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, 2008ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from ________________ to
      ________________





Commission
file number:  0-25070





LSB
FINANCIAL CORP.


(Exact
name of registrant as specified in its charter)





Indiana
            
            35-1934975(State
      or other jurisdiction of incorporation
      or organization)
            
            (I.R.S.
      Employer Identification
      No.)101
      Main Street, Lafayette, Indiana
            
            47901(Address
      of principal executive offices)
            
            (Zip
      Code)





(765)
742-1064


(Registrant’s
telephone number, including area code)





None


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





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





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





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





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





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





Class
            
            Outstanding
      at August 13, 2008Common
      Stock, $.01 par value per share
            
            1,553,409
      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
            8Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            20Item
      4T.
            Controls
      and Procedures
            20PART
      II. OTHER INFORMATION
            20Item
      1.
            Legal
      Proceedings
            20Item
      1A.
            Risk
      Factors
            20Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            21Item
      3.
            Defaults
      Upon Senior Securities
            21Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            21Item
      5.
            Other
      Information
            22Item
      6.
            Exhibits
            22SIGNATURES
            23











i








PART
IFINANCIAL INFORMATION






Item
      1.
            Financial
      Statements







LSB
FINANCIAL CORP.


Consolidated
Condensed Balance Sheets


(Dollars
in thousands, except per share data)





June
      30,
              2008
            
            
            December
      31,
              2007(unaudited)AssetsCash
      and due from banks
            
            $
            1,450
            
            
            $
            1,644Short-term
      investments
            
            
            8,610
            
            
            
            4,846Cash
      and cash equivalents
            
            
            10,060
            
            
            
            6,490Available-for-sale
      securities
            
            
            12,293
            
            
            
            13,221Total
      loans
            
            
            309,176
            
            
            
            300,610Less:
      Allowance for loan losses
            
            
            (3,470
            )
            
            
            (3,702
            )Net
      loans
            
            
            305,706
            
            
            
            296,908Premises
      and equipment, net
            
            
            6,661
            
            
            
            6,815Federal
      Home Loan Bank stock, at cost
            
            
            3,997
            
            
            
            3,997Bank
      owned life insurance
            
            
            5,728
            
            
            
            5,613Interest
      receivable and other assets
            
            
            7,535
            
            
            
            8,966Total
      Assets
            
            $
            351,980
            
            
            $
            342,010Liabilities
      and Shareholders’ EquityLiabilitiesDeposits
            
            $
            239,536
            
            
            $
            232,030Federal
      Home Loan Bank advances
            
            
            76,256
            
            
            
            74,256Interest
      payable and other liabilities
            
            
            2,135
            
            
            
            1,792Total
      liabilities
            
            
            317,927
            
            
            
            308,078Commitments
      and ContingenciesShareholders’
      EquityCommon
      stock, $.01 par valueAuthorized
      - 7,000,000 shares
              Issued
      and outstanding 2008 - 1,553,409 shares, 2007 - 1,557,968
      shares
            
            
            15
            
            
            
            15Additional
      paid-in-capital
            
            
            10,977
            
            
            
            11,066Retained
      earnings
            
            
            23,035
            
            
            
            22,777Accumulated
      other comprehensive income
            
            
            26
            
            
            
            74Total
      shareholders’ equity
            
            
            34,053
            
            
            
            33,932Total
      liabilities and shareholders’ equity
            
            $
            351,980
            
            
            $
            342,010





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 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Interest
      and Dividend IncomeLoans
            
            $
            5,153
            
            
            $
            5,491
            
            
            $
            10,356
            
            
            $
            11,071SecuritiesTaxable
            
            
            123
            
            
            
            128
            
            
            
            245
            
            
            
            292Tax-exempt
            
            
            69
            
            
            
            66
            
            
            
            138
            
            
            
            124Other
            
            
            29
            
            
            
            43
            
            
            
            56
            
            
            
            111Total
      interest and dividend income
            
            
            5,374
            
            
            
            5,728
            
            
            
            10,795
            
            
            
            11,598Interest
      ExpenseDeposits
            
            
            1,867
            
            
            
            2,033
            
            
            
            3,816
            
            
            
            4,059Borrowings
            
            
            907
            
            
            
            821
            
            
            
            1,836
            
            
            
            1,698Total
      interest expense
            
            
            2,774
            
            
            
            2,854
            
            
            
            5,652
            
            
            
            5,757Net
      Interest Income
            
            
            2,600
            
            
            
            2,874
            
            
            
            5,143
            
            
            
            5,841Provision
      for Loan Losses
            
            
            250
            
            
            
            490
            
            
            
            500
            
            
            
            740Net
      Interest Income After Provision for Loan Losses
            
            
            2,350
            
            
            
            2,384
            
            
            
            4,643
            
            
            
            5,101Non-interest
      IncomeDeposit
      account service charges and fees
            
            
            433
            
            
            
            478
            
            
            
            829
            
            
            
            884Net
      gains on loan sales
            
            
            8
            
            
            
            95
            
            
            
            25
            
            
            
            137Gain(loss)
      on sale other real estate owned
            
            
            (72
            )
            
            
            (33
            )
            
            
            19
            
            
            
            (33
            )Other
            
            
            353
            
            
            
            245
            
            
            
            632
            
            
            
            497Total
      non-interest income
            
            
            722
            
            
            
            785
            
            
            
            1,505
            
            
            
            1,485Non-Interest
      ExpenseSalaries
      and employee benefits
            
            
            1,145
            
            
            
            1,243
            
            
            
            2,372
            
            
            
            2,434Net
      occupancy and equipment expense
            
            
            341
            
            
            
            356
            
            
            
            686
            
            
            
            669Computer
      service
            
            
            135
            
            
            
            115
            
            
            
            270
            
            
            
            237Advertising
            
            
            72
            
            
            
            111
            
            
            
            140
            
            
            
