**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-Q**





ý
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the quarterly period ended March 31, 2006ORo
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the transition period from ________________ to
                ________________





Commission
      file number: 0-25070





**LSB
      FINANCIAL CORP.**


(Exact
      name of registrant as specified in its charter)





Indiana
            
            35-1934975(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)101
                Main Street, Lafayette, Indiana
            
            47901(Address
                of principal executive offices)
            
            (Zip
                Code)





(765)
      742-1064


(Registrant’s
      telephone number, including area code)





None


(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.   Y es [X]       No [   ]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.   Large accelerated
      filer [   ]       Accelerated
      filer [   ]       Non-accelerated
      filer [X]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).
      Yes [   ]       No [X]





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date.





Class
            
            Outstanding
                at May 11, 2006Common
                Stock, $.01 par value per share
            
            1,535,806
                shares








**LSB
      FINANCIAL CORP.**





INDEX





PART
                I
            FINANCIAL
                INFORMATION
            1Item
                1.
            Financial
                Statements
            1Consolidated
                Condensed Balance Sheets
            1Consolidated
                Condensed Statements of Income
            2Consolidated
                Condensed Statements of Changes in Shareholders’ Equity
            3Consolidated
                Condensed Statements of Cash Flows
            4Notes
                to Consolidated Financial Statements
            5Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            7Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            18Item
                4.
            Controls
                and Procedures
            19PART
                II.
            OTHER
                INFORMATION
            20Item
                1.
            Legal
                Proceedings
            20Item
                1A.
            Risk
                Factors
            20Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            20Item
                3.
            Defaults
                Upon Senior Securities
            21Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            21Item
                5.
            Other
                Information
            21Item
                6.
            Exhibits
            21SIGNATURES
            22INDEX
                TO EXHIBITS
            23







i


**PART
      I**  **FINANCIAL
      INFORMATION**






**Item
                1.**
            **Financial
                Statements**




LSB
      FINANCIAL CORP.


Consolidated
      Condensed Balance Sheets


(Dollars
      in thousands except per share data)


March
                31,
              2006
            
            December
                31,
              2005(unaudited)AssetsCash
                and due from banks
            
            $
            1,398
            
            $
            1,697Short-term
                investments
            
            
            9,851
            
            
            7,687Cash
                and cash equivalents
            
            
            11,249
            
            
            9,384Available-for-sale
                securities
            
            
            12,015
            
            
            11,611Loans
                held for sale
            
            
            ---
            
            
            ---Total
                loans
            
            
            329,031
            
            
            333,823Less:
                Allowance for loan losses
            
            
            (2,725
            )
            
            (2,852
            )Net
                loans
            
            
            326,306
            
            
            330,971Premises
                and equipment, net
            
            
            6,767
            
            
            6,813Federal
                Home Loan Bank stock, at cost
            
            
            4,197
            
            
            4,197Bank
                owned life insurance
            
            
            2,737
            
            
            2,715Interest
                receivable and other assets
            
            
            8,499
            
            
            6,973Total
                Assets
            
            
            371,770
            
            
            372,664Liabilities
                and Shareholders’ EquityLiabilitiesDeposits
            
            
            272,013
            
            
            265,993Federal
                Home Loan Bank advances
            
            
            64,533
            
            
            72,033Interest
                payable and other liabilities
            
            
            1,914
            
            
            1,817Total
                liabilities
            
            
            338,460
            
            
            339,843Commitments
                and ContingenciesShareholders’
                EquityCommon
                stock, $.01 par valueAuthorized
                - 7,000,000 sharesIssued
                and outstanding 2006 - 1,539,806 shares, 2005 - 1,547,806
                shares
            
            
            15
            
            
            15Additional
                paid-in-capital
            
            
            10,397
            
            
            10,565Retained
                earnings
            
            
            23,046
            
            
            22,402Unearned
                recognition and retention plan (RRP) shares
            
            
            (15
            )
            
            (22
            )Unearned
                ESOP compensation
            
            
            (36
            )
            
            (49
            )Accumulated
                other comprehensive loss
            
            
            (97
            )
            
            (90
            )Total
                shareholders’ equity
            
            
            33,310
            
            
            32,821Total
                liabilities and shareholders’ equity
            
            $
            371,770
            
            $
            372,664








See
      notes
      to consolidated condensed financial statements.






1


LSB
      FINANCIAL CORP.


Consolidated
      Condensed Statements of Income


(Dollars
      in thousands, except per share data)


(Unaudited)


Three
                months Ended
              March
                31,2006
            
            2005**Interest
                and Dividend Income**Loans
            
            $
            5,602
            
            $
            4,994SecuritiesTaxable
            
            
            104
            
            
            78Tax-exempt
            
            
            49
            
            
            32Other
            
            
            31
            
            
            18Total
                interest and dividend income
            
            
            5,786
            
            
            5,122**Interest
                Expense**Deposits
            
            
            1,899
            
            
            1,503Borrowings
            
            
            766
            
            
            742Total
                interest expense
            
            
            2,665
            
            
            2,245**Net
                interest income**
            
            
            3,121
            
            
            2,877**Provision
                for Loan Losses**
            
            
            150
            
            
            175**Net
                Interest Income After Provision for Loan Losses**
            
            
            2,971
            
            
            2,702**Noninterest
                income**Deposit
                account service charges and fees
            
            
            424
            
            
            206Net
                gains on loan sales
            
            
            51
            
            
            65Other
            
            
            187
            
            
            213Total
                noninterest income
            
            
            662
            
            
            484**Noninterest
                Expense**Salaries
                and employee benefits
            
            
            1,287
            
            
            1,191Net
                occupancy and equipment expense
            
            
            290
            
            
            276Computer
                service
            
            
            98
            
            
            99Advertising
            
            
            58
            
            
            41Other
            
            
            483
            
            
            436Total
                noninterest expense
            
            
            2,216
            
            
            2,043**Income
                Before Income Taxes**
            
            
            1,417
            
            
            1,143**Provision
                for Income Taxes**
            
            
            509
            
            
            376**Net
                income**
            
            $
            908
            
            $
            767**Basic
                Earnings Per Share**
            
            $
            0.59
            
            $
            0.51**Diluted
                Earnings Per Share**
            
            $
            0.59
            
            $
            0.50




See
      notes
      to consolidated condensed financial statements.




2




LSB
      FINANCIAL CORP.




