lsb_10q0930.htm

PART I	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

Consolidated Condensed Balance Sheets		1

Consolidated Condensed Statements of Income		2

Consolidated Condensed Statements of Changes in Shareholders’ Equity		3

Consolidated Condensed Statements of Cash Flows		4

Notes to Consolidated Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	20

PART II. OTHER INFORMATION		20

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 3.	Defaults Upon Senior Securities	21

Item 4.	Submission of Matters to a Vote of Security Holders	21

Item 5.	Other Information	21

Item 6.	Exhibits	21

SIGNATURES		22

INDEX TO EXHIBITS		23

	September 30, 2007			December 31, 2006
	(unaudited)
Assets
Cash and due from banks	$	1,448		$	1,391
Short-term investments		5,852			8,336
Cash and cash equivalents		7,300			9,727
Available-for-sale securities		14,445			16,316
Loans held for sale		110			992
Total loans		300,972			319,469
Less: Allowance for loan losses		(3,113	)		(2,770	)
Net loans		297,859			316,699
Premises and equipment, net		6,876			6,600
Federal Home Loan Bank stock, at cost		3,997			3,997
Bank owned life insurance		5,554			5,381
Interest receivable and other assets		8,740			8,688
Total Assets	$	344,881		$	368,400

Liabilities and Shareholders’ Equity
Liabilities
Deposits	$	236,903		$	255,304
Federal Home Loan Bank advances		71,118			76,618
Interest payable and other liabilities		2,028			1,638
Total liabilities		310,049			333,560

Commitments and Contingencies

Shareholders’ Equity
Common stock, $.01 par value
Authorized - 7,000,000 shares Issued and outstanding 2007 - 1,565,999 shares, 2006 - 1,603,209 shares		15			15
Additional paid-in-capital		11,269			12,227
Retained earnings		23,539			22,623
Accumulated other comprehensive loss		9			(25	)
Total shareholders’ equity		34,832			34,840

Total liabilities and shareholders’ equity	$	344,881		$	368,400

	Three months ended September 30,					Nine months ended September 30,
	2007			2006		2007			2006
Interest and Dividend Income
Loans	$	5,529		$	5,737	$	16,600		$	16,866
Securities
Taxable		135			108		427			331
Tax-exempt		70			47		194			144
Other		35			32		145			93
Total interest and dividend income		5,769			5,924		17,366			17,434
Interest Expense
Deposits		2,005			1,963		6,065			5,804
Borrowings		924			869		2,621			2,396
Total interest expense		2,929			2,832		8,686			8,200
Net Interest Income		2,840			3,092		8,680			9,234
Provision for Loan Losses		180			318		920			718
Net Interest Income After Provision for Loan Losses		2,660			2,774		7,760			8,516

Non-interest Income
Deposit account service charges and fees		486			439		1,371			1,312
Net gains on loan sales		37			65		174			172
Gain(loss) on sale of securities		0			0		0			0
Gain(loss) on sale other real estate owned		(115	)		5		(148	)		7
Other		293			200		790			582
Total non-interest income		701			709		2,187			2,073

Non-Interest Expense
Salaries and employee benefits		996			976		3,430			3,406
Net occupancy and equipment expense		320			325		990			905
Computer service		127			112		364			314
Advertising		77			55		229			184
Other		702			614		1,868			1,613
Total non-interest expense		2,222			2,082		6,881			6,422

Income Before Income Taxes		1,139			1,401		3,066			4,167
Provision for Income Taxes		422			534		1,120			1,564
Net income	$	717		$	867	$	1,946		$	2,603
Basic Earnings Per Share	$	0.46		$	0.53	$	1.23		$	1.62
Diluted Earnings Per Share	$	0.46		$	0.53	$	1.22		$	1.61
Dividends Declared Per Share	$	0.25		$	0.17	$	0.65		$	0.49

	Common Stock			Additional Paid-In Capital			Retained Earnings			Benefit Plans Compensation			Accumulated Other Comprehensive Income (Loss)			Total

