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U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-QSB
 [X]
    
    Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2004 [   ]
    
    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
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 802 South Laurel Street
Post Office Box 379
Springfield, Georgia
31329   (912) 754-0754   Not Applicable   Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [X] No
[   ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: Common Stock $1 par value,
512,000 shares outstanding at March 31, 2004 Transitional Small Business Disclosure Format (check one): Yes [   ] No
[X]




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Citizens Effingham Bancshares, Inc. and Subsidiary INDEX 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) March 31, 2004 and
December 31, 2003.
    
    
    2Consolidated Statements of Income (unaudited)  For the Three Months
Ended March 31, 2004 and 2003
    
    
    3Consolidated Statements of Cash Flows (unaudited)  For the Three Months
Ended March 31, 2004 and 2003.
    
    
    4Notes to Consolidated Financial Statements (unaudited)
    
    
    5ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    6ITEM 3. Controls and Procedures
    
    
    9PART II: OTHER INFORMATION
    
    
    10EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO
  The consolidated financial statements furnished have not been examined by
independent certified public accountants, but reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the results of
operations for the periods presented. The results of operations for the three-month period ended March 31, 2004 are
not necessarily indicative of the results to be expected for the full year. -1-




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Citizens Effingham Bancshares, Inc. and Subsidiary 
  
 March 31,
    
    December 31,2004
    
    2003AssetsCash and due from banks
    
    $
    4,065,668
    
    
    $
    3,523,799Interest-bearing cash
    
    
    11,484
    
    
    
    275,558Federal funds sold
    
    
    3,856,000
    
    
    
    5,796,000Total cash and cash equivalents
    
    
    7,933,152
    
    
    
    9,595,357Securities available for sale, at fair value
    
    
    9,812,975
    
    
    
    9,455,000Federal Home Loan Bank stock, restricted, at cost
    
    
    258,500
    
    
    
    198,800Loans, net of unearned income
    
    
    90,728,147
    
    
    
    86,058,974Less: allowance for loan losses
    
    
    (1,231,525
    )
    
    
    (1,107,357
    )Loans, net
    
    
    89,496,622
    
    
    
    84,951,617Bank premises and equipment, net
    
    
    1,903,732
    
    
    
    1,887,624Accrued Interest Receivable
    
    
    573,090
    
    
    
    557,154Cash surrender value life insurance
    
    
    2,038,660
    
    
    
    2,015,364Other assets and accrued income
    
    
    821,867
    
    
    
    709,308Total Assets
    
    $
    112,838,598
    
    
    $
    109,370,224Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    14,595,426
    
    
    $
    12,329,284Interest bearing
    
    
    88,973,163
    
    
    
    85,919,930Total deposits
    
    
    103,568,589
    
    
    
    98,249,214Accrued interest payable
    
    
    244,441
    
    
    
    245,497Other borrowed funds
    
    
    
    
    
    
    2,333,333Other liabilities and accrued expenses
    
    
    162,819
    
    
    
    74,504Total liabilities
    
    
    103,975,849
    
    
    
    100,902,548Stotckholders 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
    
    
    3,643,963
    
    
    
    3,277,253Accumulated other comprehensive income
    
    
    98,786
    
    
    
    70,423Total stockholders equity
    
    
    8,862,749
    
    
    
    8,467,676Total Liabilities and Stockholders Equity
    
    $
    112,838,598
    
    
    $
    109,370,224
 -2-




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Citizens Effingham Bancshares, Inc. and Subsidiary 
  
 Three Months EndedMarch 31,
    
    March 31,2004
    
    2003Interest Income:Interest and fees on loans
    
    $
    1,371,093
    
    
    $
    1,377,734Income on federal funds sold
    
    
    8,964
    
    
    
    11,180Interest on investment securities
    
    
    94,954
    
    
    
    97,160Total interest income
    
    
    1,475,011
    
    
    
    1,486,074Interest Expense:Deposits
    
    
    410,269
    
    
    
    551,947Other interest expense
    
    
    23,647
    
    
    
    20,365Total interest expense
    
    
    433,916
    
    
    
    572,312Net interest income before provision for loan losses
    
    
    1,041,095
    
    
    
    913,762Less - provision for loan losses
    
    
    (90,000
    )
    
    
    (90,000
    )Net interest income after provision for loan losses
    
    
    951,095
    
    
    
