##### 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 1934For the quarterly period ended
June 30, 2005o
    
    Transition report under Section 13 or 15 (d) of the Exchange ActFor the transition period from

to
 Commission
file number 333-07914
 CITIZENS EFFINGHAM BANCSHARES, INC.
  GEORGIA
    
    58-2357619(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 Springfield, Georgia 31329
 912-754-0754
 Not Applicable
  þ o
 APPLICABLE ONLY TO CORPORATE ISSUERS
 Common Stock $1 par value, 512,000 shares outstanding at August
15, 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 (unaudited)  June 30, 2005 and
December 31, 2004
    
    
    2Consolidated Statements of Income (unaudited)  For the Three Months
Ended June 30, 2005 and 2004
    
    
    3Consolidated Statements of Income (unaudited)  For the Six Months
Ended June 30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows (unaudited)  For the Six Months
Ended June 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    7ITEM 3. Controls and Procedures
    
    
    12PART II: OTHER INFORMATION
    
    
    13EX-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
June 30, 2005 and December 31, 2004
 June 30,
    
    December 31,2005
    
    2004AssetsCash and due from banks
    
    $
    4,605,440
    
    
    $
    2,610,499Interest-bearing cash
    
    
    353,178
    
    
    
    1,627Federal funds sold
    
    
    8,120,000
    
    
    
    5,347,000Total cash and cash equivalents
    
    
    13,078,618
    
    
    
    7,959,126Securities available for sale, at fair value
    
    
    14,674,358
    
    
    
    8,903,137Federal Home Loan Bank stock, restricted, at cost
    
    
    344,000
    
    
    
    306,500Loans, net of unearned income
    
    
    115,090,127
    
    
    
    106,675,834Less: allowance for loan losses
    
    
    (1,566,991
    )
    
    
    (1,253,685
    )Loans, net
    
    
    113,523,136
    
    
    
    105,422,149Bank premises and equipment, net
    
    
    2,985,142
    
    
    
    2,188,877Accrued interest receivable
    
    
    880,665
    
    
    
    637,618Cash surrender value life insurance
    
    
    2,154,640
    
    
    
    2,108,248Other real estate and repossessed assets
    
    
    13,000
    
    
    
    140,000Other assets and accrued income
    
    
    618,828
    
    
    
    412,702Total Assets
    
    $
    148,272,387
    
    
    $
    128,078,357Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    22,211,589
    
    
    $
    17,231,585Interest bearing
    
    
    109,561,107
    
    
    
    98,845,797Total deposits
    
    
    131,772,696
    
    
    
    116,077,382Accrued interest payable
    
    
    433,928
    
    
    
    303,904Subordinated debentures
    
    
    3,093,000
    
    
    
    Other borrowed funds
    
    
    1,950,000
    
    
    
    1,950,000Other liabilities and accrued expenses
    
    
    111,212
    
    
    
    36,364Total liabilities
    
    
    137,360,836
    
    
    
    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
    
    
    5,838,006
    
    
    
    4,623,911Accumulated other comprehensive income
    
    
    (46,455
    )
    
    
    (33,204
    )Total stockholders equity
    
    
    10,911,551
    
    
    
    9,710,707Total Liabilities and Stockholders Equity
    
    $
    148,272,387
    
    
    $
    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 June 30, 2005 and 2004
 Three Months EndedJune 30,2005
    
    2004Interest Income:Interest and fees on loans
    
    $
    2,162,710
    
    
    $
    1,484,976Income on federal funds sold
    
    
    55,539
    
    
    
    3,783Interest on investment securities
    
    
    126,334
    
    
    
    90,415Total interest income
    
    
    2,344,583
    
    
    
    1,579,174Interest Expense:Deposits
    
    
    641,166
    
    
    
    417,485Subordinated debentures
    
    
    39,871
    
    
    
    Other interest expense
    
    
    16,009
    
    
    
    561Total interest expense
    
    
    697,046
    
    
    
    418,046Net interest income before provision for loan losses
    
    
    1,647,537
    
    
    
    1,161,128Less  provision for loan losses
    
    
    (126,000
    )
    
    
    (90,000
    )Net interest income after provision for loan losses
    
    
    1,521,537
    
    
    
    1,071,128Other Operating Income:Service charges on deposit accounts
    
    
    114,535
    
    
    
    115,462Other service charges, commissions and fees
    
    
    102,751
    
    
    
    60,425Gain on sale of other real estate
    
    
    15
    
    
    
