UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


___________________________





FORM
10-K





[X]
            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 30, 2009       OR[  ]
            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





Commission
File Number:  001-33003





CITIZENS
COMMUNITY BANCORP, INC.


(Exact
name of small business issuer as specified in its charter)





Maryland
            
            20-5120010(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)2174
      EastRidge Center, Eau Claire, Wisconsin
            
            54701(Address
      of principal executive offices)
            (Zip
      Code)





Registrant's
telephone number, including area code:  (715) 836-9994





Securities
registered pursuant to Section 12(b) of the Act:




Title of Each
      Class:
            Name of Exchange on
      Which Registered:Common Stock, $0.01 par value
      per share
            NASDAQ Global MarketSM




Securities
registered pursuant to Section 12(g) of the Act:  None







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  YES __  NO  X





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES __  NO  X





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  YES    NO





Indicate
by check mark whether disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.    X





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.See the
definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act (Check one):





Large
accelerated filer  __   Accelerated filer __
  Non-accelerated filer __   Smaller reporting
company   X





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  YES __ NO  X












The
aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the bid and asked price of
such stock as of the last business day of the registrant's most recently
completed second fiscal quarter, was $27,635,938.   Shares of the
registrant's common stock held by any executive officer or director of the
registrant have been excluded from this computation because such persons may be
deemed to be affiliates. This determination of affiliate status is not a
conclusive determination for other purposes.





As of
December 23, 2009, there were issued and outstanding 5,471,780 shares of the
Registrant's common stock.





DOCUMENTS
INCORPORATED BY REFERENCE





Part II
of Form 10-K - Annual Report to Stockholders for the fiscal year ended September
30, 2009.


Part III
of Form 10-K - Portions of the Proxy Statement for the 2010 Annual Meeting of
Stockholders.





As used
in this report, the terms "we," "us," "our," and the "Company" mean Citizens
Community Bancorp, Inc. and its subsidiaries, unless the context indicates
another meaning and the term the "Bank" or "Citizens Community Federal" means
the Company's wholly owned subsidiary, Citizens Community Federal.











TABLE
      OF CONTENTS
            PagePART IItem
      1.
            Description
      of Business
            1Item
      1A.
            Risk
      Factors
            25Item
      1B.
            Unresolved
      Staff Comments
            28Item
      2.
            Description
      of Properties
            28Item
      3.
            Legal
      Proceedings
            31Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            31PART IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            31Item
      6.
            Selected
      Financial Data
            31Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            31Item
      7A.
            Quantitative
      and Qualitative Disclosures about Market Risk
            31Item
      8.
            Consolidated
      Financial Statements and Supplementary Data
            31Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            31Item
      9A(T).
            Controls
      and Procedures
            31Item
      9B.
            Other
      Information
            33PART IIIItem
      10.
            Directors,
      and Executive Officers and Corporate Governance
            34Item
      11.
            Executive
      Compensation
            34Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            34Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            34Item
      14.
            Principal
      Accountant Fees and Services
            35Item
      15.
            Exhibits
      and Financial Statement Schedules
            35Signatures
            36Exhibit
      Index
            37





PART
I




Item
1.   Description of Business





General





Historically,
Citizens Community Federal (the "Bank") was a federal credit
union.  The Bank accepted deposits and made loans to members, who
live, work or worship in the Wisconsin counties of Chippewa and Eau Claire, and
parts of Pepin, Buffalo and Trempealeau.  In addition, this included
businesses and other entities located in these counties, and members and
employees of the Hocak Nation.  In December 2001, the Bank converted
to a federal mutual savings bank in order to better serve our customers and the
local community through the broader lending ability of a federal savings bank,
and to expand our customer base beyond the limited field of membership permitted
for credit unions.  As a federal savings bank, the Bank has expanded
authority in structuring residential mortgage and consumer loans, and the
ability to make commercial loans, although the Bank does not currently have any
immediate plans to commence making commercial loans. In 2004, Citizens Community
Federal reorganized into the mutual holding company form of
organization.




On July
1, 2005, Citizens Community Bancorp acquired Community Plus Savings Bank,
Rochester Hills, Michigan, through a merger with and into Citizens Community
Federal.  In accordance with the merger agreement, Citizens Community
Bancorp issued 705,569 additional shares to Citizens Community MHC (the "MHC"),
based on the $9.25 million independently appraised value of Community Plus
Savings Bank.  At June 30, 2005, Community Plus Savings Bank had total
assets of $46.0 million and deposits and other liabilities of $41.8 million,
prior to purchase accounting adjustments.




On
October 31, 2006, the MHC  completed its reorganization into stock
form and Citizens Community Bancorp, Inc. (the "Company") succeeded to the
business of Citizens Community Bancorp, the MHC's former stock holding company
subsidiary.  In the reorganization, each outstanding share of common
stock of the former mid-tier stock holding company (other than shares held by
the MHC which were canceled) was converted into 1.91067 shares of common stock
of the Company.  As part of the second-step mutual to stock conversion
transaction, the Company sold a total of 5,290,000 shares to eligible depositors
of the Bank in a subscription offering at $10.00 per share, including 341,501
shares purchased by the Bank's employee stock ownership plan with funds borrowed
from the Company.




The Bank
is a federally chartered stock savings institution with 26 full-service offices
- nine stand-alone locations and 17 in-store Wal-Mart Supercenter
branches.  Citizens acquired a branch in Chippewa Falls, Wisconsin, in
November 2002, as well as a branch in Mankato, Minnesota in November of 2003,
opened a new branch office in Oakdale, Minnesota on October 1, 2004, and, as
noted, acquired Community Plus Savings Bank's Lake Orion and Rochester Hills,
Michigan, branches on July 1, 2005.




In 2008,
the Bank opened eight branches located inside Wal-Mart Supercenters in Wisconsin
and Minnesota.  These are in-store branches located in Brooklyn Park,
Faribault, Hutchinson, Red Wing and Winona, Minnesota.  The Bank moved
its former branches in Black River Falls, Rice Lake and Wisconsin Dells,
Wisconsin to inside the Wal-Mart Supercenter locations in those respective
communities.  The Bank opened six branches during 2009 inside Wal-Mart
Supercenters in Oak Park Heights, Minnesota, and Menomonie, Neenah, Plover,
Shawano and Wisconsin Rapids, Wisconsin.




On April
9, 2008, the Bank announced that it had entered into an agreement with American
National Bank (ANB) of Beaver Dam, Wisconsin, to acquire three ANB branches
located inside Wal-Mart Supercenters in Appleton, Fond du Lac and Oshkosh,
Wisconsin.  The Bank completed these branch acquisitions on August 3,
2008.




The
Company is incorporated under the laws of the State of Maryland to hold all of
the stock of Citizens Community Federal.  The Company is a unitary
savings and loan holding company and is subject to regulation by the Office of
Thrift Supervision (OTS).  The Company has no significant assets other
than its ownership of all of the outstanding shares of common stock of Citizens
Community Federal, the net proceeds of the reorganization transactions described
above that it kept and its loan to the Citizens Community Bancorp, Inc. employee
stock ownership plan.




1


At
September 30, 2009, the Company had total assets of $575.4 million, total
deposits of $409.3 million and stockholders' equity of $55.4 million.The Company and the Bank
are examined and regulated by the OTS, its primary federal
regulator.  The Company and the Bank are also regulated by the
FDIC.  The Bank is required to have certain reserves set by the
Federal Reserve Board and is a member of the Federal Home Loan Bank of Chicago,
which is one of the 12 regional banks in the Federal Home Loan Bank
System.




Forward
Looking Statements





This
document, including information incorporated by reference, contains
forward-looking statements about the Company and the Bank which we believe are
within the meaning of the Private Securities Litigation Reform Act of
1995.  These forward-looking statements include, without limitation,
statements with respect to anticipated future operating and financial
performance, growth opportunities, interest rates, cost savings and funding
advantages expected or anticipated to be realized by
management.  Words such as "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan" and similar
expressions are intended to identify these forward-looking
statements.  Forward-looking statements by the Company and its
management are based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and the intentions of management and are not guarantees
of future performance.  The Company disclaims any obligation to update
or revise any forward-looking statements based on the occurrence of future
events, the receipt of new information, or otherwise. The important factors we
discuss below, as well as other factors discussed under the caption "Risk
Factors" in Item 1A of this report and in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as identified in our
filings with the SEC and those presented elsewhere by our management from time
to time, could cause actual results to differ materially from those indicated by
the forward-looking statements made in this document:








●
            further
      developments in the Company's ongoing review of and efforts to resolve
      possible problem credit relationships, which could result in, among other
      things, additional provisions to the loan loss reserve and the incurrence
      of other material non-cash and cash charges;●
            the
      strength of the U.S. economy in general and the strength of the local
      economies in which we conduct operations;●
            the
      effects of, and changes in, trade, monetary and fiscal policies and laws,
      including interest rate policies of the Federal Reserve
      Board;●
            inflation,
      interest rate, market and monetary fluctuations and the Bank’s ability to
      maintain current deposit and loan levels at current interest
      rates;●
            deteriorating
      credit quality, including changes in the interest rate environment
      reducing interest margins;●
            prepayment speeds,
      loan origination and sale volumes, charge-offs and loan loss
      provisions;●
            the Bank's ability
      to maintain required capital levels and adequate sources of funding and
      liquidity, including the fact that maintaining minimum capital
      requirements under applicable regulations may limit the Bank's operations
      and potential growth;●
            further write-downs
      in the Bank's residential mortgage-backed securities
  portfolio;●
            the Bank's ability
      to implement its cost-savings and revenue enhancement
    initiatives;●
            the
      timely development of and acceptance of our new products and services, and
      the perceived overall value of these products and services by users
      including the features, pricing and quality compared to competitors'
      products and services;●
            the
      willingness of users to substitute our products and services for products
      and services of our competitors;










2












●
            the
      impact of changes in financial services' laws and regulations (including
      laws concerning taxes, banking, securities and
  insurance);●
            the
      impact of technological changes;●
            acquisitions;●
            changes
      in consumer spending and saving habits;●
            our
      success at managing the risks detailed above; and●
            potential goodwill
      impairment.




The
Company disclaims any obligation to update or revise any forward-looking
statements based on the occurrence of future events, the receipt of new
information, or otherwise.




Market
Area




The Bank
is a community-oriented financial institution offering a variety of financial
services to meet the needs of the communities we serve.  The Bank is
headquartered in Eau Claire, Wisconsin, and has 26 branch offices - nine
stand-alone locations and 17 in-store branches - primarily serving Wisconsin,
central and southern Minnesota, and the northern suburbs of Detroit in Oakland
and Macomb counties in Michigan.




Competition





The Bank
faces strong competition in originating real estate and other loans, and in
attracting deposits.  Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks, credit unions
and mortgage bankers.  Other savings institutions, commercial banks,
credit unions and finance companies provide vigorous competition in consumer
lending.




The Bank
attracts deposits through its branch office system. Competition for those
deposits is principally from other savings institutions, commercial banks and
credit unions located in the same community, as well as mutual funds and other
alternative investments.  The Bank competes for these deposits by
offering superior service and a variety of deposit accounts at competitive
rates.




Internet
Website




The
Company maintains a Website at www.citizenscommunityfederal.net.  The
information contained on that Website is not included as part of, or
incorporated by reference into, this Annual Report on Form
10-K.  Citizens Community Bancorp, Inc. currently makes available on
or through its Website its Annual Report on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K or amendments to these reports. These
materials are also available free of charge on the Securities and Exchange
Commission's Website at www.sec.gov.




Selected
Consolidated Financial Information





This
information is incorporated by reference from the 2009 Annual Report to
Stockholders attached hereto as Exhibit 13 ("Annual Report").




Yields
Earned and Rates Paid





This
information contained under the section captioned "Average Balances, Net
Interest Income, Yields Earned and Rates Paid" is incorporated herein by
reference from the Annual Report.




Rate/Volume
Analysis





This
information is incorporated by reference from the Annual
Report.






3




Average
Balance, Interest and Average Yields and Rates





This
information contained under the section captioned "Average Balances, Net
Interest Income, Yields Earned and Rates Paid" is incorporated herein by
reference in the Annual Report.




Lending
Activities





General.  The
Bank's first mortgage loans currently being originated carry a fixed rate of
interest.  First mortgage loans generally are long-term and amortize
on a monthly basis with principal and interest due each month.  A
majority of the Bank's first mortgage loans also contain a payable-on-demand
clause, which allows the Bank to call the loan due after a stated period,
usually between two and five years from origination.  The Bank also
has home equity line-of-credit loans in its portfolio, which have an interest
rate that adjusts based on the prime rate.  At September 30, 2009, the
net loan portfolio totaled $440.5 million, which constituted 76.6% of total
assets.




Mortgage
loans up to $500,000 and consumer loans may be approved at various levels by
loan officers and senior management.  The President may approve loans
up to our regulatory lending limit, along with recommendations from the Chief
Financial Officer.  Loans outside our general underwriting guidelines
must be approved by the board of directors.  At September 30, 2009,
our regulatory lending limit to any one borrower and the borrower's related
entities was approximately $7.7 million.  As of September 30, 2009,
the largest lending relationship to a single borrower or a group of related
borrowers consisted of four loans to a single borrower with a total balance of
$439,800. These loans were current as of September 30, 2009.







4


Loan Portfolio
Composition.  The following table presents information
concerning the composition of the Citizen Community Federal's loan portfolio in
dollar amounts and in percentages (before deductions for allowances for loan
losses) as of the dates indicated.