            152Other
            
            
            623
            
            
            
            644
            
            
            
            1,181
            
            
            
            1,166Total
      non-interest expense
            
            
            2,316
            
            
            
            2,469
            
            
            
            4,649
            
            
            
            4,658Income
      Before Income Taxes
            
            
            756
            
            
            
            700
            
            
            
            1,499
            
            
            
            1,928Provision
      for Income Taxes
            
            
            235
            
            
            
            249
            
            
            
            462
            
            
            
            698Net
      income
            
            $
            521
            
            
            $
            451
            
            
            $
            1,037
            
            
            $
            1,230Basic
      Earnings Per Share
            
            $
            0.34
            
            
            $
            0.28
            
            
            $
            0.67
            
            
            $
            0.77Diluted
      Earnings Per Share
            
            $
            0.33
            
            
            $
            0.28
            
            
            $
            0.66
            
            
            $
            0.77Dividends
      Declared Per Share
            
            $
            0.25
            
            
            $
            0.20
            
            
            $
            0.50
            
            
            $
            0.40See
      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, 2008 and 2007


(Dollars
in thousands)


(Unaudited)





Common
      Stock
            
            
            Additional
      Paid-In Capital
            
            
            Retained
      Earnings
            
            
            Accumulated
      Other Comprehensive Income (Loss)
            
            
            TotalBalance,
      January 1, 2007
            
            $
            15
            
            
            $
            12,227
            
            
            $
            22,623
            
            
            $
            (25
            )
            
            $
            34,840Comprehensive
      incomeNet
      income
            
            
            
            
            
            
            
            
            
            
            1,230
            
            
            
            
            
            
            
            1,230Change
      in unrealized appreciation (depreciation) on available-for-sale
      securities, net of taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (88
            )
            
            
            (88
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,142Dividends
      on common stock, $0.40 per share
            
            
            
            
            
            
            
            
            
            
            (639
            )
            
            
            
            
            
            
            (639
            )Purchase
      and retirement of stock (34,500 shares)
            
            
            
            
            
            
            (897
            )
            
            
            
            
            
            
            
            
            
            
            (897
            )Stock
      options exercised (290 shares)
            
            
            
            
            
            
            4
            
            
            
            
            
            
            
            
            
            
            
            4Amortization
      of stock option compensation
            
            
            
            
            
            7
            
            
            
            
            
            
            
            
            
            7Balance,
      June 30, 2007
            
            $
            15
            
            
            $
            11,341
            
            
            $
            23,214
            
            
            $
            (113
            )
            
            $
            34,457Balance,
      January 1, 2008
            
            $
            15
            
            
            $
            11,066
            
            
            $
            22,777
            
            
            $
            74
            
            
            $
            33,932Comprehensive
      incomeNet
      income
            
            
            
            
            
            
            
            
            
            
            1,037
            
            
            
            
            
            
            
            1,037Change
      in unrealized appreciation (depreciation) on available-for-sale
      securities, net of taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (48
            )
            
            
            (48
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            989Dividends
      on common stock, $0.50 per share
            
            
            
            
            
            
            
            
            
            
            (779
            )
            
            
            
            
            
            
            (779
            )Purchase
      and retirement of stock (8,900 shares)
            
            
            
            
            
            
            (166
            )
            
            
            
            
            
            
            
            
            
            
            (166
            )Stock
      options exercised (4,341 shares)
            
            
            
            
            
            
            67
            
            
            
            
            
            
            
            
            
            
            
            67Tax
      benefit of stock options exercised
            
            
            
            
            
            
            6
            
            
            
            
            
            
            
            
            
            
            
            6Amortization
      of stock option compensation
            
            
            
            
            
            4
            
            
            
            
            
            
            
            
            
            4Balance,
      June 30, 2008
            
            $
            15
            
            
            $
            10,977
            
            
            $
            23,035
            
            
            $
            26
            
            
            $
            34,053





See notes
to consolidated condensed financial statements.


3


LSB
FINANCIAL CORP.


Consolidated
Condensed Statements of Cash Flows


(Dollars
in thousands)


(Unaudited)





Six
      months endedJune
      30,2008
            
            
            2007Operating
      ActivitiesNet
      income
            
            $
            1,037
            
            
            $
            1,230Items
      not requiring (providing) cashDepreciation
            
            
            275
            
            
            
            244Provision
      for loan losses
            
            
            500
            
            
            
            740Amortization
      of premiums and discounts on securities
            
            
            10
            
            
            
            6Gain
      on sale of loans
            
            
            (19
            )
            
            
            (129
            )Loans
      originated for sale
            
            
            (492
            )
            
            
            (957
            )Proceeds
      on loans sold
            
            
            511
            
            
            
            774Loss
      on sale and writedowns of OREO
            
            
            222
            
            
            
            239Amortization
      of stock options
            
            
            4
            
            
            
            7Tax
      benefit related to stock options exercised
            
            
            (6
            )
            
            
            0Changes
      inInterest
      receivable and other assets
            
            
            40
            
            
            
            (421
            )Interest
      payable and other liabilities
            
            
            343
            
            
            
            260Net
      cash from operating activities
            
            
            2,425
            
            
            
            1,993Investing
      ActivitiesPurchases
      of available-for-sale securities
            
            
            ---
            
            
            
            (1,361
            )Proceeds
      from maturities of available-for-sale securities
            
            
            838
            
            
            
            3,097Net
      change in loans
            
            
            (10,612
            )
            
            
            15,727Proceeds
      from sale of OREO
            
            
            2,405
            
            
            
            779Purchase
      of premises and equipment
            
            
            (121
            )
            
            
            ( 571
            )Net
      cash from investing activities
            
            
            (7,490
            )
            
            
            17,671Financing
      ActivitiesNet
      change in demand deposits, money market, NOW and savings
      accounts
            