Consolidated
      Condensed Statements of Changes in Shareholders’ Equity


For
      the
      Three Months Ended March 31, 2006 and 2005


(Dollars
      in thousands)


(Unaudited)





**Common
                Stock**
            
            **Additional
                Paid-In Capital**
            
            **Retained
                Earnings**
            
            **Benefit
                Plans Compensation**
            
            **Accumulated
                Other Comprehensive Income (Loss)**
            
            **Total****Balance,
                January 1, 2005**
            
            $
            14
            
            $
            8,235
            
            $
            22,304
            
            $
            (154
            )
            $
            (6
            )
            $
            30,393Comprehensive
                incomeNet
                income
            
            
            
            
            
            
            
            
            767
            
            
            
            
            
            
            
            
            767Change
                in unrealized appreciation (depreciation) on available-for-sale
                securities, net of taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (54
            )
            
            (54
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            713Dividends
                on common stock, $0.16 per share
            
            
            
            
            
            
            
            
            (234
            )
            
            
            
            
            
            
            
            (234
            )Purchase
                and retirement of stock (9,087 shares)
            
            
            
            
            
            (240
            )
            
            
            
            
            
            
            
            
            
            
            (240
            )Stock
                options exercised (51,390 shares)
            
            
            
            
            
            219
            
            
            
            
            
            
            
            
            
            
            
            219Tax
                benefit related to stock options exercised
            
            
            
            
            
            339
            
            
            
            
            
            
            
            
            
            
            
            339Amortization
                of RRP expense
            
            
            
            
            
            
            
            
            
            
            
            7
            
            
            
            
            
            7ESOP
                shares earned
            
            
            
            
            
            46
            
            
            
            
            
            15
            
            
            
            
            
            61**Balance,
                March 31, 2005**
            
            $
            14
            
            $
            8,599
            
            $
            22,837
            
            $
            (132
            )
            $
            (60
            )
            $
            31,259**Balance,
                January 1, 2006**
            
            
            15
            
            
            10,565
            
            
            22,402
            
            
            (71
            )
            
            (90
            )
            
            32,821Reclassification
                of unearned compensation upon adoption of SFAS 123(R)
            
            
            
            
            
            (22
            )
            
            
            
            
            22Comprehensive
                incomeNet
                income
            
            
            
            
            
            
            
            
            908
            
            
            
            
            
            
            
            
            908Change
                in unrealized appreciation (depreciation) on available-for-sale
                securities, net of taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7
            )
            
            (7
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            901Dividends
                on common stock, $0.17 per share
            
            
            
            
            
            
            
            
            (264
            )
            
            
            
            
            
            
            
            (264
            )Purchase
                and retirement of stock (8,000 shares)
            
            
            
            
            
            (226
            )
            
            
            
            
            
            
            
            
            
            
            (226
            )Amortization
                of stock option compensation
            
            
            
            
            
            6
            
            
            
            
            
            
            
            
            
            
            
            6Amortization
                of RRP expense
            
            
            
            
            
            7
            
            
            
            
            
            
            
            
            
            
            
            7ESOP
                shares earned
            
            
            
            
            
            52
            
            
            
            
            
            13
            
            
            
            
            
            65**Balance,
                March 31, 2006**
            
            $
            15
            
            $
            10,382
            
            $
            23,046
            
            $
            (36
            )
            $
            (97
            )
            $
            33,310





See
      notes
      to consolidated condensed financial statements.


3


LSB
      FINANCIAL CORP.


Consolidated
      Condensed Statements of Cash Flows


(Dollars
      in thousands)


(Unaudited)





Three
                months ended
              March
                31,2006
            
            2005Operating
                ActivitiesNet
                income
            
            $
            908
            
            $
            767Items
                not requiring (providing) cashDepreciation
            
            
            117
            
            
            106Provision
                for loan losses
            
            
            150
            
            
            175Amortization
                of premiums and discounts on securities
            
            
            15
            
            
            9Federal
                Home Loan Bank stock dividend
            
            
            0
            
            
            (44
            )ESOP
                shares earned
            
            
            65
            
            
            61Gain
                on sale of loans
            
            
            25
            
            
            30Loans
                originated for sale
            
            
            (2,704
            )
            
            (4,025
            )Proceeds
                on loans sold
            
            
            2,679
            
            
            4,330Changes
                inInterest
                receivable and other assets
            
            
            (1,536
            )
            
            (256
            )Interest
                payable and other liabilities
            
            
            97
            
            
            723Net
                cash from operating activities
            
            
            (184
            )
            
            1,876Investing
                ActivitiesPurchases
                of available-for-sale securities
            
            
            (997
            )
            
            (171
            )Proceeds
                from maturities of available-for-sale securities
            
            
            566
            
            
            88Net
                change in loans
            
            
            4,515
            
            
            (7,292
            )Purchase
                of premises and equipment
            
            
            (71
            )
            
            (71
            )Net
                cash from investing activities
            
            
            4,013
            
            
            (7,446
            )Financing
                ActivitiesNet
                change in demand deposits, money market, NOW and savings
                accounts
            
            
            1,144
            
            
            1,027Net
                change in certificates of deposit
            
            
            4,876
            
            
            8,389Proceeds
                from Federal Home Loan Bank advances
            
            
            11,500
            
            
            12,000Repayment
                of Federal Home Loan Bank advances
            
            
            (19,000
            )
            
            (12,000
            )Proceeds
                from stock options exercised
            
            
            0
            
            
            219Future
                compensation cost of stock options
            
            
            6
            
            
            0Repurchase
                of stock
            
            
            (226
            )
            
            (240
            )Dividends
                paid
            
            
            (264
            )
            
            (234
            )Net
                cash from financing activities
            
            
            (1,964
            )
            
            9,161Increase
                (Decrease) in Cash and Cash Equivalents
            
            
            1,865
            
            
            3,591Cash
                and Cash Equivalents, Beginning of Period
            
            
            9,384
            
            
            9,213Cash
                and Cash Equivalents, End of Period
            
            $
            11,249
            
            $
            12,804


Supplemental
                Cash Flows InformationInterest
                paid
            
            
            2,743
            
            
            2,247Income
                taxes paid
            
            
            400
            
            
            256Supplemental
                Non-Cash DisclosuresCapitalization
                of mortgage servicing rights
            
            
            35
            
            
            43




See
      notes
      to consolidated condensed financial statements


4





LSB
      FINANCIAL CORP.


Notes
      to
      Consolidated Financial Statements


March
      31,
      2006







Note
      1 -
      General




The
      financial statements were prepared in accordance with the instructions for
      Form
      10-Q and, therefore, do not include all of the disclosures necessary for a
      complete presentation of financial position, results of operations and cash
      flows in conformity with accounting principles generally accepted in the United
      States of America. These interim financial statements have been prepared on
      a
      basis consistent with the annual financial statements and include, in the
      opinion of management, all adjustments, consisting of only normal recurring
      adjustments, necessary for a fair presentation of the results of operations
      and
      financial position for and at the end of such interim periods. All outstanding
      shares and per share figures have been adjusted to reflect a 5% stock dividend
      payable by LSB Financial Corp. (the “Company” or “LSB Financial”) to
      shareholders of record on October 7, 2005. The consolidated condensed balance
      sheet of LSB Financial Corp. as of December 31, 2005 has been derived from
      the
      audited consolidated balance sheet of LSB Financial Corp. as of that date.




