**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 September 30, 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.
 Yes [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 November 7, 2006Common
                  Stock, $.01 par value per share
              
              1,605,644
                  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
              9Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              21Item
                  4.
              Controls
                  and Procedures
              22PART
                  II.  OTHER INFORMATION
              22Item
                  1.
              Legal
                  Proceedings
              22Item
                  1A.
              Risk
                  Factors
              22Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              23Item
                  3.
              Defaults
                  Upon Senior Securities
              23Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              23Item
                  5.
              Other
                  Information
              23Item
                  6.
              Exhibits
              23SIGNATURES
              24INDEX
                  TO EXHIBITS
              25
 
 
  
  **PART
        I**  **FINANCIAL
        INFORMATION**
  **Item
                  1.**
              **Financial
                  Statements**
  LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Balance Sheets
 (Dollars
        in thousands except per share data)
 
 September
                  30,
                2006
              
              December
                  31,
                2005(unaudited)AssetsCash
                  and due from banks
              
              $
              1,413
              
              $
              1,697Short-term
                  investments
              
              
              6,158
              
              
              7,687Cash
                  and cash equivalents
              
              
              7,571
              
              
              9,384Available-for-sale
                  securities
              
              
              14,317
              
              
              11,611Loans
                  held for sale
              
              
              334
              
              
              ---Total
                  loans
              
              
              320,930
              
              
              333,823Less:
                  Allowance for loan losses
              
              
              (2,564
              )
              
              (2,852
              )Net
                  loans
              
              
              318,366
              
              
              330,971Premises
                  and equipment, net
              
              
              6,717
              
              
              6,813Federal
                  Home Loan Bank stock, at cost
              
              
              4,040
              
              
              4,197Bank
                  owned life insurance
              
              
              5,321
              
              
              2,715Interest
                  receivable and other assets
              
              
              9,112
              
              
              6,973Total
                  Assets
              
              
              365,778
              
              
              372,664Liabilities
                  and Shareholders’ EquityLiabilitiesDeposits
              
              
              255,978
              
              
              265,993Federal
                  Home Loan Bank advances
              
              
              73,533
              
              
              72,033Interest
                  payable and other liabilities
              
              
              1,927
              
              
              1,817Total
                  liabilities
              
              
              331,438
              
              
              339,843Commitments
                  and ContingenciesShareholders’
                  EquityCommon
                  stock, $.01 par valueAuthorized
                  - 7,000,000 shares
                Issued
                  and outstanding 2006 - 1,605,579 shares, 2005 - 1,625,196
                  shares
              
              
              15
              
              
              15Additional
                  paid-in-capital
              
              
              12,239
              
              
              10,565Retained
                  earnings
              
              
              22,148
              
              
              22,402Unearned
                  recognition and retention plan (RRP) shares
              
              
              0
              
              
              (22
              )Unearned
                  ESOP compensation
              
              
              (12
              )
              
              (49
              )Accumulated
                  other comprehensive loss
              
              
              (50
              )
              
              (90
              )Total
                  shareholders’ equity
              
              
              34,340
              
              
              32,821Total
                  liabilities and shareholders’ equity
              
              $
              365,778
              
              $
              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
                September
                  30,
              
              Nine
                  months ended
                September
                  30,2006
              
              2005
              
              2006
              
              2005**Interest
                  and Dividend Income**Loans
              
              $
              5,737
              
              $
              5,311
              
              $
              16,866
              
              $
              15,462SecuritiesTaxable
              
              
              108
              
              
              87
              
              
              331
              
              
              242Tax-exempt
              
              
              47
              
              
              44
              
              
              144
              
              
              116Other
              
              
              32
              
              
              27
              
              
              93
              
              
              71Total
                  interest and dividend income
              
              
              5,924
              
              
              5,469
              
              
              17,434
              
              
              15,891**Interest
                  Expense**Deposits
              
              
              1,963
              
              
              1,693
              
              
              5,804
              
              
              4,791Borrowings
              
              
              869
              
              
              774
              
              
              2,396
              
              
              2,270Total
                  interest expense
              
              
              2,832
              
              
              2,467
              
              
              8,200
              
              
              7,061**Net
                  interest income**
              
              
              3,092
              
              
              3,002
              
              
              9,234
              
              
              8,830**Provision
                  for Loan Losses**
              
              
              318
              
              
              175
              
              
              718
              
              
              475**Net
                  Interest Income After Provision for Loan Losses**
              
              
              2,774
              
              
              2,827
              
              
              8,516
              
              
              8,355**Non-interest
                  income**Deposit
                  account service charges and fees
              