At
      September 30,2009
              
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005Amount
              
              
              
              Percent
              
              
              
              Amount
              
              
              
              Percent
              
              
              
              Amount
              
              
              
              Percent
              
              
              
              Amount
              
              
              
              Percent
              
              
              
              Amount
              
              
              
              Percent(Dollars
      in thousands)Real
      Estate Loans:One-
      to four-family first mortgages
              
              $
              230,412
              
              
              
              52.0
              %
              
              $
              193,958
              
              
              
              52.5
              %
              
              $
              177,281
              
              
              
              55.3
              %
              
              $
              156,235
              
              
              
              60.3
              %
              
              $
              136,647
              
              
              
              62.5
              %Second
      mortgages
              
              
              9,639
              
              
              
              2.2
              
              
              
              10,774
              
              
              
              2.8
              
              
              
              10,461
              
              
              
              3.2
              
              
              
              9,161
              
              
              
              3.5
              
              
              
              7,630
              
              
              
              3.5Multi-family
      and commercial
              
              
              174
              
              
              
              0.1
              
              
              
              180
              
              
              
              0.1
              
              
              
              215
              
              
              
              0.1
              
              
              
              240
              
              
              
              0.1
              
              
              
              274
              
              
              
              0.1Total
      real estate loans
              
              
              240,225
              
              
              
              54.3
              
              
              
              204,912
              
              
              
              55.4
              
              
              
              187,957
              
              
              
              58.6
              
              
              
              165,636
              
              
              
              63.9
              
              
              
              144,551
              
              
              
              66.1Consumer
      Loans:Automobile
      (1)
              
              
              24,875
              
              
              
              5.6
              
              
              
              25,887
              
              
              
              7.0
              
              
              
              27,168
              
              
              
              8.5
              
              
              
              24,445
              
              
              
              9.4
              
              
              
              25,980
              
              
              
              11.9Other
      secured personal loans (2)
              
              
              172,040
              
              
              
              38.8
              
              
              
              133,181
              
              
              
              36.0
              
              
              
              100,966
              
              
              
              31.5
              
              
              
              64,384
              
              
              
              24.9
              
              
              
              43,460
              
              
              
              19.8Unsecured
      personal loans (3)
              
              
              5,655
              
              
              
              1.3
              
              
              
              5,797
              
              
              
              1.6
              
              
              
              4,610
              
              
              
              1.4
              
              
              
              4,774
              
              
              
              1.8
              
              
              
              4,743
              
              
              
              2.2Total
      consumer loans
              
              
              202,570
              
              
              
              45.7
              
              
              
              164,865
              
              
              
              44.6
              
              
              
              132,744
              
              
              
              41.4
              
              
              
              93,603
              
              
              
              36.1
              
              
              
              74,183
              
              
              
              33.9Gross
      loans
              
              
              442,795
              
              
              
              100.0
              %
              
              
              369,777
              
              
              
              100.0
              %
              
              
              320,701
              
              
              
              100.0
              %
              
              
              259,239
              
              
              
              100.0
              %
              
              
              218,734
              
              
              
              100.0
              %Net
      deferred loan costs
              
              
              (325
              )
              
              
              
              
              
              
              (67
              )
              
              
              
              
              
              
              252
              
              
              
              
              
              
              
              63
              
              
              
              
              
              
              
              ---Allowance
      for loan losses
              
              
              (1,925
              )
              
              
              
              
              
              
              (1,192
              )
              
              
              
              
              
              
              (926
              )
              
              
              
              
              
              
              (835
              )
              
              
              
              
              
              
              (803
              )Total
      loans receivable, net
              
              $
              440,545
              
              
              
              
              
              
              $
              368,518
              
              
              
              
              
              
              $
              320,027
              
              
              
              
              
              
              $
              258,467
              
              
              
              
              
              
              $
              217,931





(1)
            Includes
      both direct and indirect lending activities.(2)
            Includes
      both direct and indirect lending activities for personal items other than
      automobiles.(3)
            Includes
      only direct lending.







5





The following table shows the composition of Citizen Community Federal's loan
portfolio by fixed- and adjustable-rate loans at the dates
indicated.




At
      September 30,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentFixed
      Rate Loans:
            
            (Dollars
      in thousands)Real
      estateOne-
      to four-family first mortgages(1)
            
            $
            226,856
            
            
            
            51.2
            %
            
            $
            189,247
            
            
            
            51.1
            %
            
            $
            170,127
            
            
            
            53.0
            %
            
            $
            148,211
            
            
            
            57.0
            %
            
            $
            128,300
            
            
            
            58.7
            %Second mortgages
            
            
            9,186
            
            
            
            2.1
            
            
            
            10,373
            
            
            
            2.8
            
            
            
            9,989
            
            
            
            3.1
            
            
            
            8,367
            
            
            
            3.2
            
            
            
            6,189
            
            
            
            2.8Multi-family and commercial
            
            
            174
            
            
            
            0.1
            
            
            
            180
            
            
            
            0.1
            
            
            
            215
            
            
            
            0.1
            
            
            
            240
            
            
            
            0.1
            
            
            
            274
            
            
            
            0.1Total
      fixed-rate real estate loans
            
            
            236,216
            
            
            
            53.4
            
            
            
            199,800
            
            
            
            54.0
            
            
            
            180,331
            
            
            
            56.2
            
            
            
            156,818
            
            
            
            60.3
            
            
            
            134,763
            
            
            
            61.6Consumer loans
            
            
            202,570
            
            
            
            45.7
            
            
            
            164,865
            
            
            
            44.6
            
            
            
            132,744
            
            
            
            41.4
            
            
            
            93,603
            
            
            
            36.3
            
            
            
            74,183
            
            
            
            33.9Total
      fixed rate loans
            
            
            438,786
            
            
            
            99.1
            
            
            
            364,665
            
            
            
            98.6
            
            
            
            313,075
            
            
            
            97.6
            
            
            
            250,421
            
            
            
            96.6
            
            
            
            208,946
            
            
            
            95.5Adjustable Rate Loans:Real estateOne- to four-family first
      mortgages
            
            
            3,556
            
            
            
            0.8
            
            
            
            4,711
            
            
            
            1.3
            
            
            
            7,154
            
            
            
            2.2
            
            
            
            8,024
            
            
            
            3.1
            
            
            
            8,347
            
            
            
            3.8Second mortgages
            
            
            453
            
            
            
            0.1
            
            
            
            401
            
            
            
            0.1
            
            
            
            472
            
            
            
            0.2
            
            
            
            794
            
            
            
            0.3
            
            
            
            1,441
            
            
            
            0.7Multi-family and commercial
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Total adjustable rate
      real estate loans
            
            
            4,009
            
            
            
            0.9
            
            
            
            5,112
            
            
            
            1.4
            
            
            
            7,626
            
            
            
            2.4
            
            
            
            8,818
            
            
            
            3.4
            
            
            
            9,788
            
            
            
            4.5Consumer
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Total adjustable rate loans
            
            
            4,009
            
            
            
            0.9
            
            
            
            5,112
            
            
            
            1.4
            
            
            
            7,626
            
            
            
            2.4
            
            
            
            8,818
            
            
            
            3.4
            
            
            
            9,788
            
            
            
            4.5Total loans
            
            
            442,795
            
            
            
            100.0
            %
            
            
            369,777
            
            
            
            100.0
            %
            
            
            320,701
            
            
            
            100.0
            %
            
            
            259,239
            
            
            
            100.0
            %
            
            
            218,734
            
            
            
            100.0
            %Net
      deferred loan costs
            
            
            (325
            )
            
            
            
            
            
            
            (67
            )
            
            
            
            
            
            
            252
            
            
            
            
            
            
            
            63
            
            
            
            
            
            
            
            ---Allowance for loan losses
            
            
            (1,925
            )
            
            
            
            
            
            
            (1,192
            )
            
            
            
            
            
            
            (926
            )
            
            
            
            
            
            
            (835
            )
            
            
            
            
            
            
            (803
            )Total loans receivable, net
            
            $
            440,545
            
            
            
            
            
            
            $
            368,518
            
            
            
            
            
            
            $
            320,027
            
            
            
            
            
            
            $
            258,467
            
            
            
            
            
            
            $
            217,931





(1)
            Includes
      $194.1 million in 2009, $162.5 million in 2008, $144.5 million in 2007,
      $122.2 million in 2006 and $102.9 million in 2005 of loans with a
      payable-on-demand clause.








6


The
following schedule illustrates the contractual maturity of Citizen Community
Federal's loan portfolio at September 30, 2009.  Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due.  The following schedule does not
reflect the effects of possible prepayments or enforcement of payable-on-demand
clauses.




Real
      Estate
            
            
            ConsumerOne-
      to Four- Family
              First
      Mortgage(1)
            
            
            Second
      Mortgage
            
            
            Multi-Family
      and
              Commercial
            
            
            Automobile
            
            
            Secured
      Personal
            
            
            Unsecured
      Personal
            
            
            TotalAmount
            
            
            Weighted
              Average
              Rate
            
            
            Amount
            
            
            Weighted
              Average
              Rate
            
            
            Amount
            
            
            Weighted
              Average
              Rate
            
            
            Amount
            
            
            Weighted
              Average
              Rate
            
            
            Amount
            
            
            Weighted
              Average
              Rate
            
            
            Amount
            
            
            Weighted
              Average
              Rate
            
            
            Amount
            
            
            Weighted
              Average
              Rate2010(2)
            
            $
            122
            
            
            
            6.67
            %
            
            $
            876
            
            
            
            6.88
            %
            
            $
            174
            
            
            
            6.18
            %
            
            $
            527
            
            
            
            9.41
            %
            
            $
            1,613
            
            
            
            6.04
            %
            
            $
            2,853
            
            
            
            13.98
            %
            
            $
            6,165
            
            
            
            10.14
            %2011
            
            
            170
            
            
            
            2.83
            
            
            
            587
            
            
            
            8.53
            
            
            
            ---
            
            
            
            ---
            
            
            
            2,298
            
            
            
            9.55
            
            
            
            2,884
            
            
            
            7.98
            
            
            
            631
            
            
            
            10.53
            
            
            
            6,570
            
            
            
            8.692012
            
            
            1,459
            
            
            
            6.61
            
            
            
            1,081
            
            
            
            8.50
            
            
            
            ---
            
            
            
            ---
            
            
            
            5,706
            
            
            
            9.35
            
            
            
            6,202
            
            
            
            8.73
            
            
            
            607
            
            
            
            10.50
            
            
            
            15,055
            
            
            
            8.812013-2014
            
            
            2,568
            
            
            
            5.21
            
            
            
            2,398
            
            
            
            8.51
            
            
            
            ---
            
            
            
            ---
            
            
            
            12,983
            
            
            
            9.14
            
            
            
            27,902
            
            
            
            8.67
            
            
            
            1,533
            
            
            
            9.65
            
            
            
            47,384
            
            
            
            8.632015-2016
            
            
            2,045
            
            
            
            5.81
            
            
            
            1,669
            
            
            
            8.66
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,528
            
            
            
            8.22
            
            
            
            25,844
            
            
            
            8.21
            
            
            
            3
            
            
            
            6.00
            
            
            
            31,089
            
            
            
            8.082017-2031
            
            
            63,601
            
            
            
            6.08
            
            
            
            2,660
            
            
            
            8.11
            
            
            
            ---
            
            
            
            ---
            
            
            
            1,833
            
            
            
            8.06
            
            
            
            107,574
            
            
            
            8.11
            
            
            
            28
            
            
            
            2.85
            
            
            
            175,696
            
            
            
            7.382032
      and
              after
            
            
            160,447
            
            
            
            6.33
            
            
            
            368
            
            
            
            5.98
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            21
            
            
            
            7.00
            
            
            
            ---
            
            
            
            ---
            
            
            
            160,836
            
            
            
            6.33$
            230,412
            
            
            
            6.32
            %
            
            $
            9,639
            
            
            
            8.18
            %
            
            $
            174
            
            
            
            6.18
            %
            
            $
            24,875
            
            
            
            9.10
            %
            
            $
            172,040
            
            
            
            8.22
            %
            
            $
            5,655
            
            
            
            8.93
            %
            
            $
            442,795
            
            
            
            7.29
            %


_______________


(1)
            Includes
      $194.1 million of loans with a payable-on-demand
clause.(2)
            Includes
      home equity lines of credit, credit card loans, loans having no stated
      maturity and overdraft loans.





The
total amount of loans due after September 30, 2009, which have predetermined
interest rates is $438.8 million, while the total amount of loans due after such
date which have floating or adjustable interest rates is $4.0
million.










7


First Mortgage
Lending.  Citizens Community Federal focuses its lending
efforts primarily on the origination of loans secured by first mortgages on
owner-occupied, one- to four-family residences in our market area.  At
September 30, 2009, one- to four-family residential mortgage loans totaled
$230.4 million, or 52.0% of the Bank's gross loan portfolio.




Citizens
Community Federal generally underwrites its one- to four-family loans based on
the applicant's employment and credit history, their debt to income ratio and
the appraised value of the subject property.  Presently, Citizens
Community Federal generally lends up to 80% of the appraised value for one- to
four-family residential loans and up to 70% for non-owner occupied residential
loans.  For loans used to purchase the property with a loan-to-value
ratio in excess of 80%, Citizens Community Federal requires private mortgage
insurance in order to reduce our exposure below 80%.  Properties
securing one- to four-family loans are appraised by independent fee appraisers
approved by the board of directors to the extent the loan exceeds
$50,000.  In-house appraisals, prepared by persons other than the
originating loan officer, may be used for loans of less than $50,000, or loans
of less than $100,000 if the loan-to-value ratio is less than
50%.  Citizens Community Federal requires its borrowers to obtain
evidence of clear title and hazard insurance, and flood insurance, if
necessary.




Citizens
Community Federal currently originates most of its one- to four-family mortgage
loans on a fixed-rate basis.  Citizens Community Federal's pricing
strategy for mortgage loans includes setting interest rates that benefit our
asset/liability management strategies.  Our one- to four-family loans
are not assumable.




