SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-Q





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934For
                the quarterly period ended September 30, 2005 ̈
            OR
                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                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
                of organization
            Identification
                No.)








101
                Main Street, Lafayette, Indiana
            47902(Address
                of principal executive offices
            (Zip
                Code)





(765)
      742-1064


(Registrant’s
      telephone number, including area code)





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 an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). YES [ ] NO [X]





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,


as
      of the
      latest practicable date:





CLASS      OUTSTANDING
      AT OCTOBER 31, 2005





Common
      stock, par value $.01 per share    1,549,806














LSB
      FINANCIAL CORP.





INDEX





PART
                I.
            FINANCIAL
                INFORMATION
            1Item
                1
            Financial
                Statements (Unaudited)
            1Consolidated
                Balance Sheets
            1Consolidated
                Statements of Income
            2Consolidated
                Statements of Changes in Shareholders’ Equity
            3Consolidated
                Statements of Cash Flows
            4Notes
                to Consolidated Financial Statements
            5-7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Result of
                Operations
            8-19Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            20Item
                4.
            Controls
                and Procedures
            21PART
                II
            OTHER
                INFORMATION
            23Item
                1
            Legal
                Proceedings
            23Item
                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
            24Item
                6.
            Exhibits
            24SIGNATURES
            25EXHIBIT
                INDEX
            26

















**PART
      I FINANCIAL INFORMATION**


**Item
      1.** **FINANCIAL
      STATEMENTS**





LSB
      FINANCIAL CORP.


Consolidated
      Condensed Balance Sheets


(Dollars
      in thousands except per share data)


September
                30, 2005
              (unaudited)
            
            December
                31, 2004AssetsCash
                and due from banks
            
            $
            1,552
            
            $
            2,395Short-term
                investments
            
            
            9,686
            
            
            6,818Cash
                and cash equivalents
            
            
            11,238
            
            
            9,213Available-for-sale
                securities
            
            
            9,979
            
            
            7,947Loans
                held for sale
            
            
            138
            
            
            1,050Total
                loans
            
            
            334,571
            
            
            319,972Less:
                Allowance for loan losses
            
            
            (2,448
            )
            
            (2,095
            )Net
                loans
            
            
            332,123
            
            
            317,877Premises
                and equipment, net
            
            
            6,796
            
            
            6,750Federal
                Home Loan Bank stock, at cost
            
            
            4,197
            
            
            4,110Bank
                owned life insurance
            
            
            2,693
            
            
            2,627Interest
                receivable and other assets
            
            
            5,974
            
            
            5,471Total
                Assets
            
            $
            373,138
            
            $
            355,045Liabilities
                and Shareholders’ EquityLiabilitiesDeposits
            
            
            266,070
            
            
            256,631Federal
                Home Loan Bank advances
            
            
            72,008
            
            
            66,808Interest
                payable and other liabilities
            
            
            2,364
            
            
            1,213Total
                liabilities
            
            
            340,442
            
            
            324,652Commitments
                and ContingenciesShareholders’
                EquityCommon
                stock, $.01 par value
              Authorized
                - 7,000,000 shares
              Issued
                and outstanding 2005 - 1,554,806 shares, 2004 - 1,509,672
                shares
            
            
            14
            
            
            14Additional
                paid-in-capital
            
            
            8,620
            
            
            8,235Retained
                earnings
            
            
            24,199
            
            
            22,304Unearned
                recognition and retention plan (RRP) shares
            
            
            (29
            )
            
            (51
            )Unearned
                ESOP compensation
            
            
            (62
            )
            
            (103
            )Accumulated
                other comprehensive loss
            
            
            (46
            )
            
            (6
            )Total
                shareholders’ equity
            
            
            32,696
            
            
            30,393Total
                liabilities and shareholders’ equity
            
            $
            373,138
            
            $
            355,045See
                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
                30,2005
            
            2004
            
            2005
            
            2004**Interest
                and Dividend Income**Loans
            
            $
            5,311
            
            $
            4,737
            
            $
            15,462
            
            $
            13,837SecuritiesTaxable
            
            
            87
            
            
            90
            
            
            242
            
            
            305Tax-exempt
            
            
            44
            
            
            37
            
            
            116
            
            
            120Other
            
            
            27
            
            
            13
            
            
            71
            
            
            36Total
                interest and dividend income
            
            
            5,469
            
            
            4,877
            
            
            15,891
            
            
            14,298**Interest
                Expense**Deposits
            
            
            1,693
            
            
            1,365
            
            
            4,791
            
            
            3,904Borrowings
            
            
            774
            
            
            787
            
            
            2,270
            
            
            2,310Total
                interest expense
            
            
            2,467
            
            
            2,152
            
            
            7,061
            
            
            6,214**Net
                interest income**
            
            
            3,002
            
            
            2,725
            
            
            8,830
            
            
            8,084**Provision
                for Loan Losses**
            
            
            175
            
            
            125
            
            
            475
            
            
            375**Net
                Interest Income After Provision for Loan Losses**
            
            
            2,827
            
            
            2,600
            
            
            8,355
            
            
            7,709**Non-interest
                income**Deposit
                account service charges and fees
            