Balance, January 1, 2006	$	15		$	10,565		$	22,402		$	(71	)	$	(90	)	$	32,821
Reclassification of unearned compensation upon adoption of SFAS 123(R)					(22	)					22
Comprehensive income
Net income								2,603									2,603
Change in unrealized appreciation (depreciation) on available-for-sale securities, net of taxes														40			40
Total comprehensive income																	2,643
5% stock dividend on common stock		1			2,074			(2,075	)								0
Dividends on common stock, $0.49 per share								(782	)								(782	)
Purchase and retirement of stock (22,575 shares)		(1	)		(606	)											(607	)
Stock options exercised (2,548 shares)					38												38
Amortization of stock option compensation					19												19
Amortization of RRP expense					22												22
ESOP shares earned					149						37						186
Balance, September 30, 2006	$	15		$	12,239		$	22,148		$	(12	)	$	(50	)	$	34,340

Balance, January 1, 2007	$	15		$	12,227		$	22,623		$	0		$	(25	)	$	34,840
Comprehensive income
Net income								1,946									1,946
Change in unrealized appreciation (depreciation) on available-for-sale securities, net of taxes														34			34
Total comprehensive income																	1,980
Dividends on common stock, $0.65 per share								(1,030	)								(1,030	)
Purchase and retirement of stock (37,500 shares)					(973	)											(973	)
Stock options exercised (290 shares)					4												4
Amortization of stock option compensation					11												11
Balance, September 30, 2007	$	15		$	11,269		$	23,539		$	0		$	9		$	34,832

	Nine months ended September 30,
	2007			2006
Operating Activities
Net income	$	1,946		$	2,603
Items not requiring (providing) cash
Depreciation		381			358
Provision for loan losses		920			718
Amortization of premiums and discounts on securities		11			39
Federal Home Loan Bank stock dividend		0			157
ESOP shares earned		0			186
Gain on sale of loans		(162	)		(100	)
Loans originated for sale		(129	)		(7,362	)
Proceeds on loans sold		1,173			7,128
Amortization of stock options		11			19
Changes in
Interest receivable and other assets		(189	)		(2,250	)
Interest payable and other liabilities		389			110
Net cash from operating activities		4,292			1,606

Investing Activities
Purchases of available-for-sale securities		(1,856	)		(4,540	)
Proceeds from maturities of available-for-sale securities		3,774			1,862
Net change in loans		17,920			11,887
Purchase of premises and equipment		(657	)		(262	)
Purchase of life insurance policies		0			(2,500	)
Net cash from investing activities		19,181			6,447

Financing Activities
Net change in demand deposits, money market, NOW and savings accounts		1,656			(4,209	)
Net change in certificates of deposit		(20,057	)		(5,806	)
Proceeds from Federal Home Loan Bank advances		43,000			47,500
Repayment of Federal Home Loan Bank advances		(48,500	)		(46,000	)
Proceeds from stock options exercised		4			38
Repurchase of stock		(973	)		(607	)
Dividends paid		(1,030	)		(782	)
Net cash from financing activities		(25,900	)		(9,866	)

Increase (Decrease) in Cash and Cash Equivalents		(2,427	)		(1,813	)
Cash and Cash Equivalents, Beginning of Period		9,727			9,384
Cash and Cash Equivalents, End of Period	$	7,300		$	7,571

Supplemental Cash Flows Information
Interest paid		8,787			8,183
Income taxes paid		1,095			1,375

Supplemental Non-Cash Disclosures
Capitalization of mortgage servicing rights		12			72

The financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all of the disclosures necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. These interim financial statements have been prepared on a basis consistent with the annual financial statements and include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of operations and financial position for and at the end of such interim periods. All outstanding shares and per share figures have been adjusted to reflect a 5% stock dividend payable by LSB Financial Corp. (the “Company” or “LSB Financial”) to shareholders of record on October 6, 2006. The consolidated condensed balance sheet of LSB Financial Corp. as of December 31, 2006 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 annual report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

Stock Options: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123R”). SFAS 123R addresses all forms of share-based payment awards, including shares under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123R requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. The Company has elected the modified prospective application method and, as a result, has recorded approximately $11,000 in compensation expense related to vested stock options less estimated forfeitures for the nine month period ended September 30, 2007 compared to $19,000 for the same period in 2006.

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

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The Company does not expect that the adoption of SFAS No. 157 will have a material impact on financial condition or results of operations.

In September 2006, the FASB Emerging Issues Task Force (EITF) finalized Issue No. 06−5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85−4 (Accounting for Purchases of Life Insurance). This Issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This Issue is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of EITF No. 06-5 will have a material impact on financial condition of results of operations.

