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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 March 31, 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.)
 
 
   
   
   þ o
  o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS
 Common Stock $1 par value, 512,000 shares outstanding at May 12,
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  March 31, 2006 (unaudited) and
December 31, 2005 (audited)
    
    
    2Consolidated Statements of Income (unaudited)  For the Three Months
Ended March 31, 2006 and 2005
    
    
    3Consolidated Statements of Cash Flows (unaudited)  For the Three Months
Ended March 31, 2006 and 2005
    
    
    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

March 31, 2006 and December 31, 2005
 (Unaudited)
    
    
    (Audited)March 31,
    
    
    December 31,2006
    
    
    2005AssetsCash and due from banks
    
    $
    5,395,206
    
    
    $
    5,659,677Interest-bearing cash
    
    
    886,348
    
    
    
    384,989Federal funds sold
    
    
    14,590,000
    
    
    
    3,844,000Total cash and cash equivalents
    
    
    20,871,554
    
    
    
    9,888,666Securities available for sale, at fair value
    
    
    16,878,687
    
    
    
    14,737,959Federal Home Loan Bank stock, restricted, at cost
    
    
    344,000
    
    
    
    344,000Loans, net of unearned income
    
    
    124,125,882
    
    
    
    122,809,793Less: allowance for loan losses
    
    
    (1,787,506
    )
    
    
    (1,680,541
    )Loans, net
    
    
    122,338,376
    
    
    
    121,129,252Bank premises and equipment, net
    
    
    4,023,932
    
    
    
    4,044,522Accrued interest receivable
    
    
    1,294,732
    
    
    
    1,279,814Cash surrender value life insurance
    
    
    2,224,228
    
    
    
    2,201,032Other assets and accrued income
    
    
    918,230
    
    
    
    823,188Total Assets
    
    $
    168,893,739
    
    
    $
    154,448,433Liabilities and Stockholders EquityDeposits:Noninterest-bearing
    
    $
    23,360,522
    
    
    $
    20,705,878Interest-bearing
    
    
    126,909,136
    
    
    
    116,377,530Total deposits
    
    
    150,269,658
    
    
    
    137,083,408Accrued interest payable
    
    
    758,769
    
    
    
    586,342Subordinated debentures
    
    
    3,093,000
    
    
    
    3,093,000Other borrowed funds
    
    
    1,950,000
    
    
    
    1,950,000Other liabilities and accrued expenses
    
    
    454,337
    
    
    
    27,135Total liabilities
    
    
    156,525,764
    
    
    
    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
    
    
    7,494,535
    
    
    
    6,768,092Accumulated other comprehensive loss
    
    
    (246,560
    )
    
    
    (179,544
    )Total stockholders equity
    
    
    12,367,975
    
    
    
    11,708,548Total Liabilities and Stockholders Equity
    
    $
    168,893,739
    
    
    $
    154,448,433
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Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Consolidated Statements of Income
 For the Three Months Ended March 31, 2006 and 2005
  Three Months EndedMarch 31,2006
    
    
    2005Interest Income:Interest and fees on loans
    
    $
    2,730,819
    
    
    $
    1,943,819Income on federal funds sold
    
    
    82,500
    
    
    
    30,824Interest on investment securities
    
    
    155,593
    
    
    
    93,801Other interest and dividend income
    
    
    10,111
    
    
    
    2,587Total interest income
    
    
    2,979,023
    
    
    
    2,071,031Interest Expense:Deposits
    
    
    1,049,367
    
    
    
    561,454Subordinated debentures
    
    
    50,139
    
    
    
    Other interest expense
    
    
    15,688
    
    
    
    15,420Total interest expense
    
    
    1,115,194
    
    
    
    576,874Net interest income before provision for loan losses
    
    
    1,863,829
    
    
    
    1,494,157Less  provision for loan losses
    
    
    (126,000
    )
    
    
    (126,000
    )Net interest income after provision for loan losses
    
    
    1,737,829
    
    
    
    1,368,157Other Operating Income:Service charges on deposit accounts
    
    
    104,681
    
    
    
    102,909Other service charges, commissions and fees
    
    
    207,921
    
    
    
    77,932Gain on sale of other real estate
    
    
    
    
    
    
    5,000Other income
    
    
    35,677
    
    
    
    32,566Total other operating income
    
    
    348,279
    
    
    
    218,407Other Operating Expense:Salaries
    
    
    405,792
    
    
    
    305,861Employee Benefits
    
    
    101,156
    
    
    
    84,159Net occupancy expense
    
    
    41,003
    
    
    
    30,983Equipment rental and depreciation of equipment
    
    
    47,096
    
    
    
    62,406Other expenses
    
    
    354,345
    
    
    
    233,815Total other operating expenses
    
    
    949,392
    
    
    
    717,224Income Before Income Taxes
    
    
    1,136,716
    
    
    
    869,340Provision for income taxes
    
    
    (410,273
    )
    
