VALLEY COMMUNITY BANCSHARES INC
10-12G/A, 2000-07-21
STATE COMMERCIAL BANKS
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<PAGE>



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    ---------


                               AMENDMENT NO. 1 TO
                                     FORM 10


                                GENERAL FORM FOR
                           REGISTRATION OF SECURITIES
    Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934


                                    ---------

                        VALLEY COMMUNITY BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

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

   1307 EAST MAIN, PUYALLUP, WASHINGTON                   98372
 (Address of principal executive offices)             (Zip Code)


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

        Securities to be registered pursuant to Section 12(b)of the Act:

                                      NONE


          Securities to be registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $1.00 PAR VALUE
                                (Title of Class)


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<TABLE>
<CAPTION>
                             TABLE OF CONTENTS                                                          PAGE
<S>                                                                                                     <C>
         ITEM 1.    BUSINESS OF VALLEY COMMUNITY BANCSHARES, INC., AND THE BANKS                           3

         ITEM 2.    FINANCIAL INFORMATION                                                                 13

         ITEM 3.    PROPERTIES                                                                            30

         ITEM 4.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        31

         ITEM 5.    DIRECTORS AND EXECUTIVE OFFICERS                                                      31

         ITEM 6.    EXECUTIVE COMPENSATION                                                                33

         ITEM 7.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        36

         ITEM 8.    LEGAL PROCEEDINGS                                                                     36

         ITEM 9.    MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
                    AND RELATED STOCKHOLDER MATTERS                                                       36

         ITEM 10.   RECENT SALES OF UNREGISTERED SECURITIES                                               36

         ITEM 11.   DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED                               38

         ITEM 12.   INDEMNIFICATION OF DIRECTORS AND OFFICERS                                             39

         ITEM 13.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           41

         ITEM 14.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                    ACCOUNTING AND FINANCIAL DISCLOSURE                                                   70

         ITEM 15.   FINANCIAL STATEMENTS AND EXHIBITS                                                     70
</TABLE>



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                        VALLEY COMMUNITY BANCSHARES, INC.


                AMENDMENT NO. 1 TO FORM 10 REGISTRATION STATEMENT


ITEM 1.  BUSINESS OF VALLEY COMMUNITY BANCSHARES, INC., AND THE BANKS

GENERAL

         Valley Community Bancshares, Inc. (the "Company") is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended.
The administrative offices of the Company are located at 1307 East Main
Avenue, Puyallup, Washington 98372, and its telephone number is
(253) 848-2316.

         The Company was organized and incorporated under the laws of the
State of Washington as a holding company for its principal banking
subsidiary, Puyallup Valley Bank, a state chartered, FDIC insured commercial
bank, through a reorganization completed on July 1, 1998. The Company
conducts its business primarily through Puyallup Valley Bank, but has
recently completed the acquisition of Valley Bank, a newly organized state
chartered FDIC insured commercial bank subsidiary located in Auburn,
Washington. Puyallup Valley Bank and Valley Bank are referred to as the
"Banks" in this Registration Statement.


         The principal source of the Company's revenue are (i) interest
and fees on loans; (ii) deposit service charges; (iii) merchant credit card
processing fees; (iv) federal funds sold (funds loaned on a short-term basis
to other banks); and (v) interest on investments (principally government
securities). The Banks' 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 Banks also offer cash management services, merchant credit card
processing, safe deposit boxes, wire transfers, direct deposit or payroll and
social security checks, automated teller machine access, and automatic drafts
for various accounts.


PUYALLUP VALLEY BANK

         Puyallup Valley Bank is a Washington state-charted commercial bank
that provides full-service banking to businesses and residents within the
Puyallup community and its surrounding area. Puyallup Valley 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. Puyallup Valley Bank conducts business
out of six full-service offices and one drive-up facility.

         The organizers of Puyallup Valley Bank commenced formation efforts
in 1972. Puyallup Valley Bank was formally incorporated on January 9, 1973,
under the laws of the State of Washington after having received approval to
organize from the Division and the FDIC, and commenced operations during
October, 1973. Puyallup Valley Bank was organized with capital of $400,000
through the sale of 20,000 shares of Common Stock at a sales price of $20 per
share.

         Puyallup Valley Bank had net income of $1,520,000 in 1999,
$1,568,000 in 1998, and $1,592,000 in 1997. Total Assets at December 31, 1999
and 1998 were $124,909,000 and $125,189,000, respectively.

VALLEY BANK

         Valley Bank is a newly organized commercial bank that commenced
operations on January 11, 1999. Valley Bank was formally incorporated
December 3, 1998, under the laws of the State of Washington after having
received approval to organize from the Division of Banks of the Washington
Department of Financial Institutions (the "Division") and the FDIC. Valley
Bank was founded by a group of business and professional individuals in the
King County area as a commercial bank subsidiary of the Company to serve the
needs of the community in and around the city Auburn. Valley Bank engages in
a general commercial banking business in the Auburn area of King County and
offers commercial banking services to small and medium size businesses,
professionals and retail customers in the bank's market area.


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<PAGE>



         Valley Bank is a solely-owned subsidiary of the Company and with
initial capital of $4,025,000, the minimum amount required to capitalize a
bank in the Auburn community under federal and state law.

         Valley Bank had net loss of approximately $125,000 in 1999 and total
assets at December 31, 1999 of approximately $8,002,000. It is anticipated
that Valley Bank will continue to incur operating losses in the next year(s)
of operation. It is anticipated that such losses will not have a significant
impact on the Company.


MARKET AREA



         The Company's principal market area is located in South King County and
Eastern Pierce County region of Washington State. King County and Pierce County
are the two most populous counties in Washington State with over 2,000,000
residents. The economy of the region is dependent upon aerospace, high
technology, foreign trade and natural resources, including agriculture and
timber. The region has become more diversified over the past decade as a result
of the success of software companies such as Microsoft and the establishment of
numerous research and biotechnology firms. The regional economy generally has
experienced strong growth and stability in recent years.



         Eastern Pierce County, where Puyallup Valley Bank has six locations, is
located approximately 30 miles southeast of Seattle and five miles northeast of
Tacoma, the region's two largest cities. The area includes several residential
and agricultural communities including Puyallup, South Hill, Sumner, Edgewood,
Graham, Orting, and Summit/Fredrickson and has a population in excess of 100,000
residents. This area is characterized as the Company's principal market area.



         South King County, where Valley Bank has one location in Auburn, is
centrally located between Seattle and Tacoma and has a population of over
140,000 residents. The community is supported by light industry, aerospace, and
forest products industries. The Company considers the Auburn and Kent Valley a
natural area of expansion because of its close proximity to Eastern Pierce
County.


BUSINESS STRATEGY

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

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

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

         The Banks provide innovative, quality, financial products that meet
the banking needs of their customers and communities. The loan programs and
acceptance of certain loans may vary from time-to-time depending upon funds
available and regulations governing the banking industry. The Banks offer all
basic types of credit to their local communities including commercial and
consumer loans. The types of loans within these categories are as follows:


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<PAGE>



         COMMERCIAL LOANS. Commercial loans are typically made to sole
proprietorships, partnerships, corporations, and other business entities,
municipalities, and individuals, where the loan is to be used primarily for
business purposes. The types of loans the Banks offer include:

                  -        Small Business Administration financing programs
                  -        operating and working capital loans
                  -        loans to finance capital purchases
                  -        commercial real estate loans
                  -        business lines of credit
                  -        term loans
                  -        loans to professionals
                  -        letters of credit

         CONSUMER LOANS. Consumer loans are typically available to finance
consumer purchases, such as automobiles, household furnishings, boats, and
education. Loans are available on both a secured and an unsecured basis. The
following types of consumer loans are available:

                  -        automobiles and trucks
                  -        boats and recreational vehicles
                  -        personal loans and lines of credit
                  -        home equity lines of credit
                  -        home improvement and rehabilitation loans
                  -        credit card services
                  -        consumer real estate loans

         Other types of credit programs, such as loans to nonprofit
organizations, public entities, for community development, and other
governmental offered programs also are available.

         The Banks offer traditional banking services, such as safe deposit
boxes, wire transfers, direct deposit of payroll and social security checks,
automated teller machine access, and automatic drafts for various accounts.
The Banks do not offer trust services.


CREDIT MANAGEMENT


         The Company strives to achieve sound credit risk management. In
order to achieve this goal the Company has established stringent, centralized
credit policies and uniform underwriting criteria for all loans. The Company
emphasizes diversification in the types of loans offered, regular credit
examinations, and quarterly reviews of large loans and of loans experiencing
deterioration in credit quality. The Company identifies potential problem
loans early, charges off loans promptly, and maintains a adequate allowance
for loan loss. In order to achieve sound credit risk management the Company
has established certain credit guidelines for its lending portfolio.
Guidelines relating to the more commonly requested loans types are as follows:


1.                Short-term Single Payment Loans - These notes are made to
                  individuals and businesses and generally do not exceed six
                  months in term. The credit needs are generally seasonal with
                  the source of repayment being liquidation of the current
                  assets being financed or other current asset conversion. For
                  commercial borrowers, cash flow projections are provided to
                  establish the ability to service the debt within the terms of
                  the note. Collateral is taken if the commercial borrower
                  debt-to-worth ratio exceeds 1:1 or the current ratio is less
                  than 2:1. Loans to closely held corporations are generally
                  guaranteed by the principal(s).


2.                Term Residential First Mortgage Loans - These notes include
                  any loan whose purpose is to buy residential real estate with
                  the loan secured by the real estate. The Company currently is
                  not interested in generating residential real estate loans for
                  its portfolio, unless the interest rate on those loans can be
                  periodically adjusted to reflect current market conditions.
                  Loans in excess of five years have cut-offs for rate review.
                  The maximum amortization of first residential real estate is
                  30 years. The loan-to-value ratios normally do not exceed 80
                  percent.


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<PAGE>



3.   Consumer Installment Loans - These notes are normally made to consumers
     under the following guidelines.

          -    Automobiles - The dealer cost on new automobiles and average loan
               value on used ones.

          -    Recreational Vehicles and Boats - 80 percent of the cash selling
               price.

          -    Home Improvement - These loans are less than the borrower's
               equity in the property and are the borrower's residence.

          -    Second Liens Real Estate (Single Family) - Maximum term on these
               loans is 180 months. The debt on the property generally does not
               exceed a loan-to-value ratio of 80 percent.

          -    Mobile home - Maximum term on these loans is 180 months. The debt
               on the property generally does not exceed a loan-to-value ratio
               of 75 percent.

          -    Unsecured - The term for unsecured loans generally does not
               exceed 24 months, 6 months for single payment loans.

4.   Consumer Lines of Credit - The Company offers two personal lines of credit
     programs: Personal Line of Credit and Home Equity Line of Credit. The
     maximum term on these loans is normally 60 months. The debt on the property
     generally does not exceed a loan-to-value ratio of 80 percent.

5.   Loans For Business Purposes. - The Company makes term loans to finance the
     acquisition of fixed assets or refinance short-term debt used to purchase
     fixed assets. The maximum term is 7 years or the estimated useful life of
     the asset being purchased, whichever is less (unless secured by real
     estate). These loans include accounts receivable, inventory and/or
     equipment. Collateral is the form of a first lien on commercial real estate
     and generally has a maximum maturity of 25 years with a loan-to-value ratio
     not to exceed 80 percent. Repayment comes from cash flow and therefore
     borrowers provide the Company with a forecast of Balance Sheet, Cash Flow
     and Profit and Loss Statements as an indication of their capacity to repay
     the loan. Debt service coverage generally is at least 1:1.

6.   Real Estate Lending - The Company offers loans secured by real property
     subject to loan-to-value limits (LTV). However other credit factors such as
     capacity of the borrower, income from the underlying property, the overall
     credit-worthiness of the borrower, the level of cash equity invested in the
     property, secondary sources of repayment, and additional collateral or
     credit enhancements are also considered. The following loan-to-value limits
     have been established.

<TABLE>
<CAPTION>
                                  LOAN TYPE                      MAXIMUM LTV
                                  ---------                      -----------
                  <S>                                            <C>
                  Raw Land                                           65%
                  Development                                        75%
                  Non-Residential Construction                       80%
                  One-to-Four Family Construction                    80%
                  Improved Property                                  80%
                  Home Equity Loans                                  80%
                  Residential One-to-Four Family                     80%
</TABLE>


EMPLOYEES

         At December 31, 1999, the Banks had 49 full and 19 part time
employees. The Company does not have any employees. Management considers its
relations with employees to be satisfactory.

COMPETITION

         The geographic market area served by the Banks is highly competitive
with respect to both loans and deposits. The Banks compete principally with
commercial banks, savings and loan associations, credit unions, mortgage
companies, and other financial institutions. The major commercial bank
competitors are the regional banks (Columbia State Bank and Frontier Bank)
and national banks (Key Bank National Association, Bank of America National
Trust and Savings Association, U.S. Bank National Association and Wells Fargo
Bank) that have a branch or branches within the Bank's primary trade areas.
Among the advantages such larger banks have are their ability to finance
wide-ranging advertising campaigns and to allocate


                                      6


<PAGE>


their investment assets to geographic regions of higher yield and demand.
Such banks offer certain services which are not offered directly by the Bank
(but are offered indirectly through correspondent institutions); and, by
virtue of their greater total capitalization (legal lending limits to an
individual customer are based upon a percentage of a bank's total shareholder
equity accounts), such banks have substantially higher lending limits than
the Banks.

         The Banks also compete with the financial markets for funds. For
instance, yields on corporate and government debt securities and other
commercial paper affect the ability of commercial banks to attract and hold
deposits. Further, commercial banks compete for available funds with money
market instruments and similar investment vehicles offered by institutions
such as brokerage firms, credit card companies, and retailers (e.g., Sears,
Roebuck & Co.). In periods of high interest rates, such money market funds
have provided substantial competition to banks for deposits, and it is
anticipated that they may continue to do so in the future.

         In order to compete with the other financial institutions in their
primary trade areas, the Banks use, to the fullest extent possible, the
flexibility which is accorded by independent status. This includes an
emphasis on specialized services, local promotional activity, and personal
contacts by the Banks' officers, directors and employees. The Banks also
provide special services and programs for individuals in their primary trade
areas who are employed in the business and professional fields.

         The Company anticipates bank competition will continue to change
dramatically over the next several years as the major regional and national
banks continue to consolidate. These larger financial institutions will
continue the trend of consolidating their branch systems and providing
incentives to their customers to use electronic banking instead of visiting
branches. It is anticipated that credit unions, because of their tax
benefits, will also continue to show growth.

SUPERVISION AND REGULATION

         The following generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries and
therefore are not complete and are qualified by the statutes and regulations
referenced. In addition, due to the numerous statutes and regulations that
apply to and regulate the operation of the banking industry, many are not
referenced below.

         The Company and the Banks are subject to extensive federal and
Washington state legislation, regulation and supervision. These laws and
regulations are primarily intended to protect depositors and the FDIC rather
than shareholders of the Company. The laws and regulations affecting banks
and bank holding companies have changed significantly over recent years, and
there is reason to expect that similar changes will continue in the future.
Any change in applicable laws, regulations or regulatory policies may have a
material effect on the business, operations and prospects of the Company. The
Company is unable to predict the nature or the extent of the effects on its
business and earnings that any fiscal or monetary policies or new federal or
state legislation may have in the future.

THE COMPANY

         The Company is a bank holding company by virtue of its ownership of
the Banks, and is registered as such with the Federal Reserve. The Company is
subject to regulation under the Bank Holding Company Act of 1956, as amended
(the "BHCA"), which subjects the Company and the Banks to supervision and
examination by the Federal Reserve. Under the BHCA, the Company files with
the Federal Reserve annual reports of its operations and such additional
information as the Federal Reserve may require. The Federal Reserve Board may
examine a bank holding company and any of its subsidiaries and charge the
company for the cost of such an examination.

         SOURCE OF STRENGTH TO THE BANKS. The Federal Reserve Board takes the
position that a bank holding company is required to serve as a source of
financial and managerial strength to its subsidiary banks and may not conduct
its operations in an unsafe or unsound manner. In addition, it is the Board's
position that in serving as a source of strength to its subsidiary banks,
bank holding companies should use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial stress or
adversity and should maintain the financial flexibility and capital raising
capacity to obtain additional resources for assisting its subsidiary banks. A
bank holding company's failure to meet its obligations to serve as a source
of strength to its subsidiary banks will generally be considered by the Board
to be an unsafe and unsound banking practice or a violation of the Board's
regulations or both.


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<PAGE>


         FEDERAL RESERVE APPROVAL. Bank holding companies must obtain the
Federal Reserve's approval before they: (1) acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, they would own or control, directly or indirectly, more than 5%
of the voting shares of such bank; (2) merge or consolidate with another bank
holding company; and (3) acquire substantially all of the assets of any
additional banks. Until September 1995, the BHCA also prohibited bank holding
companies from acquiring any such interest in any bank or bank holding
company located in a state other than the state in which the bank holding
company was located, unless the laws of both states expressly authorized the
acquisition. Now, subject to certain state restrictions, such as age and
contingency laws, a bank holding company that is adequately capitalized and
adequately managed may acquire the assets of an out-of-state bank.

         CONTROL OF NONBANKS. With certain exceptions, the BHCA also
prohibits bank holding company from acquiring direct or indirect ownership or
control of voting shares in any company other than a bank or a bank holding
company unless the Federal Reserve finds the company's business to be
incidental to the business of banking. When making this determination, the
Federal Reserve in part considers whether allowing a bank holding company to
engage in those activies would offer advantages to the public that would
outweigh possible adverse effects.

         The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("Economic Growth Act") amended the BHCA to eliminate the requirement that a
bank holding company seek Federal Reserve approval before engaging de novo in
permissible nonbanking activities, if the holding company is well capitalized
and meets certain other criteria specified in the same statute. A bank
holding company meeting the specifications is now required only to notify the
Federal Reserve within 10 business days after the activity has begun.


         CONTROL TRANSACTIONS. The Change in Bank Control Act of 1978, as
amended, requires a person or group of persons acquiring "control" of a bank
holding company to provide the FRB with at least 60 days' prior written
notice of the proposed acquisition. Following receipt of this notice, the
Federal Reserve has 60 days to issue a notice disapproving the proposed
acquisition, but the Federal Reserve may extend this time period for up to
another 30 days. An acquisition may be completed before the disapproval
period expires if the Federal Reserve issues written notice of its intent not
to disapprove the action. Under a rebuttable presumption established by the
Federal Reserve, the acquisition of 10% or more of a class of voting stock of
a bank holding company with a class of securities registered under Section 12
of the Securities Exchange Act of 1934, as amended ("Exchange Act") would,
under the circumstances set forth in the presumption, constitute the
acquisition of control. In addition, any "company" would be required to
obtain the approval of the Federal Reserve under the BHCA before acquiring
25% (5% if the "company" is a bank holding company) or more of the
outstanding shares of the Company, or otherwise obtain control over the
Company.


         AFFILIATE TRANSACTIONS. The Company and the Banks are deemed
affiliates within the meaning of the Federal Reserve Act, and transactions
between affiliates are subject to certain restrictions. Generally, Sections
23A and 23B of the Federal Reserve Act: (1) limit the extent to which the
financial institution or its subsidiaires may engage in "covered
transactions" with an affiliate, as defined, to an amount equal to 10% of
such institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital
and surplus, and (2) require all transactions with an affiliate, whether or
not "covered transactions," to be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar type of
transactions.

         MANAGEMENT REGULATION. Federal law: (1) sets forth the circumstances
under which officers or directors of a financial institution may be removed
by the institution's federal supervisory agency; (2) places restraints on
lending by an institution to its executive oficers, directors, principal
stockholders, and their related insterests; and (3) prohibits management
personnel from serving as a director or in other management positions of
another financial institution whose assets exceed a specified amount or which
has an office within a specified geographic area.

         TIE-IN LIMITATIONS. The Company and the Banks are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services. For example,
with certain exceptions, neither the Company nor the Banks may condition an
extension of credit on either (1) a requirement that the customer obtain
additional services provided by it or (2) an agreement by the customer to
refrain from obtaining other services from a competitor. Effective April
1997, the Federal Reserve has adopted significant amendments to its
anti-tying rules that: (1) remove Federal Reserve-imposed anti-tying
restrictions on bank holding companies and their non-bank subsidiaries;


                                      8


<PAGE>


(2) create exemptions from the statutory restriction on bank tying
arrangements to allow banks greater flexibility to package products with
their affiliates; and (3) establish a safe harbor from the tying restrictions
for certain foreign transactions.

BANKING SUBSIDIARIES

         Applicable federal and state statutes and regulations governing a
bank's operations relate, among other matters, to capital requirements,
required reserves against deposits, investments, loans, legal lending limits,
certain interest rates payable, mergers and consolidations, borrowings,
issuance of securities, payment of dividends (see below), establishment of
branches, and dealings with affiliated persons. The FDIC has authority to
prohibit banks under their supervision from engaging in what they consider to
be an unsafe and unsound practice in conducting their business.

         The Banks are state-chartered commercial banks subject to extensive
regulation and supervision by the Washington Department of Financial
Institutions Division of Banks ("DFI"). The Banks are also subject to
regulation and examination by the FDIC, which insures their respective
deposits to the maximum extent permitted by law. The federal laws that apply
to the Banks regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability
of deposited funds and the nature and amount of and collateral for loans. The
laws and regulations governing the Banks generally have been promulgated to
protect depositors and not to protect stockholders of such institutions or
their holding companies.

