10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended: March 31, 2008 or

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: 000-53196

MOUNTAIN VALLEY BANCSHARES, INC.

(Exact name of small business issuer as specified in its charter)

Georgia	02-0714526
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

136 North Main Street, Cleveland, Georgia 30528
(Address of principal executive office)

(706) 348-6822
(Issuer’s telephone number)

N/A
(Former name, former address and former fiscal year, if changed since last report)

     Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No þ

     Indicate the number of outstanding shares of each of the issuer’s classes of common stock, as of April 1, 2008: 2,106,602; no par value.

     Transitional Small Business Disclosure Format (check one)    Yes o    No þ

INDEX

	Page
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS	1
Part I.    FINANCIAL INFORMATION	2
Item 1. Financial Statements	2
Consolidated Balance Sheets as of March 31, 2008 (Unaudited) and December 31, 2007	2
Consolidated Statements of Income for the Three Months Ended March 31, 2008 and 2007 (Unaudited)	3
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2008 and 2007 (Unaudited)	4
Consolidated Statements of Stockholders’ Equity for the Three Month Ended March 31, 2008 (Unaudited)	5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 (Unaudited)	6
Notes to Consolidated Financial Statements (Unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3. Quantitative and Qualitative Disclosures about Market Risk	13
Item 4. Controls and Procedures	13
Part II. OTHER INFORMATION	13
Item 1. Legal Proceedings	13
Item 1a. Risk Factors	13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3. Defaults Upon Senior Securities	13
Item 4. Submission of Matters to a Vote of Security Holders	13
Item 5. Other Information	14
Item 6. Exhibits	14
SIGNATURES	14
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32.1 SECTION 906, CERTIFICATION OF THE CEO AND CFO

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

     This report contains certain “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and are including this statement for purposes of these safe harbor provisions. “Forward-looking statements,” which are based on certain assumption and describe future plans, strategies and expectations of the Company, may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” Examples of forward-looking statements, include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for commercial, mortgage, consumer and other loans, real estate values, competition, changes in accounting principles, policies or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect our financial results, is included in our other filings with the Securities and Exchange Commission.

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MOUNTAIN VALLEY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2008 AND DECEMBER 31, 2007

	March 31,		December 31,
	2008		2007
	(Unaudited)		(Audited)
Assets
Cash and due from banks, including reserve requirements of $534,000 and $400,000, respectively	$	2,213,918	$	1,779,649
Interest-bearing deposits		2,820,526		171,194
Federal funds sold		25,000		5,096,000
Securities available-for-sale, at fair value		19,094,628		19,069,773
Securities held-to-maturity		998,904		998,502
Federal Home Loan Bank stock, at cost		376,400		191,000
Loans, net		105,311,002		102,694,819
Land Deposit		10,000		10,000
Premises and equipment, net		2,322,228		2,359,288
Accrued interest receivable		898,013		940,747
Other Real Estate Owned		599,099		636,599
Other assets		276,737		368,944
	$	134,946,455	$	134,316,515
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	7,563,845	$	7,545,843
Interest-bearing		95,565,588		95,030,420
Total deposits		103,129,433		102,576,263
Other borrowings		10,150,362		10,196,578
Other liabilities		350,233		492,347
Total liabilities		113,630,028		113,265,188
Shareholders’ equity
Common stock, par value $0.00; 5,000,000 shares authorized; 2,106,602 and 2,106,602 shares issued and outstanding		—		—
Paid-in capital		20,843,514		20,839,186
Retained earnings		94,177		32,773
Accumulated other comprehensive income		378,736		179,368
Total stockholders’ equity		21,316,427		21,051,327
	$	134,946,455	$	134,316,515

See Notes to Consolidated Financial Statements.

