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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 June 30, 2006
 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 August 14, 2006
 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  June 30, 2006 (unaudited) and
December 31, 2005 (audited)
    
    
    2Consolidated Statements of Income (unaudited)  For the Three Months
Ended June 30, 2006 and 2005
    
    
    3Consolidated Statements of Income (unaudited)  For the Six Months
Ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows (unaudited)  For the Six Months
Ended June 30, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6ITEM 2. Managements Discussion and Analysis or Plan of Operation
    
    
    7ITEM 3. Controls and Procedures
    
    
    12PART II: OTHER INFORMATION
    
    
    13EX-31.1 SECTION 302, CERTIFICATION OF THE CEO AND CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEO AND CFO




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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Consolidated Balance Sheets
June 30, 2006 and December 31, 2005
 (Unaudited)
    
    
    (Audited)June 30,
    
    
    December 31,2006
    
    
    2005AssetsCash and due from banks
    
    $
    3,881,397
    
    
    $
    5,659,677Interest-bearing cash
    
    
    832,587
    
    
    
    384,989Federal funds sold
    
    
    3,348,000
    
    
    
    3,844,000Total cash and cash equivalents
    
    
    8,061,984
    
    
    
    9,888,666Securities available for sale, at fair value
    
    
    17,357,103
    
    
    
    14,737,959Federal Home Loan Bank stock, restricted, at cost
    
    
    396,600
    
    
    
    344,000Loans, net of unearned income
    
    
    134,425,068
    
    
    
    122,809,793Less: allowance for loan losses
    
    
    (1,916,649
    )
    
    
    (1,680,541
    )Loans, net
    
    
    132,508,419
    
    
    
    121,129,252Bank premises and equipment, net
    
    
    4,006,232
    
    
    
    4,044,522Accrued interest receivable
    
    
    1,512,364
    
    
    
    1,279,814Cash surrender value life insurance
    
    
    2,247,424
    
    
    
    2,201,032Other assets and accrued income
    
    
    955,077
    
    
    
    823,188Total Assets
    
    $
    167,045,203
    
    
    $
    154,448,433Liabilities and Stockholders EquityDeposits:Noninterest-bearing
    
    $
    21,005,848
    
    
    $
    20,705,878Interest-bearing
    
    
    126,924,496
    
    
    
    116,377,530Total deposits
    
    
    147,930,344
    
    
    
    137,083,408Accrued interest payable
    
    
    866,667
    
    
    
    586,342Subordinated debentures
    
    
    3,093,000
    
    
    
    3,093,000Other borrowed funds
    
    
    1,950,000
    
    
    
    1,950,000Other liabilities and accrued expenses
    
    
    102,212
    
    
    
    27,135Total liabilities
    
    
    153,942,223
    
    
    
    142,739,885Stockholders 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
    
    
    8,334,755
    
    
    
    6,768,092Accumulated other comprehensive loss
    
    
    (351,775
    )
    
    
    (179,544
    )Total stockholders equity
    
    
    13,102,980
    
    
    
    11,708,548Total Liabilities and Stockholders Equity
    
    $
    167,045,203
    
    
    $
    154,448,433
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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Consolidated Statements of Income
For the Three Months Ended June 30, 2006 and 2005
 Three Months EndedJune 30,2006
    
    
    2005Interest Income:Interest and fees on loans
    
    $
    3,023,563
    
    
    $
    2,162,710Income on federal funds sold
    
    
    81,489
    
    
    
    55,615Interest on investment securities
    
    
    191,736
    
    
    
    120,877Other interest and dividend income
    
    
    16,267
    
    
    
    5,380Total interest income
    
    
    3,313,055
    
    
    
    2,344,582Interest Expense:Deposits
    
    
    1,143,203
    
    
    
    641,166Subordinated debentures
    
    
    54,368
    
    
    
    39,871Other interest expense
    
    
    15,862
    
    
    
    16,009Total interest expense
    
    
    1,213,433
    
    
    
    697,046Net interest income before provision for loan losses
    
    
    2,099,622
    
    
    
    1,647,536Less  provision for loan losses
    
    
    (126,000
    )
    
    
    (126,000
    )Net interest income after provision for loan losses
    
    
    1,973,622
    
    
    
    1,521,536Other Operating Income:Service charges on deposit accounts
    
    
    98,324
    
    
    
    114,535Other service charges, commissions and fees
    
    
    164,133
    
    
    
    102,751Gain on sale of bank premises and equipment
    
    
    5,350
    
    
    
    300Gain on sale of other real estate
    
    
    
    
    
    
    15Gain on sale of investment securities
    
    
    
    
    
    
    1,880Other income
    
    
    32,248
    
    
    
    33,499Total other operating income
    
    
    300,055
    
    
    