            
            468
            
            
            232
            
            
            955
            
            
            667Net
                gains on loan sales
            
            
            109
            
            
            104
            
            
            271
            
            
            363Gain
                on sale of securities
            
            
            0
            
            
            0
            
            
            11
            
            
            11Other
            
            
            128
            
            
            133
            
            
            560
            
            
            544Total
                non-interest income
            
            
            705
            
            
            469
            
            
            1,797
            
            
            1,585**Non-interest
                Expense**Salaries
                and employee benefits
            
            
            1,128
            
            
            1,099
            
            
            3,415
            
            
            3,242Net
                occupancy and equipment expense
            
            
            254
            
            
            262
            
            
            795
            
            
            894Computer
                service
            
            
            101
            
            
            91
            
            
            327
            
            
            280Advertising
            
            
            114
            
            
            47
            
            
            265
            
            
            228Other
            
            
            455
            
            
            402
            
            
            1,366
            
            
            1,176Total
                non-interest expense
            
            
            2,052
            
            
            1,901
            
            
            6,168
            
            
            5,820**Income
                Before Income Taxes**
            
            
            1,480
            
            
            1,168
            
            
            3,984
            
            
            3,474**Provision
                for Income Taxes**
            
            
            546
            
            
            440
            
            
            1,390
            
            
            1,273**Net
                income**
            
            $
            934
            
            $
            728
            
            $
            2,594
            
            $
            2,201**Basic
                Earnings Per Share**
            
            $
            0.61
            
            $
            0.47
            
            $
            1.70
            
            $
            1.42**Diluted
                Earnings Per Share**
            
            $
            0.60
            
            $
            0.45
            
            $
            1.69
            
            $
            1.37See
              notes to consolidated financial statements.








2





LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Changes in Shareholders’ Equity
 For
        the
        Nine Months Ended September 30, 2005 and 2004
 (Dollars
        in thousands)
 (Unaudited)
  **Common**
                **Stock**
              
              **Additional**
                **Paid-In**
                **Capital**
              
              **Retained
                  Earnings**
              
              **Benefit**
                **Plans**
                **Compensation**
              
              **Accumulated**
                **Other
                  Comprehensive**
                **Income
                  (Loss)**
              
              **Total****Balance,
                  January 1, 2004**
              
              $
              14
              
              $
              8,020
              
              $
              19,841
              
              $
              (239
              )
              $
              91
              
              $
              27,727Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              2,201
              
              
              
              
              
              
              
              
              2,201Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (69
              )
              
              (69
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,132Dividends
                  on common stock, $0.42 per share
              
              
              
              
              
              
              
              
              (592
              )
              
              
              
              
              
              
              
              (592
              )Stock
                  options exercised (10,176 shares)
              
              
              
              
              
              110
              
              
              
              
              
              
              
              
              
              
              
              110Amortization
                  of RRP expense
              
              
              
              
              
              
              
              
              
              
              
              22
              
              
              
              
              
              22ESOP
                  shares earned
              
              
              
              
              
              134
              
              
              
              
              
              42
              
              
              
              
              
              176**Balance,
                  September 30, 2004**
              
              $
              14
              
              $
              8,264
              
              $
              21,450
              
              $
              (175
              )
              $
              22
              
              $
              29,575**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, $0.46 per share
              
              
              
              
              
              
              
              
              (699
              )
              
              
              
              
              
              
              
              (699
              )Purchase
                  and retirement of stock (26,341 shares)
              
              
              
              
              
              (668
              )
              
              
              
              
              
              
              
              
              
              
              (668
              )Stock
                  options exercised (89,484 shares)
              
              
              
              
              
              329
              
              
              
              
              
              
              
              
              
              
              
              329Issuance
                  of five percent stock dividend
              
              
              1
              
              
              2,228
              
              
              (2,229
              )
              
              
              
              
              
              
              
              0Stock
                  option and RRP tax benefit
              
              
              
              
              
              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
  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
                30,2005
            
            2004Operating
                ActivitiesNet
                income
            
            $
            2,594
            
            $
            2,201Items
                not requiring (providing) cashDepreciation
            
            
            273
            
            
            397Provision
                for loan losses
            
            
            475
            
            
            375Gain
                on sale of securities
            
            
            0
            
            
            (11
            )Amortization
                of premiums and discounts on securities
            
            
            29
            
            
            193Federal
                Home Loan Bank stock dividend
            
            
            (87
            )
            
            (138
            )ESOP
                shares earned
            
            
            185
            
            
            176Gain
                on sale of loans
            
            
            116
            
            
            168Loans
                originated for sale
            
            
            (14,721
            )
            