On February 15, 2007, the FASB issued its Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to elect to report most financial assets and liabilities at their fair value with changes in fair value included in net income. The fair value option may be applied on an instrument-by-instrument or instrument class-by-class basis. The option is not available for deposits withdrawable on demand, pension plan assets and obligations, leases, instruments classified as stockholders’ equity, investments in consolidated subsidiaries and variable interest entities and certain insurance policies. The new standard is effective at the beginning of the Company’s fiscal year beginning January 1, 2008, and early application may be elected in certain circumstances. The Company expects to first apply the new standard at the beginning of its 2008 fiscal year. The Company does not expect that the adoption of SFAS No. 159 will have a material impact on financial condition or results of operations.

The Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48, the Company did not identify any material uncertain tax positions that it believes should be recognized in the financial statements.

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

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

Tippecanoe County and the eight surrounding counties comprise Lafayette Savings’ primary market area. Lafayette is the county seat of Tippecanoe County and West Lafayette is the home of Purdue University. In addition to the jobs provided by these two major employers, Greater Lafayette has a strong manufacturing sector as well as many high-tech industries attracted to the area by the presence of Purdue University. The Purdue Research Park continues to attract high-tech jobs to the area, housing over 140 companies and employing nearly 2,900 people. Further growth is expected in this area. Tippecanoe County consistently shows better growth and lower unemployment rates than Indiana or the national economy because of the diverse employment base. The unemployment rate in Tippecanoe County in August 2007 was 4.2% compared to 4.9% for the State of Indiana and 4.6% nationally.

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 has been the inversion of the yield curve. Since January 2004 short-term rates have continued to increase steadily while long-term rates have remained comparatively 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. While the Federal Reserve’s move to lower the Fed Fund rate in September restored the yield curve to its more typical slope it will take some time for the effects to be felt. Our expectation is that the Federal Reserve is done with rate changes for the year and that the yield curve will be generally flat to slightly upward-sloping through the rest of the year.

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

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

Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of LSB Financial must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of LSB Financial’s significant accounting policies, see Note 1 to the Consolidated Financial Statements as of September 30, 2007. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of LSB Financial’s Board of Directors. These policies include the following:

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.

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

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.

Our total assets decreased $23.5 million, or 6.38%, during the nine months from December 31, 2006 to September 30, 2007 primarily due to a $19.7 million decrease in net loans receivable including loans held for sale, a $1.9 million decrease in investments, and a $2.5 million decrease in short term investments. Management attributes the decrease in loans primarily to the slow recovery of the local economy, residential overbuilding in the last few years, and the tightening of credit due to the interagency regulatory focus on commercial real estate lending. Because of decreased funding needs, we allowed $18.4 million of higher cost deposits and $5.5 million of Federal Home Loan Bank advances to run off.

Non-performing assets, which include non-accruing loans, accruing loans 90 days past due and foreclosed assets, increased from $11.7 million at December 31, 2006 to $15.2 million at September 30, 2007. Non-performing loans and accruing loans 90 days past due totaled $11.2 million at September 30, 2007 and consisted of $9.1 million, or 81.13%, of one- to four-family or multi-family residential real estate loans or one- to four-family construction loans, $1.7 million, or 14.99%, of loans on land or commercial property, $392,000, or 3.48%, of commercial business loans and $45,000, or 0.40%, of consumer loans. Non-performing assets also include $3.9 million in foreclosed assets. At September 30, 2007, our allowance for loan losses equaled 1.06% of total loans compared to 0.88% at December 31, 2006. The allowance for loan losses at September 30, 2007 totaled 27.68% of non-performing loans at September 30, 2007 compared to 36.88% at December 31, 2006. Our non-performing assets equaled 4.40% of total assets at September 30, 2007 compared to 3.17% at December 31, 2006. Non-performing loans totaling $606,000 were charged off in the first nine months of 2007, offset by recoveries of $32,000. The charge-offs included a $311,000 charge-off of a loan on a newly constructed one- to four-family rental property which was sinking and has been condemned by the county. We expect the final disposition on this property to take months while the various lawsuits are adjudicated. Although our charge-offs are largely covered by existing reserves there was no expectation that this property was at risk and an additional reserve was required to cover the charge-off. We believe we use the best information available to determine the adequacy of our allowance for loan losses, however 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

General. Net income for the nine months ended September 30, 2007 was $1.9 million, a decrease of $657,000, or 25.24%, over the nine months ended September 30, 2006. Net income for the quarter ended September 30, 2007 was $717,000, a decrease of $150,000, or 17.31%, over the comparable quarter in 2006. The decrease for the nine month period was primarily due to a $554,000 decrease in net interest income, a $202,000 increase in the provision for losses and a $459,000 increase in non-interest expenses partially offset by a $114,000 increase in non-interest income and a $444,000 decrease in taxes on income. The decrease for the three month period was primarily due to a $252,000 decrease in net interest income and a $140,000 increase in non-interest expenses partially offset by a $138,000 decrease in the provision for losses and a $112,000 decrease in taxes on income.