Certain
      information and note disclosures normally included in the Company’s annual
      financial statements prepared in accordance with generally accepted accounting
      principles have been condensed or omitted. These condensed (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 for the fiscal year ended December 31, 2005 filed with the
      Securities and Exchange Commission. The results of operations for the period
      are
      not necessarily indicative of the results to be expected for the full
      year.




Stock
      Options: Effective January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards No. 123(R), *Share-Based
      Payment* ("SFAS
      123R"). SFAS 123R addresses all forms of share-based payment awards, including
      shares under employee stock purchase plans, stock options, restricted stock
      and
      stock appreciation rights. SFAS 123R requires all share-based payments to be
      recognized as expense, based upon their fair values, in the financial statements
      over the vesting period of the awards. The Company has elected the modified
      prospective application method and, as a result, has recorded approximately
      $6,000 in compensation expense related to vested stock options less estimated
      forfeitures for the three month period ended March 31, 2006. Certain other
      disclosures as required by SFAS 123R have been omitted due to their immaterial
      nature. Prior to the adoption of SFAS 123R, unearned compensation related to
      the
      RRP shares was classified as a separate component of shareholders equity. In
      accordance with SFAS 123R, the balance in unearned compensation on January
      1,
      2006 was reclassified to additional paid-in capital.




The
      following table illustrates the effect on net income and earnings per share
      if
      expense was measured using the fair value recognition provisions of FASB
      Statement No. 123, *Accounting
      for Stock-Based Compensation* .


5




Three
                  months endedMarch
                  31, 2005Net
                  income as reported
              
              $
              767Deduct:
                  Stock-based compensation expense determined under fair value based
                  method
              
              
              (11
              )Pro
                  forma net income
              
              $
              756Basic
                  earnings per share as reported
              
              $
              0.51Pro
                  forma basic earnings per share
              
              
              0.50Diluted
                  earnings per share as reported
              
              
              0.49Pro
                  forma diluted earnings per share
              
              
              0.49




Note
      2 -
      Principles of Consolidation




The
      accompanying financial statements include the accounts of LSB Financial Corp.,
      its wholly owned subsidiary Lafayette Savings Bank, FSB (“Lafayette Savings”),
      and Lafayette Savings’ wholly owned subsidiaries, LSB Service Corporation and
      Lafayette Insurance and Investments, Inc. All significant intercompany
      transactions have been eliminated upon consolidation.






Note
      3 -
      Earnings per share




Earnings
      per share are based upon the weighted average number of shares outstanding
      during the period. Diluted earnings per share further assume the issuance of
      any
      potentially dilutive shares. Unearned ESOP shares are not considered to be
      outstanding for the earnings per share computation. All shares were included
      in
      the diluted earnings per share calculation as their effect would be dilutive.
      The following table presents information about the number of shares used to
      compute earnings per share and the results of the computations:


**Quarter
                      ended March 31****2006**
                  
                  **2005**Net
                      income available to shareholders
                  
                  $
                  908
                  
                  $
                  767Weighted
                      average shares outstanding (excluding unearned ESOP
                      shares)
                  
                  
                  1,540,955
                  
                  
                  1,501,532Shares
                      used to compute diluted earnings per share
                  
                  
                  1,551,989
                  
                  
                  1,530,053Earnings
                      per share
                  
                  $
                  0.59
                  
                  $
                  0.51Diluted
                      earnings per share
                  
                  $
                  0.59
                  
                  $
                  0.50
 6


Note
      4 -
      Future Accounting Pronouncements




***Servicing
      of Financial Assets.*** ** In March
      2006, the Financial Accounting Standards Board (FASB) issued Statement of
      Financial Accounting Standards (SFAS) No. 156. This Statement amends SFAS 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,* with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities.




SFAS
      No.
      156 requires an entity to initially recognize a servicing asset or servicing
      liability at fair value each time it undertakes an obligation to service a
      financial asset by entering into a servicing contract in other specific
      situations.




In
      addition, SFAS No. 156 permits an entity to choose either of the following
      subsequent measurement methods for each class of separately recognized servicing
      assets and servicing liabilities:





**·**
            Amortization
                method—Amortize servicing assets or servicing liabilities in proportion
                to
                and over the period of estimated net servicing income or net servicing
                loss and assess servicing assets or servicing liabilities for impairment
                or increased obligation based on fair value at each reporting date.




**·**
            Fair
                value measurement method—Measure servicing assets or servicing liabilities
                at fair value at each reporting date and report changes in fair value
                in
                earnings in the period in which the changes occur.




SFAS
      No.
      156 is effective at the beginning of an entity’s first fiscal year that begins
      after September 15, 2006 and should be applied prospectively for recognition
      and
      initial measurement of servicing assets and servicing liabilities. Earlier
      adoption is permitted as of the beginning of an entity’s fiscal year, provided
      the entity has not yet issued financial statements, including interim financial
      statements, for any period of that fiscal year.




The
      Company did not early adopt SFAS No. 156 on January 1, 2006. The Company is
      currently evaluating the effect of adoption of this Statement on the Company’s
      financial condition or results of operations.






**Item
                2.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations**




**Executive
      Summary**




LSB
      Financial Corp. (the “Company” or “LSB Financial”) is an Indiana corporation
      which was organized in 1994 by Lafayette Savings Bank, FSB (“Lafayette Savings”)
      for the purpose of becoming a thrift institution holding company. Lafayette
      Savings is a federally chartered stock savings bank headquartered in Lafayette,
      Indiana. References in this Form 10-Q to "we," "us," and "our" refer to LSB
      Financial and/or Lafayette Savings as the context requires.




7




Lafayette
      Savings has been, and intends to continue to be, a community-oriented financial
      institution. Our principal business consists of attracting retail deposits
      from
      the general public and investing those funds primarily in permanent first
      mortgage loans secured by owner-occupied, one- to four-family residences, and
      to
      a lesser extent, non-owner occupied one- to four-family residential, commercial
      real estate, multi-family, construction and development, consumer and commercial
      business loans. Our revenues are derived principally from interest on mortgage
      and other loans and interest on securities.




Tippecanoe
      County and the eight surrounding counties comprise Lafayette Savings' primary
      market area. Lafayette is the county seat of Tippecanoe County, and West
      Lafayette is the home of Purdue University. The greater Lafayette area enjoys
      diverse employment including major manufacturers such as Subaru, Caterpillar,
      Wabash National and Greater Lafayette Health Services; a strong education sector
      with Purdue University and a large local campus of Ivy Tech Community College;
      government offices of Lafayette, West Lafayette and Tippecanoe County; and
      a
      growing high-tech presence with the Purdue Research Park. In the past this
      diversity insulated us from economic downturns, but the slowdowns of the last
      few years had a noticeable effect on the area. The unemployment rate at February
      2006, the most recent data available, showed unemployment rates of 4.8% for
      Tippecanoe County and 5.8% for Indiana compared to 4.5% for Tippecanoe County
      and 5.3% for Indiana at December 2005. The slight increase since year end shows
      Indiana generally has been struggling to recover from the economic slowdown.
      Over 300 foreclosed properties were scheduled to go to sheriff’s sales in
      Tippecanoe County in 2005, although some of them were withdrawn for various
      reasons. Indiana ranked number one in foreclosures nationwide in 2005, with
      almost one percent of loans in foreclosure. An announcement that Toyota intends
      to build 100,000 Camrys per year starting in 2007 should help the local economic
      recovery.




