Southern Missouri Bancorp, Inc. is a Missouri corporation originally organized for the principal purpose of becoming the holding company of Southern Bank. The principal business of Southern Bank consists of attracting deposits from the communities it serves and investing those funds in loans secured by one- to four-family residences and commercial real estate, as well as commercial business and consumer loans. These funds have also been used to purchase investment securities, mortgage-backed securities (MBS), U.S. government and federal agency obligations and other permissible securities.

Southern Bank's results of operations are primarily dependent on the levels of its net interest margin and noninterest income, and its ability to control operating expenses. Net interest margin is dependent primarily on the difference or spread between the average yield earned on interest-earning assets (including loans, mortgage-related securities, and investments) and the average rate paid on interest-bearing liabilities (including deposits, securities sold under agreements to repurchase, and borrowings), as well as the relative amounts of these assets and liabilities. Southern Bank is subject to interest rate risk to the degree that its interest-earning assets mature or reprice at different times, or on a varying basis, from its interest-bearing liabilities.

Southern Bank's noninterest income consists primarily of fees charged on transaction and loan accounts, interchange income from customer debit and ATM card use, gains on sales of loans to the secondary market, and increased cash surrender value of bank owned life insurance ("BOLI"). Southern Bank's operating expenses include: employee compensation and benefits, occupancy expenses, legal and professional fees, federal deposit insurance premiums, amortization of intangible assets, and other general and administrative expenses.

Southern Bank's operations are significantly influenced by general economic conditions including monetary and fiscal policies of the U.S. government and the Federal Reserve Board. Additionally, Southern Bank is subject to policies and regulations issued by financial institution regulatory agencies including the Federal Reserve, the Missouri Division of Finance, and the Federal Deposit Insurance Corporation. Each of these factors may influence interest rates, loan demand, prepayment rates and deposit flows. Interest rates available on competing investments as well as general market interest rates influence the Bank's cost of funds. Lending activities are affected by the demand for real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered. Lending activities are funded through the attraction of deposit accounts consisting of checking accounts, passbook and statement savings accounts, money market deposit accounts, certificate of deposit accounts with terms of 60 months or less, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank of Des Moines, and, to a lesser extent, brokered deposits. The Bank intends to continue to focus on its lending programs for one- to four-family residential real estate, commercial real estate, commercial business and consumer financing on loans secured by properties or collateral located primarily in southeast Missouri and northeast and north central Arkansas.

This Annual Report on Form 10-K contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). These measures include:

· Fiscal year 2011 net income available to common stockholders per diluted common share excluding bargain purchase gain, net of transaction expenses related to the December 2010 FDIC-assisted acquisition involving the former First Southern Bank (the "Acquisition"), net of tax;

· Fiscal year 2011 noninterest income excluding bargain purchase gain related to the Acquisition;

· Fiscal year 2012 and 2011 net income available to common stockholders excluding accretion of fair value discount on acquired loans, amortization of fair value premium on assumed time deposits, and bargain purchase gain, net of transaction expenses, related to the Acquisition, net of tax;

· Fiscal year 2012 and 2011 return on average assets excluding accretion of fair value discount on acquired loans, amortization of fair value premium on assumed time deposits, and bargain purchase gain, net of transaction expenses, related to the Acquisition, net of tax;

· Fiscal year 2012 and 2011 return on average common equity excluding accretion of fair value discount on

acquired loans, amortization of fair value premium on assumed time deposits, and bargain purchase gain, net of transaction expenses, related to the Acquisition, net of tax;

· Fiscal year 2012 and 2011 net interest margin excluding accretion of fair value discount on acquired loans and amortization of fair value premium on assumed time deposits related to the Acquisition;

Management believes that showing these amounts and measures excluding these items is useful for investors because it better reflects our core operating results and provides useful information by which to evaluate the Company's operating performance on an ongoing basis from period to period.