         The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations or
guidelines in a number of areas to ensure bank safety and soundness,
including: internal controls; credit underwriting; asset growth; management
compensation; ratios of classified assets to capital; and earnings. FDICIA
also contains provisions which are intended to change independent auditing
requirements; restrict the activities of state-chartered insured banks; amend
various consumer banking laws; limit the ability of "undercapitalized banks"
to borrow from the Federal Reserve's discount window; and require regulators
to perform periodic on-site bank examinations and set standards for real
estate lending.

         LOANS-TO-ONE BORROWER. Each of the Banks is subject to limitations
on the aggregate amount of loans that it can make to any one borrower,
including related entities. Applicable regulations generally limit
loans-to-one borrower to 20% of unimpaired capital. Each of the Banks is in
compliance with applicable loans-to-one borrower requirements.

         FDIC INSURANCE. Generally, customer deposit accounts in banks are
insured by the FDIC for up to a maximum amount of $100,000. The FDIC has
adopted a risk-based insurance assessment system under which depository
institutions contribute funds to the BIF and/or the SAIF, as applicable,
based on their risk classification.

         In September of 1996, the Deposit Insurance Funds Act of 1996
("Funds Act") was enacted. The Funds Act provided, among other things, for
the recapitalization of the SAIF through a special assessment on all
depository institutions that hold SAIF insured deposits. The one-time
assessment was designed to place the SAIF at its 1.25 reserve ratio goal.

         The FDIC may terminate the deposit insurance of any insured
depository institution if it determines after a hearing that the institution
has engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law.
The insurance may be terminated permanently, if the institution has no
tangible capital. If deposit insurance is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, will
continue to be insured for a period of six months to two years, as determined
by the FDIC.

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


                                      9


<PAGE>


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

         Under these guidelines, banks' assets are given risk-weights of 0%,
20%, 50% or 100%. Most loans are assigned to the 100% risk category, except
for first mortgage loans fully secured by residential property and, under
certain circumstances, residential construction loans (both carry a 50%
rating). Most investment securities are assigned to the 20% category, except
for municipal or state revenue bonds (which have a 50% rating) and direct
obligations of or obligations guaranteed by the United States Treasury or
United States Government Agencies (which have a 0% rating).

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


         PROMPT CORRECTIVE ACTION. Regulations adopted by the Agencies as
required by FDICIA impose even more stringent capital requirements. The FDIC and
other Agencies must take certain "prompt corrective action" when a bank fails to
meet capital requirements. The regulations establish and define five capital
levels: (1) "well-capitalized," (2) "adequately capitalized," (3)
"undercapitalized," (4) "significantly undercapitalized" and (5) "critically
undercapitalized." To qualify as "well-capitalized," an institution must
maintain at least 10% total risk-based capital, 6% Tier 1 risk-based capital,
and a leverage ratio of no less than 5%. Increasingly severe restrictions are
imposed on the payment of dividends and management fees, asset growth and other
aspects of the operations of institutions that fall below the category of being
"adequately capitalized" (which requires at least 8% total risk-based capital,
4% Tier 1 risk-based capital, and a leverage ratio of at least 4%).
Undercapitalized institutions are required to develop and implement capital
plans acceptable to the appropriate federal regulatory agency. Such plans must
require that any company that controls the undercapitalized institution must
provide certain guarantees that the institution will comply with the plan until
it is adequately capitalized. As of the date of this Prospectus/Proxy statement,
neither the Company, Valley, nor their respective subsidiaries were subject to
any regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure.


         RESTRICTIONS ON DIVIDENDS. Dividends paid to the Company by Puyallup
Valley Bank is the material source of the Company's cash flow. Various
federal and state statutory provisions limit the amount of dividends banking
subsidiaries are permitted to pay to their holding companies without
regulatory approval. Federal Reserve policy further limits the circumstances
under which bank holding companies may declare dividends. For example, a bank
holding company should not continue its existing rate of cash dividends on
its common stock unless its net income is sufficient to fully fund each
dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset qualify, and overall financial condition.

         If, in the opinion of the applicable federal banking agency, a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the institution, could include the payment of dividends), the
agency may require, after notice and hearing, that such institution cease and
desist from such practice. In addition, the Federal Reserve and the FDIC have
issued policy statements which provide that insured banks and bank holding
companies should generally pay dividends only out of current operating
earnings.


         Under Washington law, the Banks may not declare or pay a cash dividend
on their capital stock if it would cause its net worth to be reduced below (1)
the amounts required for liquidation accounts or (2) the net worth requirements,
if any, imposed by the Director of DFI. Dividends on the Bank's capital stock
may not be paid in an aggregate amount greater than the aggregate retained
earnings of the Bank, without the approval of DFI.



                                      10
<PAGE>

         FEDERAL RESERVE SYSTEM. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts
(primarily checking accounts) and non-personal time deposits. Currently,
reserves of 3% must be maintained against total transaction accounts of $49.8
million or less (after a $4.2 million exemption), and an initial reserve of
10% (subject to adjustment by the Federal Reserve to a level between 8% and
14%) must be maintained against that portion of total transaction accounts in
excess of such amount. Both of the Banks are in compliance with applicable
requirements.


         The balances maintained to meet the reserve requirements imposed by
the Federal Reserve may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the earning assets of the Company and
Valley's banking subsidiaries.


REGULATORY DEVELOPMENTS

         Congress has enacted significant federal banking legislation in
recent years. Included in this legislation have been the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
FIRREA, among other things, (i) created two deposit insurance funds
administered by the FDIC, the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF"), (ii) permitted commercial banks that
meet certain housing-related asset requirements to secure advances and other
financial services from local FHLBs, (iii) restructured the federal
regulatory agencies for savings associations, and (iv) enhanced the
regulators' enforcement powers over financial institutions and their
affiliates.

         FDICIA went substantially farther than FIRREA in establishing a more
rigorous regulatory environment. Under FDICIA. regulatory authorities are
required to enact a number of new regulations, substantially all of which are
now effective. These regulations include among other things, (i) a new method
for calculating deposit insurance premiums based on risk, (ii) restrictions
on acceptance of brokered deposits except by well-capitalized institutions,
(iii) additional limitations on loans to executive officers and directors of
banks, (iv) the employment of interest rate risk in the calculation of
risk-based capital, (v) safety and soundness standards that take into
consideration, among other things, management, operations, asset quality,
earnings and compensation, (vi) a five-tiered rating system from
well-capitalized to critically undercapitalized, along with the prompt
corrective action the agencies may take depending on the category, and (vii)
new disclosure and advertising requirements with respect to interest paid on
savings accounts.

         FDICIA and regulations adopted by the FDIC impose additional
requirements for annual independent audits and reporting when a bank begins a
fiscal year with assets of $500 million or more. Such banks, or their holding
companies, are also required to establish audit committees consisting of
directors who are independent of management.

         INTERSTATE BANKING AND BRANCHING: The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 ("Interstate Act") generally permits
nationwide interstate banking and branching by relaxing federal law
restrictions on interstate banking and providing general authorization for
interstate branching. Subject to certain state laws, such as age and
contingency laws, the Interstate Act allows adequately capitalized and
adequately managed bank holding companies to purchase the assets of
out-of-state banks). Additionally, since June 1, 1997, the Interstate Act
permits interstate bank mergers, subject to these state laws, unless the home
state of either merging bank has "opted-out" of these provisions by enacting
"opt-out" legislation. The Interstate Act does allow states to impose certain
conditions on interstate bank mergers within their borders; for example,
states may require that the in-state merging bank exist for up to five years
before the interstate merger. Under the Interstate Act, states may also
"opt-in" to de novo branching, allowing out-of-state banks to establish de
novo branches within the state.

         In 1996, Washington enacted "opting in" legislation authorizing
interstate mergers pursuant to the Interstate Act. Accordingly, as of June 6,
1996, an out-of-state bank holding company may now acquire more than 5% of
the voting shares of a Washington-based bank, regardless of reciprocity,
provided such bank or its predecessor has been doing business for at least
five years prior to the acquisition. Further, an out-of-state bank may engage
in banking in Washington if the requirements of Washington's interstate
banking statute are met, and the bank either (1) was lawfully engaged in
banking in Washington on June 6, 1996, (2) resulted from an interstate
combination pursuant to Washington law, (3) resulted from a relocation of a
head office of a state bank or a main office of a national bank pursuant to
federal law, or (4) resulted from the establishment of a savings bank branch
in compliance with applicable Washington law. Additionally, the Director of
the Division may approve

                                     11

<PAGE>

interstate combinations if the basis for such approval does not discriminate
against out-of-state banks, out-of-state holding companies, or their
subsidiaries.

         The Agencies recently adopted regulations, under which banks are
prohibited from using their interstate branches primarily for deposit
production. The Agencies have accordingly implemented a loan-to-deposit ratio
screen to ensure compliance with this prohibition.

         Further effects on the Company and the Banks may result from the
Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Community Development Act"). The Community Development Act (i) establishes
and funds institutions that are focused on investing in economically
distressed areas and (ii) streamlines the procedures for certain transactions
by financial institutions with federal banking agencies.

         Among other things, the Community Development Act requires the
federal banking agencies to (i) consider the burdens that are imposed on
financial institutions when new regulations are issued or new compliance
burdens are created and (ii) coordinate their examinations of financial
institutions when more than one agency is involved. The Community Development
Act also streamlines the procedures for forming certain one-bank holding
companies and engaging in authorized non-banking activities.

         Various regulatory relief provisions were also enacted by recent
legislation. The new legislation includes, among other things, changes to (i)
the Truth in Lending Act and the Real Estate Settlement Procedures Act to
coordinate and simplify the two laws' disclosure requirements, (ii) eliminate
civil liability for violations of the Truth in Savings Act after five years,
(iii) streamline the application process for a number of bank holding company
and bank applications, (iv) establish a privilege from discovery in any civil
or administrative proceeding or bank examination for any fair lending
self-trust results conducted by, or on behalf of, a financial institution in
certain circumstances, (v) repeal the FDICIA requirement that independent
public accountants attest to compliance with designated safety and soundness
regulations, (vi) impose a continuous regulatory review of regulations to
identify and eliminate outdated and unnecessary rules, and (vii) various
other miscellaneous provisions to reduce regulatory burdens.

         In 1999, the Financial Services Modernization Act was enacted which:
(1) repealed historical restrictions on preventing banks from affiliating
with securities firms, (2) broadens the activities that may be conducted by
national banks and banking subsidiaries of holding companies, and (3)
provides an enhanced framework for protecting the privacy of consumers'
information. In addition, bank holding companies may be owned, controlled or
acquired by any company engaged in financially related activities, as long as
such company meets regulatory requirements. To the extent that this
legislation permits banks to affiliate with financial services companies, the
banking industry may experience further consolidation, although the impact of
this legislation on the Company and the Banks is unclear at this time.

REGULATORY ENFORCEMENT AUTHORITY

         The enforcement powers available to federal banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, enforcement actions
must be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions, or inactions, may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities. Applicable law also requires public disclosure of
final enforcement actions by the federal banking agencies.

NATIONAL MONETARY POLICIES

         In addition to being affected by general economic conditions, the
earnings and growth of the Banks are affected by the policies of regulatory
authorities, including the Board of Governors of the Federal Reserve System.
An important function of the Federal Reserve System is to regulate the money
supply, credit conditions and interest rates. Among the instruments used to
implement these objectives are open market operations in U.S. Government
securities, changes in reserve requirements against bank deposits and the
Federal Reserve Discount Rate, which is the rate charged member banks to
borrow from the Federal Reserve Bank. These instruments are used in varying
combinations to influence overall growth and distribution of credit, bank
loans, investments and deposits, and their use may also affect interest rates
charged on loans or paid on deposits.

                                        12

<PAGE>

         The monetary policies of the Federal Reserve Board have had a
significant effect on the operating results of commercial banks in the past
and are expected to do so in the future. Also important in terms of effect on
banks are controls on interest rates paid by banks on deposits and types of
deposits that may be offered by banks. The Depository Institutions
Deregulation Committee, created by Congress in 1980, phased out ceilings on
the rate of interest that may be paid on deposits by commercial banks and
savings and loan associations, with the result that the differentials between
the maximum rates banks and savings and loans can pay on deposit accounts
have been eliminated. The effect of deregulation of deposit interest rates
has been to increase banks' cost of funds and to make banks more sensitive to
fluctuation in market rates.

FORWARD-LOOKING STATEMENTS

         Except for historical financial information contained herein,
certain matters discussed in this registration statement of Valley Community
Bancshares, Inc. constitute "forward-looking statements" within the meaning
of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are subject to risks and uncertainties that may cause actual
future results to differ materially. Such risks and uncertainties with
respect to Valley Community Bancshares, Inc., Puyallup Valley Bank and Valley
Bank include those related to the economic environment, particularly in the
areas in which the Company and the Bank's operates, competitive products and
pricing, fiscal and monetary policies of the U.S. government, changes in
governmental regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest
rates, acquisitions and the integration of acquired businesses, credit risk
management and asset/liability management, the financial and securities
markets, and the availability of and costs associated with sources of
liquidity

ITEM 2.  FINANCIAL INFORMATION

SELECTED FINANCIAL DATA

         The following financial data of the Company are derived from the
Company's historical audited financial statements and related footnotes. The
information set forth below should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and the Financial Statements and related Notes contained elsewhere
in this Registration Statement.


                            CHART ON FOLLOWING PAGE.


                                        13

<PAGE>


                        VALLEY COMMUNITY BANCSHARES, INC.



VALLEY COMMUNITY BANCSHARES, INC.
 Selected Financial Data

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                (dollars in thousands, except per share amounts)
                                                          1999          1998           1997          1996          1995
                                                       -----------   -----------    -----------   -----------    ---------
 <S>                                                   <C>           <C>            <C>           <C>            <C>
 STATEMENT OF INCOME DATA
      Interest Income                                    $  8,958      $  8,694       $  8,291      $  7,516      $ 7,285
      Interest expense                                      2,973         3,139          3,079         2,939        2,666
                                                       -----------   -----------    -----------   -----------    ---------
             Net interest income                            5,985         5,555          5,212         4,577        4,619
      Provision for loan losses                                84             9             66            24           39
                                                       -----------   -----------    -----------   -----------    ---------
             Net interest income after provision for
               loan losses                                  5,901         5,546          5,146         4,553        4,580
      Noninterest income                                      589           662            647           696          648
      Noninterest expense                                   4,516         4,111          3,604         3,367        3,323
                                                       -----------   -----------    -----------   -----------    ---------
         Income before provision for income tax             1,974         2,097          2,189         1,882        1,905
      Provision for income tax                                580           616            597           517          510
                                                       -----------   -----------    -----------   -----------    ---------
         Net Income                                      $  1,394      $  1,481       $  1,592      $  1,365      $ 1,395
                                                       ===========   ===========    ===========   ===========    =========

 PER SHARE DATA
      Cash Dividends                                      $   135       $   871        $   457       $   429       $  425
      Cash Dividends per weighted average shares
         outstanding                                      $  0.12       $  0.86        $  0.46       $  0.43       $ 0.43
      Basic earnings per share                            $  1.24       $  1.46        $  1.59       $  1.38       $ 1.40
      Diluted earnings per share                          $  1.21       $  1.41        $  1.53       $  1.34       $ 1.40
      Weighted average shares outstanding               1,119,780     1,012,844      1,001,013       987,192      995,401
      Weighted average diluted shares outstanding       1,152,576     1,047,745      1,038,599     1,021,198      998,287

 BALANCE SHEET DATA
      Total Assets                                       $133,837      $125,329       $112,994      $106,897      $97,316
      Net loans                                            77,675        66,841         63,740        57,582       57,505
      Deposits                                            113,809       110,283         98,150        93,488       85,389
      Stockholders' equity                                 18,724        14,078         13,436        12,240       11,184

      Equity to assets ratio                               13.99%        11.23%         11.89%        11.45%       11.49%
</TABLE>

VALLEY COMMUNITY BANCSHARES, INC.
 Selected Financial Data (continued)

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                (dollars in thousands, except per share amounts)
                                                          1999          1998           1997          1996          1995
                                                       -----------   -----------    -----------   -----------    ---------
 <S>                                                   <C>           <C>            <C>           <C>            <C>
 FIVE YEAR FINANCIAL PERFORMANCE
      Net Income                                         $  1,394      $  1,481       $  1,592      $  1,365      $ 1,395
      Average Assets                                      132,945       118,960        111,302       102,331       96,259
      Average Stockholders' Equity                         17,862        13,742         12,632        11,483       10,338

      Return on Assets (net income divided by average
       assets)                                              1.05%         1.24%          1.43%         1.33%        1.45%
      Return on Equity  (net income divided by
       average equity)                                      7.80%        10.78%         12.60%        11.89%       13.49%
      Efficiency Ratio (noninterest expense
       divided by noninterest income plus net
       interest income)                                    68.69%        66.13%         61.51%        63.85%       63.09%
</TABLE>

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

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


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


14

<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.


         The Company earned net income of $1,394,000 in 1999, compared to net
income of $1,481,000 in 1998 and net income of $1,592,000 in 1997. The
decrease in operating income is the result of the expansion strategy embarked
by the Company in 1998, when the Company organized as a holding company for
its principal banking subsidiary, Puyallup Valley Bank, through
reorganization completed on July 1, 1998. Subsequently, the Company completed
a new branch facility in Graham, Washington, and completed the organization
of Valley Bank on January 11, 1999. This expansion is primarily responsible
for the $87,000 decrease in net income reported in 1999 and the $111,000
decrease in net income reported in 1998.

         The Company's net income is derived principally from the operating
results of its banking subsidiaries, namely Puyallup Valley Bank and Valley
Bank. Puyallup Valley Bank is a well-established commercial bank and
generates the Company's operating income. Puyallup Valley Bank had net income
of $1,520.000 in 1999, $1,568,000 in 1998, and $1,592,000 in 1997. The
decrease in Puyallup Valley Bank's net income, during 1998 and 1999, is
related to the opening of a new branch facility in Graham, Washington during
the fourth quarter of 1998. Valley Bank, which incurred losses of $125,000 in
1999, is anticipated to continue to incur operating losses during the early
years of its operation. It is anticipated that the losses incurred by Valley
Bank during its initial years will not have a significant impact on the
company. However, there can be no assurance that Valley Bank will not incur
more significant losses, which could have an adverse impact on the Company's
earnings, dividend payments or future growth.

NET INTEREST INCOME

         The Company's largest component contributing to net income is net
interest income, which 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. Net interest income divided by average earning
assets is referred to net interest margin. For the years December 31, 1999,
1998, and 1997, the Company's net interest margin was 4.99 percent, 5.18
percent, and 5.23 percent, respectively.

         Net interest income during 1999, 1998, and 1997 totaled $5,985,000,
$5,555,000 and $5,212,000, respectively, representing a 7.7 percent increases
in 1999 over 1998 and a 6.6 percent in 1998 over 1997. The increase resulted
from an increase in average earning assets, partially offset by a decrease in
the Company's net interest margin.

PROVISION FOR LOAN LOSSES


         Provisions for loan losses reduce net interest income. The provision
for loan losses reflects management's judgment of the expense to be recognized
in order to maintain an adequate allowance for loan losses. For further
discussion regarding the allowance for loan losses see the discussion on
allowance for loan losses under Risk Elements. The Company provided $84,000 for
loan losses during 1999 compared to $9,000 in 1998 and $66,000 in 1997. The 1999
and 1997 provisions were primarily related to an increase in the Company's loan
portfolio. The reduction in the 1998 provision was the result of a significant
recovery that increased the allowance for loan losses to an acceptable level.
The 1999 provision was also impacted by Valley Bank which had no allowance
established upon the commencement of its lending operations. Management
anticipates that continued growth in the Company's loan portfolio will require
increases in loan loss provisions during the year 2000.


NONINTEREST INCOME AND EXPENSE

         Net income is also effected by noninterest income (primarily service
charges, and other operating income) and noninterest expenses


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


                                       15
<PAGE>


                    VALLEY COMMUNITY BANCSHARES, INC.


         Noninterest income during 1999, 1998, and 1997 totaled $589,000,
$662,000 and $647,000, respectively, representing a 11.0 percent decrease in
1999 over 1998 and a 2.3 percent increase in 1998 over 1997. The decrease in
1999 was primarily related to lower origination fees on mortgage loans
brokered which decreased as a result of higher mortgage interest rates in
1999 and a lower volume of loan applications processed. Noninterest income
during 1998 was favorably impacted by a significant increase in origination
fees on mortgage loans brokered which increased as a result of lower mortgage
interest rates in 1998 and a higher volume of loan applications processed.
Noninterest income during 1997 was favorably impacted by a significant gain
on sale of available-for-sale investments.


         Noninterest expense during 1999, 1998, and 1997 totaled $4,516,000,
$4,111,000 and $3,604,000, respectively, representing a 9.9 percent increase
in 1999 over 1998 and a 14.1 percent increase in 1998 over 1997. The increase
in 1999 was primarily related to higher salary and employee benefits,
occupancy and equipment, and other operating expenses associated with the
operation of the new Graham branch facility and Valley Bank. The increase in
1998 was related primarily related to Organizational costs associated with
the formation of the holding company and Valley Bank. The increase in salary
and employee benefits, occupancy and equipment during 1998 was related to the
opening of a loan production office in Auburn, Washington during the year and
the opening of the Graham branch in November 1998. The percentage of
noninterest expense to average assets was 3.37 percent in 1999, compared to
3.28 percent and 3.24 percent during 1998 and 1997, respectively.

