UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





ýQUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended March 31, 2008ORoTRANSITION
      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 incorporation
      or organization)
            
            (I.R.S.
      Employer 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.  Yes [X]        No [   ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):





Large
      Accelerated Filer o
            Accelerated
      Filer oNon-Accelerated
      Filer o
              (Do
      not check if a smaller reporting company)
            Smaller
      Reporting Company ý





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





The
number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date is indicated below.





Class
            
            Outstanding
      at May 7, 2008Common
      Stock, $.01 par value per share
            
            1,555,409
      shares








LSB
FINANCIAL CORP.





INDEX







PART
      I  FINANCIAL INFORMATION
            2Item
      1.
            Financial
      Statements
            2Consolidated
      Condensed Balance Sheets
            2Consolidated
      Condensed Statements of Income
            3Consolidated
      Condensed Statements of Changes in Shareholders’ Equity
            4Consolidated
      Condensed Statements of Cash Flows
            5Notes
      to Consolidated Financial Statements
            6Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            9Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            21Item
      4T.
            Controls
      and Procedures
            21PART
      II.  OTHER INFORMATION
            21Item
      1.
            Legal
      Proceedings
            21Item
      1A.
            Risk
      Factors
            21Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            22Item
      3.
            Defaults
      Upon Senior Securities
            22Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            22Item
      5.
            Other
      Information
            22Item
      6.
            Exhibits
            22SIGNATURESINDEX
      TO EXHIBITS











1


PART
I                      FINANCIAL
INFORMATION




Item
      1.
            Financial
      Statements







LSB
FINANCIAL CORP.


Consolidated
Condensed Balance Sheets


(Dollars
in thousands except per share data)





March
      31,
              2008
            
            
            December
      31,
              2007(unaudited)AssetsCash
      and due from banks
            
            $
            1,487
            
            
            $
            1,644Short-term
      investments
            
            
            11,852
            
            
            
            4,846Cash
      and cash equivalents
            
            
            13,339
            
            
            
            6,490Available-for-sale
      securities
            
            
            12,992
            
            
            
            13,221Loans
      held for sale
            
            
            247
            
            
            
            ---Total
      loans
            
            
            307,043
            
            
            
            300,610Less:
      Allowance for loan losses
            
            
            (3,277
            )
            
            
            (3,702
            )Net
      loans
            
            
            303,766
            
            
            
            296,908Premises
      and equipment, net
            
            
            6,736
            
            
            
            6,815Federal
      Home Loan Bank stock, at cost
            
            
            3,997
            
            
            
            3,997Bank
      owned life insurance
            
            
            5,671
            
            
            
            5,613Interest
      receivable and other assets
            
            
            7,593
            
            
            
            8,966Total
      Assets
            
            $
            354,341
            
            
            $
            342,010Liabilities
      and Shareholders’ EquityLiabilitiesDeposits
            
            $
            240,560
            
            
            $
            232,030Federal
      Home Loan Bank advances
            
            
            77,256
            
            
            
            74,256Interest
      payable and other liabilities
            
            
            2,338
            
            
            
            1,792Total
      liabilities
            
            
            320,154
            
            
            
            308,078Commitments
      and ContingenciesShareholders’
      EquityCommon
      stock, $.01 par valueAuthorized
      - 7,000,000 sharesIssued
      and outstanding 2008 - 1,559,409 shares, 2007 - 1,557,968
      shares
            
            
            15
            
            
            
            15Additional
      paid-in-capital
            
            
            11,085
            
            
            
            11,066Retained
      earnings
            
            
            22,903
            
            
            
            22,777Accumulated
      other comprehensive gain (loss)
            
            
            184
            
            
            
            74Total
      shareholders’ equity
            
            
            34,187
            
            
            
            33,932Total
      liabilities and shareholders’ equity
            
            $
            354,341
            
            
            $
            342,010









See notes
to consolidated condensed financial statements.


2


LSB
FINANCIAL CORP.


Consolidated
Condensed Statements of Income


(Dollars
in thousands, except per share data)


(Unaudited)





Three
      months ended
              March
      31,2008
            
            
            2007Interest
      and Dividend IncomeLoans
            
            $
            5,204
            
            
            $
            5,580SecuritiesTaxable
            
            
            122
            
            
            
            164Tax-exempt
            
            
            69
            
            
            
            58Other
            
            
            26
            
            
            
            67Total
      interest and dividend income
            
            
            5,421
            
            
            
            5,869Interest
      ExpenseDeposits
            
            
            1,949
            
            
            
            2,026Borrowings
            
            
            929
            
            
            
            876Total
      interest expense
            
            
            2,878
            
            
            
            2,902Net
      Interest Income
            
            
            2,543
            
            
            
