**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 June 30, 2006ORo
              
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                  EXCHANGE ACT OF 1934For
                  the transition period from ________________ to
                  ________________
 
 Commission
        file number: 0-25070
 
 **LSB
        FINANCIAL CORP.**
 (Exact
        name of registrant as specified in its charter)
 
 **Indiana**
              
              **35-1934975**(State
                  or other jurisdiction of
              
              (I.R.S.
                  Employerincorporation
                  or organization)
              
              Identification
                  No.)**101
                  Main Street, Lafayette, Indiana**
              
              **47901**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 **(765)
        742-1064**
 (Registrant’s
        telephone number, including area code)
 
 **None**
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
        Yes [X]     No [   ]
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.    Large accelerated
        filer [   ]      Accelerated
        filer [   ]      Non-accelerated
        filer [X]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange
        Act).   Yes [   ]      No [X]
 
 Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock, as of the latest practicable date.
 
 Class
              
              Outstanding
                  at July 15, 2006Common
                  Stock, $.01 par value per share
              
              1,531,458
                  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
              20Item
                  4.
              Controls
                  and Procedures
              21PART
                  II.
              OTHER
                  INFORMATION
              21Item
                  1.
              Legal
                  Proceedings
              21Item
                  1A.
              Risk
                  Factors
              21Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              22Item
                  3.
              Defaults
                  Upon Senior Securities
              22Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              22Item
                  5.
              Other
                  Information
              23Item
                  6.
              Exhibits
              23SIGNATURES
              24INDEX
                  TO EXHIBITS
              25
 
 
 
 
  
  **PART
        I**  **FINANCIAL
        INFORMATION**
  **Item
                  1.**
              **Financial
                  Statements**
  LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Balance Sheets
 (Dollars
        in thousands except per share data)
 **June
                    30,**
                  **2006**
                
                **December
                    31,**
                  **2005**(unaudited)AssetsCash
                    and due from banks
                
                $
                1,482
                
                $
                1,697Short-term
                    investments
                
                
                7,377
                
                
                7,687Cash
                    and cash equivalents
                
                
                8,859
                
                
                9,384Available-for-sale
                    securities
                
                
                12,401
                
                
                11,611Loans
                    held for sale
                
                
                632
                
                
                ---Total
                    loans
                
                
                326,056
                
                
                333,823Less:
                    Allowance for loan losses
                
                
                (2,731
                )
                
                (2,852
                )Net
                    loans
                
                
                323,325
                
                
                330,971Premises
                    and equipment, net
                
                
                6,717
                
                
                6,813Federal
                    Home Loan Bank stock, at cost
                
                
                4,197
                
                
                4,197Bank
                    owned life insurance
                
                
                5,270
                
                
                2,715Interest
                    receivable and other assets
                
                
                7,726
                
                
                6,973Total
                    Assets
                
                
                369,127
                
                
                372,664Liabilities
                    and Shareholders’ EquityLiabilitiesDeposits
                
                
                260,451
                
                
                265,993Federal
                    Home Loan Bank advances
                
                
                73,033
                
                
                72,033Interest
                    payable and other liabilities
                
                
                1,982
                
                
                1,817Total
                    liabilities
                
                
                335,466
                
                
                339,843Commitments
                    and ContingenciesShareholders’
                    EquityCommon
                    stock, $.01 par valueAuthorized
                    - 7,000,000 shares
                  Issued
                    and outstanding 2006 - 1,531,458 shares, 2005 - 1,547,806
                    shares
                
                
                14
                
                
                15Additional
                    paid-in-capital
                
                
                10,183
                
                
                10,565Retained
                    earnings
                
                
                23,616
                
                
                22,402Unearned
                    recognition and retention plan (RRP) shares
                
                
                0
                
                
                (22
                )Unearned
                    ESOP compensation
                
                
                (24
                )
                
                (49
                )Accumulated
                    other comprehensive loss
                
                
                (128
                )
                
                (90
                )Total
                    shareholders’ equity
                
                
                33,661
                
                
                32,821Total
                    liabilities and shareholders’ equity
                
                $
                369,127
                
                $
                372,664
 
 See
        notes
        to consolidated condensed financial statements.
  1
  
 LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Income
 (Dollars
        in thousands, except per share data)
 (Unaudited)
 
 **Three
                  months ended**
                **June
                  30,**
              
              **Six
                  months ended**
                **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Interest
                  and Dividend Income**Loans
              
              $
              5,527
              
              $
              5,157
              
              $
              11,129
              
              $
              10,151SecuritiesTaxable
              
              
              119
              
              
              77
              
              
              223
              
              
              155Tax-exempt
              
              
              48
              
              
              40
              
              
              96
              
              
              72Other
              
              
              30
              
              
              25
              
              
              62
              
              
              43Total
                  interest and dividend income
              
              
              5,724
              
              
              5,299
              
              
              11,510
              
              
              10,421**Interest
                  Expense**Deposits
              
              
              1,942
              
              
              1,594
              
              
              3,841
              
              
              3,097Borrowings
              
              
              762
              
              
              754
              
              
              1,527
              
              
              1,496Total
                  interest expense
              
              
              2,704
              
              
              2,348
              
              
              5,368
              
              
              4,593**Net
                  interest income**
              
              
              3,020
              
              
              2,951
              
              
              6,142
              
              
              5,828**Provision
                  for Loan Losses**
              
              
              250
              
              
              125
              
              
              400
              
              
              300**Net
                  Interest Income After Provision for Loan Losses**
              
              
              2,770
              
              
              2,826
              
              
              5,742
              
              
              5,528**Non-interest
                  income**Deposit
                  account service charges and fees
              
              
              449
              
              
              281
              
              
              873
              
              
              487Net
                  gains on loan sales
              
              
              58
              
              
              108
              
              
              109
              
              
              173Gain
                  on sale of securities
              
              
              0
              
              
              0
              
              
              0
              
              
              0Other
              
              
              195
              
              
              218
              
              
              382
              
              
              431Total
                  non-interest income
              
              
              702
              
              
              607
              
              
              1,364
              
              
              1,091**Non-interest
                  Expense**Salaries
                  and employee benefits
              
              
              1,143
              
              
              1,096
              
              
              2,430
              
              
              2,288Net
                  occupancy and equipment expense
              
              
              291
              
              
              265
              
              
              580
              
              
              541Computer
                  service
              
              
              104
              
              
              127
              
              
              202
              
              
              226Advertising
              
              
              72
              
              
              109
              
              
              129
              
              
              150Other
              
              
              514
              
              
              476
              
              
              999
              
              
              911Total
                  non-interest expense
              
              
              2,124
              
              
              2,073
              
              
              4,340
              
              
              4,116**Income
                  Before Income Taxes**
              
              
              1,348
              
              
              1,360
              
              
              2,766
              
              
              2,503**Provision
                  for Income Taxes**
              
              
              520
              
              
              467
              
              
              1,030
              
              
              843**Net
                  income**
              
              $
              828
              
              $
              893
              
              $
              1,736
              
              $
              1,660**Basic
                  Earnings Per Share**
              
              $
              0.54
              
              $
              0.58
              
              $
              1.13
              
              $
              1.10**Diluted
                  Earnings Per Share**
              
              $
              0.53
              
              $
              0.57
              
              $
              1.12
              
              $
              1.08**Dividends
                  Declared Per Share**
              
              $
              0.17
              
              $
              0.15
              
              $
              0.34
              
              $
              0.30
 
 See
        notes
        to consolidated condensed financial statements.
  2
  
 LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Changes in Shareholders’ Equity
 For
        the
        Six Months Ended June 30, 2006 and 2005
 (Dollars
        in thousands)
 (Unaudited)
 
