##### Table of Contents



U. S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-QSB
 þ
    
    Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2005
 o
    
    Transition report under Section 13 or 15 (d) of the Exchange Act
 For the transition period from  to
 Commission file number 333-07914
 CITIZENS EFFINGHAM BANCSHARES, INC.
  GEORGIA
    
    
    
    58-2357619(State or Other Jurisdiction of
    
    
    
    (I.R.S. EmployerIncorporation or Organization)
    
    
    
    Identification No.)
 Springfield, Georgia 31329
 912-754-0754
 Not Applicable
  þ o
  o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS
 Common Stock $1 par value, 512,000
shares outstanding at November 14, 2005
  o þ




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PAGEPART I: FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSThe following financial statements are provided for Citizens Effingham Bancshares, Inc.
and the subsidiary bank, Citizens Bank of Effingham.Consolidated Balance Sheets  September 30, 2005 (unaudited) and
December 31, 2004 (audited)
    
    2Consolidated Statements of Income (unaudited)  For the Three Months
Ended September 30, 2005 and 2004 and the Nine Months Ended
September 30, 2005 and 2004
    
    3Consolidated Statements of Cash Flows (unaudited)  For the Nine Months
Ended September 30, 2005 and 2004
    
    4Notes to Consolidated Financial Statements (unaudited)
    
    5ITEM 2. Managements Discussion and Analysis or Plan of Operation
    
    6ITEM 3. Controls and Procedures
    
    11PART II: OTHER INFORMATION
    
    12EX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-32.1 SECTION 906, CERTIFICATION OF THE CEO




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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Consolidated Balance Sheets
 September 30, 2005 and December 31, 2004
 (Unaudited)
    
    
    (Audited)September 30,
    
    
    December 31,2005
    
    
    2004AssetsCash and due from banks
    
    $
    3,773,369
    
    
    $
    2,610,499Interest-bearing cash
    
    
    394,287
    
    
    
    1,627Federal funds sold
    
    
    1,409,000
    
    
    
    5,347,000Total cash and cash equivalents
    
    
    5,576,656
    
    
    
    7,959,126Securities available for sale, at fair value
    
    
    15,615,765
    
    
    
    8,903,137Federal Home Loan Bank stock, restricted, at cost
    
    
    344,000
    
    
    
    306,500Loans, net of unearned income
    
    
    118,302,788
    
    
    
    106,675,834Less: allowance for loan losses
    
    
    (1,739,319
    )
    
    
    (1,253,685
    )Loans, net
    
    
    116,563,469
    
    
    
    105,422,149Bank premises and equipment, net
    
    
    4,088,708
    
    
    
    2,188,877Accrued interest receivable
    
    
    1,037,451
    
    
    
    637,618Cash surrender value life insurance
    
    
    2,177,836
    
    
    
    2,108,248Other real estate and repossessed assets
    
    
    
    
    
    
    140,000Other assets and accrued income
    
    
    800,047
    
    
    
    412,702Total Assets
    
    $
    146,203,932
    
    
    $
    128,078,357Liabilities and Stockholders EquityDeposits:Noninterest-bearing
    
    $
    21,696,806
    
    
    $
    17,231,585Interest-bearing
    
    
    107,444,959
    
    
    
    98,845,797Total deposits
    
    
    129,141,765
    
    
    
    116,077,382Accrued interest payable
    
    
    458,664
    
    
    
    303,904Subordinated debentures
    
    
    3,093,000
    
    
    
    Other borrowed funds
    
    
    1,950,000
    
    
    
    1,950,000Other liabilities and accrued expenses
    
    
    134,785
    
    
    
    36,364Total liabilities
    
    
    134,778,214
    
    
    
    118,367,650Stockholders Equity:Common stock, $1 par value, authorized 20,000,000 shares,
issued and outstanding 512,000 shares
    
    
    512,000
    
    
    
    512,000Paid-in capital surplus
    
    
    4,608,000
    
    
    
    4,608,000Retained earnings
    
    
    6,439,154
    
    
    
    4,623,911Accumulated other comprehensive income
    
    
    (133,436
    )
    
    
    (33,204
    )Total stockholders equity
    
    
    11,425,718
    
    
    