            2,967Provision
      for Loan Losses
            
            
            250
            
            
            
            250Net
      Interest Income After Provision for Loan Losses
            
            
            2,293
            
            
            
            2,717Non-interest
      IncomeDeposit
      account service charges and fees
            
            
            396
            
            
            
            406Net
      gains on loan sales
            
            
            16
            
            
            
            42Net
      gain on other real estate owned
            
            
            91
            
            
            
            ---Other
            
            
            279
            
            
            
            252Total
      non-interest income
            
            
            782
            
            
            
            700Non-interest
      ExpenseSalaries
      and employee benefits
            
            
            1,227
            
            
            
            1,190Net
      occupancy and equipment expense
            
            
            344
            
            
            
            314Computer
      service
            
            
            135
            
            
            
            121Advertising
            
            
            69
            
            
            
            41Other
            
            
            558
            
            
            
            523Total
      non-interest expense
            
            
            2,333
            
            
            
            2,189Income
      Before Income Taxes
            
            
            742
            
            
            
            1,228Provision
      for Income Taxes
            
            
            227
            
            
            
            449Net
      Income
            
            $
            515
            
            
            $
            779Basic
      Earnings Per Share
            
            $
            0.33
            
            
            $
            0.49Diluted
      Earnings Per Share
            
            $
            0.33
            
            
            $
            0.48Dividends
      Declared Per Share
            
            $
            0.25
            
            
            $
            0.20









See notes
to consolidated condensed financial statements.





3


LSB
FINANCIAL CORP.


Consolidated
Condensed Statements of Changes in Shareholders’ Equity


For the
Three Months Ended March 31, 2008 and 2007


(Dollars
in thousands)


(Unaudited)





Common
      Stock
            
            
            Additional
      Paid-In Capital
            
            
            Retained
      Earnings
            
            
            Accumulated
      Other Comprehensive Income (Loss)
            
            
            TotalBalance,
      January 1, 2007
            
            $
            15
            
            
            $
            12,227
            
            
            $
            22,623
            
            
            $
            (25
            )
            
            $
            34,840Comprehensive
      incomeNet
      income
            
            
            
            
            
            
            
            
            
            
            779
            
            
            
            
            
            
            
            779Change
      in unrealized appreciation (depreciation) on available-for-sale
      securities, net of taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            34
            
            
            
            34Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            813Dividends
      on common stock, $0.20 per share
            
            
            
            
            
            
            
            
            
            
            (320
            )
            
            
            
            
            
            
            (320
            )Purchase
      and retirement of stock (7,500 shares)
            
            
            
            
            
            
            (113
            )
            
            
            
            
            
            
            
            
            
            
            (113
            )Stock
      options exercised (290 shares)
            
            
            
            
            
            
            4
            
            
            
            
            
            
            
            
            
            
            
            4Amortization
      of stock option compensation
            
            
            
            
            
            4
            
            
            
            
            
            
            
            
            
            4Balance,
      March 31, 2007
            
            $
            15
            
            
            $
            12,122
            
            
            $
            23,082
            
            
            $
            9
            
            
            $
            35,228Balance,
      January 1, 2008
            
            $
            15
            
            
            $
            11,066
            
            
            $
            22,777
            
            
            $
            74
            
            
            $
            33,932Comprehensive
      incomeNet
      income
            
            
            
            
            
            
            
            
            
            
            515
            
            
            
            
            
            
            
            515Change
      in unrealized appreciation (depreciation) on available-for-sale
      securities, net of taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            110
            
            
            
            110Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            625Dividends
      on common stock, $0.25 per share
            
            
            
            
            
            
            
            
            
            
            (389
            )
            
            
            
            
            
            
            (389
            )Purchase
      and retirement of stock (2,900 shares)
            
            
            
            
            
            
            (56
            )
            
            
            
            
            
            
            
            
            
            
            (56
            )Stock
      options exercised (4,341 shares)
            
            
            
            
            
            
            67
            
            
            
            
            
            
            
            
            
            
            
            67Tax
      benefit of stock options exercised
            
            
            
            
            
            
            6
            
            
            
            
            
            
            
            
            
            
            
            6Amortization
      of stock option compensation
            
            
            
            
            
            2
            
            
            
            
            
            
            
            
            
            2Balance,
      March 31, 2008
            
            $
            15
            
            
            $
            11,085
            
            
            $
            22,903
            
            
            $
            184
            
            
            $
            34,187











See notes
to consolidated condensed financial statements.


4


LSB
FINANCIAL CORP.