 **Common
                  Stock**
              
              **Additional
                  Paid-In Capital**
              
              **Retained
                  Earnings**
              
              **Benefit
                  Plans Compensation**
              
              **Accumulated
                  Other Comprehensive Income (Loss)**
              
              **Total****Balance,
                  January 1, 2005**
              
              $
              14
              
              $
              8,235
              
              $
              22,304
              
              $
              (154
              )
              $
              (6
              )
              $
              30,393Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              1,660
              
              
              
              
              
              
              
              
              1,660Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (16
              )
              
              (16
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,644Dividends
                  on common stock, $0.30 per share
              
              
              
              
              
              
              
              
              (464
              )
              
              
              
              
              
              
              
              (464
              )Purchase
                  and retirement of stock (21,091 shares)
              
              
              
              
              
              (528
              )
              
              
              
              
              
              
              
              
              
              
              (528
              )Stock
                  options exercised (64,605 shares)
              
              
              
              
              
              249
              
              
              
              
              
              
              
              
              
              
              
              249Tax
                  benefit related to stock options exercised
              
              
              
              
              
              405
              
              
              
              
              
              
              
              
              
              
              
              405Amortization
                  of RRP expense
              
              
              
              
              
              
              
              
              
              
              
              15
              
              
              
              
              
              15ESOP
                  shares earned
              
              
              
              
              
              94
              
              
              
              
              
              28
              
              
              
              
              
              122**Balance,
                  June 30, 2005**
              
              $
              14
              
              $
              8,455
              
              $
              23,500
              
              $
              (111
              )
              $
              (22
              )
              $
              31,836**Balance,
                  January 1, 2006**
              
              
              15
              
              
              10,565
              
              
              22,402
              
              
              (71
              )
              
              (90
              )
              
              32,821Reclassification
                  of unearned compensation upon adoption of SFAS 123(R)
              
              
              
              
              
              (22
              )
              
              
              
              
              22Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              1,736
              
              
              
              
              
              
              
              
              1,736Change
                  in unrealized appreciation (depreciation) on available-for-sale
                  securities, net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (38
              )
              
              (38
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,698Dividends
                  on common stock, $0.34 per share
              
              
              
              
              
              
              
              
              (522
              )
              
              
              
              
              
              
              
              (522
              )Purchase
                  and retirement of stock (18,500 shares)
              
              
              (1
              )
              
              (523
              )
              
              
              
              
              
              
              
              
              
              
              (524
              )Stock
                  options exercised (2,152 shares)
              
              
              
              
              
              34
              
              
              
              
              
              
              
              
              
              
              
              34Amortization
                  of stock option compensation
              
              
              
              
              
              12
              
              
              
              
              
              
              
              
              
              
              
              12Amortization
                  of RRP expense
              
              
              
              
              
              15
              
              
              
              
              
              
              
              
              
              
              
              15ESOP
                  shares earned
              
              
              
              
              
              102
              
              
              
              
              
              25
              
              
              
              
              
              127**Balance,
                  June 30, 2006**
              
              $
              14
              
              $
              10,183
              
              $
              23,616
              
              $
              (24
              )
              $
              (128
              )
              $
              33,661
 
 See
        notes
        to consolidated condensed financial statements.
  3
  
 LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Cash Flows
 (Dollars
        in thousands)
 (Unaudited)
 
 **Six
                  months ended**
                **June
                  30,****2006**
              
              **2005**Operating
                  ActivitiesNet
                  income
              
              $
              1,736
              
              $
              1,660Items
                  not requiring (providing) cashDepreciation
              
              
              232
              
              
              171Provision
                  for loan losses
              
              
              400
              
              
              300Amortization
                  of premiums and discounts on securities
              
              
              29
              
              
              18Federal
                  Home Loan Bank stock dividend
              
              
              0
              
              
              (87
              )ESOP
                  shares earned
              
              
              127
              
              
              122Gain
                  on sale of loans
              
              
              (57
              )
              
              81Loans
                  originated for sale
              
              
              (5,819
              )
              
              (4,673
              )Proceeds
                  on loans sold
              
              
              5,244
              
              
              4,863Changes
                  inInterest
                  receivable and other assets
              
              
              (767
              )
              
              96Interest
                  payable and other liabilities
              
              
              165
              
              
              650Net
                  cash from operating activities
              
              
              1,290
              
              
              3,201Investing
                  ActivitiesPurchases
                  of available-for-sale securities
              
              
              (1,497
              )
              
              (997
              )Proceeds
                  from maturities of available-for-sale securities
              
              
              614
              
              
              186Net
                  change in loans
              
              
              7,246
              
              
              (11,897
              )Purchase
                  of premises and equipment
              
              
              (136
              )
              
              (94
              )Purchase
                  of life insurance policies
              
              
              (2,500
              )
              
              0Net
                  cash from investing activities
              
              
              3,727
              
              
              (12,802
              )Financing
                  ActivitiesNet
                  change in demand deposits, money market, NOW and savings
                  accounts
              
              
              (2,392
              )
              
              (4,243
              )Net
                  change in certificates of deposit
              
              
              (3,150
              )
              
              7,283Proceeds
                  from Federal Home Loan Bank advances
              
              
              27,500
              
              
              27,500Repayment
                  of Federal Home Loan Bank advances
              
              
              (26,500
              )
              
              (20,300
              )Proceeds
                  from stock options exercised
              
              
              34
              
              
              249Future
                  compensation cost of stock options
              
              
              12
              
              
              0Repurchase
                  of stock
              
              
              (524
              )
              
              (528
              )Dividends
                  paid
              
              
              (522
              )
              
              (464
              )Net
                  cash from financing activities
              
              
              (5,542
              )
              
              9,497Increase
                  (Decrease) in Cash and Cash Equivalents
              
              
              (525
              )
              
              (104
              )Cash
                  and Cash Equivalents, Beginning of Period
              
              
              9,384
              
              
              9,213Cash
                  and Cash Equivalents, End of Period
              
              $
              8,859
              
              $
              9,109Supplemental
                  Cash Flows InformationInterest
                  paid
              
              
              5,359
              
              
              4,499Income
                  taxes paid
              
              
              890
              
              
              256Supplemental
                  Non-Cash DisclosuresCapitalization
                  of mortgage servicing rights
              
              
              52
              
              
              92
 
 See
        notes
        to consolidated condensed financial statements
  4
  
 LSB
        FINANCIAL CORP.
 Notes
        to
        Consolidated Financial Statements
 June
        30,
        2006
 