    252,980Other Operating Expense:Salaries
    
    
    437,251
    
    
    
    339,193Employee benefits
    
    
    109,133
    
    
    
    84,672Net occupancy expense
    
    
    40,571
    
    
    
    30,583Equipment rental and depreciation of equipment
    
    
    64,950
    
    
    
    64,176Other expenses
    
    
    313,395
    
    
    
    249,214Total other operating expenses
    
    
    965,300
    
    
    
    767,838Income Before Income Taxes
    
    
    1,308,377
    
    
    
    1,006,678Provision for income taxes
    
    
    (468,157
    )
    
    
    (357,123
    )Net Income
    
    $
    840,220
    
    
    $
    649,555Income Per Share:Basic
    
    $
    1.64
    
    
    $
    1.27Diluted
    
    $
    1.64
    
    
    $
    1.27
 
 *
    
    Net Income / weighted average outstanding shares of 512,000. -3-




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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Consolidated Statements of Income
For the Six Months Ended June 30, 2006 and 2005
 Six Months EndedJune 30,2006
    
    
    2005Interest Income:Interest and fees on loans
    
    $
    5,754,382
    
    
    $
    4,106,529Income on federal funds sold
    
    
    163,989
    
    
    
    86,440Interest on investment securities
    
    
    347,329
    
    
    
    214,678Other interest and dividend income
    
    
    26,378
    
    
    
    7,967Total interest income
    
    
    6,292,078
    
    
    
    4,415,614Interest Expense:Deposits
    
    
    2,192,570
    
    
    
    1,202,620Subordinated debentures
    
    
    104,507
    
    
    
    39,871Other interest expense
    
    
    31,550
    
    
    
    31,429Total interest expense
    
    
    2,328,627
    
    
    
    1,273,920Net interest income before provision for loan losses
    
    
    3,963,451
    
    
    
    3,141,694Less  provision for loan losses
    
    
    (252,000
    )
    
    
    (252,000
    )Net interest income after provision for loan losses
    
    
    3,711,451
    
    
    
    2,889,694Other Operating Income:Service charges on deposit accounts
    
    
    203,005
    
    
    
    217,444Other service charges, commissions and fees
    
    
    372,054
    
    
    
    180,683Gain on sale of bank premises and equipment
    
    
    5,350
    
    
    
    300Gain on sale of other real estate
    
    
    
    
    
    
    5,015Gain on sale of investment securities
    
    
    
    
    
    
    1,880Other income
    
    
    67,925
    
    
    
    66,065Total other operating income
    
    
    648,334
    
    
    
    471,387Other Operating Expense:Salaries
    
    
    843,043
    
    
    
    645,054Employee benefits
    
    
    210,289
    
    
    
    168,831Net occupancy expense
    
    
    81,574
    
    
    
    61,566Equipment rental and depreciation of equipment
    
    
    112,046
    
    
    
    126,582Other expenses
    
    
    667,740
    
    
    
    483,029Total other operating expenses
    
    
    1,914,692
    
    
    
    1,485,062Income Before Income Taxes
    
    
    2,445,093
    
    
    
    1,876,019Provision for income taxes
    
    
    (878,430
    )
    
    
    (661,925
    )Net Income
    
    $
    1,566,663
    
    
    $
    1,214,094Income Per Share:Basic
    
    $
    3.06
    
    
    $
    2.37Diluted
    
    $
    3.06
    
    
    $
    2.37
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Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2006 and 2005
 Six Months EndedJune 30,2006
    
    
    2005Cash Flows from Operating Activities:Net income
    
    $
    1,566,663
    
    
    $
    1,214,094Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan losses
    
    
    252,000
    
    
    
    252,000Depreciation
    
    
    115,804
    
    
    
    89,787Gain on the sale of other real estate
    
    
    
    
    
    
    (5,015
    )Gain on sale of bank premises and equipment
    
    
    (5,350
    )
    
    
    (300
    )Increase in cash surrender value of life insurance
    
    
    (46,392
    )
    
    
    (46,392
    )Changes in accrued income and other assets
    
    
    (275,714
    )
    
    
    (349,346
    )Changes in accrued expenses and other liabilities
    
    
    355,402
    
    
    
    204,873Net cash provided by operating activities
    
    
    1,962,413
    
    
    
    1,359,701Cash Flows from Investing Activities:Net change in loans to customers
    
    
    (11,631,167
    )
    
    
    (8,426,158
    )Purchase of securities available for sale
    
    
    (4,473,936
    )
    
    
    (10,995,650
    )Proceeds from maturities, calls and paydowns of
securities available for sale
    
    
    1,593,836
    
    
    
    5,204,351Purchase of Federal Home Loan Bank stock
    
    
    (52,600
    )
    
