SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 
 
 
 FORM
        10-Q
 
 x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934For
                  the quarterly period ended June 30, 2005 ̈
              OR
                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE ACT OF 1934For
                  the transition period from ______ to
                  ________
 
 Commission
                  file number 0-25070**LSB
                  FINANCIAL CORP.**
                (Exact
                  Name of Registrant as Specified in its Charter)Indiana
                (State
                  or other jurisdiction of incorporation or organization)
              
              35-1934975
                (I.R.S.
                  Employer Identification No.)101
                  Main Street, Lafayette, Indiana
                (Address
                  of principal executive offices)
              
              47902
                (Zip
                  Code)(765)
                  742-1064
                (Registrant’s
                  telephone number, including area
                  code)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.YES  [X]     
        NO  [   ]
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act).   YES  [   ]     
        NO  [X]
 
 State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
 as
        of the
        latest practicable date:
 
 CLASS
              
              OUTSTANDING
                  AT AUGUST 10, 2005Common
                  stock, par value $.01 per share
              
              1,472,959
 
 
 *Table
            of Contents*
  LSB
        FINANCIAL CORP.
 
 INDEX
 
 
 PART
                  I. FINANCIAL INFORMATION
              1Item
                  1. Financial Statements (Unaudited)
              1Consolidated
                  Balance Sheets
              1Consolidated
                  Statements of Income
              2Consolidated
                  Statements of Changes in Shareholders’
                  Equity
              3Consolidated
                  Statements of Cash
                  Flows
              4Notes
                  to Consolidated Financial
                  Statements
              5-7Item
                  2. Management’s Discussion and Analysis of Financial
                  Condition and Results of Operations
              7-17Item
                  3. Quantitative and Qualitative Disclosures About
                  Market Risk
              18Item
                  4. Controls and Procedures
              19PART
                  II. OTHER INFORMATION
              20Item
                  1. Legal Proceedings
              20Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              20Item
                  3. Defaults Upon Senior
                  Securities
              20Item
                  4. Submission of Matters to a Vote of Security
                  Holders
              21Item
                  5. Other Information
              21Item
                  6. Exhibits
              21SIGNATURES
              22EXHIBIT
                  INDEX
              23
  *Table
            of Contents*
  **PART
        I FINANCIAL INFORMATION**
 **Item
        1**.**FINANCIAL
        STATEMENTS**
 LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Balance Sheets
 (Dollars
        in thousands except per share data)
 June
                  30,
                2005
                (unaudited)
              
              December
                  31,
                2004AssetsCash
                  and due from banks
              
              $
              1,782
              
              $
              2,395Short-term
                  investments
              
              
              7,327
              
              
              6,818Cash
                  and cash equivalents
              
              
              9,109
              
              
              9,213Available-for-sale
                  securities
              
              
              8,715
              
              
              7,947Loans
                  held for sale
              
              
              779
              
              
              1,050Total
                  loans
              
              
              331,738
              
              
              319,972Less:
                  Allowance for loan losses
              
              
              (2,264
              )
              
              (2,095
              )Net
                  loans
              
              
              329,474
              
              
              317,877Premises
                  and equipment, net
              
              
              6,672
              
              
              6,750Federal
                  Home Loan Bank stock, at cost
              
              
              4,197
              
              
              4,110Bank
                  owned life insurance
              
              
              2,671
              
              
              2,627Interest
                  receivable and other assets
              
              
              5,762
              
              
              5,471Total
                  Assets
              
              $
              367,379
              
              $
              355,045Liabilities
                  and Shareholders’ EquityLiabilitiesDeposits
              
              
              259,671
              
              
              256,631Federal
                  Home Loan Bank advances
              
              
              74,008
              
              
              66,808Interest
                  payable and other liabilities
              
              
              1,864
              
              
              1,213Total
                  liabilities
              
              
              335,543
              
              
              324,652Commitments
                  and ContingenciesShareholders’
                  EquityCommon
                  stock, $.01 par value
                Authorized
                  - 7,000,000 shares
                Issued
                  and outstanding 2005 - 1,466,256 shares, 2004 - 1,437,250
                  shares
              
              
              14
              
              
              14Additional
                  paid-in-capital
              
              
              8,455
              
              
              8,235Retained
                  earnings
              
              
              23,500
              
              
              22,304Unearned
                  recognition and retention plan (RRP) shares
              
              
              (36
              )
              
              (51
              )Unearned
                  ESOP compensation
              
              
              (75
              )
              
              (103
              )Accumulated
                  other comprehensive loss
              
              
              (22
              )
              
              (6
              )Total
                  shareholders’ equity
              
              
              31,836
              
              
              30,393Total
                  liabilities and shareholders’ equity
              
              $
              367,379
              
              $
              355,045
  *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
                  30,2005
              
              2004
              
              2005
              
              2004**Interest
                  and Dividend Income**Loans
              
              $
              5,157
              
              $
              4,608
              
              $
              10,151
              
              $
              9,100SecuritiesTaxable
              
              
              77
              
              
              95
              
              
              155
              
              
              214Tax-exempt
              
              
              40
              
              
              41
              
              
              72
              
              
              83Other
              
              
              25
              
              
              16
              
              
              43
              
              
              24Total
                  interest and dividend income
              
              
              5,299
              
              
              4,760
              
              
              10,421
              
              
              9,421**Interest
                  Expense**Deposits
              
              
              1,594
              
              
              1,303
              
              
              3,097
              
              
              2,539Borrowings
              
              
              754
              
              
              766
              
              
              1,496
              
              
              1,523Total
                  interest expense
              
              
              2,348
              
              
              2,069
              
              
              4,593
              
              
              4,062**Net
                  interest income**
              
              
              2,951
              
              
              2,691
              
              
              5,828
              
              
              5,359**Provision
                  for Loan Losses**
              
              
              125
              
              
              125
              
              
              300
              
              
              250**Net
                  Interest Income After Provision for Loan Losses**
              
              
              2,826
              
              
              2,566
              
              
              5,528
              
              
              5,109**Non-interest
                  income**Deposit
                  account service charges and fees
              
              
              281
              
              
              223
              
              
              487
              
              
              435Net
                  gains on loan sales
              
              
              108
              
              
              139
              
              
              173
              
              
              266Gain
                  on sale of securities
              
              
              0
              
              
              11
              
              
              0
              
              
              11Other
              
              
              218
              
              
              229
              
              
              431
              
              
              404Total
                  non-interest income
              
              
              607
              
              
              602
              
              
              1,091
              
              
              1,116**Non-interest
                  Expense**Salaries
                  and employee benefits
              
              
              1,096
              
              
              1,081
              
              
              2,288
              
              
              2,142Net
                  occupancy and equipment expense
              
              
              265
              
              
              338
              
              
              541
              
              
              631Computer
                  service
              
              
              127
              
              
              94
              
              
              226
              
              
              190Advertising
              
              
              109
              
              
              104
              
              
              150
              
              
              182Other
              
              
              476
              
              
              440
              
              
              911
              
              
              774Total
                  non-interest expense
              
              
              2,073
              
              
              2,057
              
              
              4,116
              
              
              3,919**Income
                  Before Income Taxes**
              
              
              1,360
              
              
              1,111
              
              
              2,503
              
              
              2,306**Provision
                  for Income Taxes**
              
              
              467
              
              
              357
              
              
              843
              
              
              832**Net
                  income**
              
              $
              893
              
              $
              754
              
              $
              1,660
              
              $
              1,474**Basic
                  Earnings Per Share**
              
              $
              0.61
              
              $
              0.53
              
              $
              1.15
              
              $
              1.05**Diluted
                  Earnings Per Share**
              
              $
              0.60
              
              $
              0.51
              
              $
              1.13
              
              $
              1.01
  *See
        notes to consolidated condensed financial statements.*
 2
 *Table
            of Contents*
  
 LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Changes in Shareholders’
        Equity
 For
        the
        Six Months Ended June 30, 2005 and 2004
 (Dollars
        in thousands)
 (Unaudited)
 
 **Common
                  Stock**
              
              **Additional
                  Paid-In Capital**
              
              **Retained
                  Earnings**
              
              **Benefit
                  Plans Compensation**
              
              **Accumulated
                  Other Comprehensive Income (Loss)**
              
              **Total****Balance,
                  January 1, 2004**
              
              $
              14
              
              $
              8,020
              
              $
              19,841
              
              
              ($239
              )
              $
              91
              
              $
              27,727Comprehensive
                  incomeNet
                  income
              
              
              
              
              
              
              
              
              1,474
              
              
              
              
              
              
              
              
              1,474Change
                  in unrealized appreciation
                (depreciation)
                  on available-for-sale
                securities,
                  net of taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (125
              )
              
              (125
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,349Dividends
                  on common stock, $0.29 per share
              
              
              
              
              
              
              
              
              (388
              )
              
              
              
              
              
              
              
              (388
              )Stock
                  options exercised (6,295 shares)
              
              
              
              
              
              80
              
              
              
              
              
              
              
              
              
              
              
              80Amortization
                  of RRP expense
              
              
              
              
              
              
              
              
              
              
              
              15
              
              
              
              
              
              15ESOP
                  shares earned
              
              
              
              
              
              93
              
              
              
              
              
              28
              
              
              
              
              
              121**Balance,
                  June 30, 2004**
              
              $
              14
              
              $
              8,193
              
              $
              20,927
              
              
              ($196
              )
              
              ($34
              )
              $
              28,904**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, $0.32 per share
              
              
              
              
              
              
              
              
              (464
              )
              
              
              
              
              
              
              
              (464
              )Purchase
                  and retirement of stock (20,087 shares)
              
              
              
              
              
              (528
              )
              
              
              
              
              
              
              
              
              
              
              (528
              )Stock
                  options exercised (61,529 shares)
              
              
              
              
              
              249
              
              
              
              
              
              
              
              
              
              
              
              249Stock
                  option and RRP tax benefit
              
              
              
              
              
              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
  *See
        notes to consolidated condensed financial statements.*
  3
 *Table
            of Contents*
  LSB
        FINANCIAL CORP.
 Consolidated
        Condensed Statements of Cash Flows
 (Dollars
        in thousands)
 (Unaudited)
 
 Six
                  months ended
                June
                  30,2005
              
              2004Operating
                  ActivitiesNet
                  income
              
              $
              1,660
              
              $
              1,474Items
                  not requiring (providing) cashDepreciation
              
              
              171
              
              
              286Provision
                  for loan losses
              
              
              300
              
              
              250Gain
                  on sale of securities
              
              
              0
              
              
              (11
              )Amortization
                  of premiums and discounts on securities
              
              
              18
              
              
              172Federal
                  Home Loan Bank stock dividend
              
              
              (87
              )
              
              (94
              )ESOP
                  shares earned
              
              
              122
              
              
              121Gain
                  on sale of loans
              
              
              81
              
              
              135Loans
                  originated for sale
              
              
              (4,673
              )
              
              (17,145
              )Proceeds
                  on loans sold
              
              
              4,863
              
              
              16,481Changes
                  inInterest
                  receivable and other assets
              
              
              96
              
              
              45Interest
                  payable and other liabilities
              
              
              650
              
              
              41Net
                  cash provided by operating activities
              
              
              3,201
              
              
              1,755Investing
                  ActivitiesPurchases
                  of available-for-sale securities
              
              
              (997
              )
              
              (1,383
              )Proceeds
                  from maturities of available-for-sale securities
              
              
              186
              
              
              2,594Proceeds
                  from sales of available-for-sale securities
              
              
              0
              
              
              1,355Net
                  change in loans
              
              
              (11,897
              )
              
              (26,728
              )Purchase
                  of premises and equipment
              
              
              (94
              )
              
              (51
              )Net
                  cash from investing activities
              
              
              (12,802
              )
              
              (24,213
              )Financing
                  ActivitiesNet
                  change in demand deposits, money market, NOW and savings
                  accounts
              
              
              (4,243
              )
              
              111Net
                  change in certificates of deposit
              
              
              7,283
              
              
              16,612Proceeds
                  from Federal Home Loan Bank advances
              
              
              27,500
              
              
              17,500Repayment
                  of Federal Home Loan Bank advances
              
              
              (20,300
              )
              
              (12,000
              )Proceeds
                  from stock options exercised
              
              
              249
              
              
              80Repurchase
                  of stock
              
              
              (528
              )
              
              0Dividends
                  paid
              
              
              (464
              )
              
              (388
              )Net
                  cash provided by financing activities
              
              
              9,497
              
              
              21,915Increase
                  (Decrease) in Cash and Cash Equivalents
              
              
              (104
              )
              
              (543
              )Cash
                  and Cash Equivalents, Beginning of Period
              
              
              9,213
              
              
              9,397Cash
                  and Cash Equivalents, End of Period
              
              $
              9,109
              
              $
              8,854Supplemental
                  Cash Flows InformationInterest
                  paid
              
              
              4,499
              
              
              3,998Income
                  taxes paid
              
              
              256
              
              
              490Supplemental
                  Non-Cash DisclosuresCapitalization
                  of mortgage servicing rights
              
              
              92
              
              
              13Tax
                  benefit related to stock options and RRP
              
              
              405
              
              
              0*See
                  notes to consolidated condensed financial statements*
 
  4
 *Table
            of Contents*
  
 LSB
        FINANCIAL CORP.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
        30,
        2005
 
 Note
        1 -
        General
 
 The
        financial statements were prepared in accordance with the instructions for
        Form
        10-Q and, therefore, do not include all of the disclosures necessary for
        a
        complete presentation of financial position, results of operations and cash
        flows in conformity with accounting principles generally accepted in the
        United
        States of America. These interim financial statements have been prepared
        on a
        basis consistent with the annual financial statements and include, in the
        opinion of management, all adjustments, consisting of only normal recurring
        adjustments, necessary for a fair presentation of the results of operations,
        cash flows and financial position for and at the end of such interim periods.
        All outstanding shares and per share figures have been adjusted to reflect
        a 5%
        stock dividend payable by LSB Financial Corp. (the “Company” or “LSB Financial”)
        to shareholders of record on October 8, 2004. The consolidated condensed
        balance
        sheet of LSB Financial Corp. as of December 31, 2004 has been derived from
        the
        audited consolidated balance sheet of LSB Financial Corp. as of that date.
 
