lsb_10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

	ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, 2007

		OR

	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number: 0-25070

LSB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

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

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

(765) 742-1064

(Registrant’s telephone number, including area code)

None

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:		Name of each exchange on which registered:
Common Stock, par value $0.01 per share		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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

Large Accelerated Filer o	Accelerated Filer o

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

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

As of June 30, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $30,292,850 based on the closing sale price as reported on the NASDAQ National Market.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at March 25, 2008
Common Stock, $0.01 par value per share		1,559,409 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document		Parts Into Which Incorporated
Annual Report to Shareholders for the Fiscal Year Ended December 31, 2007		Parts I and II
Proxy Statement for the Annual Meeting of Shareholders to be held April 16, 2008		Part III

Exhibit Index on Page E-1

LSB Financial Corp.

Form 10-K

Index

			Page

Forward-Looking Statements			2

Part I			3

	Item 1.	Business	3
	Item 1A.	Risk Factors	29
	Item 1B.	Unresolved Staff Comments	30
	Item 2.	Properties	30
	Item 3.	Legal Proceedings	30
	Item 4.	Submission of Matters to a Vote of Security Holders	30
	Item 4.5.	Executive Officers of the Registrant	30

Part II			31

	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
	Item 6.	Selected Financial Data	32
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	32
	Item 8.	Financial Statements and Supplementary Data	32
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	32
	Item 9A(T).	Controls and Procedures	32
	Item 9B.	Other Information	33

Part III			34

	Item 10.	Directors, Executive Officers and Corporate Governance	34
	Item 11.	Executive Compensation	34
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	34
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	35
	Item 14.	Principal Accounting Fees and Services	35

Part IV			36

	Item 15.	Exhibits, Financial Statement Schedules	36

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This document, including information included or incorporated by reference, contains, and future filings by LSB Financial on 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 these 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 our Annual Report to Shareholders attached to this Form 10-K as Exhibit 13 and identified in our filings with the Securities and Exchange Commission (“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 new products and services of Lafayette Savings Bank 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.

PART I

Item 1. Business

General

LSB Financial Corp. (“LSB Financial” or the “Company”) 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. Originally organized in 1869, Lafayette Savings converted to a federal savings bank in 1984. Lafayette Savings’ deposits are insured up to the applicable limits by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the “FDIC”). In February 1995, Lafayette Savings converted to the stock form of organization through the sale and issuance of 1,029,576 shares of its common stock to LSB Financial. LSB Financial’s principal asset is the outstanding stock of Lafayette Savings. LSB Financial presently has no separate operations and its business consists only of the business of Lafayette Savings. References in this Form 10-K to “we,” “us,” and “our” refer to LSB Financial and/or Lafayette Savings as the context requires.

We have been, and intend 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. We currently serve Tippecanoe County, Indiana and its surrounding counties through our five retail banking offices. At December 31, 2007, we had total assets of $342.0 million, deposits of $232.0 million and shareholders’ equity of $33.9 million.

Our revenues are derived principally from interest on mortgage and other loans and interest on securities.

Our executive offices are located at 101 Main Street, Lafayette, Indiana 47901. Our telephone number at that address is (765) 742-1064.

Market Area

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, is a regional health care center and attracts many high-tech industries to the area by the presence of Purdue University. The Purdue Research Park currently houses over 140 businesses, nearly 100 of which are high tech, and employs nearly 3,000 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 December 2007 was 3.6% compared to 4.4% for the State of Indiana and 4.8% nationally. This represents an improvement locally from 2006 when the comparable numbers were 3.7%, 4.7% and 4.3%, respectively.

Lending Activities

General. Our principal lending activity is the origination of conventional mortgage loans for the purpose of purchasing, constructing, or refinancing owner-occupied one- to four-family residential real estate located in our primary market area. We also originate non-owner occupied one- to four-family residential, multi-family and land development, commercial real estate, consumer and commercial business loans.

We originate both adjustable rate loans and fixed rate loans. We generally originate adjustable rate loans for retention in our portfolio in an effort to increase the percentage of loans with more frequent repricing than traditional long-term fixed rate loans. As a result of continued consumer demand for long-term fixed rate loans, we have continued to originate such loans. We underwrite these mortgages utilizing secondary market guidelines allowing them to be salable without recourse. The sale of these loans results in additional short-term income and improves our interest-rate risk position. We generally retain servicing rights on loans sold to Freddie Mac, but

release the servicing rights on loans sold to other third parties. Furthermore, in order to limit our potential exposure to increasing interest rates caused by our traditional emphasis on originating single-family mortgage loans, we have diversified our portfolio by increasing our emphasis on the origination of short-term or adjustable rate multi-family and commercial real estate loans and commercial business and consumer loans. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability Management” in the Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K.

Our loan officers and certain executive officers in combination with a senior loan officer have approval authority on loans up to $500,000 based on the borrower’s aggregate indebtedness and debt services coverage. Our officers’ loan committee has approval authority on loans up to $1.5 million, also qualified by the borrower’s aggregate indebtedness and debt services coverage. The Board of Directors’ loan committee approves all loans where aggregate debt is over $1.5 million or where debt coverage is below certain minimum thresholds. All individual loans over $500,000 are approved by the Board of Directors’ loan committee.

At December 31, 2007, the maximum amount we could have loaned to any one borrower and the borrower’s related entities was $5.4 million. Our largest lending relationship to a single borrower or a group of related borrowers at December 31, 2007, totaled $5.1 million, consisting of four loans on commercial properties, two secured commercial business loans, two unsecured commercial business loans and a single secured line of credit. The second largest lending relationship at December 31, 2007 to a single borrower or a group of related borrowers totaled $4.8 million, consisting of a single loan on a commercial property and a loan secured by a one- to four-family residence. The third largest lending relationship to a single borrower or a group of related borrowers totaled $4.8 million, consisting of 27 loans on one- to four-family rental properties, eight loans on multi-family properties, a single loan on commercial real estate, two secured commercial business loans and a home equity line of credit. All of these loans were performing in accordance with their terms at December 31, 2007. At December 31, 2007, we had 22 other loans or lending relationships to a single borrower or group of related borrowers with a principal balance in excess of $2.0 million.

Loan Portfolio Composition. The following table sets forth information concerning the composition of our loan portfolio, including loans held for sale, in dollar amounts and in percentages of the total loan portfolio, before deductions for loans in process, deferred fees and discounts and allowances for losses.

	December 31,
	2003					2004					2005					2006					2007
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Real Estate Loans
One- to four-family	$	131,562		45.68	%	$	140,356		42.95	%	$	136,982		40.31	%	$	142,045		43.70	%	$	137,611		45.48	%
Multi-family		38,045		13.21			40,279		12.33			40,094		11.80			30,160		9.28			29,764		9.84
Commercial		50,906		17.68			70,644		21.62			83,834		24.67			74,710		22.98			71,601		23.67
Land and land development		12,242		4.25			14,306		4.38			17,596		5.18			18,466		5.68			18,067		5.97
Construction		21,389		7.43			21,277		6.51			18,500		5.44			19,228		5.91			9,741		3.22
Total real estate loans		254,144		88.25			286,862		87.79			297,006		87.40			284,609		87.55			266,784		88.18

Other Loans
Consumer loans:
Home equity		17,581		6.11			21,468		6.58			19,786		5.82			16,276		5.01			14,018		4.63
Home improvement		16		0.01			432		0.13			412		0.12			417		0.13			315		.10
Automobile		2,102		0.73			1,838		0.56			2,029		0.60			2,285		0.70			1,757		.58
Deposit account		66		0.02			82		0.03			121		0.04			285		0.09			231		.08
Other		1,765		0.61			251		0.08			272		0.08			267		0.08			136		.04
Total consumer loans		21,530		7.48			24,071		7.37			22,620		6.66			19,530		6.01			16,457		5.44
Commercial business loans		12,310		4.27			15,823		4.84			20,180		5.94			20,935		6.44			19,307		6.38
Total other loans		33,840		11.75			39,894		12.21			42,800		12.60			40,465		12.45			35,764		11.82
Total loans		287,984		100.00	%		326,755		100.00	%		339,806		100.00	%		325,074		100.00	%		302,548		100.00	%

Less:
Loans in process		6,954					5,294					5,508					4,167					1,581
Deferred fees and discounts		366					439					475					446					357
Allowance for losses		3,098					2,095					2,852					2,770					3,702
Total loans receivable, net	$	277,566				$	318,927				$	330,971				$	317,691				$	296,908

The following table shows the composition of our loan portfolio, including loans held for sale, by fixed and adjustable rate at the dates indicated. The one- to four-family fixed rate loans include $5.7 million, $4.5 million and $4.1 million of loans at December 31, 2005, 2006 and 2007, respectively, which carry a fixed rate of interest for the initial five or seven years and then convert to a one-year adjustable rate of interest for the remaining term of the loan.

	December 31,
	2003					2004					2005					2006					2007
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Fixed Rate Loans:
Real estate:
One- to four-family	$	41,284		14.34	%	$	43,840		13.42	%	$	41,050		12.08	%	$	41,105		12.65	%	$	43,707		14.45	%
Multi-family		3,586		1.24			3,869		1.17			2,934		0.86			2,793		0.86			3,860		1.27
Commercial		6,852		2.38			10,294		3.15			13,893		4.09			10,797		3.32			13,753		4.55
Construction		3,342		1.16			3,221		0.99			2,800		0.82			1,989		0.61			5,223		1.73
Land and land development		8,899		3.09			7,862		2.41			10,629		3.13			7,358		2.26			2,305		.76
Total real estate loans		63,963		22.21			69,086		21.14			71,306		20.98			64,042		19.70			68,848		22.76
Consumer		2,676		0.93			2,546		0.78			2,814		0.83			3,234		1.00			2,419		.80
Commercial business		6,678		2.32			9,608		2.94			9,851		2.90			9,372		2.88			9,749		3.22
Total fixed rate loans		73,317		25.46			81,240		24.86			83,971		24.71			96,648		23.58			81,016		26.78

Adjustable Rate Loans:
Real estate:
One- to four-family		90,278		31.35			96,515		29.54			95,931		28.23			100,940		31.05			93,904		31.04
Multi-family		34,459		11.97			36,410		11.14			37,160		10.94			27,367		8.42			25,904		8.56
Commercial		44,054		15.30			60,350		18.47			69,941		20.58			63,913		19.66			57,848		19.12
Construction		8,900		3.09			11,085		3.39			14,797		4.35			16,477		5.07			4,518		1.49
Land and land development		12,490		4.33			13,416		4.11			7,871		2.32			11,870		3.65			15,762		5.21
Total real estate loans		190,182		66.04			217,776		66.65			225,700		66.42			220,567		67.85			197,936		65.42
Consumer		18,854		6.55			21,524		6.60			19,805		5.83			16,296		5.01			14,039		4.64
Commercial business		5,632		1.95			6,215		1.89			10,329		3.04			11,563		3.56			9,557		3.16
Total adjustable rate loans		214,665		74.54			245,515		75.14			255,834		75.29			248,426		76.42			221,532		73.22
Total loans		287,984		100.0	%		326,755		100.00	%		339,805		100.00	%		325,074		100.0	%		302,548		100.00	%

Less:
Loans in process		6,954					5,294					5,508					4,167					1,581
Deferred fees and discounts		366					439					475					446					357
Allowance for losses		3,098					2,095					2,852					2,770					3,702
Total loans receivable, net	$	277,566				$	318,927				$	330,971				$	317,691				$	296,908

The following schedule illustrates the maturities of our loan portfolio at December 31, 2007. Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

	Real Estate
	Mortgage(1)					Construction, Land and Land Development					Consumer					Commercial Business					Total
Due During Years Ending December 31,	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
(Dollars in Thousands)

2008	$	8,717		6.41	%	$	10,917		7.43	%	$	4,517		7.49	%	$	10,013		7.63	%	$	34,164		6.65	%
2009 to 2012		22,114		6.83			8,292		7.26			11,749		7.56			6,149		7.82			48,304		7.21
2013 and following		208,144		6.94			8,600		6.94			191		7.59			3,145		7.62			220,080		6.95
TOTAL	$	238,975		6.83	%	$	27,809		7.23	%	$	16,457		7.54	%	$	19,307		7.69	%	$	302,548		6.96	%

(1) Includes one- to four-family, multi-family and commercial real estate loans.