    
    (37,500
    )Proceeds from sale of other real estate
    
    
    
    
    
    
    205,186Property and equipment expenditures
    
    
    (72,164
    )
    
    
    (885,752
    )Investment in statutory trust
    
    
    
    
    
    
    (93,000
    )Net cash used in investing activities
    
    
    (14,636,031
    )
    
    
    (15,028,523
    )Cash Flows from Financing Activities:Net change in deposits
    
    
    10,846,936
    
    
    
    15,695,314Proceeds from issuance of subordinated debentures
    
    
    
    
    
    
    3,093,000Net cash provided by financing activities
    
    
    10,846,936
    
    
    
    18,788,314Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (1,826,682
    )
    
    
    5,119,492Cash and Cash Equivalents, Beginning of Period
    
    
    9,888,666
    
    
    
    7,959,126Cash and Cash Equivalents, End of Period
    
    $
    8,061,984
    
    
    $
    13,078,618Supplemental Cash Flow Information:Cash paid for interest
    
    $
    2,048,302
    
    
    $
    1,143,896Cash paid for income taxes
    
    $
    911,728
    
    
    $
    751,663
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Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Notes to Consolidated Financial Statements
  (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 six-month period ended
June 30, 2006 are not necessarily indicative of the results that may be expected for the year
ended December 31, 2006. 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, 2005.(2)
    
    Other Comprehensive LossDuring the six months ended June 30, 2006, the Company had unrealized holding losses on
investment securities which were reported as accumulated other comprehensive loss. An analysis
of accumulated other comprehensive loss since December 31, 2005 is as follows:
 Accumulated other comprehensive loss at December 31, 2005
    
    $
    (179,544
    )Other comprehensive loss, net of tax:Change in unrealized loss on securities available for sale
net of deferred income tax expense of $(88,725)
    
    
    (172,231
    )Less: Reclassification adjustment for gains realized in net income
    
    
    Accumulated other comprehensive loss at June 30, 2006
    
    $
    (351,775
    )
 (3)
    
    Supplemental Financial DataComponents of other operating expenses greater than 1% of total interest income and other
income for the periods ended June 30, 2006 and 2005 are:
 Three Months Ended
    
    Six Months EndedJune 30
    
    June 302006
    
    2005
    
    2006
    
    2005Legal and accounting
    
    $
    53,480
    
    
    $
    29,830
    
    
    $
    104,000
    
    
    $
    53,715Data processing
    
    
    25,567
    
    
    
    21,258
    
    
    
    48,972
    
    
    
    56,276
 -6-




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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 Six Months in the Periods Ended
 June 30, 2006 and 2005
  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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Citizens Effingham Bancshares, Inc. and Subsidiary
Item 2. Managements Discussion and Analysis or Plan of Operation
For Each of the Six Months in the Periods Ended
June 30, 2006 and 2005
 
    
    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
  -8-




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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 Six Months in the Periods Ended
June 30, 2006 and 2005
 Interim Financial Condition
  Asset Quality
  June 30,
    
    
    December 31,2006
    
    
    2005Loans on nonaccrual
    
    $
    616,000
    
    
    $
    Loans greater than 90 days past due
    
    
    79,000
    
    
    
    1,000Other real estate owned and repossessions
    
    
    10,000
    
    
    
    69,000Total nonperforming assets
    
    $
    705,000
    
    
    $
    70,000Total nonperforming assets as a percentage
of total loans (gross) and other real estate
    
    
    0.52
    %
    
    
    0.06
    %
  Allowance for loan losses at December 31, 2005
    
    $
    1,680,541Charge-offs:Commercial
    
    
    30,026Real Estate
    
    
    75Installment
    
    
    8,902Total
    
    
    39,003Recoveries:Commercial
    
    
    13,439Real Estate
    
    
    4,094Installment
    
    
    5,578Total
    
    
    23,111Provision charged to income
    
    
    252,000Allowance for loan losses at June 30, 2006
    
    $
    1,916,649
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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 Six Months in the Periods Ended
June 30, 2006 and 2005
   Results of Operations
 Six Months Ended June 30, 2006 and 2005
     Three Months Ended June 30, 2006 and 2005
    -10-




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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 Six Months in the Periods Ended
June 30, 2006 and 2005
  Liquidity
  Capital
  Investment Securities
  -11-




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Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Item 3. Controls and Procedures
 For the Six Months Ended June 30, 2006
  -12-




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Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Part II. Other Information
 For the Six Months Ended June 30, 2006
 PART II: OTHER INFORMATION:
              
 SIGNATURES
   /s/ Harry H. ShearouseHarry H. ShearousePresident and Chief Executive Officer and Principal Financial OfficerDate: August 14, 2006
 -13-