The following table presents a reconciliation of the calculation of fiscal 2011 diluted earnings per share available to common shareholders excluding bargain purchase gain and transaction expenses related to the Acquisition:

                                                                   For the twelve
                                                                    months ended
                                                                   June 30, 2011

Diluted earnings per share available to common stockholders     $               5.12
Less: impact of excluding bargain purchase gain, net of
transaction
expenses, related to the Acquisition, net of tax                                1.92
Diluted earnings per share available to common stockholders -
excluding
   bargain purchase gain, net of tax and transaction
expenses, related to the
   Acquisition                                                  $               3.20

The following table presents a reconciliation of the calculation of fiscal 2011 noninterest income excluding bargain purchase gain related to the Acquisition:

                                                                  For the twelve
                                                                   months ended
                     (dollars in thousands)                        June 30, 2011

 Noninterest income                                               $        10,502

The following table presents a reconciliation of the calculation of net income available to common stockholders, excluding accretion of fair value discount on acquired loans, amortization of premium on acquired time deposits, and bargain purchase gain, net of transaction expenses, related to the Acquisition, net of tax:

                                                      For the twelve months ended
          (dollars in thousands)                June 30, 2012              June 30, 2011

Net income available to common
stockholders                                 $              9,580       $            10,958
Less: impact of excluding accretion of
fair value discount on acquired
   loans, amortization of fair value
premium on acquired time deposits,
   and bargain purchase gain, net of
transaction expenses, related to the
   Acquisition, net of tax                                  2,446                     5,435
Net income available to common
shareholders - excluding accretion of fair
   value discount on acquired loans,
amortization of fair value premium on
   acquired time deposits, and bargain
purchase gain, net of transaction
   expenses, related to the Acquisition,
net of tax                                   $              7,134       $             5,523

The following table presents a reconciliation of the calculation of return on average assets, excluding accretion of fair value discount on acquired loans, amortization of premium on acquired time deposits, and bargain purchase gain, net of transaction expenses, related to the Acquisition, net of tax:

                                                         For the twelve months ended
                                                 June 30, 2012                 June 30, 2011

Return on average assets                                      1.37 %                        1.81 %
Less: impact of excluding accretion of
fair value discount on acquired
loans, amortization of fair value premium
on acquired time deposits,
and bargain purchase gain, net of
transaction expenses, related to the
Acquisition, net of tax                                       0.33 %                        0.86 %
Return on average assets - excluding
accretion of fair value discount on
acquired loans, amortization of fair value
premium on acquired time
deposits, and bargain purchase gain, net
of transaction expenses, related to
the Acquisition, net of tax                                   1.04 %                        0.95 %

The following table presents a reconciliation of the calculation of return on average common equity, excluding accretion of fair value discount on acquired loans, amortization of premium on acquired time deposits, and bargain purchase gain, net of transaction expenses, related to the Acquisition, net of tax:

                                                       For the twelve months ended
                                                June 30, 2012              June 30, 2011

Return on average common equity                             15.15 %                    27.08 %
Less: impact of excluding accretion of
fair value discount on acquired
   loans, amortization of fair value
premium on acquired time deposits,
   and bargain purchase gain, net of
transaction expenses, related to the
   Acquisition, net of tax                                   3.87 %                    13.43 %
Return on average common equity -
excluding accretion of fair value
   discount on acquired loans,
amortization of fair value premium on
acquired
   time deposits, and bargain purchase
gain, net of transaction expenses,
   related to the Acquisition, net of tax                   11.28 %                    13.65 %

The following table presents a reconciliation of the calculation of net interest margin, excluding accretion of fair value discount on acquired loans and amortization of premium on acquired time deposits related to the Acquisition:

                                                         For the twelve months ended
                                                 June 30, 2012                 June 30, 2011

Net interest margin                                           4.12 %                        3.92 %
Less: impact of excluding accretion of
fair value discount on acquired
   loans and amortization of fair value
premium on acquired time
   deposits related to the Acquisition                        0.57 %                        0.35 %
Net interest margin - excluding accretion
of fair value discount on acquired
   loans and amortization of fair value
premium on acquired time deposits
   related to the Acquisition                                 3.55 %                        3.57 %

The non-GAAP disclosures contained herein should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

The Company has established various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in Item 8 under the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

The allowance for losses on loans represents management's best estimate of probable losses in the existing loan portfolio. The allowance for losses on loans is increased by the provision for losses on loans charged to expense and reduced by loans charged off, net of recoveries.