    
    (304,802
    )Net Income
    
    $
    726,443
    
    
    $
    564,538Income Per Share:Basic
    
    $
    1.42
    
    
    $
    1.10Diluted
    
    $
    1.42
    
    
    $
    1.10
 
 *
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Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Consolidated
Statements of Cash Flows
 For the Three Months Ended March 31, 2006 and 2005
  Three Months EndedMarch 31,2006
    
    
    2005Cash Flows from Operating Activities:Net income
    
    $
    726,443
    
    
    $
    564,538Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan losses
    
    
    126,000
    
    
    
    126,000Depreciation
    
    
    56,542
    
    
    
    41,606Gain on the sale of other real estate
    
    
    
    
    
    
    5,000Changes in accrued income and other assets
    
    
    (92,412
    )
    
    
    (222,380
    )Changes in accrued expenses and other liabilities
    
    
    599,629
    
    
    
    356,820Net cash provided by operating activities
    
    
    1,416,202
    
    
    
    871,584Cash Flows from Investing Activities:Net change in loans to customers
    
    
    (1,335,124
    )
    
    
    (6,124,946
    )Purchase of securities available for sale
    
    
    (2,492,921
    )
    
    
    (2,490,710
    )Proceeds from maturities, calls and paydowns of
securities available for sale
    
    
    244,433
    
    
    
    666,966Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (37,500
    )Property and equipment expenditures
    
    
    (35,952
    )
    
    
    (497,701
    )Investment in statutory trust
    
    
    
    
    
    
    (93,000
    )Net cash used in investing activities
    
    
    (3,619,564
    )
    
    
    (8,576,891
    )Cash Flows from Financing Activities:Net change in deposits
    
    
    13,186,250
    
    
    
    8,125,533Proceeds from issuance of subordinated debentures
    
    
    
    
    
    
    3,093,000Net cash provided by financing activities
    
    
    13,186,250
    
    
    
    11,218,533Net Increase in Cash and Cash Equivalents
    
    
    10,982,888
    
    
    
    3,513,226Cash and Cash Equivalents, Beginning of Period
    
    
    9,888,666
    
    
    
    7,959,126Cash and Cash Equivalents, End of Period
    
    $
    20,871,554
    
    
    $
    11,472,352Supplemental Cash Flow Information:Cash paid for interest
    
    $
    1,101,493
    
    
    $
    505,490Cash paid for income taxes
    
    $
    
    
    
    $
    181,000
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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 three-month period ended
March 31, 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 three months ended March 31, 2006, the Company had unrealized holding losses on
investment securities which were reported as comprehensive income. 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 $(34,524)
    
    
    (67,016
    )Less: Reclassification adjustment for gains realized in net income
    
    
    Accumulated other comprehensive loss at March 31, 2006
    
    $
    (246,560
    )
 (3)
    
    Supplemental Financial DataComponents of other operating expenses greater than 1% of total interest income and other
income for the periods ended March 31, 2006 and 2005 are:
 Three Months EndedMarch 312006
    
    
    2005Legal and accounting
    
    $
    50,520
    
    
    $
    23,885Supplies/printing
    
    
    40,888
    
    
    
    20,407Data processing
    
    
    23,405
    
    
    
    35,018
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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 Three Months in the Periods Ended
 March 31, 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 Three Months in the Periods Ended
March 31, 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
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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 Three Months in the Periods Ended
March 31, 2006 and 2005
 Interim Financial Condition
  Asset Quality
  March 31,
    
    
    December 31,2006
    
    
    2005Loans on nonaccrual
    
    $
    192,000
    
    
    $
    Loans greater than 90 days past due
    
    
    
    
    
    
    1,000Other real estate owned
    
    
    
    
    
    
    69,000Total nonperforming assets
    
    $
    192,000
    
    
    $
    70,000Total nonperforming assets as a percentage
of total loans (gross) and other real estate
    
    
    0.15
    %
    
    
    0.06
    %
  Allowance for loan losses at December 31, 2005
    
    $
    1,680,541Charge-offs:Commercial
    
    
    30,028Real Estate
    
    
    Installment
    
    
    2,839Total
    
    
    32,867Recoveries:Commercial
    
    
    9,958Real Estate
    
    
    1,999Installment
    
    
    1,875Total
    
    
    13,832Provision charged to income
    
    
    126,000Allowance for loan losses at March 31, 2006
    
    $
    1,787,506
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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 Three Months in the Periods Ended
March 31, 2006 and 2005
   Results of Operations
     Liquidity
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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 Three Months in the Periods Ended
March 31, 2006 and 2005
 Capital
  Investment Securities
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Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Item 3. Controls and Procedures
For the Three Months Ended
March 31, 2006
 
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Citizens Effingham Bancshares, Inc. and Subsidiary
 
 Part II. Other Information
 For the Three Months Ended March 31, 2006
               SIGNATURES
   /s/Harry H. Shearouse
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