##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended: September 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For
the transition period from _________ to _________
 Commission File Number: 333-134006
 MOUNTAIN VALLEY BANCSHARES, INC.
  Georgia
    
    02-0714526(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 136 North Main Street, Cleveland, Georgia 30528
 (706) 348-6822
 N/A
  þ o
 o þ




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##### 



INDEX
  
 PagePart I. FINANCIAL INFORMATION
    
    
    1Item 1. Consolidated Financial Statements
    
    
    1Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    1Consolidated Statements of Income for the three Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    3Consolidated Statements of Comprehensive Income for the three Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    5Consolidated Statements of Income for the Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    6Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    8Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    9Consolidated Statements of Stockholders Equity for the Nine Months Ended September 30, 2006 (Unaudited)
    
    
    11Notes to Consolidated Financial Statements (Unaudited)
    
    
    12Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Controls and Procedures
    
    
    19Part II. OTHER INFORMATION
    
    
    19Item 1. Legal Proceedings
    
    
    19Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    20SIGNATURES
    
    
    21EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICAITON OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements
 MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)AssetsCash and due from banks
    
    $
    2,886,407
    
    
    $
    1,175,092Interest-bearing deposits in banks
    
    
    
    
    
    
    Federal funds sold
    
    
    265,000
    
    
    
    2,222,000Securities available for sale, at fair value
    
    
    14,174,543
    
    
    
    7,967,949Securities held-to-maturity
    
    
    1,496,172
    
    
    
    1,493,701Federal home loan bank stock, at cost
    
    
    262,600
    
    
    
    132,100Loans, net
    
    
    81,075,169
    
    
    
    59,284,542Premises and equipment, net
    
    
    2,283,101
    
    
    
    2,341,178Accrued interest receivable
    
    
    748,940
    
    
    
    407,159Foreclosed assets
    
    
    0
    
    
    
    Other assets
    
    
    66,241
    
    
    
    24,138$
    103,258,173
    
    
    $
    75,047,659Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    5,531,640
    
    
    $
    4,254,589Interest-bearing
    
    
    75,808,533
    
    
    
    60,623,819Total deposits
    
    
    81,340,173
    
    
    
    64,878,408Other borrowings
    
    
    9,480,738
    
    
    
    1,297,924Other liabilities
    
    
    409,555
    
    
    
    582,456Total liabilities
    
    
    91,230,466
    
    
    
    66,758,788Commitments and contingenciesStockholders equityCommon stock, par value $0.00; 6,250,000 shares authorized;
1,482,747 and 1,280,962 shares issued and outstanding
    
    
    
    
    
    
    Paid-in capital
    
    
    13,010,910
    
    
    
    10,198,631Retained earnings
    
    
    (931,614
    )
    
    
    (1,728,751
    )Accumulated other comprehensive loss
    
    
    (51,589
    )
    
    
    (181,009
    )Total stockholders equity
    
    
    12,027,707
    
    
    
    8,288,871$
    103,258,173
    
    
    $
    75,047,659
 See Notes to Consolidated Financial Statements.
 2




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##### Table of Contents



MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
 Three Months Ended September 30,2006
    
    
    2005Interest incomeInterest and fees on loans
    
    $
    1,803,436
    
    
    $
    989,511Interest on taxable securities
    
    
    138,892
    
    
    
    86,238Interest on nontaxable securitiesInterest on federal funds sold
    
    
    19,354
    
    
    
    4,503Interest on deposits in other banks
    
    
    2,846
    
    
    
    4,2691,964,528
    
    
    
    1,084,521Interest expenseInterest on deposits
    
    
    888,133
    
    
    
    432,117Interest on other borrowings
    
    
    71,055
    
    
    
    17,244959,188
    
    
    
    449,361Net interest income
    
    
    1,005,340
    
    
    
    635,160Provision for loan losses
    
    
    60,000
    
    
    
    147,000Net interest income after provision for
loan losses
    
    
    945,340
    
    
    
    488,160Noninterest incomeService charges on deposit accounts
    
    
    4,648
    
    
    
    3,921Other service charges, commissions and fees
    
    
    44,834
    
    
    
    33,079Mortgage origination fees
    
    
    23,642
    
    
    
    20,840Other
    
    
    30
    
    
    
    42973,154
    
    
    