    9,710,707Total Liabilities and Stockholders Equity
    
    $
    146,203,932
    
    
    $
    128,078,357
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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Consolidated Statements of Income
 For the Three Months Ended September 30, 2005 and 2004
 And For the Nine Months Ended September 30, 2005 and 2004
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest Income:Interest and fees on loans
    
    $
    2,351,270
    
    
    $
    1,576,183
    
    
    $
    6,457,799
    
    
    $
    4,432,252Income on federal funds sold
    
    
    52,246
    
    
    
    8,136
    
    
    
    138,686
    
    
    
    20,883Interest on investment securities
    
    
    158,624
    
    
    
    90,635
    
    
    
    381,269
    
    
    
    276,004Total interest income
    
    
    2,562,140
    
    
    
    1,674,954
    
    
    
    6,977,754
    
    
    
    4,729,139Interest Expense:Deposits
    
    
    769,800
    
    
    
    437,588
    
    
    
    1,972,420
    
    
    
    1,265,342Subordinated debentures
    
    
    42,384
    
    
    
    
    
    
    
    82,255
    
    
    
    Other interest expense
    
    
    15,823
    
    
    
    3,591
    
    
    
    47,252
    
    
    
    27,799Total interest expense
    
    
    828,007
    
    
    
    441,179
    
    
    
    2,101,927
    
    
    
    1,293,141Net interest income before provision for loan losses
    
    
    1,734,133
    
    
    
    1,233,775
    
    
    
    4,875,827
    
    
    
    3,435,998Less  provision for loan losses
    
    
    (126,000
    )
    
    
    (110,000
    )
    
    
    (378,000
    )
    
    
    (290,000
    )Net interest income after provision for loan losses
    
    
    1,608,133
    
    
    
    1,123,775
    
    
    
    4,497,827
    
    
    
    3,145,998Other Operating Income:Service charges on deposit accounts
    
    
    110,831
    
    
    
    114,565
    
    
    
    328,275
    
    
    
    338,181Other service charges, commissions and fees
    
    
    107,915
    
    
    
    65,384
    
    
    
    288,598
    
    
    
    187,985Gain on sale of other real estate
    
    
    
    
    
    
    
    
    
    
    5,015
    
    
    
    6,054Gain on sale of investment securities
    
    
    
    
    
    
    
    
    
    
    1,880
    
    
    
    Other income
    
    
    27,068
    
    
    
    25,870
    
    
    
    93,133
    
    
    
    79,175Total other operating income
    
    
    245,814
    
    
    
    205,819
    
    
    
    716,901
    
    
    
    611,395Other Operating Expense:Salaries
    
    
    370,698
    
    
    
    287,799
    
    
    
    1,015,752
    
    
    
    848,169Employee Benefits
    
    
    85,642
    
    
    
    66,164
    
    
    
    254,473
    
    
    
    193,729Net occupancy expense
    
    
    33,313
    
    
    
    28,623
    
    
    
    94,879
    
    
    
    83,774Equipment rental and depreciation of equipment
    
    
    61,588
    
    
    
    62,126
    
    
    
    188,170
    
    
    
    175,076Other expenses
    
    
    340,162
    
    
    
    225,284
    
    
    
    822,891
    
    
    
    719,330Total other operating expenses
    
    
    891,403
    
    
    
    669,996
    
    
    
    2,376,165
    
    
    
    2,020,078Income Before Income Taxes
    
    
    962,544
    
    
    
    659,598
    
    
    
    2,838,563
    
    
    
    1,737,315Provision for income taxes
    
    
    (361,395
    )
    
    
    (230,498
    )
    
    
    (1,023,320
    )
    
    
    (600,526
    )Net Income
    
    $
    601,149
    
    
    $
    429,100
    
    
    $
    1,815,243
    
    
    $
    1,136,789Income Per Share:Basic
    
    $
    1.17
    
    
    $
    0.84
    
    
    $
    3.55
    
    
    $
    2.22Diluted
    
    $
    1.17
    
    
    $
    0.84
    
    
    $
    3.55
    
    
    $
    2.22
 
 *
    
    Net Income / weighted average outstanding shares of 512,000. -3-




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Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Consolidated Statements of Cash Flows
 For the Nine Months Ended September 30, 2005 and 2004
  Nine Months EndedSeptember 30,2005
    