            (22,701
            )Proceeds
                on loans sold
            
            
            15,517
            
            
            23,141Changes
                inInterest
                receivable and other assets
            
            
            60
            
            
            (152
            )Interest
                payable and other liabilities
            
            
            1,150
            
            
            412Net
                cash provided by operating activities
            
            
            5,591
            
            
            4,061Investing
                ActivitiesPurchases
                of available-for-sale securities
            
            
            (2,416
            )
            
            (2,382
            )Proceeds
                from maturities of available-for-sale securities
            
            
            289
            
            
            5,461Proceeds
                from sales of available-for-sale securities
            
            
            0
            
            
            1,355Net
                change in loans
            
            
            (14,721
            )
            
            (36,922
            )Purchase
                of premises and equipment
            
            
            (319
            )
            
            (117
            )Net
                cash from investing activities
            
            
            (17,167
            )
            
            (32,605
            )Financing
                ActivitiesNet
                change in demand deposits, money market, NOW and savings
                accounts
            
            
            (5,669
            )
            
            2,155Net
                change in certificates of deposit
            
            
            15,108
            
            
            20,287Proceeds
                from Federal Home Loan Bank advances
            
            
            45,000
            
            
            23,500Repayment
                of Federal Home Loan Bank advances
            
            
            (39,800
            )
            
            (16,000
            )Proceeds
                from stock options exercised
            
            
            329
            
            
            110Repurchase
                of stock
            
            
            (668
            )
            
            0Dividends
                paid
            
            
            (699
            )
            
            (592
            )Net
                cash provided by financing activities
            
            
            13,601
            
            
            29,460Increase
                (Decrease) in Cash and Cash Equivalents
            
            
            2,025
            
            
            916Cash
                and Cash Equivalents, Beginning of Period
            
            
            9,213
            
            
            9,397Cash
                and Cash Equivalents, End of Period
            
            $
            11,238
            
            $
            10,313Supplemental
                Cash Flows InformationInterest
                paid
            
            
            7,108
            
            
            6,260Income
                taxes paid
            
            
            256
            
            
            490Supplemental
                Non-Cash DisclosuresCapitalization
                of mortgage servicing rights
            
            
            155
            
            
            195Tax
                benefit related to stock options and RRP
            
            
            580
            
            
            0See
                notes to consolidated condensed financial statements








4








LSB
      FINANCIAL CORP.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
      30, 2005





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,
      cash flows and financial position for and at the end of such interim periods.
      All outstanding shares and per share figures have been adjusted to reflect
      a 5%
      stock dividend payable by LSB Financial Corp. (the "Company" or "LSB Financial")
      to shareholders of record on October 7, 2005. The consolidated condensed balance
      sheet of LSB Financial Corp. as of December 31, 2004 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-KSB
      annual report for 2004 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: Employee
      compensation expense under stock options is reported using the intrinsic value
      method. No stock-based compensation cost for stock options is reflected in
      net
      income, as all options granted had an exercise price equal to or greater than
      the market price of the underlying common stock at date of grant. The following
      table illustrates the effect on net income and earnings per share if expense
      was
      measured using the fair value recognition provisions of FASB Statement No.
      123, *Accounting
      for Stock-Based Compensation* .








5








Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                302005
            
            2004
            
            2005
            
            2004Net
                income as reported
            
            $
            934
            
            $
            728
            
            $
            2,594
            
            $
            2,201Deduct:
                Stock-based compensation expense determined under fair value based
                method
            
            
            (11
            )
            
            (6
            )
            
            (33
            )
            
            (15
            )Pro
                forma net income
            
            $
            923
            
            $
            722
            
            $
            2,561
            
            $
            2,186Basic
                earnings per share as reported
            
            $
            0.61
            
            $
            0.47
            
            $
            1.70
            
            $
            1.42Pro
                forma basic earnings per share
            
            
            0.61
            
            
            0.47
            
            
            1.70
            
            
            1.42Diluted
                earnings per share as reported
            
            
            0.60
            
            
            0.45
            
            
            1.69
            
            
            1.37Pro
                forma diluted earnings per share
            
            
            0.60
            
            
            0.45
            
            
            1.69
            
            
            1.37








Note
      2 -
      Principles of Consolidation





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




Note
      3 -
      Earnings per share





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





6











**Three
                months ended September 30,**
            
            **Nine
                months ended September 30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Weighted
                average shares outstanding (excluding unearned ESOP
                shares)
            
            
            1,540,693
            
            
            1,557,394
            
            
            1,529,131
            
            
            1,550,000Shares
                used to compute diluted earnings per share
            
            
            1,551,935
            
            
            1,617,527
            
            
            1,538,860
            
            
            1,612,413Earnings
                per share
            
            $
            0.61
            
            $
            0.47
            
            $
            1.70
            
            $
            1.42Diluted
                earnings per share
            
            $
            0.60
            
            $
            0.45
            
            $
            1.69
            
            $
            1.37








Note
      4 -
      Future Accounting Pronouncements





In
      April
      2005, the SEC issued an amendment to SFAS 123 (SFAS No. 123R), which allows
      companies to implement SFAS 123R at the beginning of their next fiscal year,
      instead of the next reporting period, that begins after June 15, 2005. The
      new
      rule does not change the accounting required by SFAS 123R, it only changes
      the
      dates for compliance with the standard. Early adoption is permitted in periods
      in which financial statements have not yet been issued. The Corporation expects
      to adopt SFAS 123R on January 1, 2006.