Consolidated
Condensed Statements of Cash Flows


(Dollars
in thousands)


(Unaudited)





Three
      months ended
              March
      31,2008
            
            
            2007Operating
      ActivitiesNet
      income
            
            $
            515
            
            
            $
            779Items
      not requiring (providing) cashDepreciation
            
            
            136
            
            
            
            127Provision
      for loan losses
            
            
            250
            
            
            
            250Amortization
      of premiums and discounts on securities
            
            
            5
            
            
            
            4Gain
      on sale of loans
            
            
            13
            
            
            
            38Loans
      originated for sale
            
            
            (572
            )
            
            
            (238
            )Proceeds
      on loans sold
            
            
            312
            
            
            
            391Amortization
      of stock options
            
            
            2
            
            
            
            4Tax
      benefit related to stock options exercised
            
            
            (6
            )
            
            
            ---Changes
      inInterest
      receivable and other assets
            
            
            1,247
            
            
            
            (661
            )Interest
      payable and other liabilities
            
            
            546
            
            
            
            486Net
      cash from operating activities
            
            
            2,448
            
            
            
            1,180Investing
      ActivitiesPurchases
      of available-for-sale securities
            
            
            ---
            
            
            
            (861
            )Proceeds
      from maturities of available-for-sale securities
            
            
            408
            
            
            
            2,823Net
      change in loans
            
            
            (7,108
            )
            
            
            4,850Purchase
      of premises and equipment
            
            
            (57
            )
            
            
            (418
            )Net
      cash from investing activities
            
            
            (6,757
            )
            
            
            6,394Financing
      ActivitiesNet
      change in demand deposits, money market, NOW and savings
      accounts
            
            
            9,362
            
            
            
            4,918Net
      change in certificates of deposit
            
            
            (832
            )
            
            
            (6,071
            )Proceeds
      from Federal Home Loan Bank advances
            
            
            15,000
            
            
            
            5,500Repayment
      of Federal Home Loan Bank advances
            
            
            (12,000
            )
            
            
            (12,000
            )Proceeds
      from stock options exercised
            
            
            67
            
            
            
            4Tax
      benefit related to stock options exercised
            
            
            6
            
            
            
            0Repurchase
      of stock
            
            
            (56
            )
            
            
            (113
            )Dividends
      paid
            
            
            (389
            )
            
            
            (320
            )Net
      cash from financing activities
            
            
            11,158
            
            
            
            (8,082
            )Increase
      (Decrease) in Cash and Cash Equivalents
            
            
            6,849
            
            
            
            (508
            )Cash
      and Cash Equivalents, Beginning of Period
            
            
            6,490
            
            
            
            9,727Cash
      and Cash Equivalents, End of Period
            
            $
            13,339
            
            
            $
            9,219Supplemental
      Cash Flows InformationInterest
      paid
            
            
            2,902
            
            
            
            3,030Income
      taxes paid
            
            
            400
            
            
            
            400Supplemental
      Non-Cash DisclosuresCapitalization
      of mortgage servicing rights
            
            
            3
            
            
            
            4





See notes
to consolidated condensed financial statements


5


LSB
FINANCIAL CORP.


Notes to
Consolidated Financial Statements


March 31,
2008





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.  The
consolidated condensed balance sheet of LSB Financial Corp. as of December 31,
2007 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, 2007 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.






Note 2 -
Principles of Consolidation




The
accompanying financial statements include the accounts of LSB Financial, 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.




6


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.  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:







Three
      months ended March 31,2008
            
            
            2007Weighted
      average shares outstanding
            
            
            1,558,523
            
            
            
            1,602,174Shares
      used to compute diluted earnings per share
            
            
            1,560,997
            
            
            
            1,612,091Earnings
      per share
            
            $
            0.33
            
            
            $
            0.49Diluted
      earnings per share
            
            $
            0.33
            
            
            $
            0.48








Note 4 – Disclosures About Fair Value
of Assets and Liabilities





Effective January 1, 2008, the Company
adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements(FAS
157).  FAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements.  FAS 157 has been applied prospectively as of the
beginning of the year.





FAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date.  FAS 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.  The
standard describes three levels of inputs that may be used to measure fair
value:




Level
      1
              Quoted prices in active markets for identical assets or
      liabilities.


Level
      2
            Observable
      inputs other than Level 1 prices, such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or
      liabilities





Level
      3
            Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or
  liabilities





Following is a description of the
valuation methodologies used for instruments measured at fair value on a
recurring basis and recognized in the accompanying balance sheet, as well as the
general classification of such instruments pursuant to the valuation
hierarchy.





Available-for-sale
Securities


7





Where quoted market prices are not
available, fair values are estimated  by using pricing models, quoted
prices of securities with similar characteristics or discounted cash
flows.  Level 2 securities include U.S. agency securities,
mortgage-backed agency securities, obligations of states and political
subdivisions and certain other securities.  All of our
available-for-sale securities are Level 2 securities.