Our
      primary source of income is net interest income, which is the difference between
      the interest income earned on our loan and investment portfolios and the
      interest expense incurred on deposits and borrowings. Our net interest income
      depends on the balance
      of our loan and investment portfolios and the size of our net interest margin,
      which is the difference between the income generated from loans and the cost
      of
      the funding. A major area of concern in the growth of net interest income is
      the
      continuing flattening of the yield curve. Short-term rates increased steadily
      over 2005 and have continued to increase in 2006. Long-term rates, however,
      have
      remained relatively flat. Because deposits are generally tied to shorter-term
      market rates, and loans are generally tied to longer-term rates, the shrinking
      spread between the two has made it more difficult to maintain desired operating
      income levels. Our expectation is that short-term rates will continue to rise
      as
      the Federal Reserve Board responds to inflation concerns and the growing
      strength of the economy. Long-term rates have remained low because the purchase
      of U.S. government bonds has driven up the price of long-term bonds and kept
      their returns low. Until this situation changes we expect the yield curve to
      remain fairly flat.




Rate
      changes could be expected to have an impact on interest income. Rising rates
      generally increase borrower preference for variable-rate products which we
      typically keep in our portfolio. Additionally, existing adjustable rate loans
      can be expected to reprice to higher rates, both of which could be expected
      to
      have a favorable impact on interest income. Alternatively, continuing low
      interest rates could have a negative impact on our interest income as new loans
      are put on the books at comparatively low rates and our existing adjustable
      rate
      loans reprice to lower rates. Even if rates do fall, because so many borrowers
      refinanced their mortgages in the






8




last
        few
        years, we do not expect to see a return to a high volume of refinancing.
        However, low rates may be expected to encourage borrowers to initiate additional
        real estate related purchases.


We
      consider expected changes in interest rates when structuring our
      interest-earning assets and our interest-bearing liabilities. If rates are
      expected to increase we try to book shorter-term assets that will reprice
      relatively quickly to higher rates over time, and book longer-term liabilities
      that will remain for a longer time at lower rates. Conversely, if rates are
      expected to fall, we intend to structure our balance sheet such that loans
      will
      reprice more slowly to lower rates and deposits will reprice more quickly.
      We
      currently offer a three-year and a five-year certificate of deposit that allows
      depositors one opportunity to have their rate adjusted to the market rate at
      a
      future date to encourage them to choose longer-term deposit products. However,
      since we are not able to predict market interest rate fluctuations, our
      asset/liability management strategy may not prevent interest rate changes from
      having an adverse effect on our results of operations and financial
      condition.




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






**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 LSB Financial must use assumptions and estimates to apply these principles
      where actual measurement is not possible or practical. For a complete discussion
      of LSB Financial's significant accounting policies, see Note 1 to the
      Consolidated Financial Statements as of March 31, 2006. 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 LSB Financial’s Board
      of Directors. These policies include the following:






***Allowance
      for Loan Losses***




The
      allowance for loan losses represents management's estimate of probable losses
      inherent in Lafayette Savings’ loan portfolios. In determining the appropriate
      amount of the allowance for loan losses, management makes numerous assumptions,
      estimates and assessments.




The
      strategy also emphasizes diversification on an industry and customer level,
      regular credit quality reviews and quarterly management reviews of large credit
      exposures and loans experiencing deterioration of credit quality.




Lafayette
      Savings’ allowance consists of three components: probable losses estimated from
      individual reviews of specific loans, probable losses estimated from historical
      loss rates, and probable losses resulting from economic or other deterioration
      above and beyond what is reflected in the first two components of the
      allowance.






9




Larger
      commercial loans that exhibit probable or observed credit weaknesses are subject
      to individual review. Where appropriate, reserves are allocated to individual
      loans based on management's estimate of the borrower's ability to repay the
      loan
      given the availability of collateral, other sources of cash flow and legal
      options available to Lafayette Savings. Included in the review of individual
      loans are those that are impaired as provided in SFAS No. 114, *Accounting
      by Creditors for Impairment of a Loan.* Any
      allowances for impaired loans are determined by the present value of expected
      future cash flows discounted at the loan's effective interest rate or fair
      value
      of the underlying collateral. Historical loss rates are applied to other
      commercial loans not subject to specific reserve allocations.




Homogenous
      smaller balance loans, such as consumer installment and residential mortgage
      loans are not individually risk graded. Reserves are established for each pool
      of loans based on the expected net charge-offs for one year. Loss rates are
      based on the average net charge-off history by loan category.




Historical
      loss rates for commercial and consumer loans may be adjusted for significant
      factors that, in management's judgment, reflect the impact of any current
      conditions on loss recognition. Factors which management considers in the
      analysis include the effects of the national and local economies, trends in
      the
      nature and volume of loans (delinquencies, charge-offs and nonaccrual loans),
      changes in mix, asset quality trends, risk management and loan administration,
      changes in the internal lending policies and
      credit standards, collection practices and examination results from bank
      regulatory agencies and Lafayette Savings’ internal loan review.




An
      unallocated reserve is maintained to recognize the imprecision in estimating and
      measuring loss when evaluating reserves for individual loans or pools of loans.
      Allowances on individual loans are reviewed quarterly and historical loss rates
      are reviewed annually and adjusted as necessary based on changing borrower
      and/or collateral conditions and actual collection and charge-off
      experience.




Lafayette
      Savings’ primary market area for lending is Tippecanoe County, Indiana. When
      evaluating the adequacy of allowance, consideration is given to this regional
      geographic concentration and the closely associated effect of changing economic
      conditions on Lafayette Savings’ customers.






***Mortgage
      Servicing Rights***




Mortgage
      servicing rights (MSRs) associated with loans originated and sold, where
      servicing is retained, are capitalized and included in other intangible assets
      in the consolidated balance sheet. The value of the capitalized servicing rights
      represents the present value of the future servicing fees arising from the
      right
      to service loans in the portfolio. Critical accounting policies for MSRs relate
      to the initial valuation and subsequent impairment tests. The methodology used
      to determine the valuation of MSRs requires the development and use of a number
      of estimates, including anticipated principal amortization and prepayments
      of
      that principal balance. Events that may significantly affect the estimates
      used
      are changes in interest rates, mortgage loan prepayment speeds and the payment
      performance of the underlying loans. The carrying value of the MSRs is
      periodically reviewed for impairment based on a determination of fair value.
      For
      purposes of measuring impairment, the servicing rights are






10




compared
        to a valuation prepared based on a discounted cash flow methodology, utilizing
        current prepayment speeds and discount rates. Impairment, if any, is recognized
        through a valuation allowance and is recorded as amortization of intangible
        assets.