PROVISION FOR INCOME TAXES

         The Company's provision for income taxes is a significant reduction
of operating income. The provision for 1999, 1998, and 1997 was $580,000,
$616,000, and $597,000, respectively. This amount represents an effective
taxing rate of 29 percent during 1999 and 1998, compared to 27 percent during
1997. 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.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES;
AND INTEREST DIFFERENTIAL

         AVERAGE BALANCES AND AN ANALYSIS OF AVERAGE RATES EARNED AND PAID.
The following tables show average balances and interest income or interest
expense, with the resulting average yield of rate by category of average
earning asset or interest bearing liability.


                            CHART ON FOLLOWING PAGE.



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


16

<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.


VALLEY COMMUNITY BANCSHARES, INC.
Distribution of Assets, Liabilities and Stockholders' Equity

<TABLE>
<CAPTION>
                                                              INTEREST RATES AND INTEREST DIFFERENTIAL
                                                                        (dollars in thousands)
                                    1999                          1998                          1997
                                  ---------------------------   ---------------------------   ---------------------------
                                   Average   Revenue/  Yield/   Average    Revenue/  Yield/   Average    Revenue/  Yield/
                                   balance   expense   rate     balance    expense   rate     balance    expense   rate
                                  ---------  --------  ------   -------    -------   ------   -------    --------  ------
<S>                               <C>        <C>       <C>      <C>        <C>       <C>      <C>        <C>       <C>
 ASSETS
 Interest-earning assets
     Loans
       Commercial                  $ 17,607  $  1,559  8.85%     $ 16,678   $ 1,550  9.29%     $ 17,586   $ 1,666  9.47%
       Real Estate                   47,601     4,044  8.50%       41,439     3,687  8.90%       38,887     3,501  9.00%
       Installment                    5,642       477  8.45%        5,800       503  8.67%        6,030       526  8.72%
       Other                          1,285       116  9.03%        1,414       131  9.26%        1,307       128  9.79%
       Fees on loans                      -        54                   -       250                   -       186
                                  ---------- --------- ------   ---------- --------- ------   ---------- --------- ------
         Total loans (including
         fees)                     $ 72,135  $  6,250  8.66%     $ 65,331   $ 6,121  9.37%     $ 63,810   $ 6,007  9.41%

     Investment securities
       Taxable                     $ 29,255  $  1,608  5.50%     $ 21,149   $ 1,238  5.85%     $ 18,395   $ 1,103  6.00%
       Tax-exempt                     6,350       439  6.92%        7,265       550  7.57%        8,027       605  7.53%
                                  ---------- --------- ------   ---------- --------- ------   ---------- --------- ------
         Total investment
         securities                $ 35,605  $  2,047  5.75%     $ 28,414   $ 1,788  6.29%     $ 26,422   $ 1,708  6.46%

     Interest bearing deposits
       with banks                  $ 13,669  $    722  5.28%     $ 13,347   $   765  5.73%     $ 10,456   $   619  5.92%
     Federal funds sold               1,229        59  4.80%        3,665       197  5.38%        2,943       163  5.54%
     Federal Home Loan Bank
       Stock                            392        29  7.40%          135        10  7.41%            -         -  0.00%
                                  ---------- --------- ------   ---------- --------- ------   ---------- --------- ------
         Total Interest-earning    $123,030  $  9,107  7.40%     $110,892   $ 8,881  8.01%     $103,631   $  8,497 8.20%
          assets

 Noninterest-earning assets
     Cash and due from banks       $  5,187                      $  4,158                      $  3,844
     Premises and equipment,
      net                             4,478                         3,496                         3,431
 Other, less allowance for loan
   losses                               250                           414                           396
                                  ----------                    ----------                    ----------
         Total noninterest-
          earning assets           $  9,915                      $  8,068                      $  7,671
                                  ----------                    ----------                    ----------

     TOTAL ASSETS                  $132,945                      $118,960                      $111,302
                                  ==========                    ==========                    ==========

</TABLE>

      1 Average loan balance include 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%.


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


17

<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.


VALLEY COMMUNITY BANCSHARES, INC.
Distribution of Assets, Liabilities and Stockholders' Equity

<TABLE>
<CAPTION>
                                                              INTEREST RATES AND INTEREST DIFFERENTIAL
                                                                        (dollars in thousands)
                                    1999                          1998                          1997
                                  ---------------------------   ---------------------------   ---------------------------
                                   Average   Revenue/  Yield/   Average    Revenue/  Yield/   Average    Revenue/  Yield/
                                   balance   expense   rate     balance    expense   rate     balance    expense   rate
                                  ---------  --------  ------   -------    -------   ------   -------    --------  ------
<S>                               <C>        <C>       <C>      <C>        <C>       <C>      <C>        <C>       <C>
 LIABILITIES AND STOCKHOLDERS'
   EQUITY
 Interest-bearing liabilities
     Deposits
       Savings, NOW accounts,
        and money markets          $ 57,634   $ 1,396  2.42%    $ 52,797    $ 1,466  2.78%     $ 48,705   $ 1,420  2.92%
       Time deposits
        < $100,000                   21,019       981  4.67%      21,284      1,122  5.27%       22,141     1,145  5.17%
       Time deposits
        > $100,000                   12,582       578  4.59%      10,212        517  5.06%        9,727       483  4.97%
                                  ---------- --------- ------   ---------- --------- ------   ---------- --------- ------
         Total deposits            $ 91,235   $ 2,955  3.24%    $ 84,293    $ 3,105  3.68%     $ 80,573   $ 3,048  3.78%
     Other borrowed funds               414        18  4.35%         691         34  4.92%          648        31  4.78%
                                  ---------- --------- ------   ---------- --------- ------   ---------- --------- ------
         Total Interest-bearing    $ 91,649   $ 2,973  3.24%    $ 84,984    $ 3,139  3.69%     $ 81,221   $ 3,079  3.79%
           liabilities                       ---------                     ---------                     ---------


 Noninterest-bearing liabilities
     Demand deposits               $ 22,737                     $ 19,492                       $ 16,832
     Other liabilities                  697                          742                            617
                                  ----------                    ----------                    ----------
                                   $ 23,434                     $ 20,234                       $ 17,449
 Stockholders' equity                17,862                       13,742                         12,632
                                  ----------                    ----------                    ----------

     TOTAL LIABILITIES AND
     STOCKHOLDERS' EQUITY          $132,945                     $118,960                       $111,302
                                  ==========                    ==========                    ==========

 Net interest income                          $ 6,134  4.99%                $ 5,742  5.18%                $ 5,418   5.23%
                                             =========                     =========                     =========

 Margin Analysis
     Interest income/ earning
       assets                                 $ 9,107  7.40%                $ 8,881  8.01%                $ 8,497   8.20%
     Interest expense/earning
       assets                                   2,973  2.42%                  3,139  2.83%                  3,079   2.97%
     Net interest income/earning
        assets                                  6,134  4.99%                  5,742  5.18%                  5,418   5.23%


</TABLE>


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


18

<PAGE>


                    VALLEY COMMUNITY BANCSHARES, INC.


ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL. The following table sets forth, on
a tax-equivalent basis, a summary of the changes in net interest income
resulting from changes in volume and rates.

VALLEY COMMUNITY BANCSHARES, INC.
Distribution of Assets, Liabilities and Stockholders' Equity

<TABLE>
<CAPTION>
                                                                         VOLUME AND YIELD/RATE VARIANCE
                                                                   (in thousands and in tax equivalent basis)
                                               1999 Compared to 1998                   1998 Compared to 1997
                                        -------------------------------------   -------------------------------------
                                          Volume        Rate         Net          Volume        Rate         Net
                                        -----------    --------     ---------   -----------    ---------   ----------
<S>                                     <C>            <C>          <C>         <C>            <C>         <C>
 Interest income
     Loans
         Commercial                         $    84    $   (75)      $     9       $    (85)    $   (31)    $   (116)
         Real Estate                            529       (172)          357            227         (41)         186
         Installment                            (14)       (12)          (26)           (20)         (3)         (23)
         Other                                  (12)        (3)          (15)            10          (7)           3
         Fees on loans                            -       (196)         (196)             -          64           64
                                        ------------ ----------- ------------   ------------ ------------ -----------
             Total loans (including         $   587    $  (458)      $   129        $   132     $   (18)     $   114
              fees)

      Investment securities
         Taxable                            $   450    $   (80)      $   370        $   162     $   (27)     $   135
         Tax-exempt                             (66)       (45)         (111)           (58)          3          (55)
                                        ------------ ----------- ------------   ------------ ------------ -----------
             Total investment               $   384    $  (125)      $   259        $   104     $   (24)     $    80
               securities

      Interest bearing deposits with
        banks                               $    18    $   (61)      $  (43)        $   166     $   (20)     $   146
      Federal funds sold                       (119)       (19)        (138)             39          (5)          34
      Federal Home Loan Bank Stock               19          -           19              10           -           10
                                        ------------ ----------- ------------   ------------ ------------ -----------
             Total Interest-earning         $   889    $  (663)      $  226         $   451     $   (67)     $   384
               assets

 Interest-bearing liabilities
      Deposits
         Savings, NOW accounts,
          and money markets                 $   127    $  (197)         (70)        $   116     $   (70)          46
         Time deposits < $100,000               (14)      (127)        (141)            (45)         22          (23)
         Time deposits > $100,000               112        (51)          61              24          10           34
                                        ------------ ----------- ------------   ------------ ------------ -----------
             Total deposits                 $   225    $  (375)     $  (150)        $    95     $   (38)     $    57
      Other borrowed funds                      (12)        (4)         (16)              2           1            3
                                        ------------ ----------- ------------   ------------ ------------ -----------
             Total Interest-bearing         $   213    $  (379)     $  (166)        $    97     $   (37)     $    60
               liabilities
                                        ============ =========== ============   ============ ============ ===========
      Net interest income/earning
        assets                              $   676    $  (284)     $   392         $   354     $   (30)     $   324
                                        ============ =========== ============   ============ ============ ===========

</TABLE>

     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%.


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


19
<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.


INVESTMENT PORTFOLIO

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

VALLEY COMMUNITY BANCSHARES, INC.
Investment Portfolio (Dollars in thousands)

<TABLE>
<CAPTION>

                                                   Outstanding Balance at December 31,
                                                -----------    -----------    ------------
                                                   1999           1998           1997
                                                -----------    -----------    ------------
<S>                                             <C>            <C>             <C>
U.S. Treasury and U.S. Government
   corporations and agencies                      $ 27,901       $ 26,449        $ 18,198
States of the United States and political
subdivisions                                         5,121          6,640           7,576
 Other securities
                                                     1,481            528               -
                                                -----------    -----------    ------------
       Total                                      $ 34,503       $ 33,617        $ 25,774
                                                ===========    ===========    ============

</TABLE>


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

Investment in other securities includes corporate debt obligations made in
companies located and doing business throughout the United States. The debt
obligations were all within the credit ratings acceptable under the Company's
investment policy.

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

VALLEY COMMUNITY BANCSHARES, INC.
Investments as of December 31, 1999 (in thousands)
<TABLE>
<CAPTION>

                                                                After          After
                                                                one            five
                                                                year but       years but
                                                 Within         within         within         After
                                                 One Year       five years     ten years      ten years      Total
                                                -----------    -----------    ------------   -----------    ----------
<S>                                              <C>            <C>            <C>            <C>           <C>
 U.S. Treasury and U.S. Government
   corporations and agencies                       $ 6,342       $ 17,392          $  880       $ 3,287      $ 27,901
 States of the United States and political
   subdivisions                                      1,597          3,524                                       5,121
 Other securities                                                   1,481                                       1,481
                                                -----------    -----------    ------------   -----------    ----------
     Total                                         $ 7,939       $ 22,397          $  880       $ 3,287      $ 34,503
                                                ===========    ===========    ============   ===========    ==========

 Weighted average yield *
 U.S. Treasury and U.S. Government
   corporations and agencies                         5.49%          5.92%           5.87%         6.06%         5.84%
 States of the United States and political
   subdivisions                                      4.90%          4.43%                                       4.57%
 Other securities                                                   5.73%                                       5.73%
                                                -----------    -----------    ------------   -----------    ----------
                                                     5.37%          5.67%           5.87%         6.06%         5.64%
     Total                                      ===========    ===========    ============   ===========    ==========

</TABLE>

Yields on tax-exempt obligations have not been computed on a tax-equivalent
basis.

LOAN PORTFOLIO


         Managing risk is an essential part of successfully operating a
financial institution. The most prominent risk exposures regarding the loan
portfolio are credit quality and interest rate risk. Credit quality risk is the
risk of not collecting interest and/or principal balance of a loan when it is
due. Interest rate risk is the potential reduction of net interest income and
changes



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


20
<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.


in the value of financial instruments as the result of rate movements.
The Company's loan portfolio is originated and managed with these risks in mind.


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

TYPES OF LOANS


         The following table sets forth the composition of the Company's loan
portfolio for the past five years ending at December 31, 1999 (dollars in
thousands).

VALLEY COMMUNITY BANCSHARES, INC.
Loan Portfolio
<TABLE>
<CAPTION>
                                                          Outstanding Balance at December 31,
                                     -----------------------------------------------------------------------------
                                         1999            1998            1997            1996            1995
                                     -------------   -------------   -------------   -------------   -------------
 <S>                                     <C>             <C>             <C>             <C>             <C>
 Real Estate
      Construction                       $  7,384        $  4,890        $  1,282        $  5,796        $  4,837
      Mortgage                             15,867          13,788          15,087          12,602          12,586
      Commercial                           40,254          34,696          33,132          26,999          28,528
 Commercial                                12,892          12,496          11,694          10,858           9,004
 Consumer and other                         1,864           1,854           2,274           2,103           3,303
 Lease financing                              377               -               -               -               -
                                     -------------   -------------   -------------   -------------   -------------
          Total loans                      78,638          67,724          63,469          58,358          58,258
Deferred loan fees, net                        (4)              -               -               -               -
                                     -------------   -------------   -------------   -------------   -------------
          Net loans                      $ 78,634        $ 67,724        $ 63,469        $ 58,358        $ 58,258
                                     =============   =============   =============   =============   =============
</TABLE>

         The Company's loan portfolio primarily consists of commercial loans,
residential real estate loans, and commercial real estate loans. At December 31,
1999, loans totaled approximately $78.634 million, which equals approximately 69
percent of total deposits and 59 percent of total assets. At December 31, 1999,
the majority of loans were originated directly by the Company to borrowers
within the Company's principal market area.


         As a result, the Company has significant risk because of a lack of
geographical diversification. The Company mitigates this risk primarily by
diversifying the loan portfolio by industry and customer and by strong credit
underwriting criteria. At December 31, 1999 approximately 36 percent of the
Company's loan portfolio had adjustable rate features and approximately 64
percent were fixed. Approximately 76 percent of adjustable rate loans adjust
within a twelve-month period and 96 percent of the Company's fixed rate loan
portfolio is scheduled to mature within a five-year period.

         Commercial loans consist primarily of loans to business for various
purposes, including, revolving lines of credit, equipment loans, and letters of
credit. These loans generally have short maturities, have either adjustable or
fixed rates and are unsecured or secured by inventory, accounts receivable,
equipment and/or real estate.

         The Company monitors portfolio diversification by industry and by
customer. At December 31, 1999, approximately 72 percent had adjustable rates
and 23 percent had fixed rates.


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


21
<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.


         Real estate loans include various types of loans for which the Company
holds real property as collateral and consist of loans primarily on
single-family residences and commercial properties. These loans generally are
secured by a first priority lien but may also be secured by a second priority
lien. Real estate loans typically have maturities extending to five years and
have fixed or adjustable rate features. Construction loans are typically made to
contractors to construct single-family residences and commercial buildings and
generally have maturities to 18 months. Currently, the Company does not
originate real estate for sale to the secondary market, however, the Company
brokers real estate loans to other financial institutions for a fee.


          At December 31, 1999, approximately 72 percent of the Company's
real estate loans were fixed rate and approximately 28 percent had adjustable
rate features. However, 98 percent of the Company's real estate loans are
scheduled to mature and have adjustable rates within a five-year period.


         Consumer loans include various types of loans such as automobiles,
boats and recreational vehicles, personal and home equity lines of credit, and
other consumer orientated loans. At December 31, 1999, approximately 55 percent
of the consumer loan portfolio were fixed rate and approximately 45 percent had
adjustable rate features


         There are no foreign loans outstanding during the years presented.

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




MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

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


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


22
<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.


<TABLE>
<CAPTION>
VALLEY COMMUNITY BANCSHARES, INC.                                     After one
Loans as of December 31, 1999 (in thousands)                          year but
                                                        Within          within           After
                                                       One Year       five years      five years         Total
                                                     -------------   -------------   -------------   -------------
 <S>                                                   <C>            <C>             <C>                <C>
 Real Estate
      Construction                                       $  6,863         $   521          $    -        $  7,384
      Mortgage                                              2,665          12,096           1,106          15,867
      Commercial                                            6,575          33,538             141          40,254
 Commercial                                                 8,859           3,219             814          12,892
 Consumer and other                                           728             933             203           1,864
 Lease financing                                               69             308               -             377
                                                     -------------   -------------   -------------   -------------
          Total loans                                    $ 25,759        $ 50,615        $  2,264        $ 78,638
                                                     =============   =============   =============   =============

 Loan maturities after one year with:
      Fixed rates                                                        $ 44,169         $   864
      Variable rates                                                        6,446           1,400
                                                                     -------------   -------------
                                                                         $ 50,615        $  2,264
                                                                     =============   =============
</TABLE>




RISK ELEMENTS

         The following table sets forth information concerning the Company's
non-performing assets for the year ended December 31, 1999 (dollars in
thousands).

VALLEY COMMUNITY BANCSHARES, INC.
on-performing Assets
<TABLE>
<CAPTION>
                                                                Year ended December 31,
                                     -----------------------------------------------------------------------------
                                         1999            1998            1997            1996            1995
                                     -------------   -------------   -------------   -------------   -------------
 <S>                                   <C>             <C>             <C>             <C>             <C>
 on-performing assets:
      Nonaccrual loans                     $    -          $    -          $    -         $   509          $    -
      Loans 90 days or more past due                            -             507               -               -
      Restructured loans
                                     -------------   -------------   -------------   -------------   -------------
                                                -               -             507             509               -
      Other real estate owned                   -               -               -               -               -
                                     -------------   -------------   -------------   -------------   -------------
         Total non-performing assets   $    - 0 -      $   -  0 -         $   507         $   509      $   -  0 -
                                     =============   =============   =============   =============   =============
</TABLE>

         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 loans collateral.

         During 1999 and 1998 there were no loans placed on nonaccrual status
and, therefore, there was no impact to interest income during those periods
presented.


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


23
<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.


SUMMARY OF LOAN LOSS EXPERIENCE


CHANGES IN THE ALLOWANCE FOR LOAN LOSSES

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





                            CHART ON FOLLOWING PAGE.



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


24
<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.


VALLEY COMMUNITY BANCSHARES, INC.
Loan Loss Experience
<TABLE>
<CAPTION>
                                                       Analysis of the Allowance for Loan Losses
                                                                Year ended December 31,
                                     -----------------------------------------------------------------------------
                                         1999            1998            1997            1996            1995
                                     -------------   -------------   -------------   -------------   -------------
 <S>                                     <C>             <C>             <C>             <C>             <C>
 Balance at beginning of period           $   883         $   840         $   776         $   752         $   731
      Charge-offs:
          Real Estate
             Construction
             Mortgage
             Commercial
          Commercial
          Consumer and other                    8              11               3               1              19
          Lease financing
                                     -------------   -------------   -------------   -------------   -------------
                                                8              11               3               1              19

      Recoveries:
          Real Estate
             Construction
             Mortgage
             Commercial                                        42
          Commercial                                            3
          Consumer and other                                                    1               1               1
          Lease financing
                                     -------------   -------------   -------------   -------------   -------------
                                                -              45               1               1               1

      Net charge-offs                           8            (34)               2                              18
      Additions charged to
        operations                             84               9              66              24              39
                                     -------------   -------------   -------------   -------------   -------------
 Balance at end of period                 $   959         $   883         $   840         $   776         $   752
                                     =============   =============   =============   =============   =============

 Average Loans Outstanding               $ 72,135        $ 65,331        $ 63,810        $ 58,586        $ 56,988

 Ratio of net charge-offs during the
 period to average loans outstanding        0.01%          -0.05%           0.00%           0.00%           0.03%

 Ratio of allowance for loan losses
 to average loans outstanding               1.33%           1.35%           1.32%           1.32%           1.32%
</TABLE>

         The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries), and established through a
provision for credit losses charged to expense. Loans are charged against the
allowance for credit losses when management believes that the collectability 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
collectability 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 accompanying notes are an integral part of these consolidated financial
statements.


25
<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.


