General

Southern Missouri Bancorp, Inc. (Southern Missouri or Company) is a Missouri corporation and owns all of the outstanding stock of Southern Missouri Bank & Trust Co. (SMBT or the Bank). The Company's earnings are primarily dependent on the operations of the Bank. As a result, the following discussion relates primarily to the operations of the Bank. The Bank's deposit accounts are generally insured up to a maximum of $100,000 (certain retirement accounts are insured up to $250,000) by the Deposit Insurance Fund (DIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). Currently, a temporary increase in the Standard Maximum Deposit Insurance Amount, to $250,000, is in effect through December 31, 2009. The Bank currently conducts its business through its home office located in Poplar Bluff and eight full service branch facilities in Poplar Bluff (2), Van Buren, Dexter, Kennett, Doniphan, Sikeston, and Qulin, Missouri.

The significant accounting policies followed by Southern Missouri Bancorp, Inc. and its wholly-owned subsidiary for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments, which are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported, have been included in the accompanying consolidated condensed financial statements.

The consolidated balance sheet of the Company as of June 30, 2008, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K annual report filed with the Securities and Exchange Commission.

Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes. The following discussion reviews the Company's consolidated financial condition at September 30, 2008, and the results of operations for the three-month period ended September 30, 2008 and 2007, respectively.

Forward Looking Statements

This document, including information incorporated by reference, contains forward-looking statements about the Company and its subsidiaries which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may 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 intentions of management and are not guarantees of future performance. The important factors we discuss below, as well as other factors discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and 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:

º the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

º the strength of the real estate market in the local economies in which we conduct operations;
º the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
º inflation, interest rate, market and monetary fluctuations;
º 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;
º the willingness of users to substitute our products and services for products and services of our competitors;
º the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance);
º the impact of technological changes;
º acquisitions;

º changes in consumer spending and saving habits; and
º our success at managing the risks involved in the foregoing.

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.

Critical Accounting Policies

Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of the Company must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company's significant accounting policies, see "Notes to the Consolidated Financial Statements" in the Company's 2008 Annual Report. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of the Company's Board of Directors. For a discussion of applying critical accounting policies, see "Critical Accounting Policies" beginning on page 11 in the Company's 2008 Annual Report.

Executive Summary

Our results of operations depend primarily on our net interest margin, which is directly impacted by the interest rate environment. The net interest margin represents interest income earned on interest-earning assets (primarily mortgage loans, commercial loans and the investment portfolio), less interest expense paid on interest-bearing liabilities (primarily certificates of deposit, savings, interest-bearing demand accounts and borrowed funds), as a percentage of average interest-earning assets. Net interest margin is directly impacted by the spread between long-term interest rates and short-term interest rates, as our interest-earning assets, particularly those with initial terms to maturity or repricing greater than one year, generally price off longer term rates while our interest-bearing liabilities generally price off shorter term interest rates.

Our net interest income is also impacted by the shape of the market yield curve. A steep yield curve - in which the difference in interest rates between short term and long term periods is relatively large - could be beneficial to our net interest income, as the interest rate spread between our additional interest-earning assets and interest-bearing liabilities would be larger. Conversely, a flat or flattening yield curve, in which the difference in rates between short term and long term periods is relatively small or shrinking, or an inverted yield curve, in which short term rates exceed long term rates, could have an adverse impact on our net interest income, as our interest rate spread could decrease.

Our results of operations may also be affected significantly by general and local economic and competitive conditions, particularly those with respect to changes in market interest rates, government policies and actions of regulatory authorities.

During the first three months of fiscal 2009, we grew our balance sheet by $10.9 million, which was consistent with the Company's growth strategies. This additional growth primarily reflected a $7.9 million increase in total net loans, a $24.9 million increase in borrowed funds, and a $14.4 million decrease in deposits (the decrease was primarily due to public fund withdrawals, most of which was anticipated, scheduled draws on bond proceeds). The growth in loans was primarily due to commercial loan growth. The increase in borrowed funds was in the form of Federal Home Loan Bank (FHLB) advances, and was used to fund loan growth and offset deposit losses.

Our net income for the first quarter of fiscal 2009 increased 14.0% to $927,000, as compared to $813,000 earned during the same period of the prior year. The increase in net income compared to the year-ago period was primarily due to a 31.2% increase in net interest income, partially offset by a 43.1% decrease in non-interest income - the result of a charge to record the other-than-temporary impairment of the bank's investment in preferred stock issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) - a 263.6% increase in loan loss provisions, and a 7.3% increase in non-interest expense. Diluted earnings per share for the first quarter of fiscal 2009 were $0.42, as compared to $0.36 for the first quarter of fiscal 2008. For the first quarter of fiscal 2009, our increase in net interest income was due primarily to an increase in average interest rate spread, as well as an increase in average interest-earning assets.

