission. Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation.

Note 2 – 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.

-4-

VALLEY COMMUNITY BANCSHARES, INC.


	Three Months Ended					Six Months Ended
Stock Option Plan	June 30,					June 30,
In thousands, except for per-share amounts	2004		2003			2004			2003
Pro forma disclosures:
Net income as reported	$	454	$	527		$	922		$	972
Additional compensation for fair value of stock options		1		(2	)		(5	)		(4	)

Pro forma net income	$	455	$	525		$	917		$	968

Earnings per share:
Basic
As reported	$	0.37	$	0.43		$	0.75		$	0.79
Pro forma	$	0.37	$	0.43		$	0.74		$	0.79
Diluted
As reported	$	0.36	$	0.43		$	0.74		$	0.79
Pro forma	$	0.36	$	0.43		$	0.74		$	0.78

Note 3 - 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 six months ended June 30, 2004 and 2003 (dollars in thousands, except per share amounts):

VALLEY COMMUNITY BANCSHARES, INC.


	Three Months Ended				Three Months Ended
	June 30,				June 30,
Earnings Per Share	2004		2003		2004		2003
NUMERATOR:
Net income	$	454	$	527	$	922	$	972
DENOMINATOR:
Denominator for basic earnings per share:		1,238,083		1,230,566		1,237,180		1,230,345
Weighted average shares
Effect of diluted securities — stock options		8,735		4,941		8,881		4,940
Denominator for diluted earnings per share:
Weighted average shares and assumed conversion of diluted stock options		1,246,818		1,235,507		1,246,061		1,235,285
Basic earnings per share	$	0.37	$	0.43	$	0.75	$	0.79
Diluted earnings per share	$	0.36	$	0.43	$	0.74	$	0.79

Note 4 –Comprehensive Income

Total comprehensive income, which includes net income and unrealized gains and losses on the Company’s available-for-sale securities, amounted to $(6,000) and $543,000, for the three months ended June 30, 2004 and 2003, respectively. Total comprehensive income, amounted to $503,000 and $930,000, for the six months ended June 30, 2004 and 2003, respectively.

-5-

Note 5 — 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):

June 30, 2004

Securities Available-For-Sale


			Gross		Gross Unrealized Losses
	Amortized		Unrealized		Less than		12 Months		Fair
	Cost		Gains		12 Months		or More		Value
U.S. Treasury and U.S. Government corporations and agencies	$	10,887	$	8	$	128	$		$	10,767
State and political subdivisions		8,186		205		80				8,311
Mortgage-backed securities		15,001		70		141		6		14,924

	$	34,074	$	283	$	349	$	6	$	34,002

December 31, 2003

Securities Available-For-Sale


			Gross		Gross Unrealized Losses
	Amortized		Unrealized		Less than		12 Months	Fair
	Cost		Gains		12 Months		or More	Value
U.S. Treasury and U.S. Government corporations and agencies	$	13,614		109	$	2	$	$	13,721
State and political subdivisions		7,421		361		4			7,778
Mortgage-backed securities		16,964		151		54			17,061

	$	37,999		621	$	60	$	$	38,560

At June 30, 2004 and December 31, 2003, there were approximately 52 and 20 investment securities, respectively, that had fair values less than amortized cost and therefore contains unrealized losses. The Company has evaluated these securities and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any company or industry specific event. The Company anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment.

Note 6 — Loans

The major classifications of loans at June 30, 2004 and December 31, 2003 are summarized as follows (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.


	June 30,						December 31,
	2004						2003
Loan Portfolio (dollars in thousands)	Amount			Percent			Amount			Percent
Real Estate
Construction	$	10,951			9.2	%	$	9,913			8.7	%
Residential		11,099			9.3	%		12,095			10.6	%
Commercial		63,417			53.3	%		65,114			56.9	%
Commercial		31,371			26.4	%		24,872			21.7	%
Consumer and other		2,177			1.8	%		2,409			2.1	%
Lease financing		52			0.0	%		63			0.0	%

Total loans		119,067			100.0	%		114,466			100.0	%

Deferred loan fees		(189	)					(205	)

Net loans	$	118,878					$	114,261

-6-

Note 7 – 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 June 30, 2004 and December 31, 2003, totaled $1,388,000. Management believes that the allowance for loan losses at June 30, 2004 adequately reflects the risks in the loan portfolio. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments of information available to them at the time of their examination.