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

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

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

BREAKDOWN OF ALLOWANCE FOR LOAN LOSSES BY CATEGORY

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

<TABLE>
<CAPTION>
                                                              Allocation of the Allowance for Loan Losses
                                                                        Year ended December 31,
                                       ---------------------------------------------------------------------------------------
                                             1999              1998              1997              1996             1995
                                       ---------------   ---------------   ---------------   ---------------   ---------------
                                         Amount    %*      Amount    %*      Amount    %*      Amount    %*      Amount    %*
<S>                                    <C>               <C>               <C>               <C>               <C>
Balance at end of period applicable to:
   Real Estate
         Construction                    $   55    9%      $   37    7%      $   10    2%      $   43   10%      $   36    8%
         Mortgage                            16   20%          14   20%          15   24%          13   22%          13   22%
         Commercial                         141   51%         121   51%         116   52%          94   46%         100   49%
   Commercial                               129   16%         125   18%         117   18%         109   19%          90   15%
   Consumer and other                        37    2%          37    3%          45    4%          42    4%          66    6%
   Lease financing                            4    0%           -    0%           -    0%           -    0%           -    0%
   Unallocated                              577   NA          549   NA          537   NA          475   NA          447   NA
                                       ---------------   ---------------   ---------------   ---------------   ---------------
                                         $  959  100%      $  883  100%      $  840  100%      $  776  100%      $  752  100%
                                       ===============   ===============   ===============   ===============   ===============
</TABLE>

   *   Percent of loans in each category to total loans


ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES


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



         Management determines the adequacy of the allowance for loan losses
by utilizing a loan grading system to determine risk in the loan portfolio
and by considering the results of credit reviews. The loan portfolio is
separated by quality and then by loan type. Loans of acceptable quality are
evaluated as a group, by loan type, with a specific loss rate assigned to the
total loans in each type, but unallocated to any individual loan. Conversely,
each adversely classified loan is individually analyzed, to determine an
estimated loss amount. A valuation allowance is also assigned to these
adversely classified loans, but at a higher loss rate due to the greater risk
of loss. For those loans where the estimated loss is greater than the
background percentage, the estimated loss amount is considered specifically
allocated to the allowance.



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


26

<PAGE>


                       VALLEY COMMUNITY BANCSHARES, INC.



         Although management has allocated a portion of the allowance to the
loan categories using the method described above, the adequacy of the
allowance must be considered as a whole. To mitigate the imprecision in most
estimates of expected loan losses, the allocated component of the allowance
is supplemented by an unallocated component. The unallocated portion includes
management's judgmental determination of the amounts necessary for
qualitative factors such as the consideration of new products and policies,
economic conditions, concentrations of credit risk, and the experience and
abilities of lending personnel. Loan concentrations, quality, terms and basic
underlying assumptions remained substantially unchanged during the period.



         The Company uses the historical loss experience method in
conjunction with the specific identification method for calculation of the
adequacy of allowance for loan losses. A six-year average historical loan
loss rate is calculated. This experience loss rate is applied to graded loans
that are not adversely classified for a subtotal of needed allowance. Loans
adversely classified are analyzed for potential loss on an individual basis.
This subtotal is added to the experience subtotal and the total is compared
to the allowance for loan losses.


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

DEPOSITS

TYPES OF 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 low cost funding source. In addition, the Company offers
a variety of interest-bearing accounts designed to attract both short-term
and longer-term deposits from customers. Interest-bearing accounts earn
interest at rates established by Bank Management based on competitive market
factors and the Company's need for funds. The Company traditionally has not
purchased brokered deposits and does not intend to do so in the future.

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

VALLEY COMMUNITY BANCSHARES, INC.
Deposits

<TABLE>
<CAPTION>
                                                                        Average Deposits by Type
                                      ----------------   ----------------  ----------------   ----------------    ----------------
                                            1999              1998               1997               1996                 1995
                                      ----------------   ----------------  ----------------   ----------------    ----------------
                                        Amount   Rate      Amount   Rate     Amount   Rate      Amount   Rate       Amount   Rate
                                      ----------------   ----------------  ----------------   ----------------    ----------------
<S>                                   <C>                <C>               <C>                <C>                 <C>
Noninterest bearing demand deposits   $ 22,737           $ 19,492          $ 16,832           $ 15,157            $ 15,321
Interest bearing demand deposits        16,279   1.19%     14,143   1.51%    13,395   1.61%     11,697   1.60%      11,851   1.60%
Money market deposit                    28,963   3.26%     27,806   3.58%    24,979   3.81%     18,822   3.77%      15,244   3.89%
Savings deposits                        12,392   2.08%     10,848   2.36%    10,331   2.45%     10,425   2.45%      11,895   2.51%
Time certificates < $100,000            21,019   4.67%     21,284   5.27%    22,141   5.17%     23,569   5.28%      20,843   5.16%


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


27

<PAGE>


                     VALLEY COMMUNITY BANSCHARES, INC.


Time certificates > $100,000            12,582   4.59%     10,212   5.06%     9,727   4.97%     10,021   5.15%       9,834   4.97%
                                      --------           --------          --------           --------            --------
                                      $113,972           $103,785          $ 97,405           $ 89,691            $ 84,988
                                      ========           ========          ========           ========            ========
</TABLE>


CERTIFICATES OF DEPOSIT AND TIME DEPOSITS

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


                                     CHART ON FOLLOWING PAGE.





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


28

<PAGE>


VALLEY COMMUNITY BANCSHARES, INC.
Deposit Maturity


<TABLE>
<CAPTION>
                                                         Outstanding Balance at December 31,
                                    ------------------------------------------------------------------------
                                        1999           1998           1997           1996           1995
                                    ------------   ------------   ------------   ------------   ------------
<S>                                 <C>            <C>            <C>            <C>            <C>
3 months or less                       $   7,235      $   5,997      $   4,668      $   6,024      $   6,669
Over 3 through 12 months                   6,820          4,368          4,076          3,644          3,367
Over 12 through 36 months                    500            327            606            427            157
Over 36 months                                              182            172              -              -
                                    ------------   ------------   ------------   ------------   ------------
         Total                         $  14,555      $  10,874      $   9,522      $  10,095      $  10,193
                                    ============   ============   ============   ============   ============
</TABLE>

RETURN ON EQUITY AND ASSETS

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

VALLEY COMMUNITY BANCSHARES, INC.
Return on Equity and Assets

<TABLE>
<CAPTION>
                                                                                For the Year Ended December 31,
                                                                        1999       1998        1997       1996      1995
                                                                    ----------   --------   --------   --------   --------
<S>                                                                 <C>          <C>        <C>        <C>        <C>
Return on average assets (net income divided by average assets)          1.05%      1.24%      1.43%      1.33%      1.45%

Return on equity (net income divided by average equity)                  7.80%     10.78%     12.60%     11.89%     13.49%

Dividend payout ratio (dividends per share divided by net                9.64%     60.18%     31.71%     36.16%     35.68%
    income per share)

Equity to assets ratio (Average equity divided by average assets)       13.44%     11.55%     11.35%     11.22%     10.74%

</TABLE>

LIQUIDITY AND CAPITAL RESOURCES


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


          Cash flows from operations contribute significantly to liquidity as
well as proceeds from maturities of securities and increasing customer deposits.
As indicated on the Company's Consolidated Statement of Cash Flows, net cash
from operating activities contributed $2.0 million to liquidity in 1999, $1.9
million in 1998, and $2.1 million in 1997. The majority of the Company's funding
comes from customer deposits within its operating region. Customer deposits
provided $3.5 million in 1999, $12.1 million in 1988 and $4.7 million in 1997.
In 1999, certificates of deposit over $100,000 provided the majority of the
deposit growth while in 1998 the deposit grown was primarily in core deposits
(demand, money market, and savings accounts). The majority of the $14.6 million
of certificates of deposit over $100,000 is from local bank customers and are
not solicited from brokers or municipalities. The Company considers these
deposits a stable source of funds.



         Another important source of liquidity is investments in federal funds
and interest-bearing deposits with banks and the Company's security portfolio.
The Company maintains a ladder of securities that provides prepayments and
payments at maturity and a portfolio of available-for-sale securities that could
be converted to cash quickly. Proceeds from maturities of securities provided
$15.4 million in 1999, $16.2 million in 1998, and $7.2 million in 1997.


29

<PAGE>


         Borrowing represents an important long term and manageable source of
liquidity based on the Company's ability to raise new funds and renew maturing
liabilities in a variety of markets. The Banks are members of the Federal Home
Loan Bank of Seattle and have committed lines of credit up to ten percent of
assets. In addition, the Banks have committed line of credit agreements totaling
approximately $6.75 million from unaffiliated banks with maturities that range
from April 2000 to June 2000.



         The Company's total stockholder's equity increased to $18.7 million at
December 31, 1999, from $14.1 million at December 31, 1998. At December 31,
1999, stockholders' equity was 13.99 percent of total assets, compared to 11.23
percent at December 31, 1998. At December 31, 1999, the bank held cash and due
from banks, interest-bearing deposits with banks, and federal funds sold of
approximately $14.8 million. In addition, at such date $33.3 million of the
Company's investments were classified as available-for-sale.



         The market value of available-for-sale securities was less than book
value at year-end, primarily as a result of increasing interest rates, which
resulted in an unrealized loss in the investment portfolio. Management does not
believe the sale of the Company's securities would materially affect the overall
condition of the Company.


         The capital levels of the Company currently exceed applicable
regulatory guidelines at December 31, 1999. Management believes the Company's
capital will be adequate to fund the start up and related costs associated
with any new branches and Valley bank until it can achieve the deposit and
loan levels necessary to be profitable. The Company has commitments to
construct a $2 million permanent facility at 10th and D Street in Auburn, WA.
It is anticipated the building will be completed in June 2000.

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

INTEREST RATE RISK

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

         The simulation model used by the Company combines the significant
factors that affect interest rate sensitivity into a comprehensive earnings
simulation. Earning assets and interest-bearing liabilities with longer lives
may be subject to more volatility than those with shorter lives. The model
accounts for these differences in its simulations. At December 31, 1999, the
simulation modeled the impact of assumptions that interest rates would
increase or decrease 200 basis points. Results indicated the Company was
positioned so equity would not drop below that point where the Company, for
regulatory purposes, would continue to be classified "well capitalized". It
should be emphasized that the model is static in nature and does not take
into consideration possible management actions to minimize the impact on
equity. Management also matches assets and liabilities on a maturity gap
analysis and repricing gap analysis to assist in interest rate sensitivity
measurement.

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

30
<PAGE>

increase net interest income as interest income increases faster than interest
expense. However, the exact impact of the gap on future income is uncertain both
in timing and amount because interest rates for the Company`s assets and
liabilities can change rapidly as a result of market conditions and customer
patterns.

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

IMPACT OF THE YEAR 2000 ISSUE

         The Company did not experience any difficulties as a result of the
rollover into the Year 2000 nor does it anticipate any problems during 2000.
However, the Company continues to be vigilant monitoring its systems, loan
portfolio and customer base for potential problems.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's results of operations are largely dependent upon its
ability to manage market risks. Changes in interest rates can have a significant
effect on the Company's financial condition and results of operation. Other
types of market risk such as foreign currency exchange rate risk and commodity
price risk do not arise in the normal course of the Bank's business activities.
The Company does not use interest rate risk management products such as interest
rate swaps, hedges or derivatives, nor does management intend to use such
products in the future. All of the Company's transactions are denominated in
U.S. Dollars. Approximately 35% of the Company's loan portfolio has interest
rates which are variable. Fixed rate loans are generally made with a term of
five years or less.

         The following table sets forth the estimated maturity or repricing and
the resulting interest sensitivity gap, of the Company's interest-earning assets
and interest-bearing liabilities and the cumulative interest sensitivity gap at
December 31, 1999. The expected maturities are presented on a contractual basis.
Actual maturities may differ from contractual maturities because of prepayment
assumptions, early withdrawal of deposits and competition.

VALLEY COMMUNITY BANCSHARES, INC.

<TABLE>
<CAPTION>

Contractual Maturity or Repricing                              Outstanding Balance at December 31, 1999
                                                   Less than         Three          One to           Over
                                                     three         months to         five            five         Cumulative
                                                    months         one year          years           years           Total
                                                 -------------   -------------   -------------   -------------   -------------
<S>                                              <C>             <C>             <C>             <C>             <C>
 Interest - earning assets
   Interest-bearing deposits with banks              $  9,293        $    199        $    200        $     -        $   9,692
     Investments                                        4,251           8,638          21,157             457          34,503
     Loans                                             21,404           8,808          47,642             780          78,634
     Other                                                420               -               -               -             420
                                                 -------------   -------------   -------------   -------------   -------------
        Total interest - earning assets              $ 35,368        $ 17,645        $ 68,999        $  1,237       $ 123,249
                                                 =============   =============   =============   =============   =============

 Interest - bearing liabilities
      Interest bearing demand deposits               $ 15,926        $      -        $      -        $      -       $  15,926
      Money market deposit and Savings                 40,605               -               -               -          40,605
      Time certificates < $100,000                      7,000          13,234           1,140               -          21,374
      Time certificates > $100,000                      7,232           6,823             500               -          14,555
      Other borrowed funds                                539                                                             539
                                                 -------------   -------------   -------------   -------------   -------------
          Total interest - bearing
           liabilities                               $ 71,302        $ 20,057        $  1,640        $      -       $  92,999
 Interest sensitivity gap                            $(35,934)       $ (2,412)       $ 67,359        $  1,237        $ 30,250
                                                 =============   =============   =============   =============   =============
 Cumulative interest sensitivity gap                 $(35,934)       $(38,346)       $ 29,013        $ 30,250
                                                 =============   =============   =============   =============


<PAGE>

 Cumulative interest sensitivity gap
   as a percent of total assets                        -26.85%         -28.65%          21.68%          22.60%
                                                =============   =============   =============   =============
</TABLE>


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

         According to the traditional banking industry static gap table set
forth above, the Company was liability sensitive with a negative cumulative
one-year gap of $38.3 million or -28.6 percent of total assets at December 31,
1999. In general, based upon the Company's mix of deposits, loans and
investments, increases in interest rates would be expected to result in a
decrease in the Company's net interest margin, and a decrease in interest rates
would be expected to result in an increase in the Company's net interest margin.

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

         Based on a financial analysis performed as of December 31, 1999, which
takes into account how the specific interest rate scenario would be expected to
affect each interest earning asset and each interest bearing liability, the
company estimates that changes in the federal fund interest rate would affect
the Company's performance as follows.

VALLEY COMMUNITY BANCSHARES, INC.
 Financial Analysis

<TABLE>
<CAPTION>
                                                   Increase (Decrease) In
                                             Net             Net
                                          Interest        Interest        Return on
                                           Income          Margin          Equity
                                        -------------   -------------   -------------
                                                  (dollars in thousands)
<S>                                     <C>             <C>             <C>

(Current federal fund rate is 5.50%)
 Federal fund rate increase of:
      100 basis points to 6.50%          $  (403)          -0.32%          -1.31%
      200 basis points to 7.50%          $  (726)          -0.58%          -2.42%
 Federal fund rate decrease of:
      100 basis points to 4.50%           $   332           0.23%           1.15%
      200 basis points to 3.50%           $   507           0.33%           1.73%
</TABLE>

         No assurances can be given that the actual net interest margin
(percentage) or net interest income would increase or decrease by such amounts
in a 100 or 200 basis point increase or decrease in the federal fund rate.

ITEM 3.  PROPERTIES

         The Company's main office is located in Puyallup, Washington and also
serves as the main office for Puyallup Valley Bank. Puyallup Valley Bank
conducts its business through six full-service offices and one drive-up
facility. All but three of Puyallup Valley Bank's premises are owned by Puyallup
Valley Bank with options to extend existing leases on the leased facilities. The
facilities are: Main office, 1307 East Main, Puyallup, Washington; Downtown
Branch, 209 South Meridian Avenue, Puyallup, Washington; Downtown Drive-Up, 112
E. Main Avenue, Puyallup, Washington; Summit Branch, 10413 Canyon Road East,
Puyallup, Washington; South Hill Branch, 15815 Meridian Avenue East, Puyallup,
Washington; Canyon Road Branch, 12803 Canyon Road, Puyallup, Washington; and
Graham Branch, 9921 224th St. SE, Graham, Washington.


<PAGE>

         Valley Bank has entered into a lease for its initial facility located
at 1525 A Street, Suites 106 and 107, in Auburn. The lease term is for three
years with an optional two-year extension. Valley Bank makes lease payments of
$2,812 per month. Valley Bank plans to ultimately build a permanent facility on
a site, owned by the Company, that is located at 10th and D Street in Auburn,
Washington.

ITEM 4.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth the shares of Valley Community
Bancshares Common Stock beneficially owned as of March 15, 2000 by each Director
and each named Executive Officer, and the Directors and Officers as a group. As
of that date, the Company is not aware of anyone who owns more than five percent
of its shares either beneficially or of record, except as listed below.


<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS
                                                   SHARES BENEFICIALLY       % OF TOTAL SHARES
           NAME                                          OWNED(1)              OUTSTANDING(2)
           ----                                    -------------------       -----------------
          <S>                                       <C>                       <C>
           Thomas R. Absher                               56,703                    5.04%
           David H. Brown(3)                              62,830                    5.48%
           William E. Fitchitt                             1,427                     *
           David K. Hamry                                  3,303                     *
           A. Eugene Hammermaster                         26,490                    2.35%
           Steven M. Harris                                5,030                     *
           Warren D. Hunt                                 17,506                    1.56%
           Roger L. Knutson                               47,455                    4.22%
           Directors and Executive Officers              260,654                   22.51%*
           (12) as a group(4)
</TABLE>
---------------
         *  Less than 1%



<TABLE>
<CAPTION>
OTHER BENEFICIAL OWNERS
                                                   Shares Beneficially       % of Total Shares
           Name and Address                              Owned(1)              Outstanding(2)
           ----------------                        -------------------       -----------------
           <S>                                     <C>                       <C>
           Charles R. Wadsworth
           P. O. Box 578
           Puyallup, WA  98371                            57,220                    5.08%
</TABLE>

----------
<PAGE>
(1)  The shares "beneficially owned" include shares owned by or for, among
     others, the spouse and/or minor children of the individual and any other
     relative who has the same home as such individual, as well as other shares
     with respect to which the individual has or shares voting or investment
     power, or has the right to acquire within 60 days under outstanding stock
     options. Beneficial ownership may be disclaimed as to certain of the
     shares.

(2)  Any securities not outstanding but which are subject to options and
     presently exercisable by the named person within 60 days, are deemed to be
     outstanding for computing the percentage of outstanding securities owned by
     such person, but are not deemed to be outstanding for the purposes of
     computing the percentage of the class owned by any other person.

(3)  Includes 21,428 shares subject to stock options granted pursuant to the
     Puyallup Valley Bank Employee Stock Option Plan and presently exercisable.

(4)  Includes 10,721 shares subject to stock options granted pursuant to the
     Puyallup Valley Bank Employee Stock Option Plan and presently exercisable.

ITEM 5.  DIRECTORS AND EXECUTIVE OFFICERS


VALLEY COMMUNITY BANCSHARES. The following table sets forth summary information
about the Directors and Executive Officers of Valley Community Bancshares. All
of the persons named hold the same position with Puyallup Valley Bank as they do
with the Company, with the exception of William E. Fitchitt and Steven M.
Harris, who are not members of the Board of Directors of Puyallup Valley Bank.


<TABLE>
<CAPTION>
                                                                             Year Elected
             Name                Age   Position with the Company             or Appointed
             ----                ---   -------------------------             ------------
<S>                              <C>   <C>                                   <C>
Thomas R. Absher                 68    Chairman                                  1973
David H. Brown                   54    Director, President and CEO               1989
Warren D. Hunt                   67    Vice-Chairman                             1975
A. Eugene Hammermaster           65    Secretary                                 1973
William E. Fitchitt              57    Director                                  1998
David K. Hamry                   59    Director                                  1991
Steven M. Harris                 53    Director                                  1998
Roger L. Knutson                 55    Director                                  1977
Joseph E. Riordan                46    Senior Vice President and CFO             1997
Roy W. Thompson                  57    Senior Vice President and Credit          1989
                                       Administrator
Richard D. Pickett               50    President and CEO of Valley Bank          1999
</TABLE>


The Board of Directors of the Company consists of eight members. The Board of
Directors is divided into three groups for the purpose of defining terms of
office. All Directors serve three-year terms; one-third of the Directors are
elected annually. The Company's Articles of Incorporation provide that a
director may only be removed for cause, and vacancies will be filled by the
Board of Directors.

The principal occupation or business and experience of the Directors and
Executive Officers of the Company for the past five years is set forth below.

THOMAS R. ABSHER is the Chairman of the Board of Directors of the Company and a
Partner of Morningview Development, Morningside Development, Northwest Care
Development, TJC Partnership, Terrace Ventures, Poulsbo Development, and Madison
Hotel. Mr. Absher was the former President of Absher Construction Company. Mr.
Absher is also a director of Valley Bank.


<PAGE>

DAVID H. BROWN has been the President and Chief Executive Officer of the Company
since its formation and the President and Chief Executive Officer of Puyallup
Valley Bank since 1989. Prior to joining Puyallup Valley Bank, Mr. Brown was an
executive officer with Seafirst Bank for twenty years, beginning as a Management
Trainee and concluding his tenure at Seafirst as Manager of Southwest Corporate
Banking. Mr. Brown is a graduate of Pacific Coast Banking School and holds a BA
from Washington State University.

WARREN D. HUNT is the Vice Chairman of the Board of Directors of the Company and
co-owner of Newell Hunt Furniture, Inc.

EUGENE HAMMERMASTER is Secretary to the Board of Directors of the Company, and
attorney and senior member in the Hammermaster Law Firm, and a Municipal Court
Judge in Pierce County.

WILLIAM E. FITCHITT is the Vice-Chairman of Valley Bank, a Certified Public
Accountant and President of Fitchitt & Benedict, P.S., Inc.

DAVID K. HAMRY is the CEO and Director of Good Samaritan Hospital, and Good
Samaritan Community Health Care. He is a Director of WA Casualty Company and
Northwest Healthcare.

STEVEN M. HARRIS is the Chairman of the Board of Directors of Valley Bank and is
President and Designated Broker of Northwest Corporate Real Estate, Inc., a
commercial real estate sales and leasing company.