Short-term market rates were relatively steady during the first three months of fiscal 2009, compared to the declines over the prior fiscal year. After a 25 basis point cut in the Federal Funds rate (to 2.00%) on April 30, 2008, the Federal Open Market Committee of the Federal Reserve Bank (FOMC) held the rate steady through September 30, 2008. (Subsequently, in October, the FOMC cut the overnight rate target by 100 basis points.) The six-month treasury bill rate declined by about 50 basis points (to 1.60%); the two-year treasury note declined by about 60 basis points (to 2.00%); and the ten-year treasury bond declined by less than 30 basis points (to 3.38%). The market was particularly volatile as concern shifted from inflation, to the credit market crisis, and then to the sustainability of economic growth. Despite the volatility, the curve remained generally quite steep by

recent historical comparisons. In this rate environment, our net interest margin increased 51 basis points when comparing the first quarter of fiscal 2009 to the same period of the prior year. The Company believes rate cuts to date have had and will continue to have a positive impact on our results of operations, but additional rate cuts could bring the short end of the yield curve to a point at which we cannot maintain our historical pricing margins on deposit products, which may have a negative impact on operating results.

The Company's net income is also affected by the level of non-interest income and operating expenses. Non-interest income consists primarily of service charges, ATM and loan fees, and other general operating income. Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, postage, insurance, advertising, professional fees, office expenses, and other general operating expenses. During the three-month period ended September 30, 2008, non-interest income decreased 43.1% compared to the same period of the prior fiscal year, primarily due to the charge incurred to recognize the other-than-temporary impairment of the bank's investment in Freddie Mac preferred stock. Outside that charge, non-interest income would have increased 8.3%, due to increased non-sufficient funds activity and debit card activity. Non-interest expense increased for the three-month period ended September 30, 2008, by 7.3%, compared to the same period of the prior fiscal year, primarily in the categories of compensation and benefits and charges for debit card activity, combined with a reduction in the prior period's gain on the sale of foreclosed real estate assets, partially offset by lower occupancy and advertising charges.

We expect to continue to grow our assets modestly through the origination and occasional purchase of loans, and purchases of investment securities. The primary funding for our asset growth is expected to come from retail deposits, short- and long-term FHLB borrowings, and, as needed, brokered certificates of deposit. We intend to grow deposits by offering desirable deposit products for our existing customers and by attracting new depository relationships. We will continue to explore branch expansion opportunities in market areas that we believe present attractive opportunities for our strategic business model.

Comparison of Financial Condition at September 30, 2008, and June 30, 2008

The Company's total assets increased by $10.9 million, or 2.6%, to $428.7 million at September 30, 2008, as compared to $417.8 million at June 30, 2008. Loans, net of the allowance for loan losses, increased $7.9 million, or 2.3%, to $350.9 million, as compared to $343.1 million at June 30, 2008. Commercial loan balances grew by $9.3 million, while commercial real estate loans were down $2.7 million. The reduction in commercial real estate loans was attributable to a single payoff. The Company continues to focus on origination of commercial and commercial real estate loans. Investment balances increased by $1.1 million, or 2.5%, to $44.3 million, as compared to $43.2 million at June 30, 2008.

Asset growth during the first three months of fiscal 2009 has been funded primarily with FHLB advances, which increased $25.8 million, or 40.3%, to $89.9 million at September 30, 2008, as compared to $64.1 million at June 30, 2008. Deposits decreased $14.4 million, or 4.9%, to $277.9 million at September 30, 2008, compared to $292.3 million at June 30, 2008. The decrease in deposits was due primarily to an $11.5 million decrease in public unit funds, most of which was anticipated, scheduled draws on bond proceeds. The decrease in deposits was comprised of an $11.2 million decrease in money market passbook savings and money market deposit accounts, a $3.1 million decrease in certificates of deposit, and a $1.1 million decrease in statement saving accounts. Checking accounts increased $1.0 million. Securities sold under agreements to repurchase totaled $20.9 million at September 30, 2008, a decrease of $941,000, or 4.3%, compared to $21.8 million at June 30, 2008.

Total stockholders' equity increased $670,000, or 2.2%, to $31.1 million at September 30, 2008, as compared to $30.5 million at June 30, 2008. The increase was primarily due to retention of net income and the exercise of stock options outstanding, partially offset by a decrease in the market value of the available-for-sale investment portfolio and cash dividends paid.

Average Balance Sheet for the Three-Month Periods Ended September 30, 2008 and 2007

The tables below present certain information regarding Southern Missouri Bancorp, Inc.'s financial condition and net interest income for the three-month periods ending September 30, 2008 and 2007. The tables present the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. Yields on tax-exempt obligations were not computed on a tax equivalent basis.