    823,762Other Operating Income:Service charges on deposit accounts
    
    
    108,154
    
    
    
    100,449Other service charges, commissions and fees
    
    
    62,176
    
    
    
    42,568Other income
    
    
    26,297
    
    
    
    1,875Total other operating income
    
    
    196,627
    
    
    
    144,892Other Operating Expense:Salaries
    
    
    275,350
    
    
    
    245,476Employee Benefits
    
    
    65,479
    
    
    
    50,679Net occupancy expense
    
    
    27,170
    
    
    
    25,947Equipment rental and depreciation of equipment
    
    
    53,328
    
    
    
    50,568Other expenses
    
    
    219,887
    
    
    
    225,272Total other operating expenses
    
    
    641,214
    
    
    
    597,942Income (Loss) Before Income Taxes
    
    
    506,508
    
    
    
    370,712Provision for income taxes
    
    
    (139,798
    )
    
    
    (132,508
    )Net Income (Loss)
    
    $
    366,710
    
    
    $
    238,204Income (Loss) Per Share:Basic
    
    $
    0.72
    
    
    $
    0.47Diluted
    
    $
    0.72
    
    
    $
    0.47
 * Net Income / weighted average outstanding shares of 512,000. -3-




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Citizens Effingham Bancshares, Inc. and Subsidiary 
  
 Three Months EndedMarch 31,
    
    March 31,2004
    
    2003Cash Flows from Operating Activities:Net income/(loss)
    
    $
    366,710
    
    
    $
    238,204Adjustments to reconcile net loss to net
cash provided by operating activities:Provision for loan losses
    
    
    90,000
    
    
    
    90,000Depreciation
    
    
    35,728
    
    
    
    38,448Changes in accrued income and other assets
    
    
    (151,791
    )
    
    
    53,206Changes in accrued expenses and other liabilities
    
    
    72,648
    
    
    
    127,797Net cash provided by (used in) operating activities
    
    
    413,295
    
    
    
    547,655Cash Flows from Investing Activities:Net change in loans to customers
    
    
    (4,635,005
    )
    
    
    (3,504,736
    )Purchase of available for sale securities
    
    
    (1,000,000
    )
    
    
    (1,250,000
    )Proceeds from maturities, calls and paydowns of
available for sale securities
    
    
    684,999
    
    
    
    754,205Purchase of Federal Home Loan Bank stock
    
    
    (59,700
    )
    
    
    (31,600
    )Property and equipment expenditures
    
    
    (51,836
    )
    
    
    (70,211
    )Net cash provided by (used in) investing activities
    
    
    (5,061,542
    )
    
    
    (4,102,342
    )Cash Flows from Financing Activities:Net change in deposits
    
    
    5,319,375
    
    
    
    5,632,524Payments from long-term borrowings
    
    
    (2,333,333
    )
    
    
    (16,667
    )Net cash provided by (used in) financing activities
    
    
    2,986,042
    
    
    
    5,615,857Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (1,662,205
    )
    
    
    2,061,170Cash and Cash Equivalents, Beginning of Period
    
    
    9,595,357
    
    
    
    7,108,453Cash and Cash Equivalents, End of Period
    
    $
    7,933,152
    
    
    $
    9,169,623Supplement Cash Flow Information:Cash paid for interest
    
    $
    434,972
    
    
    $
    565,156Cash paid for income taxes
    
    $
    46,244
    
    
    $
    
 -4-




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Citizens Effingham Bancshares, Inc. and Subsidiary 
 (Unaudited)
  (1)
    
    Basis of PresentationThe accompanying unaudited financial statements have been prepared in
accordance with 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 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 three-month period ended March 31,
2004, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2004. 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, 2003.(2)
    
    Other Comprehensive IncomeDuring the three months ended March 31, 2004, 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, 2003 follows: Accumulated other comprehensive income (loss) at December 31, 2003
    
    
    70,423Other comprehensive income, net of tax:Change in
unrealized loss on securities available for sale
net of deferred income tax benefit of $14,611
    
    
    28,363Less: Reclassification adjustment for gains realized
in net income
    
    
    Accumulated other comprehensive income (loss) at March 31, 2004
    
    $
    98,786
  (3)
    
    Supplemental Financial DataComponents of other operating expenses greater than 1% of total interest
income and other income for the periods ended March 31, 2004 and 2003 are: Three Months EndedMarch 31,
    
