**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 ý
              
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                  EXCHANGE ACT OF 1934For
                  the quarterly period ended March 31, 2007ORo
              
              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 May 7, 2007Common
                  Stock, $.01 par value per share
              
              1,595,999
                  shares
  
  
 **LSB
        FINANCIAL CORP.**
 
 INDEX
 
  PART
                  I
              FINANCIAL
                  INFORMATION
              2Item
                  1.
              Financial
                  Statements
              2Consolidated
                  Condensed Balance Sheets
              2Consolidated
                  Condensed Statements of Income
              3Consolidated
                  Condensed Statements of Changes in Shareholders’ Equity
              4Consolidated
                  Condensed Statements of Cash Flows
              5Notes
                  to Consolidated Financial Statements
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              9Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              19Item
                  4.
              Controls
                  and Procedures
              20PART
                  II.
              OTHER
                  INFORMATION
              20Item
                  1.
              Legal
                  Proceedings
              20Item
                  1A.
              Risk
                  Factors
              20Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              21Item
                  3.
              Defaults
                  Upon Senior Securities
              21Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              21Item
                  5.
              Other
                  Information
              21Item
                  6.
              Exhibits
              21SIGNATURESINDEX
                  TO EXHIBITS
 
  i
  **PART
        I**  **FINANCIAL
        INFORMATION**
  **Item
                  1.**
              **Financial
                  Statements**
  
 LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Balance Sheets
 (Dollars
        in thousands except per share data)
 
 March
                  31,
                2007
              
              December
                  31,
                2006(unaudited)AssetsCash
                  and due from banks
              
              $
              1,511
              
              $
              1,391Short-term
                  investments
              
              
              7,708
              
              
              8,336Cash
                  and cash equivalents
              
              
              9,219
              
              
              9,727Available-for-sale
                  securities
              
              
              14,407
              
              
              16,316Loans
                  held for sale
              
              
              801
              
              
              992Total
                  loans
              
              
              314,475
              
              
              319,469Less:
                  Allowance for loan losses
              
              
              (2,876
              )
              
              (2,770
              )Net
                  loans
              
              
              311,599
              
              
              316,699Premises
                  and equipment, net
              
              
              6,891
              
              
              6,600Federal
                  Home Loan Bank stock, at cost
              
              
              3,997
              
              
              3,997Bank
                  owned life insurance
              
              
              5,438
              
              
              5,381Interest
                  receivable and other assets
              
              
              9,269
              
              
              8,688Total
                  Assets
              
              
              361,621
              
              
              368,400Liabilities
                  and Shareholders’ EquityLiabilitiesDeposits
              
              
              254,151
              
              
              255,304Federal
                  Home Loan Bank advances
              
              
              70,118
              
              
              76,618Interest
                  payable and other liabilities
              
              
              2,124
              
              
              1,638Total
                  liabilities
              
              
              326,393
              
              
              333,560Commitments
                  and ContingenciesShareholders’
                  EquityCommon
                  stock, $.01 par valueAuthorized
                  - 7,000,000 sharesIssued
                  and outstanding 2007 - 1,595,999 shares, 2006 - 1,603,209
                  shares
              
              
              15
              
              
              15Additional
                  paid-in-capital
              
              
              12,122
              
              
              12,227Retained
                  earnings
              
              
              23,082
              
              
              22,623Accumulated
                  other comprehensive gain (loss)
              
              
              9
              
              
              (25
              )Total
                  shareholders’ equity
              
              
              35,228
              
              
              34,840Total
                  liabilities and shareholders’ equity
              
              $
              361,621
              
              $
              368,400
 
 See
        notes
        to consolidated condensed financial statements.
  2
  LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Income
 (Dollars
        in thousands, except per share data)
 (Unaudited)
 
 Three
                  months ended
                March
                  31,2007
              
              2006**Interest
                  and Dividend Income**Loans
              
              $
              5,580
              
              $
              5,602SecuritiesTaxable
              
              
              164
              
              
              104Tax-exempt
              
              
              58
              
              
              49Other
              
              
              67
              
              
              31Total
                  interest and dividend income
              
              
              5,869
              
              
              5,786**Interest
                  Expense**Deposits
              
              
              2,026
              
              
              1,899Borrowings
              
              
              876
              
              
              766Total
                  interest expense
              
              
              2,902
              
              
              2,665**Net
                  Interest I****ncome**
              
              
              2,967
              
              
              3,121**Provision
                  for Loan Losses**
              
              
              250
              
              
              150**Net
                  Interest Income After Provision for Loan Losses**
              
              
              2,717
              
              
              2,971**Non-interest
                  I****ncome**Deposit
                  account service charges and fees
              
              
              406
              
              
              424Net
                  gains on loan sales
              
              
              42
              
              
              51Gain
                  on sale of securities and assets
              
              
              0
              
              
              0Other
              
              
              252
              
              
              187Total
                  non-interest income
              
              
              700
              
              
              662**Non-interest
                  Expense**Salaries
                  and employee benefits
              
              
              1,190
              
              
              1,287Net
                  occupancy and equipment expense
              
              
              314
              
              
              290Computer
                  service
              
              
              121
              
              
              98Advertising
              
              
              41
              
              
              58Other
              
              
              523
              
              
              483Total
                  non-interest expense
              
              
              2,189
              
              
              2,216**Income
                  Before Income Taxes**
              
              
              1,228
              
              
              1,417**Provision
                  for Income Taxes**
              
              
              449
              
              
              509**Net
                  I****ncome**
              
              $
              779
              
              $
              908**Basic
                  Earnings Per Share**
              
              $
              0.49
              
              $
              0.56**Diluted
                  Earnings Per Share**
              
              $
              0.48
              
              $
              0.56**Dividends
                  Declared Per Share**
              
              $
              0.20
              
              $
              0.17
 
 See
        notes
        to consolidated condensed financial statements.
 