The provision for losses on loans is determined based on management's assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experience, the level of classified and nonperforming loans and the results of regulatory examinations.

Integral to the methodology for determining the adequacy of the allowance for loan losses is portfolio segmentation and impairment measurement. Under the Company's methodology, loans are first segmented into 1) those comprising large groups of smaller-balance homogeneous loans, including single-family mortgages and installment loans, which are collectively evaluated for impairment and 2) all other loans which are individually evaluated. Those loans in the second category are further segmented utilizing a defined grading system which involves categorizing loans by severity of risk based on conditions that may affect the ability of the borrowers to repay their debt, such as current financial information, collateral valuations, historical payment experience, credit documentation, public information, and current trends. The loans subject to credit classification represent the portion of the portfolio subject to the greatest credit risk and where adjustments to the allowance for losses on loans as a result of provisions and charge-offs are most likely to have a significant impact on operations.

A periodic review of selected credits (based on loan size and type) is conducted to identify loans with heightened risk or probable losses and to assign risk grades. The primary responsibility for this review rests with the loan administration personnel. This review is supplemented with periodic examinations of both selected credits and the credit review process by applicable regulatory agencies. The information from these reviews assists management in the timely identification of problems and potential problems and provides a basis for deciding whether the credit represents a probable loss or risk that should be recognized.

Loans are considered impaired if, based on current information and events, it is probable that Southern Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the fair value of the collateral for collateral-dependent loans. If the loan is not collateral-dependent, the measurement of impairment is based on the present value of expected future cash flows discounted at the historical effective interest rate or the observable market price of the loan. In measuring the fair value of the collateral, management uses the assumptions (i.e., discount rates) and methodologies (i.e., comparison to the recent selling price of similar assets) consistent with those that would be utilized by unrelated third parties. Impairment identified through this evaluation process is a component of the allowance for loan losses. If a loan that is individually evaluated for impairment is found to have none, it is grouped together with loans having similar characteristics (i.e., the same risk grade), and an allowance for loan losses is based upon a quantitative factor (historical average charge-offs for similar loans over the past one to five years), and qualitative factors such as qualitative factors such as changes in lending policies; national, regional, and local economic conditions; changes in mix and volume of portfolio; experience, ability, and depth of lending management and staff; entry to new markets; levels and trends of delinquent, nonaccrual, special mention, and classified loans; concentrations of credit; changes in collateral values; agricultural economic conditions; and regulatory risk. For portfolio loans that are evaluated for impairment as part of homogenous pools, an allowance is maintained based upon similar quantitative and qualitative factors. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the conditions of the various markets in which collateral may

be sold may all affect the required level of the allowance for losses on loans and the associated provision for losses on loans.

General. The Company's total assets increased $51.0 million, or 7.4%, to $739.2 million at June 30, 2012, as compared to $688.2 million at June 30, 2011. The increase was due primarily to increases in the loan and available-for-sale investment portfolios of $26.9 million and $11.8 million, respectively, as well as a $7.8 million increase in bank-owned life insurance. Asset growth was funded by a $24.7 million increase in deposits, and a $39.0 million increase in stockholders' equity. FHLB advances declined by $9.0 million.

Cash and equivalents. Cash and equivalents decreased $475,000, or 1.4%, to $33.4 million at June 30, 2012, from $33.9 million at June 30, 2011, as funds were used to meet loan demand.

