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 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 March 31, 2009, and the results of operations for the three- and nine-month periods ended March 31, 2009 and 2008, 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

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 nine months of fiscal 2009, we grew our balance sheet by $37.8 million; this growth was partially 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. Growth reflected an $18.6 million increase in available-for-sale investments, a $15.4 million increase in total net loans, a $14.4 million increase in deposits, an $8.5 million increase in advances from the Federal Home Loan Bank (FHLB), and a $4.4 million increase in securities sold under agreements to repurchase. 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 real estate, residential real estate, and commercial loan growth. Deposit growth was primarily in interest-bearing checking and certificates of deposit, partially offset by decreases in money market passbook savings and money market deposit accounts.

In December 2008, the Company announced its participation in the U.S. Treasury Department's Capital Purchase Program (CPP), which is one component of its Troubled Asset Relief Program (TARP). The Treasury invested $9.6 million in perpetual preferred stock carrying a dividend of 5% for the first five years, increasing to 9% thereafter. The Treasury Department created the CPP with the intention of building capital at healthy 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 March 31, 2009, the Company has increased loan balances by $15.4 million in the current fiscal year, and by $28.5 million over the last twelve months. Additionally, the Company has contributed to the accomplishment of Treasury's objective by leveraging the investment to support the purchase of $15.1 million in agency-backed collateralized mortgage obligations (CMOs) and $5.6 million in municipal debt, helping to improve the availability of credit in two distressed markets. The majority of these securities purchases would not likely have been made by the Company, absent the Treasury investment. Including both securities and direct loans, the Company has increased its investment in credit markets by $44.7 million over the last twelve months.

In addition, on April 16, 2009, the Company announced the signing of a definitive agreement with Southern Bank of Commerce, a troubled financial institution headquartered in Paragould, Arkansas, whereby Southern Bank of Commerce will be acquired by the Company and merged into Southern Missouri Bank and Trust Co. As of March 31, 2009, Southern Bank of Commerce had total assets of $30.5 million and deposits of $29.1 million. The Company anticipated, at the time it applied for the CPP funding, that some troubled institutions would likely become available given the current state of the economy and the banking system. The Company also believed that it could assist Treasury in meeting its goals by helping to make credit available in communities in which such institutions are located. From December 31, 2006, through December 31, 2008, gross loans at Southern Bank of Commerce fell by 32.9%. The Company anticipates reversing that decline, which will assist in the accomplishment of Treasury's stated goals for the CPP.

Net income for the third quarter of fiscal 2009 increased 9.6% to $984,000, as compared to $898,000 earned during the same period of the prior year. After accounting for preferred stock dividends of $119,000 in the third quarter of fiscal 2009, net earnings available to common shareholders decreased 3.7%, to $865,000. The increase in net income compared to the year-ago period was primarily due to a 16.2% increase in net interest income, partially offset by a 17.8% increase in noninterest expense and a 17.1% increase in provisions for loan losses. Diluted earnings per common share for the third quarter of fiscal 2009 were $0.42, as compared to $0.40 for the third quarter of fiscal 2008. For the first nine months of fiscal 2009, net income increased 8.3% to $2.8 million, as compared to $2.6 million earned during the same period of the prior year. After accounting for preferred stock dividends of $154,000, net earnings available to common shareholders increased 2.3%, to $2.6 million. The increase in net income compared to the year-ago period was primarily due to a 23.7% increase in net interest income, partially offset by a 35.3% decrease in non-interest income - the result of charges to record the other-than-temporary impairment of Company investments - an 83.6% increase in loan loss provisions, and a 12.3% increase in non-interest expense. For both the third quarter and first nine months of fiscal 2009, our increase in net interest income was due primarily to an increase in average interest-earning assets, as well as an increase in net interest rate spread.

Short-term market rates fell substantially during the first nine months of fiscal 2009, following an already substantial decline over the prior fiscal year. In December 2008, the Federal Reserve cut the targeted Federal Funds rate to a range of 0.00% to 0.25%, and in March 2009, detailed its plan to purchase long-term mortgage-backed securities, agency debt, and long-term Treasuries. From July 1, 2008, to March 31, 2009, the six-month treasury bill rate declined 174 basis points (to yield 0.43%); the two-year treasury note declined 182 basis points (to yield 0.81%); and the ten-year treasury bond declined 128 basis points (to yield 2.71%). Notable volatility in the first six months of the Company's fiscal year gave way to more stability in the financial markets in the most recent quarter. 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 30 basis points when comparing the first nine months of fiscal 2009 to the same period of the prior year.