Most
mortgage loans include a payable-on-demand clause, which allows the loan to be
called at any time after the demand date.  Citizens Community Federal
has had no reason to utilize the clause over the past several years, because
rates have been historically low during this period.  May 2000 was the
last and only time the clause was utilized.  At that time, 13 loans,
totaling $541,442, were called.  It is Citizens Community Federal's
policy to write the majority of its real estate loans with a payable-on-demand
clause.  The intent of the clause is to give Citizens Community
Federal some ability to protect against sharp and prolonged interest rate
increases and their impact on net interest margin.  The clause is not
intended to be invoked in order to respond to temporary interest rate
fluctuations.  The following factors are considered in determining
whether and when to utilize the clause: (1) a significant, prolonged increase in
market rates of interest; (2) the liquidity needs of Citizens Community Federal;
(3) Citizens Community Federal's desire to restructure its balance sheet; and
(4) an unsatisfactory payment history, including delinquent real estate
taxes.  Other factors considered by the Bank include the remaining
term of the loan (i.e., a shorter remaining term could justify not calling a
loan with the same rate as a loan with a longer remaining term), other lending
relationships, payment history and the equity position of the
borrower.  When Citizens Community Federal determines to utilize the
clause, we call loans with the lowest interest rates first.




The
following trigger guidelines are used to determine whether to utilize the
payable-on-demand clause:  (1) when rates available for six-month
investment certificates of deposit exceed the rate on loans eligible to be
called under the payable-on-demand clause by more than 75 basis points; or (2)
when local market rates of interest for real estate loans exceed the rate on
existing loans with the payable-on-demand clause by 150 basis
points.  If either of these triggers are reached, Bank management has
12 months to utilize the clause and call loans, if management determines that
doing so would be in the overall best interests of the Bank.  The
existence of the payable-on-demand clauses is not considered as a factor in
determining our accounting policies for loan origination fees and costs because
we have only used the clause once in May 2000, with respect to 13
loans.




The
demand date is set based on the loan-to-value ratio and other underwriting
criteria, and is usually two to five years from the date of
origination.  During the fiscal year ended September 30, 2009,
Citizens Community Federal originated $70.4 million of one- to four-family loans
that included the payable-on-demand clause.  Fixed-rate loans secured
by one- to four-family residences have contractual maturities of up to 30 years,
and are generally fully amortizing, with payments due monthly.




Second Mortgage
Lending.  Citizens Community Federal also offers closed-end
second mortgage loans and open-end home equity lines of credit.  Home
equity lines of credit totaled $453,000 and comprised 0.01% of the gross loan
portfolio at September 30, 2009.These loans may be
originated in amounts, together with the amount of the existing first mortgage,
of up to 80% of the value of the property securing the loan.  A
closed-end second mortgage loan may go over 80% of the value of the property
securing the loan if the Bank holds the first mortgage.  Home equity
lines of credit are originated with an adjustable rate of interest, based on the
prime rate of interest plus a margin, fixed for the first year and adjustable
monthly thereafter.  Home equity lines of credit have up to a 10-year
draw period and require the payment of 1.5% of the outstanding loan balance per
month during the draw period, which amount may be re-borrowed at any time during
the draw period.  Once the draw period has lapsed, the payment is
fixed based on the loan balance at that time.  Home equity
lines-of-credit are limited to a maximum of 80% loan-to-value.  At
September 30, 2009, un-funded commitments on these lines of credit totaled
$615,000.






8




Citizens
Community Federal also offers closed-end second mortgage loans with a fixed rate
of interest.  These loans may be amortized up to 15 years with a
balloon payment at three, five or 10 years.  At September 30, 2009,
fixed-rate second mortgage loans totaled $9.6 million, or 2.2% of the Bank's
gross loan portfolio.




Consumer
Lending.  At September 30, 2009, consumer and other loans
totaled $202.6 million, or 45.7% of the gross loan
portfolio.  Citizens Community Federal offers a variety of secured
consumer loans, including new and used auto, motorcycle, boat and recreational
vehicle loans, loans secured by savings deposits, and a limited amount of
unsecured loans.  Citizens Community Federal originates consumer and
other loans primarily in its market areas.  For fiscal 2009, consumer
lending increased as a result of a strong loan demand throughout our growing
branch system.




Citizens
Community Federal originates secured loans on an indirect basis through its
indirect dealer program.  These secured consumer loans consist of
loans for a wide variety of products, including motorcycles, recreational
vehicles, pianos, all-terrain vehicles, pools and spas.  An indirect
dealer network is currently comprised of 685 active dealerswith businesses located
throughout Citizens Community Federal's market area.  In some
instances, the participating dealer may receive a premium rate for the amount
over our initial interest rate.  The loans are generally originated
with terms from 36 to 60 months and carry fixed rates of
interest.  Citizens Community Federal follows its internal
underwriting guidelines in evaluating loans obtained through the indirect dealer
program, including but not limited to the ability to repay the loan, and credit
scoring to approve the loan.




Auto
loans totaled $24.9 million at September 30, 2009, or 5.6% of gross
loans.  Auto loans may be written for up to five years for a new car
and four years for a used car with fixed rates of
interest.  Loan-to-value ratios are up to 100% of the sales price for
new autos and 100% of the retail value on used autos, based on a valuation from
official used car guides.  However, the borrower must qualify for
amounts exceeding 80% as an unsecured loan.  In addition, Citizens
Community Federal may, on occasion, originate secured auto loans in excess of
100% loan-to-value ratio based upon the credit quality of the
borrower.  Auto loans also may be originated through Citizens
Community Federal's indirect lending program.  Indirect auto loans are
made using the same underwriting guidelines as auto loans originated directly by
Citizens Community Federal.




Citizens
Community Federal originates secured direct loans on a variety of collateral
with terms varying from 36 to 60 months.  At September 30, 2009,
Citizens Community Federal had secured direct consumer loans totaling $37.5
million, of which $17.1 million was for automobiles.  At September 30,
2009, the indirect lending portfolio totaled $159.5 million, of which $7.8
million was for automobiles.




Citizens
Community Federal also originates unsecured consumer loans consisting primarily
of credit card loans totaling $1.4 million at September 30, 2009, overdraft
protection loans totaling $1.1 million at September 30, 2009, and loans made
through the Freedom Loan program.  The Freedom Loan program offers
unsecured loans to consumers with a fixed rate of interest for a maximum term of
48 months for amounts not to exceed $20,000 per individual.  At
September 30, 2009, loans originated through the Freedom Loan program totaled
$3.4 million.




Consumer
loans generally have shorter terms to maturity, which reduces Citizens Community
Federal's exposure to changes in interest rates, and carry higher rates of
interest than do one- to four-family residential mortgage loans.  In
addition, management believes that offering consumer loan products helps to
expand and create stronger ties to our existing customer base by increasing the
number of customer relationships and providing cross-marketing
opportunities.




Consumer
and other loans may entail greater risk than do one- to four-family residential
mortgage loans, particularly in the case of consumer loans which are secured by
rapidly depreciable assets, such as automobiles and recreational
vehicles.  In these cases, any repossessed collateral for a defaulted
loan may not provide an adequate source of repayment of the outstanding loan
balance.  As a result, consumer loan collections are dependent on the
borrower's continuing financial stability and, thus, are more likely to be
adversely affected by job loss, divorce, illness or personal
bankruptcy.






9




Multi-family and Commercial Real
Estate Lending.  We generally do not engage in this type of
lending, but may consider doing so in the future.  However, as part of
the acquisition of the Chippewa Falls branch on November 1, 2002, Citizens
Community Federal obtained a nominal amount of multi-family and commercial real
estate loans.




At
September 30, 2009, our two multi-family and commercial real estate loans
totaled $174,000 or 0.01% of our loan portfolio.  In order to monitor
the adequacy of cash flows on these loans, the borrower is requested or required
to provide periodic financial information.




Loan
Originations and Repayments





Citizens
Community Federal originates loans through marketing efforts and our existing
and walk-in customers.  The ability to originate loans is dependent
upon customer demand for loans in the Bank's market areas.  Demand is
affected by competition and the interest rate environment.  Since
becoming a federal savings bank, Citizens Community Federal has significantly
increased its origination of residential real estate loans.  During
the past few years, Citizens Community Federal, like many other financial
institutions, has experienced significant refinancing on loans due to the low
interest rate environment prevailing in the United States.  In periods
of economic uncertainty, the ability of financial institutions, including
Citizens Community Federal, to originate or purchase large dollar volumes of
real estate loans may be substantially reduced or restricted, with a resultant
decrease in interest income.  Citizens Community Federal does not
engage in, nor have any exposure to, subprime or construction
lending.




The
following table shows the loan origination, purchase, sale and repayment
activities of Citizens Community Federal for the periods indicated.




Year
      ended September 30,2009
            
            
            2008
            
            
            2007(In
      thousands)Originations
      by Type:Real
      estate(1)
            
            $
            95,136
            
            
            $
            55,499
            
            
            $
            41,701Non-real
      estate-consumer
            
            
            104,709
            
            
            
            90,143
            
            
            
            91,447Total
      loans originated
            
            
            199,845
            
            
            
            145,642
            
            
            
            133,148Repayments:Principal
      repayments
            
            
            126,109
            
            
            
            96,251
            
            
            
            71,512Loans
      transferred to other718
            
            
            
            315
            
            
            
            174Net
      increase (decrease)
            
            $
            73,018
            
            
            $
            49,076
            
            
            $
            61,462


______________


(1)
            Real
      estate loans include loans with a payable-on-demand feature of $70.4
      million in fiscal 2009, $43.7 million in fiscal 2008 and $32.1 million in
      fiscal 2007.  Real estate loans also include home equity lines
      of credit of $266,000 for fiscal 2009, $129,000 for fiscal 2008 and
      $349,000 for fiscal 2007.





Asset
Quality





Procedures.  When a
borrower fails to make a payment on a mortgage loan on or before the due date, a
late notice is mailed five days after the due date.  When the loan is
10 days past due, a loan officer will begin contacting the borrower by
phone.  This process will continue until satisfactory payment
arrangements have been made.  If the loan becomes two payments and ten
days past due, a notice of right-to-cure default is sent.  If the loan
becomes over 90 days delinquent, a drive-by inspection is done while further
attempts to contact the borrower by phone are made.  After the loan is
120 days past due, and acceptable arrangements have not been made, Citizens
Community Federal will generally refer the loan to legal counsel, with
instructions to prepare a notice of intent to foreclose.  This notice
allows the borrower up to 30 days to bring the loan current.  During
this 30-day period, Citizens Community Federal will still attempt to contact the
borrower to implement satisfactory payment arrangements.  If the loan
becomes 150 days past due and satisfactory arrangements have not been made,
foreclosure will be instituted.




For
consumer loans a similar process is followed, with the initial written contact
being made once the loan is five days past due.  Follow-up contacts
are generally on an accelerated basis compared to the mortgage loan
procedure.






10




Citizens Community Federal divides its loans into two categories, mortgage loans
and non-mortgage loans.  For all loans in both categories, Citizens
Community Federal employs a dual-loss reserve strategy.  First, using
a rolling three-year history, all loans, excluding classified loans, are
assigned an inherent loss reserve.  Next, each loan (mortgage and
non-mortgage) that becomes over 61 days delinquent is reviewed by senior
management.  In addition, Citizens Community Federal assesses several
factors including negative change in income, negative change in collateral,
negative change in employment and other characteristics.




The
procedure for charging off consumer loans does not differentiate between the
different types of consumer loans.  Citizens Community Federal's loan
underwriting is based mainly on the borrowers' ability to pay, along with the
value of the collateral.  All closed-end consumer loans are either
charged off or recognized as a specific loss after they become delinquent 120
days.  All open-end consumer loans are charged off or recognized as a
specific loss after they become delinquent 180 days.  Consumer loans
with collateral are charged off or recognized as a specific loss down to
collateral resale value.  In lieu of charging off the entire balance,
loans with non-real estate collateral may be written down to the value of the
collateral, if repossession is assured.





Delinquent
Loans.  The following table sets forth our loan delinquencies
by type, number and amount at September 30, 2009.




Loans
      Delinquent For:60-89
      Days
            
            
            90
      Days and Over
            
            
            Total
      Delinquent LoansNumber
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount(Dollars
      in thousands)Real
      estate
            
            
            4
            
            
            $
            169
            
            
            
            15
            
            
            $
            1,261
            
            
            
            19
            
            
            $
            1,430Consumer(1)
            
            
            184
            
            
            
            1,551
            
            
            
            525
            
            
            
            4,528
            
            
            
            709
            
            
            
            6,079Total
            
            
            188
            
            
            $
            1,720
            
            
            
            540
            
            
            $
            5,789
            
            
            
            728
            
            
            $
            7,509


__________


(1)   Includes
credit card accounts.





Non-performing
Assets.  The table below sets forth the amounts and categories
of non-performing assets in our loan portfolio.  Loans are placed on
non-accrual status when the loan becomes more than 90 days
delinquent.  At all dates presented, we had no troubled debt
restructurings which involve forgiving a portion of interest or principal on any
loans or making loans at a rate materially less than that of market
rates.  Foreclosed assets owned include assets acquired in settlement
of loans.




At
      September 30,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(Dollars
      in thousands)Non-Accruing
      Loans:One-
      to four-family
            
            $
            1,261
            
            
            $
            1,067
            
            
            $
            297
            
            
            $
            406
            
            
            $
            207Consumer(1)
            
            
            4,528
            
            
            
            2,188
            
            
            
            1,223
            
            
            
            984
            
            
            
            462Total
            
            
            5,789
            
            
            
            3,255
            
            
            
            1,520
            
            
            
            1,390
            
            
            
            669Foreclosed
      Assets:One-
      to four-family
            
            
            562
            
            
            
            ---
            
            
            
            94
            
            
            
            376
            
            
            
            ---Consumer
            
            
            74
            
            
            
            ---
            
            
            
            29
            
            
            
            13
            
            
            
            32Total
            
            
            636
            
            
            
            ---
            
            
            
            123
            
            
            
            389
            
            
            
            32Total
      non-performing assets
            
            $
            6,425
            
            
            $
            3,255
            
            
            $
            1,643
            
            
            $
            1,779
            
            
            $
            701Total
      as a percentage of total assets
            
            
            1.12
            %
            
            
            0.68
            %
            
            
            0.43
            %
            
            
            0.63
            %
            
            
            0.29
            %


___________


(1)
            Includes
      credit card accounts.