**Financial
      Condition**




***Comparison
      of Financial Condition at March 31, 2006 and December 31,
      2005***




Our
      total
      assets decreased $894,000 or 0.24% during the three months from December 31,
      2005 to March 31, 2006. Components of this decrease were a $2.2 million increase
      in short-term investments which typically fluctuate in response to funding
      needs, a $4.7 million decrease in total net loans and a $1.5 million increase
      in
      other assets. Management attributes the decrease in loans primarily to rising
      interest rates resulting in a decrease in loan origination activity, and from
      the transfer of loans from non-performing status to real estate owned as we
      gain
      control of foreclosed properties and begin the process of disposing of them.
      In
      the first quarter of 2006, $1.6 million was transferred from non-accrual loans
      to real estate owned. We also took the opportunity to repay $7.5 million in
      Federal Home Loan Bank advances in the first quarter of 2006, replacing $6.0
      million of these with generally lower-rate deposits. $3.7 million of the increase
      in deposits was from brokered funds. Management attributes the increase in
      deposits to its success in attracting borrowers to its CD products and targeted
      marketing.




Non-performing
      assets, which include non-accruing loans, accruing loans 90 days past due and
      foreclosed assets, increased from $10.6 million at December 31, 2005 to $10.7
      million at March 31, 2006. Non-performing loans totaled $7.1 million at March
      31, 2006 and consisted of $4.9 million or 69.34% of one- to four-family or
      multi-family residential real estate loans, $2.1 million or 29.35% of loans
      on
      land or commercial property and $51,000 of commercial business loans.
      Non-performing assets also include $3.6 million in foreclosed assets. At March
      31, 2006, our allowance for loan losses equaled 0.83% of total loans compared
      to
      0.85% at December 31, 2005. The allowance for loan losses at March 31, 2006
      totaled 25.53% of non-performing assets compared to 27.00% at December 31,
      2005,
      and 38.64% of non-performing loans at March 31, 2006 compared to 33.32% at
      December 31, 2005. Our non-performing assets equaled 2.87% of total assets
      at
      March 31, 2006 compared to 2.83% at December 31, 2005. Non-performing assets
      totaling $304,000 were charged off in the first three months of 2006 offset
      by
      recoveries of $28,000. These charge-offs were largely covered by existing
      reserves and there was no need for additional provisions to the allowance for
      the amounts charged off. Although we believe we use the best information
      available to determine the adequacy of our allowance for loan losses, future
      adjustments to the allowance may be necessary, and net income could be
      significantly affected, if circumstances and/or economic conditions cause
      substantial changes in the estimates we use in making the determinations about
      the levels of the allowance for losses. Additionally, various regulatory
      agencies, as an integral part of their examination process, periodically review
      our allowance for loan losses. These agencies may require the recognition of
      additions to the allowance based upon their judgments of information available
      at the time of their examination.




Shareholders’
      equity increased from $32.8 million at December 31, 2005 to $33.3 million at
      March 31, 2006, an increase of $489,000, or 1.49%, primarily as a result of
      net
      income of $908,000, partially offset by our payment of dividends on common
      stock, and the repurchase of






11


8,000
        shares of our stock as part of a stock repurchase plan. Shareholders’ equity to
        total assets was 8.96% at March 31, 2006 compared to 8.81% at December 31,
        2005.


**Results
      of Operations**




***Comparison
      of Operating Results for the Three Months Ended March 31, 2006 and March 31,
      2005***




***General*** *.* Net
      income for the three months ended March 31, 2006 was $908,000, an increase
      of
      $141,000, or 18.38%, over the three months ended March 31, 2005. This increase
      was primarily due to a $244,000 increase in net interest income and a $178,000
      increase in non-interest income partially offset by a $173,000 increase in
      non-interest expenses, and a $133,000 increase in taxes on
      income.




***Net
      Interest Income*** *.* Net
      interest income for the three months ended March 31, 2006 increased $244,000,
      or
      8.48%, over the same period in 2005. This increase was primarily due to a $9.7
      million increase in interest-earning assets and an 18 basis point increase
      in
      our net interest margin (net interest income divided by average interest-earning
      assets) from 3.34% for the three months ended March 31, 2005 to 3.52% for the
      three months ended March 31, 2006. The increase in net interest margin is
      primarily the result of a $9.7 million increase in net interest-earning assets
      with an increase in the average rate earned on interest-earning assets from
      5.94% for the three months ended March 31, 2005 to 6.52% for the three months
      ended March 31, 2006 offset by an $8.7 million increase in average
      interest-bearing liabilities with an increase in the average rate paid from
      2.73% for the three months ended March 31, 2005 to 3.16% for the three months
      ended March 31, 2006.




Interest
      income on loans increased $608,000, or 12.17%, for the three months ended March
      31, 2006 compared to the same three months in 2005. This increase was the result
      of a $6.1 million increase in average loans outstanding and an increase in
      the
      average yield on loans from 6.15% for the first three months of 2005 to 6.77%
      for the first three months of 2006, due to increasing interest rates in the
      economy causing our adjustable rate mortgages to reprice higher. The increase
      in
      the loan portfolio was due largely to borrowers continuing to take advantage
      of
      relatively low market interest rates to initiate other real estate related
      purchases. The increase in interest rates triggered consumer interest in
      lower-rate, adjustable rate mortgage products which we typically hold in our
      loan portfolio.




Interest
      earned on other investments and Federal Home Loan Bank stock increased by
      $56,000 for the three months ended March 31, 2006 compared to the same period
      in
      2005. This was primarily the result of a $3.6 million increase in average
      balances and an increase in the average yield on the average balance of other
      investments and Federal Home Loan Bank stock from 2.51% for the first three
      months of 2005 to 3.07% over the same period in 2006 due to increasing interest
      rates in the economy. The increase in the average balance was generally due
      to
      funds being reinvested into securities for liquidity purposes.




Interest
      expense for the three months ended March 31, 2006 increased $420,000, or 18.71%,
      over the same period in 2005. This increase was due to an $8.7 million increase
      in average interest-bearing liabilities as well as an increase in the average
      rate paid on interest-






12




bearing
        liabilities from 2.73% for the first three months of 2005 to 3.16% for the
        first
        three months of 2006.