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

VALLEY COMMUNITY BANCSHARES, INC.

Loan Loss Experience


	Three and six months June 30,
	2004		2003
Balance at beginning of period	$	1,388	$	1,388
Charge-offs
Recoveries:

Net recoveries		-0-		-0-
Additions charged to operations

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

Note 8 – 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 months and six months ended June 30, 2004 and 2003.

Note 9 – Recent Accounting Pronouncements

During the second quarter ended June 30, 2004 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

Critical Accounting Policies

The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. The Company considers the allowance for loan loss a critical accounting policy subject to estimate. For a full discussion of the Company’s methodology of assessing the adequacy of the allowance for loan losses, see Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Company’s 2003 Annual Report on Form 10-K.

Results of Operations

The following table shows the various performance ratios for the Company for the three months and six months ended June 30, 2004 and 2003, respectively:

VALLEY COMMUNITY BANCSHARES, INC.


	Three Months Ended June 30,						Six Months Ended June 30,
Selected Financial Data ¹ (dollars in thousands, except per share amounts)	2004			2003			2004			2003
Financial Performance
Net Income	$	454		$	527		$	922		$	972
Average Assets		178,738			175,062			178,652			173,903
Average Stockholders’ Equity		23,620			22,581			23,564			22,348
Return on Assets (net income divided by average assets)		1.02	%		1.21	%		1.04	%		1.13	%
Return on Equity (net income divided by average equity)		7.73	%		9.36	%		7.87	%		8.77	%
Net Interest Margin (net interest income (tax adjusted)
Divided by earning assets)		4.83	%		4.94	%		4.83	%		4.93	%
Efficiency Ratio (noninterest expense divided by noninterest income plus net interest income)		70.22	%		66.55	%		70.07	%		68.91	%
Ratio of noninterest income to average assets		3.50	%		3.51	%		3.52	%		3.63	%

The Company earned net income of $454,000 or $0.36 per diluted share for the three months ended June 30, 2004, compared to net income of $527,000 or $0.43 per diluted share, for the three-months ended June 30, 2003, a decrease of 13.9 percent. The Company’s return on average assets was 1.02 percent for the three months ended June 30, 2004, compared to 1.21 percent for the three months ended June 30, 2003. The decrease in net income for the three months ended June 30, 2004 was the result of decreases in net interest income and noninterest income and a increase in noninterest expense.

The Company earned net income of $922,000 or $0.74 per diluted share for the six months ended June 30, 2004, compared to net income of $972,000 or $0.79 per diluted share, for the six months ended June 30, 2003, a decrease of 5.1 percent. The Company’s return on average assets was 1.04 percent for the six months ended June 30, 2004, compared to 1.13 percent for the six months ended June 30, 2003. The decrease in net income for the six months ended June 30, 2004 was the result of a decrease in noninterest income partially offset by a increase in net interest income and a decrease in noninterest expense.

The major factors impacting net income for the three months ended June 30, 2004 are as follows:

•

A continued decrease in net interest margin resulting from loan customers refinancing their fixed rate loans to a lower interest rate.

•

Service charges on deposit accounts, primarily NSF fees, decreased in 2004.

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.

-8-

•

Origination fees on mortgage loans brokered declined as residential loan customers slowed their mortgage refinancing activity.

•

Noninterest expense increased largely as a result of higher equipment expense associated with the re-signage of the Bank.

•

Included in 2003 was the amortization of a deferred gain on the sale of real estate held for investment.

The Company anticipates higher non-interest expenses during the third quarter of 2004 when the implementation of the Bank’s internet banking product is completed. The Company does not anticipate sufficient revenues to offset the added costs of this product, as a result profitability is anticipated to be negatively impacted on a go forward basis.

Net Interest Income

Net interest income is the most significant component contributing to net income. It is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearing liabilities (deposits and borrowings). The volume of and yields earned on earning assets and the volume of and the rates paid on interest bearing liabilities determine net interest income. Interest earned and interest paid is also affected by general economic conditions, particularly changes in market interest rates, and by government policies and the action of regulatory authorities.