ROGER L. KNUTSON is the President of Knutson Farms, Inc., Knutson Equipment &
Supply, Puyallup Valley Rhubarb Company, Puyallup Valley Flower Exchange and
Puget Sound Bulb Exchange.

JOSEPH E. RIORDAN has been Senior Vice President and Chief Financial Officer of
the Company since its formation and Senior Vice President and Chief Financial
Officer of Puyallup Valley Bank since 1997. Prior to joining the Company and
Puyallup Valley Bank, Mr. Riordan was Vice President of Finance InterWest
Bancorp, Inc. From 1985 through 1996, Mr. Riordan was Vice President and
Secretary-Treasurer of Central Bancorporation. Mr. Riordan's career in the
banking industry spans over twenty years. Mr. Riordan is a Certified Public
Accountant, a Certified Management Accountant, and holds a BA in Business
Administration from Central Washington University. Mr. Riordan is the Senior
Vice President and Chief Financial Officer of Valley Bank.

ROY W. THOMPSON has been Senior Vice President of the Company since its
formation and Senior Vice President and Credit Administrator of Puyallup Valley
Bank since 1989. Prior to joining Puyallup Valley Bank, Mr. Thompson was Vice
President and Account Officer of U.S. Bank of Washington in Private Banking.
From 1983 through 1988, Mr. Thompson was Vice President and Credit Administrator
of Seattle-First National Bank. Mr. Thompson's career in the banking industry
spans over twenty years. Mr. Thompson is a graduate of Pacific Coast Banking
School, holds an MBA in Finance from the United States International University
and a BS in Business from the University of Southern California. Mr. Thompson is
the Senior Vice President and Credit Administrator of Valley Bank.

RICHARD D. PICKETT is President and CEO of Valley Bank. Prior to joining Valley
Bank, Mr. Pickett was an officer with Seafirst Bank for over twenty five years,
beginning as a Management Trainee and concluding his tenure at Seafirst as
Commercial Banking Team Leader. Mr. Pickett is a graduate of Pacific Coast
Banking School, University of Southern California Executive Leadership School
and holds a BA from Washington State University.

ITEM 6.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth all compensation paid by the Company for
services rendered in all capacities paid or accrued for the fiscal years ended
December 31, 1999, 1998 and 1997, to the Chief Executive Officer. No other
Executive officer of the Company received annual compensation in excess of
$100,000 for such years.

<PAGE>


<TABLE>
<CAPTION>

           Name and Position          Year            Salary            Bonus        Other (1)(2)(3)       Total
           -----------------          ----            ------            -----        ---------------       -----
         <S>                          <C>            <C>               <C>           <C>                 <C>
         David H. Brown               1997           $123,520          $12,250           $53,674         $189,444
         President and CEO            1998           $128,000          $30,000           $53,798         $211,798
                                      1999           $133,000          $22,770           $53,198         $208,968
</TABLE>


(1) Includes $9,000 paid to Mr. Brown by Puyallup Valley Bank for director's
    fees in 1997, 1998, and 1999.
(2) Includes profit sharing pursuant to The Company's 401(k) Plan and Profit
    Sharing Plan.
(3) Includes $35,000 accrued by Puyallup Valley Bank each year for Mr. Brown's
    Deferred Compensation Plan.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

         The Board of Directors of the Company, acting as a committee of the
whole, serves as the Compensation Committee. The Committee is responsible for
establishing and implementing all compensation policies of the Company and
its subsidiaries, as well as setting the compensation for the executive
officers of the Company and its subsidiaries. The Committee evaluates the
performance of the Chief Executive Officer and approves an appropriate
compensation level. The Chief Executive Officer evaluates the performance of
all other executive officers and recommends to the Committee individual
compensation levels for approval by the Committee.

         The Committee believes that a compensation plan for executive
officers should take into account management skills, long-term performance
results and shareholder returns. The principles underlying compensation
policies are: (i) to attract and retain highly talented and productive
executives; (ii) to provide levels of compensation competitive with those
offered throughout the banking industry; (iii) to motivate executive officers
to enhance long-term shareholder value by helping them build their own
ownership in the Company; and (iv) to integrate the compensation program with
the Company's long-term strategic planning and measurement processes.

         The current compensation plan involves a combination of salary,
bonuses, profit sharing and grants of stock options to encourage long-term
performance. The salary levels of executive officers are designed to be
competitive within the banking and financial services industries. The
Committee annually reviews industry peer group and the Washington Financial
Industry Survey and America's Community Bankers Survey of Salaries to
determine competitive salary levels. Individual annual performance is
reviewed to determined appropriate salary adjustments.

         The Company's bonus plan is based on a review of the salary surveys,
the performance of the Company and the subjective evaluation of the
performance of each executive officer.

         The Committee awards stock options to employees as a long-range
compensation program designed to reward performance and benefit shareholders.
Awards of stock options are intended to provide employees with increased
motivation and incentive to exert their best efforts on behalf of the Company
by enlarging their personal stake in its success through the opportunity to
increase the value of their stock ownership. Options are issued at the fair
market price on the date of the grant, in order to insure that any value
derived from the grant is realized by shareholders generally. The number of
options granted to any employee is based on the employee's performance and
relative responsibility within the Company. Options may have a deferred
vesting and are not exercisable prior to vesting. During the fiscal year
ended December 31, 1999, the Committee granted stock options totaling 14,500
shares to employees of the Company and its subsidiaries.

         During the fiscal year ended December 31, 1999, the base salary of
David H. Brown, President and Chief Executive Officer of the Company, was
$133,000. In addition, Mr. Brown received a performance bonus of $22,770, a
profit sharing allocation of $9,198, and was credited with $35,000 in a
Deferred Compensation Plan adopted effective January 1, 1997, which provides
for the accrual of $245,000 plus interest over a ten-year period to be paid
to Mr. Brown upon his retirement (see Deferred Compensation Plan below) and
$9,000 in Director's fees. This resulted in total compensation of $208,968,
which represents a 1.34 percent decrease from the previous year. In
determining his compensation, special consideration was given to the efforts
Mr. Brown had put forth to integrate Valley Bank as a wholly-owned subsidiary
of the Company. The Committee



<PAGE>

believes the increase in compensation is appropriate based on competitive
salary surveys and the performance of the Company. Mr. Brown did not
participate in deliberations of the Committee relating to his compensation.

Submitted by Members of the Committee:
                                                Thomas R. Absher
                                                David H. Brown
                                                Eugene Hammermaster
                                                Warren D. Hunt
                                                Roger L. Knutson
                                                William E. Fitchitt
                                                Steven M. Harris
                                                David K. Hamry

SEVERANCE AND CHANGE IN CONTROL AGREEMENTS

         In addition to regular compensation, the Company has agreed to pay
Messrs. Brown, Thompson, Riordan, and Pickett additional compensation should
their employment terminate with the Company under certain conditions. The
severance Agreements are effective only if Messrs. Brown, Thompson, Riordan,
and Pickett employment is terminated within three years after a change in
control; or employment is terminated on or after the date that any party
announces (or should announce) any prospective change in control transaction,
if a change in control occurs with twelve months of termination. Change in
control means a change in the ownership or effective control, or in the
ownership of a substantial portion of, the assets of the Company as used in
section 280G of the Internal Revenue Code of 1986, as amended. Changes in
control as includes any change within a twelve-month period in the
composition of the Board of Directors whereby the individuals serving as
directors at the beginning of such period cease to constitute at least a
majority of the Board at any time during such period. The amount of the
severance payment equals the highest compensation (as reportable on the
executive's IRS W-2 form) during one of the most recent three calendar years
ending before, or simultaneous with, the date on which the change in control
occurs.

DEFERRED COMPENSATION PLAN

         In addition to regular compensation, the Company, on April 21, 1999
to be effective January 1, 1997, agreed to provide Mr. Brown with deferred
compensation under the terms of an Supplemental Retirement Benefits
Agreement. The Agreement provides for the accrual of $245,000 plus interest
to an account over a ten-year period. The account is to be distributed to Mr.
Brown on the last day of the contract period, to Mr. Brown or his Beneficiary
upon total disability or death, to Mr. Brown upon the termination of service
within a period of twelve months following a change of control. Change in
control means (a) the purchase or other acquisition by any person, entity, or
group of persons as defined under the provisions of Section 13(d) or 14(d) of
the Securities Exchange Act of 1934 of more than fifty percent of either the
outstanding shares of common stock or the combined voting power of the
Company's then outstanding voting securities; (b) the approval by the
stockholders of the Company of a reorganization, merger of consolidation with
respect to which persons who were stockholders of the Company immediately
prior to such reorganization, merger or consolidation do not, immediately
thereafter, own more than fifty percent of the combined voting power of the
Company's then outstanding securities entitled to vote generally; (c) a
liquidation or dissolution of the Company; (d) a change in the membership of
the Board of Directors such that those individuals who at the beginning of
any twelve consecutive month period cease to constitute at a majority thereof
for any reason within that twelve month period.

EMPLOYEE BENEFIT PLANS

         The Company has a 401(k) Profit Sharing plan for all eligible
employees. Contributions to the plan adopted in December 1998 are at the
discretion of the Board of Directors. Participants may contribute up to 12
percent of compensation. The Company made no contributions to the plan in
1999, 1998, or 1997. The Company also has a noncontributory profit sharing
plan covering substantially all employees. Contributions to the plan are at
the discretion of the Board of Directors and totaled $83,500, $94,000, and
$95,500 in 1999, 1998, and 1997, respectively.

STOCK OPTION PLANS

<PAGE>

         The Company has two stock option plans that were approved by the
shareholders. One stock option plan was approved by the shareholders on April
22, 1986, and extended until March 20, 2006, at a meeting of shareholders
held in April 1996 (the "1996 Plan"). There are presently 159,070 shares
authorized for issuance under the 1996 Plan, of which 156,518 have been
issued, 109,227 have been exercised, 47,241 are outstanding. No additional
options will be granted under the 1996 Plan. On April 23, 1998, the
shareholders adopted the 1998 Employee Stock Option Plan (the "1998 Plan).
There are presently 100,000 shares authorized for issuance under the 1998
Plan, of which 17,500 have been issued and none exercised.

         The purpose of the 1996 Plan and 1998 Plan is to provide additional
incentives to key employees of Bancshares and to help attract and retain
quality personnel and to enhance shareholder value aligning employee interest
with those of the shareholders. The grant of options is at the discretion of
the Company's Board of Directors or such other committee as it may designate.
The 1998 Plan is very similar to the 1986 Plan, except that it: (i) is
updated to correct references to the Internal Revenue Code which have been
changed, (ii) permits an employee to exercise options by surrendering
already-owned shares, and (iii) permits the grant of nonqualified stock
options.

OPTION EXERCISES AND YEAR-END OPTION VALUES

         The following table summarizes option exercises during the 1999
fiscal year by each of the Named Executives and the 1999 fiscal year-end
value of unexercised options granted to the Named Executives:


<TABLE>
<CAPTION>

                                                                      Number of Securities          Value of Unexercised
                                                                Underlying Unexercised Options    In-the-Money Options at
                            Shares Acquired                             at 12/31/99                     12/31/99 (1)
Name                          on Exercise     Value Realized     (Exercisable/Unexercisable)     (Exercisable/Unexercisable)
----                          -----------     --------------     ---------------------------     ---------------------------
<S>                         <C>               <C>               <C>                              <C>
David H. Brown                   2,031            $49,930            21,428 / -0-                   $469,374 / -0-
Roy W. Thompson                   -0-               -0-              10,721 / -0-                   $217,630 / -0-
Joseph E. Riordan                 -0-               -0-                 -0- / 5,250                      -0- / $32,500
Richard D. Pickett                -0-               -0-                 -0- / 10,000                     -0- / -0-
</TABLE>


(1)  Values are calculated by subtracting the exercise price from the fair
     market value of the underlying stock. For purposes of this table, fair
     market value is deemed to be $30.00, the last known sale price of
     Bancshares common stock on December 31, 1999.

ITEM 7.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Some of the Directors and Officers of the Company, Puyallup Valley
Bank, and Valley Bank and the firms and corporations with which they are
associated, have transactions with the Puyallup Valley Bank and Valley Bank,
including borrowings and investments in time deposits. All such loans and
investments in time deposits have been made in the ordinary course of business,
have been made on substantially the same terms (including interest rates paid or
charged and collateral required) as those prevailing at the time for comparable
transactions with unaffiliated persons, and did not involve more than the normal
risk of collectability or present other unfavorable features. As of December 31,
1999, the aggregate outstanding amount of all loans to Directors and Officers
was approximately $2,139,000.

ITEM 8.  LEGAL PROCEEDINGS

<PAGE>

         The Banks are from time to time parties to various legal actions
arising in the normal course of business. The Company believes that there is
no threatened or pending proceeding against the Company or the Banks, which,
if determined adversely, would have a material effect on the business or
financial position of the Company or the Banks.

ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

NATURE OF TRADING MARKET

         At March 15, 2000, the Company had approximately 688 shareholders of
record. The stock is not traded on any exchange or automated quotation
system, and there is no firm which makes a market in the stock. The stock has
been held by shareholders who typically have held the stock for investment.
Therefore, there is no active trading market for the stock and no assurance
can be given that an active trading market for the stock will develop. During
1999, there were 141 transfers known to the Company. These transfers involved
a total of 60,731 shares. Sales prices have ranged from $30 to $35, to the
Company's best knowledge. The last trade occurred on February 29, 2000, and
was for 1,000 shares of Common Stock at a price of $30 per share. These
prices are not necessarily indicative of the fair market value of the stock,
nor is the Company necessarily aware of all transfers or the price of those
transfers.

DIVIDEND HISTORY

         The Company (Puyallup Valley Bank prior to July 1, 1998) has paid,
since Puyallup Valley Bank's inception in 1973, a combination of stock and
cash dividends to its shareholders. Since 1993, Puyallup Valley Bank has paid
a stock dividend of 5 percent per year and a cash dividend of 50(cent) per
share per year. Since July 1, 1998, the Company paid a cash dividend of
38(cent) during 1998 and a 12(cent) dividend during 1999. On JanuarY 26,
2000, the Board of Directors of the Company declared a cash dividend of $.50
per share, which was paid during February 2000 to those shareholders of
record on December 31, 1999.

         Although the Company intends to continue its policy of paying cash
dividends on its Common Stock in amounts not less than those paid in recent
periods, the ability of the Company to continue to pay such dividends will
depend primarily upon the earnings of Puyallup Valley Bank and Valley Bank
and their ability to pay dividends to the Company, as to which there can be
no assurance. For the foreseeable future, none of the earnings of Valley Bank
will be dividends to the Company as the capital will be retained at Valley
Bank to promote its growth.

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

ITEM 10.      RECENT SALES OF UNREGISTERED SECURITIES

         The following sets forth information as to all securities of
registrant sold by the registrant within the past three years, which were not
registered under the Securities Act of 1933.

         (a)   SECURITIES SOLD

               (i)   Public Offering


<TABLE>
<CAPTION>

                           Date of Sale              Title of Securities        Amount Sold
                           ------------              -------------------        -----------
                           <S>                       <C>                        <C>
                           January 31, 1999          Common Stock               102,619 shares
                                                     $1 par value
</TABLE>


               (ii)  Private Placement


<TABLE>
<CAPTION>

                           Date of Sale              Title of Securities        Amount Sold
                           ------------              -------------------        -----------
                           <S>                       <C>                        <C>
                           March 15, 1999            Common Stock                 3,570 shares
                                                     $1 par value
</TABLE>


<PAGE>

               (iii)  Exercise of Stock Options


<TABLE>
<CAPTION>

                           Date of Sale              Title of Securities        Amount Sold
                           ------------              -------------------        -----------
                           <S>                       <C>                        <C>
                           Between January 1,1997    Common Stock               20,143 shares
                           and December 31, 1999     $1 par value
</TABLE>



         (b)   UNDERWRITERS AND OTHER PURCHASERS. The shares sold in the
               offering listed under Item 10(a)(i) were sold in a public
               offering without the use of underwriters. The shares sold in
               the private placement listed under Item 10(a)(ii) were sold in
               an isolated private placement. The shares sold in the
               transactions listed under Item 10(a)(iii) above were sold to
               employees of the registrant upon the exercise of stock options
               within the past three years.



         (c)   CONSIDERATION. The consideration received for the 102,619
               share offering completed on January 31, 1999 was $3,591,000.
               The Company received land valued at $125,000 for the 3,570
               shares issued on March 15, 1999. The land is being used for
               Valley Bank's permanent facility being constructed at 10th and
               D Street in Auburn, Washington. The total consideration for
               the sale of the 20,143 shares sold upon the exercise of stock
               options granted by the registrant under the 1996 Plan was
               approximately $142,000.




               EXEMPTIONS FROM REGISTRATION CLAIMED. The sales of common
               stock by the registrant described herein have not been
               registered with the SEC in reliance on exemptions from such
               registration. Because the securities have not been
               registered, they are deemed "restricted securities" and can
               only be resold in compliance with certain exemptions from
               registration.



         (d)   The shares listed under Item 10(a)(i) were sold to
               Washington residents in an intra-state offering, exempt from
               registration with the SEC under Section 3(a)(11) of the
               Securities Act of 1933, as amended, and registered by
               qualification with the Securities Division of the State of
               Washington Department of Financial Institutions pursuant to
               Section 21.20.210 of the Revised Code of Washington. The
               shares listed under Item 10(a)(ii) were sold in an isolated
               private placement that did not involve a public offering,
               and were exempt from registration with the SEC under Section
               4(2) of the Securities Act of 1933, as amended, and were
               exempt from registration with the Securities Division of the
               State of Washington Department of Financial Institutions
               pursuant to Section 21.20.320(1) of the Revised Code of
               Washington. The shares listed under Item 10(a)(iii) were
               sold pursuant to option issuances from a compensatory
               benefit plan, and were exempt from registration with the SEC
               under 17 CFR 230.701 promulgated under Section 3(b) of the
               Securities Act of 1933, as amended, and were exempt from
               registration with the Securities Division of the State of
               Washington Department of Financial Institutions pursuant to
               Section 21.20.310(10) of the Revised Code of Washington.



         (e)   STOCK DIVIDENDS. Between January 1, 1997 and April 1, 2000,
               the registrant issued 93,175 shares of registrants Common
               Stock, $1 par value, as stock dividends. The value of the
               securities issued at the time of issuance was $2,194,000 and
               have not been registered under the Securities Act of 1933.


ITEM 11.    DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED

GENERAL

         The Company's Common Stock consists of 5,000,000 shares of Common
Stock, par value $1.00 per share, of which 1,125,561 are presently issued and
outstanding. Each share of Common Stock has the same relative rights as, and
is identical in all respects with, each other share of Common Stock. No
shares of preferred stock are authorized for issuance. In addition, up to


<PAGE>

100,000 shares of the Company's Common Stock are available for grant to
employees of the Company and the banks pursuant to the Valley Community
Bancshares 1998 Stock Option Plan.

NO CUMULATIVE VOTING

         Holders of Common Stock will be entitled to one vote per share on all
matters submitted to a vote of the shareholders, including election of
Directors. Article VII of the Articles of Incorporation of the Company provides
that shareholders may not cumulate their votes in the election of Directors.
Cumulative voting means the ability to vote, in person or by proxy, the number
of shares owned by the shareholder for as many persons as there are Directors to
be elected and for whose election the shareholder has a right to vote, or to
cumulate votes by giving one candidate as many votes as are determined by the
number of such Directors to be elected multiplied by the total number of shares
the shareholder has the right to vote, or distributing such votes on the same
principle among any number of candidates.

DIVIDEND RIGHTS

         The Company may pay dividends as declared from time to time by the
Board of Directors out of funds legally available for the payment of dividends.
The ability of the Company to pay dividends will initially and for the
foreseeable future depend on the amount of dividends paid to it by the banks.
The dividend restrictions imposed on subsidiaries by statue and regulation may
effectively limit the amount of dividends the Company can pay. See "SUPERVISION
AND REGULATION--Banking Subsidiaries" and "DIVIDEND HISTORY." Under Washington
corporate law, the Board of Directors is barred from making any dividend payment
if, after giving effect to such payment, the Company is either unable to pay its
debts as they become due in the normal course of business, or the Company's
total assets would be less than the sum of its total liabilities. The holders of
Common Stock will be entitled to receive and share equally in such dividends as
may be declared by the Board of Directors. See "DIVIDEND HISTORY."

LIQUIDATION/DISSOLUTION

         In the event of any liquidation, dissolution or winding up of the
Company, the holders of the Common Stock would be entitled to receive, on a
pro-rata basis, after payment of all debts and liabilities of the Company
(including all deposit accounts and accrued interest thereon), all assets of the
Company available for distribution.

MERGER, ACQUISITION AND "ANTI-TAKEOVER" PROVISION

         Article X of the Company's Articles of Incorporation provides that in
the event of a merger or consolidation of the Company or a sale of substantially
all of its assets, the Board of Directors must consider all relevant factors in
addition to the amount of consideration, including, without limitation, the
social and economic effects on its community and its depositors, borrowers,
employees, suppliers and other constituents. This provision might discourage a
tender offer for the Company's stock, which might be at a price above the
prevailing market rate.