Fair
      Value Measurements UsingQuoted
      Prices in Active Markets for Identical Assets
              
              
              Significant
      Other Observable Inputs
              
              
              Significant
      Unobservable InputsFair
      Value
              
              
              (Level
      1)
              
              
              (Level
      2)
              
              
              (Level
      3)Avail-for-sale
      securities
              
              
              $    
      12,992
              
              
              
              $    
      0
              
              
              
              $    
      12,992
              
              
              
              $    
      0








Note 5 – Future Accounting
Pronouncements





Financial
Accounting Standards Board Statement No. 141 (SFAS 141R), “Business Combinations (Revised
2007),” was issued in December 2007 and replaces SFAS 141 which applies
to all transactions and other events in which one entity obtains control over
one or more other businesses.  SFAS 141R requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets,
liabilities and any non-controlling interest in the acquiree at fair value as of
the acquisition date.  Contingent consideration is required to be
recognized and measured at fair value on the date of acquisition rather than at
a later date when the amount of that consideration may be determinable beyond a
reasonable doubt.  This fair value approach replaces the cost
allocation process required under SFAS 141 whereby the cost of an acquisition
was allocated to the individual asset acquired and liabilities assumed based on
their estimated fair value.  SFAS 141R requires acquirers to expense
acquisition-related costs as incurred rather than allocating such costs to the
assets acquired and liabilities assumed.  Under SFAS 141R, the
requirements of SFAS 146, “Accounting for Costs Associated
with Exit or Disposal Activities,”would have to be met in order to
accrue for a restructuring plan in purchase
accounting.  Pre-acquisition contingencies are to be recognized at
fair value, unless it is a non-contractual contingency that is not likely to
materialize, in which case, nothing should be recognized in purchase
accounting.  Instead, that contingency would be subject to the
probable and estimable recognition criteria under SFAS 5, “Accounting for
Contingencies.”The Corporation is evaluating the requirements
of SFAS 141R to determine if it will have a significant impact on the
Corporation’s financial condition or results of operations.





Financial
Accounting Standards Board Statement No. 160 (SFAS 160), “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB Statement No. 51,”
was issued in December 2007 and establishes accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary.  SFAS 160 clarifies that a non-controlling interest in a
subsidiary, which is sometimes referred to as a minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements.  Among
other requirements, SFAS 160 requires


8


consolidated
net income to be reported at amounts that are attributable to both the parent
and the non-controlling interest.  It also requires disclosure, on the
face of the consolidated income statement, of the amounts of consolidated net
income attributable to the parent and to the non-controlling
interest.  SFAS 160 is effective for the Corporation on January 1,
2009 and is not expected to have a significant impact on the Corporation’s
financial statements.





Financial
Accounting Standards Board Statement No. 161 (SFAS 161), “Disclosures About Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,”was issued in March 2008 and amends and expands the disclosure
requirements of SFAS 133 to provide greater transparency about (i) how and why
an entity uses derivative instruments, (ii) how derivative instruments and
related hedge items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations and cash
flows.  To meet those objectives, SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements.  SFAS 161 is effective for the Corporation on
January 1, 2009 and is not expected to have a significant impact on the
Corporation’s financial statements.







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.




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.




We have an
experienced and committed staff and enjoy a good reputation for serving the
people of the community and understanding their financial needs and for finding
a way to meet those needs.  We contribute time and money to improve
the quality of life in our market area and many of our employees volunteer for
local non-profit agencies.  We believe this sets us apart from the
other 19 banks and credit unions that compete with us.  We also
believe that operating independently under the same name for over 138 years is a
benefit to us—especially as acquisitions and consolidations of local financial
institutions continue.  Focusing time and resources on acquiring
customers who may be feeling disenfranchised by their
no-longer-local


9


bank has
proved to be a successful strategy.





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 slowdown of the last few years had a noticeable effect on the
area.  More recently we have seen signs of returning growth and
development.  According to the Lafayette-West Lafayette Development
Corporation, at year end 2007, ten commercial projects totaling nearly $2
billion were either underway or just completed in the greater Lafayette
area.  These and other companies created 820 new jobs, with growth
seen in every sector.  The unemployment rate in Tippecanoe County has
ranged from 3.5% to 4.5% for the past two years although it spiked to 4.9% in
March 2008.  The reason for the spike reportedly was largely in the
construction industry due to inclement weather and to temporary layoffs at a
manufacturing company in Lafayette.