 Note
        1 -
        General
  The
        financial statements were prepared in accordance with the instructions for
        Form
        10-Q and, therefore, do not include all of the disclosures necessary for
        a
        complete presentation of financial position, results of operations and cash
        flows in conformity with accounting principles generally accepted in the
        United
        States of America. These interim financial statements have been prepared
        on a
        basis consistent with the annual financial statements and include, in the
        opinion of management, all adjustments, consisting of only normal recurring
        adjustments, necessary for a fair presentation of the results of operations
        and
        financial position for and at the end of such interim periods. All outstanding
        shares and per share figures have been adjusted to reflect a 5% stock dividend
        payable by LSB Financial Corp. (the “Company” or “LSB Financial”) to
        shareholders of record on October 7, 2005. The consolidated condensed balance
        sheet of LSB Financial Corp. as of December 31, 2005 has been derived from
        the
        audited consolidated balance sheet of LSB Financial Corp. as of that date.
  Certain
        information and note disclosures normally included in the Company’s annual
        financial statements prepared in accordance with generally accepted accounting
        principles have been condensed or omitted. These condensed (consolidated)
        financial statements should be read in conjunction with the (consolidated)
        financial statements and notes thereto included in the Company’s Form 10-K
        annual report for the fiscal year ended December 31, 2005 filed with the
        Securities and Exchange Commission. The results of operations for the period
        are
        not necessarily indicative of the results to be expected for the full
        year.
  Stock
        Options: Effective January 1, 2006, the Company adopted Statement of Financial Accounting
        Standards No. 123(R), *Share-Based
        Payment* ("SFAS
        123R"). SFAS 123R addresses all forms of share-based payment awards, including
        shares under employee stock purchase plans, stock options, restricted stock
        and
        stock appreciation rights. SFAS 123R requires all share-based payments to
        be
        recognized as expense, based upon their fair values, in the financial statements
        over the vesting period of the awards. The Company has elected the modified
        prospective application method and, as a result, has recorded approximately
        $12,000 in compensation expense related to vested stock options less estimated
        forfeitures for the six month period ended June 30, 2006. Certain other
        disclosures as required by SFAS 123R have been omitted due to their immaterial
        nature. Prior to the adoption of SFAS 123R, unearned compensation related
        to the
        Recognition and Retention Plan (RRP) shares was classified as a separate
        component of shareholders equity. In accordance with SFAS 123R, the balance
        in
        unearned compensation on January 1, 2006 was reclassified to additional paid-in
        capital. Prior to 2006, the
        Company accounted for this plan under the recognition and measurement principles
        of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and related interpretations. No stock-based employee compensation cost was
        reflected in net income, as all options granted under the plan had an exercise
        price equal to the market value of the underlying common stock on the grant
        date.
   5
  The
        following table illustrates the effect on net income and earnings per share
        if
        expense was measured using the fair value recognition provisions of Financial
        Accounting Standards Board (FASB) Statement No. 123, *Accounting
        for Stock-Based Compensation* .
 
  Three
                  months ended
              
              Six
                  months endedJune
                  30, 2005
              
              June
                  30, 2005Net
                  income as reported
              
              $
              893
              
              $
              1,660Deduct:
                  Stock-based compensation expense determined under fair value based
                  method
              
              
              (11
              )
              
              (22
              )Pro
                  forma net income
              
              $
              882
              
              $
              1,638Basic
                  earnings per share as reported
              
              $
              0.58
              
              $
              1.10Pro
                  forma basic earnings per share
              
              
              0.57
              
              
              1.08Diluted
                  earnings per share as reported
              
              
              0.58
              
              
              1.08Pro
                  forma diluted earnings per share
              
              
              0.57
              
              
              1.06
 
  Note
        2 -
        Principles of Consolidation
  The
        accompanying financial statements include the accounts of LSB Financial,
        its
        wholly owned subsidiary Lafayette Savings Bank, FSB (“Lafayette Savings”), and
        Lafayette Savings’ wholly owned subsidiaries, LSB Service Corporation and
        Lafayette Insurance and Investments, Inc. All significant intercompany
        transactions have been eliminated upon consolidation.
   6
  Note
        3 -
        Earnings per share
  Earnings
        per share are based upon the weighted average number of shares outstanding
        during the period. Diluted earnings per share further assume the issuance
        of any
        potentially dilutive shares. Unearned ESOP shares are not considered to be
        outstanding for the earnings per share computation. All shares were included
        in
        the diluted earnings per share calculation as their effect would be dilutive.
        The following table presents information about the number of shares used
        to
        compute earnings per share and the results of the computations:
 
 **Three
                  months ended June 30,**
              
              **Six
                  months ended June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Weighted
                  average shares outstanding (excluding unearned ESOP
                  shares)
              
              
              1,545,308
              
              
              1,527,336
              
              
              1,534,240
              
              
              1,522,461Shares
                  used to compute diluted earnings per share
              
              
              1,555,563
              
              
              1,552,071
              
              
              1,544,887
              
              
              1,546,905Earnings
                  per share
              
              $
              0.54
              
              $
              0.58
              
              $
              1.13
              
              $
              1.10Diluted
                  earnings per share
              
              $
              0.53
              
              $
              0.57
              
              $
              1.12
              
              $
              1.08
 
 
  Note
        4 -
        Future Accounting Pronouncements
  ***Servicing
        of Financial Assets.*** ** In
        March
        2006, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standards (SFAS) 156. This Statement amends SFAS 140, *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities,* with
        respect to the accounting for separately recognized servicing assets and
        servicing liabilities.
  SFAS
        156
        requires an entity to initially recognize a servicing asset or servicing
        liability at fair value each time it undertakes an obligation to service
        a
        financial asset by entering into a servicing contract in other specific
        situations.
  In
        addition, SFAS 156 permits an entity to choose either of the following
        subsequent measurement methods for each class of separately recognized servicing
        assets and servicing liabilities:
  
 **·**
            Amortization
                method—Amortize servicing assets or servicing liabilities in proportion
                to
                and over the period of estimated net servicing income or net servicing
                loss and assess servicing assets or servicing liabilities for impairment
                or increased obligation based on fair value at each reporting date.  **·**
            Fair
                value measurement method—Measure servicing assets or servicing liabilities
                at fair value at each reporting date and report changes in fair value
                in
                earnings in the period in which the changes occur.  7
  