  3
  LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Changes in Shareholders’ Equity
 For
        the
        Three Months Ended March 31, 2007 and 2006
 (Dollars
        in thousands)
 (Unaudited)
 
 **Common
                  Stock**
              
              **Additional
                  Paid-In Capital**
              
              **Retained
                  Earnings**
              
              **Benefit
                  Plans Compensation**
              
              **Accumulated
                  Other Comprehensive Income (Loss)**
              
              **Total****Balance,
                  January 1, 2006**
              
              
              15
              
              
              10,565
              
              
              22,402
              
              
              (71
              )
              
              (90
              )
              
              32,821Reclassification
                  of unearned compensation upon adoption of SFAS 123(R)
              
              
              
              
              
              (22
              )
              
              
              
              
              22Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              908
              
              
              
              
              
              
              
              
              908Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7
              )
              
              (7
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              901Dividends
                  on common stock, $0.17 per share
              
              
              
              
              
              
              
              
              (264
              )
              
              
              
              
              
              
              
              (264
              )Purchase
                  and retirement of stock (8,000 shares)
              
              
              
              
              
              (226
              )
              
              
              
              
              
              
              
              
              
              
              (226
              )Amortization
                  of stock option compensation
              
              
              
              
              
              6
              
              
              
              
              
              
              
              
              
              
              
              6Amortization
                  of RRP expense
              
              
              
              
              
              7
              
              
              
              
              
              
              
              
              
              
              
              7ESOP
                  shares earned
              
              
              
              
              
              52
              
              
              
              
              
              13
              
              
              
              
              
              65**Balance****,
                  March 31, 2006**
              
              $
              15
              
              $
              10,382
              
              $
              23,046
              
              $
              (36
              )
              $
              (97
              )
              $
              33,310**Balance,
                  January 1, 200****7**
              
              
              15
              
              
              12,227
              
              
              22,623
              
              
              
              
              
              (25
              )
              
              34,840Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              779
              
              
              
              
              
              
              
              
              779Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              34
              
              
              34Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              813Dividends
                  on common stock, $0.20 per share
              
              
              
              
              
              
              
              
              (320
              )
              
              
              
              
              
              
              
              (320
              )Purchase
                  and retirement of stock (7,500 shares)
              
              
              
              
              
              (113
              )
              
              
              
              
              
              
              
              
              
              
              (113
              )Stock
                  options exercised (290 shares)
              
              
              
              
              
              4
              
              
              
              
              
              
              
              
              
              
              
              4Amortization
                  of stock option compensation
              
              
              
              
              
              4
              
              
              
              
              
              
              
              
              
              
              
              4**Balance,
                  March 31, 2007**
              
              $
              15
              
              $
              12,122
              
              $
              23,082
              
              $
              0
              
              $
              9
              
              $
              35,228
 
 See
        notes
        to consolidated condensed financial statements.
  4
  LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Cash Flows
 (Dollars
        in thousands)
 (Unaudited)
 
 Three
                  months ended
                March
                  31,2007
              
              2006Operating
                  ActivitiesNet
                  income
              
              $
              779
              
              $
              908Items
                  not requiring (providing) cashDepreciation
              
              
              127
              
              
              117Provision
                  for loan losses
              
              
              250
              
              
              150Amortization
                  of premiums and discounts on securities
              
              
              4
              
              
              15ESOP
                  shares earned
              
              
              ---
              
              
              65Gain
                  on sale of loans
              
              
              38
              
              
              25Loans
                  originated for sale
              
              
              (238
              )
              
              (2,704
              )Proceeds
                  on loans sold
              
              
              391
              
              
              2,679Amortization
                  of stock options
              
              
              4
              
              
              6Changes
                  inInterest
                  receivable and other assets
              
              
              (661
              )
              
              (1,536
              )Interest
                  payable and other liabilities
              
              
              486
              
              
              97Net
                  cash from operating activities
              
              
              1,180
              
              
              (178
              )Investing
                  ActivitiesPurchases
                  of available-for-sale securities
              
              
              (861
              )
              
              (997
              )Proceeds
                  from maturities of available-for-sale securities
              
              
              2,823
              
              
              566Net
                  change in loans
              
              
              4,850
              
              
              4,515Purchase
                  of premises and equipment
              
              
              (418
              )
              
              (71
              )Net
                  cash from investing activities
              
              
              6,394
              
              
              4,013Financing
                  ActivitiesNet
                  change in demand deposits, money market, NOW and savings
                  accounts
              
              
              4,918
              
              
              1,144Net
                  change in certificates of deposit
              
              
              (6,071
              )
              