         The Company's Articles of Incorporation also require the approval of
the holders of: (i) at least 66-2/3 percent of the Company's outstanding shares
of voting stock, and (ii) at least a majority of the Company's outstanding
shares of voting stock, not including shares held by an "interested
shareholder," to approve certain "transactions." However, the preceding shall
not apply in cases where the proposed transaction has been: (i) approved by a
majority of the Board of Directors, excluding Directors who have a material
financial interest in the transaction or who were nominated and elected as a
result of an arrangement with the "interested shareholder" within 24 months of
the proposed transaction, or (ii) a majority of the Board of Directors, whose
votes are entitled to be counted under clause: (i) determines that the fair
market value of the consideration to be received by non-interested shareholders
for shares of any class of which shares are owned by any interested shareholder
is not less than the highest fair market value of the consideration paid by any
interested shareholder in acquiring shares of the same class within 24 months of
the proposed transaction. The term "interested shareholder" is defined to
include any person or group of affiliated persons who beneficially owns 20
percent or more of the outstanding voting shares of a corporation. An affiliated
person is any person who either acts jointly or in concert with, or directly or
indirectly controls, is controlled by, or is under common control with another
person. The provisions of Article XI apply to any transaction between a
corporation, or any subsidiary thereof, and an interested shareholder of such
corporation or an affiliated person to an interested shareholder, that must be
authorized pursuant to applicable law by a vote of the shareholders.


<PAGE>

         The increased stockholder vote required to approve a transaction with
an interested shareholder has the effect of foreclosing mergers and other
business combinations that a majority of stockholders deem desirable and places
the power to prevent such a merger or combination in the hands of a minority of
stockholders.

NO PREEMPTIVE RIGHTS

         Article III of the Articles of Incorporation of the Company provides
that holders of Common Stock will not have any preemptive rights with respect to
any shares issued by the Company in the future; the Company may therefore sell
shares without first offering them to the then shareholders of the Company.

CERTAIN REQUIRED VOTES; AMENDMENT TO ARTICLES OF INCORPORATION

         Article VIII of the Articles of Incorporation of the Company provides
that the Company reserves the right to amend the Articles of Incorporation in
any manner now or hereafter permitted by law. Under present Washington law, the
Articles of Incorporation may be amended by a vote of a majority of the members
of the Board of Directors without the requirement of shareholder approval, if
such amendment applies only to: (i) deletion of the name and address of the
initial Directors; (ii) a change of the name of the Company, and if the Company
has only one class of shares outstanding; (iii) to change or eliminate any
provision with respect to the par value of any class of shares; and (iv) to
change the number of authorized shares to effectuate a split of, or stock
dividend in, the Company's own shares. Other amendments to the Articles of
Incorporation of the Company require the affirmative vote of the shareholders
representing two-thirds of the outstanding shares of stock.

LIMITATION OF LIABILITY

         Article VI of the Company's Articles of Incorporation limits the
liability of Directors, in their capacity as Directors, to the full extent
permitted by Washington law. Accordingly, Directors shall not be liable to the
Company and its shareholders for monetary damage except for acts or omissions
that: (i) involve intentional misconduct or a knowing violation of law by the
director; (ii) involve conduct which violates RCW 23B.08.310 of the Washington
Business Corporation Act, pertaining to unpermitted distributions to
shareholders or loans to directors, or (iii) involve any transaction from which
the director will personally receive a benefit in money, property or services to
which the director is not legally entitled. This provision does not affect the
availability of equitable remedies such as an action to enjoin or rescind a
transaction involving a breach of fiduciary duty. The above limitation of
liability also may not limit Director liability for violations of, or relieve
them from the necessity of complying with, federal securities laws.

ITEM 12.      INDEMNIFICATION OF DIRECTORS AND OFFICERS

         Article IX of the Company's Articles of Incorporation permits the
Company to indemnify and hold each Director and Officer ("Indemnitee") harmless
against all liability, provided that: (i) the Indemnitee acted in good faith;
(ii) in the case of official conduct, he reasonably believed that he was acting
in the Company's best interests, or in all other cases, that his action was not
opposed to the Company's best interests; (iii) in the case of a criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful; and
provided further, that (iv) the Indemnitee did not engage in the conduct
described in RCW 30.12.240.

         Notwithstanding the preceding, no Indemnitee shall be indemnified in
connection with: (i) a proceeding by or in the right of the Company or another
enterprise in which he was adjudged liable to the Company or other enterprise;
or (ii) any other proceeding charging improper personal benefit to himself,
whether or not involving action in his official capacity, in which he was
adjudged liable on the basis that personal benefit was improperly received by
him. Additionally, no Indemnitee shall be indemnified for any civil money
penalty or judgment resulting from any administrative or civil action instituted
by a federal banking agency, or any other liability or legal expense with regard
to any administrative proceeding or civil action instituted by any federal
banking agency which results in a final order or settlement pursuant to which
such person is: (i) assessed a civil money penalty; (ii) removed from office or
prohibited from participating in the conduct of the affairs of the Company or
other enterprise; or (iii) is required to cease and desist from or to take any
affirmative action described in Section 8(b) of the Federal Deposit Insurance
Act, as amended (12 U.S.C. 1811, ET SEQ.). However, permissible indemnification
payments may be made as permitted by 12 C.F.R. Section 359, ET SEQ., as amended
from time to time.


<PAGE>

ITEM 13.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                 MOSS ADAMS LLP
                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Stockholders
Valley Community Bancshares, Inc.

We have audited the accompanying consolidated balance sheet of Valley Community
Bancshares, Inc. and subsidiaries (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of Puyallup Valley Bank
as of December 31, 1997 were audited by other auditors whose report dated
January 9, 1998, except for Note 15 as to which the date is August 24, 1998,
expressed an unqualified opinion on those statements.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Valley Community
Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.

Everett, Washington
February 1, 2000


                                DAVID CHRISTENSEN
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors and Stockholders
Puyallup Valley Bank


We have audited the accompanying balance sheet of Puyallup Valley Bank as of
December 31, 1997 and December 31, 1996, and the related statements of income,
changes in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.


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


In our opinion, the 1997 and 1996 financial statements referred to above present
fairly, in all material respects, the financial position of Puyallup Valley Bank
as of December 31, 1997 and December 31, 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.


Portland, Oregon
January 09, 1998



<PAGE>


Except Note 15 dated
August 24, 1998



<PAGE>


                        VALLEY COMMUNITY BANCSHARES, INC.

                           CONSOLIDATED BALANCE SHEET
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                          -------------------------
                                                                             1999           1998
                                                                          ----------    -----------
<S>                                                                       <C>            <C>
ASSETS
     Cash and due from banks                                              $   5,127      $   5,630
     Interest-bearing deposits with banks                                     9,692         11,270
     Federal funds sold                                                                      2,530
     Securities available-for-sale                                           33,262         31,282
     Securities held-to-maturity                                              1,241          2,335
     Federal Home Loan Bank stock                                               420            355
                                                                          ----------    -----------

                                                                             49,742         53,402

     Loans                                                                   78,634         67,724
     Less allowance for loan losses                                             959            883
                                                                          ----------    -----------

              Loans, net                                                     77,675         66,841

     Accrued interest receivable                                                851            772
     Premises and equipment, net                                              4,717          3,543
     Real estate held for investment                                            224            256
     Other assets                                                               628            515
                                                                          ----------    -----------

              Total assets                                                $ 133,837      $ 125,329
                                                                          ==========    ===========

LIABILITIES
     Deposits
          Noninterest-bearing                                             $  21,349      $  20,806
          Interest-bearing                                                   92,460         89,477
                                                                          ----------    -----------

              Total deposits                                                113,809        110,283

     Other borrowed funds                                                       539            234
     Accrued interest payable                                                   347            340
     Other liabilities                                                          418            394
                                                                          ----------    -----------

              Total liabilities                                             115,113        111,251
                                                                          ----------    -----------

STOCKHOLDERS' EQUITY
     Common stock, par value $1 per share; 5,000,000 shares authorized;
          1,125,561 and 1,014,982 shares issued and outstanding in 1999
          and 1998, respectively                                              1,126          1,015
     Additional paid-in capital                                              16,286         12,642
     Retained earnings                                                        1,569            310
     Accumulated other comprehensive income (loss), net of tax                 (257)           111
                                                                          ----------    -----------

              Total stockholders' equity                                     18,724         14,078
                                                                          ----------    -----------

              Total liabilities and stockholders' equity                  $ 133,837      $ 125,329
                                                                          ==========    ===========
</TABLE>


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

                                      45
<PAGE>



                        VALLEY COMMUNITY BANCSHARES, INC.

                        CONSOLIDATED STATEMENT OF INCOME
                   (In thousands except for per share amounts)

<TABLE>
<CAPTION>

                                                                            YEAR ENDED DECEMBER 31,
                                                                  -----------------------------------------
                                                                          1999          1998          1997
                                                                  -------------   -----------   -----------
<S>                                                             <C>            <C>           <C>
INTEREST INCOME
     Interest and fees on loans                                    $      6247    $    6,121    $     6007
     Interest on federal funds sold and deposits in banks                  784           972           782
     Securities available-for-sale                                       1,837         1,437         1,188
     Securities held-to-maturity                                            90           164           314
                                                                  -------------   -----------   -----------

            Total interest income                                        8,958         8,694         8,291
                                                                  -------------   -----------   -----------

INTEREST EXPENSE
     Interest on deposits                                                2,955         3,105         3,048
     Interest on federal funds and other short-term borrowings              18            34            31
                                                                  -------------   -----------   -----------

            Total interest expense                                       2,973         3,139         3,079
                                                                  -------------   -----------   -----------

            Net interest income                                          5,985         5,555         5,212

PROVISION FOR LOAN LOSSES                                                   84             9            66
                                                                  -------------   -----------   -----------

            Net interest income after provision for loan losses          5,901         5,546         5,146
                                                                  -------------   -----------   -----------

NONINTEREST INCOME
     Service charges                                                       329           318           315
     Gain on sale of investment securities, net                              1             2            85
     Origination fees on mortgage loans brokered                            47           139            61
     Other operating income                                                212           203           186
                                                                  -------------   -----------   -----------

            Total noninterest income                                       589           662           647
                                                                  -------------   -----------   -----------

NONINTEREST EXPENSE
     Salaries                                                            1,849         1,741         1,552
     Employee benefits                                                     385           340           327
     Occupancy                                                             449           341           334
     Equipment                                                             471           389           358
     Organizational costs                                                                131
     Other operating expenses                                            1,362         1,169         1,033
                                                                  -------------   -----------   -----------

            Total noninterest expense                                    4,516         4,111         3,604
                                                                  -------------   -----------   -----------

INCOME BEFORE INCOME TAX                                                 1,974         2,097         2,189

PROVISION FOR INCOME TAX                                                   580           616           597
                                                                  -------------   -----------   -----------

NET INCOME                                                         $     1,394    $    1,481    $    1,592
                                                                  =============   ===========   ===========

EARNINGS PER SHARE
     Basic                                                         $      1.24    $     1.46    $     1.59
     Diluted                                                       $      1.21    $     1.41    $     1.53
     Weighted average shares outstanding                             1,119,780     1,012,844     1,001,013
     Weighted average diluted shares outstanding                     1,152,576     1,047,745     1,038,599
</TABLE>

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


                                       46
<PAGE>

                        VALLEY COMMUNITY BANCSHARES, INC.

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                    Accumulated
                                     Common Stock        Additional                                    Other            Total
                                  ------------------      Paid-In       Comprehensive   Retained    Comprehensive    Stockholders'
                                  Shares      Amount      Capital         Income        Earnings  Income (Loss), net    Equity
                                  ------      ------     ----------     -------------   --------  ------------------ -------------
<S>                          <C>         <C>           <C>           <C>                <C>       <C>                <C>
BALANCE,
    December 31, 1996           906,054     $    906      $  9,561                      $  1,652       $    123         $ 12,242

Net income                                                              $    1,592         1,592                           1,592

Other comprehensive
    income, net of $16 tax
  Unrealized loss
    on securities                                                              (31)                         (31)             (31)
                                                                        -----------

Comprehensive income                                                    $    1,561
                                                                        ===========

Cash dividend                                                                               (457)                           (457)

Stock dividend                   45,132            45           948                         (993)

Common stock exercised
  under stock option plan        13,500            14            76                                                           90
                            ------------   -----------   -----------                    --------  ------------------ -------------

BALANCE,
  December 31, 1997             964,686           965        10,585                        1,794             92           13,436

Net income                                                              $    1,481         1,481                           1,481

Other comprehensive
    income, net of $10 tax
  Unrealized gains
    on securities                                                               19                           19               19
                                                                        -----------

Comprehensive income                                                    $    1,500
                                                                        ===========

Holding company reorganization                                  893                        (893)

Cash dividend                                                                              (871)                           (871)

Stock dividend                   48,043            48         1,153                      (1,201)

Common stock exercised
  under stock option plan         2,253             2            11                                                         13
                            ------------   -----------   -----------                -----------   ------------      -----------

BALANCE,
  December 31, 1998           1,014,982         1,015        12,642                         310            111          14,078

Net income                                                              $    1,394        1,394                          1,394

Other comprehensive
    income, net of $190 tax
  Unrealized loss
    on securities                                                            (368)                       (368)           (368)
                                                                        -----------

Comprehensive income                                                    $   1,026
                                                                        ===========

Common stock issued             106,189           106         3,610                                                      3,716

Cash dividend                                                                             (135)                           (135)

Common stock exercised
  under stock option plan         4,390             5            34                                                         39
                            ------------   -----------   -----------                -----------   ------------      -----------

BALANCE,
  December 31, 1999           1,125,561    $    1,126    $   16,286                   $  1,569       $   (257)        $ 18,724
                            ============   ===========   ===========                ===========   ============      ===========
</TABLE>

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



                                       47
<PAGE>


                        VALLEY COMMUNITY BANCSHARES, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                        ---------------------------------------
                                                                           1999          1998          1997
                                                                        -----------   -----------   -----------
<S>                                                                     <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                                          $   1,394     $   1,481     $   1,592
     Adjustments to reconcile net income to net cash
            from operating activities
         Provisions for loan losses                                             84             9            66
         Depreciation                                                          415           307           303
         Deferred income tax                                                    (8)          (33)          (49)
         Net amortization on securities                                         70            62            97
         FHLB stock dividends                                                  (29)          (10)
         Gain on sale of securities available-for-sale                          (1)           (2)          (85)
         Loss on sale of premises and equipment                                                              4
         Increase in accrued interest receivable                               (79)         (103)          (38)
         Increase (decrease) in other assets                                    85           (74)          108
         Increase (decrease) in accrued interest payable                         7            21            (1)
         Increase in other liabilities                                          24           188            72
                                                                        -----------   -----------   -----------
            Net cash from operating activities                               1,962         1,846         2,069
                                                                        -----------   -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES
     Net (increase) decrease in federal funds sold                           2,530          (530)          200
     Net (increase) decrease in interest-bearing deposits with banks         1,578         1,600        (6,411)
     Purchase of securities available-for-sale                             (17,919)      (26,432)      (12,715)
     Proceeds from sales of securities available-for-sale                    1,001         2,377        11,329
     Proceeds from maturities of securities available-for-sale              13,501        13,619         5,060
     Proceeds from maturities of securities held-to-maturity                 1,094         2,562         2,155
     Purchase stock in FHLB                                                    (36)         (345)
     Net increase in loans                                                 (10,918)       (3,110)       (6,223)
     Additions to premises and equipment                                    (1,464)         (796)         (128)
     Additions to real estate held for investment                                             (1)          (24)
     Reduction to real estate held for investment                               32
                                                                        -----------   -----------   -----------
            Net cash from investing activities                              (9,791)      (11,056)       (6,757)
                                                                        -----------   -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES
     Net increase in deposits                                                3,526        12,133         4,662
     Net increase (decrease) in other borrowed funds                           305          (649)          168
     Cash dividends paid                                                      (135)         (871)         (457)
     Common stock issued                                                     3,591
     Stock options exercised                                                    39            13            90
                                                                        -----------   -----------   -----------
            Net cash from financing activities                               7,326        10,626         4,463
                                                                        -----------   -----------   -----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS                            (503)        1,416          (225)

CASH AND DUE FROM BANKS, beginning of year                                   5,630         4,214         4,439
                                                                        -----------   -----------   -----------

CASH AND DUE FROM BANKS, end of year                                     $   5,127     $   5,630     $   4,214
                                                                        ===========   ===========   ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
     Cash payments for
         Interest                                                        $   2,966     $   3,118     $   3,080
                                                                        ===========   ===========   ===========

         Income taxes                                                    $     563     $     655     $     642
                                                                        ===========   ===========   ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
     Unrealized gains (losses) on securities available-for-sale          $    (558)    $      29     $     (46)
                                                                        ===========   ===========   ===========

     Common stock issued for land                                        $     125
                                                                        ===========   ===========   ===========
     Deferred tax on unrealized gains (losses) on securities
         available-for-sale                                              $     189     $      10     $     (15)
                                                                        ===========   ===========   ===========
</TABLE>


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


                                       48
<PAGE>



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


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

         DESCRIPTION OF BUSINESS - The Company is a Washington State bank
holding company headquartered in Puyallup, Washington. The Company was organized
as a holding company for its principal bank subsidiary, Puyallup Valley Bank,
through a reorganization completed on July 1, 1998. The Company conducts its
business primarily through the Bank. The Company recently became a multi-bank
holding company by assisting in the formation of Valley Bank, a wholly-owned
subsidiary of the Company, beginning January 11, 1999.

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

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

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

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

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

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

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

         Premiums and discounts are recognized in interest income using the
interest method over the period to maturity. The Company had no trading
securities at December 31, 1999 and 1998.


                                       49

<PAGE>

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

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

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

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


         ALLOWANCE FOR LOAN LOSS - The allowance for loan loss is management's
best estimate of loan losses incurred at the balance sheet date. The allowance
for loan losses is increased by charges to income and decreased by charge-offs
(net of recoveries), and established through a provision for credit losses
charged to expense. Loans are charged against the allowance for credit losses
when management believes that the collectability 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 collectability 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.


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

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

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


         Management determines the adequacy of the allowance for loan losses by
utilizing a loan grading system to determine risk in the loan portfolio and by
considering the results of credit reviews. The loan portfolio is separated by
quality and then by loan type. Loans of acceptable quality are evaluated as a
group, by loan type, with a specific loss rate assigned to the total loans in
each type, but unallocated to any individual loan. Conversely, each adversely
classified loan is individually analyzed, to determine an estimated loss amount.
A valuation allowance is also


                                       50

<PAGE>

assigned to these adversely classified loans, but at a higher loss rate due
to the greater risk of loss. For those loans where the loss is greater than
the background percentage, the estimated loss amount is considered
specifically allocated to the allowance.


         Although management has allocated a portion of the allowance to the
loan categories using the method described above, the adequacy of the allowance
must be considered as a whole. To mitigate the imprecision in most estimates of
expected loan losses, the allocated component of the allowance is supplemented
by an unallocated component. The unallocated portion includes management's
judgmental determination of the amounts necessary for qualitative factors such
as the consideration of new products and policies, economic conditions,
concentrations of credit risk, and the experience and abilities of lending
personnel. Loan concentrations, quality, terms and basic underlying assumptions
remained substantially unchanged during the period.



                                       51

<PAGE>




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



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

               Building and improvements                       10 - 40 years
               Furniture, fixtures and equipment                3 - 10 years

         REAL ESTATE HELD FOR INVESTMENT - Real estate held for investment is
property that was acquired for resale. The property is recorded at the lower of
cost or fair value and is periodically evaluated to determine that the carrying
value does not exceed the fair value of the property. The amount the Company
will ultimately recover may differ from the carrying value of the asset because
of future market factors beyond the Company's control.

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

         RESTRICTED ASSETS - Federal Reserve Board Regulations require
maintenance of certain minimum reserve balances on deposit with the Federal
Reserve Bank. The amounts of such balances on deposit were approximately
$868,000 and $874,000 at December 31, 1999 and 1998, respectively.

         STOCK OPTION PLAN - The Company recognizes the financial effects of
stock options in accordance with Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Stock options are issued at a
price that approximates the fair value of the Bank's stock as of the grant date.
Under APB 25, options issued in this manner do not result in the recognition of
employee compensation in the Company's financial statements.

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

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

         ADVERTISING COSTS - The Company expenses advertising costs as they are
incurred and are not considered to be material.

         IMPACT OF NEW ACCOUNTING ISSUES - In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 137 entitled ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS STATEMENT NO.133. The
statement amends SFAS No. 133 to defer its effective date to all fiscal quarters
of all fiscal years beginning after June 15, 2000. Management does not believe
the adoption of this statement will have a material effect on its financial
condition or results of operation.