    6,054Gain on sale of investment securities
    
    
    1,880
    
    
    
    Other income
    
    
    33,499
    
    
    
    27,008Total other operating income
    
    
    252,680
    
    
    
    208,949Other Operating Expense:Salaries
    
    
    339,193
    
    
    
    285,020Employee Benefits
    
    
    84,672
    
    
    
    62,086Net occupancy expense
    
    
    30,583
    
    
    
    27,981Equipment rental and depreciation of equipment
    
    
    64,176
    
    
    
    59,622Other expenses
    
    
    248,914
    
    
    
    274,159Total other operating expenses
    
    
    767,538
    
    
    
    708,868Income Before Income Taxes
    
    
    1,006,679
    
    
    
    571,209Provision for income taxes
    
    
    (357,123
    )
    
    
    (230,230
    )Net Income
    
    $
    649,556
    
    
    $
    340,979Income Per Share:Basic
    
    $
    1.27
    
    
    $
    0.67Diluted
    
    $
    1.27
    
    
    $
    0.67
 
 *
    
    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, 2005 and 2004
 Six Months EndedJune 30,2005
    
    2004Interest Income:Interest and fees on loans
    
    $
    4,106,529
    
    
    $
    2,856,069Income on federal funds sold
    
    
    86,440
    
    
    
    12,747Interest on investment securities
    
    
    222,645
    
    
    
    185,369Total interest income
    
    
    4,415,614
    
    
    
    3,054,185Interest Expense:Deposits
    
    
    1,202,620
    
    
    
    827,754Subordinated debentures
    
    
    39,871
    
    
    
    Other interest expense
    
    
    31,429
    
    
    
    24,208Total interest expense
    
    
    1,273,920
    
    
    
    851,962Net interest income before provision for loan losses
    
    
    3,141,694
    
    
    
    2,202,223Less  provision for loan losses
    
    
    (252,000
    )
    
    
    (180,000
    )Net interest income after provision for loan losses
    
    
    2,889,694
    
    
    
    2,022,223Other Operating Income:Service charges on deposit accounts
    
    
    217,444
    
    
    
    223,616Other service charges, commissions and fees
    
    
    180,683
    
    
    
    122,601Gain on sale of other real estate
    
    
    5,015
    
    
    
    6,054Gain on sale of investment securities
    
    
    1,880
    
    
    
    Other income
    
    
    66,065
    
    
    
    53,305Total other operating income
    
    
    471,087
    
    
    
    405,576Other Operating Expense:Salaries
    
    
    645,054
    
    
    
    560,370Employee Benefits
    
    
    168,831
    
    
    
    127,565Net occupancy expense
    
    
    61,566
    
    
    
    55,151Equipment rental and depreciation of equipment
    
    
    126,582
    
    
    
    112,950Other expenses
    
    
    482,729
    
    
    
    494,046Total other operating expenses
    
    
    1,484,762
    
    
    
    1,350,082Income Before Income Taxes
    
    
    1,876,019
    
    
    
    1,077,717Provision for income taxes
    
    
    (661,925
    )
    
    
    (370,028
    )Net Income
    
    $
    1,214,094
    
    
    $
    707,689Income Per Share:Basic
    
    $
    2.37
    
    
    $
    1.38Diluted
    
    $
    2.37
    
    
    $
    1.38
 
 *
    
    Net Income / weighted average outstanding shares of 512,000. -4-




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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2005 and 2004
 Six Months EndedJune 30,2005
    
    2004Cash Flows from Operating Activities:Net income
    
    $
    1,214,094
    
    
    $
    707,689Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan losses
    
    
    252,000
    
    
    
    180,000Depreciation
    
    
    89,787
    
    
    
    73,097Gain on the sale of other real estate
    
    
    (5,014
    )
    
    
    (6,054
    )Changes in accrued income and other assets
    
    
    (395,738
    )
    
    
    (432,365
    )Changes in accrued expenses and other liabilities
    
    
    204,873
    
    
    
    59,960Net cash provided by operating activities
    
    
    1,360,001
    
    
    
    582,327Cash Flows from Investing Activities:Net change in loans to customers
    
    
    (8,426,158
    )
    
    
    (10,407,212
    )Purchase of available for sale securities
    
    
    (10,995,650
    )
    
    
    (1,500,000
    )Proceeds from maturities, calls and paydowns of
available for sale securities
    
    
    5,204,351
    
    
    
    1,479,145Purchase of Federal Home Loan Bank stock
    
    
    (37,500
    )
    