    March 31,2004
    
    2003Directors fees
    
    $
    19,000
    
    
    $
    43,400Supplies/printing
    
    
    18,503
    
    
    
    60,193Data processing
    
    
    43,096
    
    
    
    107,418ATM expense
    
    
    22,312
    
    
    
    48,589
 -5-




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Citizens Effingham Bancshares, Inc. and Subsidiary 
 
 Interim Financial Condition Citizens Effingham Bancshares, Inc. (the Company) reported total assets of
$112,838,598 as of March 31, 2004, compared to $109,370,224 at December 31,
2003. The most significant change in the composition of assets was an increase
in loans from $86,058,974 to $90,728,147. Also, additional Federal Home Loan
Bank stock was purchased during the first quarter at a cost of $59,700. Liquidity The Banks liquid assets as a percentage of total deposits were 7.66% at March
31, 2004, compared to 9.77% at December 31, 2003. The Company has approximately
$4,200,000 in available federal fund lines of credit with correspondent banks,
no advances were outstanding on these lines as of March 31, 2004 and December
31, 2003. The Company also has approximately $10,900,000 in an available line
of credit with the Federal Home Loan Bank. The Company had $ -0- and $2,333,333
advanced on these lines as of March 31, 2004 and December 31, 2003,
respectively. At least monthly, management analyzes the level of off-balance
sheet commitments such as unfunded loan equivalents, loan repayments, maturity
of investment securities, liquid investment and available fund lines in an
attempt to minimize the possibility that a potential shortfall will exist. Capital The capital of the Company totaled $8,862,749 as of March 31, 2004. The
capital of the Company and the Bank exceeded all prescribed regulatory capital
guidelines. Regulations require that the most highly rated banks maintain a
Tier 1 leverage ratio of 3% plus an additional cushion of at least 1 to 2
percentage points. Tier 1 capital consists of common shareholders equity,
less certain intangibles. The Banks Tier 1 leverage ratio was 7.95% at March
31, 2004, compared to 7.61% at December 31, 2003. Regulations require that the
Bank maintain a minimum total risk weighted capital ratio of 8%, with one-half
of this amount, or 4%, made up of Tier 1 capital. Risk-weighted assets consist
of balance sheet assets adjusted by risk category, and off-balance sheet assets
or equivalents similarly adjusted. At March 31, 2004, the Bank had a
risk-weighted total capital ratio of 10.46% compared to 10.64% at December 31,
2003, and a Tier I risk-weighted capital ratio of 9.21%, compared to 9.4% at
December 31, 2003. The decrease is primarily caused by the continued growth in
the loans. Asset Quality Nonperforming assets which includes non-accruing loans, repossessed collateral
and loans for which payments are more than 90 days past due totaled $754,000 at
March 31, 2004, an increase of $205,000 from December 31, 2003. There were no
related party loans which were considered nonperforming at March 31, 2004. The
composition of the nonperforming assets is presented in the following table: -6-




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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 Three Months in the Periods Ended
March 31, 2004 and 2003 March 31,
    
    December 31,2004
    
    2003Loans on nonaccrual
    
    $
    350,000
    
    
    $
    242,000Loans greater than 90 days past due
    
    
    186,000
    
    
    
    89,000Other real estate owned
    
    
    218,000
    
    
    
    218,000Other repossessed collateral
    
    
    
    
    
    
    Total nonperforming assets
    
    $
    754,000
    
    
    $
    549,000Total nonperforming assets as a percentage
of total loans (gross) and other real estate
    
    
    0.82
    %
    
    
    0.63
    %
 The allowance for loan losses totaled $1,231,525 at March 31, 2004, a net
increase of $124,168 from December 31, 2003. The allowance for loan losses
represented 1.4% and 1.3% of total loans at March 31, 2004 and December 31,
2003, respectively. An analysis of the allowance for loan losses since December
31, 2003 follows: Allowance for loan losses at December 31, 2003
    