              4,876Proceeds
                  from Federal Home Loan Bank advances
              
              
              5,500
              
              
              11,500Repayment
                  of Federal Home Loan Bank advances
              
              
              (12,000
              )
              
              (19,000
              )Proceeds
                  from stock options exercised
              
              
              4
              
              
              ---Repurchase
                  of stock
              
              
              (113
              )
              
              (226
              )Dividends
                  paid
              
              
              (320
              )
              
              (264
              )Net
                  cash from financing activities
              
              
              (8,082
              )
              
              (1,970
              )Increase
                  (Decrease) in Cash and Cash Equivalents
              
              
              (508
              )
              
              1,865Cash
                  and Cash Equivalents, Beginning of Period
              
              
              9,727
              
              
              9,384Cash
                  and Cash Equivalents, End of Period
              
              $
              9,219
              
              $
              11,249Supplemental
                  Cash Flows InformationInterest
                  paid
              
              
              3,030
              
              
              2,743Income
                  taxes paid
              
              
              400
              
              
              400Supplemental
                  Non-Cash DisclosuresCapitalization
                  of mortgage servicing rights
              
              
              4
              
              
              35
 
 See
        notes
        to consolidated condensed financial statements
  5
  LSB
        FINANCIAL CORP.
 Notes
        to
        Consolidated Financial Statements
 March
        31,
        2007
 
 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, 2006 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, 2006 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
        $4,000 in compensation expense related to vested stock options less estimated
        forfeitures for the three month period ended March 31, 2007.
  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 March 31,****2007**
              
              **2006**Weighted
                  average shares outstanding
              
              
              1,602,174
              
              
              1,618,003Shares
                  used to compute diluted earnings per share
              
              
              1,612,091
              
              
              1,629,588Earnings
                  per share
              
              $
              0.49
              
              $
              0.56Diluted
                  earnings per share
              
              $
              0.48
              
              $
              0.56
 
  Note
        4 -
        Future Accounting Pronouncements
  In
        September
        2006, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. This
        Statement defines fair value, establishes a framework for measuring fair
        value
        and expands disclosures about fair value measurements. This Statement
        establishes a fair value hierarchy about the assumptions used to measure
        fair
        value and clarifies assumptions about risk and the effect of a restriction
        on
        the sale or use of an asset. The standard is effective for fiscal years
        beginning after November 15, 2007. The Company does not expect that the adoption
        of SFAS No. 157 will have a material impact on financial condition or results
        of
        operations.
  In
        September
        2006, the FASB Emerging Issues Task Force (EITF) finalized Issue No. 06−5,
        Accounting for Purchases of Life Insurance - Determining the Amount That
        Could
        Be Realized in Accordance with FASB Technical Bulletin No. 85−4 (Accounting for
        Purchases of Life Insurance). This Issue requires that a policyholder consider
        contractual terms of a life insurance policy in determining the amount that
        could be realized under the insurance contract. It also requires that if
        the
        contract provides for a greater surrender value if all individual policies
        in a
        group are surrendered at the same time, that the surrender value be determined
        based on the assumption that policies will be surrendered on an individual
        basis. Lastly, the Issue discusses whether the cash surrender value should
        be
        discounted when the policyholder is contractually limited in its ability
        to
        surrender a policy. This Issue is effective for fiscal years beginning after
        December 15, 2006. The Company does not expect that the adoption EITF No.
        06-5
        will have a material impact on financial condition of results of
        operations.
  On
        February
        15, 2007, the FASB issued its Statement No. 159, The Fair Value Option for
        Financial Assets and Financial Liabilities—Including an Amendment of FASB
        Statement No.
   7
  115.
        SFAS
        No. 159 permits entities to elect to report most financial assets and
        liabilities at their fair value with changes in fair value included in net
        income. The fair value option may be applied on an instrument-by-instrument
        or
        instrument class-by-class basis. The option is not available for deposits
        withdrawable on demand, pension plan assets and obligations, leases, instruments
        classified as stockholders’ equity, investments in consolidated subsidiaries and
        variable interest entities and certain insurance policies. The new standard
        is
        effective at the beginning of the Company’s fiscal year beginning January 1,
        2008, and early application may be elected in certain circumstances. The
        Company
        expects to first apply the new standard at the beginning of its 2008 fiscal
        year. The Company does not expect that the adoption of SFAS No. 159 will
        have a
        material impact on 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. In addition to the jobs provided
        by
        these two major employers, Greater Lafayette has a strong manufacturing sector
        as well as many high-tech industries attracted to the area by the presence
        of
        Purdue University. The Purdue Research Park continues to attract high-tech
        jobs
        to the area, housing over 140 companies and employing nearly 2,900 people.
        Further growth is expected in this area. Tippecanoe County consistently shows
        better growth and lower unemployment rates than Indiana or the national economy
        because of the diverse employment base. The unemployment rate in Tippecanoe
        County in December 2006 was 3.7% compared to 4.7% for the State of Indiana
        and
        4.3% nationally. County unemployment rates spiked to 4.8% in January, dropping
        back to 4.4% in February due to holiday cutback as well as layoffs at Alcoa
        and
        the closing of two smaller companies, Warren Industries and Lafayette
        Paperboard. However, a Manpower survey showed the Lafayette area to have
        the
        seventh strongest hiring plans in the country for the second quarter of 2007
        with 57% of respondents intending to hire employees compared to 3% who plan
        to
        reduce staffs.
  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 inversion of the yield curve. Since January
        2004 short-term rates have continued to increase steadily while long term
        rates
        have remained comparatively flat. Because deposits are generally tied to
        shorter-term market rates, and loans are generally tied to longer-term rates,
        the shrinking spread between the two has made it more difficult to maintain
        desired operating income levels. Our expectation for 2007 is that both
        short-term and long-term rates will be relatively flat through most of the
        year,
        with the
  9
  possibility
        of both declining slightly in the third or fourth quarters resulting in a
        yield
        curve that remains inverted throughout most of the year.
 