    58,269Noninterest expenseSalaries and employee benefits
    
    
    446,117
    
    
    
    282,375Equipment
    
    
    47,300
    
    
    
    44,971Occupancy
    
    
    36,868
    
    
    
    40,974Advertising and marketing
    
    
    31,612
    
    
    
    12,085Legal and accounting
    
    
    23,858
    
    
    
    23,598
 3




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##### Table of Contents



Three Months Ended September 30,2006
    
    
    2005Telephone
    
    
    7,358
    
    
    
    8,877Supplies
    
    
    14,899
    
    
    
    18,723Data processing fees
    
    
    67,917
    
    
    
    44,816Other operating
    
    
    61,739
    
    
    
    49,386737,668
    
    
    
    525,805Income before income taxes
    
    
    280,826
    
    
    
    20,624Applicable income taxes
    
    
    
    
    
    
    Net income
    
    $
    280,826
    
    
    $
    20,624Basic earnings per share
    
    $
    0.21
    
    
    $
    0.02Diluted earnings per share
    
    $
    0.18
    
    
    $
    0.02
 See Notes to Consolidated Financial Statements.
 4




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MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
 Three Months Ended September 30,2006
    
    
    2005Net income
    
    $
    280,826
    
    
    $
    20,624Other comprehensive income (loss):Net unrealized holding gains (losses) arising during period
    
    
    166,928
    
    
    
    (55,296
    )Total other comprehensive income (loss)
    
    
    166,928
    
    
    
    (55,296
    )Comprehensive income (loss)
    
    $
    447,754
    
    
    $
    (34,672
    )
 See Notes to Consolidated Financial Statements.
 5




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##### Table of Contents



MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
 Nine Months Ended September 30,2006
    
    
    2005Interest incomeInterest and fees on loans
    
    $
    4,774,001
    
    
    $
    2,331,860Interest on taxable securities
    
    
    314,363
    
    
    
    260,506Interest on nontaxable securitiesInterest on federal funds sold
    
    
    31,554
    
    
    
    12,007Interest on deposits in other banks
    
    
    11,887
    
    
    
    26,6365,131,805
    
    
    
    2,631,009Interest expenseInterest on deposits
    
    
    2,214,183
    
    
    
    1,053,638Interest on other borrowings
    
    
    164,589
    
    
    
    32,2982,378,772
    
    
    
    1,085,936Net interest income
    
    
    2,753,033
    
    
    
    1,545,073Provision for loan losses
    
    
    196,000
    
    
    
    474,000Net interest income after provision for
loan losses
    
    
    2,557,033
    
    
    
    1,071,073Noninterest incomeService charges on deposit accounts
    
    
    13,125
    
    
    
    9,508Other service charges, commissions and fees
    
    
    130,328
    
    
    
    78,090Mortgage origination fees
    
    
    85,360
    
    
    
    57,418Other
    
    
    878
    
    
    
    688229,691
    
    
    
    145,704Noninterest expenseSalaries and employee benefits
    
    
    1,131,289
    
    
    
    873,192Equipment
    
    
    135,225
    
    
    
    119,815Occupancy
    
    
    101,205
    
    
    
    107,883Advertising and marketing
    
    
    104,873
    
    
    
    53,401Legal and accounting
    
    
    79,660
    
    
    
    69,028Telephone
    
    
    20,057
    
    
    
    26,202
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##### Table of Contents



Nine Months Ended September 30,2006
    
    
    2005Supplies
    
    
    53,230
    
    
    
    49,099Data processing fees
    
    
    194,735
    
    
    
    113,218Other operating
    
    
    169,313
    
    
    
    129,5441,989,587
    
    
    
    1,541,382Income before income taxes
    
    
    797,137
    
    
    
    (324,605
    )Applicable income taxes
    
    
    
    
    
    
    Net income
    
    $
    797,137
    
    
    $
    (324,605
    )Basic earnings per share
    
    $
    0.62
    
    
    $
    (0.28
    )Diluted earnings per share
    
    $
    0.52
    
    
    $
    (0.28
    )
 See Notes to Consolidated Financial Statements.
 7




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MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
 Nine Months Ended September 30,2006
    
    
    2005Net income
    
    $
    797,137
    
    
    $
    (324,605
    )Other comprehensive income (loss):Net unrealized holding gains (losses) arising during period
    
