SecProbe.io

CORRESP
1
filename1.htm

August 30, 2005

Mr. Don Walker

Senior Assistant

Chief Accountant

Securities and Exchange
Commission

Washington, DC 20549

Re:          Citizens
Bancshares Corporation

Form 10-K
for the Fiscal Year Ended December 31, 2004

Forms
10-Q for the Quarters Ended March 31, 2005 and June 30, 2005

File
No.:  000-14535

Dear Mr. Walker:

We are responding to the
comments received from your office by letter dated August 16, 2005, with
respect to the above-referenced periodic reports.  We have responded to each of your comments
below.

Form 10-K
for the Fiscal Year Ended December 31, 2004

Note 8 –
Income Taxes, page 61

Question:

“We note
that you have a full valuation allowance for all state tax carryforwards since
management considers it more likely than not that all related deferred tax
assets will not be realized.  Please tell
us how you determined that a full valuation allowance was needed considering
the possible sources of taxable income described by paragraph 21 of SFAS 109.  In your response, please provide quantification
supporting how you determined the amount of the valuation allowance as of December 31,
2004 and why you did not adjust the allowance in 2004.”

Response:

During the third quarter
of 2004, as a result of the external auditors’ resignation, the Company’s audit
committee hired a new accounting firm, Elliott Davis, LLC (“Elliott Davis”), to
provide external audit and tax services.
The firm began providing services to our Company in connection with the
review of our September 30, 2004 Form 10-Q.  We discussed various tax concerns with
Elliott Davis and they began the process of analyzing our current and deferred
income taxes payable.  The process of
gathering and analyzing the information from the prior auditors and tax
consultants (both Big Four Accounting Firms) required a significant amount of
research and the full analysis of the deferred income taxes was not complete as
of the date of the filing of our December 31, 2004 Form 10-K.  While management anticipated adjustments to
the deferred tax asset, we were uncertain as to the extent of the
adjustments.  Therefore at December 31,
2004, management took a conservative posture by not eliminating the full
valuation allowance of $975,000 before determining the total impact of the potential
deferred tax adjustments.

During the second quarter
of 2005, Elliott Davis completed the analysis of the current and deferred
income taxes payable and concluded that the valuation allowance related to the
state tax loss carryforwards was not required as of December 31, 2004.  Management agreed with this

conclusion.  The analysis also identified additional
temporary differences that would have reduced other deferred tax assets,
principally the temporary book versus tax difference attributable to the
allowance for loan losses.  The net
effect of eliminating the valuation allowance related to the state tax loss
carryforwards and the additional modifications of the deferred tax asset
related to the allowance for loan losses and other items was an additional
deferred tax asset of approximately $84,000.
Management concluded that this amount was immaterial to our consolidated
financial statements as of December 31, 2004.

Form 10-Q for the Fiscal Quarter Ended June 30,
2005

Management’s
Discussion and Analysis – Investment Securities, page 13

Question:

“We
note that you recorded a $346,000 other-than-temporary impairment relating to
certain perpetual preferred stock investments in two government sponsored
enterprises during June, 2005.  Your
unrealized equity security losses were $349,680 and $231,400 at December 31,
2004 and 2003, respectively.  Please
supplementally tell us how you were able to conclude that no
other-than-temporary impairment relating to these securities existed as of or
prior to December 31, 2004.  In your
response, please provide quantification supporting how you determined the
recognized $346,000 impairment and tell us how long each security was in an
unrealized loss position. Please refer to the specific relevant guidance in
SFAS No. 115 and SAB Topic 5:M in your response.”

Response:

At June 30, 2005, March 31,
2005 and December 31, 2004, the Company evaluated its equity holdings for
impairment under The Financial Accounting Standard Board’s (FASB) Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the proposed
EITF 03-1, Other Than Temporary Impairment and SAB Topic 5:M.  EITF
03-1 provides specific guidance as to how one could conclude that a loss in an
equity security is temporary. Proposed Paragraph 10 of EITF 03-1 states that
both of the following tests must be met.
Specifically, “an impairment should be deemed
other-than-temporary unless:

a.     The investor has
the ability and intent to hold an investment for a reasonable period of time
sufficient for a forecasted recovery of fair value up to (or beyond) the cost
of the investment, and

b.     Evidence
indicating that the cost of the investment is recoverable within a reasonable
period of time outweighs evidence to the contrary.”