The community has made good progress
in working through the effects of the overbuilding of one- to four-family
housing by local and out-of-town construction companies.  Many of
these houses were sold to marginally qualified borrowers, often financed by
out-of-town lenders, to people who would otherwise have populated the rental
market.  Holders of rental properties were faced with increased
vacancies at the same time the state imposed substantially higher property tax
rates.  The influx of these new houses on the market, along with
increasing numbers of foreclosed properties, resulted in stagnant or declining
property values and a large surplus of properties for sale.  As a
result, even well-established landlords and builders are choosing to leave or
are being forced out of the market.  However, information from the
Lafayette Board of Realtors indicates that 1,690 properties were sold in
Tippecanoe County from January 1, 2007 through January 1, 2008 with an average
market time of 82 days compared to 1,838 sales for the same time period one year
earlier with a market time of 80 days.  Average selling prices
increased to $152,000 from $147,000 for the two time periods.  Our
loan portfolio, which had been contracting for the last nine quarters, showed a
$7.1 million, or 2.3%, increase in the first quarter of 2008.





While the local economy continues to
improve, we continue to work with borrowers who have fallen substantially behind
on their loans.  The majority of our delinquent loans are secured by
real estate and we believe we have sufficient reserves to cover probable
losses.  The challenge is to get delinquent borrowers back on a
workable payment schedule or to get control of their properties through an
overburdened court system.  In March 2008, delinquent loans were at a
19-month low.





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.  Our net interest income also depends on the shape of the
yield curve.  In 2007, the curve gradually returned to a more normal
slight


10


upward
slope.  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 for 2008 is that short-term rates, which saw
a 2.00% decrease in the first quarter, will drift slightly lower while long-term
rates will gradually increase through most of the year maintaining a more
traditional upward sloping yield curve throughout most of the year.





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, and 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 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, 2008.  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:




11


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.




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.




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.




12


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
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, 2008 and December 31, 2007




Our total
assets increased $12.3 million, or 3.61%, during the three months from December
31, 2007 to March 31, 2008.  Primary components of this increase were
a $7.1 million increase in net loans receivable including loans held for sale
and a $7.0 million increase in short term investments, offset by a $1.3 million
decrease in other assets due partly to a $658,000 decrease in other real estate
owned.  Management attributes the increase in loans primarily to the
decision to book rather than sell fixed rate residential mortgages in an effort
to increase the loan portfolio.  The Bank’s minimal interest rate risk
exposure made this strategy possible.  Because of increased funding
needs we raised $8.5 million of deposits including a $5.0 million increase in
NOW accounts.  Additionally we increased Federal Home Loan Bank
advances by $3.0 million.





Non-performing
assets, which include non-accruing loans, accruing loans 90 days past due and
foreclosed assets, decreased from $13.9 million at December 31, 2007 to $11.6
million at March 31, 2008.  Non-performing loans and accruing loans 90
days past due totaled $8.3 million at March 31, 2008 and consisted of $6.6
million, or 80.07%, of one- to four-family or multi-family residential real
estate loans, $1.4 million, or 16.84%, of loans on land or commercial property,
$199,000, or 2.41%,of commercial business
loans and $56,000, or 0.68%,of consumer
loans.  Non-performing assets also include $3.3 million in foreclosed
assets.  At March 31, 2008, our allowance for loan losses equaled
1.07% of total loans compared to 1.23% at December 31, 2007.  The
allowance for loan losses at March 31, 2008 totaled 28.37% of non-performing
assets compared to 26.56% at December 31, 2007, and 39.67% of non-performing
loans at March 31, 2008 compared to 37.04% at December 31, 2007.  Our
non-performing assets equaled 3.26% of total assets at March 31, 2008 compared
to 4.08% at December 31, 2007.  Non-performing assets totaling
$676,000 were charged off in the first three months of 2008, offset by
recoveries of $1,000.  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




13


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 $33.9 million at December 31, 2007 to $34.2 million at
March 31, 2008, an increase of $255,000, or 0.75%, primarily as a result of net
income of $515,000, partially offset by our payment of $389,000 of dividends on
common stock, and the repurchase of 2,900 shares of our stock as part of a stock
repurchase program.  Shareholders’ equity to total assets was 9.65% at
March 31, 2008 compared to 9.92% at December 31, 2007.






Results
of Operations




Comparison
of Operating Results the Quarter Ended March 31, 2008 and March 31,
2007




General.  Net income for
the three months ended March 31, 2008 was $515,000, a decrease of $264,000, or
33.89%, over the three months ended March 31, 2007.  The decrease was
primarily due to a $424,000 decrease in net interest income and a $144,000
increase in non-interest expenses, partially offset by a $82,000 increase in
non-interest income, and a $222,000 decrease in taxes on income.