    
    2004Cash Flows from Operating Activities:Net income
    
    $
    1,815,243
    
    
    $
    1,136,789Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan losses
    
    
    378,000
    
    
    
    290,000Depreciation
    
    
    136,082
    
    
    
    111,095Gain on the sale of other real estate
    
    
    (5,015
    )
    
    
    (6,054
    )Changes in accrued income and other assets
    
    
    (763,766
    )
    
    
    (61,647
    )Changes in accrued expenses and other liabilities
    
    
    304,816
    
    
    
    92,310Net cash provided by operating activities
    
    
    1,865,360
    
    
    
    1,562,493Cash Flows from Investing Activities:Net change in loans to customers
    
    
    (11,588,308
    )
    
    
    (14,059,705
    )Purchase of securities available for sale
    
    
    (12,492,525
    )
    
    
    (2,000,000
    )Proceeds from maturities, calls and paydowns of
securities available for sale
    
    
    5,628,030
    
    
    
    2,185,582Purchase of Federal Home Loan Bank stock
    
    
    (37,500
    )
    
    
    (59,700
    )Proceeds from sale of other real estate
    
    
    214,003
    
    
    
    145,000Property and equipment expenditures
    
    
    (2,035,913
    )
    
    
    (124,944
    )Investment in statutory trust
    
    
    (93,000
    )
    
    
    Net cash used in investing activities
    
    
    (20,405,213
    )
    
    
    (13,913,767
    )Cash Flows from Financing Activities:Net change in deposits
    
    
    13,064,383
    
    
    
    9,826,263Proceeds from long-term borrowings
    
    
    
    
    
    
    (333,333
    )Proceeds from issuance of subordinated debentures
    
    
    3,093,000
    
    
    
    Net cash provided by financing activities
    
    
    16,157,383
    
    
    
    9,492,930Net Decrease in Cash and Cash Equivalents
    
    
    (2,382,470
    )
    
    
    (2,858,344
    )Cash and Cash Equivalents, Beginning of Period
    
    
    7,959,126
    
    
    
    9,595,357Cash and Cash Equivalents, End of Period
    
    $
    5,576,656
    
    
    $
    6,737,013Supplement Cash Flow Information:Cash paid for interest
    
    $
    1,947,168
    
    
    $
    1,281,073Cash paid for income taxes
    
    $
    1,241,663
    
    
    $
    530,000
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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Notes to Consolidated Financial Statements
 (Unaudited)
 (1)
    
    Basis of PresentationThe accompanying unaudited financial statements have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information, and with the
instructions to Form 10-QSB and Item 310 (b) of Regulation S-B of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and footnotes required by
U.S. generally accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the nine-month period ended
September 30, 2005 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2005. For further information refer to the consolidated financial
statements and footnotes thereto included in the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2004.(2)
    
    Other Comprehensive IncomeDuring the nine months ended September 30, 2005, the Company had unrealized holding gains
on investment securities which were reported as comprehensive income. An analysis of accumulated
other comprehensive income since December 31, 2004 is as follows:
 Accumulated other comprehensive income (loss) at December 31, 2004
    
    $
    (33,204
    )Other comprehensive income, net of tax:Change in unrealized loss on securities available for sale
net of deferred income tax expense of $(51,635)
    
    
    (98,352
    )Less: Reclassification adjustment for gains realized in net income
    
    
    (1,880
    )(100,232
    )Accumulated other comprehensive income (loss) at September 30, 2005
    
    $
    (133,436
    )
 (3)
    
    Supplemental Financial DataComponents of other operating expenses greater than 1% of total interest income and other
income for the periods ended September 30, 2005 and 2004 are:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Directors fees
    
    $
    17,800
    
    
    $
    18,500
    
    
    $
    55,900
    
    
    $
    56,900Legal and accounting
    
    
    83,142
    
    
    
    20,163
    
    
    
    136,857
    
    
    
    67,365Supplies/printing
    
    
    34,450
    
    
    
    18,531
    
    
    
    77,722
    
    
    
    62,858Data processing
    
    
    22,458
    
    
    
    43,096
    
    
    
    78,734
    
    
    
    129,288ATM expense
    
    
    26,208
    
    
    
    19,964
    
    
    
    68,715
    
    
    