 SFAS
        156
        is effective at the beginning of an entity’s first fiscal year that begins after
        September 15, 2006 and should be applied prospectively for recognition and
        initial measurement of servicing assets and servicing liabilities. Earlier
        adoption is permitted as of the beginning of an entity’s fiscal year, provided
        the entity has not yet issued financial statements, including interim financial
        statements, for any period of that fiscal year.
  The
        Company did not early adopt SFAS 156 on January 1, 2006. The Company is
        currently evaluating the effect of adoption of this Statement on the Company’s
        financial condition or results of operations.
   8
  **Item
                  2.**
              **Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations**
  **Executive
        Summary**
  LSB
        Financial Corp. (the “Company” or “LSB Financial”) is an Indiana corporation
        which was organized in 1994 by Lafayette Savings Bank, FSB (“Lafayette Savings”)
        for the purpose of becoming a thrift institution holding company. Lafayette
        Savings is a federally chartered stock savings bank headquartered in Lafayette,
        Indiana. References in this Form 10-Q to "we," "us," and "our" refer to LSB
        Financial and/or Lafayette Savings as the context requires.
  Lafayette
        Savings has been, and intends to continue to be, a community-oriented financial
        institution. Our principal business consists of attracting retail deposits
        from
        the general public and investing those funds primarily in permanent first
        mortgage loans secured by owner-occupied, one- to four-family residences
        and, to
        a lesser extent, non-owner occupied one- to four-family residential, commercial
        real estate, multi-family, construction and development, consumer and commercial
        business loans. Our revenues are derived principally from interest on mortgage
        and other loans and interest on securities.
  Tippecanoe
        County and the eight surrounding counties comprise Lafayette Savings' primary
        market area. Lafayette is the county seat of Tippecanoe County, and West
        Lafayette is the home of Purdue University. The greater Lafayette area enjoys
        diverse employment including major manufacturers such as Subaru, Caterpillar,
        Wabash National and Greater Lafayette Health Services; a strong education
        sector
        with Purdue University and a large local campus of Ivy Tech Community College;
        government offices of Lafayette, West Lafayette and Tippecanoe County; and
        a
        growing high-tech presence with the Purdue Research Park. In the past this
        diversity insulated us from economic downturns, but the slowdowns of the
        last
        few years had a noticeable effect on the area. The unemployment rate at May
        2006, the most recent data available, showed unemployment rates of 4.0% for
        Tippecanoe County and 4.8% for Indiana compared to 4.5% for Tippecanoe County
        and 5.3% for Indiana at December 2005, a slight improvement since year end.
        An
        announcement that Toyota intends to build 100,000 Camrys per year in Lafayette
        starting in 2007 should also help the local economic recovery.
  Our
        primary source of income is net interest income, which is the difference
        between
        the interest income earned on our loan and investment portfolios and the
        interest expense incurred on deposits and borrowings. Our net interest income
        depends on the balance of our loan and investment portfolios and the size
        of our
        net interest margin, which is the difference between the income generated
        from
        loans and the cost of the funding. A major area of concern in the growth
        of net
        interest income is the continuing flattening of the yield curve. Short-term
        rates increased steadily over 2005 and have continued to increase in 2006.
        Long-term rates, however, have remained relatively flat. Because deposits
        are
        generally tied to shorter-term market rates, and loans are generally tied
        to
        longer-term rates, the shrinking spread between the two has made it more
        difficult to maintain desired operating income levels. Our expectation is
        that
        short-term rates will continue to rise as the Federal Reserve Board responds
        to
        inflation concerns and the growing strength of the economy. Long-term rates
        have
        remained low because the purchase of U.S. government bonds has driven up
        the
        price of long-term bonds and kept their returns low. Until this situation
        changes we expect the yield curve to remain fairly flat.
   9
  Rate
        changes could be expected to have an impact on interest income. Rising rates
        generally increase borrower preference for variable-rate products which we
        typically keep in our portfolio. Additionally, existing adjustable rate loans
        can be expected to reprice to higher rates, both of which could be expected
        to
        have a favorable impact on interest income. Alternatively, continuing low
        interest rates could have a negative impact on our interest income as new
        loans
        are put on the books at comparatively low rates and our existing adjustable
        rate
        loans reprice to lower rates. Even if rates do fall, because so many borrowers
        refinanced their mortgages in the last few years, we do not expect to see
        a
        return to a high volume of refinancing. However, low rates may be expected
        to
        encourage borrowers to initiate additional real estate related purchases.
  We
        consider expected changes in interest rates when structuring our
        interest-earning assets and our interest-bearing liabilities. If rates are
        expected to increase we try to book shorter-term assets that will reprice
        relatively quickly to higher rates over time, and book longer-term liabilities
        that will remain for a longer time at lower rates. Conversely, if rates are
        expected to fall, we intend to structure our balance sheet such that loans
        will
        reprice more slowly to lower rates and deposits will reprice more quickly.
        We
        currently offer a three-year and a five-year certificate of deposit that
        allows
        depositors one opportunity to have their rate adjusted to the market rate
        at a
        future date to encourage them to choose longer-term deposit products. However,
        since we are not able to predict market interest rate fluctuations, our
        asset/liability management strategy may not prevent interest rate changes
        from
        having an adverse effect on our results of operations and financial
        condition.
  Our
        results of operations may also be affected by general and local competitive
        conditions, particularly those with respect to changes in market interest
        rates,
        government policies and actions of regulatory authorities.
   **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 June 30, 2006. Certain policies are
        considered critical because they are highly dependent upon subjective or
        complex
        judgments, assumptions and estimates. Changes in such estimates may have
        a
        significant impact on the financial statements. Management has reviewed the
        application of these policies with the Audit Committee of LSB Financial’s Board
        of Directors. These policies include the following:
   ***Allowance
        for Loan Losses***
  The
        allowance for loan losses represents management's estimate of probable losses
        inherent in Lafayette Savings’ loan portfolios. In determining the appropriate
        amount of the allowance for loan losses, management makes numerous assumptions,
        estimates and assessments.
   10
  The
        strategy also emphasizes diversification on an industry and customer level,
        regular credit quality reviews and quarterly management reviews of large
        credit
        exposures and loans experiencing deterioration of credit quality.
  Lafayette
        Savings’ allowance consists of three components: probable losses estimated from
        individual reviews of specific loans, probable losses estimated from historical
        loss rates, and probable losses resulting from economic or other deterioration
        above and beyond what is reflected in the first two components of the
        allowance.
  Larger
        commercial loans that exhibit probable or observed credit weaknesses are
        subject
        to individual review. Where appropriate, reserves are allocated to individual
        loans based on management's estimate of the borrower's ability to repay the
        loan
        given the availability of collateral, other sources of cash flow and legal
        options available to Lafayette Savings. Included in the review of individual
        loans are those that are impaired as provided in SFAS 114, *Accounting
        by Creditors for Impairment of a Loan.* Any
        allowances for impaired loans are determined by the present value of expected
        future cash flows discounted at the loan's effective interest rate or fair
        value
        of the underlying collateral. Historical loss rates are applied to other
        commercial loans not subject to specific reserve allocations.
  Homogenous
        smaller balance loans, such as consumer installment and residential mortgage
        loans are not individually risk graded. Reserves are established for each
        pool
        of loans based on the expected net charge-offs for one year. Loss rates are
        based on the average net charge-off history by loan category.
  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.
  An
        unallocated reserve is maintained to recognize the imprecision in estimating
        and
        measuring loss when evaluating reserves for individual loans or pools of
        loans.
        Allowances on individual loans are reviewed quarterly and historical loss
        rates
        are reviewed annually and adjusted as necessary based on changing borrower
        and/or collateral conditions and actual collection and charge-off
        experience.
  Lafayette
        Savings’ primary market area for lending is Tippecanoe County, Indiana. When
        evaluating the adequacy of allowance, consideration is given to this regional
        geographic concentration and the closely associated effect of changing economic
        conditions on Lafayette Savings’ customers.
   ***Mortgage
        Servicing Rights***
  Mortgage
        servicing rights (MSRs) associated with loans originated and sold, where
        servicing is retained, are capitalized and included in other intangible assets
        in the consolidated balance sheet. The value of the capitalized servicing
        rights
        represents the present value of the
   11
  future
        servicing fees arising from the right to service loans in the portfolio.
        Critical accounting policies for MSRs relate to the initial valuation and