The total amount of loans due to mature after December 31, 2008 which have fixed interest rates is $67 million, and which have adjustable or renegotiable interest rates is $201.3 million.

One- to Four-Family Residential Real Estate Lending

Our lending program focuses on the origination of permanent loans secured by mortgages on owner-occupied, one- to four-family residences. We also originate loans secured by non-owner occupied, one- to four-family residences. Substantially all of these loans are secured by properties located in our primary market area. We originate a variety of residential loans, including conventional 15- and 30-year fixed rate loans, fixed rate loans convertible to adjustable rate loans, adjustable rate loans and balloon loans.

Our one- to four-family residential adjustable rate loans are fully amortizing loans with contractual maturities of up to 30 years. The interest rates on the majority of the adjustable rate loans originated by us are subject to adjustment at one-, three- or five-year intervals. Our adjustable rate mortgage products generally carry interest rates which are reset to a stated margin over the weekly average of the one-, three- or five-year U.S. Treasury rates. Increases or decreases in the interest rate of our one-year adjustable rate loans are generally limited to 2% annually with a lifetime interest rate cap of 6% over the initial rate. Increases or decreases in the interest rate of three-year and five-year adjustable rate loans are limited to a 3% periodic adjustment cap with a 5% lifetime interest rate cap over the initial rate. Our one-year adjustable rate loans may be convertible into fixed rate loans after the first year and before the sixth year upon payment of a fee, do not contain prepayment penalties and do not produce negative amortization. Initial interest rates offered on our adjustable rate loans may be below the fully indexed rate. Borrowers are generally qualified at 2% over the initial interest rate for our one-year adjustable rate loans and at the initial interest rate for our three-year and five-year adjustable rate loans. We generally retain adjustable rate loans in our portfolio pursuant to our asset/liability management strategy. Five-year adjustable rate mortgage loans represented $10.6 million, three-year adjustable rate mortgage loans represented $66.7 million and one-year adjustable rate mortgage loans represented $6.4 million of our adjustable rate mortgage loans at December 31, 2007. We also offer a floating rate mortgage loan based on national prime rate, generally on non-owner-occupied residential loans. These loans represented $3.9 million of our adjustable rate mortgage loans at December 31, 2007.

We offer fixed rate mortgage loans to owner-occupants with maturities up to 30 years and which conform to Freddie Mac standards. We currently sell in the secondary market the majority of our long-term, conforming, fixed rate loans with terms over 15 years. Loans designated as held for sale are carried on the balance sheet at the lower of cost or market value. At December 31, 2007, we had no loans held for sale. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability Management” in the Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K. Interest rates charged on these fixed rate loans

are priced on a daily basis in accordance with Freddie Mac pricing standards. These loans do not include prepayment penalties.

We also offer 30-year fixed rate mortgage loans, which, after five or seven years, convert to our standard one-year adjustable rate mortgage for the remainder of the term. Of these, $5.2 million have less than three years to their adjustment date and are included in adjustable rate loans.

We had $75.7 million in non-owner occupied one- to four-family residential loans at December 31, 2007. These loans are underwritten using the same criteria as owner-occupied, one- to four-family residential loans, but are provided at higher rates than owner-occupied loans. We offer fixed rate, adjustable rate and convertible rate loans, with terms of up to 30 years.

We originate residential mortgage loans with loan-to-value ratios of up to 95% for owner-occupied residential loans and up to 80% for non-owner occupied residential loans. We typically require private mortgage insurance in an amount intended to reduce our exposure to 80% or less of the lesser of the purchase price or appraised value of the underlying collateral. We occasionally originate FHA loans in excess of 95% loan-to-value, all of which are sold, with the servicing rights released, to a third party.

In underwriting one- to four-family residential real estate loans, we evaluate both the borrower’s ability to make monthly payments and the value of the property securing the loan. Properties securing owner-occupied one- to four-family residential real estate loans that we make are appraised by independent fee appraisers. We require borrowers to obtain title insurance and fire insurance, extended coverage casualty insurance and flood insurance, if appropriate. Real estate loans that we originate contain a “due on sale” clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property.

Multi-Family and Commercial Real Estate Lending

We originate permanent loans secured by multi-family and commercial real estate. Our permanent multi-family and commercial real estate loan portfolio includes loans secured by apartment buildings, office buildings, churches, warehouses, retail stores, restaurants, shopping centers, small business facilities and farm properties, most of which are located within our primary market area.

Permanent multi-family and commercial real estate loans are originated as three-year and five-year adjustable rate loans with up to a 25-year amortization. To a substantially lesser extent, such loans are originated as fixed rate or balloon loans or at a floating rate based on national prime rate, at terms up to 15 years. The adjustable rate loans are tied to an index based on the weekly average of the three-year or five-year U.S. Treasury rate, respectively, plus a stated margin over the index. Multi-family loans and commercial real estate loans have been written in amounts of up to 85% of the lesser of the appraised value of the property or the purchase price, and borrowers are generally personally liable for all or part of the indebtedness.

Appraisals on properties securing multi-family and commercial real estate loans originated in excess of $100,000 by us are performed by independent appraisers designated by us at the time the loan is made and reviewed by management. In addition, our underwriting procedures generally require verification of the borrower’s credit history, income and financial statements, banking relationships and income projections for the property.

Multi-family and commercial real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.

Construction, Land and Land Development Lending

We make construction loans to individuals for the construction of their residences as well as to builders and developers for the construction of one- to four-family residences, multi-family dwellings and commercial real estate projects. At December 31, 2007, substantially all of these loans were secured by property located within our primary market area.

Construction loans to individuals for their residences typically run six to eight months and are generally structured to be converted to permanent loans at the end of the construction phase. These construction loans are fixed rate loans, with interest rates higher than those we offer on one- to four-family loans. During the construction phase, the borrower pays interest only. Residential construction loans are underwritten pursuant to the same guidelines used for originating permanent residential loans. At December 31, 2007, we had $2.7 million of construction loans to borrowers intending to live in the properties upon completion of construction.

Construction loans to builders of one- to four-family residences generally have terms of six to eight months and require the payment of interest only at a fixed rate for the loan term. We generally limit builders to one home construction loan at a time, but would consider requests for more than one if the homes are presold. At December 31, 2007, we had $2.9 million of construction loans to builders of one- to four-family residences. We had $201,000 of loans to builders of one- to four-family residences structured to be converted to permanent loans at the end of the construction phase.

We make construction loans to builders of multi-family dwellings and commercial projects with terms up to one year and require payment of interest only at a fixed rate for the construction phase of the loan. These loans are generally structured to be converted to one of our permanent commercial loan products at the end of the construction phase. At December 31, 2007, we had $4.0 million of loans to finance the construction of multi-family dwellings and commercial projects.

We also make loans to builders for the purpose of developing one- to four-family lots and residential condominium projects. These loans typically have terms of two to three years with interest rates tied to national prime. The maximum loan-to-value ratio is 75%. The principal in these loans is typically paid down as lots or units are sold. These loans may be structured as revolving lines of credit with maturities of generally two years or less. At December 31, 2007, we had $12.9 million of development loans to builders. We also make land acquisition loans. At December 31, 2007, we had $5.2 million in loans secured by land.

Construction and development loans are obtained principally through continued business from developers and builders who have previously borrowed from us, as well as referrals from existing customers and realtors, and walk-in customers. The application process includes a submission to us of accurate plans, specifications and costs of the project to be constructed/developed which are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction, which is the land plus the building. At December 31, 2007, our largest construction and development loan was a development loan for a mixed use project for $2.1 million.

Construction and land development loans generally present a higher level of risk than loans secured by one- to four-family residences. Because of the uncertainties inherent in estimating land development and construction costs and the market for the project upon completion, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project. Construction and land development loans to borrowers other than owner-occupants also involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. We had one non-performing construction and development loan totaling $1.1 million at December 31, 2007.

Consumer Lending

We originate a variety of different types of consumer loans, including home equity loans, direct automobile loans, home improvement loans, deposit account loans and other secured and unsecured loans for household and

personal purposes. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The largest component of consumer lending is home equity loans, which totaled $14.0 million or 4.6% of the total loan portfolio at December 31, 2007. We are currently offering a revolving line of credit home equity loan on which the total commitment amount, when combined with the balance of the first mortgage lien and other priority liens, may not exceed 90% of the appraised value of the property, with a ten-year term and minimum monthly payment requirement of interest only. At December 31, 2007, we had $16.3 million of unused credit available under our home equity line of credit program.

Our underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and the applicant’s ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is of primary consideration, our underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Commercial Business Lending

Our current commercial business lending activities encompass predominantly secured and unsecured lines of credit and loans secured by small business equipment and vehicles. At December 31, 2007, we had $6.0 million of unsecured loans and lines of credit outstanding (with $4.2 million of unused credit available) and $13.2 million of loans and lines of credit (with $1.9 million of unused credit available) secured by inventory or accounts receivable, small business equipment and vehicles. We also had $829,000 of unused credit available on letters of credit.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property the value of which tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself, which is likely to be dependent upon the general economic environment. Our commercial business loans are sometimes, but not always, secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

We recognize the increased risks associated with commercial business lending. Our commercial business lending policy emphasizes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of the industry conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis.

Loan Originations, Purchases and Sales

Real estate loans are originated by our staff of salaried loan officers and our residential mortgage loan originators who receive applications from existing customers, walk-in customers, and referrals from realtors. While we originate both adjustable rate and fixed rate loans, our ability to originate loans is dependent upon the relative customer demand for loans in our market. Demand is affected by the interest rate environment. Currently, the majority of conforming fixed rate residential mortgage loans with maturities of 15 years and over are originated for sale in the secondary market. Based on our interest-rate risk considerations, we occasionally will keep fixed rate residential mortgage loans in our portfolio to generate income and to be available for substitution in the event a loan committed for sale fails to close as expected. These loans are sold either to Freddie Mac while we retain the servicing rights, or to Citimortgage servicing released. These loans are originated to satisfy customer demand and to generate fee income and are sold to achieve the goals of our asset/liability management program.

When loans are sold to Freddie Mac, we retain the responsibility for collecting and remitting loan payments, inspecting the properties, making certain that insurance and real estate tax payments are made on behalf of borrowers, and otherwise servicing the loans. We receive a servicing fee for performing these services. We serviced mortgage loans for others totaling $131.2 million at December 31, 2007.