Net Interest Income. Net interest income for the nine months ended September 30, 2007 decreased $554,000, or 6.00%, over the same period in 2006. This decrease was generally due to a 4 basis point decrease in our net interest margin (net interest income divided by average interest-earning assets) from 3.53% for the nine months ended September 30, 2006 to 3.49% for the nine months ended September 30, 2007, partially offset by a $2.3 million increase in net interest-earning assets. The decrease in net interest margin is primarily due to the increase in the average rate on interest-bearing liabilities from 3.28% for the nine months ended September 30, 2006 to 3.70% for the nine months ended September 30, 2007 for an increase of 42 basis points while the average rate earned on interest-earning assets increased from 6.66% for the nine months ended September 30, 2006 to 6.99% for the nine months ended September 30, 2007 for an increase of 33 basis points. Net interest income for the three months ended September 30, 2007 decreased $252,000, or 8.15%, over the same period in 2006.

Interest income on loans decreased $266,000, or 1.58%, for the nine months ended September 30, 2007 compared to the same nine months in 2006. This decrease was the result of a $20.4 million decrease in the average balance of loans from $325.1 million in September 2006 to $305.7 million in September 2007 due to a continued slow local economy, offset by an increase in the average yield on loans from 6.92% for the first nine months of 2006 to 7.26% for the first nine months of 2007 due to increasing interest rates in the economy. The higher rates caused both new and adjustable rate mortgages to price and reprice higher. Interest income on loans decreased $208,000 for the third quarter of 2007 compared to the third quarter of 2006 due to a decrease in the average balance of loans from $320.9 million in September 2006 to $298.1 million in September 2007 offset by an increase in the average yield on loans from 7.15% for the

Interest earned on other investments and Federal Home Loan Bank stock increased by $198,000 for the nine months ended September 30, 2007 compared to the same period in 2006. This was primarily the result of a $2.7 million increase in average balances and an increase in the average yield on the average balance of other investments and Federal Home Loan Bank stock from 3.17% for the first nine months of 2006 to 3.83% over the same period in 2007 due to increasing interest rates in the economy. Interest income on other investments and Federal Home Loan Bank stock increased $53,000 for the third quarter of 2007 compared to the third quarter of 2006 due to an increase in the average yield on other investments and Federal Home Loan Bank stock from 3.09% for the third quarter of 2006 to 3.86% over the same period in 2007, as well as an increase of $630,000 in average balances.

Interest expense for the nine months ended September 30, 2007 increased $486,000, or 5.93%, over the same period in 2006. This increase was due to an increase in the average rate paid on interest-bearing liabilities from 3.28% for the first nine months of 2006 to 3.70% for the first nine months of 2007 partially offset by a $19.9 million decrease in average interest-bearing liabilities. While we generally invest deposits in investment securities when loan growth is slow, we typically allow higher rate brokered deposits to run off if they are not needed to fund loan growth. Brokered deposits decreased from $64.6 million at September 30, 2006 to $54.2 million at September 30, 2007. Interest expense increased $97,000, or 3.43%, for the third quarter of 2007 from the same period in 2006 primarily due to an increase in the average rate paid on average interest-bearing liabilities from 3.43% for the three month period ended September 30, 2006 to 3.65% for the same period in 2007, offset by a $9.4 million decrease in average interest-bearing liabilities for the three month period ended September 30, 2007 compared to the same period in 2006.

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

We recorded a $920,000 provision for loan losses for the nine months ended September 30, 2007 as a result of our analysis of our current loan portfolios compared to $718,000 for the same period in 2006. The increased provision during 2007 was deemed necessary to maintain the allowance for loan losses at a level considered adequate to absorb losses inherent in the loan portfolio and cover anticipated charge-offs. During the first nine months of 2007 we recorded charge-offs of $606,000 offset by recoveries of $32,000. The charge-offs included a $311,000 charge-off of a loan on a newly constructed one- to four-family rental property which had unexpectedly begun sinking and has been condemned by the county. We expect the final disposition on this property to take months while the various lawsuits are adjudicated. The $920,000 provision for loan losses for the first nine months of 2007 was considered adequate to cover further charge-offs based on our evaluation and our loan mix.