 Certain
        information and note disclosures normally included in the Company’s annual
        financial statements prepared in accordance with generally accepted accounting
        principles have been condensed or omitted. These condensed (consolidated)
        financial statements should be read in conjunction with the (consolidated)
        financial statements and notes thereto included in the Company’s Form 10-KSB
        annual report for 2004 filed with the Securities and Exchange Commission.
        The
        results of operations for the period are not necessarily indicative of the
        results to be expected for the full year.
 
 Stock
        Options: Employee
        compensation expense under stock options is reported using the intrinsic
        value
        method. No stock-based compensation cost for stock options is reflected in
        net
        income, as all options granted had an exercise price equal to or greater
        than
        the market price of the underlying common stock at date of grant. The following
        table illustrates the effect on net income and earnings per share if expense
        was
        measured using the fair value recognition provisions of Statement of Financial
        Accounting Standards (“SFAS”) No. 123, *Accounting
        for Stock-Based Compensation* .
 Three
                    months ended June 30,
                
                Six
                    months ended June 30,2005
                
                2004
                
                2005
                
                2004Net
                    income as reported
                
                $
                893
                
                $
                754
                
                $
                1,660
                
                $
                1,474Deduct:
                    Stock-based compensation expense determined under fair value
                    based
                    method
                
                
                (11
                )
                
                (5
                )
                
                (22
                )
                
                (9
                )Pro
                    forma net income
                
                $
                882
                
                $
                749
                
                $
                1,638
                
                $
                1,465Basic
                    earnings per share as reported
                
                $
                0.61
                
                $
                0.53
                
                $
                1.15
                
                $
                1.05Pro
                    forma basic earnings per share
                
                
                0.61
                
                
                0.53
                
                
                1.13
                
                
                1.05Diluted
                    earnings per share as reported
                
                
                0.60
                
                
                0.51
                
                
                1.13
                
                
                1.01Pro
                    forma diluted earnings per share
                
                
                0.60
                
                
                0.51
                
                
                1.11
                
                
                1.01
 5
 *Table
            of Contents*
  
 Note
        2 -
        Principles of Consolidation
 
 The
        accompanying financial statements include the accounts of LSB Financial Corp.,
        its wholly owned subsidiary Lafayette Savings Bank, FSB (“Lafayette Savings”),
        and Lafayette Savings’ wholly owned subsidiaries, LSB Service Corporation and
        Lafayette Insurance and Investments, Inc. All significant intercompany
        transactions have been eliminated upon consolidation.
 
 Note
        3 -
        Earnings per share
 
 Earnings
        per share are based upon the weighted average number of shares outstanding
        during the period. Diluted earnings per share further assume the issuance
        of any
        potentially dilutive shares. All shares were included in the diluted earnings
        per share calculation as their effect would be dilutive. Unearned ESOP shares
        are not considered to be outstanding for the earnings per share computation.
        The
        following table presents information about the number of shares used to compute
        earnings per share and the results of the computations:
  **Three
                    months ended June 30,**
                **Six
                    months ended June 30,****2005**
                **2004**
                **2005**
                **2004**Weighted
                    average shares outstanding (excluding unearned ESOP
                    shares)
                1,454,606
                1,405,940
                1,449,963
                1,402,153Shares
                    used to compute diluted earnings per share
                1,478,163
                1,463,180
                1,473,243
                1,460,799Earnings
                    per share
                $0.61
                $0.53
                $1.15
                $1.05Diluted
                    earnings per share
                $0.60
                $0.51
                $1.13
                $1.01
 
 Note
          4 -
          Future Accounting Pronouncements
 
 In
        April
        2005, the SEC issued an amendment to SFAS 123 (SFAS 123R), which allows
        companies to implement SFAS 123R at the beginning of their next fiscal year,
        instead of the next reporting period, that begins after June 15, 2005. The
        new
        rule does not change the accounting required by SFAS 123R, it only changes
        the
        dates for compliance with the standard. Early adoption is permitted in periods
        in which financial statements have not yet been issued. The Company expects
        to
        adopt SFAS 123R on January 1, 2006.
 
 In
        June,
        2005 the Financial Accounting Standards Board (FASB) Board decided not to
        provide additional guidance on the meaning of other-than-temporary impairment,
        but directed the FASB staff to issue a staff position (FSP) which will be
        retitled FSP 115-1, *The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments* .
        The
        final FSP will supersede EITF Issue 03-1, *The*  *Meaning
        of Other-Than-Temporary Impairment and Its Application to Certain
        Investments* ,
        and
        EITF Topic D-44, *Recognition
        of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose
        Cost Exceeds Fair Value* .
        FSP
        115-1 will replace guidance in EITF Issue 03-1 on loss recognition with
        references to existing other-than-temporary impairment guidance, such as
        SFAS
        No. 115, *Accounting
        for Certain Investments in Debt and Equity Securities* .
        FSP
        115-1 will clarify that an investor should recognize an impairment loss no
        later
        than when the impairment is deemed other than temporary, even if a decision
        to
        sell has not been made.
  6
 *Table
            of Contents*
  FSP
        115-1
        will be effective for other-than-temporary impairment analysis conducted
        in
        periods beginning after September 15, 2005. The Company has consistently
        followed the loss recognition guidance in SFAS 115, so the adoption of FSP
        115-1
        will not have any significant impact on the Company's financial condition
        or
        results of operation.
 
 **Item
        2.     MANAGEMENT'S DISCUSSION AND
        ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION**
 
 **Executive
        Summary**
 
 LSB
        Financial Corp. is an Indiana corporation which was organized in 1994 by
        Lafayette Savings Bank, FSB for the purpose of becoming a thrift institution
        holding company. Lafayette Savings is a federally chartered stock savings
        bank
        headquartered in Lafayette, Indiana. References in this Form 10-Q to "we,"
        "us,"
        and "our" refer to LSB Financial and/or Lafayette Savings as the context
        requires.
 
 Lafayette
        Savings has been, and intends to continue to be, a community-oriented financial
        institution. Our principal business consists of attracting retail deposits
        from
        the general public and investing those funds primarily in permanent first
        mortgage loans secured by owner-occupied, one- to four-family residences,
        and to
        a lesser extent, non-owner occupied one- to four-family residential, commercial
        real estate, multi-family, construction and development, consumer and commercial
        business loans. Our revenues are derived principally from interest on mortgage
        and other loans and interest on securities.
 
 Tippecanoe
        County and the eight surrounding counties comprise Lafayette Savings' primary
        market area. Lafayette is the county seat of Tippecanoe County, and West
        Lafayette is the home of Purdue University. The Greater Lafayette area typically
        shows better growth and lower unemployment rates than Indiana or the national
        economy because of the diverse employment base. The unemployment rate at
        December 2004 was 3.7% in the greater Lafayette area and 5.0% for the State
        of
        Indiana compared to May 2005, the most recent data, which showed unemployment
        rates of 4.1% and 4.6%, respectively. The May rates show an improvement over
        the
        inflated employment rates in the months following the holiday season.
 