In periods of rising interest rates, our ability to originate large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in related operating earnings. In addition, our ability to sell loans may substantially decrease as potential buyers reduce their purchasing activities.

We occasionally purchase a limited amount of participation interests in real estate loans from other financial institutions outside our primary market area. We review and underwrite all loans to be purchased to insure that they meet our underwriting standards.

The following table shows our loan and mortgage-backed security origination, purchase, sale and repayment activities for the periods indicated. One- to four-family fixed rate loans include $1.3 million, $1.5 million and $469,000 of loans originated during 2005, 2006 and 2007 respectively, which carry a fixed rate of interest for the initial five or seven years and then convert to a one-year adjustable rate of interest for the remaining term of the loan.

	Year Ended December 31,
	2005		2006			2007
Originations by type:	(In Thousands)
Adjustable rate:
Real estate – one- to four-family	$	17,065	$	14,408		$	13,916
- multi-family		4,734		1,027			4,628
- commercial		17,575		14,156			6,643
- construction, land and land development		17,864		17,896			7,147
Non-real estate – consumer		224		3,105			---
- commercial business		4,243		8,651			8,224
Total adjustable rate		61,705		59,243			40,557
Fixed rate:
Real estate – one- to four-family		25,300		25,932			34,527
- multi-family		450		653			1,866
- commercial		10,577		7,610			4,681
- construction, land and land development		15,922		8,904			3,579
Non-real estate – consumer		2,614		2,435			897
- commercial business		6,609		5,708			5,478
Total fixed rate		61,472		51,242			51,027
Total loans originated		123,177		110,485			91,584
Purchases:
Total loans purchased		1,958		403			---
Total mortgage-backed securities purchased		---		5,547			---
Total purchases		1,958		5,950			---

Sales and Repayments:
Real estate – one- to four-family		19,193		16,645			19,735
- multi-family		333		---			---
- commercial		3,368		1,000			---
Total loans sold		22,894		17,645			19,735
Principal repayments		88,367		107,805			94,333
Total loans sold and repayments		111,261		125,450			114,068
Mortgage-backed securities:
Principal repayments		355		411			1,132
Increase (decrease) in other items, net		153		(150	)		20
Net increase (decrease)	$	13,672	$	(9,576	)	$	(23,597	)

Asset Quality

Loan payments are generally due the first day of each month. When a borrower fails to make a required payment on a loan, we attempt to cause the delinquency to be cured by contacting the borrower. In the case of residential loans, a late notice is sent for accounts fifteen or more days delinquent. For delinquencies not cured by the 15th day, borrowers will be assessed a late charge. Additional written and oral contacts may be made with the borrower between 20 and 30 days after the due date. If the full scheduled payment on the loan is not received prior to the 1st day of the succeeding month, the loan is considered 30 days past due and more formal collection procedures may be instituted. If the delinquency continues for a period of 60 days, we usually send a default letter to the borrower and, after 90 days, institute appropriate action up to and including foreclosing on the property. If foreclosed, the property is sold at public auction and we may purchase it. Delinquent consumer loans are handled in a similar manner. Our procedures for repossession and sale of consumer collateral are subject to various requirements under Indiana consumer protection laws.

Delinquent Loans. The following table sets forth information concerning delinquent loans at December 31, 2007, in dollar amounts and as a percentage of each category of our loan portfolio. The amounts represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.

	Loans Delinquent For:
	60-89 Days							90 Days and Over							Total Delinquent Loans
	Number		Amount		Percent of Loan Category			Number		Amount		Percent of Loan Category			Number		Amount		Percent of Loan Category
	(Dollars in Thousands)
Real Estate:
One- to four-family		22	$	1,551		1.13	%		66	$	7,237		5.26	%		88	$	8,788		6.19	%
Multi-family		2		87		0.29			0		0		0.00			2		87		1.52
Commercial		0		0		0.00			6		707		0.99			6		707		1.83
Construction and land development		2		63		0.23			11		1,617		5.81			13		1,680		1.78
Consumer		1		10		0.06			7		50		0.30			8		60		0.25
Commercial Business		3		52		0.27			6		383		1.99			9		435		0.19
Total		30	$	1,763		0.58	%		96	$	9,994		3.30	%		126	$	11,757		3.50	%

Non-Performing Assets. The table below sets forth the amounts and categories of non-performing assets. Interest income on loans is accrued over the term of the loans based upon the principal outstanding except where serious doubt exists as to the collectibility of a loan, in which case the accrual of interest is discontinued. The amounts shown do not reflect reserves set up against such assets. See “ - Allowance for Loan Losses.”

	December 31,
	2003			2004			2005			2006			2007
	(Dollars in Thousands)
Non-accruing loans:
One- to four- family	$	2,146		$	2,863		$	5,309		$	6,851		$	7,250
Multi-family		---			---			841			328			341
Commercial real estate		102			501			1,652			---			648
Construction and land development		1,307			547			547			93			1,210
Consumer		69			34			76			89			103
Commercial business		104			262			8			3			383
Total		3,728			4,207			8,432			7,364			9,935

Accruing loans delinquent more than 90 days:
One- to-four-family		456			484			127			147			---
Commercial real estate		62			---			---			---			59
Total		518			484			127			147			59

Foreclosed assets:
One- to four-family		167			742			1,366			2,228			1,565
Multi-family		---			---			---			---			1,022
Commercial real estate		---			102			331			1,709			1,310
Construction or development		163			387			300			232			30
Consumer		---			---			7			---			17
Commercial business		10			---			---			---			---
Total		340			1,231			2,003			4,169			3,944

Total non-performing assets	$	4,586		$	5,922		$	10,563		$	11,680		$	13,938
Total as a percentage of total assets		1.44	%		1.67	%		2.83	%		3.17	%		4.08	%

Total assets	$	319,272		$	355,045		$	372,664		$	368,400		$	342,010

For the year ended December 31, 2007, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms was $622,000, none of which was included in interest income.

Other Loans of Concern. In addition to the non-performing assets set forth in the table above under the caption “Non-Performing Assets,” as of December 31, 2007, there was also an aggregate of $23.0 million in net book value of loans with respect to which past payment history or a decrease in the debt service coverage of the borrowers may cause management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. Included in the other loans of concern are (i) 148 loans to ten borrowers who each hold an average of 15 one- to four-family rental properties with a total outstanding balance of $6.4 million, where management has concerns about

the ability of the borrowers to keep the rental properties leased and about the cash flow of the borrowers; (ii) one loan secured by rental property and one unsecured loan to a single borrower with an outstanding balance of $3.0 million, where management has concerns about the cash flow of the borrower; and (iii) a land development loan to a single borrower with an outstanding balance of $1.3 million, where management has concerns about the scheduled take-down of the lots.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of Thrift Supervision (the “OTS”) to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention” by management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS and the FDIC, which may order the establishment of additional general or specific loss allowances.

In connection with the filing of our periodic reports with the OTS and in accordance with our classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. At December 31, 2007, we had classified $20.0 million of our loans as substandard, $206,000 as doubtful and none as loss. At December 31, 2007, we had designated $7.9 million in loans as special mention.

Allowance 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 other factors. We also consider the loss experience of similar portfolios in comparable lending markets as well as using the services of a consultant to assist in the evaluation of our growing commercial loan portfolio. On at least a quarterly basis, a formal analysis of the adequacy of the allowance is prepared and reviewed by management and the Board of Directors. 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 by assigning each new loan a risk rating at the time the loan is originated, corresponding to one of ten risk categories. If the loan is a commercial credit, the borrower will also be assigned a rating. Adjustments are made to these ratings on a quarterly basis, based on the performance of the individual loan. 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 form is completed on all classified loans, identifying expected losses, generally based on an analysis of the collateral securing those loans. A portion of the loan loss reserve is allocated to the classified loans in the amount identified as at risk.

Portions of the allowance are also allocated to non-classified loan portfolios which have been segregated into categories of loans having similar characteristics and similar inherent risk. These categories include loans on: one- to four-family owner-occupied properties, one- to four-family non-owner-occupied properties, multi-family rental properties, non-residential properties, land and land development projects, construction projects, second mortgages and home equity loans, unsecured commercial business loans, secured commercial business loans, and consumer loans. Factors considered in determining the percentage allocation for each category include: historical loss experience, underwriting standards, trends in property values, trends in delinquent and non-performing loans, and economic trends affecting our market. Although we believe we use the best information available to make such

determinations, future adjustments to reserves may be necessary, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Provision for Loan Losses” in the Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K.

The following table sets forth an analysis of our allowance for loan losses.

	Year Ended December 31,
	2003			2004			2005			2006			2007
	(Dollars in Thousands)

Balance at beginning of period	$	1,996		$	3,098		$	2,095		$	2,852		$	2,770

Charge-offs:
One- to four-family		---			566			218			585			672
Commercial real estate		---			---			16			274			---
Construction or development		---			876			184			278			---
Consumer		84			76			52			4			4
Commercial business		45			2			22			8			---
Total charge-offs		129			1,520			492			1,149			676
Recoveries:
One- to four-family		---			---			---			---			10
Construction or development		---			3			42			46			27
Consumer		6			11			7			3			1
Commercial business		---			3			---			---			---
Total recoveries		6			17			49			49			38

Net charge-offs		123			1,503			443			1,100			638
Additions charged to operations		1,225			500			1,200			1,018			1,570
Balance at end of period	$	3,098		$	2,095		$	2,852		$	2,770			3,702

Net charge-offs to average loans outstanding		0.05	%		0.50	%		0.13	%		0.34	%		0.21	%

Allowance for loan losses to non-performing assets		67.55	%		35.37	%		26.99	%		23.72	%		26.56	%

Allowance for loan losses to net loans at end of period		1.12	%		0.66	%		0.86	%		0.87	%		1.25	%

The allocation of our allowance for losses on loans, including loans held for sale, at the dates indicated is summarized as follows:

	At December 31,
	2003							2004							2005							2006							2007
	Amount of Loan Loss Allowance		Loan Amounts by Category		Percent of Loans in Each Category to Total Loans			Amount of Loan Loss Allowance		Loan Amounts By Category		Percent of Loans in Each Category to Total Loans			Amount of Loan Loss Allowance		Loan Amounts By Category		Percent of Loans in Each Category to Total Loans			Amount of Loan Loss Allowance		Loan Amounts By Category		Percent of Loans in Each Category to Total Loans			Amount of Loan Loss Allowance		Loan Amounts By Category		Percent of Loans in Each Category to Total Loans
	(Dollars in Thousands)
Real estate:
One- to four-family	$	815	$	131,562		45.68	%	$	470	$	140,355		42.95	%	$	636	$	136,981		40.31	%	$	1,201	$	142,045		43.70	%	$	1,917	$	137,590		45.47	%
Multi-family		225		38,045		13.21			211		40,279		12.33			219		40,094		11.80			116		30,160		9.28			99		29,765		9.84
Commercial real estate		500		50,906		17.68			586		70,644		21.62			620		83,834		24.67			459		74,710		22.98			297		71,601		23.67
Land and land development		372		12,242		4.25			253		14,306		4.38			354		17,596		5.18			390		18,466		5.68			343		18,067		5.97
Construction		651		21,389		7.43			162		21,277		6.51			192		18,500		5.44			260		19,228		5.91			323		9,741		3.22
Consumer		145		21,530		7.48			155		24,071		7.37			171		22,620		6.66			126		19,530		6.01			127		16,457		5.44
Commercial business		107		12,310		4.27			143		15,823		4.84			363		20,180		5.94			120		20,935		6.44			494		19,327		6.39
Unallocated		283		---		---			114		---		---			297		---		---			98		---		---			102		---		---
Total	$	3,098	$	287,984		100.00	%	$	2,094	$	326,755		100.00	%	$	2,852	$	339,805		100.00	%	$	2,770	$	325,074		100.00	%	$	3,702	$	302,548		100.00	%

Investment Activities

We must maintain minimum levels of securities that qualify as liquid assets under the OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets at levels we believe adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. At December 31, 2007 our liquidity ratio, liquid assets as a percentage of net withdrawable savings deposits and current borrowings was 4.36%. Our level of liquidity is a result of management’s asset/liability strategy. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability Management” and “– Liquidity and Capital Resources” in the Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K.

Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly.

Generally, we invest funds among various categories of investments and maturities based upon our asset/liability management policies, concern for the highest investment quality, liquidity needs and performance objectives. It is our general policy to purchase securities which are U.S. Government securities, investment grade municipal and corporate bonds, commercial paper, federal agency obligations and interest-bearing deposits with the Federal Home Loan Bank.

The following table sets forth the composition of our securities portfolio at the dates indicated. As of December 31, 2007, our investment portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our shareholders’ equity, excluding those issued by the U.S. Government and its agencies.

	December 31,
	2005					2006					2007
	Carrying Value		% of Total			Carrying Value		% of Total			Carrying Value		% of Total
	(Dollars in Thousands)

Debt securities:
Federal agency obligations	$	4,480		29.79	%	$	3,159		21.96	%	$	503		4.07	%
Municipal bonds		6,361		42.30			7,228		50.25			7,860		63.59
Subtotal		10,841		72.09			10,387		72.21			8,363		67.66

Other:
Federal Home Loan Bank stock		4,197		27.91			3,997		27.79			3,997		32.34
Total debt securities and Federal Home Loan Bank stock	$	15,038		100.00	%	$	14,384		100.00	%	$	12,360		100.00	%

Average remaining life of debt securities	3.52 years					4.30 years					6.33 years

Other interest-earning assets:
Interest-bearing deposits with Federal Home Loan Bank	$	7,687		100.00	%	$	8,336		100.00	%	$	4,846		100.00	%

Mortgage-backed securities:
Fannie Mae certificates	$	234		30.35	%	$	3,101		52.31	%	$	2,506		51.59	%
Freddie Mac certificates		536		69.65	%		2,828		47.69	%		2,352		48.41	%
Total mortgage-backed securities	$	770		100.00	%	$	5,929		100.00	%	$	4,858		100.00	%

The following table sets forth the composition and contractual maturities of our securities portfolio at December 31, 2007. Expected maturities will differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2007, all of our securities were classified as available for sale and as such were reported at fair value. The weighted average yields on tax exempt obligations have been computed on a tax equivalent basis.

	December 31, 2007
	Less than 1 year			1 to 5 Years			5 to 10 Years			Over 10 Years			Total Investment Securities
	(Dollars in Thousands)

Federal agency obligations	$	---		$	---		$	503		$	---		$	503
Municipal bonds		631			4,676			2,370			183			7,860
Fannie Mae certificates		---			28			2,478			---			2,506
Freddie Mac certificates		226			29			2,097			---			2,352
Total investment securities	$	857		$	4,733		$	7,448		$	183		$	13,221

Weighted average yield		4.02	%		3.68	%		4.81	%		6.00	%		4.37	%

Sources of Funds

General. 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.

Deposits. We offer a variety of deposit accounts. Our deposits consist of passbook and statement savings accounts, money market accounts, NOW accounts and certificate accounts. In addition, we periodically solicit broker originated certificates of deposit when issues are available that meet our interest rate and liquidity needs. Brokered deposits at December 31, 2007 totaled $52.3 million. We rely primarily on competitive pricing policies, on-line and off-line advertising, and customer service to attract and retain these deposits.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. We manage the pricing of our deposits in keeping with our asset/liability management, profitability and growth objectives. Based on our experience, we believe that our savings, interest- and non-interest-bearing checking accounts are relatively stable sources of deposits. However, our ability to attract and maintain certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions.

The following table sets forth our savings flows during the periods indicated.

	Year Ended December 31,
	2005			2006			2007
	(Dollars in Thousands)

Opening balance	$	256,631		$	265,993		$	255,304
Deposits		1,188,778			1,165,305			1,256,486
Withdrawals		(1,184,682	)		(1,182,612	)		(1,286,988	)
Interest credited		5,266			6,618			7,228

Ending balance	$	265,993		$	255,304		$	232,030

Net increase (decrease)	$	9,362		$	(10,689	)	$	(23,274	)

Percent increase (decrease)		3.65	%		(4.02	) %		(9.12	) %

The following table sets forth the dollar amount of savings deposits in the various types of deposit programs offered by us at the dates indicated.

	December 31,
	2005					2006					2007
	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
	(Dollars in Thousands)

Transaction and Savings Deposits:
Noninterest-bearing	$	18,401		6.91	%	$	18,358		7.18	%	$	18,823		8.10	%
Savings accounts (0.50% - 0.75% at December 31, 2007)		18,633		7.00			18,764		7.34			20,196		8.69
NOW Accounts (0.00% - 0.50% at December 31, 2007)		26,977		10.13			25,881		10.12			20,838		8.97
Money Market Accounts (1.0% - 4.40% at December 31, 2007)		13,099		4.92			12,273		4.80			16,082		6.92
Total Non-Certificates		77,110		28.96			75,276		29.44			75,939		32.68

Certificates:

0.00 - 1.99%		4,727		1.78			642		0.25			304		0.13
2.00 - 3.99%		125,744		47.23			90,877		35.55			35,925		15.46
4.00 - 5.99%		58,395		21.93			88,493		34.62			119,844		51.60
6.00 - 7.99%		17		0.00			17		0.01			18		0.01
Total certificates		188,883		70.94			180,029		70.43			156,091		67.19
Accrued interest		266		0.10			323		0.13			244		0.13
Total deposits	$	266,259		100.00	%	$	255,628		100.00	%	$	232,274		100.00	%

The following table shows rate and maturity information for our certificates of deposit as of December 31, 2007.

		0.00-1.99%			2.00-3.99%			4.00-5.99%			6.00-7.99%		Total			Percent of Total
	(Dollars in Thousands)
Certificate accounts maturing in quarter ending:

March 31, 2008	$	145		$	16,901		$	17,204		$	---		$	34,250			21.94	%
June 30, 2008		130			6,985			11,919			---			19,033			12.19
September 30, 2008		30			2,607			23,397			---			26,034			16.68
December 31, 2008		---			2,866			26,413			---			29,279			18.76
March 31, 2009		---			2,420			11,249			---			13,668			8.75
June 30, 2009		---			779			2,198			---			2,977			1.91
September 30, 2009		---			923			9,248			---			10,171			6.52
December 31, 2009		---			759			8,812			---			9,571			6.13
March 31, 2010		---			744			4,294			---			5,038			3.23
June 30, 2010		---			619			564			---			1,183			0.76
September 30, 2010		---			243			730			11			984			0.63
December 31, 2010		---			20			1,173			---			1,193			0.76
Thereafter		---			61			2,643			7			2,711			1.74

Total	$	305		$	35,925		$	119,844		$	18		$	156,092			100.00	%

Percent of total		0.20	%		23.02	%		76.78	%		0.01	%		100.00	%		100.00	%

The following table indicates the amount of our certificates of deposit by time remaining until maturity as of December 31, 2007.

		Maturity
	3 Months or Less		Over 3 to 6 Months		Over 6 to 12 Months		Over 12 months		Total
		(In Thousands)

Certificates of deposit less than $100,000, excluding public funds	$	17,650	$	8,533	$	23,468	$	21,231	$	70,882
Certificates of deposit of $100,000 or more, excluding public funds		16,570		10,403		28,765		26,154		81,892
Public funds		30		97		3,080		111		3,318
Total certificates of deposit	$	34,250	$	19,033	$	55,313	$	47,496	$	156,092

Borrowings. Our other available sources of funds include borrowings from the Federal Home Loan Bank of Indianapolis and other borrowings. As a member of the Federal Home Loan Bank of Indianapolis, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for borrowings from the Federal Home Loan Bank. Each Federal Home Loan Bank credit program has its own interest rate, which may be fixed or variable, and the programs have a range of maturities. The Federal Home Loan Bank of Indianapolis may prescribe the acceptable uses for these funds, as well as limitations on the size of the borrowings and repayment provisions.

We utilize Federal Home Loan Bank borrowings as part of our asset/liability management strategy in order to extend the maturity of our liabilities in a cost-effective manner. We may be required to pay a commitment fee upon application and may be subject to a prepayment fee if we prepay the advance. See Note 8 of the Notes to the Consolidated Financial Statements contained in the Annual Report to Shareholders attached as Exhibit 13 to this Form 10-K.

The following table sets forth the maximum month-end balance and average balance of Federal Home Loan Bank advances for the periods indicated.

	Year Ended December 31,
	2005		2006		2007
	(Dollars in Thousands)

Maximum Balance Federal Home Loan Bank Advances	$	74,008	$	76,618	$	75,256
Average Balance Federal Home Loan Bank Advances		70,906		70,513		70,777

The following table sets forth certain information as to the Federal Home Loan Bank advances at the dates indicated.

	Year Ended December 31,
	2005			2006			2007
	(Dollars in Thousands)

Federal Home Loan Bank Advances	$	72,033		$	76,618		$	74,256
Weighted average interest rate of Federal Home Loan Bank Advances		4.39	%		4.96	%		5.03	%

Subsidiaries and Other Activities

Lafayette Savings owns a service corporation, L.S.B. Service Corporation. In April 1994, Lafayette Savings made an initial investment of $51,000 in L.S.B. Service Corporation when it became a 14.16% limited partner in a low-income housing project in Lafayette, Indiana, pursuant to a 10-year commitment totaling $500,000. During 2007, L.S.B. Service Corporation recorded a $10,000 tax loss related to its investment in the project and recorded net losses of $24,000. At December 31, 2007, our total investment in L.S.B. Service Corporation was $509,000.

Lafayette Savings formed Lafayette Insurance and Investments, Inc., an Indiana corporation, on December 31, 1996. Lafayette Insurance and Investments, Inc. began offering various insurance, annuity and investment products and services to our customers in June of 1997. At December 31, 2007, our total investment in Lafayette Insurance and Investments, Inc. was $22,000. During 2002, Lafayette Insurance and Investments, Inc. became inactive and remained so in 2007.

Competition

We face strong competition, both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other savings institutions, commercial banks, credit unions and mortgage bankers making loans secured by real estate located in Tippecanoe County, our primary market area. Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in consumer lending.

We attract the majority of our deposits through our branch offices, primarily from the communities in which those branch offices are located; therefore, competition for those deposits is principally from other savings institutions, commercial banks and credit unions located in the same communities as well as mutual funds and other financial intermediaries. We compete for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours and branch locations and Internet banking with interbranch deposit and withdrawal privileges.