For the
years ended September 30, 2009, 2008 and 2007, gross interest income, which
would have been recorded had the non-accruing loans been current in accordance
with their original terms, amounted to $402,000, $187,000 and $101,900,
respectively.  No amount was included in interest income on these
loans for these periods.






11




Classified
Assets.  OTS regulations provide for the classification of
loans and other assets, such as debt and equity securities considered to be of
lesser quality, as "substandard," "doubtful" or "loss."  An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if
any.  "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected.  Assets classified as "doubtful"
have all of the weaknesses inherent in those classified "substandard," with the
added characteristic that the weaknesses present make "collection or liquidation
in full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable."  Assets classified as "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not
warranted.




When we
classify problem assets as either substandard or doubtful, we may establish
general allowances for loan losses in an amount deemed prudent by management and
approved by the Bank's board of directors.  General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets.  When we
classify problem assets as "loss," we are required either to establish a
specific allowance for losses equal to 100% of that portion of the asset so
classified or to charge off such amount.  Our determination as to the
classification of our assets and the amount of our valuation allowances is
subject to review by the OTS and the FDIC, which may order the establishment of
additional general or specific loss allowances.




In
connection with the filing of our periodic reports with the OTS and in
accordance with our classification of assets policy, we regularly review the
problem assets in our portfolio to determine whether any assets require
classification in accordance with applicable regulations.  On the
basis of management's review of our assets, at September 30, 2009, Citizens
Community Federal had classified $5.8 million of the loans in its portfolio as
substandard, all of which was included in non-performing assets.  The
total amount classified represented 10.5% of the Company's equity capital and
1.1% of assets at September 30, 2009.




Provision for Loan
Losses.  Citizens Community Federal recorded a provision for
loan losses for the year ended September 30, 2009, of $1.4 million, compared to
$721,000 for the year ended September 30, 2008, and $470,000 for the year ended
September 30, 2007.  The provision for loan losses is charged to
income to bring the allowance for loan losses to reflect probable incurred
losses based on the factors discussed below under "Allowance for Loan
Losses."  The provision for loan losses for the year ended September
30, 2009, was based on management's review of such factors which indicated that
the allowance for loan losses reflected probable incurred losses in the loan
portfolio as of the year ended September 30, 2009.




Allowance for Loan
Losses.  Citizens Community Federal maintains an allowance for
loan losses to absorb probable incurred losses in the loan
portfolio.  The allowance is based on ongoing, quarterly assessments
of the estimated probable incurred losses in the loan portfolio.  In
evaluating the level of the allowance for loan losses, management considers the
types of loans and the amount of loans in the loan portfolio, historical loss
experience, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, and prevailing economic
conditions.




At
September 30, 2009, the allowance for loan losses was $1.9 million, or 0.44%, of
the total loan portfolio. Assessing the allowance for loan losses is inherently
subjective as it requires making material estimates that may be susceptible to
significant change.  In the opinion of management, the allowance, when
taken as a whole, reflects estimated probable loan losses in our loan
portfolios.







12




The
following table sets forth an analysis of our allowance for loan losses as of
the dates indicated.




Year
      Ended September 30,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(Dollars
      in Thousands)Balance at beginning of period
            
            $
            1,192
            
            
            $
            926
            
            
            $
            835
            
            
            $
            803
            
            
            $
            554Charge-offs:One- to four-family
            
            
            (40
            )
            
            
            (44
            )
            
            
            (83
            )
            
            
            (19
            )
            
            
            (24
            )Consumer
            
            
            (633
            )
            
            
            (448
            )
            
            
            (330
            )
            
            
            (228
            )
            
            
            (212
            )Total charge-offs
            
            
            (673
            )
            
            
            (492
            )
            
            
            (413
            )
            
            
            (247
            )
            
            
            (236
            )Recoveries:One- to four-family
            
            
            1
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Consumer
            
            
            36
            
            
            
            37
            
            
            
            34
            
            
            
            28
            
            
            
            31Total recoveries
            
            
            37
            
            
            
            37
            
            
            
            34
            
            
            
            28
            
            
            
            31Net charge-offs
            
            
            (636
            )
            
            
            (455
            )
            
            
            (379
            )
            
            
            (219
            )
            
            
            (205
            )Other-obtained through merger
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            40Additions charged to operations
            
            
            1,369
            
            
            
            721
            
            
            
            470
            
            
            
            251
            
            
            
            414Balance at end of period
            
            $
            1,925
            
            
            $
            1,192
            
            
            $
            926
            
            
            $
            835
            
            
            $
            803Ratio
      of allowance for loan losses to
              net
      loans outstanding at
              end
      of period
            
            
            0.44
            %
            
            
            0.32
            %
            
            
            0.29
            %
            
            
            0.32
            %
            
            
            0.37
            %Ratio
      of net charge-offs during the
              period
      to average gross loans
              outstanding
      during the period
            
            
            0.16
            %
            
            
            0.13
            %
            
            
            0.13
            %
            
            
            0.08
            %
            
            
            0.12
            %Ratio
      of net charge-offs during the
              period
      to average non-performing
              assets
            
            
            13.14
            %
            
            
            18.58
            %
            
            
            22.15
            %
            
            
            17.66
            %
            
            
            28.37
            %





13


The distribution of our allowance for losses on loans at the dates indicated is
summarized as follows:




At
      September 30,2009
            
            
            2008
            
            
            2007Amount
      of
              Loan
      Loss
              Allowance
            
            
            Loan
              Amounts
      by
              Category
            
            
            Percent
      of
              Loans
      in Each
              Category
      to
              Total
      Loans
            
            
            Amount
      of
              Loan
      Loss
              Allowance
            
            
            Loan
              Amounts
      by
              Category
            
            
            Percent
      of
              Loans
      in Each
              Category
      to
              Total
      Loans
            
            
            Amount
      of
              Loan
      Loss
              Allowance
            
            
            Loan
              Amounts
      by
              Category
            
            
            Percent
      of
              Loans
      in Each
              Category
      to
              Total
      Loans(Dollars in Thousands)Real estate
            
            $
            242
            
            
            $
            240,225
            
            
            
            54
            %
            
            $
            184
            
            
            $
            204,912
            
            
            
            55
            %
            
            $
            64
            
            
            $
            187,957
            
            
            
            59
            %Consumer
            
            
            1,683
            
            
            
            202,570
            
            
            
            46
            
            
            
            1,008
            
            
            
            164,865
            
            
            
            45
            
            
            
            862
            
            
            
            132,744
            
            
            
            41Total
            
            $
            1,925
            
            
            $
            442,795
            
            
            
            100
            %
            
            $
            1,192
            
            
            $
            369,777
            
            
            
            100
            %
            
            $
            926
            
            
            $
            320,701
            
            
            
            100
            %






At
      September 30,2006
            
            
            2005Amount
      of
              Loan
      Loss
              Allowance
            
            
            Loan
              Amounts
      by
              Category
            
            
            Percent
      of
              Loans
      in Each
              Category
      to
              Total
      Loans
            
            
            Amount
      of
              Loan
      Loss
              Allowance
            
            
            Loan
              Amounts
      by
              Category
            
            
            Percent
      of
              Loans
      in Each
              Category
      to
              Total
      Loans(Dollars in Thousands)Real estate
            
            $
            52
            
            
            $
            165,636
            
            
            
            64
            %
            
            $
            59
            
            
            $
            144,551
            
            
            
            66
            %Consumer
            
            
            783
            
            
            
            93,603
            
            
            
            36
            
            
            
            744
            
            
            
            74,183
            
            
            
            34Total
            
            $
            835
            
            
            $
            259,239
            
            
            
            100
            %
            
            $
            803
            
            
            $
            218,734
            
            
            
            100
            %








14


Investment
Activities





Federally chartered
savings institutions have the authority to invest in various types of liquid
assets, including United States Treasury obligations, securities of various
federal agencies, including callable agency securities, certain certificates of
deposit of insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds.  Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in investment grade commercial paper and corporate debt securities, and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly.




The chief
financial officer has the basic responsibility for the management of our
investment portfolio, subject to the direction and guidance of the ALM
Committee.  The chief financial officer considers various factors when
making decisions, including the marketability, maturity and tax consequences of
the proposed investment.  The maturity structure of investments will
be affected by various market conditions, including the current and anticipated
slope of the yield curve, the level of interest rates, the trend of new deposit
inflows, and the anticipated demand for funds via deposit withdrawals and loan
originations and purchases.




The
general objectives of our investment portfolio are to provide liquidity when
loan demand is high, to assist in maintaining earnings when loan demand is low
and to maximize earnings while satisfactorily managing risk, including credit
risk, reinvestment risk, liquidity risk and interest rate risk.




In fiscal
2008, we utilized our expertise as a mortgage loan originator, selectively
purchasing non-agency mortgage-backed securities ("NAMBS") that either met or
exceeded our underwriting guidelines.  This strategy  was
employed to complement consumer loan underwriting.  Strong loan demand
in consumer lending required management of the structure of the balance sheet
and compliance with the OTS Home Owners Loan Act 35% consumer lending bucket
cap.  Management chose to increase the asset base by purchasing
AAA-rated NAMBS funded by FHLB advances.  This allowed the Bank to
continue making consumer loans.  All NAMBS had original issue dates
between 2003 and 2007.  In addition, $20 million in Agency MBS were
purchased in fiscal 2009.




At the
time of purchase, the securities were AAA-rated Jumbo Prime NAMBS, with an
average loan-to-value ratio of 68.98% and an average FICO score of
741.  We stayed within the Jumbo Prime sector, and purchased no
Sub-Prime or Alt-A MBS.  Furthermore, while the bank has purchased
hybrid ARM securities, we have refrained from purchasing any
negative-amortization loans or option ARMs.  Finally, the NAMBS
portfolio consists only of those assets that are Secondary Mortgage Enhancement
Act of 1984 ("SMMEA") eligible, meaning that the NAMBS purchased are in one of
the two highest rating categories and are first-lien mortgages
only.




Deteriorating
economic conditions have affected housing markets across the nation and as a
result, our NAMBS portfolio has been negatively impacted.  A portion
of the portfolio has recently seen downgrades from one or more rating
agencies.  The percentage of the MBS portfolio rated at below
investment grade at September 30, 2009 and 2008 was 40.7% and 5.8%,
respectively.





The
Company evaluates all investment securities on a quarterly basis, and more
frequently when economic conditions warrant to determine if an
other-than-temporary impairment exists. A debt security is considered
impaired if the fair value is less than its amortized cost basis at the report
date. If impaired, management then assesses whether the unrealized loss is
other-than-temporary.





Current
authoritative guidance provides that an unrealized loss is generally deemed to
be other-than-temporary and a credit loss is deemed to exist if the present
value of the expected future cash flows is less than the amortized cost basis of
the debt security. The credit loss component of an other-than-temporary
impairment write-down is recorded in earnings as a component of
other-than-temporary impairment in the consolidated statements of operations,
while the remaining portion of the impairment loss is recognized in other
comprehensive gain (loss), provided the Company does not intend to sell the
underlying debt security and it is “more likely than not” that the Company will
not have to sell the debt security prior to recovery.





During
the quarterly period ending June 30, 2009, the Company experienced $12.5 million
of other than temporary impairment losses on nine securities included in its MBS
portfolio.  $7.2 million of these losses were deemed to be a credit loss
and were recognized in earnings. $5.3 million of these losses are included (net
of tax) in other comprehensive loss.  At September 30, 2009, the aggregate
fair value of those nine securities was $14.6 million.






15




The
following table sets forth the composition of Citizens Community Federal's
investment securities and interest-bearing deposits at the dates
indicated.




At
      September 30,2009
            
            2008
            
            
            
            2007Fair
              Value
            
            
            %
      of Total
            
            
            
            Fair
              Value
            
            
            
            %
      of Total
            
            
            
            Fair
              Value
            
            
            
            %
      of Total(Dollars
      in Thousands)Investment
      securities:Federal
      Home Loan Bank stock
            
            $
            6,040
            
            
            
            9.33
            %
            
            
            $
            5,787
            
            
            
            
            8.52
            %
            
            
            $
            4,822
            
            
            
            
            10.77
            %Interest-bearing
      deposits with banks
            
            
            2,458
            
            
            
            3.80
            
            
            
            
            371
            
            
            
            
            0.55
            
            
            
            
            371
            
            
            
            
            0.83Mortgage-backed
      securities
            
            
            56,215
            
            
            
            86.87
            
            
            
            
            61,776
            
            
            
            
            90.93
            
            
            
            
            39,592
            
            
            
            
            88.40$
            64,713
            
            
            
            100.00
            %
            
            
            $
            67,934
            
            
            
            
            100.00
            %
            
            
            $
            44,785
            
            
            
            
            100.00
            %





16


Sources
of Funds





General.  Citizens
Community Federal's sources of funds are deposits, borrowings, payment of
principal and interest on loans, interest earned on or maturation of other
investment securities and funds provided from operations.




Deposits.  Citizens
Community Federal offers a variety of deposit accounts to both consumers and
businesses having a wide range of interest rates and terms.  Deposits
consist of savings accounts, money market deposit accounts, demand accounts and
certificates of deposit.  Citizens Community Federal solicits deposits
primarily in its market areas, including its in-store branches, and from
financial institutions and has accepted a limited amount of brokered
deposits.  At September 30, 2009, Citizens Community Federal had $9.8
million of brokered deposits.  We obtain these deposits from brokers
when the rates requested are less than the amount we pay our retail
customers.  The typical term for these brokered deposits are 12 to 18
months.  Our experience is that these are not volatile deposits
subject to significant early withdrawal.  Citizens Community Federal
primarily relies on competitive pricing policies, marketing and customer service
to attract and retain these deposits.  The Bank constantly searches for the
most cost-effective source of funds, either through brokered deposits, or
through marketing our own rates to protect our margin and maintain our sales
culture.