 Our
        primary source of revenue is interest income primarily on loans and to a
        much
        lesser extent, on investments which we hold mainly as a source of liquidity,
        and
        on Federal Home Loan Bank stock. In periods of very low interest rates when
        many
        borrowers refinance their mortgages, often to fixed rate products, we typically
        generate income by selling these loans on the secondary market at a gain.
        While
        we forego future interest income by selling these mortgages, we also avoid
        the
        risk of having a large portfolio of low-rate, fixed-rate loans should interest
        rates rise and remain high. Our loan portfolio typically consists of about
        75%
        variable-rate products.
  7
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            of Contents*
  
 Our
        primary source of income is net interest income, which is the difference
        between
        the interest income earned on our loan and investment portfolios and the
        interest expense incurred on deposits and borrowings. Our net interest income
        depends on the balance of our loan and investment portfolios and the size
        of our
        net interest margin, which is the difference between the income generated
        from
        loans and the cost of the funding. A major area of concern in the growth
        of net
        interest income is the continuing flattening of the yield curve. Short-term
        rates increased steadily over 2004 and are expected to continue to increase
        in
        2005. Long-term rates, however, have remained flat. Because deposits are
        generally tied to shorter-term market rates, and loans are generally tied
        to
        longer-term rates, the shrinking spread between the two has made it more
        difficult to maintain desired operating income levels. Our expectation is
        that
        short-term rates will continue to rise as the Federal Reserve Board responds
        to
        inflation concerns and the growing strength of the economy. Long-term rates
        have
        remained low because the purchase of U.S. government bonds has driven up
        the
        price of long-term bonds and kept their returns low. Until this situation
        changes we expect the yield curve to remain fairly flat.
 
 Rate
        changes could be expected to have an impact on interest income. Rising rates
        generally increase borrower preference for variable-rate products which we
        typically keep in our portfolio. Additionally, existing adjustable rate loans
        can be expected to reprice to higher rates, both of which could be expected
        to
        have a favorable impact on interest income. Alternatively, continuing low
        interest rates could have a negative impact on our interest income as new
        loans
        are put on the books at comparatively low rates and our existing adjustable
        rate
        loans reprice to lower rates. Even if rates do fall, because so many borrowers
        refinanced their mortgages in the last few years, we do not expect to see
        a
        return to a high volume of refinancing. However, low rates may be expected
        to
        encourage borrowers to initiate additional real estate related purchases.
 
 Our
        primary expense is interest on deposits and Federal Home Loan Bank advances
        which are used to fund loan growth. We offer customers in our market area
        time
        deposits for terms ranging from three months to five years, checking accounts
        and savings accounts. We also purchase brokered deposits and Federal Home
        Loan
        Bank advances as needed to provide funding or to improve our interest rate
        risk
        position. Generally, when interest rates are low, depositors will choose
        shorter-term products and conversely when rates are high, depositors will
        choose
        longer-term products.
 
 We
        consider expected changes in interest rates when structuring our interest
        earning assets and our interest bearing liabilities. If rates are expected
        to
        increase we try to book shorter-term assets that will reprice relatively
        quickly
        to higher rates over time, and book longer-term liabilities that will remain
        for
        a longer time at lower rates. Conversely, if rates are expected to fall,
        we
        intend to structure our balance sheet such that loans will reprice more slowly
        to lower rates and deposits will reprice more quickly. We currently offer
        a
        three-year and a five-year certificate of deposit that allows depositors
        one
        opportunity to have their rate adjusted to the market rate at a future date
        to
        encourage 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.
  8
 *Table
            of Contents*
  Our
        results of operations may also be affected by general and local competitive
        conditions, particularly those with respect to changes in market interest
        rates,
        government policies and actions of regulatory authorities.
 
 **Critical
        Accounting Policies**
 
 Generally
        accepted accounting principles are complex and require management to apply
        significant judgments to various accounting, reporting and disclosure matters.
        Management of LSB Financial Corp. must use assumptions and estimates to apply
        these principles where actual measurement is not possible or practical. For
        a
        complete discussion of LSB Financial Corp.'s significant accounting policies,
        see Note 1 to the Consolidated Financial Statements as of December 31, 2004.
        Certain policies are considered critical because they are highly dependent
        upon
        subjective or complex judgments, assumptions and estimates. Changes in such
        estimates may have a significant impact on the financial statements. Management
        has reviewed the application of these policies with the Audit Committee of
        LSB
        Financial Corp.'s Board of Directors. Those policies include the
        following:
 
 ***Allowance
        for Loan Losses***
 
 The
        allowance for loan losses represents management's estimate of probable losses
        inherent in Lafayette Savings’ loan portfolios. In determining the appropriate
        amount of the allowance for loan losses, management makes numerous assumptions,
        estimates and assessments.
 
 The
        strategy also emphasizes diversification on an industry and customer level,
        regular credit quality reviews and quarterly management reviews of large
        credit
        exposures and loans experiencing deterioration of credit quality.
 
 Lafayette
        Savings’ allowance consists of three components: probable losses estimated from
        individual reviews of specific loans, probable losses estimated from historical
        loss rates, and probable losses resulting from economic or other deterioration
        above and beyond what is reflected in the first two components of the
        allowance.
 
 Larger
        commercial loans that exhibit probable or observed credit weaknesses are
        subject
        to individual review. Where appropriate, reserves are allocated to individual
        loans based on management's estimate of the borrower's ability to repay the
        loan
        given the availability of collateral, other sources of cash flow and legal
        options available to Lafayette Savings. Included in the review of individual
        loans are those that are impaired as provided in SFAS No. 114, *Accounting
        by Creditors for Impairment of a Loan.* Any
        allowances for impaired loans are determined by the present value of expected
        future 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.
  9
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            of Contents*
  Homogenous
        smaller balance loans, such as consumer installment and residential mortgage
        loans are not individually risk graded. Reserves are established for each
        pool
        of loans based on the expected net charge-offs for one year. Loss rates are
        based on the average net charge-off history by loan category.
 
 Historical
        loss rates for commercial and consumer loans may be adjusted for significant
        factors that, in management's judgment, reflect the impact of any current
        conditions on loss recognition. Factors which management considers in the
        analysis include the effects of the national and local economies, trends
        in the
        nature and volume of loans (delinquencies, charge-offs and nonaccrual loans),
        changes in loan mix, asset quality trends, risk management and loan
        administration, changes in the internal lending policies and credit standards,
        collection practices and examination results from bank regulatory agencies
        and
        Lafayette Savings' internal loan review.
 
 An
        unallocated reserve is maintained to recognize the imprecision in estimating
        and
        measuring loss when evaluating reserves for individual loans or pools of
        loans.
        Allowances on individual loans are reviewed quarterly and historical loss
        rates
        are reviewed annually and adjusted as necessary based on changing borrower
        and/or collateral conditions and actual collection and charge-off
        experience.
 
 Lafayette
        Savings’ primary market area for lending is Tippecanoe County, Indiana. When
        evaluating the adequacy of allowance, consideration is given to this regional
        geographic concentration and the closely associated effect changing economic
        conditions have on Lafayette Savings’ customers.
 
