##### 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: June 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: 000-51957
 MOUNTAIN VALLEY BANCSHARES, INC.
  Georgia
    
    02-0714526(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 136 North Main Street, Cleveland, Georgia 30528
 (706) 348-6822
 N/A
  o þ
  o þ




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##### 



INDEX
 PagePart I. FINANCIAL INFORMATION
    
    
    1Item 1. Consolidated Financial Statements
    
    
    1Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    1Consolidated Statements of Income for the three Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    3Consolidated Statements of Comprehensive Income for the three Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    5Consolidated Statements of Income for the Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    6Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    8Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    9Consolidated Statements of Stockholders Equity for the Six Months Ended June 30, 2006 (Unaudited)
    
    
    11Notes to Consolidated Financial Statements (Unaudited)
    
    
    12Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Controls and Procedures
    
    
    17Part II. OTHER INFORMATION
    
    
    18Item 1. Legal Proceedings
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults Upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18SIGNATURES
    
    
    18EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEO/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
JUNE 30, 2006 AND DECEMBER 31, 2005
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)AssetsCash and due from banks
    
    $
    2,724,528
    
    
    $
    1,175,092Interest-bearing deposits in banks
    
    
    
    
    
    
    Federal funds sold
    
    
    2,461,000
    
    
    
    2,222,000Securities available for sale, at fair value
    
    
    8,196,140
    
    
    
    7,967,949Securities held-to-maturity
    
    
    1,495,360
    
    
    
    1,493,701Federal home loan bank stock, at cost
    
    
    303,100
    
    
    
    132,100Loans, net
    
    
    77,310,806
    
    
    
    59,284,542Premises and equipment, net
    
    
    2,261,370
    
    
    
    2,341,178Accrued interest receivable
    
    
    526,070
    
    
    
    407,159Foreclosed assets
    
    
    152,042
    
    
    
    Other assets
    
    
    84,594
    
    
    
    24,138$
    95,515,010
    
    
    $
    75,047,659Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    5,348,797
    
    
    $
    4,254,589Interest-bearing
    
    
    75,771,648
    
    
    
    60,623,819Total deposits
    
    
    81,120,445
    
    
    
    64,878,408Other borrowings
    
    
    5,239,750
    
    
    
    1,297,924Other liabilities
    
    
    232,428
    
    
    
    582,456Total liabilities
    
    
    86,592,623
    
    
    
    66,758,788Commitments and contingenciesStockholders equityCommon stock, par value $0.00; 6,250,000 shares authorized;
1,301,778 and 1,280,962 shares issued and outstanding
    
    
    
    
    
    
    Paid-in capital
    
    
    10,353,343
    
    
    
    10,198,631Retained earnings
    
    
    (1,212,440
    )
    
    
    (1,728,751
    )Accumulated other comprehensive loss
    
    
    (218,516
    )
    
    
    (181,009
    )Total stockholders equity
    
    
    8,922,387
    
    
    
    8,288,871$
    95,515,010
    
    
    $
    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 (LOSS)
 FOR THE THREE MONTHS
 ENDED JUNE 30, 2006 AND 2005
 (UNAUDITED)
 Three Months Ended June 30,2006
    
    
    2005Interest incomeInterest and fees on loans
    
    $
    1,607,941
    
    
    $
    783,058Interest on taxable securities
    
    
    88,547
    
    
    
    86,632Interest on nontaxable securitiesInterest on federal funds sold
    
    
    6,746
    
    
    
    3,837Interest on deposits in other banks
    
    
    6,654
    
    
    
    11,2871,709,888
    
    
    
    884,814Interest expenseInterest on deposits
    
    
    743,535
    
    
    
    362,399Interest on other borrowings
    
    
    49,653
    
    
    
    10,057793,188
    
    
    
    372,456Net interest income
    
    
    916,700
    
    
    
    512,358Provision for loan losses
    
    
    95,000
    
    
    
    162,000Net interest income after provision for
loan losses
    
    
    821,700
    
    
    