Loans. Loans increased $26.9 million, or 4.8%, to $583.5 million at June 30, 2012, from $556.6 million at June 30, 2011. Loan growth was comprised primarily of commercial real estate loans, which increased $15.8 million, and commercial loans, which increased $10.7 million.

Allowance for Loan Losses. The allowance for loan losses increased $1.1 million, or 16.4%, to $7.5 million at June 30, 2012, from $6.4 million at June 30, 2011. The allowance represented 1.27% of gross loans receivable at June 30, 2012, as compared to 1.14% of gross loans receivable at June 30, 2011. At June 30, 2012, nonperforming loans, which included loans past due greater than 90 days and nonaccruing loans, were $2.4 million, compared to $701,000 at June 30, 2011. See also, Provision for Loan Losses, under Comparison of Operating Results for the Years Ended June 30, 2012 and 2011.

In its quarterly evaluation of the adequacy of its allowance for loan losses, the Company employs historical data, including past due percentages, charge offs, and recoveries for the previous one to five years for each loan category. Average net charge offs are calculated as net charge offs for the period by portfolio type as a percentage of the average balance of the respective portfolio type over the same period. As the Company and industry have seen increases in loan defaults in the past several years, the Company believes that it is prudent to emphasize more recent historical factors in the allowance evaluation.

The following table sets forth the Company's historical net charge offs as of June 30, 2012:

                                 Net charge offs -       Net charge offs -
           Portfolio segment     1-year historical       5-year historical
           Real estate loans:
             Residential                       0.05 %                  0.06 %
             Construction                      0.00                    0.00
             Commercial                        0.03                    0.08
           Consumer loans                      0.59                    0.50
           Commercial loans                    0.41                    0.18

Additionally, in its quarterly evaluation of the adequacy of the allowance for loan losses, the Company evaluates changes in the financial condition of individual borrowers; changes in local, regional, and national economic conditions; the Company's historical loss experience; and changes in market conditions for property pledged to the Company as collateral. The Company has identified specific qualitative factors that address these issues and subjectively assigns a percentage to each factor. Qualitative factors are reviewed quarterly and may be adjusted as necessary to reflect improving or declining trends. At June 30, 2012, these qualitative factors included:

· Changes in lending policies

· National, regional, and local economic conditions

· Changes in mix and volume of portfolio

· Experience, ability, and depth of lending management and staff

· Entry to new markets

· Levels and trends of delinquent, nonaccrual, special mention and

· Classified loans

· Concentrations of credit

· Changes in collateral values

· Agricultural economic conditions

· Regulatory risk

The qualitative factors are applied to the allowance for loan losses based upon the following percentages by loan type:

                                Qualitative factor       Qualitative factor
                                    applied at               applied at
          Portfolio segment       June 30, 2012            June 30, 2011
          Real estate loans:
            Residential                        0.83 %                   0.88 %
            Construction                       1.10                     1.00
            Commercial                         1.32                     1.27
          Consumer loans                       1.38                     1.53
          Commercial loans                     1.38                     1.38

At June 30, 2012, the amount of our allowance for loan losses attributable to these qualitative factors was approximately $6.3 million, as compared to $5.4 million at June 30, 2011. The general increase in qualitative factors was attributable to entry to new markets and corresponding changes in the mix and volume of the portfolio and lending staff.

Investments. The available-for-sale investment portfolio increased $11.8 million, or 18.6%, to $75.1 million at June 30, 2012, as compared to $63.3 million at June 30, 2011. The increase was primarily the result of a $10.4 million increase in obligations of state and political subdivisions and a $5.1 million increase in obligations of U.S. government agencies, partially offset by a $5.3 million decrease in mortgage-backed securities and collateralized mortgage obligations.

Premises and Equipment. Premises and equipment increased $3.3 million, or 40.8%, to $11.3 million at June 30, 2012, as compared to $8.1 million at June 30, 2011. The increase was due to the acquisition of land for new branch facilities, construction of a new branch facility, remodeling and expansion of a branch facility, and the purchase of software and equipment, partially offset by increases in accumulated depreciation.