In
      June,
      2005 the Financial Accounting Standards Board (FASB) decided not to provide
      additional guidance on the meaning of other-than-temporary impairment, but
      directed the FASB staff to issue a staff position (FSP) which will be retitled
      FSP 115-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments.* The
      final FSP will supersede EITF Issue 03-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments* ,
      and
      EITF Topic D-44, *Recognition
      of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose
      Cost Exceeds Fair Value* .
      FSP
      115-1 will replace guidance in EITF Issue 03-1 on loss recognition with
      references to existing other-than-temporary impairment guidance, such as SFAS
      No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities* .
      FSP
      115-1 will clarify that an investor should recognize an impairment loss no
      later
      than when the impairment is deemed other than temporary, even if a decision
      to
      sell has not been made.





FSP
      115-1
      will be effective for other-than-temporary impairment analysis conducted in
      periods beginning after September 15, 2005. The Company has consistently
      followed the loss recognition guidance in SFAS No. 115, so the adoption of
      FSP
      115-1 will not have any significant impact on the Company's financial condition
      or results of operations.











7








**Item
      2.**   **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**





**Executive
      Summary**





LSB
      Financial Corp. is an Indiana corporation which was organized in 1994 by
      Lafayette Savings Bank, FSB 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. Tippecanoe County and the Greater
      Lafayette area typically show better growth and lower unemployment rates than
      Indiana or the national economy because of the diverse employment base. The
      unemployment rate at August 2005, the most recent data available, showed
      unemployment rates of 4.5% for Tippecanoe County and 5.2% for Indiana compared
      to 4.2% for Tippecanoe County and 5.0% for Indiana at December 2004. The slight
      increase since year end shows Indiana generally has been struggling to recover
      from the economic slowdown. Home values in the Lafayette metropolitan
      statistical area have been fairly flat, rising only 1.51% during the year ended
      June 30, 2005. The annual number of foreclosures filed in Tippecanoe County
      have
      increased by 20% from 380 to 457 from 2002 to 2004. However, since January
      2004,
      an average of 23 foreclosed homes a month have been scheduled for auction by
      the
      sheriff of Tippecanoe County. The number of building permits issued in
      Tippecanoe County, which is well in excess of population growth, has raised
      concerns about a possible decrease in the value of existing homes.





Our
      primary source of revenue is interest income primarily on loans and to a much
      lesser extent, on investments which we hold mainly as a source of liquidity,
      and
      on Federal Home Loan Bank stock. In periods of very low interest rates when
      many
      borrowers refinance their mortgages, often to fixed-rate products, we typically
      generate income by selling these loans on the secondary market at a gain. While
      we forego future interest income by selling these mortgages, we also avoid
      the
      risk of having a large portfolio of low-rate, fixed-rate loans should interest
      rates rise and remain high. Our loan portfolio typically consists of about
      75%
      variable-rate products.





8








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 2004 and have continued to increase in 2005.
      Long-term rates, however, have remained relatively flat. Because deposits are
      generally tied to shorter-term market rates, and loans are generally tied to
      longer-term rates, the shrinking spread between the two has made it more
      difficult to maintain desired operating income levels. Our expectation is that
      short-term rates will continue to rise as the Federal Reserve Board responds
      to
      inflation concerns and the growing strength of the economy. Long-term rates
      have
      remained low because the purchase of U.S. government bonds has driven up the
      price of long-term bonds and kept their returns low. Until this situation
      changes we expect the yield curve to remain fairly flat.





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





Our
      primary expense is interest on deposits and Federal Home Loan Bank advances
      which are used to fund loan growth. We offer customers in our market area time
      deposits for terms ranging from three months to five years, checking accounts
      and savings accounts. We also purchase brokered deposits and Federal Home Loan
      Bank advances as needed to provide funding or to improve our interest rate
      risk
      position. Generally, when interest rates are low, depositors will choose
      shorter-term products and conversely when rates are high, depositors will choose
      longer-term products.





