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, 2009ORo
                    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 incorporation
      or organization)
            
            (I.R.S. Employer
      Identification
      No.)101
      Main Street, Lafayette, Indiana
            
            47901(Address
      of principal executive offices)
            
            (Zip
      Code)




(765)
742-1064


(Registrant’s
telephone number, including area code)






None


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






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






Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).    Yes o     No o






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




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




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




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





Class
            
            Outstanding
      at May 7, 2009Common
      Stock, $.01 par value per share
            
            1,553,525
      shares










LSB
FINANCIAL CORP.





INDEX





PART
      I
              FINANCIAL
      INFORMATION
              1Item
      1.
              Financial
      Statements
              1Consolidated
      Condensed Balance Sheets
              1Consolidated
      Condensed Statements of Income
              2Consolidated
      Condensed Statements of Changes in Shareholders’ Equity
              3Consolidated
      Condensed Statements of Cash Flows
              4Notes
      to Consolidated Financial Statements
              5Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              9Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              22Item
      4T.
              Controls
      and Procedures
              22PART
      II. OTHER INFORMATION
              23Item
      1.
              Legal
      Proceedings
              23Item
      1A.
              Risk
      Factors
              23Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              23Item
      3.
              Defaults
      Upon Senior Securities
              24Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              24Item
      5.
              Other
      Information
              24Item
      6.
              Exhibits
              24SIGNATURESINDEX
      TO EXHIBITS



















PART
I   FINANCIAL INFORMATION




Item
      1.   Financial
      Statements




LSB
FINANCIAL CORP.


Consolidated
Condensed Balance Sheets


(Dollars
in thousands except per share data)





March
      31,2009
                      
                      
                      December
      31,2008(unaudited)AssetsCash
      and due from banks
                      
                      $
                      1,528
                      
                      
                      $
                      2,046Short-term
      investments
                      
                      
                      24,657
                      
                      
                      
                      9,179Cash
      and cash equivalents
                      
                      
                      26,185
                      
                      
                      
                      11,225Available-for-sale
      securities
                      
                      
                      12,138
                      
                      
                      
                      11,853Loans
      held for sale
                      
                      
                      2,962
                      
                      
                      
                      1,342Total
      loans
                      
                      
                      323,490
                      
                      
                      
                      328,994Less:
      Allowance for loan losses
                      
                      
                      (3,920
                      )
                      
                      
                      (3,697
                      )Net
      loans
                      
                      
                      319,570
                      
                      
                      
                      325,297Premises
      and equipment, net
                      
                      
                      6,443
                      
                      
                      
                      6,461Federal
      Home Loan Bank stock, at cost
                      
                      
                      3,997
                      
                      
                      
                      3,997Bank
      owned life insurance
                      
                      
                      5,899
                      
                      
                      
                      5,841Interest
      receivable and other assets
                      
                      
                      6,387
                      
                      
                      
                      6,996Total
      Assets
                      
                      $
                      383,581
                      
                      
                      $
                      373,012Liabilities
      and Shareholders’ EquityLiabilitiesDeposits
                      
                      $
                      275,683
                      
                      
                      $
                      258,587Federal
      Home Loan Bank advances
                      
                      
                      71,500
                      
                      
                      
                      78,500Interest
      payable and other liabilities
                      
                      
                      2,200
                      
                      
                      
                      1,850Total
      liabilities
                      
                      
                      349,383
                      
                      
                      
                      338,937Commitments
      and ContingenciesShareholders’
      EquityCommon
      stock, $.01 par valueAuthorized
      - 7,000,000 shares
                        Issued
      and outstanding 2009 - 1,553,525 shares, 2008 - 1,553,525
      shares
                      
                      
                      15
                      
                      
                      
                      15Additional
      paid-in-capital
                      
                      
                      10,984
                      
                      
                      
                      10,983Retained
      earnings
                      
                      
                      23,070
                      
                      
                      
                      22,961Accumulated
      other comprehensive gain (loss)
                      
                      
                      129
                      
                      
                      
                      116Total
      shareholders’ equity
                      
                      
                      34,198
                      
                      
                      
                      34,075Total
      liabilities and shareholders’ equity
                      
                      $
                      383,581
                      
                      
                      $
                      373,012





See notes
to consolidated condensed financial statements.


1


LSB
FINANCIAL CORP.


Consolidated
Condensed Statements of Income


(Dollars
in thousands, except per share data)


(Unaudited)





Three
      months endedMarch
      31,2009
                
                
                2008Interest
      and Dividend IncomeLoans
                
                $
                4,856
                
                
                $
                5,204SecuritiesTaxable
                
                
                47
                
                
                
                122Tax-exempt
                
                
                67
                
                
                
                69Other
                
                
                3
                
                
                
                26Total
      interest and dividend income
                
                
                4,973
                
                
                
                5,421Interest
      ExpenseDeposits
                
                
                1,815
                
                
                
                1,949Borrowings
                
                
                771
                
                
                
                929Total
      interest expense
                
                
                2,586
                
                
                
                2,878Net
      Interest Income
                
                
                2,387
                
                
                
                2,543Provision
      for Loan Losses
                
                
                569
                
                
                
                250Net
      Interest Income After Provision for Loan Losses
                
                
                1,818
                
                
                
                2,293Non-interest
      IncomeDeposit
      account service charges and fees
                
                
                336
                
                
                
                396Net
      gains on loan sales
                
                
                523
                
                
                
                16Net
      gain on other real estate owned
                
                
                33
                
                
                
                91Other
                
                
                244
                
                
                
                279Total
      non-interest income
                
                
                1,136
                
                
                
                782Non-interest
      ExpenseSalaries
      and employee benefits
                
                
                1,352
                
                
                
                1,227Net
      occupancy and equipment expense
                
                
                352
                
                
                
                344Computer
      service
                
                
                134
                
                
                
                135Advertising
                
                
                57
                
                
                
                69Other
                
                
                652
                
                
                
                558Total
      non-interest expense
                
                
                2,547
                
                
                
                2,333Income
      Before Income Taxes
                
                
                407
                
                
                
                742Provision
      for Income Taxes
                
                
                105
                
                
                
                227Net
      Income
                
                $
                302
                
                
                $
                515Basic
      Earnings Per Share
                
                $
                0.20
                
                
                $
                0.33Diluted
      Earnings Per Share
                
                $
                0.20
                
                
                $
                0.33Dividends
      Declared Per Share
                
                $
                0.125
                
                
                $
                0.25





See notes
to consolidated condensed financial statements.





