SOUTHERN MISSOURI BANCORP, INC. - Quarter Report: 2007 September (Form 10-Q)

SOUTHERN MISSOURI BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2007 AND JUNE 30, 2007

See Notes to Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006 (Unaudited)

See Notes to Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006 (Unaudited)

See Notes to Consolidated Financial Statements

SOUTHERN MISSOURI BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet of the Company as of June 30, 2007, has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three-month period ended September 30, 2007, are not necessarily indicative of the results that may be expected for the entire fiscal year. For additional information, refer to the Company's June 30, 2007, Form 10-K, which was filed with the SEC and the Company's annual report, which contains the audited consolidated financial statements for the fiscal years ended June 30, 2007 and 2006.

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Southern Missouri Bank ∓ Trust Co. (SMBT or Bank). All significant intercompany accounts and transactions have been eliminated in consolidation.

Note 2: Securities

Available for sale securities are summarized as follows at estimated fair value:

The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2007.

The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2007.

Note 3: Loans

Loans are summarized as follows:

Note 4: Deposits

Deposits are summarized as follows:

Note 5: Earnings Per Share

Basic and diluted earnings per share are based upon the weighted-average shares outstanding. The following table summarizes basic and diluted earnings per common share for the three month periods ended September 30, 2007 and 2006.

Note 6: Stock Option Plans

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), "Share-Based Payment," which requires the compensation costs related to share-based payment transactions to be recognized in financial statements. With limited exceptions, the amount of compensation cost is measured based on the grant-date fair value of the equity instruments issued. Compensation cost is recognized over the vesting period during which an employee provides service in exchange for the award. SFAS No. 123R was adopted during the first quarter of fiscal 2006.

Note 7: Employee Stock Ownership Plan

The Bank established a tax-qualified ESOP in April 1994. The plan covers substantially all employees who have attained the age of 21 and completed one year of service. The Company's intent is to continue the ESOP for fiscal 2008. The Company has been accruing $50,000 per quarter for ESOP benefit expenses this year and intends to contribute cash to the plan to allow the purchase of shares for allocation to participants at some point during fiscal 2008.

Note 8: Corporate Obligated Floating Rate Trust Preferred Securities

Southern Missouri Statutory Trust I issued $7.0 million of Floating Rate Capital Securities (the "Trust Preferred Securities") in March, 2004, with a liquidation value of $1,000 per share. The securities are due in 30 years, redeemable after five years and bear interest at a floating rate based on LIBOR. The securities represent undivided beneficial interests in the trust, which was established by the Company for the purpose of issuing the securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the "Act") and have not been registered under the Act. The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Southern Missouri Statutory Trust I used the proceeds from the sale of the Trust Preferred Securities to purchase Junior Subordinated Debentures of the Company. The Company has used its net proceeds for working capital and investment in its subsidiaries.

Note 9: Authorized Share Repurchase Program

In June, 2007, the Board of Directors authorized and announced the open-market or privately-negotiated stock repurchase of up to 110,000 shares of the Company's outstanding stock. As of September 30, 2007, a total of 18,700 shares have been repurchased. The number of shares, as of September 30, 2007, held as treasury stock was 761,950.

Note 10: Newly Adopted Accounting Pronouncements

The Company adopted the provisions of FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes," on July 1, 2007. Implementation of the new Standard did not have a material impact on the Company's financial statements. The Company files income tax returns in the U.S. federal jurisdiction and the state of Missouri. As of November 14, 2007, the open tax years under FIN 48 are 2006, 2005, and 2004 -- these tax years corrsepond to our fiscal years ended 2007, 2006, and 2005.

PART I: Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
SOUTHERN MISSOURI BANCORP, INC.

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). 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, 2007, 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, 2007, and the results of operations for the three-month periods ended September 30, 2007 and 2006, 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 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 2007 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 2007 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 2008, we grew our balance sheet by $6.1 million, which was consistent with the Company's growth strategies. This additional growth reflected a $7.2 million increase in total net loans, a $4.4 million decrease in deposits, and an $11.6 million increase in borrowed funds. The growth in loans was primarily due to commercial and commercial real estate loan originations and advances, coupled with residential real estate loan originations. The increase in borrowed funds was in the form of short-term borrowings from the Federal Home Loan Bank of Des Moines (FHLB), used in part to fund loan growth.