2

MOUNTAIN VALLEY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)

	Three Months Ended March 31,
	2008		2007
Interest income
Interest and fees on loans	$	1,918,911	$	1,967,187
Interest on taxable securities		247,734		204,048
Interest on federal funds sold		7,066		8,980
Interest on deposits in other banks		4,215		2,184
		2,177,926		2,182,399
Interest expense
Interest on deposits		949,784		957,225
Interest on other borrowings		105,335		141,536
		1,055,119		1,098,761
Net interest income		1,122,807		1,083,638
Provision for loan losses		75,000		94,300
Net interest income after provision for loan losses		1,047,807		989,338
Noninterest income
Service charges on deposit accounts		3,900		3,344
Other service charges, commissions and fees		44,675		41,471
Mortgage origination fees		55,126		49,005
Other		13,272		116
		116,973		93,936
Noninterest expense
Salaries and employee benefits		608,146		555,272
Equipment		47,795		53,114
Occupancy		96,088		42,300
Advertising and marketing		28,705		31,682
Legal and accounting		55,931		45,555
Telephone		7,844		8,238
Supplies		15,665		18,915
Data processing fees		106,871		78,025
Other operating		98,697		70,391
		1,065,742		903,492
Income before income taxes		99,038		179,782
Applicable income taxes		37,634		67,460
Net income	$	61,404	$	112,322
Basic earnings per share	$	0.03	$	0.07
Diluted earnings per share	$	0.03	$	0.06

See Notes to Consolidated Financial Statements.

3

MOUNTAIN VALLEY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)

	Three Months Ended March 31,
	2008		2007
Net income	$	61,404	$	112,322
Other comprehensive income:
Net unrealized holding gains arising during period, net of tax of $122,193 and $14,471		199,368		23,611
Total other comprehensive income		199,368		23,611
Comprehensive income	$	260,772	$	135,933

See Notes to Consolidated Financial Statements.

4

MOUNTAIN VALLEY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS
ENDED MARCH 31, 2008
(UNAUDITED)

	Common Stock								Accumulated
									Other
					Paid-in		Retained		Comprehensive
	Shares		Par Value		Capital		Earnings		Income (Loss)		Total
Balance, December 31, 2007		2,106,602	$	0	$	20,839,186	$	32,773	$	179,368	$	21,051,327
Net income		—		—		—		61,404		—		61,404
Change in fair value of available for sale securities, net of tax of $122,193		—		—		—		—		199,368		199,368
Stock Option Expense		—		—		4,328						4,328
Balance, March 31, 2008		2,106,602	$	0	$	20,843,514	$	94,177	$	378,736	$	21,316,427

See Notes to Consolidated Financial Statements.

5

MOUNTAIN VALLEY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)

	Three Months Ended March 31,
	2008			2007
OPERATING ACTIVITIES
Net income	$	61,404		$	112,322
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		50,728			53,793
Provision for loan losses		75,000			94,300
Stock-based compensation expense		4,328			6,612
Decrease (Increase) in interest receivable		42,734			(103,984	)
Increase (decrease) in interest payable		(16,691	)		26,303
Gain on sale of securities available for sale		(11,385	)		—
Gain on sale of other real estate		(1,748	)		—
Net other operating activities		(155,409	)		47,632
Total adjustments		(12,443	)		124,656
Net cash provided by operating activities		48,961			236,978
INVESTING ACTIVITIES
(Increase) in interest-bearing deposits in banks		(2,649,332	)		—
Purchases of securities available for sale		(3,051,250	)		(802,179	)
Proceeds from maturities of securities available for sale		1,559,421			1,358,656
Proceeds from the sale of securities available for sale		1,799,920			—
Purchase of Federal home loan bank stock, net		(185,802	)		(86,800	)
(Increase) decrease in federal funds sold		5,071,000			(1,839,000	)
Proceeds from sale of other real estate		39,248			—
(Increase) in loans, net		(2,691,183	)		(12,064,331	)
Purchase of premises and equipment		(13,668	)		(65,761	)
Net cash (used in) investing activities		(121,646	)		(13,499,415	)
FINANCING ACTIVITIES
Increase in deposits		553,170			10,995,659
Increase (decrease) in repurchase agreements		(2,996,217	)		793,136
Proceeds from other borrowings		2,950,001			—
Repayment of other borrowings		—			(381,242	)
Issuance of common stock, net		—			1,666,250
Net cash provided by financing activities		506,954			13,073,803
Net increase (decrease) in cash and due from banks		434,269			(188,634	)
Cash and due from banks at beginning of year		1,779,649			1,745,107
Cash and due from banks at end of period	$	2,213,918		$	1,556,473

See Notes to Consolidated Financial Statements.