        subsequent impairment tests. The methodology used to determine the valuation
        of
        MSRs requires the development and use of a number of estimates, including
        anticipated principal amortization and prepayments of that principal balance.
        Events that may significantly affect the estimates used are changes in interest
        rates, mortgage loan prepayment speeds and the payment performance of the
        underlying loans. The carrying value of the MSRs is periodically reviewed
        for
        impairment based on a determination of fair value. For purposes of measuring
        impairment, the servicing rights are compared to a valuation prepared based
        on a
        discounted cash flow methodology, utilizing current prepayment speeds and
        discount rates. Impairment, if any, is recognized through a valuation allowance
        and is recorded as amortization of intangible assets.
   **Financial
        Condition**
  ***Comparison
        of Financial Condition at June 30, 2006 and December 31,
        2005***
  Our
        total
        assets decreased $3.5 million or 0.95% during the six months from December
        31,
        2005 to June 30, 2006. Primary components of this decrease were a $7.0 million
        decrease in net loans receivable including loans held for sale offset by
        a $2.6
        million increase in bank owned life insurance, a $790,000 increase in
        investments and a $753,000 increase in other assets due mostly to an increase
        in
        other real estate owned. Management attributes the decrease in loans primarily
        to rising interest rates resulting in a decrease in loan origination activity,
        the expected payoff of several large loans due to a change in property ownership
        or strategy of the borrowers, and from the transfer of $2.9 million of loans
        from non-performing status to real estate owned as we gain control of additional
        foreclosed properties. We purchased $2.5 million of additional bank owned
        life
        insurance because the tax exempt increase in cash surrender value helps offset
        our tax burden. Because of decreased funding needs we were able to avoid
        higher
        rate deposits and allowed $5.5 million of deposits to run off.
  Non-performing
        assets, which include non-accruing loans, accruing loans 90 days past due
        and
        foreclosed assets, decreased from $10.6 million at December 31, 2005 to $10.4
        million at June 30, 2006. Non-performing loans totaled $7.6 million at June
        30,
        2006 and consisted of $5.8 million or 76.56% of one- to four-family or
        multi-family residential real estate loans, $1.8 million or 23.23% of loans
        on
        land or commercial property and $16,000 of commercial business loans.
        Non-performing assets also include $2.9 million in foreclosed assets. At
        June
        30, 2006, our allowance for loan losses equaled 0.84% of total loans compared
        to
        0.85% at December 31, 2005. The allowance for loan losses at June 30, 2006
        totaled 26.19% of non-performing assets compared to 27.00% at December 31,
        2005,
        and 36.06% of non-performing loans at June 30, 2006 compared to 33.32% at
        December 31, 2005. Our non-performing assets equaled 2.82% of total assets
        at
        June 30, 2006 compared to 2.83% at December 31, 2005. Non-performing assets
        totaling $558,000 were charged off in the first six months of 2006, offset
        by
        recoveries of $38,000. These charge-offs were largely covered by existing
        reserves and there was no need for additional provisions to the allowance
        for
        the amounts charged off. Although we believe we use the best information
        available to determine the adequacy of our allowance for loan losses, future
        adjustments to the allowance may be necessary, and net income could be
        significantly affected, if circumstances and/or economic conditions cause
        substantial changes in the estimates we use in making the determinations
        about
        the levels of the allowance for losses. Additionally, various
   12
  regulatory
        agencies, as an integral part of their examination process, periodically
        review
        our allowance for loan losses. These agencies may require the recognition
        of
        additions to the allowance based upon their judgments of information available
        at the time of their examination.
  Shareholders’
        equity increased from $32.8 million at December 31, 2005 to $33.7 million
        at
        June 30, 2006, an increase of $840,000, or 2.56%, primarily as a result of
        net
        income of $1.7 million, partially offset by our payment of $522,000 of dividends
        on common stock, and the repurchase of 18,500 shares of our stock as part
        of a
        stock repurchase plan. Shareholders’ equity to total assets was 9.12% at June
        30, 2006 compared to 8.81% at December 31, 2005.
   **Results
        of Operations**
  ***Comparison
        of Operating Results for the Six Months and the Quarter Ended June 30, 2006
        and
        June 30, 2005***
  ***General*** *.*  Net
        income for the six months ended June 30, 2006 was $1.7 million, an increase
        of
        $76,000 or 4.58%, over the six months ended June 30, 2005. Net income for
        the
        quarter ended June 30, 2006 was $828,000, a decrease of $65,000 or 7.28%
        over
        the comparable quarter in 2005. This
        increase for the six month period was primarily due to a $314,000 increase
        in
        net interest income and a $273,000 increase in non-interest income partially
        offset by a $100,000 increase in the provision for losses, a $224,000 increase
        in non-interest expenses, and a $187,000 increase in taxes on income. The
        decrease for the three month period was primarily due to a smaller, $69,000
        increase in net interest income and a $95,000 increase in non-interest income
        partially offset by a $125,000 increase in the provision for losses, a $51,000
        increase in non-interest expenses, and a $53,000 increase in taxes on
        income.
  ***Net
        Interest Income*** *.* Net
        interest income for the six months ended June 30, 2006 increased $314,000,
        or
        5.39%, over the same period in 2005. This increase was primarily due to a
        $2.6
        million increase in interest-earning assets and a 15 basis point increase
        in our
        net interest margin (net interest income divided by average interest-earning
        assets) from 3.35% for the six months ended June 30, 2005 to 3.50% for the
        six
        months ended June 30, 2006. The increase in net interest margin is primarily
        the
        result of an increase in the average rate earned on interest-earning assets
        from
        5.98% for the six months ended June 30, 2005 to 6.56% for the six months
        ended
        June 30, 2006, offset by an increase in the average rate paid on
        interest-bearing liabilities from 2.77% for the six months ended June 30,
        2005
        to 3.21% for the six months ended June 30, 2006. Net
        interest income for the second quarter of 2006 increased $69,000, or 2.34%,
        compared to the same period in 2005. Average interest-earning assets decreased
        by $5.3 million from the second quarter of 2005 to the second quarter of
        2006,
        with an accompanying $3.2 million decrease in interest-bearing liabilities.
        The
        average rate on interest-earning assets increased from 6.03% for the period
        in
        2005 to 6.60% in 2006, while the average rate on interest-bearing liabilities
        increased from 2.88% to 3.26% over the same period. The net interest margin
        increased from 3.36% for the second quarter of 2005 to 3.48% for the second
        quarter of 2006.
  Interest
        income on loans increased $978,000, or 9.63%, for the six months ended June
        30,
        2006 compared to the same six months in 2005. This increase was the result
        of an
        increase in the average yield on loans from 6.20% for the first six months
        of
        2005 to 6.80% for the first six months of 2006, due to increasing interest
        rates
        in the economy causing both new and adjustable
   13
  rate
        mortgages to price and reprice higher. The average balance of loans was largely
        unchanged as expected payoffs and paydowns were replaced with loans to borrowers
        continuing to take advantage of relatively low market interest rates to initiate
        other real estate related purchases. Interest income on loans increased $370,000
        for the second quarter of 2006 compared to the second quarter of 2005 due
        primarily to the increase in the average yield on loans from 6.25% to 6.83%
        offset by a $6.7 million decrease in average loans receivable over the same
        period.
  Interest
        earned on other investments and Federal Home Loan Bank stock increased by
        $111,000 for the six months ended June 30, 2006 compared to the same period
        in
        2005. This was primarily the result of a $2.9 million increase in average
        balances and an increase in the average yield on the average balance of other
        investments and Federal Home Loan Bank stock from 2.59% for the first six
        months
        of 2005 to 3.21% over the same period in 2006 due to increasing interest
        rates
        in the economy. The increase in the average balance was generally due to
        funds
        being reinvested into securities for liquidity purposes. Interest income
        on
        other investments and Federal Home Loan Bank stock increased $55,000 for
        the
        second quarter of 2006 compared to the second quarter of 2005 due to an increase
        of $2.3 million in average balances as well as an increase in the average
        yield
        on the average balance of other investments and Federal Home Loan Bank stock
        from 2.67% for the second quarter of 2005 to 3.35% over the same period in
        2006.
  Interest
        expense for the six months ended June 30, 2006 increased $775,000, or 16.87%,
        over the same period in 2005. This increase was due to a $2.7 million increase
        in average interest-bearing liabilities as well as an increase in the average
        rate paid on interest-bearing liabilities from 2.77% for the first six months
        of
        2005 to 3.21% for the first six months of 2006. Interest expense increased
        $356,000 or 15.16% for the second quarter of 2006 from the same period in
        2005
        primarily due to an increase in the average rate paid on average
        interest-bearing liabilities from 2.81% for the three month period in 2005
        to
        3.26% in 2006, partially offset by a $3.2 million decrease in average
        interest-bearing liabilities for the three month period in 2006 compared
        to the
        same period in 2005.
  ***Provision
        for Loan Losses*** .
        We
        establish our provision for loan losses based on a systematic analysis of