              
              439
              
              
              468
              
              
              1,312
              
              
              955Net
                  gains on loan sales
              
              
              63
              
              
              109
              
              
              172
              
              
              271Gain
                  on sale of securities and assets
              
              
              7
              
              
              0
              
              
              7
              
              
              11Other
              
              
              200
              
              
              128
              
              
              582
              
              
              560Total
                  non-interest income
              
              
              709
              
              
              705
              
              
              2,073
              
              
              1,797**Non-interest
                  Expense**Salaries
                  and employee benefits
              
              
              976
              
              
              1,128
              
              
              3,406
              
              
              3,415Net
                  occupancy and equipment expense
              
              
              325
              
              
              254
              
              
              905
              
              
              795Computer
                  service
              
              
              112
              
              
              101
              
              
              314
              
              
              327Advertising
              
              
              55
              
              
              114
              
              
              184
              
              
              265Other
              
              
              614
              
              
              455
              
              
              1,613
              
              
              1,366Total
                  non-interest expense
              
              
              2,082
              
              
              2,052
              
              
              6,422
              
              
              6,168**Income
                  Before Income Taxes**
              
              
              1,401
              
              
              1,480
              
              
              4,167
              
              
              3,984**Provision
                  for Income Taxes**
              
              
              534
              
              
              546
              
              
              1,564
              
              
              1,390**Net
                  income**
              
              $
              867
              
              $
              934
              
              $
              2,603
              
              $
              2,594**Basic
                  Earnings Per Share**
              
              $
              0.53
              
              $
              0.58
              
              $
              1.62
              
              $
              1.62**Diluted
                  Earnings Per Share**
              
              $
              0.53
              
              $
              0.57
              
              $
              1.61
              
              $
              1.61**Dividends
                  Declared Per Share**
              
              $
              0.17
              
              $
              0.15
              
              $
              0.49
              
              $
              0.44
 
 See
        notes
        to consolidated condensed financial statements.
 
  2
  LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Changes in Shareholders’ Equity
 For
        the
        Nine Months Ended September 30, 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
              
              
              
              
              
              
              
              
              2,594
              
              
              
              
              
              
              
              
              2,594Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (40
              )
              
              (40
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,554Dividends
                  on common stock, $0.44 per share
              
              
              
              
              
              
              
              
              (699
              )
              
              
              
              
              
              
              
              (699
              )Purchase
                  and retirement of stock (27,658 shares)
              
              
              
              
              
              (668
              )
              
              
              
              
              
              
              
              
              
              
              (668
              )Stock
                  options exercised (93,958 shares)
              
              
              
              
              
              329
              
              
              
              
              
              
              
              
              
              
              
              329Issuance
                  of five percent stock dividend
              
              
              1
              
              
              2,228
              
              
              (2,229
              )
              
              
              
              
              
              
              
              0Tax
                  benefit related to stock options exercised
              
              
              
              
              
              580
              
              
              
              
              
              
              
              
              
              
              
              580Amortization
                  of RRP expense
              
              
              
              
              
              
              
              
              
              
              
              22
              
              
              
              
              
              22ESOP
                  shares earned
              
              
              
              
              
              144
              
              
              
              
              
              41
              
              
              
              
              
              185**Balance****,
                  September 30, 2005**
              
              $
              15
              
              $
              10,848
              
              $
              21,970
              
              $
              (91
              )
              $
              (46
              )
              $
              32,696**Balance,
                  January 1, 200****6**
              