6

MOUNTAIN VALLEY BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 — Basis of Presentation and Accounting Estimates

The accompanying condensed consolidated financial statements include the accounts of Mountain Valley Bancshares, Inc. (the “Company”) and its wholly owned subsidiary, Mountain Valley Community Bank (the “Bank”). Significant intercompany transactions and accounts are eliminated in consolidation.

The financial statements as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto and the report of registered independent public accounting firm included in the Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 1, 2008. The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year.

The financial information included herein reflects all normal recurring adjustments which are, in the opinion of management, necessary to a fair presentation of the financial position and results of operations for interim periods.

Note 2 — Stock-based Compensation

During 2004 the Bank adopted the 2004 Stock Option Plan (the “Plan”) for eligible directors, officers, and key employees of the Bank. Options are granted to purchase common shares at a price not less than the fair value of the common stock at the date of grant, with fair value being established by the Board of Directors. The Bank has reserved and made available under the Plan 253,000 shares of the Bank’s common stock.

The Plan provides for the grant of both incentive and nonqualified stock options. The Board of Directors of the Company establishes to whom options shall be granted and determines exercise prices, vesting requirements, and the number of shares covered by each option.

For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the option’s vesting period. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. In management’s opinion, the model does not necessarily provide a reliable single measure of the fair value of options.

The Board of Directors determines vesting requirements at the time options are granted, and generally provide for vesting over a three year period. The Plan provides that the term may not exceed ten years.

A summary of the Company’s stock option activity, and related information, for the three months ended March 31, 2008 follows. Exercise price per share information is based on weighted averages.

			Exercise
			Price
	Options		Per Share
Outstanding at December 31, 2007		193,330	$	9.44
Granted		—		—
Exercised		—		—
Forfeited		—		—
Outstanding at March 31, 2008		193,330	$	9.44
Exercisable at March 31, 2008		167,076	$	8.64

7

No options were exercised for the three months ended March 31, 2008 and March 31, 2007.

Note 3 — Earnings per share

Earnings per share are calculated on the basis of the weighted average number of shares outstanding. As the Company has granted stock options to certain officers and others with the Company, diluted earnings per share has been presented in the Consolidated Statements of Income.

The following reconciles the numerators and denominators of the basic and diluted earnings per share computations:

	For the Three Months Ended March 31, 2008
			Weighted
			Average Shares-		Per-Share
	Numerator		Denominator			Amount
Net income	$	61,404
Basic EPS
Income available to common shareholders		61,404		2,106,602		$	0.03
Effect of dilutive securities
Options and Warrants				177,720			(0.00	)
Diluted EPS
Income available to common shareholders and assumed conversions	$	61,404		2,284,322		$	0.03

	For the Three Months Ended March 31, 2007
			Weighted
			Average Shares-		Per-Share
	Numerator		Denominator		Amount
Net income	$	112,322
Basic EPS
Income available to common shareholders		112,322		1,659,983	$	0.07
Effect of dilutive securities
Options and Warrants				284,033		(0.01	)
Diluted EPS
Income available to common shareholders and assumed conversions	$	112,322		1,944,016	$	0.06

Note 4 — Impact of Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS 157 “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. SFAS 157 emphasizes that fair value is a market-based measurement and not an entity-specific measurement. It also establishes a fair value hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value. The Company adopted this statement on January 1, 2008. As of March 31, 2008, the Company had securities available for sale totaling approximately $19.1 million that were reported at fair value in accordance with

8

SFAS 157. Determination of fair value, which is provided by a third party, was based on evaluations of observable market data, utilizing information such as benchmark yield curves, reported trades, broker/dealer quotes, issuer spreads, and other types of reference data. Based on the fair value hierarchy, as outlined in SFAS 157, our valuation techniques are considered Level 2 inputs, which represent significant other observable inputs.