    350,358Noninterest incomeService charges on deposit accounts
    
    
    4,264
    
    
    
    3,222Other service charges, commissions and fees
    
    
    49,604
    
    
    
    25,756Mortgage origination fees
    
    
    26,217
    
    
    
    10,851Other
    
    
    758
    
    
    
    17580,843
    
    
    
    40,004Noninterest expenseSalaries and employee benefits
    
    
    340,277
    
    
    
    303,474Equipment
    
    
    44,465
    
    
    
    36,967Occupancy
    
    
    27,444
    
    
    
    35,187Advertising and marketing
    
    
    37,446
    
    
    
    29,897Legal and accounting
    
    
    25,670
    
    
    
    27,765Telephone
    
    
    6,033
    
    
    
    9,062Supplies
    
    
    20,718
    
    
    
    17,614Data processing fees
    
    
    69,319
    
    
    
    40,051Other operating
    
    
    62,086
    
    
    
    40,193633,458
    
    
    
    540,210Income (loss) before income taxes
    
    
    269,085
    
    
    
    (149,848
    )Applicable income taxes
    
    
    
    
    
    
    Net
income (loss)
    
    $
    269,085
    
    
    $
    (149,848
    )Basic earnings per share
    
    $
    0.21
    
    
    $
    (0.12
    )Diluted earnings per share
    
    $
    0.20
    
    
    $
    (0.12
    )
 See Notes to Consolidated Financial Statements.
 3




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##### Table of Contents



MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS
ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
 Three Months Ended June 30,2006
    
    
    2005Net income (loss)
    
    $
    269,085
    
    
    $
    (149,848
    )Other comprehensive income (loss):Net unrealized holding gains (losses) arising during period
    
    
    (17,055
    )
    
    
    (118,332
    )Total other comprehensive income (loss)
    
    
    (17,055
    )
    
    
    (118,332
    )Comprehensive income (loss)
    
    $
    252,030
    
    
    $
    (268,180
    )
 See Notes to Consolidated Financial Statements.
 4




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##### Table of Contents



MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE SIX MONTHS
ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
 Six Months Ended June 30,2006
    
    
    2005Interest incomeInterest and fees on loans
    
    $
    2,970,565
    
    
    $
    1,342,349Interest on taxable securities
    
    
    175,471
    
    
    
    174,268Interest on nontaxable securitiesInterest on federal funds sold
    
    
    12,200
    
    
    
    7,504Interest on deposits in other banks
    
    
    9,041
    
    
    
    22,3673,167,277
    
    
    
    1,546,488Interest expenseInterest on deposits
    
    
    1,326,050
    
    
    
    621,521Interest on other borrowings
    
    
    93,534
    
    
    
    15,0541,419,584
    
    
    
    636,575Net interest income
    
    
    1,747,693
    
    
    
    909,913Provision for loan losses
    
    
    136,000
    
    
    
    327,000Net interest income after provision for
loan losses
    
    
    1,611,693
    
    
    
    582,913Noninterest incomeService charges on deposit accounts
    
    
    8,477
    
    
    
    5,587Other service charges, commissions and fees
    
    
    85,494
    
    
    
    45,011Mortgage origination fees
    
    
    61,718
    
    
    
    36,578Other
    
    
    848
    
    
    
    259156,537
    
    
    
    87,435Noninterest expenseSalaries and employee benefits
    
    
    685,172
    
    
    
    590,817Equipment
    
    
    87,925
    
    
    
    74,844Occupancy
    
    
    64,337
    
    
    
    66,909Advertising and marketing
    
    
    73,261
    
    
    
    41,316Legal and accounting
    
    
    55,802
    
    
    
    45,430Telephone
    
    
    12,699
    
    
    
    17,325Supplies
    
    
    38,331
    
    
    
    30,376Data processing fees
    
    
    126,818
    
    
    
    68,402Other operating
    
    
    107,574
    
    
    
    80,1581,251,919
    
    
    
    1,015,577Income (loss) before income taxes
    
    
    516,311
    
    
    
    (345,229
    )Applicable income taxes
    
    
    