Net Interest
Income.  Net interest
income for the three months ended March 31, 2008 decreased $424,000, or 14.29%,
over the same period in 2007.  This decrease was due to a 37 basis
point decrease in our net interest margin (net interest income divided by
average interest-earning assets) from 3.48% for the three months ended March 31,
2007 to 3.11% for the three months ended March 31, 2008 together with a $1.1
million decrease in net interest-earning assets.  The decrease in net
interest margin is primarily due to the 25 basis point decrease in the average
rate on interest-earning assets from 6.88% for the three months ended March 31,
2007 to 6.62% for the three months ended March 31, 2008 and a 12 basis point
increase in the average rate on interest-bearing liabilities from 3.56% to 3.68%
for the same respective periods.




Interest
income on loans decreased $376,000, or 6.74%, for the three months ended March
31, 2008 compared to the same three months in 2007.  The average rate
on loans fell from 7.14% to 6.92% partly due to the immediate decrease in rate
for over $45 million of loans tied to prime as the Federal Reserve lowered rates
a total of 300 basis points from September 2007 to March 2008.  The
average balance of loans decreased by $11.9 million due to a tightening of
underwriting standards.




Interest
earned on other investments and Federal Home Loan Bank stock decreased by
$72,000, or 24.91%, for the three months ended March 31, 2008 compared to the
same period in 2007.  This was the result of a $2.1 million decrease
in average balances and a 77 basis point decrease in the average yield on other
investments and Federal Home Loan Bank stock.  We allowed investment
securities to run off, moving some of that money into short term investments
because of loan growth opportunities.   Investment securities
decreased from $28.5 million at




14


March 31,
2007 to $26.5 million at March 31, 2008 while the average yield decreased from
4.05% for the first three months of 2007 to 3.28% over the same period in 2008
due to the movement into short term investments and the lower short term
interest rates in the economy.




Interest
expense for the three months ended March 31, 2008 decreased $24,000, or 0.83%,
over the same period in 2007 as a $53,000 increase in interest expense on
Federal Home Loan Bank advances due to a $4.3 million increase in the average
balance of these advances was more than offset by a $77,000 decrease in interest
on deposits.  The decrease in deposit interest expense was due to a
$17.2 million decrease in deposits offset by an increase in the average rate
paid on deposits from 3.18% for the first three months of 2007 to 3.28% for the
first three months of 2008.  The increase in rates was due to
generally higher interest rates in the economy, especially for longer-term
products.  The interest rate on Federal Home Loan Bank advances was
unchanged.





Provision for
Loan Losses.   The evaluation of the level of loan loss
reserves is an ongoing process that includes closely monitoring loan
delinquencies. The following chart shows delinquent loans as well as a breakdown
of non-performing assets.  As noted earlier, our delinquent loans,
including non-performing loans, are at a 19-month low.


03/31/08
                
                
                12/31/07
                
                
                03/31/07Loans
      delinquent 30-59 days
                
                $
                542
                
                
                $
                364
                
                
                $
                483Loans
      delinquent 60-89 days
                
                
                1,260
                
                
                
                1,763
                
                
                
                4,807Total
      delinquencies
                
                
                1,802
                
                
                
                2,127
                
                
                
                5,290Accruing
      loans past due 90 days
                
                
                1,669
                
                
                
                59
                
                
                
                1,331Non-accruing
      loans
                
                
                6,592
                
                
                
                9,935
                
                
                
                11,192Total
      non-performing loans
                
                
                8,261
                
                
                
                9,994
                
                
                
                12,523OREO
                
                
                3,292
                
                
                
                3,944
                
                
                
                4,691Total
      non-performing assets
                
                $
                11,553
                
                
                $
                13,938
                
                
                $
                17,214







The
accrual of interest income is discontinued when a loan becomes 90 days or three
payments past due.  Loans 90 days past due but not yet three payments
past due will continue to accrue interest as long as it has been determined that
the loan is well secured and the borrower has the capacity to
repay.   Delinquent loans, non-performing loans and other real
estate owned (“OREO”) properties all showed improvement compared to the prior
quarter and the prior year, reflecting the efforts of the staff and the slowly
improving local economy.




15


The
decrease in non-performing loans at March 31, 2008 compared to December 31, 2007
was generally due to properties being taken into OREO, payoffs or improvements
in the borrower’s situation which brought them back to performing
status.  We took $658,000 into OREO in the first quarter and received
another $583,000 in properties that were received and sold within the
quarter.




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.  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.




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 the non-impaired loan
categories.  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 to determine if an impairment should be established.  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.




As part of
our analysis we look at all loans rated doubtful, substandard, special mention
and watch.  These loans are specifically reviewed and a specific
allowance is designated for this group of loans.  At March 31, 2008,
specifically reviewed loans totaled $56.5 million compared to $51.1 million at
December 31, 2007.  Most of the increase was due to a $7.9 million
increase in watch loans.  These are loans that are performing as
agreed but are loans in which management has detected some weakness that
warrants closer monitoring.  We are proactive in identifying and
addressing potential problem loans and believe this is a reason for our success
in reducing non-performing loans.  In addition, the use of a
third-party independent loan review for commercial loans increases our
confidence that potential problems will be identified and addressed
early.  Individual impairment reports are prepared each quarter for
all substandard loans and an expected impairment is determined based on the
estimated realizable value of the collateral.