In February 2007, the FASB issued SFAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities”- including an amendment of SFAS 115. SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The decision to elect the fair value option may be applied instrument by instrument, is irrevocable and is applied to the entire instrument and not to only specified risks, specific cash flows or portions of that instrument. An entity is restricted in choosing the dates to elect the fair value option for an eligible item. This statement is effective for fiscal years beginning after November 15, 2007 with earlier adoption permitted under special rules. The adoption of this statement did not have a material impact on the consolidated financial statements of the Company.

Note 5 — Commitments and Contingencies

In the ordinary course of business, the Bank may enter into off-balance sheet financial instruments, which are not reflected in the financial statements. These instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when funds are disbursed or the instruments become payable.

The Bank uses the same credit policies for these off-balance-sheet financial instruments as it does for other instruments that are recorded in the financial statements. At March 31, 2008, the Company had outstanding commitments approximating $15.7 million.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In managing the Bank’s credit and market risk exposure, the Bank may participate these commitments with other institutions when funded. The credit risk involved in issuing these financial instruments is essentially the same as that involved in extending loans to customers. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.

The nature of the business of the Bank is such that it ordinarily results in a certain amount of litigation. In the opinion of management, there are no present matters in which the outcome will have a material adverse effect on the financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

     Mountain Valley Bancshares, Inc. (the “Company”) is a holding company for Mountain Valley Community Bank (the “Bank”), a Georgia bank located at 136 North Main Street, Cleveland, Georgia 30528. The Bank received its Georgia banking charter in 2004 and opened for business on May 4, 2004. The Company was incorporated in 2004 as a Georgia corporation to serve as the holding company for the Bank. The Company owns 100% of the outstanding capital stock of the Bank.

     The Company’s principal business of earning interest income primarily on loans, investments and mortgage-backed securities and paying interest on deposits and borrowings is conducted primarily through the Bank. Our net interest income may be affected significantly by economic conditions, local competition, changes in market interest rates and governmental policies and actions. Net income also is affected by our provision for loan losses, non-interest income, consisting primarily of fees and charges on deposit accounts and loans, and non-interest expense, consisting primarily of salaries and employee benefits, company equipment, data processing and other operating costs.

     Critical Accounting Policies. The Company has not changed any of its critical accounting policies since those disclosed in its Form 10-KSB filed with the Securities and Exchange Commission on April 1, 2008. Those

9

accounting policies relate to the judgments and estimates used in the preparation of our financial statements in the calculation of the allowance for loan losses, the accounting for impaired loans and the provision for income taxes.

Overview

     Our first quarter results were highlighted by slower loan growth and compressed net interest margins. Our net income declined to $61,404 for the first quarter of 2008 from $112,322 for the first quarter of 2007, primarily as a result of the drop in net interest margin and an increase in other operating expenses. Our total assets remained relatively stable over the first quarter of 2008, increasing only marginally from $134.3 million at December 31, 2007 to $134.9 million at March 31, 2008. Many of the communities throughout Georgia, including some of the communities that we serve, are currently experiencing a downturn in the real estate market, especially as it relates to the acquisition, construction and development of residential housing. Although we have not experienced any material increase in delinquencies or nonaccrual loans, we have slowed down our loan production due to a general decrease in development activity.

     While our loan losses have been minimal, we have been directly impacted by the interest rate reductions initiated by the Federal Reserve in response to the broad market conditions. Because our loans generally reprice more quickly than our deposits, the declining interest rate environment has compressed our net interest margin. This has caused our net interest margin for the first quarter of 2008 to drop by 50 basis points from 4.05% for the first quarter of 2007 to 3.55% for the first quarter of 2008. We expect that our net interest margin will improve over the next several months as our deposits begin to reprice at lower rates. However, if the weakening real estate market begins to affect our loan portfolio, any resulting increase in nonperforming loans could offset the benefit that is produced by the repricing of our deposits.

Results of operations

     The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results for three-month periods ended March 31, 2008 and 2007.

     Financial condition

     Our total assets grew 0.4% during the first three months of 2008 to $134.9 million. Loan growth of $2.6 million was funded by fed funds sold which decreased $5.1 million. The remainder of the fed funds sold was transferred to interest bearing deposits which increased $2.6 million.