            
            8,541
            
            
            
            6,034Net
      change in certificates of deposit
            
            
            (1,035
            )
            
            
            (14,303
            )Proceeds
      from Federal Home Loan Bank advances
            
            
            19,000
            
            
            
            28,500Repayment
      of Federal Home Loan Bank advances
            
            
            (17,000
            )
            
            
            (38,500
            )Proceeds
      from stock options exercised
            
            
            67
            
            
            
            4Tax
      benefit related to stock options exercised
            
            
            6
            
            
            
            0Repurchase
      of stock
            
            
            (166
            )
            
            
            (897
            )Dividends
      paid
            
            
            (779
            )
            
            
            (639
            )Net
      cash from financing activities
            
            
            8,634
            
            
            
            (19,801
            )Increase
      (Decrease) in Cash and Cash Equivalents
            
            
            3,569
            
            
            
            (137
            )Cash
      and Cash Equivalents, Beginning of Period
            
            
            6,490
            
            
            
            9,727Cash
      and Cash Equivalents, End of Period
            
            $
            10,059
            
            
            $
            9,590Supplemental
      Cash Flows InformationInterest
      paid
            
            
            5,724
            
            
            
            5,867Income
      taxes paid
            
            
            400
            
            
            
            870Supplemental
      Non-Cash DisclosuresCapitalization
      of mortgage servicing rights
            
            
            6
            
            
            
            8Loans
      transferred to OREO
            
            
            1,314
            
            
            
            1,478





4





LSB
FINANCIAL CORP.


Notes to
Consolidated Financial Statements


June 30,
2008


Note 1 -
General




The
financial statements were prepared in accordance with the instructions for Form
10-Q and, therefore, do not include all of the disclosures necessary for a
complete presentation of financial position, results of operations and cash
flows in conformity with accounting principles generally accepted in the United
States of America.  These interim financial statements have been
prepared on a basis consistent with the annual financial statements and include,
in the opinion of management, all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the results of
operations and financial position for and at the end of such interim
periods.  The consolidated condensed balance sheet of LSB Financial
Corp. as of December 31, 2007 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, 2007 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.






Note 2 -
Principles of Consolidation




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




5


Note 3 -
Earnings per share




Earnings
per share are based upon the weighted average number of shares outstanding
during the period.  Diluted earnings per share further assume the
issuance of any potentially dilutive shares.  All shares related to
stock options outstanding 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 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Weighted
      average shares outstanding (excluding unearned ESOP shares in
      2007)
            
            
            1,555,310
            
            
            
            1,608,977
            
            
            
            1,556,917
            
            
            
            1,596,638Shares
      used to compute diluted earnings per share
            
            
            1,556,894
            
            
            
            1,616,667
            
            
            
            1,558,960
            
            
            
            1,604,646Earnings
      per share
            
            $
            0.34
            
            
            $
            0.28
            
            
            $
            0.67
            
            
            $
            0.77Diluted
      earnings per share
            
            $
            0.33
            
            
            $
            0.28
            
            
            $
            0.66
            
            
            $
            0.77








Note 4 –
Disclosures About Fair Value of Assets and Liabilities




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





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





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





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





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





6


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





Available-for-sale
Securities





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





Fair
      Value Measurements UsingQuoted
      Prices in Active Markets for Identical Assets
            
            
            Significant
      Other Observable Inputs
            
            
            Significant
      Unobservable InputsFair
      Value
            
            
            (Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)Available-for-sale
      securities
            
            
            $
      12,293
            
            
            
            $
      0
            
            
            
            $
      12,293
            
            
            
            $
      0







Note 5 –
Future Accounting Pronouncements




Financial
Accounting Standards Board Statement No. 141 (SFAS 141R), “Business Combinations (Revised
2007),” was issued in December 2007 and is effective for years beginning
after December 15, 2008, for the Company January 1, 2009,  and
replaces SFAS 141 which applies to all transactions and other events in which
one entity obtains control over one or more other businesses.  SFAS
141R requires an acquirer, upon initially obtaining control of another entity,
to recognize the assets, liabilities and any non-controlling interest in the
acquiree at fair value as of the acquisition date.  Contingent
consideration is required to be recognized and measured at fair value on the
date of acquisition rather than at a later date when the amount of that
consideration may be determinable beyond a reasonable doubt.  SFAS
141R requires acquirers to expense acquisition-related costs as incurred rather
than allocating such costs to the assets acquired and liabilities
assumed.  Under SFAS 141R, the requirements of SFAS 146, “Accounting for Costs Associated
with Exit or Disposal Activities,”would have to be met in order to
accrue for a restructuring plan in purchase accounting.





Financial
Accounting Standards Board Statement No. 160 (SFAS 160), “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB Statement No. 51,”
was issued in December 2007 and establishes accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary.  SFAS 160 clarifies that a non-controlling interest in a
subsidiary, which is sometimes referred to as a minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements.  Among
other requirements, SFAS 160 requires consolidated net income to be reported at
amounts that are attributable to both the parent and the non-controlling
interest.  It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest.  SFAS
160 is effective for the Company on January 1, 2009 and is not expected to have
a significant impact on the Company’s financial statements.





7


Financial
Accounting Standards Board Statement No. 161 (SFAS 161), “Disclosures About Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,”was issued in March 2008 and amends and expands the disclosure
requirements of SFAS 133 to provide greater transparency about (i) how and why
an entity uses derivative instruments, (ii) how derivative instruments and
related hedge items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations and cash
flows.  To meet those objectives, SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements.  SFAS 161 is effective for the Company on
January 1, 2009 and is not expected to have a significant impact on the
Company’s financial statements.









