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; and all accounts are currently temporarily insured up to $250,000) by the Deposit Insurance Fund (DIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). The Bank currently conducts its business through its home office located in Poplar Bluff and nine full service branch facilities in Poplar Bluff (2), Van Buren, Dexter, Kennett, Doniphan, Sikeston, Matthews, 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 December 31, 2008, and the results of operations for the three- and six-month periods ended December 31, 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:

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

· the strength of the real estate market in 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;

· 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;

· 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; and

· 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

Accounting principles generally accepted in the United States of America 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 six months of fiscal 2009, we grew our balance sheet by $35.4 million; this above-trend growth was due to the leveraged use of $9.6 million in preferred capital invested by the U.S. Treasury Department under the terms of their Capital Purchase Program. This additional growth primarily reflected an $18.4 million increase in available-for-sale investments, an $8.2 million increase in total net loans, a $28.6 million increase in borrowed funds, and a $6.2 million decrease in deposits (the decrease was primarily due to public fund withdrawals, most of which was anticipated, and scheduled draws on bond proceeds). The growth in available-for-sale investments was primarily in the form of collateralized mortgage obligations (CMOs) and municipal bonds. The growth in loans was primarily due to commercial and commercial real estate loan growth. The increase in borrowed funds related to advances from the Federal Home Loan Bank (FHLB), and was used to fund investment and loan growth and offset deposit losses.

The Treasury Department created the Capital Purchase Program with the intention of building capital at U.S. financial institutions in order to increase the flow of financing to U.S. businesses and consumers, and to support the U.S. economy. As of December 31, 2008, the Company has contributed to the accomplishment of that objective by leveraging the Treasury's investment to increase loan balances by $8.2 million in the current fiscal year, and by $31.6 million over the last twelve months. Additionally, the Company has purchased $15 million in agency-backed collateralized mortgage obligations (CMOs) and $4.5 million in municipal debt since the Treasury investment was made, helping to improve the availability of credit in two distressed markets. These are investment purchases that the Company would not likely have made, absent the Treasury investment. Including both direct loans and investment securities, the Company has increased its investment in credit markets by $52.6 million over the last twelve months.

Our net income for the second quarter of fiscal 2009 increased 1.7% to $888,000, as compared to $873,000 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 24.8% increase in net interest income, partially offset by a 60.1% decrease in non-interest income - the result of a charge to record the

other-than-temporary impairment of the bank's investment in a trust preferred pool - a 122.2% increase in loan loss provisions, and an 11.6% increase in non-interest expense. Diluted earnings per share for the second quarter of fiscal 2009 were $0.40, as compared to $0.39 for the second quarter of fiscal 2008. For the first six months of fiscal 2008, net income increased 7.6% to $1.8 million, as compared to $1.7 million 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 27.9% increase in net interest income, partially offset by a 51.6% decrease in non-interest income - the result of charges to record the other-than-temporary impairment of Company investments - a 200% increase in loan loss provisions, and a 9.5% increase in non-interest expense. For both the second quarter and first six months 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 fell substantially during the first six months of fiscal 2009, following an already substantial decline over the prior fiscal year. From October to December, 2008, the Federal Reserve cut rates from 2.00% to a range of 0.00% to 0.25%. The six-month treasury bill rate declined by almost 200 basis points (to less than .30%); the two-year treasury note declined almost 200 basis points (to 0.76%); and the ten-year treasury bond declined by almost 175 basis points (to 2.25%). 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, which is generally to the Company's benefit. In this rate environment, our net interest margin increased 41 basis points when comparing the first six months of fiscal 2009 to the same period of the prior year.

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 six-month period ended December 31, 2008, non-interest income decreased 51.6% compared to the same period of the prior fiscal year, primarily due to charges incurred to recognize the other-than-temporary impairment of Company investments. Outside those charges, non-interest income would have increased 5.5%, due to increased debit card activity and non-sufficient funds fee collections. Non-interest expense increased for the six-month period ended December 31, 2008, by 9.5%, compared to the same period of the prior fiscal year, primarily in the categories of compensation and benefits and deposit insurance assessments.