              
              15
              
              
              10,565
              
              
              22,402
              
              
              (71
              )
              
              (90
              )
              
              32,821Reclassification
                  of unearned compensation upon adoption of SFAS 123(R)
              
              
              
              
              
              (22
              )
              
              
              
              
              22Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              2,603
              
              
              
              
              
              
              
              
              2,603Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              40
              
              
              40Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,643Dividends
                  on common stock, $0.49 per share
              
              
              
              
              
              
              
              
              (782
              )
              
              
              
              
              
              
              
              (782
              )Purchase
                  and retirement of stock (22,575 shares)
              
              
              (1
              )
              
              (606
              )
              
              
              
              
              
              
              
              
              
              
              (607
              )Stock
                  options exercised (2,548 shares)
              
              
              
              
              
              38
              
              
              
              
              
              
              
              
              
              
              
              38Issuance
                  of five percent stock dividend
              
              
              1
              
              
              2,074
              
              
              (2,075
              )
              
              
              
              
              
              
              
              0Amortization
                  of stock option compensation
              
              
              
              
              
              19
              
              
              
              
              
              
              
              
              
              
              
              19Amortization
                  of RRP expense
              
              
              
              
              
              22
              
              
              
              
              
              
              
              
              
              
              
              22ESOP
                  shares earned
              
              
              
              
              
              149
              
              
              
              
              
              37
              
              
              
              
              
              186**Balance,
                  September 30, 2006**
              
              $
              15
              
              $
              12,239
              
              $
              22,148
              
              $
              (12
              )
              $
              (50
              )
              $
              34,340
 
 See
        notes
        to consolidated condensed financial statements.
  3
  LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Cash Flows
 (Dollars
        in thousands)
 (Unaudited)
 
 Nine
                  months ended
                September
                  30,2006
              
              2005Operating
                  ActivitiesNet
                  income
              
              $
              2,603
              
              $
              2,594Items
                  not requiring (providing) cashDepreciation
              
              
              358
              
              
              273Provision
                  for loan losses
              
              
              718
              
              
              475Amortization
                  of premiums and discounts on securities
              
              
              39
              
              
              29Federal
                  Home Loan Bank stock dividend
              
              
              157
              
              
              (87
              )ESOP
                  shares earned
              
              
              186
              
              
              185Gain
                  on sale of loans
              
              
              (100
              )
              
              116Loans
                  originated for sale
              
              
              (7,362
              )
              
              (14,721
              )Proceeds
                  on loans sold
              
              
              7,128
              
              
              15,517Changes
                  inInterest
                  receivable and other assets
              
              
              (2,250
              )
              
              60Interest
                  payable and other liabilities
              
              
              110
              
              
              1,150Net
                  cash from operating activities
              
              
              1,587
              
              
              5,591Investing
                  ActivitiesPurchases
                  of available-for-sale securities
              
              
              (4,540
              )
              
              (2,416
              )Proceeds
                  from maturities of available-for-sale securities
              
              
              1,862
              
              
              289Net
                  change in loans
              
              
              11,887
              
              
              (14,721
              )Purchase
                  of premises and equipment
              
              
              (262
              )
              
              (319
              )Purchase
                  of life insurance policies
              
              
              (2,500
              )
              
              0Net
                  cash from investing activities
              
              
              6,447
              
              
              (17,167
              )Financing
                  ActivitiesNet
                  change in demand deposits, money market, NOW and savings
                  accounts
              
              
              (4,209
              )
              
              (5,669
              )Net
                  change in certificates of deposit
              
              
              (5,806
              )
              
              15,108Proceeds
                  from Federal Home Loan Bank advances
              
              
              47,500
              
              
              45,000Repayment
                  of Federal Home Loan Bank advances
              
              
              (46,000
              )
              
              (39,800
              )Proceeds
                  from stock options exercised
              
              
              38
              
              
              329Compensation
                  cost of stock options
              
              
              19
              
              
              0Repurchase
                  of stock
              
              
              (607
              )
              
              (668
              )Dividends
                  paid
              
              
              (782
              )
              