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


	Three Months Ended June 30,
Net Interest Income, adjusted to a Tax Equivalent Basis (dollars in thousands),	2004		2003		Six Months Ended June 30,
Interest income, as reported	$	2,194	$	2,298	$	4,387	$	4,587
Effect of tax exempt income		40		34		79		66

TE interest income		2,234		2,332		4,466		4,653
Interest expense		233		331		454		710

TE net interest income	$	2,001	$	2,001	$	4,012	$	3,943

TE net interest income, divided by average earning assets is referred to as net interest margin. For the three months ended June 30, 2004 the Company’s net interest margin was 4.83 percent compared to 4.94 percent for the three months ended June 30, 2003. For the six months ended June 30, 2004 the Company’s net interest margin was 4.83 percent compared to 4.93 percent for the six months ended June 30, 2003.

TE interest income was $2,234,000 and $4,466,000 for the three months and six months ended June 30, 2004, respectively compared to $2,332,000 and $4,653,000 for the three months and six months ended June 30, 2003, respectively. The yield on interest-earning assets decreased to 5.39 percent for the three months ended June 30, 2004 compared to 5.76 percent during the same period a year ago and decreased to 5.37 percent for the six months ended June 30, 2004 compared to 5.82 percent during the same period a year ago. The three month and six month decrease was the result of a decrease in the yield earned on earning assets partially offset by the additional earnings received on the increased volume of earning assets.

Interest expense was $233,000 and $454,000 for the three months and six months ended June 30, 2004, respectively compared to $331,000 and $710,000 for the three months and six months ended June 30, 2003, respectively. The cost of funds decreased to 0.78 percent for the three months ended June 30, 2004 compared to 1.10 percent during the same period a year ago and decreased to 0.76 percent for the six months ended June 30, 2004 compared to 1.19 percent

-9-

during the same period a year ago. The three month and six month decrease was due to a decrease in the Company’s cost of funds resulting from low 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 beginning in 2001. The significant decrease in market interest rates initially had a positive impact on the Company’s net interest margin as the Company experienced a greater reduction in deposit costs in comparison to the reduction in the earnings on loans and investments. However, during 2003 and 2004 market interest remained relatively low which resulted in a greater reduction in the earnings on loans and investments as compared to the reduction in deposit costs.

The Company’s current interest rate risk position suggests that in the event of an increase in market interest rates, the Company’s TE net interest income and margin may decrease. The decrease results because the Company has a greater amount of interest bearing liabilities subject to repricing when compared to the repricing of interest earning assets. Any TE net interest income and margin decrease is dependent on the timing and magnitude of any interest rate increase. Therefore, the decrease 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 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 while the ability to lower deposit rates is somewhat limited.

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 June 30, 2004 and 2003:

VALLEY COMMUNITY BANCSHARES, INC.


	For the Three Months Ended June 30,
	2004							2003
	Average		Revenue/		Yield/			Average		Revenue/		Yield/
AVERAGE BALANCES AND INTEREST RATES EARNED/PAID (dollars in thousands)	Balance		Expense		Rate			Balance		Expense		Rate
ASSETS
Interest-earning assets
Loans (including fees) ¹	$	117,915	$	1,873		6.39	%	$	110,307	$	1,942		7.06	%
Investment securities ^{2 3}		34,938		297		3.42	%		33,398		303		3.64	%
Other earning assets		13,894		64		1.85	%		18,712		94		2.01	%

Total Interest-earning assets		166,747		2,234		5.39	%		162,417		2,332		5.76	%
Total noninterest-earning assets		11,991							12,645

TOTAL ASSETS	$	178,738						$	175,062

Interest-bearing liabilities
Deposits	$	118,725	$	231		0.78	%	$	119,970	$	330		1.10	%
Other borrowed funds		797		2		1.01	%		460		1		0.87	%

Total Interest-bearing liabilities		119,522		233		0.78	%		120,430		331		1.10	%
Noninterest-bearing liabilities		35,596							32,051
Stockholders’ equity		23,620							22,581

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	178,738						$	175,062


Net interest spread			$	2,001		4.60	%			$	2,001		4.65	%

Margin Analysis
TE interest income/earning assets			$	2,234		5.39	%			$	2,332		5.76	%
Interest expense/earning assets				233		0.56	%				331		0.82	%

Net interest margin			$	2,001		4.83	%			$	2,001		4.94	%

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.

-10-

VALLEY COMMUNITY BANCSHARES, INC.