                       Three-month period ended               Three-month period ended
                          September 30, 2008                     September 30, 2007
                    Average     Interest and  Yield/       Average      Interest and  Yield/
                    Balance      Dividends   Cost (%)      Balance       Dividends   Cost (%)
Interest earning
assets:
Mortgage loans   $ 245,107,380  $ 4,144,477      6.76    $ 226,041,123  $ 4,042,688      7.15
(1)
Other loans (1)    104,421,694    1,645,016      6.30       91,014,918    1,868,620      8.21
                 -----------------------------------------------------------------------------
   Total net       349,529,074    5,789,493      6.63      317,056,041    5,911,308      7.46
loans
Mortgage-backed     28,373,270      354,425      5.00       11,022,386      125,066      4.54
securities
Investment          17,192,035      176,808      4.11       26,966,168      289,487      4.29
securities (2)
Other interest       5,416,700       21,748      1.61        2,844,650        6,768      0.95
earning assets
                 -----------------------------------------------------------------------------
    Total          400,511,079    6,342,474      6.33      357,889,245    6,332,629      7.08
interest earning
assets (1)
Other               20,133,048            -                 21,715,090            -
noninterest
earning assets
(3)
                 ---------------------------           -----------------------------
    Total        $ 420,644,127  $ 6,342,474              $ 379,604,335  $ 6,332,629
assets
                 -------------- ------------           ---------------- ------------
Interest bearing
liabilities:
Savings          $  70,410,786  $   395,066      2.24    $  77,765,702  $   757,396      3.90
accounts
NOW accounts        35,952,515      119,915      1.33       29,925,632      104,042      1.39
Money market         9,011,205       37,378      1.66        5,880,962       27,700      1.88
deposit
accounts
Certificates of    148,849,425    1,281,271      3.44      132,470,942    1,636,992      4.94
deposit
                 -----------------------------------------------------------------------------
    Total          264,223,931    1,833,630      2.78      246,043,238    2,526,130      4.11
interest bearing
deposits
Borrowings:
Securities sold
under agreements    21,348,541       89,489      1.68       15,689,972      192,551      4.91
to repurchase
FHLB advances       74,888,043      862,210      4.61       61,031,033      831,999      5.45
Subordinated         7,217,000      103,659      5.75        7,217,000      150,515      8.34
debt
                 -----------------------------------------------------------------------------
    Total          367,677,515    2,888,988      3.14      329,981,243    3,701,195      4.49
interest bearing
liabilities
Noninterest
bearing demand      20,847,479            -                 18,579,412            -
deposits
Other                1,226,963            -                  2,040,539            -
noninterest
bearing
liabilities
                 ---------------------------           -----------------------------
    Total          389,751,957    2,888,988                350,601,194    3,701,195
liabilities
Stockholders'       30,892,170            -                 29,003,141            -
equity
                 ---------------------------           -----------------------------
    Total
liabilities and  $ 420,644,127  $ 2,888,988              $ 379,604,335  $ 3,701,195
stockholders'
equity
                 -------------- ------------           ---------------- ------------

Net interest                    $ 3,453,486                             $ 2,631,434
income

Interest rate                                    3.19                                    2.59
spread (4)
Net interest                                     3.45                                    2.94
margin (5)

Ratio of average
interest-earning
assets to           108.93%                                108.46%
average
interest-bearing
liabilities

(1) Calculated net of deferred loan fees, loan discounts and loans-in-process. Non-accrual loans are included in average loans.
(2) Includes FHLB stock and related cash dividends.
(3) Includes average balances for fixed assets and BOLI of $8.2 million and $7.3 million, respectively, for the three-month period ending September 30, 2008, as compared to $8.6 million and $7.0 million for the same period of the prior year.
(4) Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average interest-earning assets

Results of Operations - Comparison of the three-month periods ended September 30, 2008 and 2007

General. Net income for the three-month period ended September 30, 2008, was $927,000, an increase of $114,000, or 14.0%, as compared to net income of $813,000 earned during the same period of the prior year. Basic and diluted earnings per share were $0.42, for the first quarter of fiscal 2009, compared to $0.37 basic and $0.36 diluted earnings per share for the first quarter of fiscal 2008. Our annualized return on average assets for the three-month period ended September 30, 2008, was ..88%, compared to .86% for the same period of the prior year. Our return on average stockholders' equity for the three-month period ended September 30, 2008, was 12.0%, compared to 11.2% for the same period of the prior year.