              (699
              )Net
                  cash from financing activities
              
              
              (9,847
              )
              
              13,601Increase
                  (Decrease) in Cash and Cash Equivalents
              
              
              (1,813
              )
              
              2,025Cash
                  and Cash Equivalents, Beginning of Period
              
              
              9,384
              
              
              9,213Cash
                  and Cash Equivalents, End of Period
              
              $
              7,571
              
              $
              11,238Supplemental
                  Cash Flows InformationInterest
                  paid
              
              
              8,183
              
              
              7,108Income
                  taxes paid
              
              
              1,375
              
              
              256Supplemental
                  Non-Cash DisclosuresCapitalization
                  of mortgage servicing rights
              
              
              72
              
              
              155
 
 See
        notes
        to consolidated condensed financial statements
  4
  LSB
        FINANCIAL CORP.
 Notes
        to
        Consolidated Financial Statements
 September
        30, 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 6, 2006. 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
        $19,000 in compensation expense related to vested stock options less estimated
        forfeitures for the nine month period ended September 30, 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
        Recognition and Retention Plan (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. Prior to 2006, the
        Company accounted for this plan under the recognition and measurement principles
        of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and related interpretations. No stock-based employee compensation cost was
        reflected in net income, as all options granted under the plan had an exercise
        price equal to the market value of the underlying common stock on the grant
        date.
   5
  The
        following table illustrates the effect on net income and earnings per share
        if
        expense was measured using the fair value recognition provisions of Financial
        Accounting Standards Board (FASB) Statement No. 123, *Accounting
        for Stock-Based Compensation* .
 
  Three
                  months ended
              
              Nine
                  months endedSeptember
                  30, 2005
              
              September
                  30, 2005Net
                  income as reported
              
              $
              934
              
              $
              2,594Deduct:
                  Stock-based compensation expense determined under fair value based
                  method
              
              
              (11
              )
              
              (33
              )Pro
                  forma net income
              
              $
              923
              
              $
              2,561Basic
                  earnings per share as reported
              
              $
              0.58
              
              $
              1.62Pro
                  forma basic earnings per share
              
              
              0.57
              
              
              1.61Diluted
                  earnings per share as reported
              
              
              0.57
              
              
              1.61Pro
                  forma diluted earnings per share
              
              
              0.56
              
              
              1.60
 
  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. 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:
  
 **Three
                  months ended September 30,**
              
              **Nine
                  months ended September 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Weighted
                  average shares outstanding (excluding unearned ESOP
                  shares)
              