2


LSB
FINANCIAL CORP.


Consolidated
Condensed Statements of Changes in Shareholders’ Equity


For the
Three Months Ended March 31, 2009 and 2008


(Dollars
in thousands)


(Unaudited)







Common
      Stock
                          
                          
                          Additional
                            Paid-In
                            Capital
                          
                          
                          Retained
      Earnings
                          
                          
                          Accumulated
      Other Comprehensive Income (Loss)
                          
                          
                          TotalBalance,
      January 1, 2008
                          
                          $
                          15
                          
                          
                          $
                          11,066
                          
                          
                          $
                          22,777
                          
                          
                          $
                          74
                          
                          
                          $
                          33,932Comprehensive
      incomeNet
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          515
                          
                          
                          
                          
                          
                          
                          
                          515Change
      in unrealized appreciation (depreciation) on available-for-sale
      securities, net of taxes
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          110
                          
                          
                          
                          110Total
      comprehensive income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          625Dividends
      on common stock, $0.25 per share
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (389
                          )
                          
                          
                          
                          
                          
                          
                          (389
                          )Purchase
      and retirement of stock (2,900 shares)
                          
                          
                          
                          
                          
                          
                          (56
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (56
                          )Stock
      options exercised (4,341 shares)
                          
                          
                          
                          
                          
                          
                          67
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          67Tax
      benefit of stock options exercised
                          
                          
                          
                          
                          
                          
                          6
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          6Amortization
      of stock option compensation
                          
                          
                          
                          
                          
                          2
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2Balance,
      March 31, 2008
                          
                          $
                          15
                          
                          
                          $
                          11,085
                          
                          
                          $
                          22,903
                          
                          
                          $
                          184
                          
                          
                          $
                          34,187Balance,
      January 1, 2009
                          
                          $
                          15
                          
                          
                          $
                          10,983
                          
                          
                          $
                          22,961
                          
                          
                          $
                          116
                          
                          
                          $
                          34,075Comprehensive
      incomeNet
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          302
                          
                          
                          
                          
                          
                          
                          
                          302Change
      in unrealized appreciation (depreciation) on available-for-sale
      securities, net of taxes
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          13
                          
                          
                          
                          13Total
      comprehensive income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          315Dividends
      on common stock, $0.125 per share
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (193
                          )
                          
                          
                          
                          
                          
                          
                          (193
                          )Amortization
      of stock option compensation
                          
                          
                          
                          
                          
                          1
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1Balance,
      March 31, 2009
                          
                          $
                          15
                          
                          
                          $
                          10,984
                          
                          
                          $
                          23,070
                          
                          
                          $
                          129
                          
                          
                          $
                          34,198





See notes
to consolidated condensed financial statements.


3


LSB
FINANCIAL CORP.


Consolidated
Condensed Statements of Cash Flows


(Dollars
in thousands)


(Unaudited)





Three
      months endedMarch
      31,2009
                  
                  
                  2008Operating
      ActivitiesNet
      income
                  
                  $
                  302
                  
                  
                  $
                  515Items
      not requiring (providing) cashDepreciation
                  
                  
                  122
                  
                  
                  
                  136Provision
      for loan losses
                  
                  
                  569
                  
                  
                  
                  250Amortization
      of premiums and discounts on securities
                  
                  
                  5
                  
                  
                  
                  5Gain
      on other real estate owned
                  
                  
                  (33
                  )
                  
                  
                  (91
                  )Gain
      on sale of loans
                  
                  
                  (389
                  )
                  
                  
                  (13
                  )Loans
      originated for sale
                  
                  
                  (22,733
                  )
                  
                  
                  (546
                  )Proceeds
      on loans sold
                  
                  
                  21,502
                  
                  
                  
                  312Amortization
      of stock options
                  
                  
                  1
                  
                  
                  
                  2Tax
      benefit related to stock options exercised
                  
                  
                  ---
                  
                  
                  
                  (6
                  )Changes
      inInterest
      receivable and other assets
                  
                  
                  783
                  
                  
                  
                  596Interest
      payable and other liabilities
                  
                  
                  350
                  
                  
                  
                  546Net
      cash from operating activities
                  
                  
                  479
                  
                  
                  
                  1,706Investing
      ActivitiesPurchases
      of available-for-sale securities
                  
                  
                  (701
                  )
                  
                  
                  ---Proceeds
      from maturities of available-for-sale securities
                  
                  
                  567
                  
                  
                  
                  408Net
      change in loans
                  
                  
                  4,445
                  
                  
                  
                  (8,316
                  )Proceeds
      from sale of OREO
                  
                  
                  371
                  
                  
                  
                  1,950Purchase
      of premises and equipment
                  
                  
                  (104
                  )
                  
                  
                  (57
                  )Net
      cash from investing activities
                  
                  
                  4,578
                  
                  
                  
                  (6,015
                  )Financing
      ActivitiesNet
      change in demand deposits, money market, NOW and savings
      accounts
                  
                  
                  10,479
                  
                  
                  
                  9,362Net
      change in certificates of deposit
                  
                  
                  6,617
                  
                  
                  
                  (832
                  )Proceeds
      from Federal Home Loan Bank advances
                  
                  
                  ---
                  
                  
                  
                  15,000Repayment
      of Federal Home Loan Bank advances
                  
                  
                  (7,000
                  )
                  
                  
                  (12,000
                  )Proceeds
      from stock options exercised
                  
                  
                  ---
                  
                  
                  
                  67Tax
      benefit related to stock options exercised
                  
                  
                  ---
                  
                  
                  
                  6Repurchase
      of stock
                  
                  
                  ---
                  
                  
                  
                  (56
                  )Dividends
      paid
                  
                  
                  (193
                  )
                  
                  
                  (389
                  )Net
      cash from financing activities
                  
                  
                  9,903
                  
                  
                  
                  11,158Increase
      (Decrease) in Cash and Cash Equivalents
                  
                  
                  14,960
                  
                  
                  
                  6,849Cash
      and Cash Equivalents, Beginning of Period
                  
                  
                  11,225
                  
                  
                  
                  6,490Cash
      and Cash Equivalents, End of Period
                  
                  $
                  26,185
                  
                  
                  $
                  13,339Supplemental
      Cash Flows InformationInterest
      paid
                  
                  
                  2,615
                  
                  
                  
                  2,902Income
      taxes paid
                  
                  
                  100
                  
                  
                  
                  400Supplemental
      Non-Cash DisclosuresCapitalization
      of mortgage servicing rights
                  
                  
                  135
                  
                  
                  
                  3





See notes
to consolidated condensed financial statements


4


LSB
FINANCIAL CORP.