Our charges incurred to recognize the other-than-temporary impairment (OTTI) of available-for-sale investments related to investments in Freddie Mac preferred stock ($304,000 loss realized in the first quarter of fiscal 2009) and a pooled trust preferred collateralized debt obligation ($375,000 loss realized in the second quarter of fiscal 2009). The Company currently holds three additional collateralized debt obligations (CDOs) which have not been deemed other-than-temporarily impaired, based on the Company's best judgment using information currently available. All of these investments are described in the table below:

                                                         Unrealized          Estimated            S&P        Moody's
          Security               Amortized Cost       Gains / (Losses)       Fair Value         Rating        Rating
Freddie Mac Preferred Stock
Series Z                        $              -     $            1,215     $      1,215             C          Ca
Trapeza CDO IV, Ltd., class
C2                                       125,000                (72,006 )         52,994          NR            Ca
Trapeza CDO XIII, Ltd., class
A2A                                      476,224               (256,224 )        220,000          BB+          Aaa
Trapeza CDO XIII, Ltd., class
B                                        476,938               (356,938 )        120,000          NR           Aa2
Preferred Term Securities
XXIV, Ltd., class B1                     433,472               (344,307 )         89,165          NR           Aa2
  Totals                        $      1,511,634     $       (1,029,475 )   $    482,159

The Company determined the amount of OTTI charges to record on the Freddie Mac Preferred Stock based on quoted market prices, and on the Trapeza IV CDO based on the estimated present value of expected cash flows on the instruments, discounted using a current market rate on such securities. For the Trapeza XIII CDOs and the Preferred Term Securities pooled trust preferred investments, the Company expects to receive principal and interest in full without a material change in the scheduled interest payments, based on a review of the terms of the obligation and the financial strength of the underlying firms.

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 December 31, 2008, and June 30, 2008

The Company's total assets increased by $35.4 million, or 8.5%, to $453.3 million at December 31, 2008, as compared to $417.8 million at June 30, 2008. Available-for-sale investment balances increased by $18.4 million, or 46.1%, to $58.3 million, as compared to $39.9 million at June 30, 2008. This growth was attributed to the Company's leveraged use of the investment by the U.S. Treasury Department of $9.6 million under its Capital Purchase Program. Loans, net of the allowance for loan losses, increased $8.2 million, or 2.4%, to $351.2 million at December 31, 2008, as compared to $343.1 million at June 30, 2008. Commercial real estate loan balances grew by $3.7 million, while commercial loans were up $2.5 million, as the Company continues to focus on developing this business.

Asset growth during the first nine months of fiscal 2008 has been funded primarily with FHLB advances, which increased $28.6 million, or 44.7%, to $92.7 million at December 31, 2008, as compared to $64.1 million at June 30, 2008. Deposits decreased $6.2 million, or 2.1%, to $286.0 million at December 31, 2008, compared to $292.3 million at June 30, 2008. This reflected public unit deposit runoff of $13.7 million, partially offset by non-public deposit growth of $7.5 million. By account type, the decrease in deposits was due to a $13.2 million decrease in money market passbook savings and money market deposit accounts, a $3.6 million decrease in certificates of deposit, and a $2.8 million decrease in statement saving accounts, partially offset by checking account growth of $12.1 million, as the Company introduced a new, high-rate "rewards checking" product. Securities sold under agreements to repurchase totaled $25.5 million at December 31, 2008, an increase of $3.7 million, or 17.0%, compared to $21.8 million at June 30, 2008.

Total stockholders' equity increased $9.8 million, or 32.1%, to $40.3 million at December 31, 2008, as compared to $30.5 million at June 30, 2008. The increase was primarily due to the $9.6 million investment in preferred equity by the U.S. Treasury Department under the terms of its Capital Purchase Program. Additionally, capital increased due to retention of net income, an increase in the market value of the Company's available-for-sale investment portfolio, and the exercise of stock options outstanding, partially offset by stock repurchases and cash dividends paid.

Average Balance Sheet for the Three- and Six-Month Periods Ended December 31, 2008 and 2007

The tables on the following pages present certain information regarding Southern Missouri Bancorp, Inc.'s financial condition and net interest income for the three- and six-month periods ending December 31, 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
                                              December 31, 2008                                  December 31, 2007
                                   Average        Interest and        Yield/          Average        Interest and        Yield/
                                   Balance          Dividends        Cost (%)         Balance          Dividends        Cost (%)
 Interest earning assets:
  Mortgage loans (1)            $ 251,367,563     $   4,209,253           6.70     $ 232,410,132     $   4,150,302           7.14
  Other loans (1)                 103,076,030         1,524,884           5.92        86,354,079         1,769,239           8.20
   Total net loans                354,443,593         5,734,137           6.47       318,764,211         5,919,541           7.43
  Mortgage-backed securities       32,312,440           399,776           4.95        13,919,968           156,160           4.49
  Investment securities (2)        18,057,845           159,671           3.54        25,771,074           289,080           4.49
  Other interest earning
assets                              5,745,215            10,332           0.72         4,016,624            12,460           1.24
    Total interest earning
assets (1)                        410,559,093         6,303,916           6.14       362,471,877         6,377,241           7.04
 Other noninterest earning
assets (3)                         24,780,987                 -                       24,582,025                 -
       Total assets             $ 435,340,080     $   6,303,916                    $ 387,053,902     $   6,377,241