 Rate
        changes could be expected to have an impact on interest income. Rising rates
        generally increase borrower preference for variable-rate products which we
        typically keep in our portfolio, and existing adjustable rate loans can be
        expected to reprice to higher rates, both of which could be expected to have
        a
        favorable impact on interest income. Alternatively, continuing low interest
        rates could have a negative impact on our interest income as new loans are
        put
        on the books at comparatively low rates and our existing adjustable rate
        loans
        reprice to lower rates. Even if rates do fall, because so many borrowers
        refinanced their mortgages in the last few years, we do not expect to see
        a
        return to a high volume of refinancing. However, low rates may be expected
        to
        encourage borrowers to initiate additional real estate related purchases.
  We
        consider expected changes in interest rates when structuring our
        interest-earning assets and our interest-bearing liabilities. If rates are
        expected to increase we try to book shorter-term assets that will reprice
        relatively quickly to higher rates over time, and book longer-term liabilities
        that will remain for a longer time at lower rates. Conversely, if rates are
        expected to fall, we intend to structure our balance sheet such that loans
        will
        reprice more slowly to lower rates and deposits will reprice more quickly.
        We
        currently offer a three-year and a five-year certificate of deposit that
        allows
        depositors one opportunity to have their rate adjusted to the market rate
        at a
        future date to encourage them to choose longer-term deposit products. However,
        since we are not able to predict market interest rate fluctuations, our
        asset/liability management strategy may not prevent interest rate changes
        from
        having an adverse effect on our results of operations and financial
        condition.
  Our
        results of operations may also be affected by general and local competitive
        conditions, particularly those with respect to changes in market interest
        rates,
        government policies and actions of regulatory authorities.
   **Critical
        Accounting Policies**
  Generally
        accepted accounting principles are complex and require management to apply
        significant judgments to various accounting, reporting and disclosure matters.
        Management of LSB Financial must use assumptions and estimates to apply these
        principles where actual measurement is not possible or practical. For a complete
        discussion of LSB Financial's significant accounting policies, see Note 1
        to the
        Consolidated Financial Statements as of March 31, 2007. 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
   10
 
  allowance
            for loan losses, management makes numerous assumptions, estimates and
            assessments.
  The
        strategy also emphasizes diversification on an industry and customer level,
        regular credit quality reviews and quarterly management reviews of large
        credit
        exposures and loans experiencing deterioration of credit quality.
  Lafayette
        Savings’ allowance consists of three components: probable losses estimated from
        individual reviews of specific loans, probable losses estimated from historical
        loss rates, and probable losses resulting from economic or other deterioration
        above and beyond what is reflected in the first two components of the
        allowance.
  Larger
        commercial loans that exhibit probable or observed credit weaknesses are
        subject
        to individual review. Where appropriate, reserves are allocated to individual
        loans based on management’s estimate of the borrower’s ability to repay the loan
        given the availability of collateral, other sources of cash flow and legal
        options available to Lafayette Savings. Included in the review of individual
        loans are those that are impaired as provided in SFAS No. 114, *Accounting
        by Creditors for Impairment of a Loan.* Any
        allowances for impaired loans are determined by the present value of expected
        future cash flows discounted at the loan’s effective interest rate or fair value
        of the underlying collateral. Historical loss rates are applied to other
        commercial loans not subject to specific reserve allocations.
  Homogenous
        smaller balance loans, such as consumer installment and residential mortgage
        loans are not individually risk graded. Reserves are established for each
        pool
        of loans based on the expected net charge-offs for one year. Loss rates are
        based on the average net charge-off history by loan category.
  Historical
        loss rates for commercial and consumer loans may be adjusted for significant
        factors that, in management’s judgment, reflect the impact of any current
        conditions on loss recognition. Factors which management considers in the
        analysis include the effects of the national and local economies, trends
        in the
        nature and volume of loans (delinquencies, charge-offs and nonaccrual loans),
        changes in mix, asset quality trends, risk management and loan administration,
        changes in the internal lending policies and credit standards, collection
        practices and examination results from bank regulatory agencies and Lafayette
        Savings’ internal loan review.
  Allowances
        on individual loans are reviewed quarterly and historical loss rates are
        reviewed annually and adjusted as necessary based on changing borrower and/or
        collateral conditions and actual collection and charge-off
        experience.
  Lafayette
        Savings’ primary market area for lending is Tippecanoe County, Indiana. When
        evaluating the adequacy of allowance, consideration is given to this regional
        geographic concentration and the closely associated effect of changing economic
        conditions on Lafayette Savings’ customers.
   11
  ***Mortgage
        Servicing Rights***
  Mortgage
        servicing rights (MSRs) associated with loans originated and sold, where
        servicing is retained, are capitalized and included in other intangible assets
        in the consolidated balance sheet. The value of the capitalized servicing
        rights
        represents the present value of the future servicing fees arising from the
        right
        to service loans in the portfolio. Critical accounting policies for MSRs
        relate
        to the initial valuation and subsequent impairment tests. The methodology
        used
        to determine the valuation of MSRs requires the development and use of a
        number
        of estimates, including anticipated principal amortization and prepayments
        of
        that principal balance. Events that may significantly affect the estimates
        used
        are changes in interest rates, mortgage loan prepayment speeds and the payment
        performance of the underlying loans. The carrying value of the MSRs is
        periodically reviewed for impairment based on a determination of fair value.
        For
        purposes of measuring impairment, the servicing rights are compared to a
        valuation prepared based on a discounted cash flow methodology, utilizing
        current prepayment speeds and discount rates. Impairment, if any, is recognized
        through a valuation allowance and is recorded as amortization of intangible
        assets.
   **Financial
        Condition**
  ***Comparison
        of Financial Condition at March 31, 2007 and December 31,
        2006***
  Our
        total
        assets decreased $6.8 million or 1.84% during the three months from December
        31,
        2006 to March 31, 2007. Primary components of this decrease were a $5.3 million
        decrease in net loans receivable including loans held for sale and a $2.5
        million decrease in securities and short term investments, offset by a $581,000
        increase in other assets due mostly to an increase in other real estate owned.
        Management attributes the decrease in loans primarily to the slow recovery
        of
        the local economy, residential overbuilding in the last few years and the
        tightening of credit due to the interagency regulatory focus on commercial
        real
        estate lending. Because of decreased funding needs we allowed $1.2 million
        of
        deposits and $6.5 million of Federal Home Loan Bank advances to run off.
 