Notes to
Consolidated Financial Statements


March 31,
2009





Note 1 -
General




The financial
statements were prepared in accordance with the instructions for Form 10-Q and,
therefore, do not include all of the disclosures necessary for a complete
presentation of financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States of
America.  These interim financial statements have been prepared on a
basis consistent with the annual financial statements and include, in the
opinion of management, all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results of operations and
financial position for and at the end of such interim periods.  The
consolidated condensed balance sheet of LSB Financial Corp. as of March 31, 2009
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, 2008 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.




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.


5


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 excluded in the
diluted earnings per share calculation as their effect would be
antidilutive.  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 31,2009
                            
                            
                            2008Weighted
      average shares outstanding
                            
                            
                            1,553,525
                            
                            
                            
                            1,558,523Shares
      used to compute diluted earnings per share
                            
                            
                            1,553,525
                            
                            
                            
                            1,560,997Earnings
      per share
                            
                            $
                            0.20
                            
                            
                            $
                            0.33Diluted
      earnings per share
                            
                            $
                            0.20
                            
                            
                            $
                            0.33








Note 4 – Disclosures About Fair Value
of Assets and Liabilities





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





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


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


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





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






6





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


Available-for-sale
Securities





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




March 31, 2009
                          
                          
                          
                          
                          Fair
      Value Measurements UsingQuoted
      Prices in Active Markets for Identical Assets
                          
                          
                          Significant
      Other Observable Inputs
                          
                          
                          Significant
      Unobservable InputsFair
      Value
                          
                          
                          (Level
      1)
                          
                          
                          (Level
      2)
                          
                          
                          (Level
      3)Available-for-sale
      securities
                          
                          $ 
      12,138
                          
                          
                          $ 
      0
                          
                          
                          $ 
      12,138
                          
                          
                          $ 
      0





December 31, 2008
                          
                          
                          
                          
                          Fair
      Value Measurements UsingQuoted
      Prices in Active Markets for Identical Assets
                          
                          
                          Significant
      Other Observable Inputs
                          
                          
                          Significant
                            Unobservable
                            InputsFair
      Value
                          
                          
                          (Level
      1)
                          
                          
                          (Level
      2)
                          
                          
                          (Level
      3)Available-for-sale
      securities
                          
                          $ 
      11,853
                          
                          
                          $ 
      0
                          
                          
                          $ 
      11,853
                          
                          
                          $ 
      0








Impaired
Loans





Loan
impairment is reported when scheduled payments under contractual terms are
deemed uncollectible.  Impaired loans are carried at the present value
of estimated future cash flows using the loan’s existing rate, or the fair value
of collateral if the loan is collateral dependent.  A portion of the
allowance for loan losses is allocated to impaired loans if the value of such
loans is deemed to be less than the unpaid balance.  If these
allocations cause the allowance for loan losses to increase, such increase is
reported as a component of the provision for loan losses.  Loan losses
are charged against the allowance when management believes the uncollectability
of the loan is confirmed.  During the first three months of 2009,
impaired loans were partially charged-off or re-evaluated.  This
valuation would be considered Level 3, consisting of appraisals of underlying
collateral and discounted cash flow analysis.







7


The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying balance sheet measured at fair value on a
nonrecurring basis and the level within the FAS 157 fair value hierarchy in
which the fair value measurements fall at March 31, 2009:






March 31, 2009
                          
                          
                          
                          
                          Fair
      Value Measurements UsingQuoted
      Prices in Active Markets for Identical Assets
                          
                          
                          Significant
      Other Observable Inputs
                          
                          
                          Significant
      Unobservable InputsFair
      Value
                          
                          
                          (Level
      1)
                          
                          
                          (Level
      2)
                          
                          
                          (Level
      3)Impaired
      Loans
                          
                          $ 
      3,273
                          
                          
                          $ 
      0
                          
                          
                          $ 
      3,273
                          
                          
                          $ 
      0








December 31, 2008
                          
                          
                          
                          
                          Fair
      Value Measurements UsingQuoted
      Prices in Active Markets for Identical Assets
                          
                          
                          Significant
      Other Observable Inputs
                          
                          
                          Significant
      Unobservable InputsFair
      Value
                          
                          
                          (Level
      1)
                          
                          
                          (Level
      2)
                          
                          
                          (Level
      3)Impaired
      Loans
                          
                          $ 
      4,803
                          
                          
                          $ 
      0
                          
                          
                          $ 
      4,803
                          
                          
                          $ 
      0




Note 5 –
Future Accounting Pronouncements




On May 5,
2008, Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted
Accounting Principles,or SFAS 162, was issued.  This standard
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements that are
presented in conformity with generally accepted accounting principles in the
U.S.  The adoption of this standard will not impact the presentation
of our financial position or results of operations.




In April
2009, the FASB issued the following new accounting standards:





i.)
            FASB
      Staff Position FAS 157-4, Determining Whether a Market
      Is Not Active and a Transaction Is Not Distressed, or FSP FAS
      157-4. FSP FAS 157-4 provides guidelines for making fair value
      measurements more consistent with the principles presented in SFAS
      157.  FSP FAS 157-4 provides additional authoritative guidance
      in determining whether a market is active or inactive, and whether a
      transaction is distressed, is applicable to all assets and liabilities
      (i.e. financial and nonfinancial) and will require enhanced
      disclosures.





ii.)
            FASB
      Staff Position FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation
      of Other-Than-Temporary-Impairments,or FSP FAS 115-2, FAS 124-2,
      and EITF 99-20-2. FSP FAS 115-2, FAS 124-2, and EITF 99-20-2 provides
      additional guidance to provide greater clarity about the credit and
      noncredit component of an other-than-temporary impairment event and to
      more effectively communicate when an other-than-temporary impairment event
      has occurred.  This FSP applies to debt
    securities.