At September 30, 2007, non-performing assets, consisting of non-accruing loans, accruing loans 90 or more days delinquent and other real estate owned, totaled $15.2 million compared to $11.7 million at December 31, 2006. In addition to our non-performing assets, we identified $5.0 million in other loans of concern, compared to $4.6 million identified at December 31, 2006, where information about possible credit or cash flow problems of borrowers caused management to designate these loans as needing additional monitoring, and may result in disclosure of such loans as non-performing assets in the future. The vast majority of these loans, as well as our non-performing assets, are well collateralized.

Non-Interest Income. Non-interest income for the nine months ended September 30, 2007 increased by $114,000, or 5.50%, compared to the same period in 2006. This was primarily due to a $208,000 increase in other income consisting of, among other things, a $126,000 decrease in our reserve for losses due to and other adjustments on our overdraft program as our loss experience on this program has been less than originally estimated, and a $68,000 increase in income recognized from bank owned life insurance because of the purchase of an additional $2.5 million in insurance in May of 2006. The increase in other income was augmented by a $59,000 increase in fees on deposit accounts consisting primarily of non-sufficient funds fees from our overdraft program and was partially offset by a $155,000 loss on the sale of other real estate owned as we work to dispose of properties acquired through foreclosure.

Non-Interest Expense. Non-interest expense for the nine months ended September 30, 2007 increased $459,000 over the same period in 2006. The major components of this increase included a $255,000 increase in other expenses primarily related to foreclosed property expenses, a $50,000 increase in FDIC Insurance and a $41,000 increase in deposit fraud losses primarily due to a local business whose customer credit card information was compromised and the subsequent fraudulent use of these cards, some of which belonged to bank customers. An $85,000 increase in occupancy expenses included increased depreciation on assets scheduled for

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.

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.

We anticipate that we will have sufficient funds available to meet current funding commitments. At September 30, 2007, we had outstanding commitments to originate loans and available lines of credit totaling $40.6 million and commitments to provide funds to complete current construction projects in the amount of $2.1 million. In addition, we had commitments to sell $110,000 of fixed-rate residential loans. Certificates of deposit, including brokered deposits, which will mature in one year or less at September 30, 2007 totaled $113.4 million. Based on our experience, our certificates of deposit have been a relatively stable source of long-term funds as such certificates are generally renewed upon maturity since we have established long-term banking relationships with our customers. Therefore, we believe a significant portion of such deposits will remain with us, although this cannot be assured. At September 30, 2007, $54.2 million of our deposits were in brokered deposits, $34.4 million of which will mature in one year

Shareholders’ equity totaled $34.83 million at September 30, 2007 compared to $34.84 million at December 31, 2006, a decrease of $7,000, or 0.02%, due primarily to net income of $1.9 million, partially offset by our payment of dividends on common stock and the repurchase of 37,500 shares of our stock as part of a stock repurchase plan. Shareholders’ equity to total assets was 10.10% at September 30, 2007 compared to 9.46% at December 31, 2006.

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, 2006 and September 30, 2007, Lafayette Savings was categorized as well capitalized. Our actual and required capital amounts and ratios at December 31, 2006 and September 30, 2007 are presented below:

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2007
Total risk-based capital (to risk-weighted assets)	$	36,841		13.7	%	$	21,479		8.0	%	$	26,849		10.0	%
Tier I capital (to risk-weighted assets)		34,188		12.7			10,740		4.0			16,109		6.0
Tier I capital (to adjusted total assets)		34,188		9.9			10,339		3.0			17,231		5.0
Tier I capital (to adjusted tangible assets)		34,188		9.9			6,892		2.0		N/A		N/A
Tangible capital (to adjusted tangible assets)		34,188		9.9			5,169		1.5		N/A		N/A
As of December 31, 2006
Total risk-based capital (to risk-weighted assets)	$	36,533		13.0	%	$	22,532		8.0	%	$	28,164		10.0	%
Tier I capital (to risk-weighted assets)		34,037		12.1			11,266		4.0			16,899		6.0
Tier I capital (to adjusted total assets)		34,037		9.2			1,055		3.0			18,425		5.0
Tier I capital (to adjusted tangible assets)		34,037		9.2			7,370		2.0		N/A		N/A
Tangible capital (to adjusted tangible assets)		34,037		9.2			5,527		1.5		N/A		N/A