    
    
    
    Net income (loss)
    
    $
    516,311
    
    
    $
    (345,229
    )Basic earnings per share
    
    $
    0.40
    
    
    $
    (0.27
    )Diluted earnings per share
    
    $
    0.38
    
    
    $
    (0.27
    )
 See Notes to Consolidated Financial Statements.
 5




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MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS
ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
 Six Months Ended June 30,2006
    
    
    2005Net
income (loss)
    
    $
    516,311
    
    
    $
    (345,229
    )Other comprehensive loss:Net unrealized holding gains (losses) arising during period
    
    
    (37,507
    )
    
    
    (45,730
    )Total other comprehensive loss
    
    
    (37,507
    )
    
    
    (45,730
    )Comprehensive income (loss)
    
    $
    478,804
    
    
    $
    (390,959
    )
 See Notes to Consolidated Financial Statements.
 6




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MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
 Six Months Ended June 30,2006
    
    
    2005OPERATING ACTIVITIESNet income(loss)
    
    $
    516,311
    
    
    $
    (345,229
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    99,394
    
    
    
    94,898Provision for loan losses
    
    
    136,000
    
    
    
    327,000Net losses on sale or disposal of premises and equipment
    
    
    
    
    
    
    (Increase) decrease in interest receivable
    
    
    (118,911
    )
    
    
    (145,803
    )Increase (decrease) in interest payable
    
    
    (262
    )
    
    
    62,173(Increase) decrease in other assets
    
    
    (212,498
    )
    
    
    (3,031
    )Increase (decrease) in other liabilities
    
    
    (363,345
    )
    
    
    (1,015,424
    )Total adjustments
    
    
    (459,622
    )
    
    
    (680,187
    )Net cash provided by (used in) operating activities
    
    
    56,689
    
    
    
    (1,025,416
    )INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in banks
    
    
    
    
    
    
    579,529Purchases of securities available for sale
    
    
    (556,804
    )
    
    
    (252,197
    )Proceeds from maturities of securities available for sale
    
    
    290,906
    
    
    
    340,007Proceeds from sale of securities available for sale
    
    
    
    
    
    
    Purchase of Federal home loan bank stock, net
    
    
    (172,659
    )
    
    
    (111,207
    )(Increase) decrease in federal funds sold
    
    
    (239,000
    )
    
    
    401,000(Increase) decrease in loans, net
    
    
    (18,162,264
    )
    
    
    (24,846,842
    )Purchase of premises and equipment
    
    
    (19,586
    )
    
    
    (35,886
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (18,859,407
    )
    
    
    (23,925,596
    )FINANCING ACTIVITIESIncrease (decrease) in deposits
    
    
    16,242,037
    
    
    
    23,761,936Increase in repurchase agreements
    
    
    555,405
    
    
    
    Proceeds from other borrowings
    
    
    3,400,000
    
    
    
    551,385Repayment of other borrowings
    
    
    
    
    
    
    Issuance of common stock, net
    
    
    154,712
    
    
    
    55,400Net cash provided by (used in) financing activities
    
    
    20,352,154
    
    
    
    24,368,721Net increase in cash and due from banks
    
    
    1,549,436
    
    
    
    (582,291
    )Cash and due from banks at beginning of year
    
    
    1,175,092
    
    
    
    750,415Cash and due from banks at end of year
    
    $
    2,724,528
    
    
    $
    168,124
 See Notes to Consolidated Financial Statements.
 7




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##### Table of Contents



MOUNTAIN VALLEY BANCSHARES, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE SIX MONTHS
ENDED JUNE 30, 2006
(UNAUDITED)
 AccumulatedCommon Stock
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    
    OtherPar
    
    
    Paid-in
    
    
    Retained
    
    
    ESOP
    
    
    ComprehensiveShares
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    516,311
    
    
    
    
    
    
    
    
    
    
    
    516,311Other comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,507
    )
    
    
    (37,507
    )Issuance of common
stock for
exercise of
warrants
    
    
    20,816
    
    
    