	For the Six Months Ended June 30,
	2004							2003
	Average		Revenue/		Yield/			Average		Revenue/		Yield/
AVERAGE BALANCES AND INTEREST RATES EARNED/PAID (dollars in thousands)	Balance		Expense		Rate			Balance		Expense		Rate
ASSETS
Interest-earning assets
Loans (including fees) ¹	$	116,623	$	3,716		6.41	%	$	108,616	$	3,846		7.14	%
Investment securities ^{2 3}		36,018		621		3.47	%		32,517		621		3.85	%
Other earning assets		14,242		129		1.82	%		20,158		186		1.86	%

Total Interest-earning assets		166,883		4,466		5.37	%		161,291		4,653		5.82	%
Total noninterest-earning assets		11,769							12,612
TOTAL ASSETS	$	178,652						$	173,903

Interest-bearing liabilities
Deposits	$	119,395	$	451		0.76	%	$	119,569	$	707		1.19	%
Other borrowed funds		638		3		0.95	%		472		3		1.28	%

Total Interest-bearing liabilities		120,033		454		0.76	%		120,041		710		1.19	%
Noninterest-bearing liabilities		35,055							31,514
Stockholders’ equity		23,564							22,348

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	178,652						$	173,903


Net interest spread			$	4,012		4.61	%			$	3,943		4.63	%

Margin Analysis
TE interest income/earning assets			$	4,466		5.38	%			$	4,653		5.82	%
Interest expense/earning assets				454		0.55	%				710		0.89	%

Net interest margin			$	4,012		4.83	%			$	3,943		4.93	%

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.

-11-

The following table sets forth information concerning the Company’s change in TE net interest income for the period that are attributable to changes in interest rate and changes in volume for the three months and six month ended June 30, 2004 compared to the three months and six months ended June 30, 2003:

VALLEY COMMUNITY BANCSHARES, INC.


	2004 Compared to 2003
Volume/Rate Analysis ¹ — For the Three Months ended June 30, (dollars in thousands)	Volume			Rate			Net
TE Interest income
Loans (including fees) ²	$	126		$	(195	)	$	(69	)
Investment securities ³		13			(12	)		1
Other earning assets		(32	)		2			(30	)

		107			(205	)		(98	)
Interest-bearing liabilities
Total deposits		(3	)		(96	)		(99	)
Other borrowed funds		1						1

		(2	)		(96	)		(98	)

	$	109		$	(109	)	$	0

VALLEY COMMUNITY BANCSHARES, INC.


	2004 Compared to 2003
Volume/Rate Analysis ¹ — For the Six Months ended June 30, (dollars in thousands)	Volume			Rate			Net
TE Interest income
Loans (including fees) ²	$	277		$	(407	)	$	(130	)
Investment securities ³		64			(64	)
Other earning assets		(76	)		19			(57	)

		265			(452	)		(187	)
Interest-bearing liabilities
Total deposits		(1	)		(255	)		(256	)
Other borrowed funds		1			(1	)

		0			(256	)		(256	)

	$	265		$	(196	)	$	69

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%.

-12-

Provision for loan losses

Provisions for loan losses reduce net interest income. The Company provided $0 for loan losses for the three months and six months ended June 30, 2004 and 2003.

Management believes the amount of the allowance for loan losses to be adequate to absorb losses in the current portfolio. This belief 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 $255,000 and $531,000 for the three months and six months ended June 30, 2004, respectively, compared to $332,000 and $671, 000 during the same respective periods a year ago.

The decrease in noninterest income was the result of lower deposit service charges (NSF fees), lower loan origination fees on mortgage loans brokered, and a decrease in the amortization of deferred gain on the sale of real estate. The decrease was partially offset by gains realized on the sale of investment securities. The significant reduction in origination fees on mortgage loans brokered is the result of residential loan customer reducing their demand for mortgage refinance loans. The reduction in demand occurred because most mortgage loan refinance customers refinanced their mortgages shortly after the Federal Reserve lowered interest rates for the last time in 2003. Included in 2003 was the amortization of a portion of the $211,000 deferred gain realized on the sale of real estate that the Bank previously held for investment purpose.

The following table sets forth information concerning the various components of the Company’s noninterest income for the three months and six months ended June 30, 2004 and 2003, respectively:

VALLEY COMMUNITY BANCSHARES, INC.