BOLI. The Bank purchased "key person" life insurance policies on employees in fiscal 2003 and fiscal 2005 for original premiums totaling $6.0 million. In fiscal 2012, the Bank purchased additional "key person" life insurance policies for original premiums totaling $7.5 million. At June 30, 2012, the cash surrender value of these policies had increased to $16.0 million.

Intangible Assets. Intangible assets generated through branch acquisitions in fiscal 2000 decreased $255,000 to $817,000 as of June 30, 2012, and will continue to be amortized in accordance with ASC Topic 350. The July 2009 acquisition of the Southern Bank of Commerce resulted in goodwill of $126,000, which will not be amortized, but will be tested for impairment at least annually, and a $184,000 core deposit intangible, which is being amortized over a five-year period using the straight-line method. The December 2010 assumption of the deposits of the former First Southern Bank resulted in a $625,000 core deposit intangible, which is being amortized over a five-year period using the straight-line method.

Deposits. Deposits increased $24.7 million, or 4.4%, to $584.8 million at June 30, 2012, as compared to $560.2 million at June 30, 2011. Deposit growth was comprised primarily of non-interest bearing accounts, which increased $22.0 million, and NOW accounts, which increased $41.4 million, and was partially offset by declines in certificates of deposit, which decreased $33.3 million, and savings accounts, which decreased $7.7 million.

Borrowings. FHLB advances decreased $9.0 million, or 26.9%, to $24.5 million at June 30, 2012, as compared to $33.5 million at June 30, 2011. At both June 30, 2012 and 2011, outstanding advances included no overnight borrowings. Of the $24.5 million in advances outstanding at June 30, 2012, the full amount carried fixed rates, and was subject to early redemption by the issuer.

Subordinated Debt. In March 2004, $7.0 million of Floating Rate Capital Securities of Southern Missouri

Statutory Trust I, with a liquidation value of $1,000 per share were issued. The securities mature in March 2034, were redeemable beginning in March 2009, and bear interest at a floating rate of three-month LIBOR plus 275 basis points.

Stockholders' Equity. The Company's stockholders' equity increased $39.0 million, or 70.0%, to $94.7 million at June 30, 2012, as compared to $55.7 million at June 30, 2011. The increase was primarily due to the November 2011 common stock offering, additional capital invested in the Company's preferred stock under the SBLF program (net of the repurchase of preferred stock issued under the TARP program), and retention of net income, partially offset by cash dividends paid on common and preferred stock.

Net Income. The Company's net income available to common stockholders for the fiscal year ended June 30, 2012, was $9.6 million, a decrease of $1.4 million, or 12.6%, from the $11.0 million net income available to common stockholders for the prior fiscal year. Before an effective dividend on preferred shares of $424,000 and a charge of $94,000 for the repurchase of preferred stock issued at a discount under the TARP program, net income was $10.1 million for the 2012 fiscal year, a decrease of $1.4 million, or 12.0%, as compared to the $11.5 million in net income for the prior fiscal year. The decrease in net income was primarily due to a $6.4 million decrease in noninterest income and a $2.1 million increase in noninterest expense, partially offset by a $5.3 million increase in net interest income, a $1.4 million decrease in provision for income taxes, and a $600,000 decrease in provision for loan losses. Exclusive of fair value discount accretion on acquired loans, amortization of fair value premium on acquired time deposits, and bargain purchase gain, net of transaction expenses, related to the Acquisition, net of tax, net income available to common stockholders for fiscal 2012 was $7.1 million, as compared to $5.5 million for fiscal 2011.

Net Interest Income. Net interest income for fiscal 2012 was $29.0 million, an increase of $5.3 million, or 22.1%, when compared to the prior fiscal year. The increase was due to a $98.3 million increase in average interest-earning assets, . . .