8





iii.)
            FASB
      Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair
      Value of Financial Impairments, or FSP FAS 107-1 and APB
      28-1.  FSP FAS 107-1 and APB 28-1, amends FASB Statement No.
      107, Disclosures about
      Fair Value of Financial Instruments, to require disclosures about
      fair value of financial instruments in interim as well as in annual
      financial statements.  This FSP also amends APB Opinion No. 28,
      Interim Financial
      Reporting, to require those disclosures in all interim financial
      statements.





These
standards are effective for periods ending after June 15, 2009.  We
are evaluating the impact that these standards will have on our financial
statements.





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




Executive
Summary




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





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




We have an
experienced and committed staff and enjoy a good reputation for serving the
people of the community and understanding their financial needs and for finding
a way to meet those needs.  We contribute time and money to improve
the quality of life in our market area and many of our employees volunteer for
local non-profit agencies.  We believe this sets us apart from the
other 19 banks and credit unions that compete with us.  We also
believe that operating independently under the same name for 140 years is a
benefit to us—especially as acquisitions and consolidations of local financial
institutions continue.  Focusing time and resources on acquiring
customers who may be feeling disenfranchised by their no-longer-local bank has
proved to be a successful strategy.




Tippecanoe
County and the eight surrounding counties comprise Lafayette Savings’ primary
market area.  In this period of extraordinary economic times, we find
ourselves in a community that to some extent has been sheltered from the worst
effects of the slowdown.  The greater Lafayette area enjoys diverse
employment including several major manufacturers; a strong education sector with
Purdue University and a large local campus of Ivy Tech Community College;
government offices of Lafayette, West Lafayette and Tippecanoe County and a
growing high-tech presence with the Purdue Research Park and the growth of a new
medical corridor


9


spurred
by the building of two new hospitals. However the area isn’t immune to the
effects of the recession.  The Tippecanoe County unemployment rate for
March 2009 was 8.5%, compared to 10.6% for Indiana and 9.0% for the
U.S.  There were temporary layoffs announced by Caterpillar, and
Wabash National indicated it may be looking for a buyer.  However, a
recent national report on the “Best Cities for Jobs” by the Praxis Strategy
Group characterized the Lafayette area as “this year’s shooting star” having
moved from a ranking of 287 in 2008 to 85 this year.  It noted the
“significant investment in infrastructure and advanced infrasystems, enabling
them (rising stars) to create jobs in higher-value, innovation-generating
economic activities.”  Purdue University employs almost 15,000 people
and has enrollment at the West Lafayette campus of over 40,000.  The
University’s new construction in 2008 provided capital investments of over $242
million, thanks in part to their successful fundraising campaign which raised
over $7 billion. The success of the Purdue Research Park in attracting high-tech
companies to the Lafayette area is seen in the 52 buildings with 1.3 million
square feet owned or leased by 160 companies employing 3,100 people. Its 195,000
square feet of incubator space makes it the largest institutionally operated
incubator program in the nation.  A 121 turbine wind farm being
established in adjacent White County is expected to boost Tippecanoe County’s
economy by at least $20 million a year according to Greater Lafayette
Commerce.  Some examples of new manufacturing growth include Federal
Express which announced it will build a distribution center in Lafayette in
2009, EDS Indiana Technical Resource Center leasing 13,000 square feet in Purdue
Research Park and hiring 92 people with additional growth planned for 45,000
square feet occupied in 2009 and 200 employees hired by 2010.  TRW
plans to expand its operations with a new $29 million facility in south
Lafayette that will employ 200 people.  Subaru of Indiana increased
its national sales by 3% in 2008, the only major auto manufacturer to do
so.





The
community is making progress working through the effects of the overbuilding of
one- to four-family housing when housing starts increased from a somewhat
typical 858 starts in 2001 to 1,219 in 2004.  New construction has
dropped every year since, to 448 in 2008.   Many of the houses
which had been sold to marginally qualified borrowers reappeared on the market
as foreclosed properties, further slowing the need for new
housing.  While this increase in foreclosed properties and distressed
housing sales has been a drag on the economy, this was due more to aggressive
marketing of houses to people who couldn’t afford them rather than because of
increased levels of unemployment.  In addition, unlike in other parts
of the country, housing values in the Metropolitan Statistical Area of which
Tippecanoe County is a part have increased by 2.88% over the last 12 months
according to a report from the Office of Federal Housing Enterprise
Oversight.





We
continue to work with borrowers who have fallen substantially behind on their
loans.  The majority of our delinquent loans are secured by real
estate and we believe we have sufficient reserves to cover probable
losses.  The challenge is to get delinquent borrowers back on a
workable payment schedule or to get control of their properties through an
overburdened court system.  We acquired 11 properties in the first
quarter of 2009 through foreclosure or deeds-in-lieu of
foreclosure.





Our
primary source of income is net interest income, which is the difference between
the interest income earned on our loan and investment portfolio 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 – the difference between the income


10


generated
from loans and the cost of funding.  Our net interest income also
depends on the shape of the yield curve.  Since January 2007, the
Federal Reserve has lowered short-term rates from around 5.0% to almost zero
while long-term rates which had also been near 5.0% fell to under
3.0%.  Because deposits are generally tied to shorter-term market
rates and loans are generally tied to longer-term rates this would typically be
viewed as a positive step.  In reality, loans—especially those
immediately repriceable to prime—fell immediately while deposits generally
stayed high due to a demand for liquidity, especially by big banks whose
presence in the deposit markets was ubiquitous.  We have started to
see deposit rates gradually respond to the lower market rates as banks are less
concerned about the loss of liquidity.  Overall loan rates are
expected to stay low.




Rate changes
can typically be expected to have an impact on interest
income.  Falling rates generally increase borrower preference for
fixed rate products, which we typically sell on the secondary market, and
existing adjustable rate loans can be expected to reprice to lower rates, which
could be expected to have a negative impact on our interest
income.  Also any new loans put on the books will be at comparatively
low rates.  Because the government is working to push long-term rates
to fall further to help ease the housing crisis, we are seeing a return to a
high volume of refinancing.





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.