              
              1,637,872
              
              
              1,617,728
              
              
              1,608,551
              
              
              1,605,588Shares
                  used to compute diluted earnings per share
              
              
              1,647,136
              
              
              1,629,532
              
              
              1,618,646
              
              
              1,615,803Earnings
                  per share
              
              $
              0.53
              
              $
              0.58
              
              $
              1.62
              
              $
              1.62Diluted
                  earnings per share
              
              $
              0.53
              
              $
              0.57
              
              $
              1.61
              
              $
              1.61
 
 
  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) 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
        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 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.  7
  **·**
            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
        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 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.
   8
  **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.
  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. Throughout the 1990s the
        unemployment rate in Tippecanoe County hovered around 2.09%. Beginning in
        2000,
        however, the unemployment rate reached 4.1% and has stayed in that range
        since.
        The unemployment rate at August 2006, the most recent data available, showed
        unemployment rates of 4.2% for Tippecanoe County and 5.2% for Indiana. An
        announcement that Toyota intends to build 100,000 Camrys per year in Lafayette
        starting in 2007 should help the local economic recovery as should the building
        of two new hospitals.
   9
  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 throughout 2006. Long-term rates,
        however, have remained relatively flat, occasionally falling. 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 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.
   10
  **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 September 30, 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.
  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 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.
   11
  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.
   ***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.
   12
  **Financial
        Condition**
  ***Comparison
        of Financial Condition at September 30, 2006 and December 31,
        2005***
  Our
        total
        assets decreased $6.9 million or 1.85% during the nine months from December
        31,
        2005 to September 30, 2006. Primary components of this decrease were a $12.3
        million decrease in net loans receivable including loans held for sale, offset
        by a $2.6 million increase in bank owned life insurance, a $2.7 million increase
        in investments and a $2.1 million increase in other assets due mostly to
        an
        increase in other real estate owned. Management attributes the decrease in
        loans
        primarily to rising interest rates resulting in a decrease in loan origination
        activity, the expected payoff of several large loans due to a change in property
        ownership or strategy of the borrowers, and from the transfer of $3.5 million
        of
        loans from non-performing status to real estate owned as we gain control
        of
        additional foreclosed properties resulting in a $2.6 million increase in
        other
        real estate owned. We purchased $2.5 million of additional bank owned life
        insurance because the tax exempt increase in cash surrender value helps offset
        our tax burden. We also purchased $3.1 million in mortgage backed securities
        to
        help address the decrease in loan volume. Because of decreased funding needs
        we
        were able to avoid higher rate deposits and allowed $10.0 million of deposits
        to
        run off.
  Non-performing
        assets, which include non-accruing loans, accruing loans 90 days past due
        and
        foreclosed assets, decreased from $10.6 million at December 31, 2005 to $9.2
        million at September 30, 2006. Non-performing loans totaled $4.6 million
        at
        September 30, 2006 and consisted of $4.2 million or 93.16% of one- to
        four-family or multi-family residential real estate loans, $226,000 or 4.96%
        of
        loans on land or commercial property, $75,000 of commercial business loans
        and
        $10,000 of consumer loans. Non-performing assets also include $4.7 million
        in
        foreclosed assets. At September 30, 2006, our allowance for loan losses equaled
        0.80% of total loans compared to 0.85% at December 31, 2005. The allowance
        for
        loan losses at September 30, 2006 totaled 27.83% of non-performing assets
        compared to 27.00% at December 31, 2005, and 55.87% of non-performing loans
        at
        September 30, 2006 compared to 33.32% at December 31, 2005. Our non-performing
        assets equaled 2.52% of total assets at September 30, 2006 compared to 2.83%
        at
        December 31, 2005. Non-performing assets totaling $1.1 million were charged
        off
        in the first nine months of 2006, offset by recoveries of $43,000. 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 $34.3 million
        at
        September 30, 2006, an increase of $1.5 million, or 4.63%, primarily as a
        result
        of net income of $2.6 million, partially offset by our payment of $782,000
        of
        dividends on common stock, and the repurchase of 22,575 shares of our stock
        as
        part of a stock repurchase plan. Shareholders’ equity to total assets was 9.39%
        at September 30, 2006 compared to 8.81% at December 31, 2005.