Our net income for the first quarter of 2008 increased 9.9% to $813,000, as compared to $740,000 earned during the same period of the prior year. The increase in net income was primarily due to a 5.7% increase in net interest income, partially offset by a 5.7% increase in non-interest expense. Diluted earnings per share for the first quarter of fiscal 2008 were $0.36, as compared to $0.33 for the first quarter of fiscal 2007. For the three-month period ended September 30, 2007, our growth in interest income was derived primarily from the overall growth in our balance sheet and the increase in yields earned; the increase in interest expense reflected the growth in our interest-bearing liabilities and increases in rates paid.

Short-term market interest rates declined during the first three months of fiscal 2008, following increases during the previous two fiscal years. After two years of increases left the overnight lending rate at 5.25% in June 2006, the Federal Open Market Committee of the Federal Reserve Bank held the rate steady until September 2007, when it cut rates by 50 basis points, to 4.75%. From July 1 to September 30, 2007, rates on short term treasuries declined based on investor expectations regarding short-term monetary policy. At July 1, the six-month treasury bill and two-year treasury note yielded almost 5%, three months later, the yield was off nearly 100 basis points; meanwhile the ten-year bond declined about 50 basis points. The result was a steepened yield curve. In this rate environment, our net interest margin decreased four basis points when comparing the first quarter of fiscal 2008 with the corresponding period in fiscal 2007; however, compared to the fourth quarter of fiscal 2007, our net interest margin improved from 2.92% to 2.94% in the first quarter of fiscal 2008. The $142,000 increase in net interest income for the first quarter of 2008, when compared to the corresponding period in 2007, reflected growth of 7.2% in our average interest-earning assets, compared to the prior period.

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, 2007, compared to the corresponding period ended September 30, 2006, non-interest income increased 2.3%, primarily due to increased ATM transaction fee income and loan fee collections, partially offset by lower income from NSF charges. Non-interest expense increased during the three months ended September 30, 2007, compared to the same period of the prior fiscal year, primarily in the categories of compensation and benefits, as well as occupancy expenses, with the increases partially offset by lower advertising costs.

We expect to continue to grow our assets modestly through the origination and occasional purchase of loans and investment securities. A portion of the current period's loan growth is attributed to the seasonal nature of agricultural lending, and growth for the remainder of the fiscal year may not continue at the same pace. The primary funding for our asset growth is expected to come from retail deposits, short- and long-term FHLB borrowings, and 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, 2007, and June 30, 2007

The Company's total assets increased by $6.1 million, or 1.6%, to $386.0 million at September 30, 2007, as compared to $379.9 million at June 30, 2007. Loans, net of the allowance for loan losses, increased $7.2 million, or 2.3%, to $319.3 million, as compared to $312.1 million at June 30, 2007. The Company continues to focus on origination of commercial loans, resulting in growth of $3.3 million in commercial and commercial real estate loan balances. Cash and cash equivalent balances decreased $1.9 million, or 25.3%, to $5.5 million, as compared to $7.3 million at June 30, 2007.

Asset growth during the first three months of fiscal 2008 has been funded primarily with short-term FHLB borrowings. At June 30, 2007, the Company had $7.0 million in short-term FHLB borrowings. At September 30, 2007, short-term FHLB borrowings increased to $19.6 million. During the first three months of fiscal 2008, one FHLB advance of $1.0 million was called, and the Company replaced this funding with short-term borrowings. The remaining $11.6 million increase in short-term borrowings was due to asset growth and decreases in deposit balances. FHLB advances totaled $65.6 at September 30, 2007, compared to $54.0 million at June 30, 2007. At September 30, 2006, FHLB advances totaled $65.9 million. Deposits decreased $4.4 million, or 1.6%, to $265.7 million at September 30, 2007, as compared to $270.1 million at June 30, 2007. At September 30, 2006, deposits totaled $247.3 million. The decrease in total deposits was primarily due to a $3.8 million decrease in checking account balances (of which $3.0 million was in accounts tied to repurchase agreements, with customers whose account balances tend to fluctuate), and a $3.4 million combined decrease in money market passbook and money market deposit accounts, partially offset by a $2.6 million increase in certificates of deposit. Securities sold under agreements to repurchase decreased $1.6 million, or 8.9%; the decrease was primarily attributed to normal balance fluctuations with customers holding the agreements.