     Our loan to deposit ratio for the bank decreased to 93.8% at March 31, 2008 from 97.3% at December 31, 2007. Our current securities, deposit balances and available lines of credit should provide the funds for expected loan growth. Stockholders’ equity has increased by $265 thousand due primarily to net income of $61,000 and increase in Fair Value of Available for Sale Securities of $199,000.

     Liquidity

     We consider our liquidity to be adequate to meet operating and loan funding requirements at March 31, 2008. At March 31, 2008, the bank’s liquidity ratio (i.e. cash, short-term assets, marketable assets, available lines of credit divided by deposits and other borrowings) was approximately 13.84% and the loan to deposit ratio, as noted above, was approximately 93.8%. As the loan portfolio grows, we will continue to monitor the liquidity and make adjustments as deemed necessary. Investing our available funds in loans and other high yielding securities should increase earnings potential.

     Requirements by banking regulators include the monitoring of risk-based capital guidelines for banks and holding companies that are designed to make capital requirements more sensitive to differences in risk profiles and account for off balance sheet items. We exceed the regulatory minimums on capital requirements and ratios. Management will monitor these amounts and ratios on a continuous basis. The minimum capital requirements and the actual capital ratios on a consolidated and bank-only basis are as follows:

10

	Actual
										Regulatory
										Minimum
							Regulatory			Requirements
							Minimum			For Well Capitalized
	Consolidated			Bank			Requirement			Status
Leverage capital ratios		15.83	%		7.90	%		4.00	%		5.00	%
Risk-based capital ratios:
Tier one capital		19.08	%		9.52	%		4.00	%		6.00	%
Total capital		20.19	%		10.63	%		8.00	%		10.00	%

     We have obtained a total of $9.8 million lines of credit with three correspondent banks. These lines of credit can be accessed as needed for liquidity and subsidiary capital needs. We also have a $3 million secured line of credit with one correspondent bank and $2.9 million in available funding with the Federal Home Loan Bank.

     Net interest income

     Net interest income is the difference between the interest and fees earned on loans, securities, and other interest-earning assets (interest income) and the interest paid on deposits and borrowed funds (interest expense). Our net interest income during the first quarter of 2008 was $1,123,000, which represented an increase of $39,000 as compared to the same period in 2007. The increase in net interest income is due to an increase in the average balance of loans outstanding as the spread between yields on interest-earning assets and interest-bearing liabilities decreased. Our yield on interest earning assets was 6.91% and 8.23% for the three months ended March 31, 2008 and 2007, respectively. The cost of interest bearing liabilities was 4.10% and 4.82% for the three months ended March 31, 2008 and 2007, respectively. Our net interest margin was 3.55% during the first quarter of 2008 as compared to 4.05% for the first quarter of 2007.

     Provision for loan losses

     The provision for loan losses is based on management’s evaluation of the economic environment, the history of charged off loans and recoveries, size and composition of the loan portfolio, non-performing and past due loans, and other aspects of the loan portfolio. Management reviews the allowance for loan loss on a quarterly basis and makes provisions as necessary. A provision of $75,000 was made during the first quarter of 2008 based upon this evaluation process. The allowance for loan loss as a percentage of total loans was 1.15% at March 31, 2008 compared to 1.11% at December 31, 2007. Management believes the allowance for loan loss is adequate to meet any potential losses in the loan portfolio.

     At March 31, 2008 and 2007, non-accrual, past due and restructured loans were as follows:

	March 31,
	2008		2007
	(Dollars in thousands)
Total non-accruing loans	$	165	$	1,227
Loans contractually past due ninety days or more as to interest or principal payments and still accruing	$	0	$	0
Loans, 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	$	0
Loans now current about which there are serious doubts as to the ability of the borrower to comply with present loan repayment terms	$	0	$	0

11

     Non-accrual loans have decreased from $1.2 million at March 31, 2007 to $165 thousand at March 31, 2008 while past due loans greater than 90 days and still accruing have remained at zero. Net charge-offs increased by $23,000 for the three months ended March 31, 2008 as compared to the corresponding period in 2007. During the first quarter of 2007, we recovered slightly more loans than we charged off. Therefore, net charge-offs as a percentage of average loans outstanding were (0.01%) for the three months ended March 31, 2008 compared to net recoveries as a percentage of average loans outstanding of 0.02% for the same period in 2007.