***Provision
      for Loan Losses*** .  We
      establish our provision for loan losses based on a systematic analysis of risk
      factors in the loan portfolio. The analysis includes consideration of
      concentrations of credit, past loss experience, current economic conditions,
      the
      amount and composition of the loan portfolio, estimated fair value of the
      underlying collateral, delinquencies and industry standards. On at least a
      quarterly basis, a formal analysis of the adequacy of the allowance is prepared
      and reviewed by management and the Board of Directors. This analysis serves
      as a
      point in time assessment of the level of the allowance and serves as a basis
      for
      provisions for loan losses.




Our
      analysis of the loan portfolio begins at the time the loan is originated, when
      each loan is assigned a risk rating. If the loan is a commercial credit, the
      borrower will also be assigned a similar rating. Loans that continue to perform
      as agreed will be included in one of ten non-classified loan categories.
      Portions of the allowance are allocated to loan portfolios in the various risk
      grades, based upon a variety of factors, including historical loss experience,
      trends in the type and volume of the loan portfolios, trends in delinquent
      and
      non-performing loans, and economic trends affecting our market. Loans no longer
      performing as agreed are assigned a lower risk rating, eventually resulting
      in
      their being regarded as classified loans. A collateral re-evaluation is
      completed on all classified loans. This process results in the allocation of
      specific amounts of the allowance to individual problem loans, generally based
      on an analysis of the collateral securing those loans. These components are
      added together and compared to the balance of our allowance at the evaluation
      date.




Non-classified
      loan categories include first mortgage loans on the following types of
      properties: one- to four-family owner occupied, one- to four-family non-owner
      occupied, multi-family, non-residential, land and land development, and
      construction. Additional categories include: second mortgage and home equity
      loans, unsecured commercial business loans, secured commercial business loans,
      and consumer loans.




We
      recorded a $150,000 provision for loan losses for the three months ended March
      31, 2006 as a result of our analysis of our current loan portfolios compared
      to
      $175,000 for the same period in 2005. The decreased provision during 2006 was
      deemed to maintain the allowance for loan losses at a level considered adequate
      to absorb losses inherent in the loan portfolio and cover anticipated
      charge-offs. During the first three months of 2006 we recorded charge-offs
      of
      $304,000 offset by recoveries of $28,000. The $150,000 provision for loan losses
      for the first quarter of 2006 was considered adequate to cover further
      charge-offs based on our evaluation and our loan mix.




At
      March
      31, 2006, non-performing assets, consisting of non-accruing loans, accruing
      loans 90 or more days delinquent and other real estate owned, totaled $10.7
      million compared to $10.6 million at December 31, 2005. In addition to our
      non-performing assets, we identified $1.9 million in other loans of concern,
      virtually unchanged from the $2.0 million identified at December 31, 2005,
      where
      known information about possible credit problems of borrowers causes management
      to have doubts as to the ability of the borrowers to comply with present
      repayment terms, and may result in disclosure of such loans as non-performing
      assets in the






13




future.
        The vast majority of these loans, as well as our non-performing assets, are
        well
        collateralized.


***Non-Interest
      Income*** .
      Non-interest income for the three months ended March 31, 2006 increased by
      $178,000 or 36.78% compared to the same period in 2005. This was primarily
      due
      to a $218,000 increase in fees on deposit accounts due to our overdraft product
      in which we may pay overdrafts of up to $500 made by qualified
      depositors for a $30 per overdraft fee, partially offset by a $26,000 decrease
      in other income, primarily the result of a $29,000 reserve for possible losses
      on our overdraft program, partially offset by a $14,000 decrease in the gain
      on
      the sale of mortgage loans in the secondary market ** resulting
      from decreased sales due to the decrease in refinance activity.




***Non-Interest
        Expense*** .   Non-interest
        expense for the three months ended March 31, 2006 increased $173,000 over
        the
        same period in 2005. The major components of this increase included a $96,000
        increase in salaries and employee benefits partly due to the payment of
        incentive awards and the recognition of compensation expense related to the
        expensing of stock options in accordance with SFAS 123R. Please see footnote
        1
        of the consolidated condensed financial statements for further discussion
        of the
        adoption of SFAS 123R. In addition to increased salaries and employee benefits,
        the remaining $47,000 increase in other non-interest expenses was mostly
        due to
        increased expenses related to foreclosed properties.


***Income
      Tax Expense*** *.*   Our
      income tax provision increased by $133,000 for the three months ended March
      31,
      2006 compared to the three months ended March 31, 2005, primarily due to
      increased income.






**Liquidity**




Our
      primary sources of funds are deposits, repayment and prepayment of loans,
      interest earned on or maturation of investment securities and short-term
      investments, borrowings and funds provided from operations. While maturities
      and
      the scheduled amortization of loans, investments and mortgage-backed securities
      are a predictable source of funds, deposit flows and mortgage prepayments are
      greatly influenced by general market interest rates, economic conditions and
      competition.




We
      monitor our cash flow carefully and strive to minimize the level of cash held
      in
      low-rate overnight accounts or in cash on hand. We also carefully track the
      scheduled delivery of loans committed for sale to be added to our cash flow
      calculations. Our current internal policy for liquidity requires minimum
      liquidity of 4.0% of total assets.




Liquidity
      management is both a daily and long-term function for our senior management.
      We
      adjust our investment strategy, within the limits established by the investment
      policy, based upon assessments of expected loan demand, expected cash flows,
      Federal Home Loan Bank advance opportunities, market yields and objectives
      of
      our asset/liability management program. Base levels of liquidity have generally
      been invested in interest-earning overnight and time deposits with the Federal
      Home Loan Bank of Indianapolis. Funds for which a demand is not foreseen in
      the
      near future are invested in investment and other securities for the purpose
      of
      yield enhancement and asset/liability management.






14




Our
      liquidity ratios at December 31, 2005 and March 31, 2006 were 6.40% and 7.39%,
      respectively compared to a regulatory liquidity base, and 4.87% and 5.69%
      compared to total assets at the end of each period.




We
      anticipate that we will have sufficient funds available to meet current funding
      commitments. At March 31, 2006, we had outstanding commitments to originate
      loans and available lines of credit totaling $45.7 million and commitments
      to
      provide funds to complete current construction projects in the amount of $4.3
      million. In addition we had commitments to sell $724,000 of fixed-rate
      residential loans. Certificates of deposit, including brokered deposits, which
      will mature in one year or less at March 31, 2006 totaled $97.8 million. Based
      on our experience, our certificates of deposit have been a relatively stable
      source of long-term funds as such certificates are generally renewed upon
      maturity since we have established long-term banking relationships with our customers.
      Therefore, we believe a significant portion of such deposits will remain with
      us, although this cannot be assured. At March 31, 2006, $70.9 million of our
      deposits were in brokered deposits, $20.6 million of which will mature in one
      year or less. These deposits can be expected not to renew at maturity and will
      have to be replaced with other funding upon maturity. We also have $13.0 million
      of Federal Home Loan Bank advances maturing in the next twelve
      months.