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




Executive
Summary




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




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




We have
an experienced and committed staff and enjoy a good reputation for serving the
people of the community and understanding their financial needs and for finding
a way to meet those needs.  We contribute time and money to improve
the quality of life in our market area and many of our employees volunteer for
local non-profit agencies.  We believe this sets us apart from the
other 19 banks and credit unions that compete with us.  We also
believe that operating independently under the same name for over 138 years is a
benefit to us—especially as acquisitions and consolidations of local financial
institutions continue.  Focusing time and resources on acquiring
customers who may be feeling disenfranchised by their no-longer-local bank has
proved to be a successful strategy.





Tippecanoe
County and the eight surrounding counties comprise Lafayette Savings’ primary
market area.  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;


8


and a
growing high-tech presence with the Purdue Research Park.  In the
past, this diversity insulated us from economic downturns, but the slowdown of
the last few years had a noticeable effect on the area.  More recently
we have seen signs of returning growth and development.  According to
the Lafayette-West Lafayette Development Corporation (LWLDC), at year end 2007,
ten commercial projects totaling nearly $2 billion were either underway or just
completed in the greater Lafayette area. In the first quarter of 2008 expansions
were announced in manufacturing, life sciences and technology employment as well
as healthcare with two new hospitals, a combined $402 million
investment.   The LWLDC also notes that five new hotels are in
progress, and the retail/restaurant sector is welcoming
newcomers.  The unemployment rate in Tippecanoe County has generally
ranged from 3.5% to 4.5% for the past two years, most recently measured at 4.2%
in May 2008.  There was a 4.9% spike in March due largely to the
effect of inclement weather on the construction industry and to temporary
layoffs at a manufacturing company in Lafayette.





The
community has made good progress in working through the effects of the
overbuilding of one- to four-family housing by local and out-of-town
construction companies.  Many of these houses were sold to marginally
qualified borrowers, often financed by out-of-town lenders, to people who would
otherwise have populated the rental market.  Holders of rental
properties were faced with increased vacancies at the same time the state
imposed substantially higher property tax rates.  The influx of these
new houses on the market, along with increasing numbers of foreclosed
properties, resulted in stagnant or declining property values and a large
surplus of properties for sale.  As a result, even well-established
landlords and builders are choosing to leave or are being forced out of the
market.  However, information from the Lafayette Board of Realtors
indicates that 1,690 properties were sold in Tippecanoe County from January 1,
2007 through January 1, 2008 with an average market time of 82 days compared to
1,838 sales for the same time period one year earlier with a market time of 80
days.  Average selling prices increased to $152,000 from $147,000 for
the two time periods.  Our loan portfolio showed an $8.8 million, or
2.0%, increase in the first six months of 2008.





While the
local economy continues to improve, we continue to work with borrowers who have
fallen substantially behind on their loans.  The majority of our
delinquent loans are secured by real estate and we believe we have sufficient
reserves to cover probable losses.  The challenge is to get delinquent
borrowers back on a workable payment schedule or to get control of their
properties through an overburdened court system.  In June 2008,
delinquent loans were at a 42-month low.





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.  Our net interest
income also depends on the shape of the yield curve.  In 2007, the
curve gradually returned to a more normal slight upward
slope.  Because deposits are generally tied to shorter-term market
rates, and loans are generally tied to longer-term rates, the shrinking spread
between the two has made it more difficult to maintain desired operating income
levels.  Our expectation for 2008 is that short-term rates, which saw
a 2.00% decrease in the first quarter, will drift slightly lower while long-term
rates will gradually increase through most of the year maintaining a more
traditional upward sloping yield curve throughout most of the year.




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, and existing
adjustable rate loans can be expected to reprice to higher rates, both of which
could be expected to have a favorable impact on interest
income.  Alternatively, continuing low interest rates could have a
negative impact on our interest income as new loans are put on the books at
comparatively low rates and our existing adjustable rate loans reprice to lower
rates.  Even if rates do fall, because so many borrowers refinanced
their mortgages in the last few years, we do not expect to see a return to a
high volume of refinancing.  However, low rates may be expected to
encourage borrowers to initiate additional real estate related
purchases.




We
consider expected changes in interest rates when structuring our
interest-earning assets and our interest-bearing liabilities.  If
rates are expected to increase we try to book shorter-term assets that will
reprice relatively quickly to higher rates over time, and book longer-term
liabilities that will remain for a longer time at lower
rates.  Conversely, if rates are expected to fall, we intend to
structure our balance sheet such that loans will reprice more slowly to lower
rates and deposits will reprice more quickly.  We currently offer a
three-year and a five-year certificate of deposit that allows depositors one
opportunity to have their rate adjusted to the market rate at a future date to
encourage them to choose longer-term deposit products.  However, since
we are not able to predict market interest rate fluctuations, our
asset/liability management strategy may not prevent interest rate changes from
having an adverse effect on our results of operations and financial
condition.




Our
results of operations may also be affected by general and local competitive
conditions, particularly those with respect to changes in market interest rates,
government policies and actions of regulatory authorities.






Critical
Accounting Policies




Generally
accepted accounting principles are complex and require management to apply
significant judgments to various accounting, reporting and disclosure matters.
Management of LSB Financial must use assumptions and estimates to apply these
principles where actual measurement is not possible or practical. For a complete
discussion of LSB Financial's significant accounting policies, see Note 1 to the
Consolidated Financial Statements as of June 30, 2008.  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 No. 114, Accounting by Creditors for
Impairment of a Loan.  Any allowances for impaired loans are
determined by the present value of expected future cash flows discounted at the
loan’s effective interest rate or fair value of the underlying
collateral.  Historical loss rates are applied to other commercial
loans not subject to specific reserve allocations.




Homogenous
smaller balance loans, such as consumer installment and residential mortgage
loans are not individually risk graded. Reserves are established for each pool
of loans based on the expected net charge-offs for one year. Loss rates are
based on the average net charge-off history by loan category.