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

We, like other financial institutions, are subject to interest rate risk to the extent that our interest-bearing liabilities reprice on a different basis than our interest-earning assets. The Office of Thrift Supervision (“OTS”), our primary regulator, supports the use of a net portfolio value (“NPV”) approach to the quantification of interest rate risk. In essence, this approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance-sheet contracts. An NPV ratio, in any interest rate scenario, is defined as the NPV in that rate scenario divided by the market value of assets in the same scenario, essentially a market value adjusted capital ratio.

It has been and continues to be a priority of the Board of Directors and management to manage interest rate risk to maintain an acceptable level of potential changes to interest income as a result of interest rate changes. Our asset/liability management policy, established by the Board of Directors, sets forth acceptable limits on the amount of change in net portfolio value given certain changes in interest rates. We have an asset/liability management committee which meets quarterly to review our interest rate position, and an investment committee which reviews the interest rate risk position and other related matters with the Board of Directors, and makes recommendations for adjusting this position to the full Board of Directors. In addition, the investment committee of the Board of Directors meets semi-annually with our outside investment advisors to review our investment portfolio and strategies relating to interest rate risk. Specific strategies have included the sale of long-term, fixed-rate loans to reduce the average maturity of our interest-earning assets and the use of Federal Home Loan Bank advances to lengthen the effective maturity of our interest-bearing liabilities. In the future, our community banking emphasis, including the origination of commercial business loans, is intended to further increase our portfolio of short-term and/or adjustable rate loans.

Presented below, as of June 30, 2007 and December 31, 2006, is an analysis of our interest rate risk as measured by the effect on NPV caused by instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up 300 basis points and down 200 basis points, and compared to Board policy limits. The Board Limit column indicates the lowest allowable limits for NPV after each interest rate shock. Assumptions used in calculating the amounts in this table are OTS assumptions. No information is provided for a negative 300 basis point shift in interest rates, due to a low prevailing interest rate environment making such scenarios unlikely.

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.

An evaluation of the Company’s disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the Securities Exchange Act of 1934, as amended (the “Act”)), as of September 30, 2007, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) identified in connection with the Company’s evaluation of controls that occurred during the quarter ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over the financial reporting.

Issuer Purchases of Equity Securities
Month of Purchase	Total Number of Shares Purchased¹		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan²		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan

July 1 – July 30, 2007		0	$	0		0		74,717

August 1 – August 31, 2007		3,000	$	25.00		3,000		71,717

September 1 – September 30, 2007		0	$	0		0		71,717

Total		3,000	$	25.00		3,000		71,717

Indiana		35-1934975
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

101 Main Street, Lafayette, Indiana		47901
(Address of principal executive offices)		(Zip Code)

Class		Outstanding at November 13, 2007
Common Stock, $.01 par value per share		1,557,999 shares

Change in	Board Limit	At June 30, 2007		At December 31, 2006
Interest 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%	10.34%	(200) bp	10.38%	(156) bp
200	7.00	11.33	(100)	11.25	(68)
100	8.00	12.10	(24)	11.92	(1)
0	8.00	12.34	--	11.94	--
-100	8.00	12.46	12	11.96	3
-200	7.00	12.48	14	11.92	(2)

	LSB FINANCIAL CORP.
	(Registrant)


Date: November 14, 2007	By:	/s/ Randolph F. Williams
		Randolph F. Williams, President
		(Principal Executive Officer)


Date: November 14, 2007	By:	/s/ Mary Jo David
		Mary Jo David, Treasurer
		(Principal Financial and Accounting Officer)

Regulation S-K Exhibit Number		Document

31.1		Rule 13(a)-14(a) Certification (Chief Executive Officer)
31.2		Rule 13(a)-14(a) Certification (Chief Financial Officer)
32		Section 906 Certification

	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007		2006
Weighted average shares outstanding (excluding unearned ESOP shares)		1,567,129		1,637,872		1,586,694		1,608,551
Shares used to compute diluted earnings per share		1,573,546		1,647,136		1,594,100		1,618,646
Earnings per share	$	0.46	$	0.53	$	1.23	$	1.62
Diluted earnings per share	$	0.46	$	0.53	$	1.22	$	1.61