There are 21 other savings institutions, credit unions and banks in our primary market area. We estimate our share of the savings market and mortgage loans in Tippecanoe County to be approximately 14%.

Regulation

General. Lafayette Savings is a federally chartered savings bank, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, we are subject to broad federal regulation, primarily by the OTS, and oversight extending to all of our operations. Lafayette Savings is a member of the Federal Home Loan Bank of Indianapolis and is subject to certain limited regulation by the Board of Governors of the Federal Reserve System. As the thrift holding company of Lafayette Savings, LSB Financial is also subject to federal regulation and oversight by the OTS.

Insurance of Deposits. The Bank's deposits are insured to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed into law in February 2006, has resulted in significant changes to the federal deposit insurance program:

Effective March 31, 2006, the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) were merged to create a new fund, called the Deposit Insurance Fund (“DIF”)

·		The current $100,000 deposit insurance coverage is subject to adjustment for inflation beginning in 2010 and every succeeding five years

·		Deposit insurance coverage for individual retirement accounts and certain other retirement accounts has been increased from $100,000 to $250,000 and also will be subject to adjustment for inflation

Pursuant to the Reform Act, the FDIC is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.5% of estimated insured deposits and the FDIC has been given discretion to set assessment rates according to risk regardless of the level of the fund reserve ratio. On November 2, 2006, the FDIC adopted final regulations that set the designated reserve ratio for the DIF at 1.25% beginning January 1, 2007.

Insured depository institutions that were in existence on December 31, 1996 and paid assessments prior to that date (or their successors) are entitled to a one-time credit against future assessments based on their past contributions to the BIF or SAIF. In 2006, the Bank received a one-time credit of $163,379 against future assessments.

Also on November 2, 2006, the FDIC adopted final regulations that establish a new risk-based premium system. Under the new system, the FDIC will evaluate each institution's risk based on three primary sources of information: supervisory ratings for all insured institutions, financial ratios for most institutions, and long-term debt issuer ratings for large institutions that have such ratings. An institution’s assessments will be based on the insured institution's ranking in one of four risk categories. Effective January 1, 2007, well-capitalized institutions with the CAMELS ratings of 1 or 2 will be grouped in Risk Category I and will be assessed for deposit insurance at an annual rate of between five and seven cents for every $100 of domestic deposits. Institutions in Risk Categories II, III and IV will be assessed at annual rates of 10, 28 and 43 cents, respectively. An increase in assessments could have a material adverse effect on the Company’s earnings.

FDIC-insured institutions remain subject to the requirement to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017. For the quarter ended December 31, 2007, the FICO assessment rate was equal to 1.14 cents for each $100 in domestic deposits maintained at an institution.

Federal Regulation of Savings Associations. The OTS has extensive authority over the operations of savings institutions. As part of this authority, we are required to file periodic reports with the OTS and are subject to periodic examinations by the OTS and the FDIC.

The OTS also has extensive enforcement authority over all savings institutions and their holding companies. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions.

Lafayette Savings’ general permissible lending limit for loans to one borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus, except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus. At December 31, 2007, our lending limit under this restriction was $5.4 million.

Regulatory Capital Requirements. To be considered adequately capitalized, under the prompt corrective action regulations, a savings association must maintain the following capital ratios: a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 4% (unless its supervisory condition allows a 3% ratio), a Tier 1 risk-based ratio (the ratio of Tier 1 capital to risk-weighted assets) of at least 4%, and a total risk-based capital ratio (the ratio of total capital to risk-weighted assets) of at least 8%. Total capital consists of Tier 1 and Tier 2 capital.

Tier 1 capital generally consists of common stockholders’ equity, noncumulative perpetual preferred stock and other tangible capital plus certain intangible assets, including a limited amount of purchased credit card receivables. Tier 2 capital consists generally of certain permanent and maturing capital instruments and allowances for loan and lease losses up to 1.25% of risk-weighted assets. When determining total capital, Tier 2 capital may not exceed Tier 1 capital. At December 31, 2007, we had no intangible assets which were included in Tier 1 capital, other than mortgage servicing rights of $1.1 million.

To determine the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 90% at origination unless insured to such ratio by an insurer approved by Fannie Mae or Freddie Mac.

To be considered well capitalized, a savings association must have a leverage ratio of at least 5%, a Tier 1 risk-based ratio of at least 6% and a total risk-based capital ratio of 10%. As of December 31, 2007, Lafayette Savings qualified as well capitalized, with a leverage ratio of 9.8%, a Tier 1 risk-based capital ratio of 12.8% and a total risk-based capital ratio of 13.9%. The OTS may reclassify a savings association in a lower capital category or require it to hold additional capital based upon supervisory concerns on a case-by-case basis.

Under the prompt corrective action regulations, the OTS and the FDIC are authorized, and under certain circumstances required, to take certain actions against a savings association that is not at least adequately capitalized. Such an association must submit a capital restoration plan and, until the plan is approved by the OTS, may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. For a savings association controlled by a holding company, the capital restoration plan must include a guarantee by the holding company limited to the lesser of 5% of the association’s assets when it failed the “adequately capitalized” standard or the amount needed to satisfy the plan, and, in the event of the bankruptcy of the holding company, the guaranty would have priority over the claims of general creditors. Additional and more stringent restrictions may be applicable, depending on the financial condition of the association and other circumstances. If an association becomes critically undercapitalized, because it has a ratio of tangible equity to total assets of 2% or less, appointment of a receiver or conservator may be required.

Limitations on Dividends and Other Capital Distributions. OTS regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account.

A savings association that is a subsidiary of a holding company, such as Lafayette Savings, may make a capital distribution with prior notice to the OTS, in an amount that does not exceed its net income for the calendar year-to-date plus retained net income for the previous two calendar years (less any dividends previously paid) if the savings association has a regulatory rating in the two top examination categories, is not of supervisory concern, and would remain well-capitalized following the proposed distribution. All other institutions or those seeking to exceed the noted amounts must obtain approval from the OTS for a capital distribution before making the distribution.

Qualified Thrift Lender Test. All savings institutions are required to meet a qualified thrift lender test to avoid certain restrictions on their operations. This test requires a savings institution to have at least 65% of its portfolio assets in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended. Under either test, these assets primarily consist of residential housing related loans and investments. At December 31, 2007, Lafayette Savings met the test.

Any savings institution that fails to meet the qualified thrift lender test must either convert to a national bank or restrict its branching rights, new activities and investments and dividends to those permissible for a national bank. If the institution has not requalified or converted to a national bank within three years after the failure, it must sell all investments and stop all activities not permissible for a national bank. If any institution that fails the qualified thrift lender test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies.

Transactions with Affiliates. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association’s capital and are subject to collateralization requirements. Affiliates of Lafayette Savings include LSB Financial and any company which is under common control with Lafayette Savings. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of an affiliate. The OTS has the discretion to further restrict transactions of a savings association with an affiliate on a case-by-case basis.

Community Reinvestment Act. Under the Community Reinvestment Act, every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The Community Reinvestment Act requires the OTS, in connection with our examination, to assess our record of meeting the credit needs of our community and to take this record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by Lafayette Savings. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. We were examined for Community Reinvestment Act compliance in 2007 and received a rating of “Outstanding.”

Holding Company Regulation. LSB Financial is a unitary savings and loan holding company subject to regulatory oversight by the OTS. LSB Financial is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over us and our non-savings institution subsidiaries.

LSB Financial generally is not subject to activity restrictions. If LSB Financial acquired control of another savings institution as a separate subsidiary, it would become a multiple savings and loan holding company, and its activities and any of its subsidiaries (other than Lafayette Savings or any other savings institution) would generally become subject to additional restrictions.

USA PATRIOT Act of 2001. On October 26, 2001, President Bush signed the USA PATRIOT Act of 2001 (the “PATRIOT Act”). The PATRIOT Act, among other things, is intended to strengthen the ability of U.S. law enforcement to combat terrorism on a variety of fronts. The PATRIOT Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes. Many of the provisions in the PATRIOT Act were to have expired December 31, 2005, but the U.S. Congress authorized renewals that extended the provisions until March 10, 2006. In early March 2006, the U.S. Congress approved the USA PATRIOT Improvement and Reauthorization Act of 2005 (the “Reauthorization Act”) and the USA PATRIOT Act Additional Reauthorizing Amendments Act of 2006 (the “PATRIOT Act Amendments”), and they were signed into law by President Bush on March 9, 2006. The Reauthorization Act makes permanent all but two of the provisions that had been set to expire and provides that the remaining two provisions, which relate to surveillance and the production of business records under the Foreign Intelligence Surveillance Act, will expire in four years. The PATRIOT Act Amendments include provisions allowing recipients of certain subpoenas to obtain judicial review of nondisclosure orders and clarifying the use of certain subpoenas to obtain information from libraries. We do not anticipate that these changes will materially affect our operations.

Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The Sarbanes-Oxley Act’s stated goals include enhancing corporate responsibility, increasing penalties for accounting and auditing improprieties at publicly traded companies and protecting investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”).

Among other things, the Sarbanes-Oxley Act creates the Public Company Accounting Oversight Board as an independent body subject to SEC supervision with responsibility for setting auditing, quality control and ethical standards for auditors of public companies. The Sarbanes-Oxley Act also requires public companies to make faster and more extensive financial disclosures, requires the chief executive officer and chief financial officer of public companies to provide signed certifications as to the accuracy and completeness of financial information filed with the SEC, and provides enhanced criminal and civil penalties for violations of the federal securities laws.

The Sarbanes-Oxley Act also addresses functions and responsibilities of audit committees of public companies. The statute makes the audit committee directly responsible for the appointment, compensation and oversight of the work of the company’s outside auditor, and requires the auditor to report directly to the audit committee. The Sarbanes-Oxley Act authorizes each audit committee to engage independent counsel and other advisors, and requires a public company to provide the appropriate funding, as determined by its audit committee, to pay the company’s auditors and any advisors that its audit committee retains. The Sarbanes-Oxley Act also requires public companies to include an internal control report and assessment by management, along with an attestation to this report prepared by the company’s registered public accounting firm, in their annual reports to stockholders.

Although LSB Financial will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on LSB Financial’s results of operations or financial condition.

Federal and State Taxation

Federal Taxation. Savings institutions that meet certain definitional tests relating to the composition of assets and other conditions prescribed by the Internal Revenue Code of 1986, as amended, are permitted to establish reserves for bad debts and to make annual additions which may, within specified formula limits, be taken as a deduction in computing taxable income for federal income tax purposes. The amount of the bad debt reserve deduction is computed under the experience method.

In addition to the regular income tax, corporations, including savings institutions, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation’s regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation’s regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income.

A portion of our reserves for losses on loans which are presented on the statement of financial condition of retained earnings, may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder, including distributions on redemption, dissolution or liquidation, or for any other purpose except to absorb bad debt losses. As of December 31, 2007, the portion of our reserves subject to this treatment for tax purposes totaled approximately $1.9 million. We file consolidated federal income tax returns with our subsidiaries on a calendar year basis using the accrual method of accounting. We have not been audited by the IRS during the last five fiscal years.

Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on corporations transacting the business of a financial institution in Indiana. Included in the definition of corporations transacting the business of a financial institution in Indiana are holding companies of thrift institutions, as well as thrift institutions. Net income for franchise tax purposes will constitute federal taxable income before net operating loss deductions and special deductions, adjusted for certain items, including Indiana income taxes and bad debts. Other applicable Indiana taxes include sales, use and property taxes.

Employees

At December 31, 2007, we had a total of 97 employees, including 13 part-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.

Item 1A. Risk Factors

Not Applicable.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We conduct our business at our main office and four other locations in Lafayette and West Lafayette, Indiana. We own our main office and three branch offices. The fourth branch office is leased with the term of the lease expiring in 2009. The total net book value of our premises and equipment (including land, building and leasehold improvements and furniture, fixtures and equipment) at December 31, 2007 was approximately $6.8 million. We have also purchased an office building adjacent to the main office location as our growth rate has required space for additional personnel and will for the next few years.

We maintain an on-line database of depositor and borrower customer information. The net book value of our data processing, computer equipment and software at December 31, 2007 was $355,000.

Item 3. Legal Proceedings

We are, from time to time, 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 us in the proceedings, that the resolution of any prior and pending proceedings should not have a material effect on our financial condition or results of operations.

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

No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2007.

Item 4.5 Executive Officers of the Registrant

The executive officers of LSB Financial are identified below. The executive officers are elected annually by the Board of Directors of LSB Financial.

Randolph F. Williams (age 59). Mr. Williams is President and Chief Executive Officer of LSB Financial and its wholly-owned subsidiary, Lafayette Savings. Mr. Williams was appointed to the Board of Directors of LSB Financial in September 2001. He was appointed President of LSB Financial in September 2001 and Chief Executive Officer in January 2002. Mr. Williams served as President and Chief Operating Officer of Delaware Place Bank in Chicago, Illinois from 1996 until joining LSB Financial. Mr. Williams has over 25 years of banking-related experience.

Mary Jo David (age 58). Ms. David is Vice President, Chief Financial Officer and Secretary of LSB Financial and Lafayette Savings. She has held these positions with the Company since its formation in 1994 and with Lafayette Savings since 1992 and was elected a Director of LSB Financial and Lafayette Savings in 1999.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) We have not sold any equity securities during the period covered by this report that were not registered under the Securities Act of 1933. Additionally, pages 53 through 54 of our 2007 Annual Report to Shareholders attached to this document as Exhibit 13 are incorporated herein by reference. In addition, the “Equity Compensation Plan Information” contained in Part III, Item 12 of this Form 10-K is incorporated herein by reference.

(b) We have no information to furnish pursuant to Rule 463 of the Securities Act of 1933 and Item 701(f) of Regulation S-K.

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

October 1 – October 31, 2007		8,000	$	24.70		8,000		63,717
November 1 – November 30, 2007		---		---		---		---
December 1 – December 31, 2007		2,000		21.32		2,000		61,717

Total		10,000	$	24.02		10,000		61,717

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

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

Item 6. Selected Financial Data

Not Applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Pages 3 through 21 of our 2007 Annual Report to Shareholders attached to this document as Exhibit 13 are incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.

Item 8. Financial Statements and Supplementary Data

Pages 24 through 49 of our 2007 Annual Report to Shareholders attached to this document as Exhibit 13 are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A(T). Controls and Procedures

Evaluation of Disclosure Controls and Procedures. An evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), as of December 31, 2007 (the “Evaluation Date”), was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures in effect as of the Evaluation Date are effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Act is (i) accumulated and communicated to our 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 SEC’s rules and forms.

Management’s Report on Internal Control over Financial Reporting.

The management of LSB Financial Corp. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934). Our internal control over financial reporting process was designed, under supervision of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations in any internal control, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and

projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment, management has determined that, as of December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by its registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Controls over Financial Reporting. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) identified in connection with our evaluation of controls that occurred during the quarter ended December 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

We have no information that was required to be reported on a Form 8-K in the fourth quarter covered by this 10-K, but was not reported on a Form 8-K during the fourth quarter.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information concerning LSB Financial directors is incorporated herein by reference to the sections of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2008 under the caption “Proposal I - Election of Directors.” Information concerning LSB Financial executive officers is included in Item 4.5 in Part I of this Form 10-K and is incorporated herein by reference.

The information relating to corporate governance required by this item is incorporated herein by reference to the section of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2008 under the caption “Corporate Governance.”

Section 16(a) of the Exchange Act requires our directors and executive officers and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and our other equity securities by the end of the second business day following a change. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2007, all Section 16(a) filing requirements applicable to our officers, directors and 10% beneficial owners were complied with except as disclosed in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2008 under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” incorporated herein by reference.

LSB Financial has a written code of ethics that applies to all of our directors, officers and employees. The code of ethics is available on our website at www.lsbank.com.

Item 11. Executive Compensation

Information concerning executive compensation is incorporated herein by reference to the sections of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2008 with the captions “Executive Compensation” and “Compensation of Directors.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to the section of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2008 with the caption “Principal Holders of Common Stock.”

Equity Compensation Plan Information. The following table summarizes our equity compensation plans as of December 31, 2007.

Plan Category	Number of securities to be issued upon exercise of outstanding options warrants and rights (a)	Weighted-average exercise price of outstanding options warrants and rights (b)	Number of Securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)

Equity compensation plans approved by security holders(1)	41,316(2)	18.52 (3)	81,000(4)
Equity compensation plans not approved by security holders	---	---	---

(1)

LSB Financial Corp.’s 1995 Stock Option and Incentive Plan terminated on August 22, 2005 so no further options may be granted under the 1995 Stock Option and Incentive Plan. LSB Financial Corp.’s Recognition and Retention Plan terminated by its terms on August 22, 2005, so no further awards may be made under the Recognition and Retention Plan.

(2)	Includes 41,316 shares under LSB Financial Corp.’s Stock Option and Incentive Plan and no shares under LSB Financial Corp.’s Recognition and Retention Plan.

(3)	The total in Column (b) includes only the weighted-average price of stock options, as the restricted shares awarded under the Recognition and Retention Plan have no exercise price and no shares have been awarded under the Recognition and Retention Plan.
(4)	Includes 81,000 shares reserved for issuance under the LSB Financial Corp. 2007 Stock Option and Incentive Plan. No options have yet been granted or awards made under the 2007 Stock Option and Incentive Plan.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information concerning director independence and certain relationships and transactions is incorporated herein by reference to the sections of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2008 with the captions “Corporate Governance” and “Transactions with Related Persons.”

Item 14. Principal Accountant Fees and Services

Information concerning principal accountant fees and services are incorporated herein by reference to the sections of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2008 with the captions “Accountants” and “Accountant’s Fees.”

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)	The following documents are filed as part of this report:	Annual Report Page No(s).

	Financial Statements:
	Report of BKD, LLP, Independent Registered Public Accounting Firm	23
	Consolidated Balance Sheets at December 31, 2007 and 2006	24
	Consolidated Statements of Income for the Years Ended December 31, 2007 and 2006	25
	Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2007 and 2006	26
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 and 2006	27
	Notes to Consolidated Financial Statements	28-49

	Financial Statement Schedules: All schedules are omitted as the required information either is not applicable or is included in the consolidated financial statements or related notes.

(b)	The exhibits filed herewith or incorporated by reference herein are set forth on the Index to Exhibits.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 COP.

Date:	3/17/08	By:	/s/ Randolph F. Williams
			Randolph F. Williams, President,
			Chief Executive Officer and Director
			(Duly Authorized Representative)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Mariellen M. Neudeck		/s/ Randolph F. Williams
Mariellen M. Neudeck, Chairman of the Board		Randolph F. Williams, President, Chief Executive Officer and Director
		(Principal Executive and Operating Officer)

Date:	3/17/08	Date:	3/17/08


/s/ James A. Andrew,		/s/ Kenneth P. Burns
James A. Andrew, Director		Kenneth P. Burns, Director

Date:	3/17/08	Date:	3/17/08


/s/ Philip W. Kemmer		/s/ Peter Neisel
Philip W. Kemmer, Director		Peter Neisel, Director

Date:	3/17/08	Date:	3/17/08


/s/ Jeffrey A. Poxon,		/s/ Thomas R. McCully
Jeffrey A. Poxon, Director		Thomas R. McCully, Director

Date:	3/17/08	Date:	3/17/08


/s/ Mary Jo David		/s/ Charles W. Shook
Mary Jo David, Vice President, Chief Financial Officer, Secretary-Treasurer and Director (Principal Financial and Accounting Officer)		Charles W. Shook, Director

Date:	3/17/08	Date:	3/17/08

INDEX TO EXHIBITS

Regulation S-K Exhibit Number		Document

3.1		Articles of Incorporation, filed on September 21, 1994 as an exhibit to Registrant’s Registration Statement on Form S-1 (File No. 33-84266), are incorporated by reference.
3.2		Bylaws, as amended and restated, filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on September 19, 2007 (File No. 0-25070), are incorporated herein by reference.
4		Registrant’s Specimen Stock Certificate, filed on September 21, 1994 as an exhibit to Registrant’s Registration Statement on Form S-1 (File No. 33-84266), is incorporated herein by reference.
10.1*		Registrant’s 1995 Stock Option and Incentive Plan, filed as Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25070), is incorporated herein by reference.
10.2*		Registrant’s 1995 Recognition and Retention Plan, filed as Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25070), is incorporated herein by reference.
10.3*		Form of 1995 Stock Option and Incentive Plan Non-Qualified Stock Option Agreement, filed as Exhibit 10.4 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 (File No. 0-25070), is incorporated herein by reference.
10.4*		Form of 1995 Stock Option and Incentive Plan Incentive Stock Option Agreement, filed as Exhibit 10.5 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 (File No. 0-25070), is incorporated herein by reference.
10.5*		Form of Recognition and Retention Plan Restricted Stock Agreement, filed as Exhibit 10.6 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 (File No. 0-25070), is incorporated herein by reference.
10.6*		Deferred Compensation Agreement between Lafayette Savings Bank and Randolph F. Williams, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K for the event occurring on September 29, 2005 (File No. 0-25070), is incorporated herein by reference.
10.7*		Amended and Restated Employment Agreement dated February 27, 2008 between LSB Financial Corp. and Randolph F. Williams filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 3, 2008 (File No. 0-25070) is incorporated herein by reference.
10.8*		Amended and Restated Employment Agreement dated February 27, 2008 between LSB Financial Corp. and Mary Jo David filed as Exhibit 10.2 to the Registrant’s 8-K filed on March 3, 2008 (File No. 0-25070), is incorporated herein by reference.
10.9*		LSB Financial Corp. 2007 Stock Option and Incentive Plan, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 24, 2007 (File No. 0-25070), is incorporated herein by reference.

10.10*		Form of 2007 Stock Option and Incentive Plan Incentive Stock Option Agreement, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2007 (File No. 0-25070) is incorporated herein by reference.

10.11*		Form of 2007 Stock Option and Incentive Plan Non-qualified Stock Option Agreement, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2007 (File No. 0-25070), is incorporated herein by reference.

E-1

Regulation S-K Exhibit Number		Document

10.12*		Form of Agreement for Restricted Stock Granted under LSB Financial Corp. 2007 Stock Option and Incentive Plan, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2007 (File No. 0-25070), is incorporated herein by reference.