        risk
        factors in the loan portfolio. The analysis includes consideration of
        concentrations of credit, past loss experience, current economic conditions,
        the
        amount and composition of the loan portfolio, estimated fair value of the
        underlying collateral, delinquencies and industry standards. On at least
        a
        quarterly basis, a formal analysis of the adequacy of the allowance is prepared
        and reviewed by management and the Board of Directors. This analysis serves
        as a
        point in time assessment of the level of the allowance and serves as a basis
        for
        provisions for loan losses.
  Our
        analysis of the loan portfolio begins at the time the loan is originated,
        when
        each loan is assigned a risk rating. If the loan is a commercial credit,
        the
        borrower will also be assigned a similar rating. Loans that continue to perform
        as agreed will be included in one of ten non-classified loan categories.
        Portions of the allowance are allocated to loan portfolios in the various
        risk
        grades, based upon a variety of factors, including historical loss experience,
        trends in the type and volume of the loan portfolios, trends in delinquent
        and
        non-performing loans, and economic trends affecting our market. Loans no
        longer
        performing as agreed are assigned a lower risk rating, eventually resulting
        in
        their being regarded as classified loans. A collateral re-evaluation is
        completed on all classified loans. This process results in the allocation
        of
        specific
   14
  amounts
        of the allowance to individual problem loans, generally based on an analysis
        of
        the collateral securing those loans. These components are added together
        and
        compared to the balance of our allowance at the evaluation date.
  Non-classified
        loan categories include first mortgage loans on the following types of
        properties: one- to four-family owner occupied, one- to four-family non-owner
        occupied, multi-family, non-residential, land and land development, and
        construction. Additional categories include: second mortgage and home equity
        loans, unsecured commercial business loans, secured commercial business loans,
        and consumer loans.
  We
        recorded a $400,000 provision for loan losses for the six months ended June
        30,
        2006 as a result of our analysis of our current loan portfolios compared
        to
        $300,000 for the same period in 2005. The increased provision during 2006
        was
        deemed necessary to maintain the allowance for loan losses at a level considered
        adequate to absorb losses inherent in the loan portfolio and cover anticipated
        charge-offs. During the first six months of 2006 we recorded charge-offs
        of
        $558,000 offset by recoveries of $38,000. The $400,000 provision for loan
        losses
        for the first six months of 2006 was considered adequate to cover further
        charge-offs based on our evaluation and our loan mix.
  At
        June
        30, 2006, non-performing assets, consisting of non-accruing loans, accruing
        loans 90 or more days delinquent and other real estate owned, totaled $10.4
        million compared to $10.6 million at December 31, 2005. In addition to our
        non-performing assets, we identified $1.7 million in other loans of concern,
        down slightly from the $2.0 million identified at December 31, 2005, where
        known
        information about possible credit problems of borrowers causes management
        to
        have doubts as to the ability of the borrowers to comply with present repayment
        terms, and may result in disclosure of such loans as non-performing assets
        in
        the future. The vast majority of these loans, as well as our non-performing
        assets, are well collateralized.
  ***Non-Interest
        Income*** .
        Non-interest income for the six months ended June 30, 2006 increased by $273,000
        or 25.02% compared to the same period in 2005. This was primarily due to
        a
        $386,000 increase in fees on deposit accounts due to our overdraft product
        in
        which we may pay overdrafts of up to $500 made by qualified
        depositors for a $30 per overdraft fee, partially offset by a $64,000 decrease
        in the gain on the sale of mortgage loans due to a decrease in loans sold
        and a
        $49,000 decrease in other income, primarily the result of a $72,000 reserve
        for
        possible losses on our overdraft program. Non-interest
        income for the second quarter of 2006 increased by $95,000 over the same
        period
        in 2005, primarily due to a $168,000 increase in fees on deposit accounts
        due to
        the introduction of the new overdraft product mentioned above and an offsetting
        $50,000 decrease in the gain on the sale of mortgage loans in the secondary
        market ** and
        a
        $23,000 decrease in other income.
  ***Non-Interest
        Expense*** .
        Non-interest expense for the six months ended June 30, 2006 increased $224,000
        over the same period in 2005. The major components of this increase included
        a
        $142,000 increase in salaries and employee benefits partly due to the payment
        of
        incentive awards and the recognition of compensation expense related to the
        expensing of stock options in accordance with SFAS 123R. Please see Note
        1 to
        the Consolidated Financial Statements as of June 30, 2006 for further discussion
        of the adoption of SFAS 123R. In addition to increased salaries and employee
        benefits, the remaining $82,000 increase in other non-interest expenses
   15
  was
        mostly due to increased expenses related to foreclosed properties and to
        a
        maintenance charge on our overdraft checking program. Non-interest expense
        for
        the second quarter of 2006 increased by $51,000 over the same period in 2005,
        due largely to the factors mentioned above.
  ***Income
        Tax Expense*** *.* Our
        income tax provision increased by $187,000 for the six months ended June
        30,
        2006 compared to the six months ended June 30, 2005, primarily due to increased
        income. Our income tax provision increased by $53,000 for the second quarter
        of
        2006 despite slightly lower pretax income compared to the same
        period ****** in ****** 2005
        primarily due to the termination of a ten year tax credit for a low income
        housing project and a decrease in loans on property in a reduced tax enterprise
        zone.
   **Liquidity**
  Our
        primary sources of funds are deposits, repayment and prepayment of loans,
        interest earned on or maturation of investment securities and short-term
        investments, borrowings and funds provided from operations. While maturities
        and
        the scheduled amortization of loans, investments and mortgage-backed securities
        are a predictable source of funds, deposit flows and mortgage prepayments
        are
        greatly influenced by general market interest rates, economic conditions
        and
        competition.
  We
        monitor our cash flow carefully and strive to minimize the level of cash
        held in
        low-rate overnight accounts or in cash on hand. We also carefully track the
        scheduled delivery of loans committed for sale to be added to our cash flow
        calculations. Our current internal policy for liquidity requires minimum
        liquidity of 4.0% of total assets.
  Liquidity
        management is both a daily and long-term function for our senior management.
        We
        adjust our investment strategy, within the limits established by the investment
        policy, based upon assessments of expected loan demand, expected cash flows,
        Federal Home Loan Bank advance opportunities, market yields and objectives
        of
        our asset/liability management program. Base levels of liquidity have generally
        been invested in interest-earning overnight and time deposits with the Federal
        Home Loan Bank of Indianapolis. Funds for which a demand is not foreseen
        in the
        near future are invested in investment and other securities for the purpose
        of
        yield enhancement and asset/liability management.
  Our
        liquidity ratios at December 31, 2005 and June 30, 2006 were 6.40% and 6.65%,
        respectively, compared to a regulatory liquidity base, and 4.87% and 5.10%
        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 June 30, 2006, we had outstanding commitments to originate
        loans
        and available lines of credit totaling $51.3 million and commitments to provide
        funds to complete current construction projects in the amount of $5.4 million.
        In addition we had commitments to sell $340,000 of fixed-rate residential
        loans.
        Certificates of deposit, including brokered deposits, which will mature in
        one
        year or less at June 30, 2006 totaled $104.7 **** million.
        Based on our experience, our certificates of deposit have been a relatively
        stable source of long-term funds as such certificates are generally renewed
        upon
        maturity since we have established long-term banking relationships with our
        customers. Therefore, we believe a significant portion of such deposits will
        remain with us, although this cannot be assured. At June 30, 2006, $69.8
        million
        of
   16
  our
        deposits were in brokered deposits, $25.6 million of which will mature in
        one
        year or less. These deposits can be expected not to renew at maturity and
        will
        have to be replaced with other funding upon maturity. We also have
        $31.5 **** million
        of Federal Home Loan Bank advances maturing in the next twelve
        months.
   **Capital
        Resources** ****
  Shareholders’
        equity totaled $33.7 million at June 30, 2006 compared to $32.8 million at
        December 31, 2005, an increase of $840,000 or 2.56%, due primarily to net
        income
        of $1.7 million, partially offset by our payment of dividends on common stock
        and the repurchase of 18,500 shares of our stock as part of a stock repurchase
        plan. Shareholders’ equity to total assets was 9.12% at June 30, 2006 compared
        to 8.81% at December 31, 2005.
  Federal
        insured savings institutions are required to maintain a minimum level of
        regulatory capital. If the requirement is not met, regulatory authorities
        may
        take legal or administrative actions, including restrictions on growth or
        operations or, in extreme cases, seizure. As of December 31, 2005 and June
        30,
        2006, Lafayette Savings was categorized as well capitalized. Our actual and
        required capital amounts and ratios at December 31, 2005 and June 30, 2006
        are
        presented below:
   17
  