Total stockholders' equity increased $500,000, or 1.7%, to $29.2 million at September 30, 2007, as compared to $28.7 million at June 30, 2007. The increase was primarily due to retention of net income and an increase in the market value of the available-for-sale investment portfolio, partially offset by purchases of treasury stock and cash dividends paid.

Average Balance Sheet for the Three Months Ended September 30, 2007 and 2006

The table on the following page presents certain information regarding Southern Missouri Bancorp, Inc.'s financial condition and net interest income for the three-month periods ending September 30, 2007 and 2006. The table presents 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.

Results of Operations - Comparison of the three month periods ended September 30, 2007 and 2006

General. Net income for the three month period ended September 30, 2007, was $813,000, as compared to net income of $740,000 earned during the same period of the prior year. Basic and diluted earnings per share were $0.37 and $0.36 for the first quarter of fiscal 2008, compared to $0.33 basic and diluted earnings per share for the first quarter of fiscal 2007. Our annualized return on average assets was .86% for the first three months of fiscal 2008 compared to .83% for the first three months of fiscal 2007. Our return on average stockholders' equity was 11.2% for the first three months of fiscal 2008, compared to 11.0% for the first three months of fiscal 2007.

Net Interest Income. Net interest income for the three months ended September 30, 2007 increased $142,000 as compared to the same period of the prior year. This increase primarily reflected our growth initiatives that resulted in increases in the average balances of both interest-earning assets and interest-bearing liabilities, and was partially offset by a decrease in our net interest rate spread. Our net interest rate spread was 2.59% for the three-month period ended September 30, 2007, as compared to 2.67% for the same period of the prior year. For the first quarter of fiscal 2008, our net interest margin, determined by dividing the annualized net interest income by total average interest-earning assets, was 2.94%, compared to 2.98% for the same period of the prior year. The decrease in net interest rate spread for the three-month period ended September 30, 2007, resulted from a 34 basis point increase in the weighted-average cost of funds, partially offset by a 26 basis point increase in the weighted-average yield on interest-earning assets. Net interest rate spread compression during the last twelve months was attributed to repricing of liabilities at relatively higher short-term rates, while asset repriced at a slower pace and based on relatively lower longer-term interest rates. This trend appears to have slowed -- however, if not reversed -- on a linked-quarter comparison. The Company's first quarter fiscal 2008 net interest spread improved to 2.59%, from 2.58% in the fourth quarter of fiscal 2007, while the net interest margin improved to 2.94%, from 2.92%.

Interest Income. Total interest income for the three-month period ended September 30, 2007, was $6.3 million, an increase of $646,000, or 11.4%, compared to the same period of the prior year. The increase was due to a $24.2 million, or 7.2%, increase in the average balance of interest-earning assets, to $358 million, and a 26 basis point increase in the yield earned on those assets. For the three-month period ended September 30, 2007, the average interest rate on interest-earning assets was 7.08%, as compared to 6.82% for the same period of the prior year.

Interest Expense. Total interest expense for the three-month period ended September 30, 2007, was $3.7 million, an increase of $504,000, or 15.8%, compared to the same period of the prior year. The increase was due to a $22.0 million, or 7.1%, increase in the average balance of interest-bearing liabilities, to $330 million, and the increase in the weighted average cost of funds of 34 basis points. The increase in the average balance of interest-bearing liabilities was primarily due to funding needed to provide for asset growth.

Provision for Loan Losses. The provision for loan losses for the three-month period ended September 30, 2007, was $110,000, as compared to $125,000 for the same period of the prior year. 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. Although we believe that we have established and maintained the allowance for loan losses at adequate levels, additions will 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 increased $13,000, or 2.3%, to $590,000 for the three-month period ended September 30, 2007, as compared to $577,000 for the same period of the prior year. The increase was primarily due to increased collections of loan fees, charges for NSF activity, and income from ATM and check card transactions.