   13
  **Results
        of Operations**
  ***Comparison
        of Operating Results for the Nine Months and the Quarter Ended September
        30,
        2006 and September 30, 2005***
  ***General*** *.*  Net
        income for the nine months ended September 30, 2006 was $2.6 million, an
        increase of $9,000 or 0.35%, over the nine months ended September 30, 2005.
        Net
        income for the quarter ended September 30, 2006 was $867,000, a decrease
        of
        $67,000 or 7.17% from the comparable quarter in 2005. The
        increase for the nine month period was primarily due to a $404,000 increase
        in
        net interest income and a $276,000 increase in non-interest income partially
        offset by a $243,000 increase in the provision for losses, a $254,000 increase
        in non-interest expenses, and a $174,000 increase in taxes on income. The
        decrease for the three month period was primarily due to a $143,000 increase
        in
        the provision for losses and a $30,000 increase in non-interest expenses
        partially offset by a $90,000 increase in net interest income.
  ***Net
        Interest Income*** *.* Net
        interest income for the nine months ended September 30, 2006 increased $404,000,
        or 4.58%, over the same period in 2005. This increase was primarily due to
        a 17
        basis point increase in our net interest margin (net interest income divided
        by
        average interest-earning assets) from 3.36% for the six months ended September
        30, 2005 to 3.53% for the nine months ended September 30, 2006 partially
        offset
        by a $1.3 million decrease in interest-earning assets. The increase in net
        interest margin is primarily the result of an increase in the average rate
        earned on interest-earning assets from 6.05% for the nine months ended September
        30, 2005 to 6.66% for the nine months ended September 30, 2006, offset by
        an
        increase in the average rate paid on interest-bearing liabilities from 2.83%
        for
        the nine months ended September 30, 2005 to 3.28% for the nine months ended
        September 30, 2006. Net
        interest income for the third quarter of 2006 increased $90,000, or 3.00%,
        compared to the same period in 2005 primarily due to a 19 basis point increase in our net interest margin from
        3.39%
        for the three months ended September 30, 2005 to 3.58% for the nine months
        ended
        September 30, 2006. A verage
        interest-earning assets decreased by $9.2 million from the third quarter
        of 2005
        to the third quarter of 2006, with an accompanying $5.7 million decrease
        in
        interest-bearing liabilities. The average rate on interest-earning assets
        increased from 6.18% for the period in 2005 to 6.87% in 2006, while the average
        rate on interest-bearing liabilities increased from 2.94% to 3.43% over the
        same
        period.
  Interest
        income on loans increased $1.4 million, or 9.08%, for the nine months ended
        September 30, 2006 compared to the same nine months in 2005. This increase
        was
        the result of an increase in the average yield on loans from 6.28% for the
        first
        nine months of 2005 to 6.92% for the first nine months of 2006, due to
        increasing interest rates in the economy causing both new and adjustable
        rate
        mortgages to price and reprice higher. The decrease in the average balance
        of
        loans was due to a tightening of underwriting standards as well as from the
        movement of loans which had long been in foreclosure as we finally begin
        to
        obtain title to the properties through sheriff’s sales or deeds in lieu of
        foreclosure. Interest income on loans increased $426,000 for the third quarter
        of 2006 compared to the third quarter of 2005 due primarily to the increase
        in
        the average yield on loans from 6.43% to 7.15% offset by a $9.8 million decrease
        in average loans receivable over the same period.
   14
  Interest
        earned on other investments and Federal Home Loan Bank stock increased by
        $139,000 for the nine months ended September 30, 2006 compared to the same
        period in 2005. This was primarily the result of a $2.2 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 2.63% for the first
        nine
        months of 2005 to 3.17% 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 income
        on other investments and Federal Home Loan Bank stock increased $29,000 for
        the
        third quarter of 2006 compared to the third quarter of 2005 due to an increase
        of $606,000 in average balances as well as an increase in the average yield
        on
        the average balance of other investments and Federal Home Loan Bank stock
        from
        2.67% for the third quarter of 2005 to 3.09% over the same period in
        2006.
  Interest
        expense for the nine months ended September 30, 2006 increased $1.1 million,
        or
        16.13%, over the same period in 2005. This increase was due to an increase
        in
        the average rate paid on interest-bearing liabilities from 2.83% for the
        first
        nine months of 2005 to 3.28% for the first nine months of 2006. Interest
        expense
        increased $365,000 or 14.80% for the third quarter of 2006 from the same
        period
        in 2005, primarily due to an increase in the average rate paid on average
        interest-bearing liabilities from 2.94% for the three month period in 2005
        to
        3.43% in 2006, partially offset by a $5.7 million decrease in average
        interest-bearing liabilities for the three month period in 2006 compared
        to the
        same period in 2005.
  ***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.
   15
  We
        recorded a $718,000 provision for loan losses for the nine months ended
        September 30, 2006 as a result of our analysis of our current loan portfolios
        compared to $475,000 for the same period in 2005. The increased provision