The flow
of deposits is influenced significantly by general economic conditions, changes
in money market and prevailing interest rates and competition.  The
variety of deposit accounts we offer has allowed us to be competitive in
obtaining funds and to respond with flexibility to changes in consumer
demand.  We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate
conscious.  We try to manage the pricing of our deposits in keeping
with our asset/liability management, liquidity and profitability objectives,
subject to competitive factors.  Based on experience, management
believes that Citizens Community Federal's deposits are relatively stable
sources of funds.  Despite this stability, the ability to attract and
maintain these deposits and the rates paid on them has been and will continue to
be significantly affected by market conditions.




Deposit
Flow





The
following table sets forth deposit flows during the periods
indicated.




Year
      Ended September 30,2009
            
            
            2008
            
            
            2007(Dollars
      in Thousands)Opening
      balance
            
            $
            297,243
            
            
            $
            207,734
            
            
            $
            186,711Deposits
      assumed in ANB branch
              acquisition
            
            
            ---
            
            
            
            18,406
            
            
            
            ---Net
      change in deposits
            
            
            101,910
            
            
            
            61,965
            
            
            
            14,029Interest
      credited
            
            
            10,158
            
            
            
            9,138
            
            
            
            6,994Ending
      balance
            
            $
            409,311
            
            
            $
            297,243
            
            
            $
            207,734Net
      increase
            
            $
            112,068
            
            
            $
            89,509
            
            
            $
            21,023Percent
      increase
            
            
            37.7
            %
            
            
            43.1
            %
            
            
            11.3
            %





17


The
following table sets forth the dollar amount of savings deposits in the various
types of deposit programs we offered at the dates indicated.


At
      September 30,2009
            
            
            2008
            
            
            2007Amount
            
            
            Percent
              of
      Total
            
            
            Amount
            
            
            Percent
              of
      Total
            
            
            Amount
            
            
            Percent
              of
      Total(Dollars
      in Thousands)Transaction Accountsand Savings Deposits:Demand accounts
            
            $
            19,731
            
            
            
            4.82
            %
            
            $
            19,017
            
            
            
            6.40
            %
            
            $
            18,657
            
            
            
            8.98
            %Savings accounts
            
            
            26,387
            
            
            
            6.45
            
            
            
            22,267
            
            
            
            7.49
            
            
            
            22,855
            
            
            
            13.06Money market accounts
            
            
            146,709
            
            
            
            35.84
            
            
            
            44,777
            
            
            
            15.06
            
            
            
            27,121
            
            
            
            11.00Total non-certificates
            
            
            192,827
            
            
            
            47.11
            
            
            
            86,061
            
            
            
            28.95
            
            
            
            68,633
            
            
            
            33.04Certificates:6-12
      month
            
            
            64,321
            
            
            
            15.71
            
            
            
            67,481
            
            
            
            22.70
            
            
            
            53,868
            
            
            
            25.9315-18
      month
            
            
            54,380
            
            
            
            13.29
            
            
            
            52,504
            
            
            
            17.67
            
            
            
            30,055
            
            
            
            14.4724-60
      month
            
            
            24,737
            
            
            
            6.04
            
            
            
            21,908
            
            
            
            7.37
            
            
            
            18,744
            
            
            
            9.02Anniversary
            
            
            641
            
            
            
            0.16
            
            
            
            265
            
            
            
            0.09
            
            
            
            170
            
            
            
            0.08Institutional
            
            
            56,939
            
            
            
            13.91
            
            
            
            56,738
            
            
            
            19.09
            
            
            
            26,378
            
            
            
            12.70IRA
            
            
            15,466
            
            
            
            3.78
            
            
            
            12,286
            
            
            
            4.13
            
            
            
            9,886
            
            
            
            4.76Total certificates
            
            
            216,484
            
            
            
            52.89
            
            
            
            211,182
            
            
            
            71.05
            
            
            
            139,101
            
            
            
            66.96Total Deposits
            
            $
            409,311
            
            
            
            100.00
            %
            
            $
            297,243
            
            
            
            100.00
            %
            
            $
            207,734
            
            
            
            100.00
            %





The
following table shows rate and maturity information for Citizens Community
Federal's certificates of deposit at September 30, 2009.




0.00-
              1.99%
            
            
            
            2.00-
              3.99%
            
            
            
            4.00-
              5.99%
            
            
            Total
            
            
            Percent
              of
      Total(Dollars
      in Thousands)Certificate Accounts MaturingDuring
      the 12 Months Ended:September
      30, 2010
            
            $
            18,974
            
            
            $
            122,664
            
            
            $
            21,864
            
            
            $
            163,502
            
            
            
            75.52
            %September
      30, 2011
            
            
            294
            
            
            
            35,958
            
            
            
            5,136
            
            
            
            41,388
            
            
            
            19.12September
      30, 2012
            
            
            5
            
            
            
            5,914
            
            
            
            3,216
            
            
            
            9,135
            
            
            
            4.22September
      30, 2013
            
            
            14
            
            
            
            1,590
            
            
            
            849
            
            
            
            2,453
            
            
            
            1.13Thereafter
            
            
            ---
            
            
            
            6
            
            
            
            ---
            
            
            
            6
            
            
            
            0.01Total
            
            $
            19,287
            
            
            $
            166,132
            
            
            $
            31,065
            
            
            $
            216,484
            
            
            
            100.00
            %Percent of total
            
            
            8.91
            %
            
            
            76.74
            %
            
            
            14.35
            %
            
            
            100.00
            %







18


The
following table indicates the amount of Citizens Community Federal's
certificates of deposit by time remaining until maturity as of September 30,
2009.




3
      Months
              or
      Less
            
            
            Over
      3 to
              6
      Months
            
            
            Over
      6 to
              12
      Months
            
            
            Over
              12
      Months
            
            
            Total(In
      thousands)Certificates
      of depositless
      than $100,000
            
            $
            24,571
            
            
            $
            31,415
            
            
            $
            56,303
            
            
            $
            38,890
            
            
            $
            151,179Certificates
      of depositof
      $100,000 or more
            
            
            17,602
            
            
            
            10,353
            
            
            
            23,258
            
            
            
            14,092
            
            
            
            65,305Total
      certificates of deposit
            
            $
            42,173
            
            
            $
            41,768
            
            
            $
            79,561
            
            
            $
            52,982
            
            
            $
            216,484





Borrowings.  Although
deposits are our primary source of funds, Citizens Community Federal may utilize
borrowings when they are a less costly source of funds and can be invested at a
positive interest rate spread, when it desires additional capacity to fund loan
demand or when they meet asset/liability management goals.  Borrowings
consist of advances from the Federal Home Loan Bank of Chicago.  See
Note 8 of the Notes to Consolidated Financial Statements.




Citizens
Community Federal may obtain advances from the Federal Home Loan Bank of Chicago
upon the security of certain of our mortgage loans and mortgage-backed and other
securities.  These advances may be made pursuant to several different
credit programs, each of which has its own interest rate, range of maturities
and call features.  At September 30, 2009, Citizens Community Federal
had $106.8 million in Federal Home Loan Bank advances outstanding and the
ability to borrow an additional $55.3 million.  These advances were
taken as a liquidity source to fund increasing loan demand in previous years,
and the purchase of investment securities in fiscal 2009.




Citizens
Community Federal is authorized to borrow from the Federal Reserve Bank of
Chicago's "discount window" after it has exhausted other reasonable alternative
sources of funds, including Federal Home Loan Bank borrowings.  We
have never borrowed from our Federal Reserve Bank.




The
following table sets forth the maximum month-end balance and average balance of
borrowings for the periods indicated.




Year
      Ended September 30,2009
            
            
            2008
            
            
            2007(In
      Thousands)Maximum Balance:FHLB advances
            
            $
            120,805
            
            
            $
            115,737
            
            
            $
            96,446Average Balance:FHLB
      advances
            
            $
            105,169
            
            
            $
            105,699
            
            
            $
            48,643





The following table sets forth certain
information as to Citizens Community Federal's borrowings at the dates
indicated.





At
      September 30,2009
            
            
            2008
            
            
            2007(Dollars
      in Thousands)FHLB advances
            
            $
            106,805
            
            
            $
            110,245
            
            
            $
            96,446Weighted
      average interest rate
              of
      FHLB advances
            
            
            3.89
            %
            
            
            4.48
            %
            
            
            5.19
            %


19


Subsidiary
and Other Activities




As a
federally chartered savings bank, Citizens Community Federal is permitted by OTS
regulations to invest up to 2% of assets, or $11.5 million at September 30,
2009, in the stock of, or unsecured loans to, service corporation subsidiaries.
Citizens Community Federal may invest an additional 1% of our assets in service
corporations where such additional funds are used for inner-city or community
development purposes.  Citizens Community Federal does not currently
have any subsidiary service corporations.




Employees





At
September 30, 2009, the Bank had a total of 102 full-time employees and 188
part-time employees.  Employees are not represented by any collective
bargaining group.  Management considers its employee relations to be
good.




REGULATION





Set forth
below is a brief description of certain laws and regulations that are applicable
to Citizens Community Bancorp, Inc. and Citizens Community
Federal.  The description of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, does not
purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.




Legislation
is introduced from time to time in the United States Congress that may affect
our operations.  In addition, the regulations governing Citizens
Community Bancorp, Inc. and Citizens Community Federal may be amended from time
to time by the OTS, the FDIC or the SEC, as appropriate.  Any such
legislative or regulatory changes in the future could adversely affect our
operations and financial condition.  No assurance can be given as to
whether or in what form any such changes may occur.




Citizens
Community Federal





Citizens
Community Federal, as a federally chartered savings bank, is subject to
regulation and oversight by the OTS extending to all aspects of its
operations.  Citizens Community Federal also is subject to regulation
and examination by the FDIC, which insures the deposits of Citizens Community
Federal to the maximum extent permitted by law.  This regulation of
Citizens Community Federal is intended for the protection of depositors and the
insurance of deposit accounts and not for the purpose of protecting
stockholders.  As a federal savings bank, Citizens Community Federal
is required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS. Citizens Community Bancorp, Inc., as the Bank's holding
company, is also subject to regulation and examination by the OTS.




OTS
Regulation.  Our relationship with our depositors and borrowers
is regulated to a great extent by federal laws and OTS regulations, especially
in such matters as the ownership of savings accounts and the form and content of
our mortgage requirements.  In addition, the branching authority of
Citizens Community Federal is regulated by the OTS.  Citizens
Community Federal is generally authorized to branch nationwide.




The
investment and lending authority of Citizens Community Federal is prescribed by
federal laws and regulations, and it is prohibited from engaging in any
activities not permitted by such laws and regulations.  As a federal
savings bank, Citizens Community Federal is required to meet a qualified thrift
lender test.  This test requires Citizens Community Federal to have at
least 65% of its portfolio assets, as defined by regulation, in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis.  In addition, Citizens may have no more than 35% of total
assets in consumer loans, commercial paper and corporate debt
securities  As an alternative, we may maintain 60% of the Bank's
assets in those assets specified in Section 7701(a)(19) of the Internal Revenue
Code.  Under either test, we are required to maintain a significant
portion of our assets in residential-housing-related loans and
investments.  Any institution that fails to meet the qualified thrift
lender test becomes subject to certain restrictions on its operations and must
convert to a national bank charter, unless it re-qualifies as, and thereafter
remains, a qualified thrift lender.  If such an institution has not
re-qualified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank.  We were not subject to a similar
requirement when we were a credit union and were not in compliance with this
requirement at the time we became a federal savings bank.  As of
September 30, 2009, Citizens Community Federal met this requirement with a
qualified thrift lender percentage of 81.13%.  In addition, at
September 30, 2009, Citizens had 34.69% of its assets in consumer loans,
commercial paper and corporate debt securities, in compliance with the
applicable thrift lender limit.






20




Under OTS
regulations, Citizens Community Federal is subject to a lending limit for loans
to one borrower or group of related borrowers.  This lending limit is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case the limit is increased to 25% of impaired capital and
surplus).  At September 30, 2009, Citizens Community Federal's lending
limit under this restriction was $7.7 million.  At September 30, 2009,
our outstanding loans are in compliance with this lending limit.




The OTS's
oversight of Citizens Community Federal includes reviewing its compliance with
the customer privacy requirements imposed by the Gramm-Leach-Bliley Act of 1999
and the anti-money laundering provisions of the USA Patriot Act.  The
Gramm-Leach-Bliley privacy requirements place limitations on the sharing of
consumer financial information with unaffiliated third parties.  They
also require each financial institution offering financial products or services
to retail customers to provide such customers with its privacy policy and with
the opportunity to "opt out" of the sharing of their personal information with
unaffiliated third parties.  The USA Patriot Act significantly expands
the responsibilities of financial institutions in preventing the use of the
United States financial system to fund terrorist activities.  Its
anti-money laundering provisions require financial institutions operating in the
United States to develop anti-money laundering compliance programs and due
diligence policies and controls to ensure the detection and reporting of money
laundering.  These compliance programs are intended to supplement
existing compliance requirements under the Bank Secrecy Act and the Office of
Foreign Assets Control Regulations.




We are
subject to periodic examinations by the OTS.  During these
examinations, the examiners may require Citizens Community Federal to provide
for higher general or specific loan loss reserves, which can impact our capital
and earnings.  As a federal savings bank, Citizens Community Federal
is subject to a semi-annual assessment, based upon its total assets, to fund the
operations of the OTS.