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





9





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 Corp. must use assumptions and estimates to apply
      these principles where actual measurement is not possible or practical. For
      a
      complete discussion of LSB Financial Corp.'s significant accounting policies,
      see Note 1 to the Consolidated Financial Statements as of December 31, 2004.
      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 Corp.'s Board of Directors. Those 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 No. 114, *Accounting
      by Creditors for Impairment of a Loan.* Any
      allowances for impaired loans are determined by the present value of expected
      future





10





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 loan mix, asset quality trends, risk management and loan
      administration, changes in the internal lending policies and credit standards,
      collection practices and examination results from bank regulatory agencies
      and
      Lafayette Savings’ internal loan review.





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





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





***Mortgage
      Servicing Rights***





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





11








**Financial
      Condition**





***Comparison
      of Financial Condition at September 30, 2005 and December 31,
      2004***





Our
      total
      assets increased $18.1 million or 5.10% during the nine months from December
      31,
      2004 to September 30, 2005. This increase was primarily due to a $14.2 million
      increase in total net loans, and a $4.9 million increase in short term
      investments and securities available for sale. Management attributes the
      increase in loans primarily to continuing relatively low interest rates which
      encourages investment in the real estate market, and to an increasing preference
      for lower-rate, adjustable-rate mortgage products which we keep in our
      portfolio. The securities are held primarily as a source of liquidity. The
      increase in assets was funded by a $9.4 million increase in deposits and a
      $5.2
      million increase in Federal Home Loan Bank advances. Most of the deposit
      increase was due to a $13.8 million increase in brokered funds. We use Federal
      Home Loan Bank advances and brokered deposits as needed because of their
      availability, predictability and generally competitive price, or to improve
      our
      interest rate risk position. Shareholders’ equity increased from $30.4 million
      at December 31, 2004 to $32.7 million at September 30, 2005, an increase of
      $2.3
      million, due primarily to net income and the tax benefit from the exercise
      of
      stock options, offset in part by the payment of a cash dividend.





Non-performing
      assets, which include non-accruing loans, accruing loans 90 days past due and
      foreclosed assets, increased from $5.9 million at December 31, 2004 to $9.5
      million at September 30, 2005. Non-performing loans at September 30, 2005
      consisted of $4.9 million of loans on residential real estate which had an
      average loan-to-appraisal value of 60.76%, $3.2 million of loans on land or
      commercial property with an average loan-to-appraisal value of 43.52%, $47,000
      of commercial business loans and $13,000 of non-accruing consumer loans.
      Non-performing assets also include $1.3 million in foreclosed assets. At
      September 30, 2005, our allowance for loan losses equaled 0.73% of total loans
      compared to 0.65% at December 31, 2004. The allowance for loan losses at
      September 30, 2005 totaled 25.88% of non-performing assets compared to 35.38%
      at
      December 31, 2004, and 30.03% of non-performing loans at September 30, 2005
      compared to 44.66% at December 31, 2004. Our non-performing assets equaled
      2.53%
      of total assets at September 30, 2005 compared to 1.67% at December 31, 2004.
      Non-performing assets totaling $161,000 were charged off in the first nine
      months of 2005. 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.





12








Shareholders’
      equity increased $2.3 million, or 7.58%, during the first nine months of 2005,
      primarily as a result of net income of $2.6 million and a $580,000 tax benefit
      from the exercise of options to purchase 89,484 shares of our common stock,
      partially offset by our payment of $699,000 in dividends on common stock, and
      the repurchase of 26,341 shares of our stock as part of a stock repurchase
      plan.
      The majority of the stock options exercised were scheduled to expire in August
      2005. Shareholders’ equity to total assets was 8.76% at September 30, 2005
      compared to 8.57% at December 31, 2004.





**Results
      of Operations**





***Comparison
      of Operating Results for the Nine Months and the Quarter Ended September 30,
      2005 and September 30, 2004***





***General.*** Net
      income for the nine months ended September 30, 2005 was $2.6 million, an
      increase of $393,000, or 17.86%, over the nine months ended September 30, 2004.
      Net income for the quarter ended September 30, 2005 was $934,000, an increase
      of
      $206,000, or 28.30%, over the comparable quarter in 2004. These increases were
      primarily due to increases in net interest income and deposit account service
      fees, partially offset by increases in non-interest expenses, and an increase
      in
      the provision for loan losses.





***Net
      Interest Income.*** Net
      interest income for the nine months ended September 30, 2005 increased $746,000,
      or 9.23%, over the same period in 2004. The increase in net interest income
      was
      primarily due to a $26.5 million increase in average interest-earning assets.
      Our net interest margin (net interest income divided by average interest-earning
      assets) remained virtually unchanged, increasing by three basis points from
      3.33% at September 30, 2004 to 3.36% for the nine months ended September 30,
      2005. The increase in net interest income was helped by a $4.0 million decrease
      in average investment securities as money from maturing investments was
      reinvested in higher earning loans. Net interest income for the third quarter
      of
      2005 increased $277,000, or 10.17%, compared to the same period in 2004, due
      to
      similar reasons as those noted above. Average interest-earning assets increased
      by $21.6 million from the third quarter of 2004 to the third quarter of
      2005.  The net interest margin increased from 3.28% for the third quarter
      of 2004 to 3.39% for the third quarter of 2005.