  **Actual**
              
              **For
                  Capital Adequacy Purposes**
              
              **To
                  Be Well Capitalized Under Prompt Corrective Action
                  Provisions****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**As
                  of June 30, 2006Total
                  risk-based capital(to
                  risk-weighted assets)
              
              $
              35,499
              
              
              12.3
              %
              $
              23,008
              
              
              8.0
              %
              $
              28,760
              
              
              10.0
              %Tier
                  I capital(to
                  risk-weighted assets)
              
              
              32,806
              
              
              11.4
              
              
              11,504
              
              
              4.0
              
              
              17,256
              
              
              6.0Tier
                  I capital(to
                  adjusted total assets)
              
              
              32,806
              
              
              8.9
              
              
              11,070
              
              
              3.0
              
              
              18,449
              
              
              5.0Tier
                  I capital(to
                  adjusted tangible assets)
              
              
              32,806
              
              
              8.9
              
              
              7,380
              
              
              2.0
              
              
              N/A
              
              
              N/ATangible
                  capital(to
                  adjusted tangible assets)
              
              
              32,806
              
              
              8.9
              
              
              5,535
              
              
              1.5
              
              
              N/A
              
              
              N/AAs
                  of December 31, 2005Total
                  risk-based capital(to
                  risk-weighted assets)
              
              $
              34,001
              
              
              11.7
              %
              $
              23,187
              
              
              8.0
              %
              $
              28,984
              
              
              10.0
              %Tier
                  I capital(to
                  risk-weighted assets)
              
              
              31,306
              
              
              10.8
              
              
              11,594
              
              
              4.0
              
              
              17,390
              
              
              6.0Tier
                  I capital(to
                  adjusted total assets)
              
              
              31,306
              
              
              8.4
              
              
              11,163
              
              
              3.0
              
              
              18,606
              
              
              5.0Tier
                  I capital(to
                  adjusted tangible assets)
              
              
              31,306
              
              
              8.4
              
              
              7,442
              
              
              2.0
              
              
              N/A
              
              
              N/ATangible
                  capital(to
                  adjusted tangible assets)
              
              
              31,306
              
              
              8.4
              
              
              5,582
              
              
              1.5
              
              
              N/A
              
              
              N/A
 
  **Disclosure
        Regarding Forward-Looking Statements**
  This
        document, including information included or incorporated by reference, contains,
        and future filings by LSB Financial on Form 10-K, Form 10-Q and Form 8-K
        and
        future oral and written statements by LSB Financial and our management may
        contain, forward-looking statements about LSB Financial and its subsidiaries
        which we believe are within the meaning of the Private Securities Litigation
        Reform Act of 1995. These forward-looking statements include, without
        limitation, statements with respect to anticipated future operating and
        financial performance, growth opportunities, interest rates, cost savings
        and
        funding advantages expected or anticipated to be realized by management.
        Words
        such as may, could, should, would, believe, anticipate, estimate, expect,
        intend, plan and similar expressions are intended to identify forward-looking
        statements. Forward-looking statements by LSB Financial and its management
        are
        based on beliefs, plans, objectives, goals, expectations, anticipations,
        estimates and intentions of management and are not guarantees of future
        performance. We disclaim any obligation to update or revise any forward-looking
        statements based on the occurrence of future events, the receipt of new
        information or otherwise. The important factors we discuss below and elsewhere
        in this document, as well as other factors discussed under the caption
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations in this document and identified in our filings with the SEC and
        those
        presented elsewhere by our management from time to time, could cause actual
        results to differ materially from those indicated by the forward-looking
        statements made in this document.
   18
  The
        following factors, many of which are subject to change based on various other
        factors beyond our control, could cause our financial performance to differ
        materially from the plans, objectives, expectations, estimates and intentions
        expressed in such forward-looking statements:
   **·**
            the
                strength of the United States economy in general and the strength
                of the
                local economies in which we conduct our
                operations;  **·**
            the
                effects of, and changes in, trade, monetary and fiscal policies and
                laws,
                including interest rate policies of the Federal Reserve
                Board;  **·**
            financial
                market, monetary and interest rate fluctuations, particularly the
                relative
                relationship of short-term interest rates to long-term interest
                rates;  **·**
            the
                timely development of and acceptance of our new products and services
                of
                Lafayette Savings and the perceived overall value of these products
                and
                services by users, including the features, pricing and quality compared
                to
                competitors’ products and services;  **·**
            the
                willingness of users to substitute competitors’ products and services for
                our products and services;  **·**
            the
                impact of changes in financial services’ laws and regulations (including
                laws concerning taxes, accounting standards, banking, securities
                and
                insurance);  **·**
            the
                impact of technological changes;  **·**
            acquisitions;  **·**
            changes
                in consumer spending and saving habits;
                and  **·**
            our
                success at managing the risks involved in the
                foregoing.  
   19
  **Item
        3.  Quantitative and Qualitative Disclosures About Market
        Risk** ****
  We,
        like
        other financial institutions, are subject to interest rate risk to the extent
        that our interest-bearing liabilities reprice on a different basis than our
        interest-earning assets. The Office of Thrift Supervision (“OTS”), our primary
        regulator, supports the use of a net portfolio value (“NPV”) approach to the
        quantification of interest rate risk. In essence, this approach calculates
        the
        difference between the present value of expected cash flows from assets and
        the
        present value of expected cash flows from liabilities, as well as cash flows
        from off-balance-sheet contracts. An NPV ratio, in any interest rate scenario,
        is defined as the NPV in that rate scenario divided by the market value of
        assets in the same scenario, essentially a market value adjusted capital
        ratio.
  It
        has
        been and continues to be a priority of the Board of Directors and management
        to
        manage interest rate risk to maintain an acceptable level of potential changes
        to interest income as a result of interest rate changes. Our asset/liability
        management policy, established by the Board of Directors, sets forth acceptable
        limits on the amount of change in net portfolio value given certain changes
        in
        interest rates. We have an asset/liability management committee which meets
        quarterly to review our interest rate position, and an investment committee
        which reviews the interest rate risk position and other related matters with
        the
        Board of Directors, and makes recommendations for adjusting this position
        to the
        full Board of Directors. In addition, the investment committee of the Board
        of
        Directors meets semi-annually with our outside investment advisors to review
        our
        investment portfolio and strategies relating to interest rate risk. Specific
        strategies have included the sale of long-term, fixed-rate loans to reduce
        the
        average maturity of our interest-earning assets and the use of Federal Home
        Loan
        Bank advances to lengthen the effective maturity of our interest-bearing
        liabilities. In the future, our community banking emphasis, including the
        origination of commercial business loans, is intended to further increase
        our
        portfolio of short-term and/or adjustable rate loans.
  Presented
        below, as of March 31, 2006 and December 31, 2005, is an analysis of our
        interest rate risk as measured by the effect on NPV caused by instantaneous
        and
        sustained parallel shifts in the yield curve, in 100 basis point increments,
        up
        300 basis points and down 200 basis points, and compared to Board policy
        limits.
        The Board Limit column indicates the lowest allowable limits for NPV after
        each
        interest rate shock. Assumptions used in calculating the amounts in this
        table
        are OTS assumptions. No information is provided for a negative 300 basis
        point
        shift in interest rates, due to a low prevailing interest rate environment
        making such scenarios unlikely.
  Change
                  in
              