	Three Months Ended June 30,				Three Months Ended June 30,
Noninterest Income (dollars in thousands)	2004		2003		2004		2003
Noninterest Income
Service charges	$	102	$	122	$	207	$	237
Gain on sale of investment securities, net		7				49		15
Origination fees on mortgage loans brokered		50		77		78		201
Mutual fund and insurance commissions		4		5		25		14
Customer check charges		12		5		23		8
ATM and debit card		38		37		69		68
Merchant bank card income, net		20		22		32		37
Amortization of deferred gain on sale of real estate				38				38
Other		22		26		48		53

Total noninterest income	$	255	$	332	$	531	$	671

Noninterest expense was $1,556,000 and $3,128,000 for the three months and six months ended June 30, 2004, respectively, compared to $1,530,000 and $3,134,000 during the same respective periods a year ago.

The decrease in noninterest expense was primarily the result of decreased salaries and employee benefits and from lower professional fees. The 2004 decrease in salaries and benefits was the result of decreased commissions paid to residential mortgage originators resulting from a drop in mortgage refinancing activity. The decrease in professional fees in 2004 occurred largely as a result of non-recurring merger related expenses (between Puyallup Valley Bank and Valley Bank) that were paid in 2003. The percentage of noninterest expense to average assets was 3.50 percent for the three months ended June 30, 2004, compared to 3.51 percent during the same period last year

-13-

The following table sets forth information concerning the various components of the Company’s noninterest expense for the three months and six months ended June 30, 2004 and 2003, respectively:

VALLEY COMMUNITY BANCSHARES, INC.


	Three Months Ended June 30,				Six Months Ended June 30,
Noninterest Expense (dollars in thousands)	2004		2003		2004		2003
Noninterest Expense
Salaries	$	631	$	630	$	1,297	$	1,311
Employee benefits		159		163		336		339
Occupancy		145		133		285		272
Equipment		121		104		236		215
Operating		131		139		261		278
Software		50		52		99		105
Advertising and marketing		43		44		72		75
Professional		54		51		114		132
Directors		28		28		56		56
ATM and debit card		39		44		74		76
Business and occupation tax		37		35		68		67
Other		118		107		230		208

Total noninterest expense	$	1,556	$	1,530	$	3,128	$	3,134

The Company’s efficiency ratio, which is the ratio of noninterest expense to net interest income plus noninterest income, was 70.1 percent for the six months ended June 30, 2004 compared to 68.9 percent for the six months ended June 30, 2003.

Provision for income tax

The Company’s provision for income tax is a significant reduction of operating income. The provision for the three months ended June 30, 2004, was $206,000 compared to $242,000 for the three months ended June 30, 2003. The provision for the six months ended June 30, 2004, was $414,000 compared to $442,000 for the six months ended June 30, 2003. The provision represents an effective tax rate of 31 percent during 2004 and 2003, respectively. The Company’s marginal tax rate is currently 34 percent. The difference between the Company’s effective and marginal tax rate is primarily related to investments made in tax-exempt securities.

Financial Condition

The Company’s total consolidated assets decreased 1.3 percent to $179.9 million as of June 30, 2004, compared to $182.2 million as of December 31, 2003. Loans increased and deposits decreased 4.0 percent and 1.3 percent, respectively during the six months ended June 30, 2004. The increase in loans was funded with maturities of investments securities. The decrease in deposits was funded by a draw down of federal funds sold. Stockholders’ equity decreased as a result of the payment of a 60¢ per share cash dividend to stockholders and a decrease in other comprehensive income partially offset by earnings during the six months ended June 30, 2004.

Investment Portfolio

The major classifications of investments at June 30, 2004 and December 31, 2003, are summarized in Note 4 – Investment Securities in the Notes to Condensed Consolidated Financial Statements.

At June 30, 2004, the Company had $34.0 million of securities available-for-sale, compared to $38.6 million as of December 31, 2003. The investment portfolio decreased by $4.6 million during 2004, as a result of the sale and maturity of approximately $9.5 million of securities and a $.6 million decrease in the market value of securities partially offset by the purchase of approximately $5.7 million in securities. The funds received by the decrease in the securities portfolio were invested in more profitable loans.

At June 30, 2004, 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.

-14-

Loan Portfolio

The major classifications of loans at June 30, 2004 and December 31, 2003, 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 June 30, 2004. They include loans to medical doctors and dentists in the amount of approximately $25.8 million.

Loans were $118.9 million as of June 30, 2004, compared to $114.3 million as of December 31, 2003, an increase of 4.0 percent. The increase was primarily in real estate construction and commercial loans, partially offset by a decrease in real estate residential and real estate commercial loans. The percentage of loans to total assets increased to 66.1 percent at June 30, 2004 compared to 62.7 percent at December 31, 2003. 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.