Interest
      income on loans increased $1.6 million or 11.74% for the nine months ended
      September 30, 2005 compared to the same nine months in 2004. This increase
      was
      the result of a $30.5 million increase in average loans outstanding augmented
      by
      an increase in the average yield on loans from 6.19% for the first nine months
      of 2004 to 6.28% for the first nine months of 2005, as adjustable rate loans
      tied to short term indices price and reprice higher as those market
      rates
      increase in the economy. The increase in





13





the
      loan
      portfolio was due largely to borrowers continuing to take advantage of
      relatively low market interest rates to refinance existing mortgages and
      initiate other real estate related purchases. Interest income on loans increased
      $574,000 for the third quarter of 2005 compared to the third quarter of 2004
      due
      primarily to the $21.6 million increase in average loans receivable and the
      increase in the average yield on loans from 6.09% to 6.43% over the same
      period.





Interest
      earned on other investments and Federal Home Loan Bank stock decreased by
      $32,000 for the nine months ended September 30, 2005 compared to the same period
      in 2004. This was primarily the result of a $4.0 million decrease in average
      balances partially offset by an increase in the average yield on the average
      balance of other investments and Federal Home Loan Bank stock from 2.39% for
      the
      first nine months of 2004 to 2.63% over the same period in 2005. The decrease
      in
      the average balance was generally due to those funds being reinvested into
      higher yielding loans. Interest income on other investments and Federal Home
      Loan Bank stock increased $18,000 for the third quarter of 2005 compared to
      the
      third quarter of 2004 due to an increase of $1.9 million in average balances
      as
      well as by an increase in the average yield on the average balance of other
      investments and Federal Home Loan Bank stock from 2.57% for the third quarter
      of
      2004 to 2.67% over the same period in 2005.





Interest
      expense for the nine months ended September 30, 2005 increased $847,000, or
      13.63%, over the same period in 2004. This increase was due to a $24.0 million
      increase in average interest-bearing liabilities as well as an increase in
      the
      average rate paid on interest-bearing liabilities from 2.68% for the first
      nine
      months of 2004 to 2.83% for the first nine months of 2005. Interest expense
      increased $315,000 for the third quarter of 2005 from the same period in 2004,
      primarily due to an $18.8 million increase in average interest-bearing
      liabilities and an increase in the average rate paid on average interest-bearing
      liabilities from 2.71% for the third quarter of 2004 to 2.94% for 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,





14





trends
      in
      delinquent and non-performing loans, and economic trends affecting our market.
      Loans no longer performing as agreed are assigned a lower risk rating,
      eventually resulting in their being regarded as classified loans. A collateral
      re-evaluation is completed on all classified loans. This process results in
      the
      allocation of specific amounts of the allowance to individual problem loans,
      generally based on an analysis of the collateral securing those loans. These
      components are added together and compared to the balance of our allowance
      at
      the evaluation date.





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





We
      recorded a $475,000 provision for loan losses for the nine months ended
      September 30, 2005 as a result of our analysis of our current loan portfolios
      compared to $375,000 for the same period in 2004. The increased provision during
      2005 was 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 2005 we recorded
      charge-offs of $161,000. The $475,000 provision for loan losses for the first
      nine months of 2005 was considered adequate to cover further charge-offs based
      on our evaluation and our loan mix.





At
      September 30, 2005, non-performing assets, consisting of non-accruing loans,
      accruing loans 90 or more days delinquent and other real estate owned, totaled
      $9.5 million compared to $5.9 million at December 31, 2004. In addition to
      our
      non-performing assets, we identified $6.0 million in other loans of concern,
      down from $9.8 million at December 31, 2004, 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 that 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 nine months ended September 30, 2005 increased
      by
      $212,000, or 13.38%, compared to the same period in 2004. This was primarily
      due
      to a $288,000 increase in fees on deposit accounts due to the overdraft product
      in which we pay any overdrafts of up to $500 made by qualified
      depositors for a $30 per overdraft fee and by a $16,000 increase in other
      income, primarily the result of a $20,000 increase in mortgage loan servicing
      fees, partially offset by a $92,000 decrease in the gain on the sale of mortgage
      loans in the secondary market ** resulting
      from decreased sales due to the decrease in refinance activity. Non-interest
      income for the third quarter of 2005 increased by $236,000 over the same period
      in 2004, primarily due to a $236,000 increase in fees on deposit accounts due
      to
      the introduction of a new product mentioned above and a $5,000 increase
      in
      the gain on the sale of mortgage loans in the secondary market **offset
      by a
      $5,000
      decrease in other income.