Historical
loss rates for commercial and consumer loans may be adjusted for significant
factors that, in management’s judgment, reflect the impact of any current
conditions on loss recognition.  Factors which management considers in
the analysis include the effects of the national and local economies, trends in
the nature and volume of loans (delinquencies, charge-offs and nonaccrual
loans), changes in mix, asset quality trends, risk management and loan
administration, changes in the internal lending policies and credit standards,
collection practices and examination results from bank regulatory agencies and
Lafayette Savings’ internal loan review.




Allowances
on individual loans are reviewed quarterly and historical loss rates are
reviewed annually and adjusted as necessary based on changing borrower and/or
collateral conditions and actual collection and charge-off
experience.




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




11




Mortgage
Servicing Rights




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






Financial
Condition




Comparison
of Financial Condition at June 30, 2008 and December 31, 2007




Our total
assets increased $10.0 million, or 2.92%, during the six months from December
31, 2007 to June 30, 2008.  Primary components of this increase were
an $8.8 million increase in net loans receivable and a $3.8 million increase in
short term investments, offset by a $1.4 million decrease in other assets due
partly to a $1.3 million decrease in other real estate
owned.  Management attributes the increase in loans primarily to the
decision to take advantage of the Bank’s minimal interest rate risk exposure to
book rather than sell fixed rate residential mortgages in an effort to increase
the loan portfolio as well as increased interest in non-residential property
financing.  Because of increased funding needs we raised $7.5 million
of deposits including a $3.8 million increase in Negotiable Order of Withdrawal
(NOW) accounts.  Additionally we increased Federal Home Loan Bank
advances by $2.0 million.





Non-performing
assets, which include non-accruing loans, accruing loans 90 days past due and
foreclosed assets, decreased from $13.9 million at December 31, 2007 to $10.8
million at June 30, 2008.  Non-performing loans and accruing loans 90
days past due totaled $8.2 million at June 30, 2008 and consisted of $6.1
million, or 74.64%, of one- to four-family or multi-family residential real
estate loans, $1.8 million, or 21.68%, of loans on land or commercial property,
$271,000, or 3.31%,of commercial business
loans and $30,000, or 0.37%,of consumer
loans.  Non-performing assets also include $2.6 million in foreclosed
assets.  At June 30, 2008, our allowance for loan losses equaled 1.14%
of total loans compared to 1.25% at December 31, 2007.  The allowance
for loan losses at June 30, 2008 totaled 32.04% of non-performing assets
compared to 26.56% at December 31, 2007, and 42.32% of non-performing loans at
June 30, 2008 compared to 37.04% at December 31, 2007.  Our
non-performing assets equaled 3.08% of total assets at June 30, 2008 compared to
4.08% at December 31, 2007.  Non-performing assets totaling $746,000
were charged off in the first six months of 2008, offset by recoveries of
$14,000.  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




12


adjustments
to the allowance may be necessary, and net income could be significantly
affected, if circumstances and/or economic conditions cause substantial changes
in the estimates we use in making the determinations about the levels of the
allowance for losses.  Additionally, various regulatory agencies, as
an integral part of their examination process, periodically review our allowance
for loan losses.  These agencies may require the recognition of
additions to the allowance based upon their judgments of information available
at the time of their examination.




Shareholders’
equity increased from $33.9 million at December 31, 2007 to $34.1 million at
June 30, 2008, an increase of $121,000, or 0.36%, primarily as a result of net
income of $1.0 million, partially offset by our payment of $779,000 of dividends
on common stock, and the repurchase of 8,900 shares of our stock as part of a
stock repurchase program.  Shareholders’ equity to total assets was
9.67% at June 30, 2008 compared to 9.92% at December 31, 2007.






Results
of Operations




Comparison
of Operating Results for the Six Months and the Quarter Ended June 30, 2008 and
June 30, 2007




General.  Net income for
the six months ended June 30, 2008 was $1.0 million, a decrease of $193,000, or
15.69%, over the six months ended June 30, 2007.  Net income for the
quarter ended June 30, 2008 was $521,000, an increase of $70,000, or 15.52%,
over the comparable quarter in 2007. The decrease for the six month period was
primarily due to a $698,000 decrease in net interest income partially offset by
a $240,000 decrease in the provision for loan losses, a $236,000 decrease in
taxes on income, a $20,000 increase in non-interest income and a $9,000 decrease
in non-interest expenses.  The increase for the three month period was
primarily due to a $240,000 decrease in the provision for losses, a
$153,000 decrease in non-interest expenses and a $14,000 decrease in taxes
on income partially offset by a $274,000 decrease in net interest income
and a $63,000 decrease in non-interest income.




Net Interest
Income.  Net interest
income for the six months ended June 30, 2008 decreased $698,000, or 11.95%,
over the same period in 2007.  This decrease was due to a 36 basis
point decrease in our net interest margin (net interest income divided by
average interest-earning assets) from 3.48% for the six months ended June 30,
2007 to 3.12% for the six months ended June 30, 2008 together with a $6.3
million decrease in average net interest-earning assets.  The decrease
in net interest margin is primarily due to the 35 basis point decrease in the
average rate on interest-earning assets from 6.91% for the six months ended June
30, 2007 to 6.56% for the six months ended June 30, 2008. The average rate on
interest-bearing liabilities changed only one basis point during this period
from 3.59% to 3.60% for the same respective periods.  Net interest
income for the three months ended June 30, 2008 decreased $274,000, or 9.53%,
over the same period in 2007 for similar reasons.




Interest
income on loans decreased $715,000, or 6.47%, for the six months ended June 30,
2008 compared to the same six months in 2007.  The average rate on
loans fell from 7.19% to 6.83% partly due to the immediate decrease in rate for
over $45 million of loans tied to prime as the Federal Reserve lowered rates a
total of 300 basis points from September 2007 to March 2008.  The
average balance of loans decreased by $4.6 million due to a tightening of
underwriting standards.  Interest income on loans decreased $338,000
for the second quarter of 2008 compared to the second quarter of 2007 due to a
decrease in the average yield on loans




13


from
7.25% for the second quarter of 2007 to 6.74% for the second quarter of 2008
partly offset by a $2.7 million increase in the average balance of loans from
$303.1 million for the second quarter of 2007 to $305.9 million for the second
quarter of 2008 as we begin to see signs of an improving local
economy.