        during
        2006 was deemed necessary 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 nine months of 2006 we recorded
        charge-offs of $1.1 million offset by recoveries of $43,000. The $718,000
        provision for loan losses for the first nine months of 2006 was considered
        adequate to cover further charge-offs based on our evaluation and our loan
        mix.
  At
        September 30, 2006, non-performing assets, consisting of non-accruing loans,
        accruing loans 90 or more days delinquent and other real estate owned, totaled
        $9.2 million compared to $10.6 million at December 31, 2005. In addition
        to our
        non-performing assets, we identified $5.4 million in other loans of concern,
        compared to $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 future. Much of this increase is due to loans which had earlier been
        classified as substandard but had improved their performance enough to be
        reclassified as loans of concern. The vast majority of these loans, as well
        as
        our non-performing assets, are well collateralized.
  ***Non-Interest
        Income*** .
        Non-interest income for the nine months ended September 30, 2006 increased
        by
        $276,000 or 15.36% compared to the same period in 2005. This was primarily
        due
        to a $357,000 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, and a $22,000 increase in other income
        consisting of, among other things, a $39,000 increase in debit card fees,
        a
        $33,000 increase in mortgage loan servicing fees, a $39,000 increase in income
        recognized from bank owned life insurance less an $87,000 increase in
        reserve for losses and other adjustments on our overdraft program. These
        increases were partially offset by a $99,000 decrease in the gain on the
        sale of
        mortgage loans due to a decrease in loans sold. Non-interest
        income for the third quarter of 2006 was virtually the same as the same period
        in 2005, primarily due to a $29,000 decrease in fees on deposit accounts
        due to
        the introduction of the new overdraft product mentioned above and a $46,000
        decrease in the gain on the sale of mortgage loans in the secondary market
        offset by a $72,000 increase in other income for similar reasons to those
        mentioned above.
   16
  ***Non-Interest
        Expense*** .
        Non-interest expense for the nine months ended September 30, 2006 increased
        $254,000 over the same period in 2005 due primarily to a $247,000 increase
        in
        expenses related to foreclosed properties and to a maintenance charge on
        our
        overdraft checking program. Non-interest expense for the third quarter of
        2006
        increased by $30,000 over the same period in 2005, due to a $159,000 increase
        in
        other expenses caused primarily from expenses related to foreclosed properties
        offset by a $152,000 decrease in salaries caused by a $180,000 decrease in
        provision for incentive awards and the recognition of compensation expense
        related to the expensing of stock options in accordance with SFAS 123R. Please
        see Note 1 to the Consolidated Financial Statements as of September 30, 2006
        for
        further discussion of the adoption of SFAS 123R.
  ***Income
        Tax Expense*** *.*   Our
        income tax provision increased by $174,000 for the nine months ended September
        30, 2006 compared to the nine months ended September 30, 2005, due partly
        to
        increased income and also to the termination of a ten year tax credit for
        a low
        income housing project and a decrease in loans on property in a reduced tax
        enterprise zone. Our income tax provision decreased by $12,000 for the third
        quarter of 2006 due to slightly lower pretax income compared to the same
        period ** in ** 2005
        offset by the factors mentioned above.
   **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 December 31, 2005 and September 30, 2006 were 6.40% and
        5.65%, respectively, compared to a regulatory liquidity base, and 4.87% and
        4.48% compared to total assets at the end of each period.
   17
  We
        anticipate that we will have sufficient funds available to meet current funding
        commitments. At September 30, 2006, we had outstanding commitments to originate
        loans and available lines of credit totaling $45.2 million and commitments
        to
        provide funds to complete current construction projects in the amount of
        $5.0
        million. In addition we had commitments to sell $1.1 million of residential
        loans. Certificates
        of deposit which will mature in one year or less at September 30, 2006 totaled
        $122.2 million. Included in that number are $33.5 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 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 $33.5 **** million
        of Federal Home Loan Bank advances maturing in the next twelve
        months.
   **Capital
        Resources**
  Shareholders’
        equity totaled $34.3 million at September 30, 2006 compared to $32.8 million
        at
        December 31, 2005, an increase of $1.5 million or 4.63%, due primarily to
        net
        income of $2.6 million, partially offset by our payment of dividends on common
        stock and the repurchase of 22,575 shares of our stock as part of a stock
        repurchase plan. Shareholders’ equity to total assets was 9.39% at September 30,
        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 September
        30, 2006, Lafayette Savings was categorized as well capitalized. Our actual
        and
        required capital amounts and ratios at December 31, 2005 and September 30,
        2006
        are presented below:
   18
  **Actual**
                ****
                **For
                    Capital Adequacy Purposes**
                ****
                **To
                    Be Well Capitalized Under Prompt Corrective Action
                    Provisions****Amount**
                