                                       52

<PAGE>

NOTE 2 - INVESTMENT SECURITIES

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



<TABLE>
<CAPTION>

     DECEMBER 31, 1999

     SECURITIES AVAILABLE-FOR-SALE                                           Gross          Gross
                                                             Amortized     Unrealized     Unrealized         Fair
                                                               Cost          Gains          Losses          Value
                                                            -----------    -----------    ----------    -----------
<S>                                                       <C>            <C>            <C>           <C>
     U.S. Treasury and U.S. Government
                corporations and agencies                   $   18,630     $       23     $     224     $   18,429
     State and political subdivisions                            4,233              7            39          4,201
     Mortgage-backed securities                                  9,269             14           132          9,151
     Other                                                       1,520                           39          1,481
                                                            -----------    -----------    ----------    -----------

                                                                33,652             44           434         33,262
                                                            -----------    -----------    ----------    -----------
     SECURITIES HELD-TO-MATURITY

     U.S. Treasury and U.S. Government
                corporations and agencies                          321              2                          323
     State and political subdivisions                              920              4                          924
                                                            -------------------------------------------------------

                                                                 1,241              6                        1,247
                                                            -----------    -----------    ----------    -----------

                                                            $   34,893     $       50     $     434     $   34,509
                                                            ===========    ===========    ==========    ===========

<CAPTION>
     DECEMBER 31, 1998

     SECURITIES AVAILABLE-FOR-SALE                                           Gross          Gross
                                                             Amortized     Unrealized     Unrealized         Fair
                                                               Cost          Gains          Losses          Value
                                                            -----------    -----------    ----------    -----------
<S>                                                       <C>            <C>            <C>           <C>
     U.S. Treasury and U.S. Government
                corporations and agencies                   $   15,867     $       92     $      60     $   15,899
     State and political subdivisions                            4,658             85             2          4,741
     Mortgage-backed securities                                 10,056             65             7         10,114
     Other                                                         533                            5            528
                                                            -----------    -----------    ----------    -----------

                                                                31,114            242            74         31,282
                                                            -----------    -----------    ----------    -----------
     SECURITIES HELD-TO-MATURITY

     U.S. Treasury and U.S. Government
                corporations and agencies                          436              2                          438
     State and political subdivisions                            1,899             25                        1,924
                                                            -------------------------------------------------------

                                                                 2,335             27                        2,362
                                                            -----------    -----------    ----------    -----------

                                                            $   33,449     $      269     $      74     $   33,644
                                                            ===========    ===========    ==========    ===========

</TABLE>



                                       53


<PAGE>



NOTE 2 - INVESTMENT SECURITIES (continued)




         The amortized cost and estimated market value of securities
available-for-sale and securities held-to-maturity, at December 31, 1999, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.



<TABLE>
<CAPTION>
                                                          Available-For-Sale             Held-to-Maturity
                                                       --------------------------    -------------------------
                                                                       Estimated                    Estimated
                                                        Amortized        Fair       Amortized         Fair
                                                          Cost          Value          Cost          Value
                                                       -----------    -----------    ----------    -----------

<S>                                                  <C>            <C>            <C>           <C>
     Due in one year or less                           $    7,099     $    7,054     $     885     $      889
     Due from one to five years                            22,698         22,362            35             35
     Due from five to ten years                               913            880
     Due after ten years                                    2,942          2,966           321            323
                                                       -----------    -----------    ----------    -----------

                    Totals                             $   33,652     $   33,262     $   1,241     $    1,247
                                                       ===========    ===========    ==========    ===========

</TABLE>



         Proceeds from sales of available-for-sale investment securities were
$1,001,000, $2,377,000 and $11,329,000 in 1999, 1998 and 1997, respectively.

         Gross gains from the sales of available-for-sale investment securities
were $1,000, $5,000 and $87,000 in 1999, 1998 and 1997, respectively. The
Company incurred gross losses of $0 in 1999, $3,000 in 1998, and $2,000 in 1997.

         Investments in State and political subdivisions represent purchases of
municipal bonds located in Washington State. Investments in corporate debt
obligations are made in companies located and doing business throughout the
United States. The debt obligations were all within the credit ratings
acceptable under the Company's investment policy.

         Investment securities with a book value of $3,864,000 and $2,370,000 at
1999 and 1998, respectively, have been pledged to secure public deposits, as
required by law, and other purposes. The estimated fair value of these pledged
securities is $3,829,000 and $2,370,000 at December 31, 1999 and 1998,
respectively.

NOTE 3 - LOANS

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


                                       54


<PAGE>



<TABLE>
<CAPTION>

                                                                        1999           1998
                                                                    -----------    -----------
<S>                                                                 <C>             <C>
     Real Estate
            Construction                                            $    7,384     $    4,890
            Mortgage                                                    15,867         13,788
            Commercial                                                  40,257         34,696
     Commercial                                                         12,892         12,496
     Consumer and other                                                  1,860          1,854
     Lease                                                                 377
                                                                    -----------    -----------

                                                                        78,637         67,724
     Less deferred loan fees, net                                           (3)
                                                                    -----------    -----------

                                                                    $   78,634     $   67,724
                                                                    ===========    ===========
</TABLE>


                                       55
<PAGE>



NOTE 3 - LOANS (continued)

         Contractual maturities of loans as of December 31, 1999 are as shown
below. Actual maturities may differ from contractual maturities because
individual borrowers may have the right to prepay loans with or without
prepayment penalties.

<TABLE>
<CAPTION>
                                            Within 1 Year    1 - 5 Years    After 5 Years        Total
                                            -------------   -------------   -------------   -------------

<S>                                         <C>              <C>            <C>            <C>
     Commercial                             $    8,859       $    3,219     $      814       $ 12,892
     Real Estate, commercial                     6,575           33,538            141         40,254
     Real Estate, construction                   6,863              521                         7,384
     Real Estate, mortgage                       2,665           12,096          1,106         15,867
     Consumer and other                            724              933            203          1,860
     Lease                                          69              308                           377
                                            -------------   -------------   -------------   -------------

                                            $   25,755       $   50,615     $    2,264       $ 78,634
                                            =============   =============   =============   =============

<CAPTION>
                                                                1 - 5           After
                                                                Years          5 Years
                                                            -------------   -------------
<S>                                                         <C>             <C>
     Loans maturing after one year with:
     Fixed rates                                             $   44,169     $      864
     Variable rates                                               6,446          1,400
                                                            -------------   -------------

                                                             $   50,615     $    2,264
                                                            =============   =============
</TABLE>

         At December 31, 1999 and 1998, the Company had no loans that were
specifically classified as impaired and therefore, no allocation of the
allowance for possible credit losses was considered necessary at December 31,
1999 and 1998.

         The effects of troubled debt restructurings are not considered material
to the Company's financial position and results of operations.

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

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

<TABLE>
<CAPTION>
                                                         1999           1998           1997
                                                      -----------    -----------    -----------
<S>                                                    <C>            <C>            <C>
       Balance, beginning of year                      $     883      $     840      $     776
       Provision for loan losses                              84              9             66
       Additions from recoveries                                             45
       Loans charged off                                      (8)           (11)            (2)
                                                      -----------    -----------    -----------

       Balance, end of year                            $     959      $     883      $     840
                                                      ===========    ===========    ===========
</TABLE>


                                       56
<PAGE>



NOTE 5 - PREMISES AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                               1999           1998
                                                           -----------    -----------
<S>                                                         <C>            <C>
     Equipment, furniture and fixtures                      $   3,205      $   2,644
     Land and buildings                                         3,748          3,695
     Construction in progress                                     950
                                                           -----------    -----------

                                                                7,903          6,339
     Less: accumulated depreciation                            (3,186)        (2,796)
                                                           -----------    -----------

                                                            $   4,717      $   3,543
                                                           ===========    ===========
</TABLE>

         Depreciation expense on premises and equipment totaled $415,000 in
1999, $307,000 in 1998, and $303,000 in 1997.

         The Company began construction on the future headquarters of Valley
Bank. Estimated cost to complete construction in progress at December 31, 1999
is $1,050,000.

NOTE 6 - DEPOSITS

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

<TABLE>
<CAPTION>
                                                     1999           1998
                                                 -----------    -----------
<S>                                               <C>            <C>
     Demand accounts                              $   15,926     $   16,185
     Money market accounts                            28,603         29,040
     Savings accounts                                 12,002         12,101
     Certificates of deposit over $100,000            14,555         10,874
     Other certificates of deposit                    21,374         21,277
                                                 -----------    -----------

                                                 $   92,460     $   89,477
                                                 ===========    ===========
</TABLE>

         At December 31, 1999, the scheduled maturities of certificates of
deposit are as follows (dollars in thousands):

<TABLE>
<S>                                                             <C>
                              2000                              $   34,289
                              2001                                   1,339
                              2002                                     265
                              2003                                      36
                                                                -----------

                                                                $   35,929
                                                                ===========
</TABLE>


                                       57

<PAGE>



NOTE 7 - CREDIT ARRANGEMENTS

         The Banks are members of the Federal Home Loan Bank of Seattle. As a
member, Puyallup Valley Bank has a committed line of credit up to 10 percent of
total assets. Valley Bank's credit line is on a case-by-case basis. Borrowings
generally provide for interest at the then current published rates. There were
no borrowings outstanding at December 31, 1999 or 1998.

         At December 31, 1999, committed line of credit agreements totaling
approximately $6,750,000 were available to the Company from unaffiliated banks
with maturities that range from April 2000 to June 2000. Such lines generally
provide for interest at the then existing federal funds rate. There were no
borrowings outstanding under these credit arrangements at December 31, 1999 and
1998.

NOTE 8 - INCOME TAXES

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

<TABLE>
<CAPTION>
                                       1999           1998          1997
                                   -----------    -----------    ----------
<S>                                 <C>            <C>            <C>
     Current                        $     588      $     649      $    646
     Deferred                              (8)           (33)          (49)
                                   -----------    -----------    ----------

                                    $     580      $     616      $    597
                                   ===========    ===========    ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                             1999                         1998                          1997
                                  --------------------------   --------------------------    -------------------------
                                     Amount         Rate          Amount         Rate           Amount         Rate
                                  -----------    -----------   -----------    -----------    -----------    ----------
<S>                               <C>            <S>           <C>            <C>            <C>            <C>
     Federal income tax at
          statutory rates         $      671            34%     $     713            34%      $     744           34%

     Effect of tax-exempt
          interest income                (96)           (5)%         (108)           (5)%          (136)          (6)%
     Other                                 5                           11                           (11)          (1)%
                                  -----------    -----------   -----------    -----------    -----------    ----------
                                  $      580            29%     $     616            29%      $     597           27%
                                  ===========    ===========   ===========    ===========    ===========    ==========
</TABLE>


                                       58
<PAGE>



NOTE 8 - INCOME TAXES (continued)

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

<TABLE>
<CAPTION>
                                                                                1999           1998
                                                                            -----------    -----------
<S>                                                                          <C>            <C>
     Deferred tax assets
          Allowance for loan losses                                          $     270      $     232
          Unrealized loss on securities available-for-sale                         132
          Deferred compensation                                                     36
          Other                                                                     31             73
                                                                            -----------    -----------

                                                                                   469            305
                                                                            -----------    -----------
     Deferred tax liabilities
          Accumulated depreciation                                                  32             70
          Unrealized gain on securities available-for-sale                                         57
          Other                                                                     65              3
                                                                            -----------    -----------

                                                                                    97            130
                                                                            -----------    -----------

     Net deferred tax asset                                                  $     372      $     175
                                                                            ===========    ===========
</TABLE>

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

NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL

         In January 1998 and 1997, the Company distributed, 48,043 shares and
45,132 shares, respectively, of common stock in connection with 5 percent stock
dividends. All references in the accompanying consolidated financial statements
to the average number of shares of common stock and per share amounts have been
restated to reflect these stock dividends.

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

         Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999, that the Company meets all capital adequacy requirements to which it is
subject.

         As of November 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Banks as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.


                                       59

<PAGE>



NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)

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

<TABLE>
<CAPTION>

                                         Actual
                                 ------------------------
AS OF DECEMBER 31, 1999:           Amount       Ratio
                                 ----------    ----------
<S>                              <C>           <C>
Total Capital
 (to Risk-Weighted Assets)
          Consolidated           $ 19,940         21.7%    [Greater than or equal to]
          Puyallup Valley Bank   $ 13,867         16.3%    [Greater than or equal to]
          Valley Bank            $  3,962         68.0%    [Greater than or equal to]

Tier I Capital
     (to Risk-Weighted Assets)
          Consolidated           $ 18,981         20.6%    [Greater than or equal to]
          Puyallup Valley Bank   $ 12,970         15.2%    [Greater than or equal to]
          Valley Bank            $  3,900         66.9%    [Greater than or equal to]

Tier I Capital
     (to Average Assets)
          Consolidated           $ 18,981         13.8%    [Greater than or equal to]
          Puyallup Valley Bank   $ 12,970         10.0%    [Greater than or equal to]
          Valley Bank            $  3,900         53.4%    [Greater than or equal to]


AS OF DECEMBER 31, 1998:

Total Capital
     (to Risk-Weighted Assets)
          Consolidated           $ 14,850         19.2%    [Greater than or equal to]
          Puyallup Valley Bank   $ 13,233         17.1%    [Greater than or equal to]

Tier I Capital
     (to Risk-Weighted Assets)
          Consolidated           $ 13,967         18.0%    [Greater than or equal to]
          Puyallup Valley Bank   $ 12,350         16.0%    [Greater than or equal to]

Tier I Capital
     (to Average Assets)
          Consolidated           $ 13,967         11.0%    [Greater than or equal to]
          Puyallup Valley Bank   $ 12,350          9.8%    [Greater than or equal to]

<CAPTION>

                                                    For Capital
                                                 Adequacy Purposes
                                -----------------------------------------------------
AS OF DECEMBER 31, 1999:         Amount                                     Ratio
                                ----------                               ------------
                                <C>                                      <C>
Total Capital
 (to Risk-Weighted Assets)
          Consolidated               7,357   [Greater than or equal to]    8.0%   [Greater than or equal to]
          Puyallup Valley Bank       6,814   [Greater than or equal to]    8.0%   [Greater than or equal to]
          Valley Bank                  466   [Greater than or equal to]    8.0%   [Greater than or equal to]

Tier I Capital
     (to Risk-Weighted Assets)
          Consolidated               3,678   [Greater than or equal to]    4.0%   [Greater than or equal to]
          Puyallup Valley Bank       3,407   [Greater than or equal to]    4.0%   [Greater than or equal to]
          Valley Bank                  233   [Greater than or equal to]    4.0%   [Greater than or equal to]

Tier I Capital
     (to Average Assets)
          Consolidated               5,522   [Greater than or equal to]    4.0%   [Greater than or equal to]
          Puyallup Valley Bank       5,194   [Greater than or equal to]    4.0%   [Greater than or equal to]
          Valley Bank                  292   [Greater than or equal to]    4.0%   [Greater than or equal to]


AS OF DECEMBER 31, 1998:

Total Capital
     (to Risk-Weighted Assets)
          Consolidated               7,747   [Greater than or equal to]  10.0%
          Puyallup Valley Bank       7,733   [Greater than or equal to]  10.0%

Tier I Capital
     (to Risk-Weighted Assets)
          Consolidated               3,099   [Greater than or equal to]    4.0%   [Greater than or equal to]
          Puyallup Valley Bank       3,093   [Greater than or equal to]    4.0%   [Greater than or equal to]

Tier I Capital
     (to Average Assets)
          Consolidated               5,065   [Greater than or equal to]    4.0%   [Greater than or equal to]
          Puyallup Valley Bank       5,061   [Greater than or equal to]    4.0%   [Greater than or equal to]

<CAPTION>
                                                  To Be Well
                                               Capitalized Under
                                               Prompt Corrective
                                               Action Provisions
                                 -----------------------------------------------
AS OF DECEMBER 31, 1999:          Amount                                 Ratio
                                 ---------                            ----------
                                 <C>                                  <C>
Total Capital
 (to Risk-Weighted Assets)
          Consolidated              9,196   [Greater than or equal to]   10.0%
          Puyallup Valley Bank      8,518   [Greater than or equal to]   10.0%
          Valley Bank                 583   [Greater than or equal to]   10.0%

Tier I Capital
     (to Risk-Weighted Assets)
          Consolidated              5,518   [Greater than or equal to]   6.0%
          Puyallup Valley Bank      5,111   [Greater than or equal to]   6.0%
          Valley Bank                 350   [Greater than or equal to]   6.0%

Tier I Capital
     (to Average Assets)
          Consolidated              6,903   [Greater than or equal to]   5.0%
          Puyallup Valley Bank      6,492   [Greater than or equal to]   5.0%
          Valley Bank                 365   [Greater than or equal to]   5.0%


AS OF DECEMBER 31, 1998:

Total Capital
     (to Risk-Weighted Assets)
          Consolidated              7,747   [Greater than or equal to]  10.0%
          Puyallup Valley Bank      7,733   [Greater than or equal to]  10.0%

Tier I Capital
     (to Risk-Weighted Assets)
          Consolidated          $   4,648   [Greater than or equal to]   6.0%
          Puyallup Valley Bank  $   4,640   [Greater than or equal to]   6.0%

Tier I Capital
     (to Average Assets)
          Consolidated          $   6,331   [Greater than or equal to]   5.0%
          Puyallup Valley Bank  $   6,326   [Greater than or equal to]   5.0%
</TABLE>


                                        60
<PAGE>


NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES

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

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

<TABLE>
<CAPTION>
                                          1999           1998
                                      ------------   ------------
<S>                                  <C>            <C>
Commitments to extend credit           $   13,910    $     8,513
Standby letters of credit                     343            391
                                      ------------   ------------

                                       $   14,253    $     8,904
                                      ============   ============
</TABLE>

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

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

         (b) OPERATING LEASE COMMITMENTS - The Company leases its operating
facilities under agreements which expire between 2000 and 2004. The agreements
require the Company to pay certain operating expenses. The approximate annual
commitment for rental space under these operating leases is summarized as
follows (dollars in thousands):

<TABLE>
<CAPTION>
                        Year Ending
                        December 31,
                        ------------
                       <S>                    <C>
                              2000             $      102
                              2001                     93
                              2002                     65
                              2003                     27
                                              ------------

                                               $      287
                                              ============
</TABLE>


                                       61
<PAGE>



NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)

         Rental expense charged to operations was $109,000, $74,000 and $75,000
for the years ended December 31, 1999, 1998 and 1997, respectively.

NOTE 11 - RELATED PARTY TRANSACTIONS

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

         Such loans had aggregate balances and activity during 1999, 1998 and
1997 as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                      1999           1998            1997
                                                  ------------    -----------    -----------
<S>                                               <C>             <C>            <C>
      Balance at beginning of year                 $      550      $     500      $     435
      New loans or advances                             2,378             50          2,165
      Repayments                                         (789)                       (2,100)
                                                  ------------    -----------    -----------

      Balance at end of year                       $    2,139      $     550      $     500
                                                  ============    ===========    ===========
</TABLE>

         Deposits from related parties totaled approximately $5,175,000 and
$4,677,000 at December 31, 1999 and 1998, respectively.

NOTE 12 - EMPLOYEE BENEFITS

         The Company has a 401(k) defined contribution plan for those employees
who meet the eligibility requirements set forth in the plan. Contributions to
the plan, adopted in January 1987, are at the discretion of the Company's Board
of Directors. Eligible employees can contribute up to 12% of compensation. The
Company made no contributions to the plan in 1999, 1998 or 1997.

         The Company also has a noncontributory profit sharing plan covering
substantially all employees. Contributions to the plan are at the discretion of
the Company's Board of Directors, and totaled $84,000, $94,000 and $96,000 in
1999, 1998 and 1997, respectively.

NOTE 13 - STOCK OPTION PLAN

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


                                       62
<PAGE>



NOTE 13 - STOCK OPTION PLAN (continued)

         Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. The pro forma recognizes, as compensation, the
estimated present value of stock options granted using an option valuation model
known as the Black-Scholes model. Pro forma earnings per share amounts reflect
an adjustment as if the present value of the options were recognized as
compensation for the period.

         For the most part, variables and assumptions are used in the model. For
the periods 1999, 1998 and 1997, respectively, the risk-free interest rate is
5.75%, 5.75% and 5.90%, the dividend yield rate is 1.4%, 1.7% and 1.9%, the
price volatility is not meaningful, and the weighted average expected life of
the options has been measured at 7 years.

         The fair value of options issued in 1999 and 1998 were estimated at
$24,000 and $21,000, respectively. The remaining unrecognized compensation for
fair value of stock options was approximately $25,000 as of December 31, 1999.