Interest
earned on other investments and Federal Home Loan Bank stock decreased by
$88,000, or 24.91%, for the six months ended June 30, 2008 compared to the same
period in 2007.  This was the result of a 42 basis point decrease in
the average yield on other investments and Federal Home Loan Bank stock and a
$1.7 million decrease in average balances.  The decrease in yield was
primarily caused by the decrease in the return on short term investments due to
the Federal Reserve rate cuts mentioned above.  Interest income on
other investments and Federal Home Loan Bank stock decreased $16,000 for the
second quarter of 2008 compared to the second quarter of 2007 due to a slight
decrease in the average yield on other investments and Federal Home Loan Bank
stock from 3.57% for the second quarter of 2007 to 3.52% over the same period in
2008, as well as a $1.4 million decrease in average balances.




Interest
expense for the six months ended June 30, 2008 decreased $105,000, or 1.82%,
over the same period in 2007 due to a $243,000 decrease in interest on deposits
partially offset by a $138,000 increase in interest expense on Federal Home Loan
Bank advances.  The lower deposit costs were due to a $13.4 million
decrease in average deposits and a decrease in the average rate paid on deposits
from 3.22% for the first six months of 2007 to 3.20% for the first six months of
2008.  The increase in Federal Home Loan Bank advance expense was due
to a $7.1 million increase in average balances partially offset by a decrease in
the average rate paid on advances from 4.95% for the first six months of 2007 to
4.85% for the first six months of 2008. The lower rates were generally due to
the lower interest rates in the economy, especially for shorter-term
products.   Interest expense decreased $80,000, or 2.80%, for the
second quarter of 2008 from the same period in 2007 primarily due to a $6.3
million decrease in average interest-bearing liabilities for the three month
period ended June 30, 2008 compared to the same period in 2007.  The
average rate paid on average interest-bearing liabilities was virtually
unchanged.




Provision for
Loan Losses.  The evaluation of the level of loan loss reserves
is an ongoing process that includes closely monitoring loan delinquencies. The
following chart shows delinquent loans as well as a breakdown of non-performing
assets.  As noted earlier, our delinquent loans, including
non-performing loans, are at a 42-month low.




06/30/08
            
            
            12/31/07
            
            
            06/30/07Loans
      delinquent 30-59 days
            
            $
            162
            
            
            $
            364
            
            
            $
            1,288Loans
      delinquent 60-89 days
            
            
            687
            
            
            
            1,763
            
            
            
            5,552Total
      delinquencies
            
            
            849
            
            
            
            2,127
            
            
            
            6,840Accruing
      loans past due 90 days
            
            
            0
            
            
            
            59
            
            
            
            2,088Non-accruing
      loans
            
            
            8,200
            
            
            
            9,935
            
            
            
            10,099Total
      non-performing loans
            
            
            8,200
            
            
            
            9,994
            
            
            
            12,187OREO
            
            
            2,630
            
            
            
            3,944
            
            
            
            4,612Total
      non-performing assets
            
            $
            10,830
            
            
            $
            13,938
            
            
            $
            16,799







14


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




The
decrease in non-performing loans at June 30, 2008 compared to December 31, 2007
was generally due to properties being taken into OREO, payoffs or improvements
in the borrower’s situation which brought them back to performing
status.  We took $804,000 into OREO in the first six months of 2008
and received another $583,000 in properties that were received and sold within
the six months.  We sold a total of $2.6 million of OREO properties
during the first six months of 2008.




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.  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.




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




As part
of our analysis we look at all loans rated doubtful, substandard, special
mention and watch.  These loans are specifically reviewed and a
specific allowance is designated for this group of loans.  At June 30,
2008, specifically reviewed loans totaled $55.3 million compared to $51.1
million at December 31, 2007.  Most of the increase was due to a $7.4
million increase in watch loans.  These are loans that are performing
as agreed but are loans in which management has detected some weakness that
warrants closer monitoring.  We are proactive in identifying and
addressing potential problem loans and believe this is a reason for our success
in reducing non-performing loans.  In addition, the use of a
third-party independent loan review for commercial loans increases our
confidence that potential problems will be identified and addressed
early.  Individual impairment reports are prepared each quarter for
all substandard




15


loans and
an expected impairment is determined based on the estimated realizable value of
the collateral.  Over this same period substandard loans were reduced
by $3.5 million as loans were either restructured or taken into
OREO.




The
remainder of the portfolio is assigned a reserve based on a five-year average of
historical charge-off levels.  In addition, a qualitative analysis is
done on environmental factors that may have an impact on future loan losses and
the resulting estimated potential loss is applied to the entire
portfolio.   In March we adjusted five of these
factors.  The risk from the levels of and trends in delinquencies was
reduced as a result of the reduction in delinquent loans discussed
above.  The risk of loss from charge-offs was increased because of the
anticipated increase in the acquisition and sale of OREO
properties.  The risk from the change in underwriting standards was
decreased as the new credit analysis guidelines and credit department have
effectively changed the credit culture of the bank.  The risk from
regulatory reviews was reduced due to the response from the Office of Thrift
Supervision (“OTS”) visit in 2007.  The risk from credit
concentrations was increased as the concentrations in one- to four-family
non-owner occupied and land development loans approached or exceeded internal
limits.  This is the first change in these factors in almost two
years.  There were no changes made to environmental factors in the
second quarter.