The remainder
of the portfolio is assigned a reserve based on a five-year average of
historical charge-off levels.  In addition, a qualitative analysis is
done on environmental factors that may have an impact on future loan losses and
the resulting estimated potential loss is applied to the entire
portfolio.   In March we adjusted five of these
factors.  The risk from the levels of and trends in delinquencies was
reduced as a result of the reduction in delinquent loans discussed
above.  The risk of loss from charge-offs was increased because of the
anticipated increase in the acquisition and sale of OREO
properties.  The risk from the change in underwriting
standards




16


was
decreased as the new credit analysis guidelines and credit department have
effectively changed the credit culture of the bank.  The risk from
regulatory reviews was reduced due to the response from the Office of Thrift
Supervision (“OTS”) visit in 2007.  The risk from credit
concentrations was increased as the concentrations in one- to four-family
non-owner occupied and land development loans approached or exceeded internal
limits.  This is the first change in these factors in almost two
years.




As a result of our
analysis we recorded a $250,000 provision for loan losses for the three
months ended March 31, 2008, the same as the provision made for the same period
in 2007.  This provision was deemed appropriate 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.  An
analysis of the allowance for loan losses for the three months ended March 31,
2008 and 2007 follows:


(Dollars
      in Thousands)2008
              
              
              2007Balance
      at January 1
              
              $
              3,702
              
              
              
              2,770Loans
      charged off
              
              
              (676
              )
              
              
              (149
              )Recoveries
              
              
              1
              
              
              
              9Provision
              
              
              250
              
              
              
              250Balance
      at March 31
              
              $
              3,277
              
              
              $
              2,876







The balance
of loan loss reserves decreased $425,000, from $3.7 million at December 31, 2007
to $3.2 million at March 31, 2008.  This decline primarily reflects
the charge-off of loans previously identified as impaired and specifically
reserved.  These charge-offs resulted in a decrease in the specific
allowance on impaired loans of $563,000.




Non-Interest
Income.  Non-interest income for the three months ended March
31, 2008 increased by $82,000, or 11.71%, compared to the same period in
2007.  This was primarily due to a $91,000 increase in the gain on
other real estate owned as we were able to dispose of several properties we had
previously written down at a higher price than expected.  This
increase was augmented by a $27,000 increase in other income and was partially
offset by a $10,000 decrease in fees on deposit accounts and a $26,000 decrease
in the gain on the sale of mortgage loans due to a decrease in loans
sold.




17


Non-Interest
Expense.  Non-interest expense for the three months ended March
31, 2008 increased $144,000 over the same period in 2007 due to relatively small
increases in each category.  Salaries were up $37,000 due to an
increase in loan origination activity by commission-based loan originators and
an increase in health insurance costs, a $30,000 increase in occupancy costs due
to higher depreciation and janitorial expense, a $28,000 increase in advertising
expense as we work to increase loan and deposit activity and a $35,000 increase
in other expenses due primarily to an increase in FDIC insurance expense and
losses from fraud directed at bank customers.




Income
Tax Expense.
Our income tax
provision decreased by $222,000 for the three months ended March 31, 2008
compared to the three months ended March 31, 2007, due primarily to decreased
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.




Our liquidity
ratios at March 31, 2008 and December 31, 2007 were 8.17% and 5.83%,
respectively, compared to a regulatory liquidity base, and 6.05% and 4.36%
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, 2008, we had outstanding commitments to
originate loans and available lines of credit totaling $29.6 million and
commitments to provide funds to complete current construction projects in the
amount of $1.6 million. We had no outstanding commitments to sell residential
loans.  Certificates of deposit which will mature in one year or less
totaled $109.1 million at March 31, 2008.  Included in that number are
$33.3 million of brokered deposits.Based
on our experience, certificates of deposit held by local depositors have been a
relatively stable source of long-term funds as such certificates are generally
renewed upon




18


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.  Brokered deposits can be expected not to renew at maturity
and will have to be replaced with other funding upon maturity.  We
also have $22.8 million of Federal Home Loan Bank advances maturing in the next
twelve months.






Capital
Resources




Shareholders’
equity totaled $34.2 million at March 31, 2008 compared to $33.9 million at
December 31, 2007, an increase of $255,000, or 0.75%, due primarily to net
income of $515,000, partially offset by our payment of dividends on common stock
and the repurchase of 2,900 shares of our stock as part of a stock repurchase
program.  Shareholders’ equity to total assets was 9.65% at March 31,
2008 compared to 9.92% at December 31, 2007.