     There were $1,269,300 and $0 impaired loans that had related allowances determined in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, at March 31, 2008 and 2007. The Company’s allowance for loan loss includes $173,582 for these impaired loans.

     Information regarding the allowance for loan losses data through March 31, 2008 and 2007 is set forth in the following table.

	Three Months Ended
	March 31,
	2008			2007
	(Dollars in thousands)
Average amount of loans outstanding	$	105,006		$	90,712
Balance of allowance for loan losses at beginning of period		1,154			1,024
Loans charged off
Commercial and financial					2
Real estate
Installment		9
		9			2
Loans recovered
Commercial and financial					6
Real estate
Installment		1			10
		1			16
Net (charge-offs) recoveries		(8	)		14
Additions to allowance charged to operating expense during Period		75			94
Balance of allowance for loan losses at end of period		1,221			1,132
Ratio of net loan (charge-offs) recoveries during the period to average loans outstanding		(0.01	%)		0.02	%

12

     Non-interest income

     Non-interest income increased by $23,000 for the three-month period ended March 31, 2008 as compared to the same period in 2007. In March 2008, we had a gain on the sale of other real estate owned in the amount of $2 thousand. We also had a gain on the sale of securities available for sale $11 thousand. Mortgage origination fees increased $6,000. The remainder of the increase was primarily the result of increases in various fees due to our growth.

     Non-interest expense

     Non-interest expense increased by $162,000 for the three-month period ended March 31, 2008 as compared to the same period in 2007. The increases are due to increased salaries and employee benefits of $53,000, data processing expenses of $29,000, occupancy expense of $54,000, and other operating of $28,000. Salaries and employee benefits have increased due to the annual salary increases and the staffing of our Jackson County and Hall County branch offices. Data processing expense has increased due to our growth. Occupancy expense increased due to the opening of our Jackson County and Hall County branch offices. Other operating has increased due to directors’ fees that we started paying in 2008 and general operations of the Bank.

     Net income

     Net income decreased by $51,000 for the three-month period ended March 31, 2008 compared to the three months ended March 31, 2007, or approximately 45%. The decrease in net income is due to the increases in non interest expenses in 2008 and the reduction in net interest margin.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     This item is not applicable since we are a smaller reporting company.

Item 4. Controls and Procedures

     Our Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the quarterly period covered by this Form 10-Q and have concluded that the our disclosure controls and procedures are effective. There were no changes in the our internal control over financial reporting during the first quarter of 2008 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     We are not a party to any material legal proceedings other than ordinary routine litigation incidental to our business.

Item 1a. Risk Factors

     This item is not applicable since we are a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     None

Item 3. Defaults Upon Senior Securities

     None.

Item 4. Submission of Matters to a Vote of Security Holders

13

     No matters were submitted to a vote of security holders during the quarter ended March 31, 2008.

Item 5. Other Information

     None.

Item 6. Exhibits

     The following exhibits are included with this report:

31.1	Certificate of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certificate of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certificate of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

     In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MOUNTAIN VALLEY BANCSHARES, INC.
 

Date:	May 14, 2008	/s/ Marc J. Greene Marc J. Greene President and CEO
Date:	May 14, 2008	/s/ Rachel Marshall Rachel Marshall Chief Financial Officer

14

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Marc J. Greene, President and CEO, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Mountain Valley Bancshares, Inc.
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 14, 2008

/s/ Marc J. Greene  

Marc J. Greene 

President and CEO 

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Rachel Marshall, CFO, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Mountain Valley Bancshares, Inc.
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 14, 2008

/s/ Rachel Marshall  

Rachel Marshall 

Chief Financial Officer 

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Mountain Valley Bancshares, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Marc J. Greene, President and CEO of the Company, and Rachel Marshall, CFO of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Marc J. Greene  

Marc J. Greene 

President and CEO 

Date: May 14, 2008

/s/ Rachel Marshall  

Rachel Marshall 

CFO 

Date: May 14, 2008