Net Interest Income. Net interest income for the three-month period ended September 30, 2008, increased $822,000, or 31.2%, as compared to the same period of the prior year. The increase reflected an expansion of our net interest rate spread, and our growth initiatives, which resulted in increases in the average balances of both interest-earning assets and interest-bearing liabilities. Our interest rate spread was 3.19% for the three-month period ended September 30, 2008, as compared to 2.59% for the same period of the prior year. For the three-month period ended September 30, 2008, our net interest margin, determined by dividing the annualized net interest income by total average interest-earning assets, was 3.45%, compared to 2.94% for the same period of the prior year. The increase in interest rate spread for the three-month period resulted from a 135 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 75 basis point decrease in the average yield on interest-earning assets. Expansion of our interest rate spread was attributed primarily to the faster re-pricing of liabilities (compared to assets) on the Company's balance sheet, combined with the improved slope of the yield curve.

Interest Income. Total interest income for the three-month period ended September 30, 2008, was $6.3 million, up $10,000, or 0.2%, from the roughly equivalent amount earned in the same period of the prior year. The increases was due to the increase of $42.6 million, or 11.9%, in the average balance of interest-earning assets during the first quarter of fiscal 2009, partially offset by a 75 basis point decrease in the average yield on those assets. For the three-month period ended September 30, 2008, the average interest rate on interest-earning assets was 6.33%, as compared to 7.08% for the same period of the prior year.

Interest Expense. Total interest expense for the three-month period ended September 30, 2008, was $2.9 million, a decrease of $812,000, or 21.9%, compared to the same period of the prior fiscal year. The decrease was due to a 135 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a $37.7 million increase in the average balance of interest-bearing liabilities. For the three-month period ended September 30, 2008, the average interest rate on interest-bearing liabilities was 3.14%, as compared to 4.49% for the same period of the prior year. The increase in the average balance of interest-bearing liabilities was primarily due to funding needed for asset growth.

Provision for Loan Losses. The provision for loan losses for the three-month period ended September 30, 2008, was $400,000, as compared to $110,000 for the same period of the prior year. The increased provision was primarily due to management's belief that it is appropriate to maintain larger reserves in light of continuing deterioration of the credit and housing markets. In addition, the Company's growth, over the last several years, in its commercial and commercial real estate loan portfolios has required increased provisions for loan losses, as those loan types generally carry additional risk. In general, however, the Company does not anticipate that it will realize the level of credit problems that have been experienced by financial institutions more heavily involved in either subprime or Alt-A residential lending, or construction and development lending. Although we believe that we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary as the loan portfolio grows, as economic conditions change, and as other conditions differ from the current operating environment. Even though we use the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. (See "Critical Accounting Policies", "Allowance for Loan Loss Activity" and "Nonperforming Assets").

Non-interest Income. Non-interest income for the three-month period ended September 30, 2008, decreased $255,000, or 43.1%, to $336,000, as compared to $590,000 for the same period of the prior year. The decrease was primarily due to the charge incurred to recognize the other-than-temporary impairment of the bank's investment in Freddie Mac preferred stock. Outside that charge, non-interest income would have increased 8.3%, due to increased non-sufficient funds activity and debit card activity.

Non-interest Expense. Non-interest expense for the three-month period ended September 30, 2008, increased $138,000, or 7.3%, to $2.0 million, as compared to $1.9 million, for the same period of the prior year. The increase in non-interest expense was primarily in the categories of compensation and benefits and charges for debit card activity, combined with a reduction in the prior period's gain on the sale of foreclosed real estate assets, partially offset by lower occupancy and advertising charges. As the Company continues to grow its balance sheet, non-interest expense will continue to increase due to compensation, expenses related to expansion, and inflation. Our efficiency ratio, determined by dividing total non-interest expense by the sum of net interest income and non-interest income, was 53.8% for the three-month period ended September 30, 2008, as compared to 58.9% for the same period of the prior year.

Income Taxes. Provisions for income taxes for the three-month period ended September 30, 2008, increased $26,000, or 6.4%, to $425,000, as compared to $399,000 for the same period of the prior year. Our effective tax rate for the three-month period ended September 30, 2008, was 31.4%, as compared to 32.9% for the same period of the prior year. The decrease in the effective tax rate was attributable to the Company's investment in tax-exempt securities and purchases of tax credits; the increase in tax provisions was due to increased pre-tax income, partially offset by the lower effective tax rate.

Allowance for Loan Loss Activity

The Company regularly reviews its allowance for loan losses and makes adjustments to its balance based on management's analysis of the loan portfolio, the amount of non-performing and classified assets, as well as general economic conditions. Although the Company maintains its allowance for loan losses at a level that it considers sufficient to provide for losses, there can be no assurance that future losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies, which can order the establishment of additional loss provisions. The following table summarizes changes in the allowance for loan losses over the three months ended September 30, 2008 and 2007:

. . .