As a result of our analysis
we recorded a $500,000 provision for loan losses for the six months ended
June 30, 2008, compared to $740,000 for the same period in 2007.  This
provision was deemed appropriate by management 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.  An analysis of the
allowance for loan losses for the six months ended June 30, 2008 and 2007
follows:




(Dollars
      in Thousands)2008
            
            
            2007Balance
      at January 1
            
            $
            3,702
            
            
            
            2,770Loans
      charged off
            
            
            (746
            )
            
            
            (524
            )Recoveries
            
            
            14
            
            
            
            22Provision
            
            
            500
            
            
            
            740Balance
      at June 30
            
            $
            3,470
            
            
            $
            3,008






The
balance of loan loss reserves decreased $232,000, from $3.7 million at December
31, 2007 to $3.5 million at June 30, 2008.  This decline primarily
reflects the first quarter charge-off of $682,000 of loans previously identified
as impaired and specifically reserved.  These charge-offs resulted in
a decrease in the specific allowance on impaired loans of
$563,000.  The balance of loan loss reserves increased by $193,000 in
the second quarter of 2008.




Non-Interest
Income.  Non-interest income for the six months ended June 30,
2008 increased by $20,000, or 1.35%, compared to the same period in
2007.  This was primarily due to a $135,000 increase in other income
generally due to higher fees for loan closings and debit card usage due to
increases in volume and to recoveries on our check coverage program and a
$52,000 increase in the gain on other real estate owned as we were able to
dispose of several properties we had previously written down at a higher price
than expected partially offset by a $112,000 decrease in the gain on the sale of
mortgage loans due to a decrease in loans sold and a  $55,000 decrease
in fees on deposit accounts.  Non-interest income for the second
quarter of 2008 decreased by $63,000 compared to the same period in 2007
primarily due to an $87,000




16


decrease
in the gain on the sale of mortgage loans in the secondary market due to lower
activity, a $39,000 increase in the loss on the sale of other real estate
owned due to a downward adjustment to the OREO value of several properties to
reflect accepted offers and a $45,000 decrease in fees on deposit accounts
offset by a $108,000 increase in other income for the reasons mentioned
above.




Non-Interest
Expense.  Non-interest expense for the six months ended June
30, 2008 decreased $9,000 over the same period in 2007 due to relatively small
changes in each category.  Salaries were down $62,000 primarily due to
a decrease in incentive pay and an increase in health insurance costs. 
Other changes included a $17,000 increase in occupancy costs due to higher
depreciation and maintenance expense, a $12,000 decrease in advertising expense
as we focus more on direct mailing and a $15,000 increase in other expenses due
primarily to an increase in FDIC insurance expense and expenses related to
foreclosed and bank-owned property.  Non-interest expense for the
second quarter of 2008 decreased by $153,000 over the same period in 2007, due
largely to the factors mentioned above.




Income
Tax Expense.Our income tax
provision decreased by $236,000 for the six months ended June 30, 2008 compared
to the six months ended June 30, 2007, due primarily to decreased
income.  Our income tax provision decreased by $14,000 for the second
quarter of 2008 compared to the second quarter of 2007 because of the effects of
negative earnings in December.






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 June 30, 2008 and December 31, 2007 were 6.90% and 5.83%,
respectively, compared to a regulatory liquidity base, and 5.14% and 4.36%
compared to total assets at the end of each period.




17


We
anticipate that we will have sufficient funds available to meet current funding
commitments.  At June 30, 2008, we had outstanding commitments to
originate loans and available lines of credit totaling $38.3 million and
commitments to provide funds to complete current construction projects in the
amount of $2.6 million. We had no outstanding commitments to sell residential
loans.  Certificates of deposit which will mature in one year or less
totaled $115.6 million at June 30, 2008.  Included in that number are
$31.2 million of brokered deposits.Based
on our experience, certificates of deposit held by local depositors have been a
relatively stable source of long-term funds as such certificates are generally
renewed upon maturity since we have established long-term banking relationships
with our customers.  Therefore, we believe a significant portion of
such deposits will remain with us, although this cannot be
assured.  Brokered deposits can be expected not to renew at maturity
and will have to be replaced with other funding upon maturity.  We
also have $30.8 million of Federal Home Loan Bank advances maturing in the next
twelve months.






Capital
Resources




Shareholders’
equity totaled $34.1 million at June 30, 2008 compared to $33.9 million at
December 31, 2007, an increase of $121,000, or 0.36%, due primarily to net
income of $1.0 million, partially offset by our payment of dividends on common
stock and the repurchase of 8,900 shares of our stock as part of a stock
repurchase program.  Shareholders’ equity to total assets was 9.67% at
June 30, 2008 compared to 9.92% at December 31, 2007.




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 June 30,
2008 and December 31, 2007, Lafayette Savings was categorized as well
capitalized.  Our actual and required capital amounts and ratios at
June 30, 2008 and December 31, 2007 are presented below:




Actual
            
            For
      Capital Adequacy Purposes
            
            To
      Be Well Capitalized Under Prompt Corrective Action ProvisionsAmount
            
            
            Ratio
            
            Amount
            
            
            Ratio
            
            Amount
            
            
            RatioAs
      of June 30, 2008Total
      risk-based capital(to
      risk-weighted assets)
            
            $
            36,321
            
            
            
            13.5
            %
            
            $
            21,507
            
            
            
            8.0
            %
            
            $
            26,884
            
            
            
            10.0
            %Tier
      I capital(to
      risk-weighted assets)
            
            
            33,772
            
            
            
            12.6
            
            
            
            10,754
            
            
            
            4.0
            
            
            
            16,130
            
            
            
            6.0Tier
      I capital(to
      adjusted total assets)
            
            
            33,772
            
            
            
            9.6
            
            
            
            10,545
            
            
            
            3.0
            
            
            
            17,574
            
            
            
            5.0Tier
      I capital(to
      adjusted tangible assets)
            