Non-interest Expense. Non-interest expense increased $102,000, or 5.7%, to $1.9 million for the three-month period ended September 30, 2007, as compared to $1.8 million for the same period of the prior year. The increase in non-interest expense was primarily due to increased salaries and benefits, as well as increased occupancy expenses. 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 58.9% for the first quarter of fiscal 2008, as compared to 58.6% for the same period of the prior year.

Income Taxes. Provisions for income taxes for the three-month period ended September 30, 2007, decreased $5,000, or 1.2%, to $399,000, as compared to $404,000 for the same period of the prior year. Our effective tax rate for the first three months of fiscal 2008 was 32.9%, as compared to 35.3% for the same period of the prior year. The decrease in the effective tax rate and our provisions for income taxes was primarily due to the Company's investment in tax-exempt securities and purchases of tax credits, partially offset by increased pre-tax income.

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, 2007 and 2006:

The allowance for loan losses has been calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Company's loans. Management considers such factors as the repayment status of a loan, the estimated net fair value of the underlying collateral, the borrower's intent and ability to repay the loan, local economic conditions, and the Company's historical loss ratios. We maintain the allowance for loan losses through the provisions for loan losses that we charge to income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. The allowance for loan losses increased $82,000 to $2.6 million at September 30, 2007, from $2.5 million at June 30, 2007. At September 30, 2007, the Bank had $4.4 million, or 1.13% of total assets adversely classified (substandard, doubtful, or loss) as compared to adversely classified assets of $1.0 million, or .28% of assets at September 30, 2006. At September 30, 2007, the Company had classified assets as substandard, doubtful, and loss, in the amount of $4.4 million, $4,000, and $0, respectively.

While management believes that our asset quality remains strong, it recognizes that, due to the continued growth in the loan portfolio and potential changes in market conditions, our level of nonperforming assets and resulting charge offs may fluctuate. Higher levels of net charge offs requiring additional provisions for loan losses could result. Although management uses 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.

Nonperforming Assets

The ratio of nonperforming assets to total assets and non-performing loans to net loans receivable is another measure of asset quality. Nonperforming assets of the Company include nonaccruing loans, accruing loans delinquent/past maturity 90 days or more, and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. The following table summarizes changes in the Company's level of nonperforming assets over selected time periods:

Liquidity Resources

The term "liquidity" refers to our ability to generate adequate amounts of cash to fund loan originations, loans purchases, deposit withdrawals and operating expenses. Our primary sources of funds include deposit growth, securities sold under agreements to repurchase, FHLB advances, brokered deposits, amortization and prepayment of loan principal and interest, investment maturities and sales, and funds provided by our operations. While the scheduled loan repayments and maturing investments are relatively predictable, deposit flows, FHLB advance redemptions, and loan and security prepayment rates are significantly influenced by factors outside of the Bank's control, including interest rates, general and local economic conditions and competition in the marketplace. The Bank relies on FHLB advances and brokered deposits as additional sources for funding cash or liquidity needs.

The Company uses its liquid resources principally to satisfy its ongoing cash requirements, which include funding loan commitments, funding maturing certificates of deposit and deposit withdrawals, maintaining liquidity, funding maturing or called FHLB advances, purchasing investments, and meeting operating expenses. At September 30, 2007, the Company had outstanding commitments to fund approximately $43.9 million in mortgage and non-mortgage loans. These commitments are expected to be funded through existing cash balances, cash flow from normal operations and, if needed, FHLB advances. At September 30, 2007, the Bank had pledged its residential real estate loan portfolio with FHLB with available credit of approximately $99.1 million, of which $65.6 million had been advanced. In addition, the Bank has the ability to pledge several of its other loan portfolios, including commercial real estate, home equity, and commercial business loans, which could provide additional collateral for an additional $86.3 million in borrowings at September 30, 2007. In total, FHLB borrowings are generally limited to 35% of bank assets, or $134.2 million, which means $68.6 million in borrowings remains available. Along with the ability to borrow from the FHLB, management believes its liquid resources will be sufficient to meet the Company's liquidity needs.