 Non-performing
        assets, which include non-accruing loans, accruing loans 90 days past due
        and
        foreclosed assets, increased from $11.7 million at December 31, 2006 to $17.2
        million at March 31, 2007. Non-performing loans and accruing loans 90 days
        past
        due totaled $12.5 million at March 31, 2007 and consisted of $9.9 million
        or
        79.15% of one- to four-family or multi-family residential real estate loans,
        $2.0 million or 15.99% of loans on land or commercial property, $511,000
        or
        4.08% **** of
        commercial business loans and $97,000 or 0.78% **** of
        consumer loans. Non-performing assets also include $4.7 million in foreclosed
        assets. At March 31, 2007, our allowance for loan losses equaled 0.91% of
        total
        loans compared to 0.86% at December 31, 2006. The allowance for loan losses
        at
        March 31, 2007 totaled 16.71% of non-performing assets compared to 23.72%
        at
        December 31, 2006, and 22.97% of non-performing loans at March 31, 2007 compared
        to 36.88% at December 31, 2006. Our non-performing assets equaled 4.76% of
        total
        assets at March 31, 2007 compared to 3.17% at December 31, 2006. The ratio
        of
        total non-performing loans to total collateral was at 63.65% at March 31,
        2007.
        Non-performing assets totaling $153,000 were charged off in the first three
        months of 2007, offset by recoveries of $9,000. 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
   12
  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 $34.8 million at December 31, 2006 to $35.2 million
        at
        March 31, 2007, an increase of $388,000, or 1.11%, primarily as a result
        of net
        income of $779,000, partially offset by our payment of $320,000 of dividends
        on
        common stock, and the repurchase of 7,500 shares of our stock as part of
        a stock
        repurchase plan. Shareholders’ equity to total assets was 9.74% at March 31,
        2007 compared to 9.46% at December 31, 2006.
   **Results
        of Operations**
  ***Comparison
        of Operating Results the Quarter Ended March 31, 2007 and March 31,
        2006***
  ***General*** *.*  Net
        income for the three months ended March 31, 2007 was $779,000, a decrease
        of
        $129,000, or 14.21%, over the three months ended March 31, 2006. The
        decrease was primarily due to a $154,000 decrease in net interest income
        and a
        $100,000 increase in the provision for losses, partially offset by a $38,000
        increase in non-interest income, a $27,000 decrease in non-interest expenses,
        and a $60,000 decrease in taxes on income.
  ***Net
        Interest
        Income*** *.* Net
        interest income for the three months ended March 31, 2007 decreased $154,000,
        or
        4.93%, over the same period in 2006. This decrease was due to a 4 basis point
        decrease in our net interest margin (net interest income divided by average
        interest-earning assets) from 3.52% for the three months ended March 31,
        2006 to
        3.48% for the three months ended March 31, 2007 together with a $1.5 million
        decrease in net interest-earning assets. The decrease in net interest margin
        is
        primarily because the average rate earned on interest-earning assets increased
        less than the average rate paid on interest-bearing liabilities. Specifically,
        the average rate earned on interest-earning assets increased from 6.52% for
        the
        three months ended March 31, 2006 to 6.88% for the three months ended March
        31,
        2007 for an increase of 35 basis points, compared to an increase in the average
        rate paid on interest-bearing liabilities from 3.16% to 3.56% for the same
        time
        period.
  Interest
        income on loans decreased $22,000, or 0.39%, for the three months ended March
        31, 2007 compared to the same three months in 2006. While the average yield
        on
        loans increased from 6.77% for the first three months of 2006 to 7.14% for
        the
        first three months of 2007, due to increasing interest rates in the economy
        which caused both new and adjustable rate mortgages to price and reprice
        higher,
        the average balance of new loans decreased by $18.0 million due to a tightening
        of underwriting standards as well as the continuing sluggish local economy.
  Interest
        earned on other investments and Federal Home Loan Bank stock increased by
        $105,000, or 57.07%, for the three months ended March 31, 2007 compared to
        the
        same period in 2006. This was the result of a $4.6 million increase in average
        balances and a 98 basis point
   13
  increase
        in the average yield on other investments and Federal Home Loan Bank stock.
        We
        purchased additional investment securities to offset the slower loan growth,
        increasing investment securities from $24.0 million to $28.5 million and
        increasing the average yield from 3.07% for the first three months of 2006
        to
        4.05% over the same period in 2007 due to higher interest rates in the economy.
  Interest
        expense for the three months ended March 31, 2007 increased $237,000, or
        8.89%,
        over the same period in 2006. This increase was due to an increase in the
        average rate paid on interest-bearing liabilities from 3.16% for the first
        three
        months of 2006 to 3.56% for the first three months of 2007 which more than
        offset the $11.9 million decrease in average interest-bearing liabilities.
        The
        increase in rates was due to generally higher interest rates in the economy,
        especially for shorter-term products which depositors preferred. $110,000
        of the
        increase was caused by an increase in the average rate of Federal Home Loan
        Bank
        advances from 4.61% to 4.92%.
 