15








***Non-Interest
      Expense.***  ** Non-interest
      expense for the nine months ended September 30, 2005 increased $348,000 over
      the
      same period in 2004. The major components of this increase included a $173,000
      increase in salaries and employee benefits partly due to increased compliance
      and health insurance costs, and a $190,000 increase in other non-interest
      expenses partly due to increased reporting costs and expenses related to
      foreclosed properties, partially offset by a $99,000 decrease in occupancy
      expenses due to the write-off of some fixed assets in 2004. Non-interest expense
      for the third quarter of 2005 increased by $151,000 over the same period in
      2004, due largely to factors mentioned above.





***Income
      Tax Expense.***   Our
      income tax provision increased by $117,000 for the nine months ended September
      30, 2005 compared to the nine months ended September 30, 2004, primarily as
      a
      result of a $510,000 increase in income before taxes, as well as from tax
      savings relating to our Bank Owned Life Insurance program and increased lending
      in an area in Lafayette designated as an urban enterprise zone, qualifying
      for
      enterprise zone tax credits. Our income tax provision increased by $106,000
      for
      the third quarter of 2005 compared to the same period ****** in ****** 2004
      primarily due to a $312,000 increase in income before income taxes as well
      as
      the same tax changes 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.





16








Our
      liquidity ratios at December 31, 2004 and September 30, 2005 were 5.80% and
      6.67%, respectively compared to a regulatory liquidity base, and 4.38% and
      5.08%
      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 September 30, 2005, we had outstanding commitments to originate
      loans and available lines of credit totaling $61.0 million and commitments
      to
      provide funds to complete current construction projects in the amount of $6.2
      million. In addition, we had commitments to sell $1.7 million of fixed rate
      residential loans. Certificates of deposit, including brokered deposits, which
      will mature in one year or less at September 30, 2005 totaled $73.3 million.
      Based on our experience, our certificates of deposit have been a relatively
      stable source of long-term funds, as such certificates are generally renewed
      upon maturity since we have established long-term banking relationships with
      our
      customers. Therefore, we believe a significant portion of such deposits will
      remain with us, although this cannot be assured. At September 30, 2005, $64.6
      million of our deposits were in brokered deposits, $14.0 million of which will
      mature in one year or less. These deposits can be expected not to renew at
      maturity and will have to be replaced with other funding upon maturity. We
      also
      have $19.0 million of Federal Home Loan Bank advances maturing in the next
      twelve months.











**Capital
      Resources**





Shareholders’
      equity totaled $32.7 million at September 30, 2005 compared to $30.4 million
      at
      December 31, 2004, an increase of $2.3 million or 7.58%, due primarily to net
      income of $2.6 million and a $580,000 tax benefit from the exercise of options
      to purchase 89,484 shares of our common stock, partially offset by our payment
      of dividends on common stock, and the repurchase of 26,341 shares of our stock
      as part of a stock repurchase plan. Shareholders’ equity to total assets was
      8.76% at September 30, 2005 compared to 8.57% at December 31, 2004.





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, 2004 and September
      30, 2005, Lafayette Savings was categorized as well capitalized. Our actual
      and
      required capital amounts and ratios at December 31, 2004 and September 30,
      2005
      are presented below:





17





Actual
            
            OTS
              For
                Capital
              Adequacy
                Purposes
            
            FDIC
              To
                Be Well
              Capitalized
                Under
              Corrective
                Action ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio(Dollars
                in thousands)**As
                of September 30, 2005**Total
                risk-based capital (to risk-weighted assets)
            
            $
            33,787
            
            
            11.7
            %
            $
            23,061
            
            
            8.0
            %
            $
            28,826
            
            
            10.0
            %Tier
                I capital (to risk-weighted assets)
            
            
            31,544
            
            
            10.9
            %
            
            11,531
            
            
            4.0
            %
            
            17,296
            
            
            6.0
            %Tier
                I capital (to adjusted total assets)
            
            
            31,544
            
            
            8.5
            %
            
            11,011
            
            
            3.0
            %
            
            18,351
            
            
            5.0
            %Tier
                I capital (to adjusted tangible assets)
            
            
            31,544
            
            
            8.5
            %
            
            7,455
            
            
            2.0
            %
            
            N/A
            
            
            N/ATangible
                capital (to adjusted tangible assets)
            
            
            31,544
            
            
            8.5
            %
            
            5,591
            
            
            1.5
            %
            
            N/A
            
            
            N/A**As
                of December 31, 2004**Total
                risk-based capital (to risk-weighted assets)
            
            $
            31,657
            
            
            11.6
            %
            $
            21,812
            
            
            8.0
            %
            $
            27,265
            
            
            10.0
            %Tier
                I capital (to risk-weighted assets)
            
            
            29,797
            
            
            10.9
            %
            
            10,906
            
            
            4.0
            %
            
            16,359
            
            
            6.0
            %Tier
                I capital (to adjusted total assets)
            
            
            29,797
            
            
            8.4
            %
            
            10,656
            
            
            3.0
            %
            
            17,761
            
            
            5.0
            %Tier
                I capital (to adjusted tangible assets)
            
            
            29,767
            
            
            8.4
            %
            
            7,104
            
            
            2.0
            %
            
            N/A
            
            
            N/ATangible
                capital (to adjusted tangible assets)
            
            
            29,797
            
            
            8.4
            %
            
            5,328
            
            
            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.