**Capital
      Resources** ****




Shareholders’
      equity totaled $33.3 million at March 31, 2006 compared to $32.8 million at
      December 31, 2005, an increase of $489,000 or 1.49%, due primarily to net income
      of $908,000, partially offset by our payment of dividends on common stock,
      and
      the repurchase of 8,000 shares of our stock as part of a stock repurchase plan.
      Shareholders’ equity to total assets was 8.96% at March 31, 2006 compared to
      8.81% at December 31, 2005.




Federal
      insured savings institutions are required to maintain a minimum level of
      regulatory capital. If the requirement is not met, regulatory authorities may
      take legal or administrative actions, including restrictions on growth or
      operations or, in extreme cases, seizure. As of December 31, 2005 and March
      31,
      2006, Lafayette Savings was categorized as well capitalized. Our actual and
      required capital amounts and ratios at December 31, 2005 and March 31, 2006
      are
      presented below:




15


**Actual**
              
              **For
                  Capital Adequacy Purposes**
              
              **To
                  Be Well Capitalized Under Prompt Corrective Action
                  Provisions****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**As
                  of March 31, 2006Total
                  risk-based capital(to
                  risk-weighted assets)
              
              $
              35,006
              
              
              
              12.1
              %
              
              $
              23,079
              
              
              
              8.0
              %
              
              $
              28,848
              
              
              
              10.0
              %Tier
                  I capital(to
                  risk-weighted assets)
              
              
              32,319
              
              
              
              11.2
              
              
              
              11,539
              
              
              
              4.0
              
              
              
              17,309
              
              
              
              6.0Tier
                  I capital(to
                  adjusted total assets)
              
              
              32,319
              
              
              
              8.7
              
              
              
              11,144
              
              
              
              3.0
              
              
              
              18,573
              
              
              
              5.0Tier
                  I capital(to
                  adjusted tangible assets)
              
              
              32,319
              
              
              
              8.7
              
              
              
              7,429
              
              
              
              2.0
              
              
              
              N/A
              
              
              
              N/ATangible
                  capital(to
                  adjusted tangible assets)
              
              
              32,319
              
              
              
              8.7
              
              
              
              5,572
              
              
              
              1.5
              
              
              
              N/A
              
              
              
              N/AAs
                  of December 31, 2005Total
                  risk-based capital(to
                  risk-weighted assets)
              
              $
              34,001
              
              
              
              11.7
              %
              
              $
              23,187
              
              
              
              8.0
              %
              
              $
              28,984
              
              
              
              10.0
              %Tier
                  I capital(to
                  risk-weighted assets)
              
              
              31,306
              
              
              
              10.8
              
              
              
              11,594
              
              
              
              4.0
              
              
              
              17,390
              
              
              
              6.0Tier
                  I capital(to
                  adjusted total assets)
              
              
              31,306
              
              
              
              8.4
              
              
              
              11,163
              
              
              
              3.0
              
              
              
              18,606
              
              
              
              5.0Tier
                  I capital(to
                  adjusted tangible assets)
              
              
              31,306
              
              
              
              8.4
              
              
              
              7,442
              
              
              
              2.0
              
              
              
              N/A
              
              
              
              N/ATangible
                  capital(to
                  adjusted tangible assets)
              
              
              31,306
              
              
              
              8.4
              
              
              
              5,582
              
              
              
              1.5
              
              
              
              N/A
              
              
              
              N/A
  **Disclosure
        Regarding Forward-Looking Statements**




This
      document, including information included or incorporated by reference, contains,
      and future filings by LSB Financial on Form 10-K, Form 10-Q and Form 8-K and
      future oral and written statements by LSB Financial and our management may
      contain, forward-looking statements about LSB Financial and its subsidiaries
      which we believe are within the meaning of the Private Securities Litigation
      Reform Act of 1995. These forward-looking statements 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 forward-looking
      statements. Forward-looking statements by LSB Financial and its management
      are
      based on beliefs, plans, objectives, goals, expectations, anticipations,
      estimates and intentions of management and are not guarantees of future
      performance. We disclaim any obligation to update or revise any forward-looking
      statements based on the occurrence of future events, the receipt of new
      information or otherwise. The important factors we discuss below and elsewhere
      in this document, as well as other factors discussed under the caption
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations in this document 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.






16




The
      following factors, many of which are subject to change based on various other
      factors beyond our control, could cause our financial performance to differ
      materially from the plans, objectives, expectations, estimates and intentions
      expressed in such forward-looking statements:




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




**·**
            the
                effects of, and changes in, trade, monetary and fiscal policies and
                laws,
                including interest rate policies of the Federal Reserve
                Board;




·
            financial
                market, monetary and interest rate fluctuations, particularly the
                relative
                relationship of short-term interest rates to long-term interest
                rates;




·
            the
                timely development of and acceptance of our new products and services
                of
                Lafayette Savings 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 competitors’ products and services for
                our products and services;




**·**
            the
                impact of changes in financial services’ laws and regulations (including
                laws concerning taxes, accounting standards, 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.






17




**Item
                3.**
            **Quantitative
                and Qualitative Disclosures About Market Risk******




We,
      like
      other financial institutions, are subject to interest rate risk to the extent
      that our interest-bearing liabilities reprice on a different basis than our
      interest-earning assets. The Office of Thrift Supervision (“OTS”), our primary
      regulator, supports the use of a net portfolio value (“NPV”) approach to the
      quantification of interest rate risk. In essence, this approach calculates
      the
      difference between the present value of expected cash flows from assets and
      the
      present value of expected cash flows from liabilities, as well as cash flows
      from off-balance-sheet contracts. An NPV ratio, in any interest rate scenario,
      is defined as the NPV in that rate scenario divided by the market value of
      assets in the same scenario, essentially a market value adjusted capital
      ratio.




It
      has
      been and continues to be a priority of the Board of Directors and management
      to
      manage interest rate risk to maintain an acceptable level of potential changes
      to interest income as a result of interest rate changes. Our asset/liability
      management policy, established by the Board of Directors, sets forth acceptable
      limits on the amount of change in net portfolio value given certain changes
      in
      interest rates. We have an asset/liability management committee which meets
      quarterly to review our interest rate position, and an investment committee
      which reviews the interest rate risk position and other related matters with
      the
      Board of Directors, and makes recommendations for adjusting this position to
      the
      full Board of Directors. In addition, the investment committee of the Board
      of
      Directors meets semi-annually with our outside investment advisors to review
      our
      investment portfolio and strategies relating to interest rate risk. Specific
      strategies have included the sale of long-term, fixed-rate loans to reduce
      the
      average maturity of our interest-earning assets and the use of Federal Home
      Loan
      Bank advances to lengthen the effective maturity of our interest-bearing
      liabilities. In the future, our community banking emphasis, including the
      origination of commercial business loans, is intended to further increase our
      portfolio of short-term and/or adjustable rate loans.