    
    (59,700
    )Proceeds from sale of other real estate
    
    
    205,186
    
    
    
    145,000Property and equipment expenditures
    
    
    (886,052
    )
    
    
    (85,037
    )Investment in statutory trust
    
    
    (93,000
    )
    
    
    Net cash used in investing activities
    
    
    (15,028,823
    )
    
    
    (10,427,804
    )Cash Flows from Financing Activities:Net change in deposits
    
    
    15,695,314
    
    
    
    5,668,305Net increase in federal funds purchased
    
    
    
    
    
    
    380,000Proceeds from long-term borrowings
    
    
    
    
    
    
    (2,333,333
    )Proceeds from issuance of subordinated debentures
    
    
    3,093,000
    
    
    
    Net cash provided by financing activities
    
    
    18,788,314
    
    
    
    3,714,972Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    5,119,492
    
    
    
    (6,130,505
    )Cash and Cash Equivalents, Beginning of Period
    
    
    7,959,126
    
    
    
    9,595,357Cash and Cash Equivalents, End of Period
    
    $
    13,078,618
    
    
    $
    3,464,852Supplement Cash Flow Information:Cash paid for interest
    
    $
    1,143,896
    
    
    $
    858,451Cash paid for income taxes
    
    $
    751,663
    
    
    $
    360,000
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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 six-month period ended
June 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 six months ended June 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 $(6,827)
    
    
    (11,371
    )Less: Reclassification adjustment for gains realized in net income
    
    
    (1,880
    )(13,251
    )Accumulated other comprehensive income (loss) at June 30, 2005
    
    $
    (46,455
    )
 (3)
    
    Supplemental Financial DataComponents of other operating expenses greater than 1% of total interest income and other
income for the periods ended June 30, 2005 and 2004 are:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Directors fees
    
    $
    18,400
    
    
    $
    19,400
    
    
    $
    38,100
    
    
    $
    38,400Legal and accounting
    
    
    29,830
    
    
    
    25,996
    
    
    
    53,715
    
    
    
    47,202Supplies/printing
    
    
    22,865
    
    
    
    25,824
    
    
    
    43,272
    
    
    
    44,327Data processing
    
    
    21,258
    
    
    
    43,096
    
    
    
    56,276
    
    
    
    86,192ATM expense
    
    
    21,257
    
    
    
    20,076
    
    
    
    42,507
    
    
    
    42,388
 -6-




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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
For Each of the Six Months in the Periods Ended
June 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;
 -7-




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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
For Each of the Six Months in the Periods Ended
June 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
    Interim Financial Condition
  -8-




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Citizens Effingham Bancshares, Inc. and Subsidiary
 Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
For Each of the Six Months in the Periods Ended
June 30, 2005 and 2004
 Asset Quality
  June 30,
    
    December 31,2005
    
    2004Loans on nonaccrual
    
    $
    130,000
    
    
    $
    197,000Loans greater than 90 days past due
    
    
    
    
    
    
    28,000Other real estate owned
    
    
    13,000
    
    
    
    140,000Total nonperforming assets
    
    $
    143,000
    
    
    $
    365,000Total nonperforming assets as a percentage
of total loans (gross) and other real estate
    
    
    0.12
    %
    
    
    0.32
    %
  Allowance for loan losses at December 31, 2004
    
    $
    1,253,685Charge-offs:Commercial
    
    
    3,719Real Estate
    
    
    19,017Installment
    
    
    15,057Total
    
    
    37,793Recoveries:Commercial
    
    
    4,758Real Estate
    
    
    70,487Installment
    
    
    23,854Total
    
    
    99,099Provision charged to income
    
    
    252,000Allowance for loan losses at June 30, 2005
    
    $
    1,566,991
 -9-




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##### Table of Contents



Citizens Effingham Bancshares, Inc. and Subsidiary
 Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
For Each of the Six Months in the Periods Ended
June 30, 2005 and 2004
   Results of Operations
    Liquidity
 -10-




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Citizens Effingham Bancshares, Inc. and Subsidiary
 Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
For Each of the Six Months in the Periods Ended
June 30, 2005 and 2004
   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, 2005
   -12-




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Citizens Effingham Bancshares, Inc. and Subsidiary
 Part II. Other Information
For the Six Months Ended June 30, 2005
 
 PART II: OTHER INFORMATION:
             A.
    
    Exhibit 31.1B.
    
    Exhibit 32.1
 
 SIGNATURES
    
 
  -13-