 ***Mortgage
        Servicing Rights***
 
 Mortgage
        servicing rights (MSRs) associated with loans originated and sold, where
        servicing is retained, are capitalized and included in other intangible assets
        in the consolidated balance sheet. The value of the capitalized servicing
        rights
        represents the present value of the future servicing fees arising from the
        right
        to service loans in the portfolio. Critical accounting policies for MSRs
        relate
        to the initial valuation and subsequent impairment tests. The methodology
        used
        to determine the valuation of MSRs requires the development and use of a
        number
        of estimates, including anticipated principal amortization and prepayments
        of
        that principal balance. Events that may significantly affect the estimates
        used
        are changes in interest rates, mortgage loan prepayment speeds and the payment
        performance of the underlying loans. The carrying value of the MSRs is
        periodically reviewed for impairment based on a determination of fair value.
        For
        purposes of measuring impairment, the servicing rights are compared to a
        valuation prepared based on a discounted cash flow methodology, utilizing
        current prepayment speeds and discount rates. Impairment, if any, is recognized
        through a valuation allowance and is recorded as amortization of intangible
        assets.
  10
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  **Financial
        Condition**
 
 ***Comparison
        of Financial Condition at June 30, 2005 and December 31,
        2004***
 
 Our
        total
        assets increased $12.3 million or 3.47% during the six months from December
        31,
        2004 to June 30, 2005. This increase was primarily due to a $11.6 million
        increase in total net loans and a $768,000 increase in securities available
        for
        sale. Management attributes the increase in loans primarily to continuing
        relatively low interest rates which encourages investment in the real estate
        market, and to an increasing preference for lower-rate, adjustable-rate mortgage
        products which we keep in our portfolio. The increase in assets was funded
        by a
        $7.2 million increase in Federal Home Loan Bank advances and a $3.0 million
        increase in deposits. Most of the deposit increase was due to a $3.6 million
        increase in brokered funds. We use Federal Home Loan Bank advances and brokered
        deposits as needed because of their availability, predictability and generally
        competitive price, or to improve our interest rate risk position. Shareholders’
        equity increased from $30.4 million at December 31, 2004 to $31.8 million
        at
        June 30, 2005, an increase of $1.4 million, due primarily to net income and
        the
        tax benefit from the exercise of stock options, offset in part by the payment
        of
        a cash dividend.
 
 Non-performing
        assets, which include non-accruing loans, accruing loans 90 days past due
        and
        foreclosed assets, increased from $5.9 million at December 31, 2004 to $8.5
        million at March 31, 2005 and stayed fairly constant at $8.6 million at June
        30,
        2005. Non-performing loans at June 30, 2005 consisted of $4.8 million of
        loans
        on one- to four-family residential real estate which had an average
        loan-to-appraisal value of 65.43%, $3.0 million of loans on land or commercial
        property with an average loan-to-appraisal value of 37.39%, $39,000 of
        commercial business loans and $6,000 of non-accruing consumer loans.
        Non-performing assets also include $781,000 in foreclosed assets. At June
        30,
        2005, our allowance for loan losses equaled 0.68% of total loans compared
        to
        0.65% at December 31, 2004. The allowance for loan losses at June 30, 2005
        totaled 26.32% of non-performing assets compared to 35.38% at December 31,
        2004,
        and 28.95% of non-performing loans at June 30, 2005 compared to 44.66% at
        December 31, 2004. Our non-performing assets equaled 2.34% of total assets
        at
        June 30, 2005 compared to 1.67% at December 31, 2004. Non-performing assets
        totaling $161,000 were charged off in the first six months of 2005. These
        charge-offs were largely covered by existing reserves and there was no need
        for
        additional provisions to the allowance for the amounts charged off. Although
        we
        believe we use the best information available to determine the adequacy of
        our
        allowance for loan losses, future adjustments to the allowance may be necessary,
        and net income could be significantly affected, if circumstances and/or economic
        conditions cause substantial changes in the estimates we use in making the
        determinations about the levels of the allowance for losses. Additionally,
        various regulatory agencies, as an integral part of their examination process,
        periodically review our allowance for loan losses. These agencies may require
        the recognition of additions to the allowance based upon their judgments
        of
        information available at the time of their examination.
  11
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  Shareholders’
        equity increased $1.4 million, or 4.75%, during the first six months of 2005
        primarily as a result of net income of $1.7 million and a $405,000 tax benefit
        from the exercise of 61,529 stock options, partially offset by our payment
        of
        $464,000 in dividends on common stock, and the repurchase of 20,087 shares
        of
        our stock as part of a stock repurchase plan. Shareholders’ equity to total
        assets was 8.67% at June 30, 2005 compared to 8.57% at December 31,
        2004.
 
 **Results
        of Operations**
 
 ***Comparison
        of Operating Results for the Six Months and the Quarter Ended June 30, 2005
        and
        June 30, 2004***
 
 ***General.*** Net
        income for the six months ended June 30, 2005 was $1.7 million, an increase
        of
        $186,000 or 12.62%, over the six months ended June 30, 2004. Net income for
        the
        quarter ended June 30, 2005 was $893,000, an increase of $139,000 or 18.44%
        over
        the comparable quarter in 2004. These increases were primarily due to increases
        in net interest income, partially offset by decreases in the gain on sale
        of
        loans due to the decreased originations and refinancings of fixed-rate mortgage
        loans and the sale of such loans on the secondary market caused by stagnant
        mortgage rates, increases in non-interest expenses, and a $50,000 increase
        in
        the provision for loan losses.
 
 ***Net
        Interest Income.*** Net
        interest income for the six months ended June 30, 2005 increased $469,000,
        or
        8.75%, over the same period in 2004. The increase in net interest income
        was
        primarily due to a $35.9 million increase in average loans receivable. Our
        net
        interest margin (net interest income divided by average interest-earning
        assets)
        remained virtually unchanged, decreasing by one basis point from 3.36% at
        June
        30, 2004 to 3.35% for the six months ended June 30, 2005. The increase in
        average loans was funded primarily by a $26.6 million increase in
        interest-earning liabilities with an increase in average rate from 2.66%
        to
        2.77%, and partially by a $6.9 million decrease in average investment securities
        as money from maturing investments was reinvested in higher earning loans.
        Net
        interest income for the second quarter of 2005 increased $260,000, or 9.67%,
        compared to the same period in 2004, due to similar reasons as those noted
        above. Average loans receivable increased by $30.5 million from the second
        quarter of 2004 to the second quarter of 2005, funded by a $21.5 million
        increase in interest-earning liabilities with an increase in average rate
        from
        2.64% to 2.81%, and partially from a $5.7 million decrease in investment
        securities.
  Interest
        income on loans increased $1.1 million or 11.55% for the six months ended
        June
        30, 2005 compared to the same six months in 2004. This increase was the result
        of a $35.9 million increase in average loans outstanding partially offset
        by a
        decrease in the average yield on loans from 6.24% for the first six months
        of
        2004 to 6.20% for the first six months of 2005, due to continuing low long-term
        interest rates in the economy. The increase in the loan portfolio was due
        largely to borrowers continuing to take advantage of relatively low market
        interest rates to refinance existing mortgages and initiate other real estate
        related purchases. The occasional, slight increase in interest rates triggered
        borrower interest in lower-rate, adjustable-rate mortgage products which
        we
        typically hold in our loan portfolio. Interest income on loans increased
        $549,000 for the second quarter of 2005 compared to the second quarter of
        2004
        due primarily to the $30.5 million increase in average loans receivable and
        the
        increase in the average yield on loans from 6.15% to 6.25% over the same
        period.
  12
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  Interest
        earned on other investments and Federal Home Loan Bank stock decreased by
        $51,000 for the six months ended June 30, 2005 compared to the same period
        in
        2004. This was primarily the result of a $6.9 million decrease in average
        balances partially offset by an increase in the average yield on the average
        balance of other investments and Federal Home Loan Bank stock from 2.32%
        for the
        first six months of 2004 to 2.59% over the same period in 2005. The decrease
        in
        the average balance was generally due to those funds being reinvested into
        longer-term loans or investments. Interest income on other investments and
        Federal Home Loan Bank stock decreased $10,000 for the second quarter of
        2005
        compared to the second quarter of 2004 due to a decrease of $5.7 million
        in
        average balances offset by an increase in the average yield on the average
        balance of other investments and Federal Home Loan Bank stock from 2.25%
        for the
        second quarter of 2004 to 2.67% over the same period in 2005, as maturing
        investments were used for loan funding needs.
 