The Company's net income is also affected by the level of its 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 nine-month period ended March 31, 2009, non-interest income decreased 35.3% 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. Excluding those charges, non-interest income would have increased 2.6%, attributable to increased debit card activity and secondary market loan sale income. Non-interest expense increased for the nine-month period ended March 31, 2009, by 12.3%, 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, Trapeza CDO IV, Ltd., class C2 ($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           $                 -   $            8,400    $             8,400   C      Ca
Trapeza CDO IV, Ltd.,
class C2                             125,000             (118,025)                 6,975   NR     Ca
Trapeza CDO XIII, Ltd.,
class A2A                            476,847             (372,497)               104,350  BB-    Baa2
Trapeza CDO XIII, Ltd.,
class B                              477,596             (409,346)                68,250   NR     B3
Preferred Term
Securities XXIV, Ltd.,
class B1                             432,078             (348,191)                83,887   NR     B2
  Totals                 $          1,511,521  $        (1,239,659)  $           271,862

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. The Trapeza IV CDO is receiving principal in kind (PIK), in lieu of cash interest payments, and is treated by the Company as a non-accrual asset. 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 March 31, 2009, and June 30, 2008

The Company's total assets increased by $37.8 million, or 9.0%, to $455.6 million at March 31, 2009, as compared to $417.8 million at June 30, 2008. Available-for-sale investment balances increased by $18.6 million, or 46.7%, to $58.5 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 $15.4 million, or 4.5%, to $358.4 million at March 31, 2009, as compared to $343.1 million at June 30, 2008. Commercial real estate loan balances grew by $8.0 million, while commercial loans were up $2.2 million, as the Company continues to focus on developing this business. Residential real estate loans were up $2.7 million.

Asset growth during the first nine months of fiscal 2009 has been funded primarily with deposit growth, which totaled $14.4 million, or 4.9%, bringing deposit balances to $306.7 million at March 31, 2009, as compared to $292.3 million at June 30, 2008. The increase in deposits was due primarily to a $23.3 million increase in interest-bearing checking accounts, a $2.9 million increase in non-interest checking accounts, and a $6.1 million increase in certificates of deposit, partially offset by a $15.3 million decrease in combined money market passbook savings and money market deposit accounts, and a $2.7 million decrease in statement savings accounts. Included in those figures is a decrease in public unit funds of $13.4 million, and an increase in brokered CDs of $4.2 million, meaning that retail, non-brokered deposits were up $23.7 million since June 30, 2008. The Company attributes strong deposit growth to introduction of its new "rewards checking" product, which provides the depositor an above-market yield on their checking account when the customer meets certain conditions such as debit card use and receipt of electronic monthly statements. Deposit outflows from money market passbook savings, money market deposit accounts, and statement savings accounts are attributed to scheduled withdrawals of public unit funds, and customer preference for products offering higher yields, including our own reward checking and certificate of deposit products. The Company also used FHLB advances, which increased $8.5 million, or 13.2%, to $72.5 million at March 31, 2009, as compared to $64.1 million at June 30, 2008. Securities sold under agreements to repurchase totaled $26.2 million at March 31, 2009, an increase of $4.4 million, or 20.3%, compared to $21.8 million at June 30, 2008.

Total stockholders' equity increased $10.7 million, or 35.0%, to $41.1 million at March 31, 2009, 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 on both common and preferred shares.

Average Balance Sheet for the Three- and Nine-Month Periods Ended March 31, 2009 and 2008

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 nine-month periods ending March 31, 2009 and 2008. 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
                                    March 31, 2009                           March 31, 2008
                           Average      Interest and    Yield/      Average      Interest and    Yield/
                           Balance        Dividends    Cost (%)     Balance        Dividends    Cost (%)
 Interest earning
assets:
  Mortgage loans (1)    $  258,159,170  $    4,222,271   6.54    $  227,601,634  $    4,201,486   7.38
  Other loans (1)           98,675,653       1,391,031   5.64        97,041,925       1,555,271   6.41
   Total net loans         356,834,823       5,613,302   6.29       324,643,559       5,756,757   7.09
  Mortgage-backed           42,085,918        510,534    4.85        23,509,298        294,284    5.01
securities
  Investment                22,263,967        163,294    2.93        21,849,724        298,506    5.46
securities (2)
  Other interest             5,014,033          2,769    0.22         8,002,491         36,137    1.81
earning assets
    Total interest         426,198,741       6,289,899   5.90       378,005,072       6,385,684   6.76
earning assets (1)
 Other noninterest          25,427,883          -                    21,910,487          -
earning assets (3)
       Total assets     $  451,626,624  $    6,289,899           $  399,915,559  $    6,385,684