13		Annual Report to Shareholders for the Year Ended December 31, 2007.
21		Subsidiaries of Registrant.
23		Consent of BKD, LLP, Independent Registered Public Accounting Firm.

31.1		Rule 13a - 14(a) Certification (Chief Executive Officer).

31.2		Rule 13a - 14(a) Certification (Chief Financial Officer).

32		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates exhibits that describe or evidence management contracts and plans required to be filed as exhibits.

E-2

	FINANCIAL HIGHLIGHTS

	December 31, 2007
	(Dollars in Thousands)

	Total assets	$342,010
	Total loans, net of allowance	296,908
	Securities and short-term investments	18,067
	Deposits	232,030
	Borrowings	74,256
	Shareholders’ equity	33,932
	Shareholders’ equity as percent of assets	9.92%
	Net Income	$1,574

	December 31,
	2007			2006		2005		2004		2003
	(Dollars in Thousands, except share data)
Selected Operations Data:

Total interest income	$	22,882		$	23,263	$	21,498	$	19,286	$	19,070
Total interest expense		11,655			11,142		9,664		8,416		8,529
Net interest income		11,227			12,121		11,834		10,870		10,541
Provision for loan losses		1,570			1,018		1,200		500		1,225
Net interest income after provision for loan losses		9,657			11,103		10,634		10,370		9,316
Deposit account service charges		1,838			1,766		1,423		889		820
Gain on sales of mortgage loans		201			214		322		593		1,810
Gain on call of securities		6			---		---		---		---
Loss on real estate owned		(1,097	)		---		---		---		---
Other non-interest income		1,098			858		764		747		677
Total non-interest income		2,046			2,838		2,509		2,240		3,307
Total non-interest expense		9,322			8,593		8,111		7,554		7,742
Income before taxes		2,381			5,348		5,032		5,056		4,881
Income taxes		807			1,998		1,764		1,792		1,932
Net income	$	1,574		$	3,350	$	3,268	$	3,264	$	2,949

Earnings per share	$	1.00		$	2.08	$	2.03	$	2.10	$	1.92
Earnings per share, assuming dilution		0.99			2.07		2.02		2.03		1.85
Dividends paid per share		0.90			0.68		0.61		0.51		0.44

	December 31,
	2007			2006			2005			2004			2003
Selected Financial Ratios and Other Data:

Performance Ratios:
Return on assets (ratio of net income to average total assets)		0.45	%		0.91	%		0.89	%		0.95	%		0.94	%
Return on equity (ratio of net income to average equity)		4.52			9.88			10.21			11.19			11.03
Average interest rate spread during period		3.25			3.33			3.23			3.20			3.36
Net interest margin(1)		3.42			3.48			3.37			3.32			3.50
Operating expense to average total assets		2.66			2.33			2.20			2.20			2.46
Average interest-earning assets to average interest-bearing liabilities		1.05	x		1.05	x		1.05	x		1.05	x		1.05	x

Quality Ratios:
Non-performing assets to total assets at end of period		4.08	%		3.17	%		2.83	%		1.67	%		1.28	%
Allowance for loan losses to non-performing loans		26.56			23.72			27.00			35.38			67.57
Allowance for loan losses to loans receivable		1.23			0.86			0.85			0.66			1.12

Capital Ratios:
Shareholders’ equity to total assets at end of period		9.92			9.46			8.81			8.56			8.68
Average shareholders’ equity to average total assets		9.92			9.19			8.69			8.50			8.49
Dividend payout ratio		90.00			32.69			30.05			24.54			22.31

Other Data:
Number of full-service offices		5			5			5			5			5

SELECTED FINANCIAL CONDITION DATA

(Dollars in thousands)

	December 31, 2007		December 31, 2006		$ Difference			% Difference

Total assets	$	342,010	$	368,400	$	(26,390	)		(7.16	)%

Loans receivable, including loans held for sale, net		296,908		317,691		(20,783	)		(6.54	)
Residential mortgage loans		137,611		142,045		(4,434	)		(3.12	)
Home equity lines of credit		14,018		16,276		(2,258	)		(13.87	)
Other real estate loans		127,593		138,397		(10,804	)		(7.81	)
Commercial business loans		19,307		20,935		(1,628	)		(7.78	)
Consumer loans		2,439		3,254		(815	)		(25.05	)
Loans sold		19,735		15,720		4,015			25.54

Nonperforming loans		9,935		7,364		2,571			34.91
Loans past due 90 days, still accruing		59		147		(88	)		(59.86	)
Other real estate owned		3,944		4,169		(225	)		(5.40	)
Nonperforming assets		13,938		11,680		2,258			19.33

Available-for-sale securities		13,221		16,316		(3,095	)		(18.97	)
Short-term investments		4,846		8,336		(3,490	)		(41.87	)

Deposits		232,030		255,304		(23,274	)		(9.12	)
Core deposits		75,939		75,277		662			0.88
Brokered deposits		47,766		65,617		(17,851	)		(27.20	)

FHLB advances		74,256		76,618		(2,362	)		(3.08	)
Shareholders’ equity (net)		33,932		34,840		(908	)		(2.61	)

	2007								2006
	Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate			Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate

Interest-Earning Assets:
Loans receivable(1)	$	302,947			21,894		7.23	%	$	323,216		$	22,443		6.94	%
Mortgage-backed securities		5,274			272		5.16			2,274			98		4.31
Other investments		16,208			534		3.29			18,527			521		2.81
FHLB stock		3,997			182		4.55			4,115			201		4.88
Total interest-earning assets		328,426			22,882		6.97			348,132			23,263		6.68
Non-interest earning assets		22,655								20,635
Total assets	$	351,081							$	368,767

Liabilities and Shareholders’ Equity:
Interest-Bearing Liabilities:
Savings deposits	$	19,304			199		1.03		$	18,851			164		0.87
Demand and NOW deposits		58,460			601		1.03			56,169			377		0.67
Time deposits		165,353			7,285		4.41			187,110			7,280		3.89
Borrowings		70,778			3,570		5.04			70,513			3,321		4.71
Total interest-bearing liabilities		313,895			11,655		3.71			332,649			11,142		3.35
Other liabilities		3,292								2,224
Total liabilities		317,187								334,873
Shareholders’ equity		33,894								33,894
Total liabilities and shareholders’ equity	$	351,081							$	368,767
Net interest income				$	11,227							$	12,121
Net interest rate spread							3.25	%							3.33	%
Net earning assets	$	14,531							$	15,483
Net yield on average interest-earning assets							3.42	%							3.48	%
Average interest-earning assets to average interest-bearing liabilities		1.05	x							1.05	x

LSB FINANCIAL CORP.





TABLE OF CONTENTS

Letter to Shareholders	i
Selected Financial Information	1
Management’s Discussion and Analysis	3
Disclosure Regarding Forward-Looking Statements	22
Auditors’ Report	23
Consolidated Financial Statements	24
Directors and Executive Officers	50
Shareholder Information	52

	ANNUAL MEETING

		The Annual Meeting of Shareholders of LSB Financial Corp. will be held April 16, 2008 at 9:00 a.m. local time at the LSB Building, located at 22 N. Second Street, Lafayette, Indiana.

	Year Ended December 31,
	2006 vs. 2007									2005 vs. 2006
	Increase (Decrease) Due to						Total Increase			Increase (Decrease) Due to						Total Increase
	Volume			Rate			Decrease			Volume			Rate			Decrease
	(In thousands)
Interest-earning assets:
Loans receivable	$	(1,429	)	$	880		$	(549	)	$	(408	)	$	1,945		$	1,537
Mortgage-backed securities		135			39			174			58			(1	)		57
Other investments		(71	)		84			13			46			104			150
FHLB stock		(5	)		(14	)		(19	)		(3	)		24			21
Total interest-earning assets	$	(1,370	)	$	989		$	(381	)	$	(307	)	$	2,072		$	1,765

Interest-bearing liabilities:
Savings deposits	$	5		$	30		$	35		$	(2	)	$	28		$	26
Demand deposits and NOW accounts		23			201			224			(27	)		45			18
Time deposits		(899	)		904			5			1256			1,049			1,174
Borrowings		13			236			249			(17	)		277			260
Total interest-bearing liabilities	$	(858	)	$	1,371		$	513		$	79		$	1,399		$	1,478

Net interest income							$	(894	)							$	287

				At December 31, 2007				At December 31, 2006
Change in Interest Rate		Board Limit Post-shock		Post-shock		Change		Post-shock		Change
(Basis Points)		NPV Ratio		NPV Ratio		(Basis Points)		NPV Ratio		(Basis Points)

300	bp	6.00	%	10.59	%	(128	)	10.38	%	(156	) bp
200		7.00		11.21		(65	)	11.25		(68	)
100		8.00		11.62		(24	)	11.92		(1	)
0		8.00		11.86		---		11.94		--
-100		8.00		11.97		11		11.96		3
-200		7.00		12.04		18		11.92		(2	)

Quarter Ending	Interest Income		Interest Expense		Net Interest Income		Provision For Loan Losses		Net Income			Basic Earnings Per Share			Diluted Earnings Per Share

2007
March	$	5,869	$	2,903	$	2,966	$	250	$	779		$	0.49		$	0.48
June		5,728		2,854		2,874		490		451			0.28			0.28
September		5,769		2,929		2,840		180		717			0.46			0.46
December		5,516		2,969		2,547		650		(373	)		(0.24	)		(0.24	)
	$	22,882	$	11,655	$	11,227	$	1,570	$	1,574

2006
March	$	5,786	$	2,665	$	3,121	$	150	$	908		$	0.56		$	0.56
June		5,724		2,704		3,020		250		828			0.51			0.50
September		5,924		2,832		3,092		318		867			0.53			0.53
December		5,829		2,941		2,888		300		747			0.47			0.46
	$	23,263	$	11,142	$	12,121	$	1,018	$	3,350

Assets	2007		2006

Cash and due from banks	$	1,644	$	1,391
Short-term investments		4,846		8,336
Cash and cash equivalents		6,490		9,727
Available-for-sale securities		13,221		16,316
Loans held for sale		0		992
Loans, net of allowance for loan losses of $3,702 and $2,770		296,908		316,699
Premises and equipment, net		6,815		6,600
Federal Home Loan Bank stock		3,997		3,997
Interest receivable and other assets		8,966		8,688
Bank owned life insurance		5,613		5,381
Total assets	$	342,010	$	368,400

Liabilities and Stockholders’ Equity
Liabilities
Deposits	$	232,030	$	255,304
Federal Home Loan Bank advances		74,256		76,618
Interest payable and other liabilities		1,792		1,638
Total liabilities		308,078		333,560

Commitments and Contingencies

Stockholders’ Equity
Common stock, $.01 par value; authorized 7,000,000 shares; issued and outstanding 2007 -1,557,968 shares, 2006 - 1,603,209 shares		15		15
Additional paid-in capital		11,066		12,227
Retained earnings		22,777		22,623
Accumulated other comprehensive income/(loss)		74		(25	)
Total stockholders’ equity		33,932		34,840

Total liabilities and stockholders’ equity	$	342,010	$	368,400

	2007			2006
Interest and Dividend Income
Loans	$	21,894		$	22,443
Securities
Taxable		550			501
Tax-exempt		264			192
Other		174			127
Total interest and dividend income		22,882			23,263

Interest Expense
Deposits		8,085			7,821
Borrowings		3,570			3,321
Total interest expense		11,655			11,142