Transactions
between Citizens Community Federal and its affiliates generally are required to
be on terms as favorable to the institution as transactions with non-affiliates,
and certain of these transactions, such as loans to an affiliate, are restricted
to a percentage of Citizens Community Federal's capital.  In addition,
Citizens Community Federal may not lend to any affiliate engaged in activities
not permissible for a bank holding company or acquire the securities of most
affiliates.  Citizens Community Bancorp, Inc. is an affiliate of
Citizens Community Federal.  Citizens Community Federal has entered
into an expense allocation agreement and a tax allocation agreement with
Citizens Community Bancorp, Inc. in order to meet these
requirements.




The OTS
has adopted guidelines establishing safety and soundness standards on such
matters as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits.  Any institution regulated
by the OTS that fails to comply with these standards must submit a compliance
plan.




The OTS
has extensive enforcement authority over all savings associations and their
holding companies, including, Citizens Community Federal and Citizens Community
Bancorp, Inc. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions.  In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices.  Other actions or inactions may provide
the basis for enforcement action, including misleading or untimely reports filed
with the OTS.  Except under certain circumstances, public disclosure
of final enforcement actions by the OTS is required by law.




FDIC Regulation and Insurance of
Accounts.  Citizens Community Federal's deposits are insured up
to the applicable limits by the FDIC, and such insurance is backed by the full
faith and credit of the United States Government.  As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured
institutions.  It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the deposit insurance fund.  The FDIC also has the
authority to initiate enforcement actions against Citizens Community Federal and
may terminate our deposit insurance if it determines that we have engaged in
unsafe or unsound practices or is in an unsafe or unsound
condition.




21


Citizens
Community Bancorp, Inc.




As a
savings association holding company, Citizens Community Bancorp, Inc. is subject
to regulation, supervision and examination by the OTS.  Applicable
federal law and regulations limit the activities of Citizens Community Bancorp,
Inc. and require the approval of the OTS for any acquisition or divestiture of a
subsidiary, including another financial institution or holding company
thereof.  Citizens Community Bancorp, Inc. is an affiliate of Citizens
Community Federal, so its transactions with Citizens Community Federal are
subject to regulatory limits and must be on terms as favorable to Citizens
Community Federal as its transactions with non-affiliates.




If
Citizens Community Federal fails the qualified thrift lender test, then Citizens
Community Bancorp, Inc. must obtain the approval of the OTS prior to continuing
after such failure, directly or through other subsidiaries, any business
activity other than those approved for bank holding companies or their
subsidiaries.  In addition, within one year of such failure Citizens
Community Bancorp, Inc. must register as, and will become subject to, the
restrictions applicable to bank holding companies.




Regulatory
Capital Requirements





Capital Requirements for Citizens
Community Federal.  Citizens Community Federal is required to
maintain minimum levels of regulatory capital under OTS
regulations.  These regulations established three capital standards, a
tangible capital requirement, a leverage or core capital requirement and a
risk-based capital requirement.  The OTS is also authorized to impose
capital requirements in excess of these standards on a case-by-case
basis.




The
capital regulations require tangible capital of at least 1.5% of adjusted total
assets, as defined by regulation.  Tangible capital generally includes
common stockholders' equity and retained earnings, and certain noncumulative
perpetual preferred stock and related earnings and excludes most intangible
assets, which also are deducted from assets for purposes of calculating this
capital ratio.  At September 30, 2009, Citizens Community Federal had
tangible capital of $51.1 million, or 8.9% of adjusted total assets, which was
approximately $42.4 million above the required level.




The
capital standards require core or Tier 1 capital equal to at least 3.0% of
adjusted total assets for the strongest institutions with the highest
examination rating and 4.0% of adjusted total assets for all other institutions,
unless the OTS requires a higher level based on the particular circumstances or
risk profile of the institution.  Core capital generally consists of
tangible capital, plus certain intangibles.  At September 30, 2009,
Citizens Community Federal had $6.7 million of intangibles, $0 of which were
included in core capital.  At September 30, 2009, Citizens Community
Federal had core capital equal to $51.1 million, or 8.9% of adjusted total
assets, which was $28.1 million above the required level of 4%.




The OTS
also requires Citizens Community Federal to have total capital of at least 8.0%
of risk-weighted assets.  Total capital consists of core or Tier 1
capital, as defined above, and Tier 2 capital, which consists of certain
permanent and maturing capital instruments that do not qualify as Tier 1 capital
and of the allowance for possible loan and lease losses up to a maximum of 1.25%
of risk-weighted assets.  Tier 2 capital may be used to satisfy this
risk-based requirement only to the extent of Tier 1 capital.  In
determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
1250%, based on the risk inherent in the type of asset.  The OTS is
authorized to require Citizens Community Federal to maintain an additional
amount of total capital to account for concentration of credit risk, level of
interest rate risk, equity investments in non-financial companies and the risk
of non-traditional activities.  At September 30, 2009, Citizens
Community Federal had $546.4 million in risk-weighted assets and total capital
of $52.1 million, or 9.6% of risk-weighted assets, which was $8.5 million above
the required level.




The OTS
is authorized and, under certain circumstances, required to take certain actions
against savings banks that fail to meet these capital requirements, or that fail
to maintain an additional capital ratio of Tier 1 capital of at least 4.0% of
risk weighted-assets.  The OTS is generally required to take action to
restrict the activities of an "under-capitalized institution," which is an
institution with less than either a 4.0% core capital ratio, a 4.0% Tier 1
risked-based capital ratio or an 8.0% total risk-based capital
ratio.  Any such institution must submit a capital restoration plan,
and, until such plan is approved by the OTS, it may not increase its assets,
acquire another institution, establish a branch or engage in any new activities,
and generally may not make capital distributions.  The OTS is
authorized to impose the additional restrictions on under-capitalized
institutions.




Any
institution that fails to comply with its capital plan or has Tier 1 risk-based
or core capital ratios of less than 3.0% or a total risk-based capital ratio of
less than 6.0% is considered "significantly undercapitalized" and must be made
subject to one or more additional specified actions and operating restrictions
that may cover all aspects of its operations and may include a forced merger or
acquisition of the institution.  An institution with tangible equity
to total assets of less than 2.0% is "critically undercapitalized" and becomes
subject to further mandatory restrictions on it.  The OTS generally is
authorized to reclassify an institution into a lower capital category and impose
the restrictions applicable to such category if the institution is engaged in
unsafe or unsound practices or is in an unsafe or unsound
condition.  The imposition by the OTS of any of these measures on
Citizens Community Federal may have a substantial adverse effect on its
operations and profitability.




22




Institutions
with at least a 4.0% core capital ratio, a 4.0% Tier 1 risked-based capital
ratio and an 8.0% total risk-based capital ratio are considered "adequately
capitalized."  An institution is deemed a "well capitalized"
institution if it has at least a 5% leverage capital ratio, a 6.0% Tier 1
risked-based capital ratio and a 10.0% total risk-based capital
ratio.  At September 30, 2009, Citizens Community Federal was
considered an "adequately capitalized" institution in terms of the risk-based
capital measurement, and “well capitalized” in terms of the leverage and
tangible capital requirements.




The OTS
is also generally authorized to reclassify an institution into a lower capital
category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.  The imposition by the OTS of any of these measures
on Citizens Community Federal may have a substantial adverse effect on its
operations and profitability.




Capital Requirements for Citizens
Community Bancorp, Inc.  Citizens Community Bancorp, Inc. is
not subject to any specific capital requirements.  The OTS, however,
does expect Citizens Community Bancorp, Inc. to support Citizens Community
Federal, including providing additional capital when Citizens Community Federal
does not meet its capital requirements.  As a result of this
expectation, the OTS regulates the ability of Citizens Community Federal to pay
dividends to Citizens Community Bancorp, Inc.




Limitations
on Dividends and Other Capital Distributions





OTS
regulations impose various restrictions on savings institutions with respect to
the ability of Citizens Community Federal to make distributions of capital,
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account.  Citizens Community
Federal must file a notice or application with the OTS before making any capital
distribution.  Citizens Community Federal generally may make capital
distributions during any calendar year in an amount up to 100% of net income for
the year to date plus retained net income for the two preceding years, so long
as it is well-capitalized after the distribution.  If Citizens
Community Federal, however, proposes to make a capital distribution when it does
not meet its current minimum capital requirements (or will not following the
proposed capital distribution) or that will exceed these net income limitations,
it must obtain OTS approval prior to making such distribution.  The
OTS may always object to any distribution based on safety and soundness
concerns.




As
disclosed in our Annual Report, attached as an exhibit to this report, we are
bound by the terms of a Memorandum of Understanding (MOU) with the OTS that
prohibits payment of dividends without prior approval while the Memorandum of
Understanding is in effect.




Federal
Securities Law





The stock
of Citizens Community Bancorp, Inc. is registered with the SEC under the
Securities Exchange Act of 1934, as amended.  Citizens Community
Bancorp, Inc. is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Securities Exchange Act
of 1934.




Citizens
Community Bancorp, Inc. stock held by persons who are affiliates of Citizens
Community Bancorp, Inc. may not be resold without registration unless sold in
accordance with certain resale restrictions.  Affiliates are generally
considered to be officers, directors and principal stockholders.  If
Citizens Community Bancorp, Inc. meets specified current public information
requirements, each affiliate of Citizens Community Bancorp, Inc. will be able to
sell in the public market, without registration, a limited number of shares in
any three-month period.




The SEC
and NASDAQ have adopted regulations and policies under the Sarbanes-Oxley Act of
2002 that apply to Citizens Community Bancorp, Inc. as a registered company
under the Securities Exchange Act of 1934 and a NASDAQ-traded
company.  The stated goals of these Sarbanes-Oxley requirements are to
increase corporate responsibility, provide for enhanced penalties for accounting
and auditing improprieties at publicly traded companies and to protect investors
by improving the accuracy and reliability of corporate disclosures pursuant to
the securities laws.  The SEC and NASDAQ Sarbanes-Oxley-related
regulations and policies include very specific additional disclosure
requirements and new corporate governance rules.  The Sarbanes-Oxley
Act represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its
committees.






23




TAXATION


Federal
Taxation





General.  Citizens
Community Bancorp, Inc., and Citizens Community Federal are subject to federal
income taxation in the same general manner as other corporations, with some
exceptions discussed below.  The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
Citizens Community Bancorp, Inc. or Citizens Community Federal.  Prior
to December 2001, Citizens Community Federal was a credit union and was not
generally subject to corporate income tax.  The Company files
consolidated federal tax returns with Citizens Community
Federal.  Neither the Company nor Citizens Community Federal has been
audited by the Internal Revenue Service during the past five years.




Method of
Accounting.  For federal income tax purposes, Citizens
Community Federal currently reports its income and expenses on the accrual
method of accounting and uses a fiscal year ending on September 30 for filing
its federal income tax return.




Minimum Tax.  The
Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a
base of regular taxable income plus certain tax preferences, called alternative
minimum taxable income.  The alternative minimum tax is payable to the
extent such alternative minimum taxable income is in excess of the regular
tax.  Net operating losses can offset no more than 90% of alternative
minimum taxable income.  Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future
years.  Citizens Community Federal has not been subject the
alternative minimum tax, nor do we have any such amounts available as credits
for carryover.




Net Operating Loss
Carryovers.  A financial institution may elect to carryback net
operating losses to five, four or three-year periods as well as the preceding
two taxable years, and forward to the succeeding 20 taxable
years.  This provision applies to losses incurred in taxable years
beginning after August 6, 1997.  At September 30, 2009, Citizens
Community Bancorp, Inc. will carryback the current net operating loss to prior
years, and have no net operating loss carryforwards for federal income tax
purposes.




Corporate Dividends-Received
Deduction.  Because we have elected to file a consolidated
return with Citizens Community Federal, dividends the Company receives from
Citizens Community Federal will not be included as income to Citizens Community
Bancorp, Inc.  The corporate dividends-received deduction is 100% or
80%, in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, depending on the level of
stock ownership of the payer of the dividend.




State
Taxation





Citizens
Community Bancorp, Inc. and Citizens Community Federal are subject to the
Wisconsin corporate franchise (income) tax, which is assessed at the rate of
7.9% of taxable income.  Wisconsin taxable income generally is the
same as federal taxable income with certain adjustments.  Citizens
Community Federal has branch offices in Minnesota and Michigan and, accordingly,
is subject to state taxes in these states as well.  Neither the
Company nor Citizens Community Federal has been audited by Wisconsin or any
other state taxing authorities during the past five years.




As a
Maryland corporation, Citizens Community Bancorp, Inc. is required to file an
annual report with and pay an annual fee to the State of Maryland.






24




Item
1A.   Risk Factors





The risks
described below are not the only risks we face. Additional risks that we do not
yet know of or that we currently think are immaterial may also impair our future
business operations. If any of the events or circumstances described in the
following risks actually occur, our business, financial condition or results of
operations could be materially adversely affected. In such cases, the trading
price of our common stock could decline.




Our
loan portfolio possesses increased risk due to our substantial number of
consumer loans.




Our
consumer loans accounted for approximately $202.6 million, or 45.7%, of our
total loan portfolio as of September 30, 2009, of which $24.9 million consisted
of automobile loans, $172.0 million consisted of personal loans secured by other
collateral and $5.7 million consisted of unsecured personal
loans.  Generally, we consider these types of loans to involve a
higher degree of risk compared to first mortgage loans on one- to four-family,
owner-occupied residential properties.  As a result of our large
portfolio of consumer loans, it may become necessary to increase the level of
our provision for loan losses, which could hurt our profits.  Consumer
loans generally entail greater risk than do one- to four-family residential
mortgage loans, particularly in the case of loans that are secured by rapidly
depreciable assets, such as automobiles.  In these cases, any
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance.  In addition, $7.8
million of our automobile loans and $151.7 million of our other secured consumer
loans were indirect loans originated by or through third parties, which present
greater risk than our direct lending products.  See the sections
titled "Lending Activities - Consumer Lending" and "Asset Quality" included in
Item 1 of this report.