              Board
                  Limit
              
              At March
                  31, 2006
              
              At
                  December 31, 2005Interest
                  Rate
              
              Post-shock
              
              Post-shock
              
              Change
              
              Post-shock
              
              Change(Basis
                  Points)
              
              NPV
                  Ratio
              
              NPV
                  Ratio
              
              (Basis
                  Points)
              
              NPV
                  Ratio
              
              (Basis
                  Points)300
                  bp
              
              6.00%
              
              10.90%
              
              (86)
                  bp
              
              10.16%
              
              (80)
                    bp200
              
              7.00
              
              11.31
              
              (45)
              
              10.58
              
              (38)100
              
              8.00
              
              11.63
              
              (13)
              
              10.87
              
              (8)0
              
              8.00
              
              11.76
              
              --
              
              10.96
              
              ---100
              
              8.00
              
              11.61
              
              (15)
              
              10.74
              
              (22)-200
              
              7.00
              
              11.22
              
              (54)
              
              10.31
              
              (65)
 
  20
  
 In
        evaluating our exposure to interest rate risk, certain shortcomings inherent
        in
        the method of analysis presented in the foregoing table must be noted. For
        example, although certain assets and liabilities may have similar maturities
        or
        periods to repricing, they may react in different degrees to changes in market
        interest rates. Also, the interest rates on certain types of assets and
        liabilities may fluctuate in advance of changes in market interest rates,
        while
        interest rates on other types may lag behind changes in market rates. Further,
        in the event of a change in interest rates, prepayments and early withdrawal
        levels may deviate significantly from those assumed in calculating the table.
        Finally, the ability of many borrowers to service their debt may decrease
        in the
        event of an interest rate increase. As a result, the actual effect of changing
        interest rates may differ from that presented in the foregoing
        table.
  Management
        believes that at June 30, 2006 there have been no material changes in Lafayette
        Savings’ interest rate sensitivity which would cause a material change in the
        market risk exposures that affect the quantitative and qualitative risk
        disclosures as presented above, from the Company’s Annual Report on Form 10-K
        for the period ended December 31, 2005.
   **Item
                  4.**
              **Controls
                  and Procedures**
  An
        evaluation of the Company’s disclosure controls and procedures (as defined in
        Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the
        Securities Exchange Act of 1934, as amended (the “Act”)), as of June 30, 2006,
        was carried out under the supervision and with the participation of the
        Company’s Chief Executive Officer, Chief Financial Officer and several other
        members of the Company’s senior management. The Company’s Chief Executive
        Officer and Chief Financial Officer concluded that the Company’s disclosure
        controls and procedures currently in effect are effective in ensuring that
        the
        information required to be disclosed by the Company in the reports it files
        or
        submits under the Act is (i) accumulated and communicated to the Company’s
        management (including the Chief Executive Officer and Chief Financial Officer)
        in a timely manner and (ii) recorded, processed, summarized and reported
        within
        the time periods specified in the Securities and Exchange Commission’s rules and
        forms. There have been no changes in our internal control over financial
        reporting (as defined in Rule 13a-15(f) of the Act) identified in connection
        with the Company’s evaluation of controls that occurred during the quarter ended
        June 30, 2006, that have materially affected, or are reasonably likely to
        affect, our internal control over the financial reporting.
   **PART
        II. OTHER INFORMATION**
  **Item
                  1.**
              **Legal
                  Proceedings**
  The
        Supervisory Agreement between Lafayette Savings and the OTS (the “Agreement”)
        described in the Form 10-Q for the quarter ended March 31, 2006 was executed
        on
        May 15, 2006. See LSB Financial’s report on Form 10-Q for the quarter ended
        March 31, 2006 for a detailed description of the terms and conditions of
        the
        Agreement.
  **Item
                  1A.**
              **Risk
                  Factors**
  There
        have been no material changes from the risk factors as previously disclosed
        in
        our Form 10-K Report for the fiscal year ended December 31, 2005.
    21
  **Item
                  2.**
              **Unregistered
                  Sales of Equity Securities and Use of Proceeds******
  The
        following table sets forth the number and prices paid for repurchased
        shares.
  **Issuer
                  Purchases of Equity Securities****Month
                  of Purchase**
              
              **Total
                  Number of Shares****Purchased****1**
              
              **Average
                  Price****Paid
                  per Share**
              
              **Total
                  Number of Shares Purchased as Part of Publicly Announced****Plan****2**
              
              **Maximum
                  Number (or Approximate Dollar Value) of Shares that May Yet Be
                  Purchased****Under
                  the Plan**April
                  1 - April 30, 2006
              
              
              4,000
              
              $
              28.75
              
              
              4,000
              
              
              21,717May
                  1 - May 31, 2006
              
              
              6,500
              
              $
              28.10
              
              
              6,500
              
              
              15,217June
                  1 - June 30, 2006
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---Total
              
              
              10,500
              
              $
              28.35
              
              
              10,500
              
              
              15,217
 _______________________
 1 There
        were no shares repurchased other than through a publicly announced plan or
        program.
 2 We have
        in place a plan, announced September 27, 2004, to repurchase 5% of our common
        stock .
   **Item
                  3.**
              **Defaults
                  Upon Senior Securities******
  None
        to
        be reported.
   **Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**
  On
        April
        19, 2006, LSB Financial Corp. held its Annual Meeting of Stockholders (the
        “Meeting”).
  The
        directors who were elected at the Meeting for a term to expire in 2009, are
        as
        follows:
  
 **For**
              
              **Withheld**James
                  A. Andrew
              
              
              1,305,310
              
              
              9,490Kenneth
                  P. Burns
              
              
              1,305,290
              
              
              9,510Philip
                  W. Kemmer
              
              
              1,296,178
              
              
              18,622Randolph
                  F. Williams
              
              
              1,293,121
              
              
              21,679
 
 The
        directors whose terms continued after the Meeting are as follows: Mary Jo
        David,
        Harry A. Dunwoody, Thomas R. McCully, Mariellen M. Neudeck, Peter Neisel
        and
        Jeffrey A. Poxon.
    22
  **Item
                  5.**
              **Other
                  Information**
  None.
   **Item
                  6.**
              **Exhibits******
  The
        exhibits listed in the Index to Exhibits are incorporated herein by
        reference.
   23
   **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the Registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  
  LSB
                  FINANCIAL CORP.(Registrant)Date:
              August
                14, 2006
              
              By:
              /s/
Randolph
                F. WilliamsRandolph
                  F. Williams, President(Principal
                  Executive Officer)Date:
              August
                14, 2006
              
              By:
              /s/
Mary
                Jo DavidMary
                  Jo David, Treasurer(Principal
                  Financial and AccountingOfficer)
 
  24
  **INDEX
        TO EXHIBITS**
 
 Regulation
                  S-K ExhibitNumber
              
              Document31.1
              
              Rule
                  13(a)-14(a) Certification (Chief Executive Officer)31.2
              
              Rule
                  13(a)-14(a) Certification (Chief Financial Officer)32
              
              Section
                  906 Certification