Net Interest Income		11,227			12,121

Provision for Loan Losses		1,570			1,018

Net Interest Income After Provision for Loan Losses		9,657			11,103

Noninterest Income
Deposit account service charges and fees		1,838			1,766
Net gains on loan sales		201			214
Net realized gains on calls of available-for-sale securities		6			—
Net loss on other real estate owned		(1,097	)		—
Other		1,098			858
Total noninterest income		2,046			2,838

Noninterest Expense
Salaries and employee benefits		4,488			4,590
Net occupancy and equipment expense		1,330			1,205
Computer service		493			425
Advertising		299			297
Other		2,712			2,076
Total noninterest expense		9,322			8,593

Income Before Income Tax		2,381			5,348

Provision for Income Taxes		807			1,998

Net Income	$	1,574		$	3,350

Basic Earnings Per Share	$	1.00		$	2.08

Diluted Earnings Per Share	$	0.99		$	2.07

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

Balance, December 31, 2005		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								3,350									3,350
Change in unrealized appreciation (depreciation) on available-for-sale securities, net of taxes														65			65
Total comprehensive income																	3,415
5% stock dividend on common stock		1			2,074			(2,075	)								—
Dividends on common stock, $.68 per share								(1,054	)								(1,054	)
Purchase and retirement of stock (24,500 shares)		(1	)		(682	)											(683	)
Stock options exercised (3,114 shares)					51												51
Tax benefit related to stock options exercised and RRP					2												2
Amortization of stock option compensation					25												25
Amortization of RRP expense					22												22
ESOP shares earned					192						49						241

Balance, December 31, 2006		15			12,227			22,623			—			(25	)		34,840

Comprehensive income
Net income								1,574									1,574
Change in unrealized appreciation (depreciation) on available-for-sale securities, net of taxes														99			99
Total comprehensive income																	1,673
Dividends on common stock, $.90 per share								(1,420	)								(1,420	)
Purchase and retirement of stock (47,500 shares)					(1,212	)											(1,212	)
Stock options exercised (2,259 shares)					34												34
Tax benefit related to stock options exercised					3												3
Amortization of stock option compensation					14												14

Balance, December 31, 2007	$	15		$	11,066		$	22,777		$	—		$	74		$	33,932

	2007			2006
Operating Activities
Net income	$	1,574		$	3,350
Items not requiring (providing) cash
Depreciation		522			488
Provision for loan losses		1,570			1,018
Amortization of premiums and discounts on securities		18			44
Deferred income taxes		(328	)		124
Federal Home Loan Bank stock dividend		—			—
ESOP - shares earned		—			241
Gain on called available-for-sale securities		(6	)		—
Loss on other real estate owned		1,097			—
Gain on sale of loans		(201	)		(214	)
Loans originated for sale		(18,558	)		(17,033	)
Proceeds on loans sold		19,735			16,095
Compensation cost of stock options		14			25
Tax benefit related to stock options exercised		(3	)		(2	)
Changes in
Interest receivable and other assets		(141	)		111
Interest payable and other liabilities		154			(179	)
Net cash provided by operating activities		5,447			4,068

Investing Activities
Purchases of available-for-sale securities		(2,357	)		(8,112	)
Proceeds from maturities of available-for-sale securities		5,606			3,471
Proceeds from the sales of available-for-sale securities		—			—
Net change in loans		14,887			8,666
Proceeds from sale of real estate owned		2,148			2,613
Purchase of premises and equipment		(737	)		(275	)
Reclamation of Federal Home Loan Bank Stock		—			200
Purchase of life insurance policies		—			(2,500	)
Net cash provided by investing activities		19,547			4,063

Financing Activities
Net change in demand deposits, money market, NOW and savings accounts		663			(1,835	)
Net change in certificates of deposit		(23,937	)		(8,854	)
Proceeds from Federal Home Loan Bank advances		60,000			65,000
Repayment of Federal Home Loan Bank advances		(62,362	)		(60,415	)
Proceeds from stock options exercised		34			51
Tax benefit related to stock options purchased		3			2
Repurchase of stock		(1,212	)		(683	)
Dividends paid		(1,420	)		(1,054	)
Net cash used in financing activities		(28,231	)		(7,788	)

Increase (Decrease) in Cash and Cash Equivalents		(3,237	)		343

Cash and Cash Equivalents, Beginning of Year		9,727			9,384

Cash and Cash Equivalents, End of Year	$	6,490		$	9,727

Supplemental Cash Flows Information
Interest paid	$	11,726		$	11,067
Income taxes paid		1,647			2,036

Supplemental Non-Cash Disclosures
Capitalization of mortgage servicing rights	$	16		$	80
Loans transferred to Other Real Estate		3,334			4,588

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
Available-for-sale Securities:
December 31, 2007
U. S. Government sponsored agencies	$	500	$	3	$	—		$	503
Mortgage-backed securities		4,782		78		(2	)		4,858
State and political subdivision		7,815		55		(10	)		7,860
	$	13,097	$	136	$	(12	)	$	13,221
December 31, 2006
U. S. Government sponsored agencies	$	3,172	$	2	$	(15	)	$	3,159
Mortgage-backed securities		5,912		24		(7	)		5,929
State and political subdivision		7,273		9		(54	)		7,228
	$	16,357	$	35	$	(76	)	$	16,316

	Amortized Cost		Fair Value

Within one year	$	630	$	631
One to five years		4,651		4,676
Five to ten years		2,851		2,873
After ten years		183		183
		8,315		8,363
Mortgage-backed securities		4,782		4,858
Totals	$	13,097	$	13,221

	Less than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

U. S. Government sponsored agencies	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities		59		—		289		2		348		2
State and political subdivisions		—		—		1,678		10		1,678		10
Total temporarily impaired securities	$	59	$	—	$	1,967	$	12	$	2,025	$	12

	2007			2006

Balance, beginning of year	$	2,770		$	2,852
Provision charged to expense		1,570			1,018
Losses charged off, net of recoveries of $38 for 2007 and $49 for 2006		(638	)		(1,100	)
Balance, end of year	$	3,702		$	2,770

	2007			2006

Land	$	1,681		$	1,326
Buildings and improvements		6,444			6,367
Equipment		3,714			3,408
		11,839			11,101
Less accumulated depreciation		(5,024	)		(4,501	)
Net premises and equipment	$	6,815		$	6,600

	2007			2006
Mortgage servicing rights
Balance, beginning of year	$	1,261		$	1,323
Additions		16			80
Amortization of servicing rights		(145	)		(142	)
Balance, end of year	$	1,132		$	1,261

2008	$	108,596
2009		36,387
2010		8,398
2011		623
Thereafter		2,088
	$	156,092

2008	$	31,756
2009		21,500
2010		18,500
2011		2,500
Thereafter		—
	$	74,256

	2007			2006

Taxes currently payable	$	1,136		$	1,874
Deferred income taxes		(329	)		124
Income tax expense	$	807		$	1,998

	2007			2006

Computed at the statutory rate (34%)	$	810		$	1,818
Increase (decrease) resulting from
Tax exempt interest		(76	)		(60	)
State income taxes		78			214
ESOP expense		—			65
Other		(5	)		(39	)
Actual tax expense	$	807		$	1,998

	2007		2006
Deferred tax assets
Allowance for loan losses	$	1,212	$	1,076
Non-accrual loan income		141		92
Unrealized loss on available-for-sale securities		—		17
Other		123		113
		1,476		1,298
Deferred tax liabilities
Depreciation		240		364
Mortgage servicing rights		476		531
FHLB stock dividends		164		164
Unrealized gain on available-for-sale securities		50		—
Other		172		141
		1,102		1,200
Net deferred tax asset	$	375	$	98

	2007		2006

Unrealized gains on available-for-sale securities	$	170	$	108
Less: reclassification adjustment for gain realized in the income statement, net of tax expense of $2 and $0 respectively		6		—
Net unrealized gains on available-for-sale securities		164		108
Tax expense		65		43
Other comprehensive income	$	99	$	65

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2007
Total risk-based capital (to risk-weighted assets)	$	36,320		13.9	%	$	20,954		8.0	%	$	26,192		10.0	%
Tier I capital (to risk-weighted assets)		33,444		12.8			10,477		4.0			15,716		6.0
Tier I capital (to adjusted total assets)		33,444		9.8			10,249		3.0			17,081		5.0
Tier I capital (to adjusted tangible assets)		33,444		9.8			6,833		2.0			N/A		N/A
Tangible capital (to adjusted tangible assets)		33,444		9.8			5,124		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			11,055		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

	2007		2006

Allocated shares		96,013		97,303
Shares released for allocation		—		9,320
Unearned shares		—		—
Total ESOP shares		96,013		106,623
Fair value of unearned shares at December 31	$	—	$	—

	2007
	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value

Outstanding, beginning of year		43,575		$	18.34
Granted		—			—
Exercised		(2,259	)		14.96
Forfeited or expired		—			—

Outstanding, end of year		41,316		$	18.52	5.03 years	$	107
Exercisable, end of year		25,354		$	15.67	5.23 years	$	105

	Year Ended December 31, 2007
	Income		Weighted- Average Shares		Per Share Amount

Net income	$	1,574		1,579,792
Basic earnings per share
Income available to common stockholders					$	1.00
Effect of dilutive securities
Stock options				8,978
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	1,574		1,588,770	$	0.99

	Year Ended December 31, 2006
	Income		Weighted- Average Shares		Per Share Amount

Net income	$	3,350		1,607,315
Basic earnings per share
Income available to common stockholders					$	2.08
Effect of dilutive securities
Stock options				11,317
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	3,350		1,618,632	$	2.07

	December 31, 2007				December 31, 2006
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	6,490	$	6,490	$	9,727	$	9,727
Available-for-sale securities		13,221		13,221		16,316		16,316
Loans including loans held for sale, net of allowance for loan losses		296,908		300,755		317,691		318,597
Federal Home Loan Bank stock		3,997		3,997		3,997		3,997
Interest receivable		1,641		1,641		1,834		1,834

Financial liabilities
Deposits		232,030		233,566		255,304		253,863
Federal Home Loan Bank advances		74,256		75,248		76,618		76,485
Interest payable		421		421		498		498

	2007		2006
Commitments to extend credit
Fixed rate	$	9,215	$	2,068
Variable rate		830		2,067
Unused portions of lines of credit		26,355		35,869
Letters of credit		829		566

Condensed Balance Sheets
	December 31
	2007		2006
Assets
Cash	$	38	$	46
Securities available-for-sale		184		195
Investment in the Bank		33,565		34,012
Other assets		166		607
Total assets	$	33,953	$	34,860
Liabilities	$	21	$	20
Stockholders' Equity		33,932		34,840
Total liabilities and stockholders' equity	$	33,953	$	34,860

Condensed Statements of Income
	Year Ending December 31
	2007			2006
Income
Dividends from the Bank	$	2,275		$	1,007
Other income		11			12
Total income		2,286			1,019
Expenses		(251	)		(221	)
Income Before Income Tax and Equity in Undistributed Income of Subsidiaries		2,035			798
Income Tax Benefit		98			108
Income Before Equity in Undistributed Income of Subsidiaries		2,133			906
Equity in Undistributed Income of Subsidiaries		(559	)		2,444
Net Income	$	1,574		$	3,350