EITF 03-1 sets a higher standard for
determining that a loss is not other-than-temporary in an
equity versus a debt security. In a highly rated debt security, the
investor can generally assert they intend to hold the security until maturity,
thus fully recovering the principal amount of the debt security. With an equity
security, however, one can’t rely on a maturity date for a recovery in price.
Here the investor has to show evidence that the market value will likely
recover in a reasonable period of time.

In August 2000 and January 2001,
the Company purchased adjustable rate agency preferred stocks of Fannie Mae and
Freddie Mac (the “agency preferred securities”) totaling $1.4 million.  The interest rate environment at that time
was indicative of an inverted yield curve where short-term rates were higher
than long-term rates.  Since the purchase
of the preferred securities, short-term rates have fallen significantly and,
until recently, were at historically low levels.  As a result, the yield of the agency
preferred securities repriced to reflect the lower rate environment, negatively
impacting their fair value.  The
following chart depicts the historical price movement of

our
agency preferred securities, which have a dividend rate that is tied to the two
year Treasury yield.

Price Decline Corresponds to Falling 2 Year Yields

The drop in short term rates and the
steepening of the yield curve, occurred at the same time prices dropped on the
agency preferred securities. As a result, market prices declined in order for
the taxable equivalent yield to be competitive with other securities in the
marketplace and not as a result of the financial condition of the issuer.

Additionally, the index histories clearly
showed a degree of volatility that demonstrated an expectation that the index
could return to a level that would allow any unrealized loss to be recovered
within a reasonable period of time.

Price Decline Also Corresponds to the Steepness of
the Curve

Based on the above
analysis, which reflects a trend that persisted up to the time of the Company’s
March 31, 2005 filing, management concluded that the fair values of the
agency preferred securities were highly correlated with the movement of short
term interest rates and the shape of the yield curve.  This correlation made a compelling case that
the unrealized losses in the agency preferred securities were only temporary
and the fair value of the securities would recover as interest rates increased.

Also, Fannie Mae had been working closely
with the Office of Federal Housing Enterprise Oversight (“OFHEO”) to fulfill
the terms of their September 27, 2004 agreement and to cooperate with the
OFHEO’s continuing special examination of its accounting policies and practices
and internal controls.  The Fannie Mae
Capital Restoration Plan, approved by the OFHEO, would allow Fannie Mae to meet
its minimum capital requirement, as well as OFHEO’s required 30 percent surplus
by the September 30, 2005 deadline.
As of March 31, 2005 and December 31,

2004, the issues detailed by OFHEO did
not significantly impact Fannie Mae’s Standard & Poor’s rating of AA-.  The Company also has the ability and intent
to hold these securities until maturity.

From
December 31, 2004 to March 31, 2005, the agency preferred securities
recovered approximately $50,000 of their unrealized loss reported at year
end.  Therefore, management believed that
the securities were not impaired at March 31, 2005 or December 31,
2004 because the expected recovery of fair value began as the yield curve
flattened and the Company had the intent and ability to hold the securities for
a reasonable period of time for a forecasted recovery of the fair values up to
and beyond the cost of the investments or until the securities were called at
par.

Analysis
of Agency Preferred Securities Impairment for Form 10-Q as of June 30,
2005:

1.     On August 9,
2005, Fannie Mae filed a Form 8-K with the SEC indicating that they were
unable to file their Form 10-Q for the quarter ended June 30, 2005
and that they were unlikely to file their Annual Report on Form 10-K for
the year ended December 31, 2004 by December 16, 2005, the deadline
allowed under the listing standard of the New York Stock Exchange (NYSE).  Fannie Mae also said in a SEC disclosure that
they continue to be plagued by poor internal controls given the “magnitude of
material weaknesses that currently exist” and that management is “likely to
conclude” that their financial reporting will be “ineffective” for 2005.  Management of Citizens Bancshares Corporation
interpreted these events to mean that Fannie Mae’s accounting problems are more
severe than first disclosed.