 Interest
        expense for the six months ended June 30, 2005 increased $531,000 or 13.07%
        over
        the same period in 2004. This increase was due to a $26.7 million increase
        in
        average interest-bearing liabilities as well as an increase in the average
        rate
        paid on interest-bearing liabilities from 2.66% for the first six months
        of 2004
        to 2.77% for the first six months of 2005. Interest expense increased $279,000
        for the second quarter of 2005from the same period in 2004 primarily due
        to a
        $21.5 million increase in average interest-bearing liabilities and an increase
        in the average rate paid on average interest-bearing liabilities from 3.64%
        for
        the second quarter of 2004 to 2.81% for the same period in
        2005.
 
 ***Provision
        for Loan Losses*** .  We
        establish our provision for loan losses based on a systematic analysis of
        risk
        factors in the loan portfolio. The analysis includes consideration of
        concentrations of credit, past loss experience, current economic conditions,
        the
        amount and composition of the loan portfolio, estimated fair value of the
        underlying collateral, delinquencies and industry standards. On at least
        a
        quarterly basis, a formal analysis of the adequacy of the allowance is prepared
        and reviewed by management and the Board of Directors. This analysis serves
        as a
        point in time assessment of the level of the allowance and serves as a basis
        for
        provisions for loan losses.
 
 Our
        analysis of the loan portfolio begins at the time the loan is originated,
        when
        each loan is assigned a risk rating. If the loan is a commercial credit,
        the
        borrower will also be assigned a similar rating. Loans that continue to perform
        as agreed will be included in one of ten non-classified loan categories.
        Portions of the allowance are allocated to loan portfolios in the various
        risk
        grades, based upon a variety of factors, including historical loss experience,
        trends in the type and volume of the loan portfolios, trends in delinquent
        and
        non-performing loans, and economic trends affecting our market. Loans no
        longer
        performing as agreed are assigned a lower risk rating, eventually resulting
        in
        their being regarded as classified loans. A collateral re-evaluation is
        completed on all classified loans. This process results in the allocation
        of
        specific amounts of the allowance to individual problem loans, generally
        based
        on an analysis of the collateral securing those loans. These components are
        added together and compared to the balance of our allowance at the evaluation
        date.
  13
 *Table
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  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 $300,000 provision for loan losses for the six months ended June
        30,
        2005 as a result of our analysis of our current loan portfolios compared
        to
        $250,000 for the same period in 2004. The increased provision during 2005
        was
        necessary to maintain the allowance for loan losses at a level considered
        adequate to absorb losses inherent in the loan portfolio and cover anticipated
        charge-offs. During the first six months of 2005 we recorded charge-offs
        of
        $161,000. The $300,000 provision for loan losses for the first six months
        of
        2005 was considered adequate to cover further charge-offs based on our
        evaluation and our loan mix.
 
 At
        June
        30, 2005, non-performing assets, consisting of non-accruing loans, accruing
        loans 90 or more days delinquent and other real estate owned, totaled $8.6
        million compared to $5.9 million at December 31, 2004. In addition to our
        non-performing assets, we identified $5.6 million other loans of concern,
        down
        from $9.8 million at December 31, 2004, where known information about possible
        credit problems of borrowers causes management to have doubts as to the ability
        of the borrowers to comply with present repayment terms, and that may result
        in
        disclosure of such loans as non-performing assets in the future. The vast
        majority of these loans, as well as our non-performing assets, are well
        collateralized.
 
 ***Non-Interest
        Income*** .
        Non-interest income for the six months ended June 30, 2005 decreased by $25,000
        or 2.24% compared to the same period in 2004. This was primarily due to a
        $93,000 decrease in the gain on the sale of mortgage loans in the secondary
        market ** resulting
        from decreased sales due to the decrease in refinance activity. This decrease
        was partially offset by a $52,000 increase in fees on deposit accounts due
        to
        the introduction of a new product in which we pay any overdrafts of up to
        $500
        made by qualified
        depositors for a $30 per overdraft fee and by a $27,000 increase in other
        income, primarily the result of a $20,000 increase in mortgage loan servicing
        fees. Non-interest income for the second quarter of 2005 increased by $5,000
        over the same period in 2004, primarily due to a $58,000 increase in fees
        on
        deposit accounts due to the introduction of a new product mentioned above,
        partially offset by a $31,000 decrease in the gain on the sale of mortgage
        loans
        in the secondary market ** resulting
        from decreased sales due to the decrease in refinance activity and by an
        $11,000
        decrease in other income, primarily the result of a decrease in the amortization
        of mortgage loan servicing fees resulting from a decrease in loan
        prepayments.
 ***Non-Interest
        Expense.***  ** Non-interest
        expense for the six months ended June 30, 2005 increased $197,000 over the
        same
        period in 2004. The major components of this increase included a $146,000
        increase in salaries and employee benefits partly due to increased compliance
        and health insurance costs, and a $137,000 increase in other non-interest
        expenses partly due to increased reporting costs and expenses related to
        foreclosed properties, partially offset by a $90,000 decrease in occupancy
        expenses due to the write-off of some fixed assets in 2004. Non-interest
        expense
        for the second quarter of 2005 increased by $16,000 over the same period
        in
        2004, due largely to factors mentioned above.
  14
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  ***Income
        Tax
        Expense.***   Our
        income tax provision increased by $11,000 for the six months ended June 30,
        2005
        compared to the six months ended June 30, 2004, primarily as a result of
        tax
        savings relating to our Bank Owned Life Insurance program and increased lending
        in an area in Lafayette designated as an urban enterprise zone, qualifying
        for
        enterprise zone tax credits. Our income tax provision increased by $110,000
        for
        the second quarter of 2005 compared to the same period ****** in ****** 2004
        primarily due to a $249,000 increase in income before income taxes offset
        by the
        same tax changes mentioned above.
 
 
 **Liquidity**
 
 Our
        primary sources of funds are deposits, repayment and prepayment of loans,
        interest earned on or maturation of investment securities and short-term
        investments, borrowings and funds provided from operations. While maturities
        and
        the scheduled amortization of loans, investments and mortgage-backed securities
        are a predictable source of funds, deposit flows and mortgage prepayments
        are
        greatly influenced by general market interest rates, economic conditions
        and
        competition.
 