 ***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.
  We
        recorded a $250,000 provision for loan losses for the three months ended
        March
        31, 2007 as a result of our analysis of our current loan portfolios compared
        to
        $150,000 for the same period in 2006. The increased provision 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 three months of 2007 we recorded charge-offs
        of
        $153,000 offset by recoveries of $9,000.
  At
        March
        31, 2007, non-performing assets, consisting of non-accruing loans, accruing
        loans 90 or more days delinquent and other real estate owned, totaled $17.2
        million compared to $11.7 million at December 31, 2006. In addition to our
        non-performing assets, we identified $2.6 million in other loans of concern,
        compared to $4.6 million identified at December 31,
   14
  2006,
        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. The vast majority of these loans, as
        well
        as our non-performing assets, are well collateralized.
  ***Non-Interest
        Income*** .
        Non-interest income for the three months ended March 31, 2007 increased by
        $38,000, or 5.74%, compared to the same period in 2006. This was primarily
        due
        to a $65,000 increase in other income consisting of, among other things,
        a
        $29,000 decrease in reserve for losses and other adjustments on our overdraft
        program, a $21,000 increase in income recognized from bank owned life insurance
        and an $11,000 increase in debit card fees. This increase was partially offset
        by an $18,000 decrease in fees on deposit accounts and a $9,000 decrease
        in the
        gain on the sale of mortgage loans due to a decrease in loans sold.
  ***Non-Interest
        Expense*** .
        Non-interest expense for the three months ended March 31, 2007 decreased
        $27,000
        over the same period in 2006 due primarily to a $97,000 decrease in salaries
        due
        to lower benefit costs resulting from a change from an Employee Stock Ownership
        Plan to a 401(k) match program and lower health insurance costs due to a
        change
        in carrier, partially offset by a $40,000 increase in other expenses primarily
        related to foreclosed property expenses and to a $47,000 increase in occupancy
        and computer service expenses.
  ***Income
        Tax
        Expense*** *.*   Our
        income tax provision decreased by $60,000 for the three months ended March
        31,
        2007 compared to the three months ended March 31, 2006, due partly to decreased
        income.
   **Liquidity**
  Our
        primary sources of funds are deposits, repayment and prepayment of loans,
        interest earned on or maturation of investment securities and short-term
        investments, borrowings and funds provided from operations. While maturities
        and
        the scheduled amortization of loans, investments and mortgage-backed securities
        are a predictable source of funds, deposit flows and mortgage prepayments
        are
        greatly influenced by general market interest rates, economic conditions
        and
        competition.
  We
        monitor our cash flow carefully and strive to minimize the level of cash
        held in
        low-rate overnight accounts or in cash on hand. We also carefully track the
        scheduled delivery of loans committed for sale to be added to our cash flow
        calculations. Our current internal policy for liquidity requires minimum
        liquidity of 4.0% of total assets.
  Liquidity
        management is both a daily and long-term function for our senior management.
        We
        adjust our investment strategy, within the limits established by the investment
        policy, based upon assessments of expected loan demand, expected cash flows,
        Federal Home Loan Bank advance opportunities, market yields and objectives
        of
        our asset/liability management program. Base levels of liquidity have generally
        been invested in interest-earning overnight and time deposits with the Federal
        Home Loan Bank of Indianapolis. Funds for which a demand is not foreseen
        in the
        near future are invested in investment and other securities for the purpose
        of
        yield enhancement and asset/liability management.
   15
  Our
        liquidity ratios at December 31, 2006 and March 31, 2007 were 7.79% and 7.53%,
        respectively, compared to a regulatory liquidity base, and 6.09% and 5.97%
        compared to total assets at the end of each period.
  We
        anticipate that we will have sufficient funds available to meet current funding
        commitments. At March 31, 2007, we had outstanding commitments to originate
        loans and available lines of credit totaling $37.2 million and commitments
        to
        provide funds to complete current construction projects in the amount of
        $2.7
        million. We had no outstanding commitments to sell residential loans. Certificates
        of deposit which will mature in one year or less at March 31, 2007 totaled
        $130.9 million. Included in that number are $39.6 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 $24.0 million of Federal Home Loan Bank
        advances maturing in the next twelve months.
   **Capital
        Resources**
  Shareholders’
        equity totaled $35.2 million at March 31, 2007 compared to $34.8 million
        at
        December 31, 2006, an increase of $388,000, or 1.11%, due primarily to net
        income of $779,000, partially offset by our payment of dividends on common
        stock
        and the repurchase of 7,500 shares of our stock as part of a stock repurchase
        plan. Shareholders’ equity to total assets was 9.74% at March 31, 2007 compared
        to 9.46% at December 31, 2006.
  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, 2006 and March
        31,
        2007, Lafayette Savings was categorized as well capitalized. Our actual and
        required capital amounts and ratios at December 31, 2006 and March 31, 2007
        are
        presented below:
   16
  **Actual**
              