	June 30,		December 31,
Non-performing Assets	2004		2003
Non-performing assets:
Nonaccrual loans	$		$	10
Loans 90 days or more past due
Restructured loans		-0-		10

Other real estate owned
Total non-performing assets	$	-0-	$	10

As of June 30, 2004, the Company had no nonperforming assets, which include nonaccrual loans, loans 90 days or more past due and still accruing interest, and restructured loans. The Company had $10,000 in nonperforming assets as of December 31, 2003.

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 six months ended June 30, 2004, and 2003 there was one loan on nonaccrual status. The gross income that would have been recorded for the six months ended June 30, 2004, and 2003 if the nonaccrual loan had been current and in accordance with its original term was insignificant. Interest recognized on the loan for the year was insignificant.

Potential Problem Loans

At June 30, 2004 and December 31, 2003, the Company had potential problem loans totaling approximately $3,451,000 and $2,349,000, respectively. The increase occurred as a result of the Company’s recent adverse classification of loan credits within the Company’s Auburn and Kent markets. 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.

-15-

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, Kent and King County areas. Real estate prices in this market are stable at this time but may weaken as a result of a slow local and national economy. Therefore, the ultimate collectibility of a substantial portion of the Company’s loan portfolio may be susceptible to change as local market conditions change in the future.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgment about information available to them at the time of their examination.

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

VALLEY COMMUNITY BANCSHARES, INC.


	Analysis of the Allowance for Loan Losses
	Three months ended						Six months ended
	June 30,						June 30,
Loan Loss Experience	2004			2003			2004			2003
Average Allowance for Loan Losses	$	1,388		$	1,388		$	1,388		$	1,388
Average Loans Outstanding	$	117,915		$	110,307		$	116,623		$	108,616
Ratio of net charge-offs during the period to average loans outstanding		0.00	%		0.00	%		0.00	%		0.00	%
Ratio of average allowance for loan losses to average loans outstanding		1.18	%		1.26	%		1.19	%		1.28	%

The ratio of the allowance for loan losses as a percentage of loans decreased to 1.17 percent at June 30, 2004 compared to 1.21 percent and 1.28 percent at December 31, 2003 and June 30, 2003, respectively. The decrease in the ratio during the past year was due to several factors including positive credit performance within several of the Company’s larger classified credits, no loan charge-offs, slowing loan demand, the effects of an improving economy, and management’s current evaluation of the loan portfolio. Management continues to emphasize credit quality and carefully monitors the loan portfolio especially given the softness within the local economy. Any changes to the Company’s loan loss allowance will be considered as circumstances warrant.

-16-

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 decreased 1.3 percent to $155.2 million as of June 30, 2004, compared to $157.2 million as of December 31, 2003. The decrease occurred primarily in money market deposits and time certificates of deposit less than $100,000 during the six months, partially offset by an increase in demand deposits and in time certificates of deposit greater than $100,000.

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

VALLEY COMMUNITY BANCSHARES, INC.


	Period ended,
	June 30, 2004					December 31, 2003
Deposits (dollars in thousands)	Amount		Percent			Amount		Percent
Noninterest bearing demand	$	35,611	$	22.9	%	$	34,675		22.1	%
Interest bearing demand		24,528		15.8	%		24,110		15.3	%
Money market		36,622		23.6	%		39,018		24.8	%
Savings		16,106		10.4	%		16,500		10.5	%
Time certificates < $100,000		20,057		12.9	%		21,657		13.8	%
Time certificates > $100,000		22,303		14.4	%		21,271		13.5	%

	$	155,227	$	100.0	%	$	157,231		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 to liquidity as well as proceeds from maturities of securities and customer deposits. As indicated on the Company’s Condensed Consolidated Statement of Cash Flows, net cash from operating activities for the six months ended June 30, 2004 contributed $1.3 to liquidity compared to $1.4 million for the six months ended June 30, 2003. The majority of the Company’s funding comes from customer deposits within its operating region. However, during the six months ended June 30, 2004 customer deposits decreased $2.0 million compared to a 4.2 million increase for the six months ended June 30, 2003. Other sources of liquidity include investments in federal funds and interest-bearing deposits with banks and the Company’s securities portfolio. The Company generally 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 $9.5 million for the six months ended June 30, 2004 compared to $12.1 million for the three months ended June 30, 2003.