                **Ratio**
                
                **Amount**
                
                **Ratio**
                
                **Amount**
                
                **Ratio**As
                    of September 30, 2006Total
                    risk-based capital
                  (to
                    risk-weighted
                    assets)
                
                $
                35,841
                
                
                12.3
                %
                $
                23,366
                
                
                8.0
                %
                $
                29,207
                
                
                10.0
                %Tier
                    I capital
                  (to
                    risk-weighted
                    assets)
                
                
                33,484
                
                
                11.5
                
                
                11,683
                
                
                4.0
                
                
                17,524
                
                
                6.0Tier
                    I capital
                  (to
                    adjusted total
                    assets)
                
                
                33,484
                
                
                9.2
                
                
                10,978
                
                
                3.0
                
                
                18,297
                
                
                5.0Tier
                    I capital
                  (to
                    adjusted
                    tangible assets)
                
                
                33,484
                
                
                9.2
                
                
                7,319
                
                
                2.0
                
                
                N/A
                
                
                N/ATangible
                    capital
                  (to
                    adjusted
                    tangible assets)
                
                
                33,484
                
                
                9.2
                
                
                5,489
                
                
                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.
   19
  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.  
   20
  **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 June 30, 2006 and December 31, 2005, 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 300
        basis
        points and down 200 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
                  June 30, 2006
              
              At
                  December 31, 2005Interest
                  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
              %
              
              10.63
              %
              
              (125
              )
                bp
              
              10.16
              %
              
              (80
              )
                bp200
              
              
              7.00
              
              
              11.15
              
              
              (73
              )
              
              10.58
              
              
              (38
              )100
              
              
              8.00
              
              
              11.59
              
              
              (29
              )
              
              10.87
              
              
              (8
              )0
              
              
              8.00
              
              
              11.88
              
              
              --
              
              
              10.96
              
              
              ---100
              
              
              8.00
              
              
              11.92
              
              
              4
              
              
              10.74
              
              
              (22
              )-200
              
              
              7.00
              
              
              11.68
              
              
              (20
              )
              
              10.31
              
              
              (65
              )
  21
 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 September 30, 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 September 30,
        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
        September 30, 2006, that have materially affected, or are reasonably likely
        to
        affect, our internal control over the financial reporting.
  **PART
        II. OTHER INFORMATION**
  **Item
                  1.**
              **Legal
                  Proceedings**
  The
        Supervisory Agreement between Lafayette Savings and the OTS (the “Agreement”)
        described in the Form 10-Q for the quarter ended March 31, 2006 was executed
        on
        May 15, 2006. See LSB Financial’s report on Form 10-Q for the quarter ended
        March 31, 2006 for a detailed description of the terms and conditions of
        the
        Agreement.
  **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.
   22
  **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 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**July
                  1 - July 31, 2006
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              15,217August
                  1 - August 31, 2006
              
              
              3,000
              
              $
              27.75
              
              
              3,000
              
              
              12,217September
                  1 - September 30, 2006
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              12,217Total
              
              
              3,000
              
              $
              27.75
              
              
              3,000
              
              
              12,217
 _______________________
 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.
  **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.
   23
  **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: 
                  November 13, 2006
              By:
              /s/
Randolph
                F. WilliamsRandolph
                  F. Williams, President(Principal
                  Executive Officer)Date: 
                  November 13, 2006
              By:
              /s/
Mary
                Jo DavidMary
                  Jo David, Treasurer(Principal
                  Financial and AccountingOfficer)
 
  24
  **INDEX
        TO EXHIBITS**
  
 
 Regulation
                S-K
                  ExhibitNumber
              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
 
   25