              **For
                  Capital Adequacy Purposes**
              
              **To
                  Be Well Capitalized Under Prompt Corrective Action
                  Provisions****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**As
                  of March 31, 2007Total
                  risk-based capital
                (to
                  risk-weighted assets)
              
              $
              36,880
              
              
              13.1
              %
              $
              22,502
              
              
              8.0
              %
              $
              28,128
              
              
              10.0
              %Tier
                  I capital
                (to risk-weighted assets)
              
              
              34,423
              
              
              12.2
              
              
              11,251
              
              
              4.0
              
              
              16,877
              
              
              6.0Tier
                  I capital
                (to adjusted total assets)
              
              
              34,423
              
              
              9.5
              
              
              10,852
              
              
              3.0
              
              
              18,087
              
              
              5.0Tier
                  I capital
                (to adjusted tangible assets)
              
              
              34,423
              
              
              9.5
              
              
              7,235
              
              
              2.0
              
              
              N/A
              
              
              N/ATangible
                  capital
                (to adjusted tangible assets)
              
              
              34,423
              
              
              9.5
              
              
              5,426
              
              
              1.5
              
              
              N/A
              
              
              N/AAs
                  of December 31, 2006Total
                  risk-based capital
                (to risk-weighted assets)
              
              $
              36,533
              
              
              13.0
              %
              $
              22,532
              
              
              8.0
              %
              $
              28,164
              
              
              10.0
              %Tier
                  I capital
                (to risk-weighted assets)
              
              
              34,037
              
              
              12.1
              
              
              11,266
              
              
              4.0
              
              
              16,899
              
              
              6.0Tier
                  I capital
                (to adjusted total assets)
              
              
              34,037
              
              
              9.2
              
              
              11,055
              
              
              3.0
              
              
              18,425
              
              
              5.0Tier
                  I capital
                (to adjusted tangible assets)
              
              
              34,037
              
              
              9.2
              
              
              7,370
              
              
              2.0
              
              
              N/A
              
              
              N/ATangible
                  capital
                (to adjusted tangible assets)
              
              
              34,037
              
              
              9.2
              
              
              5,527
              
              
              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.
  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:
   17
  ·
                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.
  
   18
  **Item
                  3.**
              **Quantitative
                  and Qualitative Disclosures About Market Risk******
  We,
        like
        other financial institutions, are subject to interest rate risk to the extent
        that our interest-bearing liabilities reprice on a different basis than our
        interest-earning assets. The Office of Thrift Supervision (“OTS”), our primary
        regulator, supports the use of a net portfolio value (“NPV”) approach to the
        quantification of interest rate risk. In essence, this approach calculates
        the
        difference between the present value of expected cash flows from assets and
        the
        present value of expected cash flows from liabilities, as well as cash flows
        from off-balance-sheet contracts. An NPV ratio, in any interest rate scenario,
        is defined as the NPV in that rate scenario divided by the market value of
        assets in the same scenario, essentially a market value adjusted capital
        ratio.
  It
        has
        been and continues to be a priority of the Board of Directors and management
        to
        manage interest rate risk to maintain an acceptable level of potential changes
        to interest income as a result of interest rate changes. Our asset/liability
        management policy, established by the Board of Directors, sets forth acceptable
        limits on the amount of change in net portfolio value given certain changes
        in
        interest rates. We have an asset/liability management committee which meets
        quarterly to review our interest rate position, and an investment committee
        which reviews the interest rate risk position and other related matters with
        the
        Board of Directors, and makes recommendations for adjusting this position
        to the
        full Board of Directors. In addition, the investment committee of the Board
        of
        Directors meets semi-annually with our outside investment advisors to review
        our
        investment portfolio and strategies relating to interest rate risk. Specific
        strategies have included the sale of long-term, fixed-rate loans to reduce
        the
        average maturity of our interest-earning assets and the use of Federal Home
        Loan
        Bank advances to lengthen the effective maturity of our interest-bearing
        liabilities. In the future, our community banking emphasis, including the
        origination of commercial business loans, is intended to further increase
        our
        portfolio of short-term and/or adjustable rate loans.
  Presented
        below, as of December 31, 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
                  December 31, 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%
              