    62,352
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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Item 2. Managements Discussion and Analysis or Plan of Operation
 For Each of the Nine Months in the Periods Ended
 September 30, 2005 and 2004
  Advisory Note Regarding Forward-Looking Statements
   
    
    the challenges, costs and complications associated with the continued
development of our branches;
    
    the potential that loan charge-offs may exceed the allowance for loan losses or
that such allowance will be increased as a result of factors beyond the control of us;
    
    our dependence on senior management;
    
    competition from existing financial institutions operating in our market areas
as well as the entry into such areas of new competitors with greater resources, broader
branch networks and more comprehensive services;
    
    adverse conditions in the stock market, the public debt market, and other
capital markets (including changes in interest rate conditions);
    
    changes in deposit rates, the net interest margin, and funding sources;
    
    inflation, interest rate, market, and monetary fluctuations;
    
    risks inherent in making loans including repayment risks and value of collateral;
    
    the strength of the United States economy in general and the strength of the
local economies in which we conduct operations may be different than expected resulting in,
among other things, a deterioration in credit quality or a reduced demand for credit,
including the resultant effect on our loan portfolio and allowance for loan losses;
    
    fluctuations in consumer spending and saving habits;
    
    the demand for our products and services;
    
    technological changes;
    
    the challenges and uncertainties in the implementation of our expansion and development strategies;
    
    the ability to increase market share;
    
    the adequacy of expense projections and estimates of impairment loss;
    
    the impact of changes in accounting policies by the Securities and Exchange Commission;
    
    unanticipated regulatory or judicial proceedings;
    
    the potential negative effects of future legislation affecting financial
institutions (including without limitation laws concerning taxes, banking, securities, and
insurance);
    
    the effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal Reserve System;
    
    the timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as the Internet;
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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
Item 2. Managements Discussion and Analysis or Plan of Operation
For Each of the Nine Months in the Periods Ended
September 30, 2005 and 2004
 
    
    the impact on our business, as well as on the risks set forth above, of various
domestic or international military or terrorist activities or conflicts;
    
    other factors described in this report and in other reports we have filed with
the Securities and Exchange Commission; and
    
    Our success at managing the risks involved in the foregoing.
  CRITICAL ACCOUNTING POLICIES
    General
  -7-




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Citizens Effingham Bancshares, Inc. and Subsidiary
Item 2. Managements Discussion and Analysis or Plan of Operation
For Each of the Nine Months in the Periods Ended
September 30, 2005 and 2004
 Interim Financial Condition
  Asset Quality
  September 30,
    
    
    December 31,2005
    
    
    2004Loans on nonaccrual
    
    $
    130,000
    
    
    $
    197,000Loans greater than 90 days past due
    
    
    273,000
    
    
    
    28,000Other real estate owned
    
    
    
    
    
    
    140,000Total nonperforming assets
    
    $
    403,000
    
    
    $
    365,000Total nonperforming assets as a percentage
of total loans (gross) and other real estate
    
    
    0.34
    %
    
    
    0.32
    %
  Allowance for loan losses at December 31, 2004
    
    $
    1,253,685Charge-offs:Commercial
    
    
    3,719Real Estate
    
    
    19,017Installment
    
    
    16,937Total
    
    
    39,673Recoveries:Commercial
    
    
    47,429Real Estate
    
    
    73,887Installment
    
    
    25,991Total
    
    
    147,307Provision charged to income
    
    
    378,000Allowance for loan losses at September 30, 2005
    
    $
    1,739,319
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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
Item 2. Managements Discussion and Analysis or Plan of Operation
For Each of the Nine Months in the Periods Ended
September 30, 2005 and 2004
   Results of Operations
     Liquidity
   -9-




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Citizens Effingham Bancshares, Inc. and Subsidiary
Item 2. Managements Discussion and Analysis or Plan of Operation
For Each of the Nine Months in the Periods Ended
September 30, 2005 and 2004
  Capital
  Investment Securities
  -10-




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Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Item 3. Controls and Procedures
 For the Nine Months Ended September 30, 2005
  -11-




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Citizens Effingham Bancshares, Inc. and Subsidiary
Part II. Other Information
For the Nine Months Ended September 30, 2005
 
 PART II: OTHER INFORMATION:
            
 
 SIGNATURES
   /s/ Harry H. Shearouse
 
  - 12 -