If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings could decrease.




We make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans.  In determining the amount of the allowance for loan
losses, we review our loans and our loss and delinquency experience and evaluate
economic conditions.  Management recognizes that significant new
growth in the loan portfolio and the refinancing of existing loans can result in
completely new portfolios of unseasoned loans that may not perform in a
historical or projected manner.  If our assumptions are incorrect, our
allowance for loan losses may not be sufficient to cover actual losses,
resulting in additions to our allowance.  Material additions to our
allowance could decrease our net income.  Our allowance for loan
losses was 0.44% of net loans, and 33.3% of non-performing loans at September
30, 2009.  Our regulators periodically review our allowance for loan
losses and may require us to increase our provision for loan losses or recognize
additional loan charge-offs.  Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory authorities will have
a material adverse effect on our financial condition and results of
operations.  As of September 30, 2009, we believe that the current
allowance reflects probable incurred credit losses in the
portfolio.




Impairment of Investment Securities,
Goodwill, Other Intangible Assets, or Deferred Tax Assets could Require Charges
to Earnings, which could Result in a Negative Impact on Our Results of
Operations.


In
assessing the impairment of investment securities, management considers the
length of time and extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issuers, and the intent and
our ability to retain our investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value in the near term.
Under current accounting standards, goodwill and certain other intangible assets
with indeterminate lives are no longer amortized but, instead, are assessed for
impairment periodically or when impairment indicators are present. Assessment of
goodwill and such other intangible assets could result in circumstances where
the applicable intangible asset is deemed to be impaired for accounting
purposes. Under such circumstances, the intangible asset’s impairment would be
reflected as a charge to earnings in the period during which such impairment is
identified. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The impact of
each of these impairment matters could have a material adverse effect on our
business, results of operations, and financial condition.


25





A
failure by us to maintain required levels of capital could have a material
adverse effect on our business.





Banking
regulations require us to maintain adequate levels of capital, in order to
support our operations and fund outstanding liabilities. Furthermore, Citizens
Community Federal is required to maintain specific capital levels. If the Bank
fails to maintain the required capital levels, Citizens Community Federal could
be subject to various sanctions by federal regulators that could adversely
impact us.  Such sanctions could potentially include, without
limitation, the termination of deposit insurance by the Federal Deposit
Insurance Corporation, limitations on the Bank's ability to pay dividends to us
and the issuance of a capital directive by a federal regulatory authority
requiring an increase in capital.





Our ability and the ability of the Bank to raise additional capital, if needed,
may be impaired by changes and trends in the capital markets that are outside
our control. Accordingly, there can be no assurance that we will be able to
raise additional capital, if needed on terms acceptable to us.





Rising
interest rates may hurt our profits.




To be
profitable we have to earn more interest on our loans and investments than we
pay on our deposits and borrowings.  Overall, interest rates generally
have decreased in fiscal 2009 and 2008.  If interest rates begin to
rise again, our net interest income and the value of our assets could be reduced
if interest paid on interest-bearing liabilities, such as deposits and
borrowings, increases more quickly than interest received on interest-earning
assets, such as loans and investments.  This is most likely to occur
if short-term interest rates increase at a faster rate than long-term interest
rates, which would cause income to go down.  In addition, rising
interest rates may hurt our income, because they may reduce the demand for loans
and the value of our securities.  A flat yield curve also may hurt our
income, because it would reduce our ability to reinvest proceeds from loan and
investment repayments at higher rates.  See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Quantitative and
Qualitative Disclosures About Market Risk" in the Annual Report, attached hereto
as Exhibit 13.




If
economic conditions continue to deteriorate, our results of operations and
financial condition could be adversely impacted as borrowers' ability to repay
loans declines and the value of the collateral securing our loans
decreases.




Our
financial results may be adversely affected by changes in prevailing economic
conditions, including decreases in real estate values, changes in interest rates
that cause a decrease in interest rate spreads, adverse employment conditions,
the monetary and fiscal policies of the federal government and other significant
external events.  In addition, we have a significant amount of real
estate loans.  Accordingly, decreases in real estate values could
adversely affect the value of collateral securing our loans.  Adverse
changes in the economy may also have a negative effect on the ability of our
borrowers to make timely repayments of their loans.  These factors
could expose us to an increased risk of loan defaults and losses and have an
adverse impact on our earnings.




We
operate in a highly regulated environment and may be affected adversely by
negative examination results and changes in laws and regulations.




Citizens
Community Federal is subject to extensive regulation, supervision and
examination by the OTS, our chartering authority, and by the FDIC, the insurer
of our deposits.  Citizens Community Bancorp, Inc. is subject to
regulation and supervision by the OTS.  This regulation and
supervision governs the activities in which we may engage and are intended
primarily for the protection of the deposit insurance fund administered by the
FDIC and our depositors.  Regulatory authorities have extensive
discretion in their supervisory and enforcement activities, including the
imposition of restrictions on our operations, the classification of our assets
and determination of the level of our allowance for loan losses.  Any
change in this regulation and oversight, whether in the form of regulatory
policy, regulations, legislation or supervisory action, may have a material
impact on our operations and profitability.




As
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Quantitative and Qualitative Disclosures About Market
Risk" in the Annual Report, attached hereto as Exhibit 13, each of Citizens
Community Bancorp, Inc. and Citizens Community Federal are subject to a
Memorandum of Understanding with the OTS, which contains certain restrictions on
our operations.




Strong
competition within our market areas may limit our growth and
profitability.






26




Competition
in the banking and financial services industry is intense.  In our
market areas, we compete with numerous commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms operating
locally and elsewhere.  Some of our competitors have substantially
greater resources and broader lending authority than we have, greater name
recognition and market presence, which benefit them in attracting business, and
offer certain services that we do not or cannot provide.  In addition,
larger competitors may be able to price loans and deposits more aggressively
than we do.  Our profitability depends upon our continued ability to
successfully compete in our market areas.  The greater resources and
deposit and loan products offered by some of our competitors may limit our
ability to increase our interest-earning assets.




Our
business is geographically concentrated in Wisconsin, Minnesota and Michigan and
a downturn in economic conditions in these states could reduce our
profits.




Most of
our loans are to individuals located in Wisconsin, Minnesota and
Michigan.  Any decline in the economy of these states could have an
adverse impact on our earnings.  Decreases in local real estate values
in these regions could adversely affect the value of property used as
collateral.  Adverse changes in the local economies of these regions
also may have a negative effect on the ability of our borrowers to make timely
repayments of their loans, which would have an adverse impact on our
earnings.




Difficult
market conditions and economic trends have adversely affected our industry and
our business.





Negative
developments beginning in the latter half of 2007 in the sub-prime mortgage
market and the securitization markets for such loans, together with volatility
in oil prices and other factors, have resulted in uncertainty in the financial
markets in general and a related general economic downturn, which have continued
in 2009.  Dramatic declines in the housing market, with decreasing
home prices and increasing delinquencies and foreclosures, have negatively
impacted the credit performance of mortgage and construction loans and resulted
in significant write-downs of assets by many financial
institutions.  In addition, the values of real estate collateral
supporting many loans have declined and may continue to decline. General
downward economic trends, reduced availability of commercial credit and
increasing unemployment have negatively impacted the credit performance of
commercial and consumer credit, resulting in additional
write-downs.  Concerns over the stability of the financial markets and
the economy have resulted in decreased lending by financial institutions to
their customers and to each other.  This market turmoil and tightening
of credit has led to increased commercial and consumer delinquencies, lack of
customer confidence, increased market volatility and widespread reduction in
general business activity.  Competition among depository institutions
for deposits has increased significantly. Financial institutions have
experienced decreased access to deposits or borrowings.




The
resulting economic pressure on consumers and businesses and the lack of
confidence in the financial markets may adversely affect our business, financial
condition, results of operations and stock price.





Our
ability to assess the creditworthiness of customers and to estimate the losses
inherent in our credit exposure is made more complex by these difficult market
and economic conditions.  As a result of the foregoing factors, there
is a potential for new federal or state laws and regulations regarding lending
and funding practices and liquidity standards, and bank regulatory agencies are
expected to be very aggressive in responding to concerns and trends identified
in examinations.   This increased government action may increase our
costs and limit our ability to pursue certain business
opportunities.  We also may be required to pay even higher Federal
Deposit Insurance Corporation premiums than the recently increased level,
because financial institution failures resulting from the depressed market
conditions have depleted and may continue to deplete the deposit insurance fund
and reduce its ratio of reserves to insured deposits.




We do not
believe these difficult conditions are likely to improve significantly in the
near future.  A worsening of these conditions would likely exacerbate
the adverse effects of these difficult market and economic conditions on us, our
customers and the other financial institutions in our market.  As a
result, we may experience increases in foreclosures, delinquencies and customer
bankruptcies, as well as more restricted access to funds.




We
may elect or be compelled to seek additional capital in the future, but that
capital may not be available when it is needed.





We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations.  In addition, we may elect to
raise additional capital to support the growth of our business or to finance
acquisitions, if any, or we may elect to raise additional capital for other
reasons.  In that regard, a number of financial institutions have
recently raised considerable amounts of capital as a result of deterioration in
their results of operations and financial condition arising from the turmoil in
the mortgage loan market, deteriorating economic conditions, declines in real
estate values and other factors.  Should we be required by regulatory
authorities or otherwise elect to raise additional capital, we may seek to do so
through the issuance of, among other things, our common stock or securities
convertible into our common stock, which could dilute your ownership interest in
the Company.






27




Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets, economic conditions and a number of other factors, many of
which are outside our control, and on our financial performance.




Accordingly,
we cannot assure you of our ability to raise additional capital if needed or on
terms acceptable to us. If we cannot raise additional capital when needed or on
terms acceptable to us, it may have a material adverse effect on our financial
condition and results of operations.




The
trading price of shares of our common stock fluctuates and investors in our
common stock may experience substantial losses.





The
trading price of our common stock has been volatile and may continue to be
volatile in the future. The trading price of our common stock could decline or
fluctuate in response to a variety of factors, including:






●
            
            the timing of our
      announcements or those of our competitors concerning significant product
      developments, acquisitions or financial performance;●
            
            fluctuation in our
      quarterly operating results;●
            
            substantial
      sales of our common stock;●
            
            general stock market
      conditions; or●
            
            other
      economic or external factors.





You may
be unable to sell your stock at or above your purchase price.




Our
shares of common stock arethinly
traded and our stock price may be more volatile.





Because
our common stock is thinly traded, its market price may fluctuate significantly
more than the stock market in general or the stock prices of similar companies,
which are exchanged, listed or quoted on NASDAQ. We believe there are 4,246,074
shares of our common stock held by nonaffiliates as of December 29, 2009. Thus,
our common stock will be less liquid than the stock of companies with broader
public ownership, and as a result, the trading prices for our shares of common
stock may be more volatile. Among other things, trading of a relatively small
volume of our common stock may have a greater impact on the trading price for
our stock than would be the case if our public float were larger.




We
are subject to security and operational risks relating to our use of technology
that could damage our reputation and our business.
 
 Security
breaches in our internet banking activities could expose us to possible
liability and damage our reputation.  Any compromise of our security
also could deter customers from using our internet banking services that involve
the transmission of confidential information.  We rely on standard
internet security systems to provide the security and authentication necessary
to effect secure transmission of data.  These precautions may not
protect our systems from compromises or breaches of our security measures that
could result in damage to our reputation and our business.





Item
1B.   Unresolved Staff Comments





None.





Item
2.   Description of Properties





The
following table provides a list of the Bank's main and branch offices and
indicates whether the properties are owned or leased.


Location
            Owned
      or
              Leased
            Lease
      Expiration
              Date
            Net
      Book Value at
              September
      30, 2009
              (In
      Thousands)ADMINISTRATIVE
      OFFICES:
            Leased
            April
      30, 20122174
      EastRidge CenterEau
      Claire, WI 54701BRANCH
      OFFICES:Appleton
      Branch
            Leased
            January
      31, 20143701
      E. Calumet St.Appleton,
      WI  54915   28
   Location
            Owned
      or
              Leased
            Lease
      Expiration
              Date
            Net
      Book Value at

              September
      30, 2009
              (In
      Thousands)Black
      River Falls Branch
            Leased
            January
      31, 2014611
      Highway 54 E.Black
      River Falls, WI 54615Chippewa
      Falls Branch
            Owned
            N/A
            340427
      W.  Prairie View RoadChippewa
      Falls, WI 54729Eastside
      Branch
            Owned
            N/A
            3401028
      N.  Hillcrest ParkwayAltoona,
      WI 54720Fairfax
      Branch
            Owned
            N/A
            781219
      Fairfax StreetAltoona,
      WI 54720Fond
      du Lac Branch
            Leased
            January
      31, 2014377
      N. Rolling Meadows Dr.Fond
      du Lac, WI  54936Mondovi
      Branch
            Leased
            June
      30, 2010695
      E.  Main StreetMondovi,
      WI 54755Oshkosh
      Branch
            Leased
            January
      31, 2014351
      S. Washburn St.Oshkosh,
      WI  54904Rice
      Lake Branch
            Leased
            May
      10, 20132501
      West Ave.Rice
      Lake, WI 54868Westside
      Branch
            Owned
            N/A
            2802125
      Cameron StreetEau
      Claire, WI 54703Wisconsin
      Dells Branch
            Leased
            January
      31, 2014130
      Commerce St.Wisconsin
      Dells, WI 53965Lake
      Orion Branch(1)
            Leased
            February
      28, 2012688
      S.  Lapeer RoadLake
      Orion, MI 48362Rochester
      Hills Branch
            Owned
            N/A
            474310
      West Tienken RoadRochester
      Hills, MI 48306Brooklyn
      Park Branch
            Leased
            January
      31, 20148000
      Lakeland Ave.Brooklyn
      Park, MN 55445Faribault
      Branch
            Leased
            January
      31, 2014150
      Western Ave.Faribault,
      MN 55021   
  Location
            Owned
      or
              Leased
            Lease
      Expiration
              Date
            Net
      Book Value at
              September 30, 2009
              (In Thousands)Hutchinson
      Branch
            Leased
            January
      31, 20141300
      Trunk Hwy. 15 SHutchinson,
      MN  55350Mankato
      Branch
            Leased
            October
      30, 20101410
      Madison AvenueMankato,
      MN 56001Oakdale
      Branch
            Leased
            September
      30, 20147035
      10th Street NorthOakdale,
      MN 55128Red
      Wing Branch
            Leased
            March
      3, 2013295
      Tyler Rd. SRed
      Wing, MN  55066  Winona
      Branch
                955
      Frontenac Dr.
                Winona, MN   55987
              Leased
              January
      31, 2014Menomonie
      Branch

                180
      Cedar Falls Rd
                Menomonie,
      WI 54751
              Leased
              March 3,
      2014Neenah
      Branch
                155
      Winneconne Ave
                Neenah,
      WI 54956
              Leased
              April 21,
      2014Wisconsin
      Rapids

                4331
      8th
      St S
                Wisconsin
      Rapids, WI 54494
              Leased
              May 26,
      2014Shawano
      Branch

                1244
      E Green Bay St
                Shawano,
      WI 54166
              Leased
              June 9,
      2014Oak
      Park Heights Branch

                5815
      Norell Ave
                Stillwater,
      MN 55082
              Leased
              January 31,
      2015Plover
      Branch

                250
      Crossroads Dr
                Plover,
      WI 54467
              Leased
              January
      31, 2015
 _____________





(1)
            Effective
      March 1, 2007, Citizens Community Federal has a right to cancel this
      lease, with the cancellation to take effect 90 days after it exercises the
      right to cancel.