The level of
turmoil in the financial services industry does present unusual risks and
challenges for the Company, as described in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Possible
Implications of Current Events” in the Annual Report to Shareholders filed as
Exhibit 13 to the Company’s Form 10-K for the year ended December 31,
2008.






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


11


March 31,
2009.  Certain policies are considered critical because they are
highly dependent upon subjective or complex judgments, assumptions and
estimates. Changes in such estimates may have a significant impact on the
financial statements. Management has reviewed the application of these policies
with the Audit Committee of LSB Financial’s Board of Directors. These policies
include the following:




Allowance
for Loan Losses




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




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





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




Larger
commercial loans that exhibit probable or observed credit weaknesses are subject
to individual review. Where appropriate, reserves are allocated to individual
loans based on management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral, other sources of cash flow and legal
options available to Lafayette Savings.  Included in the review of
individual loans are those that are impaired as provided in SFAS 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.






12




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.






Financial
Condition




Comparison
of Financial Condition at March 31, 2009 and December 31, 2008




Our total
assets increased $10.6 million, or 2.83%, during the three months from December
31, 2008 to March 31, 2009.  Primary components of this increase were
a $15.0 million increase in short-term investments and cash and due from banks
partially offset by a $4.1 million decrease in net loans receivable including
loans held for sale.  Management attributes the increase in short-term
investments to a $17.1 million increase in deposits from December 31, 2008 to
March 31, 2009 which we moved to short-term investments in expectation of future
funding needs or repayments of Federal Home Loan Bank advances or maturing
brokered deposits.  The decrease in net loans was generally due to the
increase in borrowers refinancing their mortgages to lower rate fixed rate
mortgages which we typically sell on the secondary market.   The
increase in deposits was generally due to a decision by bank customers to move
funds to the safety of a bank offering FDIC deposit insurance coverage rather
than leave them in more risky investments.  We reduced Federal Home
Loan Bank advances by $7.0 million from December 31, 2008 to March 31,
2009.




Non-performing
assets, which include non-accruing loans, accruing loans 90 days past due and
foreclosed assets, increased from $9.4 million at December 31, 2008 to $12.9
million at March 31, 2009.  Non-performing assets at March 31, 2009
consisted of $8.0 million of loans on residential real estate, $2.2 million on
land or commercial real estate loans, $19,000 on consumer loans and $683,000 on
commercial business loans.  Foreclosed assets consisted of $1.7
million of residential property and $220,000 of commercial real
estate.  At March 31, 2009, our allowance for losses equaled 1.20% of
total loans (including loans held for sale) compared to 1.12% at December 31,
2008.  The allowance for loan losses at March 31, 2009 totaled 30.45%
of nonperforming assets compared to 39.38% at December 31, 2008, and 35.71% of
non-performing loans at March 31, 2009 compared to 46.35% at December 31,
2008.  Our non-performing assets equaled 3.36% of total assets at
March 31, 2009 compared to 2.52% at December 31, 2008.


13




When a
non-performing loan is added to our classified loan list, an impairment analysis
is completed to determine expected losses upon final disposition of the
property.  An adjustment to loan loss reserves is made at that time
for any anticipated losses.  This analysis is updated quarterly
thereafter.  Because of the large number of foreclosures the court
systems frequently have backlogs in scheduling loan hearings.  It may
take up to two years to move a foreclosed property through the system to the
point where we can obtain title to and dispose of it.  We attempt to
acquire properties through deeds-in-lieu of foreclosure if there are no other
liens on the properties.  In 2008, we acquired 25 properties through
deeds-in-lieu of foreclosure and an additional 9 properties through
foreclosure.  In the first quarter of 2009 we acquired 2 properties
through deeds-in-lieu of foreclosure and an additional 9 properties through
foreclosure.  As a result, $351 was charged against loan loss reserves
for these properties in 2009 to reduce the carrying value of the property to the
estimated realizable value.  Although we believe we use the best
information available to determine the adequacy of our allowance for loan
losses, future adjustments to the allowance may be necessary, and net income
could be significantly affected if circumstances and/or economic conditions
cause substantial changes in the estimates we use in making the determinations
about the levels of the allowance for losses.  Additionally, various
regulatory agencies, as an integral part of their examination process,
periodically review our allowance for loan losses.  These agencies may
require the recognition of additions to the allowance based upon their judgments
of information available at the time of their examination.




Shareholders’
equity increased from $34.1 million at December 31, 2008 to $34.2 million at
March 31, 2009, an increase of $123,000, or 0.36%, primarily as a result of net
income of $302,000, partially offset by our payment of $193,000 of dividends on
common stock.  Shareholders’ equity to total assets was 8.92% at March
31, 2009 compared to 9.14% at December 31, 2008.


14




Average
Balances, Interest Rates and Yields
 
 The
following table presents for the periods indicated the total dollar amount of
interest income earned on average interest-earning assets and the resultant
yields on such assets, as well as the interest expense paid on average
interest-bearing liabilities, and the rates paid on such
liabilities.  No tax equivalent adjustments were made.  All
average balances are monthly average balances.  Non-accruing loans
have been included in the table as loans carrying a zero
yield.





Three
      months ended
                                      March 31, 2009
                                    
                                    
                                    Three
      months ended
                                      March 31, 2008Average Outstanding Balance
                                    
                                    
                                    Interest Earned/Paid
                                    
                                    
                                    Yield/ Rate
                                    
                                    
                                    Average Outstanding Balance
                                    
                                    
                                    Interest Earned/Paid
                                    
                                    
                                    Yield/RateInterest-Earning
      Assets:Loans
      receivable(1)
                                    
                                    $
                                    324,078
                                    
                                    
                                    
                                    4,856
                                    
                                    
                                    
                                    5.99
                                    %
                                    
                                    $
                                    300,871
                                    
                                    
                                    
                                    5,204
                                    
                                    
                                    
                                    6.92
                                    %Other
      investments
                                    
                                    
                                    33,532
                                    
                                    
                                    
                                    117
                                    
                                    
                                    
                                    1.40
                                    
                                    
                                    
                                    26,462
                                    
                                    
                                    
                                    217
                                    
                                    
                                    
                                    3.28Total
      interest-earning assets
                                    
                                    
                                    357,610
                                    
                                    
                                    
                                    4,973
                                    
                                    
                                    
                                    5.56
                                    
                                    
                                    