18








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.








19





**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 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
      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, and makes
      recommendations for adjusting this position to the full Board of Directors.
      In
      addition, the investment committee of the Board 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 September 30, 2005 and December 31, 2004, is an analysis of our
      interest rate risk as measured by the effect on NPV caused by instantaneous
      and
      sustained parallel shifts in the yield curve, in 100 basis point increments,
      up
      and down 300 basis points, and compared to Board policy limits. The Board Limit
      column indicates the lowest allowable limits for NPV after each interest rate
      shock. Assumptions used in calculating the amounts in this table are OTS
      assumptions. No information is provided for a negative 300 basis point shift
      in
      interest rates, due to a low prevailing interest rate environment making such
      scenarios unlikely. Information for a negative 200 basis point shift in interest
      rates began to be provided in 2005.





20








Change
                in
            Board
                Limit
            At
                September 30, 2005
            At
                December 31, 2004Interest
                Rate
            Post-shock
            Post-shock
            Change
            Post-shock
            Change(Basis
                Points)
            NPV
                Ratio
            NPV
                Ratio
            (Basis
                Points)
            NPV
                Ratio
            (Basis
                Points)300
            bp
            6.00
            %
            10.79
            %
            (50
            )bp
            10.55
            %
            (12
            )bp200
            
            7.00
            
            11.13
            
            (16
            )
            10.82
            
            14100
            
            8.00
            
            11.32
            
            3
            
            10.89
            
            210
            
            8.00
            
            11.29
            
            --
            
            10.68
            
            ---100
            
            7.00
            
            10.94
            
            (35
            )
            10.16
            
            (52
            )-200
            
            6.00
            
            10.39
            
            (90
            )
            n/a
            
            n/a





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, 2005 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-KSB
      for the period ended December 31, 2004.





**Item
      4. CONTROLS AND PROCEDURES** .





An
      evaluation of the Company’s disclosure controls and procedures (as defined in
      Sections 13(a)-15(e) and 15(d)-15(e) of the regulations promulgated
      under the Securities Exchange Act of 1934, as amended (the “Act”)), as of
      September 30, 2005, 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, 2005 that have materially affected, or are
      reasonably likely to materially affect, our internal control over the financial
      reporting.





21








The
      Company intends to continually review and evaluate the design and effectiveness
      of its disclosure controls and procedures and to improve its controls and
      procedures over time and to correct any deficiencies that it may discover in
      the
      future. The goal is to ensure that senior management has timely access to all
      material financial and non-financial information concerning the Company’s
      business. While the Company believes the present design of its disclosure
      controls and procedures is effective to achieve its goal, future events
      affecting its business may cause the Company to modify its disclosure controls
      and procedures.








22





**PART
      II - OTHER INFORMATION**





**Item
      1.**   **LEGAL
      PROCEEDINGS**





The
      Company, from time to time, is involved as plaintiff or defendant in various
      legal actions arising in the normal course of business. While the ultimate
      outcome of these proceedings cannot be predicted with certainty, it is the
      opinion of management, after consultation with counsel representing the Company
      in the proceedings, that the resolution of any prior and pending proceedings
      should not have a material effect on the Company or Lafayette Savings’ financial
      condition or results of operations.





**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, 2005
            
            
            0
            
            
            -
            
            
            0
            
            
            41,932August
                1 -August
                31, 2005
            
            
            0
            
            
            -
            
            
            0
            
            
            41,932September
                1 - September 30, 2005
            
            
            5,000
            
            
            28.00
            
            
            5,000
            
            
            36,932Total
            
            
            5,000
            
            
            28.00
            
            
            5,000
            
            
            36,932





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


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





**Item
      3.**   **DEFAULTS
      UPON SENIOR SECURITIES**





None
      to
      be reported.





**Item
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None
      to
      be reported.





23








**Item
      5.**   **OTHER
      INFORMATION**





None.





**Item
      6.**   **EXHIBITS**





Exhibits:





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








24





**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
              14, 2005
            
            /s/
              Randolph F. WilliamsRandolph
                F. Williams, President(Chief
                Executive Officer)Date:
            November
              14, 2005
            
            /s/
              Mary Jo DavidMary
                Jo David, Treasurer(Principal Financial
                and Chief Accounting Officer)














25











**INDEX
      TO EXHIBITS**








Regulation
              S-K
                Exhibit
              Number
            
            Document31.1
            
            Rule
                13(a)-14(a) Certification (Chief Executive Officer)31.2
            
            Rule
                13(a)-14(a) Certification (Chief Financial Officer)32
            
            Section
                1350 Certification