 Interest bearing
liabilities:
  Savings accounts              $  64,796,101     $     326,194           2.01     $  76,479,426     $     690,995           3.61
  NOW accounts                     42,999,550           202,129           1.88        31,154,693           107,129           1.38
  Money market deposit
accounts                            6,407,373            23,601           1.47         5,720,047            27,237           1.90
  Certificates of deposit         146,287,148         1,256,716           3.44       138,039,043         1,651,144           4.78
    Total interest bearing
deposits                          260,490,172         1,808,640           2.78       251,393,209         2,476,505           3.94
 Borrowings:
  Securities sold under
agreements
  to repurchase                    24,110,814            52,526           0.87        19,408,098           207,435           4.28
  FHLB advances                    84,841,304           884,732           4.17        57,270,121           768,463           5.37
  Subordinated debt                 7,217,000            99,819           5.53         7,217,000           153,627           8.51
    Total interest bearing
liabilities                       376,659,290         2,845,717           3.02       335,288,428         3,606,030           4.30
 Noninterest bearing demand
deposits                           24,426,808                 -                       19,996,122                 -
 Other noninterest bearing
liabilities                         1,133,714                 -                        2,328,759                 -
    Total liabilities             402,219,812         2,845,717                      357,613,309         3,606,030
 Stockholders' equity              33,120,268                 -                       29,440,593                 -
      Total liabilities and
      stockholders' equity      $ 435,340,080     $   2,845,717                    $ 387,053,902     $   3,606,030

 Net interest income                              $   3,458,199                                      $   2,771,211

 Interest rate spread (4)                                                 3.12                                               2.74
 Net interest margin (5)                                                  3.37                                               3.06

Ratio of average
interest-earning assets
to average interest-bearing
liabilities                            109.00 %                                           108.11 %

(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 $7.4 million, respectively, for the three-month period ending December 31, 2008, as compared to $8.5 million and $7.1 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.

                                             Six-month period ended                             Six-month period ended
                                               December 31, 2008                                  December 31, 2007
                                    Average        Interest and        Yield/          Average        Interest and        Yield/
                                    Balance          Dividends        Cost (%)         Balance          Dividends        Cost (%)
 Interest earning assets:
  Mortgage loans (1)             $ 248,237,472     $   8,353,731           6.73     $ 229,225,628     $   8,192,990           7.15
  Other loans (1)                  103,748,862         3,169,900           6.11        88,684,499         3,637,860           8.20
   Total net loans                 351,986,334        11,523,631           6.55       317,910,127        11,830,850           7.44
  Mortgage-backed securities        30,310,641           754,200           4.98        12,471,177           281,226           4.51
  Investment securities (2)         17,624,941           336,480           3.82        26,368,621           578,567           4.39
  Other interest earning
assets                               5,580,958            32,080           1.15         3,430,637            19,229           1.12
    Total interest earning
assets (1)                         405,502,874        12,646,391           6.24       360,180,562        12,709,871           7.06
 Other noninterest earning
assets (3)                          22,690,740                 -                       23,148,557                 -
       Total assets              $ 428,193,614     $  12,646,391                    $ 383,329,119     $  12,709,871

 Interest bearing liabilities:
  Savings accounts               $  67,603,440     $     721,261           2.13     $  77,122,565     $   1,448,391           3.76
  NOW accounts                      39,476,033           322,044           1.63        30,540,163           211,171           1.38
  Money market deposit
accounts                             7,709,289            60,979           1.58         5,800,505            54,937           1.89
  Certificates of deposit          147,568,287         2,537,987           3.44       135,254,993         3,288,137           4.86
    Total interest bearing
deposits                           262,357,049         3,642,271           2.78       248,718,226         5,002,635           4.02
 Borrowings:
  Securities sold under
agreements
  to repurchase                     22,729,678           142,015           1.25        17,549,035           399,986           4.56
 FHLB advances                      79,864,674         1,746,942           4.37        59,150,577         1,600,462           5.41
 Subordinated debt                   7,217,000           203,478           5.64         7,217,000           304,143           8.43
    Total interest bearing
liabilities                        372,168,401         5,734,706           3.08       332,634,838         7,307,226           4.39
 Noninterest bearing demand
deposits                            22,754,712                 -                       19,287,767                 -
 Other noninterest bearing
liabilities                          1,264,282                 -                        2,184,647                 -
    Total liabilities              396,187,395         5,734,706                      354,107,252         7,307,226
 Stockholders' equity               32,006,219                 -                       29,221,867                 -
      Total liabilities and
      stockholders' equity       $ 428,193,614     $   5,734,706                      383,329,119     $   7,307,226

 Net interest income                               $   6,911,685                                          5,402,645
. . .