 We
        monitor our cash flow carefully and strive to minimize the level of cash
        held in
        low-rate overnight accounts or in cash on hand. We also carefully track the
        scheduled delivery of loans committed for sale to be added to our cash flow
        calculations. Our current internal policy for liquidity requires minimum
        liquidity of 4.0% of total assets.
 
 Liquidity
        management is both a daily and long-term function for our senior management.
        We
        adjust our investment strategy, within the limits established by the investment
        policy, based upon assessments of expected loan demand, expected cash flows,
        Federal Home Loan Bank advance opportunities, market yields and objectives
        of
        our asset/liability management program. Base levels of liquidity have generally
        been invested in interest-earning overnight and time deposits with the Federal
        Home Loan Bank of Indianapolis. Funds for which a demand is not foreseen
        in the
        near future are invested in investment and other securities for the purpose
        of
        yield enhancement and asset/liability management.
  Our
        liquidity ratios at December 31, 2004 and June 30, 2005 were 5.80% and 5.58%,
        respectively compared to a regulatory liquidity base, and 4.38% and 4.23%
        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, 2005, we had outstanding commitments to originate
        loans
        and available lines of credit totaling $58.9 million and commitments to provide
        funds to complete current construction projects in the amount of $5.9 million.
        In addition we had commitments to sell $2.4 million of fixed-rate residential
        loans. Certificates of deposit which will mature in one year or less at June
        30,
        2005 totaled $69.3 million. Based on our experience, our certificates of
        deposit
        have been a relatively stable source of long-term funds as such certificates
        are
        generally renewed upon maturity since we have established long-term banking
        relationships with our customers. Therefore, we believe a significant portion
        of
        such deposits will remain with us, although this cannot be assured. At June
        30,
        2005, $59.6 million of our deposits were in brokered deposits, $14.0 million
        of
        which will mature in one year or less. These deposits can be expected not
        to
        renew at maturity and will have to be replaced with other funding upon maturity.
        We also have $21.5 million of Federal Home Loan Bank advances maturing in
        the
        next twelve months.
  15
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  **Capital
        Resources**
 
 Shareholders’
        equity totaled $31.8 million at June 30, 2005 compared to $30.4 million at
        December 31, 2004, an increase of $1.4 million or 4.75%, due primarily to
        net
        income of $1.7 million and a $405,000 tax benefit from the exercise of options
        to purchase 61,529 shares of our common stock, partially offset by our payment
        of dividends on common stock, and the repurchase of 20,087 shares of our
        stock
        as part of a stock repurchase plan. Shareholders’ equity to total assets was
        8.67% at June 30, 2005 compared to 8.57% at December 31, 2004.
 
 Federal
        insured savings institutions are required to maintain a minimum level of
        regulatory capital. If the requirement is not met, regulatory authorities
        may
        take legal or administrative actions, including restrictions on growth or
        operations or, in extreme cases, seizure. As of December 31, 2004 and June
        30,
        2005, Lafayette Savings was categorized as well capitalized. Our actual and
        required capital amounts and ratios at December 31, 2004 and June 30, 2005
        are
        presented below:
 
 Actual
              
              
              OTS
                For
                  Capital Adequacy Purposes
              
              
              FDIC
                To
                  Be Well Capitalized Under Corrective Action ProvisionsAmount
              
              Ratio
              
              
              Amount
              
              Ratio
              
              
              Amount
              
              Ratio(Dollars
                  in thousands)**As
                  of June 30, 2005**Total
                  risk-based capital (to risk-weighted assets)
              
              $
              32,866
              
              
              11.5
              %
              
              $
              22,840
              
              
              8.0
              %
              
              $
              28,550
              
              
              10.0
              %Tier
                  I capital (to risk-weighted assets)
              
              
              30,808
              
              
              10.8
              %
              
              
              11,420
              
              
              4.0
              %
              
              
              17,130
              
              
              6.0
              %Tier
                  I capital (to adjusted total assets)
              
              
              30,808
              
              
              8.4
              %
              
              
              11,011
              
              
              3.0
              %
              
              
              18,351
              
              
              5.0
              %Tier
                  I capital (to adjusted tangible assets)
              
              
              30,808
              
              
              8.4
              %
              
              
              7,340
              
              
              2.0
              %
              
              
              N/A
              
              
              N/ATangible
                  capital (to adjusted tangible assets)
              
              
              30,808
              
              
              8.4
              %
              
              
              5,505
              
              
              1.5
              %
              
              
              N/A
              
              
              N/A**As
                  of December 31, 2004**Total
                  risk-based capital (to risk-weighted assets)
              
              $
              31,657
              
              
              11.6
              %
              
              $
              21,812
              
              
              8.0
              %
              
              $
              27,265
              
              
              10.0
              %Tier
                  I capital (to risk-weighted assets)
              
              
              29,797
              
              
              10.9
              %
              
              
              10,906
              
              
              4.0
              %
              
              
              16,359
              
              
              6.0
              %Tier
                  I capital (to adjusted total assets)
              
              
              29,797
              
              
              8.4
              %
              
              
              10,656
              
              
              3.0
              %
              
              
              17,761
              
              
              5.0
              %Tier
                  I capital (to adjusted tangible assets)
              
              
              29,767
              
              
              8.4
              %
              
              
              7,104
              
              
              2.0
              %
              
              
              N/A
              
              
              N/ATangible
                  capital (to adjusted tangible assets)
              
              
              29,797
              
              
              8.4
              %
              
              
              5,328
              
              
              1.5
              %
              
              
              N/A
              
              
              N/A
 
  16
 *Table
            of Contents*
  
 **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
        Operation 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;
 ·
              acquisitions;
 ·
              changes
                  in consumer spending and saving habits;
                  and
 ·
              our
                  success at managing the risks involved in the foregoing.


17
 *Table
            of Contents*
  **Item
        3.    QUANTITATIVE AND QUALITATIVE
        DISCLOSURES ABOUT MARKET RISK**
 
 We,
        like
        other financial institutions, are subject to interest rate risk to the extent
        that our interest-bearing liabilities reprice on a different basis than our
        interest-earning assets. The Office of Thrift Supervision (“OTS”), our primary
        regulator, supports the use of a net portfolio value (“NPV”) approach to the
        quantification of interest rate risk. In essence, this approach calculates
        the
        difference between the present value of expected cash flows from assets and
        the
        present value of expected cash flows from liabilities, as well as cash flows
        from off balance sheet contracts. An NPV ratio, in any interest rate scenario,
        is defined as the NPV in that rate scenario divided by the market value of
        assets in the same scenario, essentially a market value adjusted capital
        ratio.
 