    $
    1,107,357Charge-offs:Commercial
    
    
    Real Estate
    
    
    Installment
    
    
    2,000Total
    
    
    2,000Recoveries:Commercial
    
    
    13,000Real Estate
    
    
    8,168Installment
    
    
    15,000Total
    
    
    36,168Provision charged to income
    
    
    90,000Allowance for loan losses at March 31, 2004
    
    $
    1,231,525
 The loan portfolio is reviewed periodically to evaluate the outstanding loans
and to measure the performance of the portfolio and the adequacy of the
allowance for loan losses. This analysis includes a review of delinquency
trends, actual losses, and internal credit ratings. Managements judgment as
to the adequacy of the allowance is based upon a number of assumptions about
future events which it believes to be reasonable, but which may or may not be
reasonable. However, because of the inherent uncertainty of assumptions made
during the evaluation process, there can be no assurance that loan losses in
future periods will not exceed the allowance for loan losses of that additional
allocations to the allowance will not be required. -7-




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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 Three Months in the Periods Ended
March 31, 2004 and 2003 The Bank was most recently examined by its primary regulatory authority in
September, 2003. There were no recommendations by the regulatory authority that
in managements opinion will have material effects on the Banks liquidity,
capital resources or operations. Investment Securities At March 31, 2004, the Bank had $9,812,975 in investment securities
available-for-sale. The net unrealized gain on available for sale securities,
net of deferred tax benefit, was $28,363 on March 31, 2004. During the period
ended March 31, 2004, the bank purchased $1,000,000 in investment securities
available for sale. Also, as of March 31, 2004, the maturities and calls of
investment securities totaled $684,999, resulting in neither a gain nor a loss.
The bank invests primarily in obligations of the United States or obligations
guaranteed as to principal and interest by the United States and other taxable
and tax-exempt securities. Results of Operations Net interest income for the first quarter of 2004 was $366,710, an increase of
$128,506 (53.9%) compared to the same period for 2003. Interest income for the
third quarter of 2004 was $1,475,011 representing a decrease of $11,063 (.74%)
over the same period in 2003. The decrease in interest income was due to
decreased interest rates on loans. Interest expense for the first quarter of
2004 decreased $138,396 (24.2%) compared to the same period in 2003. The
decrease in interest expense is primarily due to a decrease in average interest
rates charged on interest bearing deposits. Amounts charged to expense related to the allowance for loan losses for the
three months ended March 31, 2004 and 2003 were $90,000 and $90,000,
respectively. Other operating income for the first quarter of 2004 was $196,627, an increase
of $51,735 compared to the same period in 2003. Other operating expenses for the first quarter of 2004 were $641,214, an
increase of $43,272 (7.2%) compared to the same period for 2003. The increase
is primarily attributable to an increase of employee salaries and benefits of
$44,674 (15.1%). -8-




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Citizens Effingham Bancshares, Inc. and Subsidiary 
 
 The Corporations management, including the Chief Executive Officer and
Chief Financial Officer, supervised and participated in an evaluation of the
effectiveness of its disclosure controls and procedures (as defined in federal
securities rules) as of the end of the period covered by this report. Based
on, and as of the date of, that evaluation, the Corporations Chief Executive
Officer and Chief Financial Officer have concluded that the Corporations
disclosure controls and procedures were effective in accumulating and
communicating information to management, including the Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosures of that information under the Securities and Exchange
Commissions rules and forms and that the Corporations disclosure controls and
procedures are designed to ensure that the information required to be disclosed
in reports that are filed or submitted by the Corporation under the Securities
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms. There were no significant changes in the Corporations internal controls
or in other factors that could significantly affect these controls subsequent
to the date of their evaluation. -9-




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Citizens Effingham Bancshares, Inc. and Subsidiary
Part II. Other Information
For the Three Months Ended March 31, 2004 
 PART II: OTHER INFORMATION:Item 1. Legal ProceedingsThere are no material legal proceedings to which the Company is a party or of which their property is the subject.Item 2. Changes in Securities(a) Not Applicable(b) Not ApplicableItem 3. Defaults Upon Senior SecuritiesNot ApplicableItem 4. Submission of Matters to a Vote of Security-HoldersThere were no matters submitted to security holders for a vote during the three months ended March 31, 2004Item 5. Other InformationNoneItem 6. Exhibits and Reports on Form 8-K.A. There have been no reports filed on form 8-K for the three months ended March 31, 2004.B. Exhibit 31.1C. Exhibit 32.1
 
 SIGNATURES In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. Citizens Effingham Bancshares, Inc. /s/Harry H.
Shearouse  Harry H. Shearouse
President and Chief Executive Officer Date: May 11, 2004 -10-