                                    327,333
                                    
                                    
                                    
                                    5,421
                                    
                                    
                                    
                                    6.62Savings
      deposits
                                    
                                    $
                                    23,889
                                    
                                    
                                    
                                    61
                                    
                                    
                                    
                                    1.02
                                    
                                    
                                    $
                                    20,807
                                    
                                    
                                    
                                    55
                                    
                                    
                                    
                                    1.06Demand
      and NOW deposits
                                    
                                    
                                    63,431
                                    
                                    
                                    
                                    112
                                    
                                    
                                    
                                    0.71
                                    
                                    
                                    
                                    60,522
                                    
                                    
                                    
                                    140
                                    
                                    
                                    
                                    0.93Time
      deposits
                                    
                                    
                                    182,574
                                    
                                    
                                    
                                    1,641
                                    
                                    
                                    
                                    3.60
                                    
                                    
                                    
                                    155,968
                                    
                                    
                                    
                                    1,754
                                    
                                    
                                    
                                    4.50Borrowings
                                    
                                    
                                    71,500
                                    
                                    
                                    
                                    771
                                    
                                    
                                    
                                    4.31
                                    
                                    
                                    
                                    75,589
                                    
                                    
                                    
                                    929
                                    
                                    
                                    
                                    4.92Total
      interest-bearing liabilities
                                    
                                    
                                    341,394
                                    
                                    
                                    
                                    2,585
                                    
                                    
                                    
                                    3.03
                                    
                                    
                                    
                                    312,886
                                    
                                    
                                    
                                    2,878
                                    
                                    
                                    
                                    3.68Net
      interest income
                                    
                                    
                                    
                                    
                                    
                                    $
                                    2,388
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    2,543Net
      interest rate spread
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2.53
                                    %
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2.95
                                    %Net
      earning assets
                                    
                                    $
                                    16,216
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    14,447Net
      yield on average interest-earning assets
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2.67
                                    %
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    3.11
                                    %Average
      interest-earning assets to average interest-bearing
      liabilities
                                    
                                    
                                    1.05
                                    x
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    1.05
                                    x






15


Results
of Operations




Comparison
of Operating Results the Quarter Ended March 31, 2009 and March 31,
2008




General.  Net income for
the three months ended March 31, 2009 was $302,000, a decrease of $213,000, or
41.36%, over the three months ended March 31, 2008.  The decrease was
primarily due to a $319,000 increase in the allowance for loan losses and a
$156,000 decrease in net interest income and a $214,000 increase in non-interest
expenses, partially offset by a $354,000 increase in non-interest income, and a
$122,000 decrease in taxes on income.




Net Interest
Income.  Net interest
income for the three months ended March 31, 2009 decreased $156,000, or 6.13%,
over the same period in 2008.  This decrease was due to a 44 basis
point decrease in our net interest margin (net interest income divided by
average interest-earning assets) from 3.11% for the three months ended March 31,
2008 to 2.67% for the three months ended March 31, 2009 offset by a $1.8 million
increase in net interest-earning assets.  The decrease in net interest
margin is primarily due to the 106 basis point decrease in the average rate on
interest-earning assets from 6.62% for the three months ended March 31, 2008 to
5.56% for the three months ended March 31, 2009 offset by a 65 basis point
decrease in the average rate on interest-bearing liabilities from 3.68% to 3.03%
for the same respective periods.




Interest
income on loans decreased $348,000, or 6.69%, for the three months ended March
31, 2009 compared to the same three months in 2008.  The average rate
on loans fell from 6.92% to 5.99% partly due to the aggressive rate cuts by the
Federal Reserve starting in 2007 which left prime rates at 3.25% at March 31,
2009 compared to 5.25% in March 2008.  The effect on rates tied to
prime was immediate but all variable rates repriced downward during the
period.  The average balance of loans increased by $23.2 million due
to tighter credit at some of the larger banks which brought us the opportunity
to consider new lending relationships.




Interest
earned on other investments and Federal Home Loan Bank stock decreased by
$100,000, or 46.08%, for the three months ended March 31, 2009 compared to the
same period in 2008.  This was the result of a 188 basis point
decrease in the average yield on other investments and Federal Home Loan Bank
stock offset by a $7.1 million increase in average balances.  Much of
the $17.1 million increase in deposits received in the first quarter was moved
into low-rate, short-term investments in expectation of the opportunity to
replace brokered deposits with local deposits and reduce the level of Federal
Home Loan Bank advances and to fund growth.




Interest
expense for the three months ended March 31, 2009 decreased $292,000, or 10.15%,
over the same period in 2008 due to a $158,000 decrease in interest expense on
Federal Home Loan Bank advances and a $134,000 decrease in interest on
deposits.  The decrease in interest expense on Federal Home Loan Bank
advances was due to a $4.1 million decrease in the average balance along with a
60 basis point decrease in the average rate.  The decrease in interest
on deposits was due to a decrease in the average rate paid on deposits from
3.28% for the first three months of 2008 to 2.69% for the first three months of
2009, offset by a $32.6 million increase in average deposits.  The
decrease in rates was due to generally lower interest rates in the
economy.





16


Provision for
Loan Losses.   The evaluation of the level of loan loss
reserves is an ongoing process that includes closely monitoring loan
delinquencies. The following chart shows delinquent loans as well as a breakdown
of non-performing assets.




03/31/09
                                                          
                                                          
                                                          12/31/08
                                                          
                                                          
                                                          03/31/08Loans
      delinquent 30-59 days
                                                          
                                                          $
                                                          721
                                                          
                                                          
                                                          $
                                                          1,483
                                                          
                                                          
                                                          $
                                                          542Loans
      delinquent 60-89 days
                                                          
                                                          
                                                          3,758
                                                          
                                                          
                                                          
                                                          3,187
                                                          
                                                          
                                                          
                                                          1,260Total
      delinquencies
                                                          
                                                          
                                                          4,479
                                                          
                                                          
                                                          
                                                          4,670
                                                          
                                                          
                                                          
                                                          1,802Accruing
      loans past due 90 days
                                                          
                                                          
                                                          656
                                                          
                                                          
                                                          
                                                          0
                                                          
                                                          
                                                          
                                                          1,669Non-accruing
      loans
                                                          
                                                          
                                                          10,320
                                                          
                                                          
                                                          