    
    
    
    
    154,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154,712Issuance of common
stock, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned ESOP shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, June 30, 2006
    
    
    1,301,778
    
    
    $
    0
    
    
    $
    10,353,343
    
    
    $
    (1,212,440
    )
    
    $
    0
    
    
    $
    (218,516
    )
    
    $
    8,922,387
 See Notes to Consolidated Financial Statements.
 8




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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
  SixMonths EndedJune 30, 2005Net income as reported
    
    $
    (345,229
    )Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects
    
    
    61,000Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    
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##### Table of Contents



SixMonths EndedJune 30, 2005Proforma net income including stock-based compensation
cost based on fair-value method
    
    
    (406,229
    )Earnings per share:Basic  as reported
    
    $
    (0.27
    )Basic  proforma
    
    $
    (0.32
    )
 Note 3  Earnings per share
    For the Six Months Ended June 30, 2006WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    516,311Basic EPSIncome available to common
shareholders
    
    
    516,311
    
    
    
    1,293,981
    
    
    $
    0.40Effect of dilutive securitiesOptions
    
    
    
    
    
    
    78,628
    
    
    
    (0.02
    )Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    516,311
    
    
    
    1,372,609
    
    
    $
    0.38
 For the Six Months Ended June 30, 2005WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    (345,229
    )Basic EPSIncome
available to
common
shareholders
    
    
    (345,229
    )
    
    
    1,267,986
    
    
    $
    (0.27
    )
 For the Three Months Ended June 30, 2006WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    269,085Basic EPSIncome available to common
shareholders
    
    
    269,085
    
    
    
    1,291,641
    
    
    $
    0.21Effect of dilutive securitiesOptions
    
    
    
    
    
    
    77,123
    
    
    
    (0.01
    )Diluted EPSIncome available to common
shareholders and assumed
conversions
    
    $
    269,085
    
    
    
    1,368,764
    
    
    $
    0.20
 For the Three Months Ended June 30, 2005WeightedAverage Shares-
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    AmountNet income
    
    $
    (149,848
    )Basic EPSIncome
available to
common
shareholders
    
    
    (149,848
    )
    
    
    1,269,934
    
    
    $
    (0.12
    )
 10




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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 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
 Overview
   11




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Critical Accounting Policies. .
 Results of operations
  Financial condition
   Liquidity
   ActualRegulatoryMinimumConsolidated
    
    Bank
    
    RequirementLeverage capital ratios
    
    
    10.90%
    
    
    
    10.60
    %
    
    
    4.00
    %Risk-based capital ratios:Tier one capital
    
    
    11.29%
    
    
    
    11.07
    %
    
    
    4.00
    %Total capital
    
    
    12.41%
    
    
    
    12.19
    %
    
    
    8.00
    %
  12




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Net interest income
    Provision for loan losses
   June 30,2006
    
    2005(Dollars in thousands)Total non-accruing loans
    
    $
    78
    
    
    $
    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
  13




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Non-interest income
   Non-interest expense
   Net income
   Forward-Looking Statements
  
 Item 3. Controls and Procedures
 14




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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
   Name
    
    
    
    
    
    Votes For
    
    Votes Against
    
    AbstainC. Lamar Black
    
    
    
    
    
    
    831,868
    
    
    
    0
    
    
    
    0Joel R. Campbell
    
    
    
    
    
    
    831,868
    
    
    
    0
    
    
    
    0Marc J. Greene
    
    
    
    
    
    
    831,868
    
    
    
    0
    
    
    
    0June W. Parks
    
    
    
    
    
    
    831,868
    
    
    
    0
    
    
    
    0
 
 Item 5. Other Information
  
 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 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 15




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##### Table of Contents



SIGNATURES
  MOUNTAIN VALLEY BANCSHARES, INC.Date: August 14, 2006
    
    /s/ Marc J. Greene

Marc J. GreenePresident and CEODate: August 14, 2006
    
    /s/ Rachel Marshall

Rachel MarshallChief Financial Officer
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