30


Item
3.   Legal Proceedings




In the opinion of management, the Bank is not a party to any other pending
claims or lawsuits that are expected to have a material effect on the Bank's
financial condition or operations.  Periodically, there have been
various claims and lawsuits involving the Bank, mainly as a defendant, such as
claims to enforce liens, condemnation proceedings on properties in which the
Bank holds security interests, claims involving the making and servicing of real
property loans and other issues incident to the Bank's
business.  Aside from such pending claims and lawsuits, which are
incident to the conduct of the Bank's ordinary business, the Bank is not a party
to any material pending legal proceedings that would have a material effect on
the financial condition or operations of the Bank.





Item
4.   Submission of Matters to a Vote of Security
Holders





No
matters were submitted to a vote of security holders during the quarter ended
September 30, 2009.




PART
II





Item
5.   Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities





(a)
            The
      information contained in the section captioned "Stockholder Information"
      in the Annual Report, attached hereto as Exhibit 13, is incorporated
      herein by reference.




(b)
            Information
      regarding our equity compensation plans is included in Item 12 of this
      Form 10-K.




Item
6.   Selected Financial Data





The
information contained in the section captioned "Selected Consolidated Financial
Information" in the Annual Report is incorporated herein by
reference.  Such information should be read along with the Company’s
financial statements and the notes to those financial statements and with
"Management’s Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference elsewhere herein.




Item
7.    Management's Discussion and Analysis of Financial
Condition and Results of Operations





The
information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Annual Report
is incorporated herein by reference.




Item
7A.   Quantitative and Qualitative Disclosures About Market
Risk





The
information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Quantitative and
Qualitative Disclosures about Market Risk" in the Annual Report is incorporated
herein by reference.




Item
8.   Consolidated Financial Statements and Supplementary
Data




The
financial statements, together with the report thereon of Wipfli, LLP dated
December 21, 2009, contained in the Company’s 2009 Annual Report to
Shareholders, are incorporated herein by reference.





Item
9.   Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure





No
disclosure under this item is required.




Item
9A(T).   Controls And Procedures.





Evaluation
of disclosure controls and procedures





The
Company conducted an evaluation, under the supervision and with the
participation of the Company’s management, including the President and Chief
Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by
this report. There are inherent limitations to the effectiveness of any system
of disclosure controls and procedures, including the possibility of human error
and the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.  Due to the material
weaknesses described below, the President and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures were not effective as of
the end of the period covered by this report in alerting them on a timely basis
to material information relating to the Company required to be included in the
Company’s reports filed or submitted under the Exchange Act. The President and
Chief Financial Officer believe that, subsequent to September 30, 2009, the
Company has remediated or is currently in process of remediating these
deficiencies.






31





Management’s
Report on Internal Control Over Financial Reporting





The
management of Citizens Community Bancorp, Inc. (the “Company”) is responsible
for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act.  The Company’s internal control system is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States
(GAAP).





Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2009.  In making this assessment, management
used the criteria established in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). As defined by the Public Company Accounting
Oversight Board’s Auditing Standard No. 5, a material weakness is a control
deficiency, or combination of control deficiencies, that resulted in more than a
remote likelihood that a material misstatement of our annual or interim
financial statements would not be prevented or detected.





Our
assessment identified the following material weaknesses in the financial
reporting and disclosure process:






●
            
            Inadequate
      financial statement disclosures for other-than temporary securities,
       income taxes, and subsequent events related to retirement plans;
      and●
            
            Improper
      application of GAAP related to revenue recognition on securities
      classified as other-than temporarily impaired and the recording of
      employee benefit expense related to terminated
  employees.








As a
result of the above deficiencies, certain accounting errors occurred and certain
adjustments were recorded in the fourth quarter.  The impact of these
adjustments was not material to the financial statements.  However, due to
the actual misstatements, the potential for more significant misstatements, and
the absence of other mitigating controls, there is a more than remote likelihood
that a material misstatement of the interim and annual financial statements
would not be prevented or detected as a result of each weakness.  As a
result, management determined that these identified deficiencies were material
weaknesses in internal control over financial reporting and has concluded that
our internal control over financial reporting was not effective as of September
30, 2009.








/s/
      Tim Cruciani
            
            
            /s/
      John D. ZettlerPresident
            
            Chief
      Financial OfficerDecember
      29, 2009
            
            December
      29, 2009








32




Remediation
of Material Weaknesses





As
discussed above, we have identified material weaknesses in our internal control
over financial reporting.  We have taken steps to address the specific
deficiencies identified above.  In addition, to remediate the material
weaknesses in our internal control over financial reporting subsequent to year
end, we have implemented or are in the process of implementing the following
actions, which are all expected to be completed by the end of the first quarter
except for the last item, which will be ongoing:






●
            
            We
      are assessing the need for additional ongoing employee training as it
      relates to the evolving financial reporting environment and new emerging
      accounting issues.●
            
            We
      are implementing additional procedures within our financial close and
      reporting process to analyze for accuracy and adjust all material accounts
      on a timely basis.●
            
            We are evaluating
      our financial organization to determine the most appropriate and effective
      use of our current resources and to determine if additional resources are
      necessary to support the financial reporting
process.




Changes
in Internal Control





There
were no changes in the Company’s internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934, as amended) that occurred during the fourth quarter ended
September 30, 2009 that has materially affected or is reasonably likely to
materially affect the Company’s internal control over financial
reporting.








Item
9B.   Other Information





Effective
December 7, 2009, the Company and each of Timothy J. Cruciani (our President)
and Rebecca Johnson (our Senior Vice President) and effective December 14, 2009,
the Company and John D. Zettler (our Chief Financial Officer) agreed to
voluntarily terminate each of their existing employment
agreements.


33


PART III





Item
10.   Directors, Executive Officers and Corporate
Governance





Information
with respect to this item is incorporated herein by reference to the discussion
under the heading "Election of Directors," "Executive Officers," "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Audit Committee Matters – Audit
Committee Financial Expert" in the Company's Proxy Statement for the 2010 Annual
Meeting of Shareholders, which will be filed with the Commission on or before
January 28, 2010. Information regarding the Company's Code of Conduct and Ethics
is incorporated herein by reference to the discussion under "Corporate
Governance Matters –Code of Conduct and Ethics" in the Company's Proxy Statement
for the 2010 Annual Meeting of Shareholders.





The Audit
Committee of the Company's Board of Directors is an "audit committee" for
purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The
members of the Audit Committee are David Westrate (Chairman), Richard McHugh and
Brian Schilling.





Item
11.   Executive Compensation




Information
with respect to this item is incorporated herein by reference to the discussion
under the headings "Compensation of Directors" and "Executive Compensation" in
the Company's Proxy Statement for the 2010 Annual Meeting of Shareholders, which
will be filed with the Commission on or before January 28, 2010.





Item
12.   Security Ownership of Certain Beneficial Owners and
Management and Related  Stockholder Matters





Information
with respect to this item is incorporated herein by reference to the discussion
under the heading "Security Ownership" in the Company's Proxy Statement for the
2010 Annual Meeting of Shareholders, which will be filed with the Commission on
or before January 28, 2010.





The
following table sets forth information as of September 30, 2009, with respect to
compensation plans under which shares of common stock were issued.




Equity
Compensation Plan Information


Plan
      Category
            Number
      of securities to
              be
      issued upon exercise
              of
      outstanding options
              warrants
      and rights
            Weighted-average
              exercise
      price of
              outstanding
      options
              warrants
      and rights
            Number
      of Securities
              remaining
      available for
              future
      issuance under
              equity
      compensation plansEquity
      Compensation Plans Approved By Security Holders
            185,110
            $7.04
            451,083Equity
      Compensation Plans Not Approved By Security Holders
            ---
            ---
            ---







Item
13.   Certain Relationships and Related Transactions, and
Director Independence





Information
with respect to this item is incorporated herein by reference to the discussion
under the heading "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for the 2010 Annual Meeting of Shareholders, which
will be filed with the Commission on or before January 28, 2010. Information
regarding director independence is incorporated by reference to the discussions
under "Corporate Governance Matters-Director Independence" in the Company’s
Proxy Statement for the 2010 Annual Meeting of Shareholders, which will be filed
with the Commission on or before January 28, 2010.




34


PART
IV


Item
14.   Principal Accountant Fees and Services





Information
with respect to this item is incorporated herein by reference to the discussion
under the heading "Audit Committee Matters – Fees of Independent Registered
Public Accounting Firm" in the Company's Proxy Statement for the 2010 Annual
Meeting of Shareholders, which will be filed with the Commission on or before
January 28, 2010.




Item
15.   Exhibits and Financial Statement Schedules





(a)(1)  Financial
Statements:




The
following financial statements of the Company, included in the Company's 2009
Annual Report to Shareholders, are incorporated by reference in Item 8 of
this Form 10-K annual report:




Consolidated
      Balance Sheets as of September 30, 2009, and 2008Consolidated
      Statements of Income for the Years Ended September 30, 2009, 2008 and
      2007Consolidated
      Statements of Changes in Stockholders' Equity For the Years Ended
      September 30, 2009, 2008 and 2007Consolidated
      Statements of Cash Flows For the Years Ended September 30, 2009, 2008 and
      2007Notes
      to Consolidated Financial
Statements




(a)(2)   Financial
Statement Schedules:




All
financial statement schedules have been omitted as the information is not
required under the related instructions or is not applicable.




(a)(3)   Exhibits:




Regulation
      S-K
              Exhibit
      Number
            Document
            Reference
      to
              Prior
      Filing
              or
      Exhibit Number
              Attached
      Hereto3(i)
            Articles
      of Incorporation of the Registrant
            *3(ii)
            Bylaws
      of the Registrant
            *10
            Material
      contracts:(a)
            Registrant's
      2004 Stock Option Plan
            *(b)
            Registrant's
      2004 Recognition and Retention Plan
            *(c)
            Supplemental
      Executive Retirement Plan
            *(d)
            Tax
      Allocation Agreement
            **13
            2009
      Annual Report to Stockholders
            1314
            Code
      of Conduct and Ethics
            1421
            Subsidiaries
      of the Registrant
            2123
            Consent
      of Auditors
            2331
            Rule
      13a-14(a)/15d-14(a) Certifications
            3132
            Section
      1350 Certifications
            32


_______________________


*
            Filed
      as exhibit to the Company's registration statement filed on June 30, 2006,
      (File No.333-135527) pursuant to Section 5 of the Securities Act of
      1933.  All of such previously filed documents are hereby
      incorporated herein by reference in accordance with Item 601 of Regulation
      S-K.**
            Filed
      as exhibit to Citizen Community Bancorp's Annual Report on Form 10-KSB for
      the fiscal year ended September 30,
2004.





35


SIGNATURES





Pursuant
to the requirements of section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.










/s/ Tim
Cruciani








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.








By:
            /s/ Richard McHugh
            
            December
      29, 2009Richard
      McHugh
              Chairman
      of the BoardBy:
            /s/
      Tim Cruciani
            
            December
      29, 2009Tim
      Cruciani
              President
              (Principal
      Executive Officer)By:
            /s/
      Thomas C. Kempen
            
            December
      29, 2009Thomas
      C. Kempen
              Vice
      Chairman of the BoardBy:
            /s/
      Brian R. Schilling
            
            December
      29, 2009Brian
      R. Schilling
              Director
      and TreasurerBy:
            /s/
      David B. Westrate
            
            December
      29, 2009David
      B. Westrate
              DirectorBy:
            /s/
      John D. Zettler
            
            December
      29, 2009John
      D. Zettler
              Senior
      Vice President and Chief Financial Officer
              (Principal
      Financial Officer and Principal Accounting Officer)





36


Index
to Exhibits





Regulation
      S-K
              Exhibit
      Number
            Document13
            2009
      Annual Report to Stockholders14
            Code
      of Conduct and Ethics21
            Subsidiaries
      of the Registrant23
            Consent
      of Auditors31.1
      and 31.2
            Rule
      13a-14(a)/15d-14(a) Certifications32
            Section
      1350 Certifications*





_______________


*       This
certification is not "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.