                                                          7,976
                                                          
                                                          
                                                          
                                                          6,592Total
      non-performing loans
                                                          
                                                          
                                                          10,976
                                                          
                                                          
                                                          
                                                          7,976
                                                          
                                                          
                                                          
                                                          8,261OREO
                                                          
                                                          
                                                          1,897
                                                          
                                                          
                                                          
                                                          1,412
                                                          
                                                          
                                                          
                                                          3,292Total
      non-performing assets
                                                          
                                                          $
                                                          12,873
                                                          
                                                          
                                                          $
                                                          9,388
                                                          
                                                          
                                                          $
                                                          11,553







The
accrual of interest income is discontinued when a loan becomes 90 days and three payments
past due.  Loans 90 days past due but not yet three payments past due
will continue to accrue interest as long as it has been determined that the loan
is well secured and in the process of collection.  Troubled debt
restructurings are considered non-accruing loans until sufficient time has
passed for them to establish a pattern of compliance with the terms of the
restructure.   Delinquent loans, non-performing loans and other
real estate owned (“OREO”) properties all showed improvement compared to the
prior quarter and the prior year, reflecting the efforts of the staff and the
condition of the local economy.




The
increase in non-performing loans at March 31, 2009 compared to December 31, 2008
was generally due to a number of properties moving into non-performing status
because factors including the deterioration in the borrower’s situation due to
loss of employment or in some cases due to the postponement or inability to
complete an expected sale of property.  We took $910,000 into OREO in
the first quarter, writing off $351,000, and sold a total of $371,000 of OREO
properties.




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 other relevant factors.  From
time to time, we also use the services of a consultant to assist in the
evaluation of our growing commercial real estate loan portfolio. 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.


17


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.





More
specifically, our analysis of the loan portfolio will begin at the time the loan
is originated, at which time 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 higher 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 $569,000 provision for loan losses for the three months ended March
31, 2009 as a result of our analyses of our current loan portfolios, compared to
$250,000 during the same period in 2008.  The provisions were
necessary to maintain the allowance for loan losses at a level considered
adequate to absorb losses inherent and incurred in the loan
portfolio.  During the first quarter of 2009, we charged $351,000
against loan loss reserves on 18 loans either written off or taken into other
real estate owned.  We expect to obtain possession of more properties
in 2009 that are currently in the process of foreclosure.  The final
disposition of these properties may be expected to result in a loss in some
cases.  The $569,000 provision for loan losses in the first quarter of
2009 was considered adequate to cover further charge-offs based on our
evaluation and our loan mix.




2009
                            
                            
                            2008(Dollars
      in Thousands)Balance
      at January 1
                            
                            $
                            3,697
                            
                            
                            $
                            3,702Loans
      charged off
                            
                            
                            (351
                            )
                            
                            
                            (676
                            )Recoveries
                            
                            
                            5
                            
                            
                            
                            1Provision
                            
                            
                            569
                            
                            
                            
                            250Balance
      at March 31
                            
                            $
                            3,920
                            
                            
                            $
                            3,277





At March
31, 2009, non-performing assets, consisting of non-performing loans, accruing
loans 90 days or more delinquent and other real estate owned, totaled $12.9
million compared to $9.4 million at December 31, 2008.  In addition to
our non-performing assets, we identified $4.8 million in other loans of concern
where 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.







18


At March
31, 2009, we believe that our allowance for loan losses was adequate to absorb
probable incurred losses inherent in our loan portfolio.  Our
allowance for losses equaled 1.20% of net loans receivable and 35.71% of
non-performing loans at March 31, 2009 compared to 1.12% and 46.35% at December
31, 2008, respectively.  Our nonperforming assets equaled 3.36% of
total assets at March 31, 2009 compared to 2.52% at December 31,
2008.




Non-Interest
Income.  Non-interest income for the three months ended March
31, 2009 increased by $354,000, or 45.27%, compared to the same period in
2008.  This was primarily due to a $507,000 gain in the sale of
mortgage loans as the lower interest rate and new federal programs have resulted
in a large number of borrowers refinancing their mortgages for lower rate, fixed
rate mortgages which we typically sell on the secondary market. We completed
sales of $21.5 million of loans in the first quarter and anticipated gains of
$134,000 on committed loans to be sold in the second quarter.  The
gain from the sale of loans was offset by a $60,000 decrease in fees on deposit
accounts, by a $58,000 decrease in the gain on the disposal of other real estate
owned, and a $35,000 decrease in other income primarily due to a $45,000
decrease in mortgage loan servicing fees due to writing off the mortgage
servicing rights on loans that were refinanced, offset primarily by a $13,000
increase in fees generated by our in-house wealth management
department.




Non-Interest
Expense.  Non-interest expense for the three months ended March
31, 2009 increased $214,000 over the same period in 2008 due to a $125,000
increase in salaries due to an increase in loan origination activity by
commission-based loan originators and a $94,000 increase in other expenses due
primarily to a $100,000 increase in FDIC insurance.




Income
Tax Expense.
Our income tax
provision decreased by $122,000 for the three months ended March 31, 2009
compared to the three months ended March 31, 2008, due primarily to decreased
income.






Liquidity




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




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




Liquidity
management is both a daily and long-term function for our senior management. We
adjust our investment strategy, within the limits established by our 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.




19


Our
liquidity ratios at March 31, 2009 and December 31, 2008 were 12.04% and 6.64%,
respectively, compared to a regulatory liquidity base, and 9.17% and 5.07%
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, 2009, we had outstanding commitments to
originate loans and available lines of credit totaling $57.5 million and
commitments to provide funds to complete current construction projects in the
amount of $3.9 million. We had $7.6 million in outstanding commitments to sell
residential loans.  Certificates of deposit which will mature in one
year or less totaled $136.5 million at March 31, 2009.  Included in
that number are $45.1 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 $45.5 million of Federal Home Loan Bank advances maturing in the next
twelve months.






Capital
Resources




Shareholders’
equity totaled $34.2 million at March 31, 2009 compared to $34.1 million at
March 31, 2008, an increase of $123,000, or 0.36%, due primarily to net income
of $302,000, partially offset by our payment of dividends on common
stock.  Shareholders’ equity to total assets was 8.92% at March 31,
2009 compared to 9.14% at December 31, 2008.