 It
        has
        been and continues to be a priority of the Board and management to manage
        interest rate risk to maintain an acceptable level of potential changes to
        interest income as a result of interest rate changes. Our asset/liability
        policy, established by the board of directors, sets forth acceptable limits
        on
        the amount of change in net portfolio value given certain changes in interest
        rates. We have an asset/liability management committee which meets quarterly
        to
        review our interest rate position, and an investment committee which reviews
        the
        interest rate risk position and other related matters with the Board, and
        makes
        recommendations for adjusting this position to the full Board of Directors.
        In
        addition, the investment committee of the Board meets semi-annually with
        our
        outside investment advisors to review our investment portfolio and strategies
        relating to interest rate risk. Specific strategies have included the sale
        of
        long-term, fixed rate loans to reduce the average maturity of our
        interest-earning assets and the use of Federal Home Loan Bank advances to
        lengthen the effective maturity of our interest-bearing liabilities. In the
        future, our community banking emphasis, including the origination of commercial
        business loans, is intended to further increase our portfolio of short-term
        and/or adjustable rate loans.
 
 Presented
        below, as of December 31, 2004 and 2003, is an analysis of our interest rate
        risk as measured by the effect on NPV caused by instantaneous and sustained
        parallel shifts in the yield curve, in 100 basis point increments, up and
        down
        300 basis points, and compared to Board policy limits. The Board Limit column
        indicates the lowest allowable limits for NPV after each interest rate shock.
        Assumptions used in calculating the amounts in this table are OTS assumptions.
        No information is provided for a negative 200 or 300 basis point shift in
        interest rates, due to a low prevailing interest rate environment making
        such
        scenarios unlikely.
 Change
                    in
                
                Board
                    Limit
                
                At
                    December 31, 2004
                
                At
                    December 31, 2003Interest
                    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
                %
                
                10.55
                %
                
                (12
                )
                    bp
                
                9.64
                %
                
                (35
                )
                    bp200
                
                
                7.00
                
                
                10.82
                
                
                14
                
                
                9.98
                
                
                0100
                
                
                8.00
                
                
                10.89
                
                
                21
                
                
                10.13
                
                
                140
                
                
                8.00
                
                
                10.68
                
                
                --
                
                
                9.98
                
                
                ---100
                
                
                8.00
                
                
                10.16
                
                
                (52
                )
                
                9.40
                
                
                (59
                )
 
  18
 *Table
            of Contents*
  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, 2005 there have been no material changes in Lafayette
        Savings’ interest rate sensitivity which would cause a material change in the
        market risk exposures that affect the quantitative and qualitative risk
        disclosures as presented above, from the Company’s Annual Report on Form 10-KSB
        for the period ended December 31, 2004.
 
 **Item
        4. CONTROLS AND PROCEDURES**.
 
 An
        evaluation of the Company’s disclosure controls and procedures (as defined in
        Rule 13(a)-15(e) of the Securities Exchange Act of 1934 (the “Act”)), as of June
        30, 2005, was carried out under the supervision and with the participation
        of
        the Company’s Chief Executive Officer, Chief Financial Officer and several other
        members of the Company’s senior management. The Company’s Chief Executive
        Officer and Chief Financial Officer concluded that the Company’s disclosure
        controls and procedures currently in effect are effective in ensuring that
        the
        information required to be disclosed by the Company in the reports it files
        or
        submits under the Act is (i) accumulated and communicated to the Company’s
        management (including the Chief Executive Officer and Chief Financial Officer)
        in a timely manner and (ii) recorded, processed, summarized and reported
        within
        the time periods specified in the Securities and Exchange Commission’s rules and
        forms. There have been no changes in our internal control over financial
        reporting (as defined in Rule 13a-15(f) of the Act) that occurred during
        the
        quarter ended June 30, 2005, that has materially affected, or is reasonably
        likely to affect, our internal control over the financial
        reporting.
 
 The
        Company intends to continually review and evaluate the design and effectiveness
        of its disclosure controls and procedures and to improve its controls and
        procedures over time and to correct any deficiencies that it may discover
        in the
        future. The goal is to ensure that senior management has timely access to
        all
        material financial and non-financial information concerning the Company’s
        business. While the Company believes the present design of its disclosure
        controls and procedures is effective to achieve its goal, future events
        affecting its business may cause the Company to modify its disclosure controls
        and procedures.
  19
 *Table
            of Contents*
  **PART
        II - OTHER INFORMATION**
 
 
 **Item
        1. LEGAL PROCEEDINGS**
 
 The
        Company, from time to time, is involved as plaintiff or defendant in various
        legal actions arising in the normal course of business. While the ultimate
        outcome of these proceedings cannot be predicted with certainty, it is the
        opinion of management, after consultation with counsel representing the Company
        in the proceedings, that the resolution of any prior and pending proceedings
        should not have a material effect on the Company or Lafayette Savings’ financial
        condition or results of operations.
 
 **Item
        2.****UNREGISTERED
        SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
 
 The
        following table sets forth the number and prices paid for repurchased
        shares.
 **Issuer
                    Purchases of Equity Securities****Month
                    of Purchase**
                **Total
                    Number of Shares Purchased****1**
                **Average
                    Price Paid per Share**
                **Total
                    Number of Shares Purchased as Part of Publicly Announced
                    Plan****2**
                **Maximum
                    Number (or Approximate Dollar Value) of Shares that May Yet Be
                    Purchased
                    Under the Plan**April
                    1 - April 30, 2005
                0
                0
                0
                52,932May
                    1 - May 31, 2005
                11,000
                26.182
                11,000
                41,932June
                    1 - June 30, 2005
                0
                0
                0
                41,932Total
                11,000
                26.182
                11,000
                41,932
 
 1There
              were no shares repurchased other than through a publicly announced
              plan or
              program.
 2We
        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.
  20
 *Table
            of Contents*
  **Item
        4.****SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 On
        April
        20, 2005, LSB Financial Corp. held its Annual Meeting of Stockholders
        (“Meeting”).
 
 The
        directors who were elected at the Meeting for a term to expire in 2008, are
        as
        follows:
 
 Votes
              
              VotesFor
              
              WithheldMary
                  Jo David
              
              
              1,276,612
              
              
              5,110Thomas
                  R. McCully
              
              
              1,257,045
              
              
              24,677Peter
                  Neisel
              
              
              1,272,160
              
              
              9,562Jeffrey
                  A. Poxon
              
              
              1,274,087
              
              
              7,635
 
 The
        directors whose terms continued after the Meeting are as follows: James A.
        Andrew, Kenneth P. Burns, Harry A. Dunwoody, Philip W. Kemmer, Mariellen
        M.
        Neudeck and Randolph F. Williams.
 
 **Item
        5.****OTHER
        INFORMATION**
 
 None.
 
 **Item
        6.****EXHIBITS**
 
 Exhibits:
 
 The
        exhibits listed in the Exhibit Index are incorporated herein by
        reference.
 
  21
 *Table
            of Contents*
  **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
                10, 2005
              
              /s/
                Randolph F. WilliamsRandolph
                  F. Williams, President
                (Principal
                  Executive Officer)Date:
              August
                10, 2005
              
              /s/
                Mary Jo DavidMary
                  Jo David, Treasurer
                (Principal
                  Financial and Accounting Officer)
 
 
  22
 *Table
            of Contents*
  
 
 **INDEX
        TO EXHIBITS**
 
 
 Regulation
                S-K
                  Exhibit
                Number
              
              Document31.1
              
              Rule
                  13(a)-14(a) Certification (Chief Executive Officer)31.2
              
              Rule
                  13(a)-14(a) Certification (Chief Financial Officer)32
              
              Section
                  1350 Certifications