              10.38%
              
              (156)
                  bp
              
              10.16%
              
              (80)
                  bp200
              
              7.00
              
              11.25
              
              (68)
              
              10.58
              
              (38)100
              
              8.00
              
              11.92
              
              (1)
              
              10.87
              
              (8)0
              
              8.00
              
              11.94
              
              
              
              10.96-100
              
              8.00
              
              11.96
              
              3
              
              10.74
              
              (22)-200
              
              7.00
              
              11.92
              
              (2)
              
              10.31
              
              (65)
 
 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
   19
  certain
        assets and liabilities may have similar maturities or periods to repricing,
        they
        may react in different degrees to changes in market interest rates. Also,
        the
        interest rates on certain types of assets and liabilities may fluctuate in
        advance of changes in market interest rates, while interest rates on other
        types
        may lag behind changes in market rates. Further, in the event of a change
        in
        interest rates, prepayments and early withdrawal levels may deviate
        significantly from those assumed in calculating the table. Finally, the ability
        of many borrowers to service their debt may decrease in the event of an interest
        rate increase. As a result, the actual effect of changing interest rates
        may
        differ from that presented in the foregoing table.
  Management
        believes that at March 31, 2007 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, 2006.
  **Item
                  4.**
              **Controls
                  and Procedures**
  An
        evaluation of the Company’s disclosure controls and procedures (as defined in
        Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the
        Securities Exchange Act of 1934, as amended (the “Act”)), as of March 31, 2007,
        was carried out under the supervision and with the participation of the
        Company’s Chief Executive Officer, Chief Financial Officer and several other
        members of the Company’s senior management. The Company’s Chief Executive
        Officer and Chief Financial Officer concluded that the Company’s disclosure
        controls and procedures currently in effect are effective in ensuring that
        the
        information required to be disclosed by the Company in the reports it files
        or
        submits under the Act is (i) accumulated and communicated to the Company’s
        management (including the Chief Executive Officer and Chief Financial Officer)
        in a timely manner and (ii) recorded, processed, summarized and reported
        within
        the time periods specified in the Securities and Exchange Commission’s rules and
        forms. There have been no changes in our internal control over financial
        reporting (as defined in Rule 13a-15(f) of the Act) identified in connection
        with the Company’s evaluation of controls that occurred during the quarter ended
        March 31, 2007, 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, 2006.
   20
  **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 Plans
                  or****Programs****2**
              
              **Maximum
                  Number (or Approximate Dollar Value) of Shares that May Yet Be
                  Purchased
                  Under the Plans or****Programs****2**January
                  1 - January 31, 2007
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              9,217February
                  1 - February 28, 2007
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              109,217March
                  1 - March 31, 2007
              
              
              7,500
              
              
              26.77
              
              
              7,500
              
              
              101,717Total
              
              
              7,500
              
              $
              26.77
              
              
              7,500
              
              
              101,717
 _______________________
  1 There
        were no shares repurchased other than through a publicly announced plan or
        program.
 2 We have
        in place a plan, announced September 27, 2004, to repurchase 5% of our common
        stock. We also have in place a program, announced February 6, 2007, to
        repurchase up to 100,000 shares of our common stock.
  
  **Item
                  3.**
              **Defaults
                  Upon Senior Securities******
  None.
  **Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**
  None.
 
 **Item
                  5.**
              **Other
                  Information**
  None.
  **Item
                  6.**
              **Exhibits******
  The
        exhibits listed in the Index to Exhibits are incorporated herein by
        reference.
   21
   **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the Registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  LSB
                  FINANCIAL CORP.(Registrant)Date:
                  May 14, 2007
              By:
              /s/
                Randolph F. WilliamsRandolph
                  F. Williams, President(Principal
                  Executive Officer)Date:
                  May 14, 2007
              By:
              /s/
                Mary Jo DavidMary
                  Jo David, Treasurer(Principal
                  Financial and Accounting Officer)
 
  
  **INDEX
        TO EXHIBITS**
  
 
 Regulation
                S-K
                  Exhibit Number
              
              Document10.1
              
              Form
                  of 2007 Stock Option and Incentive Plan Incentive Stock Option
                  Agreement10.2
              
              Form
                  of 2007 Stock Option and Incentive Plan Non-qualified Stock Option
                  Agreement10.3
              
              Form
                  of Agreement for Restricted Stock Granted under LSB Financial Corp.
                  2007
                  Stock Option and Incentive Plan31.1
              
              Rule
                  13(a)-14(a) Certification (Chief Executive Officer)31.2
              
              Rule
                  13(a)-14(a) Certification (Chief Financial Officer)32
              
              Section
                  906 Certification