20


Federal
insured savings institutions are required to maintain a minimum level of
regulatory capital.  If the requirement is not met, regulatory
authorities may take legal or administrative actions, including restrictions on
growth or operations or, in extreme cases, seizure.  As of March 31,
2009 and December 31, 2008, Lafayette Savings was categorized as well
capitalized.  Our actual and required capital amounts and ratios at
March 31, 2009 and December 31, 2008 are presented below:




Actual
                                            
                                            
                                            For
      Capital Adequacy Purposes
                                            
                                            
                                            To
      Be Well Capitalized Under Prompt Corrective Action
    ProvisionsAmount
                                            
                                            
                                            Ratio
                                            
                                            
                                            Amount
                                            
                                            
                                            Ratio
                                            
                                            
                                            Amount
                                            
                                            
                                            RatioAs
      of March 31, 2009Total
      risk-based capital(to
      risk-weighted assets)
                                            
                                            $
                                            36,759
                                            
                                            
                                            
                                            12.6
                                            %
                                            
                                            $
                                            23,332
                                            
                                            
                                            
                                            8.0
                                            %
                                            
                                            $
                                            29,165
                                            
                                            
                                            
                                            10.0
                                            %Tier
      I capital(to
      risk-weighted assets)
                                            
                                            
                                            33,918
                                            
                                            
                                            
                                            11.6
                                            
                                            
                                            
                                            11,666
                                            
                                            
                                            
                                            4.0
                                            
                                            
                                            
                                            17,499
                                            
                                            
                                            
                                            6.0Tier
      I capital(to
      adjusted total assets)
                                            
                                            
                                            33,918
                                            
                                            
                                            
                                            8.9
                                            
                                            
                                            
                                            11,501
                                            
                                            
                                            
                                            3.0
                                            
                                            
                                            
                                            19,168
                                            
                                            
                                            
                                            5.0Tier
      I capital(to
      adjusted tangible assets)
                                            
                                            
                                            33,918
                                            
                                            
                                            
                                            8.9
                                            
                                            
                                            
                                            7,667
                                            
                                            
                                            
                                            2.0
                                            
                                            
                                            
                                            N/A
                                            
                                            
                                            
                                            N/ATangible
      capital(to
      adjusted tangible assets)
                                            
                                            
                                            33,918
                                            
                                            
                                            
                                            8.9
                                            
                                            
                                            
                                            5,751
                                            
                                            
                                            
                                            1.5
                                            
                                            
                                            
                                            N/A
                                            
                                            
                                            
                                            N/AAs
      of December 31, 2008Total
      risk-based capital(to
      risk-weighted assets)
                                            
                                            $
                                            36,409
                                            
                                            
                                            
                                            12.8
                                            %
                                            
                                            $
                                            22,763
                                            
                                            
                                            
                                            8.0
                                            %
                                            
                                            $
                                            28,453
                                            
                                            
                                            
                                            10.0
                                            %Tier
      I capital(to
      risk-weighted assets)
                                            
                                            
                                            33,763
                                            
                                            
                                            
                                            11.9
                                            
                                            
                                            
                                            11,381
                                            
                                            
                                            
                                            4.0
                                            
                                            
                                            
                                            17,072
                                            
                                            
                                            
                                            6.0Tier
      I capital(to
      adjusted total assets)
                                            
                                            
                                            33,763
                                            
                                            
                                            
                                            9.1
                                            
                                            
                                            
                                            11,158
                                            
                                            
                                            
                                            3.0
                                            
                                            
                                            
                                            18,597
                                            
                                            
                                            
                                            5.0Tier
      I capital(to
      adjusted tangible assets)
                                            
                                            
                                            33,763
                                            
                                            
                                            
                                            9.1
                                            
                                            
                                            
                                            7,439
                                            
                                            
                                            
                                            2.0
                                            
                                            
                                            
                                            N/A
                                            
                                            
                                            
                                            N/ATangible
      capital(to
      adjusted tangible assets)
                                            
                                            
                                            33,763
                                            
                                            
                                            
                                            9.1
                                            
                                            
                                            
                                            5,579
                                            
                                            
                                            
                                            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.




21


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.







Item
      3.  Quantitative
      and Qualitative Disclosures About Market Risk




Not
Applicable.






Item
      4T.  Controls
      and Procedures




Evaluation of Disclosure Controls
and Procedures.An evaluation of the Company’s disclosure
controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the
regulations promulgated under the Securities Exchange Act of 1934, as amended
(the “Act”)), as of March 31, 2009, 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.




22


Changes in Internal Controls over
Financial Reporting.There have been no changes in our
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Act) identified in connection with the Company’s evaluation of controls that
occurred during the quarter ended March 31, 2009, that have materially affected,
or are reasonably likely to materially affect, our internal control over the
financial reporting.









PART
II. OTHER INFORMATION




Item
      1.  Legal
      Proceedings




None.






Item
      1A.Risk Factors




Not
Applicable.







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




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




Issuer
      Purchases of Equity SecuritiesMonth of Purchase
                  
                  Total
      Number of Shares Purchased1
                  
                  
                  Average
      Price Paid per Share
                  
                  
                  Total
      Number of Shares Purchased as Part of Publicly Announced Plans orPrograms2
                  
                  
                  Maximum
      Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
      Under the Plans orPrograms2January
      1 – January 31, 2009
                  
                  
                  ---
                  
                  
                  
                  ---
                  
                  
                  
                  ---
                  
                  
                  
                  52,817February
      1 – February 28, 2009
                  
                  
                  ---
                  
                  
                  
                  ---
                  
                  
                  
                  ---
                  
                  
                  
                  52,817March
      1 – March 31, 2009
                  
                  
                  ---
                  
                  
                  
                  ---
                  
                  
                  
                  ---
                  
                  
                  
                  52,817Total
                  
                  
                  ---
                  
                  
                  
                  $   ---
                  
                  
                  
                  ---
                  
                  
                  
                  52,817


_______________________




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


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




23


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.









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: 
      May 15, 2009
            By:
            /s/
      Randolph F. WilliamsRandolph
      F. Williams, President(Principal
      Executive Officer)Date: 
      May 15, 2009
            By:
            /s/
      Mary
      Jo DavidMary
      Jo David, Treasurer(Principal
      Financial and 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
      906 Certification