At June 30, 2004, the Company held cash and due from banks, interest-bearing deposits with banks, and federal funds sold of approximately $21.1 million. In addition, at such date $34.0 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 June 30, 2004, the Bank had no advances outstanding to the FHLB or from unaffiliated banks.

-17-

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 June 30, 2004 and December 31, 2003 were $17.0 and $21.5 million, respectively.

The Company’s total stockholders’ equity decreased to $23.5 million at June 30, 2004 from $23.7 million at December 31, 2003. The decrease was the result of a 60¢ dividend per share paid to stockholders of record on December 31, 2003 and unrealized losses recorded on securities available for sale, net of income tax, partially offset by net income earned during the six months ended June 30, 2004. At June 30, 2004, stockholders’ equity was 13.1 percent of total assets, compared to 13.0 percent at December 31, 2003.

The market value of available-for-sale securities was less than book value at June 30, 2004 and higher than book value at December 31, 2003. The decrease in market value was primarily the result of higher market interest rates, which resulted in unrealized losses in the investment portfolio. In the event market interest rates continue to increase, the market value of the Company’s investment portfolio may continue to 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 June 30, 2004, 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 6.4 percent, the Company would still be well in excess of capital adequacy requirements in the event the Company would be required to liquidate these securities for unforeseen liquidity needs.

Capital Adequacy Requirements

The capital levels of the Company currently exceed applicable regulatory guidelines, and the Bank is qualified as “well-capitalized” at June 30, 2004. 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.

For a full discussion of capital adequacy requirements, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2003.

The capital amounts and ratios for the Company and the Bank as of June 30, 2004, are presented in the following table (dollars in thousands):

VALLEY COMMUNITY BANCSHARES, INC.


													To Be Well
													Capitalized Under
							For Capital						Prompt Corrective
Capital	Actual						Adequacy Purposes						Action Provisions
As of June 30, 2004	Amount		Ratio				Amount		Ratio				Amount		Ratio
Total Capital
(to Risk-Weighted Assets)
Consolidated	$	24,872		18.4	%	³	$	10,787		8.0	%	³	$	13,484		10.0	%
Valley Bank	$	23,296		17.3	%	³	$	10,787		8.0	%	³	$	13,484		10.0	%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated	$	23,484		17.4	%	³	$	5,394		4.0	%	³	$	8,090		6.0	%
Valley Bank	$	21,908		16.2	%	³	$	5,394		4.0	%	³	$	8,090		6.0	%
Tier I Capital
(to Average Assets)
Consolidated	$	23,484		13.2	%	³	$	7,139		4.0	%	³	$	8,924		5.0	%
Valley Bank	$	21,908		12.3	%	³	$	7,137		4.0	%	³	$	8,921		5.0	%

-18-

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 June 30, 2004, 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, 2003. For additional information, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2003.

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 as of June 30, 2004. 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 period specified in the SEC’s rules and forms.

(b) Changes in Internal Controls: In the quarter ended June 30, 2004, 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 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.

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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: unforeseen legal proceedings, unexpected costs in connection with internet banking initiative, competitive pressure in the banking industry significantly increasing; increases or decreases 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 2003 Annual Report on Form 10-K.

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

The Annual Meeting of Shareholders of Valley Community Bancshares, Inc. (the “Meeting”) was held on April 29, 2004. The only matter of business conducted at the Meeting was the election of Directors. At the Meeting, the following Directors were elected to server on the board until the 2007 Annual Meeting of Shareholders: A. Eugene Hammermaster, Warren D. Hunt and Roger L Knutson. The least number of votes in favor of any such Director was 95% of the shares voted at the Meeting.

The terms of Directors, Ronald E. Claudon, William E. Fitchitt, David K. Hamry , Thomas R. Absher, David H. Brown, and Thomas M. Pasquier continued after the meeting.

Item 5. OTHER INFORMATION

Not applicable.

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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		Deferred Compensation Agreement for Mr. Brown *

	10.5		Deferred Compensation Agreement for Mr. Thompson #

	10.6		1998 Stock Option Plan *

	10.7		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 April 29, 2004. The report included a press release announcing financial results for the three months ended March 31, 2004.

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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: July 28, 2004	By /s/ David H. Brown
	David H. Brown
	President and Chief Executive Officer



Date: July 28, 2004	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