         Management believes that the variables and assumptions used in the
options pricing model are subjective and represent only one estimate of possible
value. The fair value of options granted, that are recognized in pro forma
earnings, is shown below:

<TABLE>
<CAPTION>

      In thousands, except for per share amounts           1999            1998            1997
      ------------------------------------------       -----------     -----------     -----------
      <S>                                              <C>             <C>             <C>
      Pro forma disclosures
         Net income as reported                         $   1,394       $   1,481       $   1,592
         Additional compensation for fair value of
           stock options                                       (3)             (2)
                                                       -----------     -----------     -----------

         Pro forma net income                           $   1,391       $   1,479       $   1,592
                                                       ===========     ===========     ===========

         Earnings per share
           Basic
              As reported                               $    1.24       $    1.46       $    1.59
                                                       ===========     ===========     ===========
              Pro forma                                 $    1.24       $    1.46       $    1.59
                                                       ===========     ===========     ===========
           Diluted
              As reported                               $    1.21       $    1.41       $    1.53
                                                       ===========     ===========     ===========
              Pro forma                                 $    1.21       $    1.41       $    1.53
                                                       ===========     ===========     ===========
</TABLE>


                                       63
<PAGE>



NOTE 13 - STOCK OPTION PLAN (continued)

         Information with respect to option transactions is summarized as
follows:

<TABLE>
<CAPTION>
                                                       Average
                                                       Exercise        Currently       Options
                                      Authorized        Price          Exercised     Outstanding    Exercisable
                                      -----------     -----------     -----------    -----------    -----------
<S>                                  <C>             <C>             <C>            <C>            <C>
Balance, December 31, 1996               159,070       $    9.45          89,134         65,634         27,558

      Granted                                              25.00                          5,000
      Exercised                                             6.70          13,500        (13,500)       (13,500)
      Expired and forfeitures                              19.05                         (5,250)
      Vested                                                                                            24,130
                                      -----------     -----------     -----------    -----------    -----------
Balance, December 31, 1997               159,070           10.69         102,634         51,884         38,188

      1998 Option plan                   100,000
      Granted                                              33.00                         13,750
      Exercised                                             5.99           2,253         (2,253)        (2,253)
                                      -----------     -----------     -----------    -----------    -----------
Balance, December 31, 1998               259,070           15.70         104,887         63,381         35,935

      Granted                                              35.00                         14,500
      Exercised                                             8.68           4,390         (4,390)        (4,390)
      Expired and forfeitures                              34.14                         (8,750)
      Vested                                                                                             5,464
                                      -----------     -----------     -----------    -----------    -----------
Balance, December 31, 1999               259,070       $   18.00         109,277         64,741         37,009
                                      ===========     ===========     ===========    ===========    ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                       Weighted Average                                        Weighted Average
                                           Remaining      Weighted Average       Number        Exercise Price of
      Range of          Number of         Contractual     Exercise Price of    Exercisable        Exercisable
  Exercise Prices     Option Shares     Life (In Years)     Option Shares     Option Shares      Option Shares
 -----------------   ---------------   -----------------  ----------------   ---------------   -----------------
<S>                 <C>               <C>                 <C>                <C>               <C>
            $5.42            8,027               0.27              $5.42             8,027                $5.42
   $9.70 - $12.36           30,806               3.16             $10.27            28,982               $10.14
           $15.54            1,158               5.46             $15.54                 -                  -
           $23.81            5,250               7.89              $5.25                 -                  -
              $25            2,000               8.22             $25.00                 -                  -
              $35           17,500               9.26             $35.00                 -                  -
</TABLE>

                                       64


<PAGE>



NOTE 14 - EARNINGS PER SHARE

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

<TABLE>
<CAPTION>

      In thousands, except for per share amounts           1999            1998            1997
      ------------------------------------------       ------------    ------------    ------------
      <S>                                              <C>             <C>             <C>
      Net income (numerator)                            $    1,394      $    1,481      $    1,592
                                                       ============    ============    ============

      Shares used in the calculation (denominator)
           Weighted average shares outstanding           1,119,780       1,012,844       1,001,013
           Effect of dilutive stock options                 32,796          34,901          37,586
           Fully diluted shares                          1,152,576       1,047,745       1,038,599
                                                       ============    ============    ============

      Basic earnings per share                               $1.24           $1.46           $1.59
                                                       ============    ============    ============

      Fully diluted earnings per share                       $1.21           $1.41           $1.53
                                                       ============    ============    ============
</TABLE>

NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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


                                       65

<PAGE>





NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

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

<TABLE>
<CAPTION>
                                                            1999                             1998
                                                 ----------------------------     --------------------------
                                                   Carrying          Fair           Carrying        Fair
                                                    Amount           Value           Amount         Value
                                                 ------------     -----------     ------------   -----------
     <S>                                        <C>               <C>             <C>            <C>
      Financial Assets:
         Cash and due from banks, interest-
           bearing deposits with banks,
           and federal funds sold                 $   14,819       $   14,819      $   19,430    $   19,430
         Securities                               $   34,503       $   34,509      $   33,617    $   33,644
         Federal Home Loan Bank stock             $      420       $      420      $      355    $      355
         Loans                                    $   78,634       $   77,667      $   67,724    $   68,408
      Financial Liabilities:
         Deposits                                 $  113,809       $  113,725      $  110,283    $  110,339
         Other borrowed funds                     $      539       $      539      $      234    $      234
</TABLE>

NOTE 16 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION

         Condensed balance sheet at December 31, 1999 and 1998 (dollars in
thousands):

<TABLE>
<CAPTION>
                                                                        1999               1998
                                                                  --------------    ---------------
<S>                                                               <C>               <C>
ASSETS
      Cash and due from bank                                       $      1,131      $       1,592
      Investment in Banks                                                16,613             12,461
      Other assets                                                          980                145
                                                                  --------------    ---------------
          Total assets                                             $     18,724      $      14,198
                                                                  ==============    ===============
LIABILITIES
      Accounts payable                                                               $         120
                                                                                    ---------------
          Total liabilities                                                                    120
                                                                                    ---------------
TOTAL STOCKHOLDERS' EQUITY                                         $     18,724             14,078
                                                                  --------------    ---------------
          Total liabilities and stockholders' equity               $     18,724      $      14,198
                                                                  ==============    ===============
</TABLE>

                                       66

<PAGE>




NOTE 16 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (continued)

         Condensed statement of income for the year ended December 31, 1999 and
for the period from inception (July 1, 1998) to December 31, 1998 (dollars in
thousands):

<TABLE>
<CAPTION>
                                                                       1999            1998
                                                                  --------------  --------------
<S>                                                               <C>             <C>
INCOME
   Dividend from Bank                                              $        900    $      2,075
   Other income                                                              27
                                                                  --------------  --------------
         Total income                                                       927           2,075
                                                                  --------------  --------------
EXPENSES
   Other expenses                                                            15             131
                                                                  --------------  --------------
         Total expenses                                                      15             131
                                                                  --------------  --------------
NET INCOME BEFORE FEDERAL INCOME TAX AND
   EQUITY IN UNDISTRIBUTED INCOME OF BANK                                   912           1,944

INCOME TAX                                                                  (13)             44
                                                                  --------------  --------------

NET INCOME BEFORE EQUITY IN UNDISTRIBUTED
   INCOME OF BANK                                                           899           1,988

EQUITY IN UNDISTRIBUTED INCOME OF BANK                                      495
DISTRIBUTIONS RECEIVED IN EXCESS OF BANK INCOME                                          (1,294)
                                                                  --------------  --------------

NET INCOME                                                         $      1,394    $        694
                                                                  ==============  ==============
</TABLE>



                                       67

<PAGE>




NOTE 16 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (continued)

         Condensed statement of cash flows for the year ended December 31, 1999
and for the period from inception (July 1, 1998) to December 31, 1998 (dollars
in thousands):

<TABLE>
<CAPTION>
                                                                           1999            1998
                                                                      --------------  --------------
<S>                                                                   <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                          $      1,394    $        694
   Adjustments to reconcile net income to net cash
           from operating activities
      Distributions received in excess of subsidiary bank income               (495)          1,294
      Other operating activities                                                (54)             26
                                                                      --------------  --------------
           Net cash from operating activities                                   845           2,014
                                                                      --------------  --------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of real estate                                                     (776)            (50)
   Investment in Valley Bank                                                 (4,025)
                                                                      --------------  --------------
           Net cash from investing activities                                (4,801)            (50)

CASH FLOWS FROM FINANCING ACTIVITIES
   Sale of Common Stock                                                       3,630              13
   Dividend                                                                    (135)           (385)
                                                                      --------------  --------------

           Net cash from financing activities                                 3,495            (372)

NET INCREASE (DECREASE) IN CASH                                                (461)          1,592

CASH, beginning of year                                                       1,592
                                                                      --------------  --------------
CASH, end of year                                                      $      1,131     $     1,592
                                                                      ==============  ==============
</TABLE>

NOTE 17 - SUBSEQUENT EVENT

         (a) DIVIDENDS - On January 26, 2000, the Board of Directors of the
Company declared a cash dividend of $.50 per share. The dividend was paid during
February 2000 to those shareholders of record on December 31, 1999. The dividend
was approximately $563,000.




                                       68

<PAGE>


VALLEY COMMUNITY BANCORPORATION, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)



<TABLE>
<CAPTION>

(dollars in Thousands)
                                                                          March 31,     December 31,
                                                                            2000            1999
                                                                        --------------------------------
<S>                                                                     <C>             <C>
ASSETS
    Cash and due from banks                                              $  5,359         $  5,127
    Interest-bearing deposits with banks                                    6,991            9,692
    Federal funds sold
    Securities available-for-sale                                          31,910           33,262
    Securities held-to-maturity                                             1,214            1,241
    Federal Home Loan Bank stock                                              426              420
                                                                          ------------------------
                                                                           45,900           49,742
    Loans                                                                  83,932           78,634
    Less allowance for loan losses                                            986              959
                                                                          ------------------------
           Loans, net                                                      82,946           77,675
    Accrued interest receivable                                               786              851
    Premises and equipment, net                                             4,935            4,717
    Real estate held for investment                                           224              224
    Other assets                                                              708              628
                                                                         -------------------------
           Total assets                                                  $135,499         $133,837
                                                                         =========================

LIABILITIES
    Deposits
       Noninterest-bearing                                               $ 22,831         $ 21,349
       Interest-bearing                                                    92,727           92,460
                                                                         ------------------------
           Total deposits                                                 115,558          113,809
    Other borrowed funds                                                      510              539
    Accrued interest payable                                                  422              347
    Other liabilities                                                         550              418
                                                                         ------------------------
           Total liabilities                                              117,040          115,113
                                                                         ------------------------

STOCKHOLDERS' EQUITY
    Common stock, par value $1 per share; 5,000,000 shares authorized;
       1,125,561 shares issued and outstanding in 2000 and 1999             1,126            1,126
    Additional paid-in capital                                             16,286           16,286
    Retained earnings                                                       1,383            1,569
    Accumulated other comprehensive income (loss), net of tax                (336)            (257)
                                                                         -------------------------
           Total stockholders' equity                                      18,459           18,724
                                                                         -------------------------

           Total liabilities and stockholders' equity                    $135,499         $133,837
                                                                         ==========================
</TABLE>


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


                                       69

<PAGE>


VALLEY COMMUNITY BANCORPORATION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
(dollars in thousands, except for share amounts)


<TABLE>
<CAPTION>
                                                                                       Accumulated
                                        Common Stock         Additional                    Other              Total
                                   -----------------------     Paid-In    Retained     Comprehensive      Stockholders'
                                      Shares      Amount       Capital    Earnings   Income (loss), Net       Equity
                                   ------------ ----------   ----------   --------   ------------------   -------------
<S>                                <C>          <C>          <C>          <C>        <C>                  <C>
Balance at December 31, 1999         1,125,561    $1,126      $16,286     $1,569           $(257)             $18,724
                                     ---------    ------      -------     ------           -----              -------

Net income                                                                   377                                  377

Unrealized loss on securities                                                                (79)                 (79)

Common stock issued                                                                                                 -

Cash dividend                                                               (563)                                (563)
                                     ---------    ------      -------     ------           -----              -------
Balance at Merck 31, 2000            1,125,561    $1,126      $16,286     $1,383           $(336)             $18,459
                                     =========    ======      =======     ======           =====              =======
</TABLE>

<TABLE>
<CAPTION>
COMPREHENSIVE INCOME                                          Three Months Ended
                                                                  March 31,
                                                           -------------------------
                                                               2000         1999
                                                           ------------ ------------
<S>                                                        <C>          <C>
Net income, as reported                                        $377         $284
                                                           ------------ ------------
Increase (decrease) in unrealized loss on securities
    Available for sale, net of tax of $(41),
    and $(27) respectively.                                     (79)         (54)
                                                           ------------ ------------

    Comprehensive income                                       $298         $230
                                                           ============ ============
</TABLE>


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



                                      70

<PAGE>


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


<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                                                              March 31,
                                                                   ---------------------------------
                                                                         2000            1999
                                                                   ----------------  ---------------
<S>                                                                <C>               <C>
INTEREST INCOME
    Interest and fees on loans                                       $   1,812       $   1,474
    Interest on federal funds sold and deposits in banks                   103             215
    Interest on securities                                                 485             445
                                                                     ---------       ---------
            Total interest income                                        2,400           2,134
                                                                     ---------       ---------

INTEREST EXPENSE
    Interest on deposits                                                   768             726
    Interest on federal funds and other short-term borrowings                5               4
                                                                     ---------       ---------
            Total interest expense                                         773             730
                                                                     ---------       ---------

            Net interest income                                          1,627           1,404
PROVISION FOR LOAN LOSSES                                                   27              15
                                                                     ---------       ---------

            Net interest income after provision
                for loan losses                                          1,600           1,389
                                                                     ---------       ---------

NONINTEREST INCOME
    Service charges                                                         74              80
    Origination fees on mortgage loans brokered                              3              23
    Other operating income                                                  65              51
                                                                     ---------       ---------
            Total noninterest income                                       142             154
                                                                     ---------       ---------

NONINTEREST EXPENSE
    Salaries                                                               494             454
    Employee benefits                                                      117             106
    Occupancy                                                              119             112
    Equipment                                                              110             113
    Other operating expenses                                               363             357
                                                                     ---------       ---------
            Total noninterest expense                                    1,203           1,142
                                                                     ---------       ---------

INCOME BEFORE INCOME TAX                                                   539             401

PROVISION FOR INCOME TAX                                                   162             117
                                                                     ---------       ---------
NET INCOME                                                           $     377       $     284
                                                                     =========       =========

EARNINGS PER SHARE
    Basic                                                            $    0.33       $    0.26
    Diluted                                                          $    0.33       $    0.25
    Weighted average shares outstanding                              1,125,562       1,108,227
    Weighted average diluted shares outstanding                      1,154,009       1,142,447
</TABLE>


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



                                      71

<PAGE>


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


<TABLE>
<CAPTION>
                                                                       Three Months Ended,
                                                                            March 31,
                                                                 --------------------------------
                                                                      2000            1999
                                                                 --------------------------------
<S>                                                              <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                       $     377        $     285
    Adjustments to reconcile net income to net cash
            from operating activities
        Provisions for loan losses                                          27               15
        Depreciation                                                        94              103
        Deferred income tax                                                  2               (8)
        Net amortization on securities                                      10               22
        FHLB stock dividends                                                (6)              (7)
        Increase in accrued interest receivable                             65               79
        Increase (decrease) in other assets                                (41)               6
        Increase (decrease) in accrued interest payable                     75               (7)
        Increase (decrease) in other liabilities                           132              (67)
                                                                     ---------        ---------
            Net cash from operating activities                             735              421
                                                                     ---------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES
    Net increase in federal funds sold                                       -              (70)
    Net decrease in interest-bearing deposits with banks                 2,701            2,902
    Purchase of securities available-for-sale                           (1,306)          (8,202)
    Proceeds from maturities of securities available-for-sale            2,528            5,448
    Proceeds from maturities of securities held-to-maturity                 27              214
    Purchase stock in FHLB                                                   -              (20)
    Net increase in loans                                               (5,298)          (3,488)
    Additions to premises and equipment                                   (312)            (747)
                                                                     ---------        ---------
            Net cash from investing activities                          (1,660)          (3,963)
                                                                     ---------        ---------

CASH FLOWS FROM FINANCING ACTIVITIES
    Net increase (decrease) in deposits                                  1,749           (1,576)
    Net increase (decrease) in other borrowed funds                        (29)             141
    Cash dividends paid                                                   (563)            (135)
    Common stock issued                                                      -            3,591
    Stock options exercised                                                  -               28
                                                                     ---------        ---------
            Net cash from financing activities                           1,157            2,049
                                                                     ---------        ---------

NET INCREASE (DECREASE) IN CASH AND DUE                                    232           (1,493)
    FROM BANKS
CASH AND DUE FROM BANKS, beginning of year                               5,127            5,630
                                                                     ---------        ---------
CASH AND DUE FROM BANKS, at end of period                            $   5,359        $   4,137
                                                                     =========        =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
    Cash payments for Interest                                       $     698        $     724
                                                                     ---------        ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
    Unrealized gains (losses) on securities available-for-sale       $    (120)       $     (81)
                                                                     =========        =========
    Common stock issued for land                                     $       -        $     125
                                                                     =========        =========
    Deferred tax on unrealized gains (losses) on securities
        available-for-sale                                           $      41        $      27
                                                                     =========        =========

</TABLE>


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



                                      72

<PAGE>


VALLEY COMMUNITY BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.       Basis of Presentation



Valley Community Bancshares, Inc. (the "Company") has prepared the consolidated
financial statements of the Company for the three-month period ended March 31,
2000 and March 31, 1999 without audit by the Company's independent auditors.
However, the financial statements have been prepared in accordance with
generally accepted accounting principals 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, 1999 has been
derived from the audited consolidated balance sheet of the Company as of that
date. The results of operations for the three months ended March 31, 2000, are
not necessarily indicative of the results to be anticipated for the year ending
December 31, 2000.



Certain information and note disclosures normally included in the Company's
annual financial statement prepared in accordance with generally accepted
accounting principals 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 and notes thereto
included in the Company's Form 10 for the year ended December 31, 1999. Certain
amounts in the 1999 financial statements have been reclassified to conform to
the 2000 presentation.



2.       Earnings per share



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



The following table sets forth the computation of basic and diluted earnings per
share for the three months ended March 31, 2000 and 1999 (dollars in thousands,
except per share amounts).

<TABLE>
<CAPTION>
VALLEY COMMUNITY BANCSHARES, INC.                          Three Months Ended
Earnings Per Share                                              March 31,
                                                         ----------------------
                                                            2000        1999
                                                         ----------  ----------
<S>                                                      <C>         <C>
NUMERATOR
Net Income                                               $     377   $     284

DENOMINATOR
Denominator for basic earnings per share:
   Weighted average shares                               1,125,562   1,108,227
   Effect of dilutive securities - stock options            28,447      34,220

Denominator for diluted earnings per share:
   Weighted average shares and assumed
      conversion of dilutive stock options               1,154,009   1,142,447

Basic earnings per share                                 $    0.33       $0.26
                                                         ---------   ---------
                                                         ---------   ---------

Diluted earnings per share                               $    0.33       $0.25
                                                         ---------   ---------
                                                         ---------   ---------
</TABLE>


                                      73

<PAGE>




ITEM 14.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE

         Not applicable.

ITEM 15.      FINANCIAL STATEMENTS AND EXHIBITS

         (1)      Independent Auditor's Report

         (2)      Consolidated Balance Sheet at December 31, 1999 and December
                  31,1998

         (3)      Consolidated Statement of Income for the years ended December
                  31, 1999, December 31, 1998 and December 31, 1997

         (4)      Consolidated Statement of Cash Flows for the years ended
                  December 31, 1999, December 31, 1998 and December 31, 1997

         (5)      Consolidated Statement of Changes in Stockholders' Equity for
                  the years ended December 31, 1999, December 31, 1998 and
                  December 31, 1997

         (6)      Notes to Consolidated Year-End Financial Statements

         (7)      Consolidated Balance Sheet at March 31, 2000

         (8)      Consolidated Statement of Income for quarter ended March 31,
                  2000

         (9)      Consolidated Statement of Cash Flow for quarter ended March
                  31, 2000

         (10)     Notes to Consolidated Financial Statements for quarter ended
                  March 31, 2000.


The Exhibits are described in the Exhibit Index immediately following the
signature page filed as a part of this Registration Statement.

SIGNATURES

         Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized.


                                       VALLEY COMMUNITY BANCSHARES, INC.
                                       (Registrant)


Date:    July 21, 2000                 By: /s/ David H. Brown
                                           David H. Brown
                                           President and Chief Executive Officer


                                      74

<PAGE>




                               POWER OF ATTORNEY

         We, the undersigned directors and officers of Valley Community
Bancshares, Inc., do hereby severally constitute and appoint David H. Brown our
true and lawful attorney and agent to do any and all things and acts in our
names in the capacities indicated below and to execute all instruments for us on
our names in the capacities indicated below which said David H. Brown may deem
necessary or advisable to enable Valley Community Bancshares, Inc., to comply
with any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the Registration Statement on Form 10 relating to
the registering of Valley Community Bancshares, Inc.'s Common Stock, including
specifically but not limited to, power and authority to sign for us or any of us
in our names in the capacities indicated below the Registration Statement and
any and all amendments (including post-effective amendments) thereto; and we
hereby ratify and confirm all that David H. Brown shall do or cause to be done
by virtue hereof.

         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

<TABLE>
<S>                                            <C>                                   <C>
    /s/ Thomas R. Absher                       Chairman of the Board                 April 23, 2000
    -----------------------------
    Thomas R. Absher

    /s/ David H. Brown                         Director, President and CEO           April 23, 2000
    -----------------------------
    David H. Brown

    /s/ Warren D. Hunt                         Director                              April 23, 2000
    -----------------------------
    Warren D. Hunt

    /s/ A. Eugene Hammermaster                 Director                              April 23, 2000
    -----------------------------
    A. Eugene Hammermaster

    /s/ William E. Fitchett                    Director                              April 23, 2000
    -----------------------------
    William E. Fitchett

    /s/ David K. Hamry                         Director                              April 23, 2000
    -----------------------------
    David K. Hamry

    /s/ Steven M. Harris                       Director                              April 23, 2000
    -----------------------------
    Steven M. Harris

    /s/ Roger L. Knutson                       Director                              April 23, 2000
    -----------------------------
    Roger L. Knutson

    /s/ Joseph E. Riordan                      Senior Vice President and CFO         April 23, 2000
    -----------------------------
    Joseph E. Riordan

    /s/ Roy W. Thompson                        Senior Vice President                 April 23, 2000
    -----------------------------
    Roy W. Thompson

    /s/ Richard D. Pickett                     President of Valley Bank              April 23, 2000
    -----------------------------
    Richard D. Pickett
</TABLE>




                                      75

<PAGE>




EXHIBIT INDEX

<TABLE>
     <S>     <C>
     3.1     Articles of Incorporation of the Company
     3.2     Bylaws of the Company
     4.1     Specimen Stock Certificate
     4.2     Reference is made to Exhibits 3.1 and 3.2
     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    1998 Stock Option Plan
     10.7    Valley Bank Construction Agreement dated November 18, 1999
     10.8    401(k) Defined Contribution Plan and Noncontributory Profit Sharing Plan Adoption Agreement
     11      Statement re: computation of per share earnings
     21      Subsidiaries of the Company
     24      Power of Attorney is set forth on the signature page of this Registration Statement
     27      Financial Data Schedule
</TABLE>



                                      76



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