    
    129,420
    
    
    
    (101,126
    )Total other comprehensive income (loss)
    
    
    129,420
    
    
    
    (101,126
    )Comprehensive income (loss)
    
    $
    926,557
    
    
    $
    (425,731
    )
 See Notes to Consolidated Financial Statements.
 8




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##### Table of Contents



MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
 Nine Months Ended September 30,2006
    
    
    2005OPERATING ACTIVITIESNet income
    
    $
    797,137
    
    
    $
    (324,605
    )Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    150,760
    
    
    
    142,565Provision for loan losses
    
    
    196,000
    
    
    
    327,000(Increase) decrease in interest receivable
    
    
    (341,781
    )
    
    
    (195,049
    )Increase (decrease) in interest payable
    
    
    11,047
    
    
    
    61,389Net other operating activities
    
    
    (228,522
    )
    
    
    64,136Total adjustments
    
    
    (212,496
    )
    
    
    400,041Net cash provided by operating activities
    
    
    584,641
    
    
    
    75,436INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    
    
    
    
    980,686Purchases of securities available for sale
    
    
    (7,607,436
    )
    
    
    Proceeds from maturities of securities available for sale
    
    
    1,530,062
    
    
    
    154,891Purchase of Federal home loan bank stock, net
    
    
    (130,500
    )
    
    
    (109,600
    )(Increase) decrease in federal funds sold
    
    
    1,957,000
    
    
    
    460,000(Increase) decrease in loans, net
    
    
    (21,986,627
    )
    
    
    (29,203,995
    )Purchase of premises and equipment
    
    
    (92,683
    )
    
    
    (56,096
    )Net cash provided by (used in) investing activities
    
    
    (26,330,184
    )
    
    
    (27,774,114
    )FINANCING ACTIVITIESIncrease (decrease) in deposits
    
    
    16,461,765
    
    
    
    27,712,274Increase in repurchase agreements
    
    
    5,526,392
    
    
    
    Proceeds from other borrowings
    
    
    2,656,422
    
    
    
    1,066,288Repayment of other borrowings
    
    
    
    
    
    
    Issuance of common stock, net
    
    
    2,812,279
    
    
    
    86,560
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##### Table of Contents



Nine Months Ended September 30,2006
    
    
    2005Net cash provided by (used in) financing activities
    
    
    27,456,858
    
    
    
    28,865,122Net increase in cash and due from banks
    
    
    1,711,315
    
    
    
    1,166,444Cash and due from banks at beginning of year
    
    
    1,175,092
    
    
    
    750,415Cash and due from banks at end of year
    
    $
    2,886,407
    
    
    $
    1,916,859
 See Notes to Consolidated Financial Statements.
 10




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MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2006
(UNAUDITED)
 AccumulatedUnearned
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    ESOP
    
    
    ComprehensiveShares
    
    
    Par Value
    
    
    Capital
    
    
    Earnings
    
    
    Shares
    
    
    Income (Loss)
    
    
    TotalBalance, December
31, 2005
    
    
    1,280,962
    
    
    $
    0
    
    
    $
    10,198,631
    
    
    $
    (1,728,751
    )
    
    $
    
    
    
    $
    (181,009
    )
    
    $
    8,288,871Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    797,137
    
    
    
    
    
    
    
    
    
    
    
    797,137Other comprehensive
income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,420
    
    
    
    129,420Issuance of common
stock
    
    
    201,785
    
    
    
    
    
    
    
    2,812,279
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,812,279Issuance of common
stock, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned ESOP shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, September
30, 2006
    
    
    1,482,747
    
    
    $
    0
    
    
    $
    13,010,910
    
    
    $
    (931,614
    )
    
    $
    0
    
    
    $
    (51,589
    )
    
    $
    12,027,707
 See Notes to Consolidated Financial Statements.
 11




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##### Table of Contents



MOUNTAIN VALLEY BANCSHARES, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Note 1  Basis of Presentation and Accounting Estimates
    Note 2  Stock-based Compensation
 Accounting for Share-Based Payment
  NineMonths EndedSeptember 30, 2005Net loss as reported
    