Presented
      below, as of December 31, 2005 and 2004, is an analysis of our interest rate
      risk as measured by the effect on NPV caused by instantaneous and sustained
      parallel shifts in the yield curve, in 100 basis point increments, up and down
      300 basis points, and compared to Board policy limits. The Board Limit column
      indicates the lowest allowable limits for NPV after each interest rate shock.
      Assumptions used in calculating the amounts in this table are OTS assumptions.
      No information is provided for a negative 300 basis point shift in interest
      rates, due to a low prevailing interest rate environment making such scenarios
      unlikely.






Change
                in
            
            Board
                Limit
            
            At
                December 31, 2005
            
            At
                December 31, 2004Interest
                Rate
            
            Post-shock
            
            Post-shock
            
            Change
            
            Post-shock
            
            Change(Basis
                Points)
            
            NPV
                Ratio
            
            NPV
                Ratio
            
            (Basis
                Points)
            
            NPV
                Ratio
            
            (Basis
                Points)300
            bp
            
            6.00
            %
            
            10.16
            %
            
            (80
            )
                bp
            
            10.55
            %
            
            (12
            )
                bp200
            
            
            7.00
            
            
            10.58
            
            
            (38
            )
            
            10.82
            
            
            14100
            
            
            8.00
            
            
            10.87
            
            
            (8
            )
            
            10.89
            
            
            210
            
            
            8.00
            
            
            10.96
            
            
            
            
            
            10.68-100
            
            
            8.00
            
            
            10.74
            
            
            (22
            )
            
            10.16
            
            
            (52
            )-200
            
            
            7.00
            
            
            10.31
            
            
            (65
            )
            
            n/a
            
            
            n/a







18




In
      evaluating our exposure to interest rate risk, certain shortcomings inherent
      in
      the method of analysis presented in the foregoing table must be noted. For
      example, although certain assets and liabilities may have similar maturities
      or
      periods to repricing, they may react in different degrees to changes in market
      interest rates. Also, the interest rates on certain types of assets and
      liabilities may fluctuate in advance of changes in market interest rates, while
      interest rates on other types may lag behind changes in market rates. Further,
      in the event of a change in interest rates, prepayments and early withdrawal
      levels may deviate significantly from those assumed in calculating the table.
      Finally, the ability of many borrowers to service their debt may decrease in
      the
      event of an interest rate increase. As a result, the actual effect of changing
      interest rates may differ from that presented in the foregoing
      table.




Management
      believes that at March 31, 2006 there have been no material changes in Lafayette
      Savings’ interest rate sensitivity which would cause a material change in the
      market risk exposures that affect the quantitative and qualitative risk
      disclosures as presented above, from the Company’s Annual Report on Form 10-K
      for the period ended December 31, 2005.






**Item
      4. Controls and Procedures**




An
      evaluation of the Company’s disclosure controls and procedures (as defined in
      Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the
      Securities Exchange Act of 1934, as amended (the “Act”)), as of March 31, 2006,
      was carried out under the supervision and with the participation of the
      Company’s Chief Executive Officer, Chief Financial Officer and several other
      members of the Company’s senior management. The Company’s Chief Executive
      Officer and Chief Financial Officer concluded that the Company’s disclosure
      controls and procedures currently in effect are effective in ensuring that
      the
      information required to be disclosed by the Company in the reports it files
      or
      submits under the Act is (i) accumulated and communicated to the Company’s
      management (including the Chief Executive Officer and Chief Financial Officer)
      in a timely manner and (ii) recorded, processed, summarized and reported within
      the time periods specified in the Securities and Exchange Commission’s rules and
      forms. There have been no changes in our internal control over financial
      reporting (as defined in Rule 13a-15(f) of the Act) identified in connection
      with the Company’s evaluation of controls that occurred during the quarter ended
      March 31, 2006, that have materially affected, or are reasonably likely to
      affect, our internal control over the financial reporting.




19




**PART
      II. OTHER INFORMATION**




**Item
                1.**
            **Legal
                Proceedings**




In
      connection with the 2005 examination of the Bank by the Office of Thrift
      Supervision (“OTS”), the OTS found certain instances where the
      Bank did not comply with applicable laws and regulations. The Bank is
      currently in the process of negotiating a Supervisory Agreement with the OTS
      (the “Agreement”) under which the Bank will agree to take a number of actions
      within specified timeframes. Among other things, under this proposed agreement,
      the Bank’s board of directors must implement certain policies and procedures to
      ensure appropriate monitoring of the Bank’s asset quality as well as
      internal controls and independent testing and audit functions.


Under
        the
        proposed Agreement, the Bank’s board of directors must also implement a program
        designed to bring the aggregate outstanding loans into compliance with
        supervisory loan-to-value limits and adopt written action plans for certain
        classified loans.






**Item
                1A.**
            **Risk
                Factors**




There
      have been no material changes from the risk factors as previously disclosed
      in
      our Form 10-K Report for the fiscal year ended December 31, 2005.






**Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of Proceeds******




The
      following table sets forth the number and prices paid for repurchased
      shares.






20




**Issuer
                Purchases of Equity Securities****Month
                of Purchase**
            
            **Total
                Number of Shares Purchased****1**
            
            **Average
                Price Paid per Share**
            
            **Total
                Number of Shares Purchased as Part of Publicly Announced
                Plan****2**
            
            **Maximum
                Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
                Under the Plan**January
                1 - January 31, 2006
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            33,717February
                1 - February 28, 2006
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            33,717March
                1 - March 31, 2006
            
            
            8,000
            
            
            $28.28
            
            
            8,000
            
            
            25,717Total
            
            
            8,000
            
            
            $28.28
            
            
            8,000
            
            
            25,717





1 There
      were no shares repurchased other than through a publicly announced plan or
      program.


2 We have
      in place a plan, announced September 27, 2004, to repurchase 5% of our common
      stock .






**Item
                3.**
            **Defaults
                Upon Senior Securities******




None
      to
      be reported.






**Item
                4.**
            **Submission
                of Matters to a Vote of Security
                Holders**




None
      to
      be reported.






**Item
                5.**
            **Other
                Information**




None.






**Item
                6.**
            **Exhibits******




The
      exhibits listed in the Index to Exhibits are incorporated herein by
      reference.







21




**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.







LSB
                FINANCIAL CORP.(Registrant)Date:
            May
              15, 2006
            
            By:
            /s/
Randolph
              F. WilliamsRandolph
                F. Williams, President(Principal
                Executive Officer)Date:
            May
              15, 2006
            
            By:
            /s/
Mary
              Jo DavidMary
                Jo David, Treasurer(Principal
                Financial and Accounting Officer)





22




**INDEX
      TO EXHIBITS**








Regulation
                S-KExhibitNumber
            
            Document31.1
            
            Rule
                13(a)-14(a) Certification (Chief Executive Officer)31.2
            
            Rule
                13(a)-14(a) Certification (Chief Financial Officer)32
            
            Section 906
                Certification