            
            33,772
            
            
            
            9.6
            
            
            
            7,030
            
            
            
            2.0
            
            
            
            N/A
            
            
            
            N/ATangible
      capital(to
      adjusted tangible assets)
            
            
            33,772
            
            
            
            9.6
            
            
            
            5,272
            
            
            
            1.5
            
            
            
            N/A
            
            
            
            N/AAs
      of December 31, 2007Total
      risk-based capital(to
      risk-weighted assets)
            
            $
            36,320
            
            
            
            13.9
            %
            
            $
            20,954
            
            
            
            8.0
            %
            
            $
            26,192
            
            
            
            10.0
            %Tier
      I capital(to
      risk-weighted assets)
            
            
            33,444
            
            
            
            12.8
            
            
            
            10,477
            
            
            
            4.0
            
            
            
            15,716
            
            
            
            6.0Tier
      I capital(to
      adjusted total assets)
            
            
            33,444
            
            
            
            9.8
            
            
            
            10,249
            
            
            
            3.0
            
            
            
            17,081
            
            
            
            5.0Tier
      I capital(to
      adjusted tangible assets)
            
            
            33,444
            
            
            
            9.8
            
            
            
            6,833
            
            
            
            2.0
            
            
            
            N/A
            
            
            
            N/ATangible
      capital(to
      adjusted tangible assets)
            
            
            33,444
            
            
            
            9.8
            
            
            
            5,124
            
            
            
            1.5
            
            
            
            N/A
            
            
            
            N/A


18




Disclosure
Regarding Forward-Looking Statements




This
document, including information included or incorporated by reference, contains,
and future filings by LSB Financial on Form 10-K, Form 10-Q and Form 8-K and
future oral and written statements by LSB Financial and our management may
contain, forward-looking statements about LSB Financial and its subsidiaries
which we believe are within the meaning of the Private Securities Litigation
Reform Act of 1995.  These forward-looking statements include, without
limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities, interest rates, cost savings and
funding advantages expected or anticipated to be realized by
management.  Words such as may, could, should, would, believe,
anticipate, estimate, expect, intend, plan and similar expressions are intended
to identify forward-looking statements.  Forward-looking statements by
LSB Financial and its management are based on beliefs, plans, objectives, goals,
expectations, anticipations, estimates and intentions of management and are not
guarantees of future performance.  We disclaim any obligation to
update or revise any forward-looking statements based on the occurrence of
future events, the receipt of new information or otherwise.  The
important factors we discuss below and elsewhere in this document, as well as
other factors discussed under the caption Management’s Discussion and Analysis
of Financial Condition and Results of Operations in this document and identified
in our filings with the SEC and those presented elsewhere by our management from
time to time, could cause actual results to differ materially from those
indicated by the forward-looking statements made in this document.




The
following factors, many of which are subject to change based on various other
factors beyond our control, could cause our financial performance to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements:






·
            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;








19




·
            acquisitions;




·
            changes
      in consumer spending and saving habits;
and




·
            our
      success at managing the risks involved in the
  foregoing.








Item
      3.
            Quantitative
      and Qualitative Disclosures About Market
Risk




Not
Applicable.






Item
      4T.
            Controls
      and Procedures




Evaluation of Disclosure Controls
and Procedures.An evaluation of the Company’s disclosure
controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the
regulations promulgated under the Securities Exchange Act of 1934, as amended
(the “Act”)), as of June 30, 2008, 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.




Changes in Internal Controls over
Financial Reporting.There have been no changes in our
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Act) identified in connection with the Company’s evaluation of controls that
occurred during the quarter ended June 30, 2008, that have materially affected,
or are reasonably likely to materially affect, our internal control over the
financial reporting.






PART
II. OTHER INFORMATION




Item
      1.   Legal
      Proceedings




None.






Item
      1A.   Risk Factors




Not
Applicable.




20




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




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




Issuer
      Purchases of Equity SecuritiesMonth of Purchase
            
            Total
      Number of Shares Purchased1
            
            
            Average
      Price Paid per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans orPrograms2
            
            
            Maximum
      Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
      Under the Plans orPrograms2April
      1 – April 30, 2008
            
            
            4,000
            
            
            
            18.44
            
            
            
            4,000
            
            
            
            54,817May
      1 – May 31, 2008
            
            
            1,000
            
            
            
            18.00
            
            
            
            1,000
            
            
            
            53,817June
      1 – June 30, 2008
            
            
            1,000
            
            
            
            17.86
            
            
            
            1,000
            
            
            
            52,817Total
            
            
            6,000
            
            
            $
            18.27
            
            
            
            6,000
            
            
            
            52,817


_______________________


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


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








Item
      3.   Defaults Upon Senior
  Securities




None.






Item
      4.   Submission of Matters to a Vote of Security
      Holders




On April
16, 2008, 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 2011, are as
follows:




For
            
            
            WithheldMary
      Jo David
            
            
            1,273,266
            
            
            
            162,850Thomas
      R. McCully
            
            
            1,278,653
            
            
            
            157,463Peter
      Neisel
            
            
            1,364,908
            
            
            
            71,208Jeffrey
      A. Poxon
            
            
            1,274,058
            
            
            
            162,058








21





The
directors whose terms continued after the Meeting are as follows: James A.
Andrew, Kenneth P. Burns, Philip W. Kemmer, Mariellen M. Neudeck, Charles W.
Shook and Randolph F. Williams.









Item
      5.   Other
Information




None.






Item
      6.   Exhibits




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




22









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, 2008
            By:
            /s/
      Randolph
      F. WilliamsRandolph
      F. Williams, President(Principal
      Executive Officer)Date: 
      August 14, 2008
            By:
            /s/
      Mary
      Jo DavidMary
      Jo David, Treasurer(Principal
      Financial and AccountingOfficer)





23


INDEX
TO EXHIBITS










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










24