2.     Fannie Mae
advised in their Form 8-K that they expect to complete their filing
requirements by the second half of 2006, missing the December 16, 2005
NYSE deadline for filing their December 31, 2004 Annual Report on Form 10-K.  As a result, the NYSE may initiate delisting
procedures against Fannie Mae that could have a material adverse impact on its
preferred equity stock price.

3.     Standard &
Poor’s (S&P), the rating agency, has indicated that they may lower their
AA- rating of Fannie Mae’s agency preferred securities if there are any further
setbacks of a material nature.  The
Company relied on the fact that S&P did not lower Fannie Mae’s rating on
its preferred stock when it evaluated the impairment of the agency preferred
securities it held at March 31, 2005 and December 31, 2004.

4.     Because of their
deflated price, there has been a continued lack of liquidity in the agency
preferred securities as fewer shares trade in the open market each week.

5.     Fannie
Mae’s business model could be significantly impacted by major regulatory
changes; adversely impacting the future earnings potential of the agency
preferred securities investment.

6.     Since
December 31, 2004, interest rates have risen substantially on the short
end of the curve and the yield curve has shown further inversion.  However, these factors have not had the
positive impact on the price of the agency preferred securities as management
had originally anticipated.  We believe
this is mainly due to continued negative financial concerns at Fannie Mae. At June 30,
2005, the agency preferred securities’ unrealized loss was only $4,000 less
than the amount reported at December 31, 2004.  Therefore, the length of time and the extent
to which management anticipated a market value recovery in a rising and
flattening rate environment is not expected to occur within a reasonable period
of time.

7.     The
following market value of the agency preferred securities as of June 30, 2005
were determined by the closing bid side quote for the shares as listed on the
NYSE.  This information is provided
monthly by our investment advisor and bond accounting agent, Morgan Keegan, Inc.

  Shares

  Cost

  Market

  Book Value

  Market

  Value

  Fannie
  Mae Variable Rate Noncumulative Preferred Series G

  20,000

  $

  50.00

  $

  35.80

  $

  1,000,000

  $

  716,000

  Freddie
  Mac Variable Rate Noncumulative Preferred Series M

  8,000

  $

  50.00

  $

  42.25

  400,000

  338,000

  $

  1,400,000

  $

  1,054,000

8.     The
agency preferred securities unrealized loss position on an annual basis is
detailed as follows:

  Year ended

  December

  31,

  Fannie Mae

  Variable Rate

  Noncumulative

  Preferred

  Series G

  Cusip No.

  313586802

  Freddie Mac

  Variable Rate

  Noncumulative

  Preferred

  Series M

  Cusip No.

  313400780

  Unrealized Gain

  (Loss)

  2004

  Cost

  $

  1,000,000

  $

  400,000

  $

  (349,680

  )

  Market

  740,000

  310,320

  2003

  Cost

  $

  1,000,000

  $

  400,000

  $

  (231,400

  )

  Market

  835,000

  333,600

  2002

  Cost

  $

  1,000,000

  $

  400,030

  $

  (89,030

  )

  Market

  911,000

  400,000

  2001

  Cost

  $

  1,000,000

  $

  400,152

  $

  (23,952

  )

  Market

  975,000

  401,200

  2000

  Cost

  $

  1,000,000

  $

  —

  $

  —

  Market

  1,000,000

  —

  —

Considering these factors, the guidance in SFAS No. 115,
proposed EITF 03-1, and SAB Topic 5:M, Company
management has concluded that an other-than-temporary impairment has incurred
in its agency preferred securities, and that a write-down of the securities to
market value as of June 30, 2005 was appropriate.

The Citizens Bancshares Corporation, hereby,
acknowledges the following:

•      the
Company is responsible for the adequacy and accuracy of the disclosure in the
filing;

•      staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing; and

•      the Company may not assert
staff comments as a defense in any proceeding initiated by the Commission or
any person under the federal securities laws of the United States.

Thank you for your
consideration of our responses to your comments.  If you have any questions, please call us at (404)
653-2800.

Sincerely,

  /s/ James E. Young

  Chief Executive Officer

  Citizens Bancshares Corporation

  /s/ Samuel J. Cox

  Chief Financial Officer

  Citizens Bancshares Corporation