Regulatory Capital

The Bank is subject to minimum regulatory capital requirements pursuant to regulations adopted by the federal banking agencies. The requirements address both risk-based capital and leverage capital. As of September 30, 2007, and June 30, 2007, the Bank met all applicable adequacy requirements.

The FDIC has in place qualifications for banks to be classified as "well-capitalized." As of September 30, 2007, the most recent notification from the FDIC categorized the Bank as "well-capitalized." There were no conditions or events since the FDIC notification that has changed the Bank's classification.

The Bank's actual capital amounts and ratios are also presented in the following tables.

PART I: Item 3: Quantitative and Qualitative Disclosures About Market Risk

SOUTHERN MISSOURI BANCORP, INC.

Asset and Liability Management and Market Risk

The goal of the Company's asset/liability management strategy is to manage the interest rate sensitivity of both interest-earning assets and interest-bearing liabilities in order to maximize net interest income without exposing the Bank to an excessive level of interest rate risk. The Company employs various strategies intended to manage the potential effect that changing interest rates may have on future operating results. The primary asset/liability management strategy has been to focus on matching the anticipated repricing intervals of interest-earning assets and interest-bearing liabilities. At times, however, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the Company may determine to increase its interest rate risk position somewhat in order to maintain its net interest margin.

In an effort to manage the interest rate risk resulting from fixed rate lending, the Bank has utilized longer term FHLB advances (maturities up to ten years), subject to early redemption and fixed terms. Other elements of the Company's current asset/liability strategy include: (i) increasing originations of commercial business, commercial real estate, agricultural operating lines, and agricultural real estate loans, which typically provide higher yields and shorter repricing periods, but inherently increase credit risk; (ii) limiting the price volatility of the investment portfolio by maintaining a weighted average maturity of less than five years, (iii) actively soliciting less rate-sensitive deposits, and (iv) offering competitively priced money market accounts and CDs with maturities of up to five years. The degree to which each segment of the strategy is achieved will affect profitability and exposure to interest rate risk.

During the first three months of fiscal year 2008, fixed rate residential loan production totaled $6.4 million, as compared to $3.5 million during the same period of the prior year. At September 30, 2007, the fixed rate residential loan portfolio was $95.1 million with a weighted average maturity of 206 months, as compared to $87.1 million at September 30, 2006, with a weighted average maturity of 196 months. The Company originated $2.4 million in adjustable-rate residential loans during the three-month period ended September 30, 2007, as compared to $2.2 million during the same period of the prior year. At September 30, 2007, fixed rate loans with remaining maturities in excess of 10 years totaled $80.4 million, or 25.2% of net loans receivable, as compared to $71.4 million, or 24.5% of net loans receivable at September 30, 2006. The Company originated $14.1 million of fixed rate commercial and commercial real estate loans during the three-month period ended September 30, 2007, as compared to $15.0 million during the same period of the prior year. At September 30, 2007, the fixed rate commercial and commercial real estate loan portfolio was $100.7 million with a weighted average maturity of 28 months, compared to $60.8 million at September 30, 2006, with a weighted average maturity of 41 months. The Company originated $8.1 million in adjustable rate commercial and commercial real estate loans during the three-month period ended September 30, 2007, as compared to $15.7 million during the same period of the prior year. At September 30, 2007, adjustable-rate home equity lines of credit totaled $6.5 million, as compared to $6.3 million at September 30, 2006. Over the last several years, the Company has maintained a weighted average life of its investment portfolio of less than four years. Management continues to focus on customer retention, customer satisfaction, and offering new products to customers in order to increase the Company's amount of less rate-sensitive deposit accounts. As the company believed the Federal Reserve's Open Market Committee was approaching the peak of the interest rate cycle in 2006, management began to avoid extending maturities of deposits and borrowings. As rates have been lowered recently, management will re-evaluate this strategy, exploring the possibility of locking in some long-term borrowing costs.

Interest Rate Sensitivity Analysis

The following table sets forth as of September 30, 2007, management's estimates of the projected changes in net portfolio value ("NPV") in the event of 100, 200, and 300 basis point ("bp") instantaneous and permanent increases, and 100, 200, and 300 basis point instantaneous and permanent decreases in market interest rates. Dollar amounts are expressed in thousands.