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 March 31,
2008 and December 31, 2007, Lafayette Savings was categorized as well
capitalized.  Our actual and required capital amounts and ratios at
March 31, 2008 and December 31, 2007 are presented below:




Actual
            
            
            For
      Capital Adequacy Purposes
            
            
            To
      Be Well Capitalized Under Prompt Corrective Action
    ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
      of March 31, 2008Total
      risk-based capital
              (to risk-weighted assets)
            
            $
            36,081
            
            
            
            13.3
            %
            
            $
            21,674
            
            
            
            8.0
            %
            
            $
            27,093
            
            
            
            10.0
            %Tier
      I capital
              (to risk-weighted assets)
            
            
            33,649
            
            
            
            12.4
            
            
            
            10,837
            
            
            
            4.0
            
            
            
            16,256
            
            
            
            6.0Tier
      I capital
              (to adjusted total assets)
            
            
            33,649
            
            
            
            9.5
            
            
            
            10,636
            
            
            
            3.0
            
            
            
            17,727
            
            
            
            5.0Tier
      I capital
              (to adjusted tangible assets)
            
            
            33,649
            
            
            
            9.5
            
            
            
            7,091
            
            
            
            2.0
            
            
            
            N/A
            
            
            
            N/ATangible
      capital
              (to adjusted tangible assets)
            
            
            33,649
            
            
            
            9.5
            
            
            
            5,318
            
            
            
            1.5
            
            
            
            N/A
            
            
            
            N/AAs
      of December 31, 2007Total
      risk-based capital
              (to risk-weighted assets)
            
            $
            36,320
            
            
            
            13.9
            %
            
            $
            20,954
            
            
            
            8.0
            %
            
            $
            26,192
            
            
            
            10.0
            %Tier
      I capital
              (to risk-weighted assets)
            
            
            33,444
            
            
            
            12.8
            
            
            
            10,477
            
            
            
            4.0
            
            
            
            15,716
            
            
            
            6.0Tier
      I capital
              (to adjusted total assets)
            
            
            33,444
            
            
            
            9.8
            
            
            
            10,249
            
            
            
            3.0
            
            
            
            17,081
            
            
            
            5.0Tier
      I capital
              (to adjusted tangible assets)
            
            
            33,444
            
            
            
            9.8
            
            
            
            6,833
            
            
            
            2.0
            
            
            
            N/A
            
            
            
            N/ATangible
      capital
              (to adjusted tangible assets)
            
            
            33,444
            
            
            
            9.8
            
            
            
            5,124
            
            
            
            1.5
            
            
            
            N/A
            
            
            
            N/A





19




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.




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);




20




·
            the
      impact of technological changes;






·
            acquisitions;






·
            changes
      in consumer spending and saving habits;
and






·
            our
      success at managing the risks involved in the
  foregoing.







Item
3.   Quantitative
and Qualitative Disclosures About Market Risk




Not
Applicable.




Item
4T.   Controls
and Procedures




Evaluation of
Disclosure 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, 2008, 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.




Changes in Internal
Controls over Financial Reporting.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, 2008, that have materially
affected, or are reasonably likely to materially affect, our internal control
over the financial reporting.






PART
II. OTHER INFORMATION




Item 1.   Legal
Proceedings


None.






Item
1A.   Risk
Factors




Not
Applicable.




21




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




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




Issuer
      Purchases of Equity SecuritiesMonth of Purchase
            
            Total
      Number of Shares Purchased1
            
            Average
      Price Paid per Share
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans orPrograms2
            
            Maximum
      Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
      Under the Plans orPrograms2January
      1 – January 31, 2008
            
            
            1,900
            
            
            
            19.23
            
            
            
            1,900
            
            
            
            59,817February
      1 – February 28, 2008
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            59,817March
      1 – March 31, 2008
            
            
            1,000
            
            
            
            19.00
            
            
            
            1,000
            
            
            
            58,817Total
            
            
            2,900
            
            
            $
            19.15
            
            
            
            2,900
            
            
            
            58,817


_______________________




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




2 We have
in place a program, announced February 6, 2007, to repurchase up to 100,000
shares of our common stock.







Item
3.  Defaults
Upon Senior Securities




None.




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




None.




Item
5.  Other
Information




None.




Item
6.  Exhibits




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




22







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, 2008
            
            By:
            /s/
      Randolph
      F. WilliamsRandolph
      F. Williams, President(Principal
      Executive Officer)Date:
            May
      15, 2008
            
            By:
            /s/
      Mary Jo DavidMary
      Jo David, Treasurer(Principal
      Financial and Accounting Officer)








INDEX
TO EXHIBITS










Regulation
      S-K Exhibit Number
            
            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