 Interest bearing
liabilities:
  Savings accounts      $   62,385,720  $      228,037   1.46    $   76,063,709  $      551,764   2.90
  NOW accounts              54,368,002        302,079    2.22        33,218,035        107,591    1.30
  Money market deposit       6,111,761         19,398    1.27         5,882,984         26,654    1.81
accounts
  Certificates of          151,788,816       1,187,026   3.13       144,823,148       1,587,492   4.38
deposit
    Total interest         274,654,299       1,736,540   2.53       259,987,876       2,273,501   3.50
bearing deposits
 Borrowings:
  Securities sold
under agreements            26,861,704         44,959    0.67        24,877,685        183,894    2.96
  to repurchase
 FHLB advances              77,071,667        851,239    4.42        55,507,418        717,801    5.17
 Subordinated debt           7,217,000         81,708    4.53         7,217,000        134,625    7.46
    Total interest         385,804,670       2,714,446   2.81       347,589,979       3,309,821   3.81
bearing liabilities
 Noninterest bearing        23,909,363  -                            19,687,209  -
demand deposits
 Other noninterest           1,057,053  -                             2,230,731  -
bearing liabilities
    Total liabilities      410,771,086       2,714,446              369,507,919       3,309,821
 Stockholders' equity       40,855,538          -                    30,407,640          -
      Total
liabilities and         $  451,626,624  $    2,714,446           $  399,915,559  $    3,309,821
      stockholders'
equity

 Net interest income                    $    3,575,453                           $    3,075,863

 Interest rate spread                                    3.09                                     2.95
(4)
 Net interest margin                                     3.36                                     3.25
(5)

Ratio of average
interest-earning
assets                     110.47%                                  108.75%
to 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 $7.5 million, respectively, for the three-month period ending March 31, 2009, as compared to $8.3 million and $7.2 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

                               Nine-month period ended                   Nine-month period ended
                                    March 31, 2009                           March 31, 2008
                           Average      Interest and    Yield/      Average       Interest and    Yield/
                           Balance        Dividends    Cost (%)     Balance        Dividends     Cost (%)
 Interest earning
assets:
  Mortgage loans (1)    $  251,544,704  $   12,576,002   6.67    $  228,684,296  $   12,394,476    7.23
  Other loans (1)          102,057,792       4,560,931   5.96        91,470,307       5,193,130    7.57
   Total net loans         353,602,496      17,136,933   6.46       320,154,603      17,587,606    7.32
  Mortgage-backed           34,235,733       1,264,734   4.93        16,150,551        575,510     4.75
securities
  Investment                19,171,282        499,774    3.48        24,862,322        877,075     4.70
securities (2)
  Other interest             5,391,983         34,849    0.86         4,954,588         55,364     1.49
earning assets
    Total interest         412,401,494      18,936,290   6.12       366,122,064      19,095,555    6.95
earning assets (1)
 Other noninterest          23,603,122          -                    22,735,868          -
earning assets (3)
       Total assets     $  436,004,616  $   18,936,290           $  388,857,932  $   19,095,555

 Interest bearing
liabilities:
  Savings accounts      $   65,864,200  $      949,297   1.92    $   76,769,613  $    2,000,155    3.47
  NOW accounts              44,440,022        624,123    1.87        31,432,785        318,762     1.35
  Money market deposit       7,176,780         80,377    1.49         5,827,998         81,591     1.87
accounts
  Certificates of          148,975,130       3,725,013   3.33       138,444,378       4,875,628    4.70
deposit
    Total interest         266,456,132       5,378,810   2.69       252,474,774       7,276,136    3.84
bearing deposits
 Borrowings:
  Securities sold
under agreements            24,107,020        186,974    1.03        19,991,918        583,880     3.89
. . .