    $
    (324,605
    )Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects
    
    
    57,000Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
 12




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NineMonths EndedSeptember 30, 2005Proforma net
loss including stock-based compensation
cost based on fair-value method
    
    
    (381,605
    )Earnings per share:Basic  as reported
    
    $
    (0.28
    )Basic  proforma
    
    $
    (0.33
    )Diluted  as reported
    
    $
    (0.28
    )Diluted  proforma
    
    $
    (0.33
    )
 Note 3  Earnings per share
    For the Nine Months Ended September 30, 2006WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    797,137Basic EPSIncome available to common
shareholders
    
    
    797,137
    
    
    
    1,283,799
    
    
    $
    0.62Effect of dilutive securitiesOptions
    
    
    
    
    
    
    258,200
    
    
    
    (0.10
    )Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    797,137
    
    
    
    1,541,999
    
    
    $
    0.52
 For the Nine Months Ended September 30, 2005WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet loss
    
    $
    (324,605
    )Basic EPSLoss available to common
shareholders
    
    
    (324,605
    )
    
    
    1,140,560
    
    
    $
    (0.28
    )
 13




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##### Table of Contents



For the Nine Months Ended September 30, 2005WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountEffect of dilutive securitiesOptions
    
    
    
    
    
    
    
    
    
    
    Diluted EPSLoss available to common
shareholders and assumed
conversions
    
    $
    (324,605
    )
    
    
    1,140,560
    
    
    $
    (0.28
    )
 For the Three Months Ended September 30, 2006WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    280,826Basic EPSIncome available to common
shareholders
    
    
    280,826
    
    
    
    1,320,833
    
    
    $
    0.21Effect of dilutive securitiesOptions
    
    
    
    
    
    
    257,625
    
    
    
    (0.03
    )Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    280,826
    
    
    
    1,578,458
    
    
    $
    0.18
 For the Three Months Ended September 30, 2005WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    20,624Basic EPSIncome available to common
shareholders
    
    
    20,624
    
    
    
    1,271,518
    
    
    $
    0.02Effect of dilutive securitiesOptions
    
    
    
    
    
    
    81,109
    
    
    
    0.00Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    20,624
    
    
    
    1,352,627
    
    
    $
    0.02
  Note 4  Impact of Recently Issued Accounting Standards
 , Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140. Accounting for Derivative Instruments and Hedging Activities Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets
 , Accounting for Servicing of Financial Assets, an
amendment of FASB Statement No. 140. Accounting for Transfers
and Servicing of
 14




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Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125
   Note 5  Commitments and Contingencies
     
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Overview
  15




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Critical Accounting Policies. .
 Results of operations
  Financial condition
   Liquidity
  16




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##### Table of Contents



ActualRegulatoryMinimumConsolidated
    
    Bank
    
    RequirementLeverage capital ratios
    
    
    10.97
    %
    
    
    9.36
    %
    
    
    4.00
    %Risk-based capital ratios:Tier one capital
    
    
    12.74
    %
    
    
    10.87
    %
    
    
    4.00
    %Total capital
    
    
    13.88
    %
    
    
    12.00
    %
    
    
    8.00
    %
  Net interest income
    Provision for loan losses
  17




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##### Table of Contents



September 30,2006
    
    2005(Dollars in thousands)Total non-accruing loans
    
    $
    32
    
    
    $
    0Loans contractually past due ninety days or more as to interest or
principal payments and still accruing
    
    $
    0
    
    
    $
    0Loans, the terms of which have been renegotiated to provide a reduction
or deferral of interest or principal because of deterioration in the
financial position of the borrower
    
    $
    0
    
    
    $
    0Loans now current about which there are serious doubts as to the
ability of the borrower to comply with present loan repayment terms
    
    $
    0
    
    
    $
    0
  Non-interest income
   Non-interest expense
   Net income
  18




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##### Table of Contents



Item 3. Controls and Procedures
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  19




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##### Table of Contents



Item 6. Exhibits
  31.1
    
    Certificate of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certificate of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certificate of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 20




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##### Table of Contents



SIGNATURES
  MOUNTAIN VALLEY BANCSHARES, INC.Date: November 13, 2006
    /s/ Marc J. GreeneMarc J. GreenePresident and CEODate: November 13, 2006
    /s/ Rachel MarshallRachel MarshallChief Financial Officer 21