lsbi-20130331.htm

PART I FINANCIAL INFORMATION		1

Item 1. Financial Statements		1
Consolidated Condensed Balance Sheets		1
Consolidated Condensed Statements of Income and Comprehensive Income		2
Consolidated Condensed Statements of Changes in Shareholders’ Equity		3
Consolidated Condensed Statements of Cash Flows		4
Notes to Consolidated Condensed Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3. Quantitative and Qualitative Disclosures About Market Risk		41

Item 4. Controls and Procedures.		41

PART II. OTHER INFORMATION		42

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Mine Safety Disclosures	45

Item 5.	Other Information	45

Item 6.	Exhibits	45

SIGNATURES		46

	March 31, 2013			December 31, 2012
	(unaudited)
Assets
Cash and due from banks	$	1,249		$	25,643
Interest bearing deposits		22,838			5,778
Cash and cash equivalents		24,087			31,421
Interest bearing time deposits		1,747			1,740
Available-for-sale securities		37,998			28,004
Loans held for sale		2,296			1,363
Total loans		279,124			286,157
Less: Allowance for loan losses		(6,062	)		(5,900	)
Net loans		273,062			280,257
Premises and equipment, net		7,157			7,069
Federal Home Loan Bank stock, at cost		3,185			3,185
Bank owned life insurance		6,633			6,595
Interest receivable and other assets		5,025			4,976
Total assets	$	361,190		$	364,610

Liabilities and Shareholders’ Equity
Liabilities
Deposits	$	309,357		$	308,637
Federal Home Loan Bank advances		10,000			15,000
Interest payable and other liabilities		2,279			2,018
Total liabilities		321,636			325,655

Commitments and Contingencies

Shareholders’ Equity
Common stock, $.01 par value
Authorized - 7,000,000 shares Issued and outstanding 2013 - 1,556,782 shares, 2012 - 1,555,972 shares		15			15
Additional paid-in-capital		11,134			11,121
Retained earnings		28,070			27,495
Accumulated other comprehensive income		335			324
Total shareholders’ equity		39,554			38,955

Total liabilities and shareholders’ equity	$	361,190		$	364,610

	Three months ended March 31,
	2013			2012
Interest and Dividend Income
Loans	$	3,477		$	4,075
Securities
Taxable		104			66
Tax-exempt		45			39
Other		16			14
Total interest and dividend income		3,642			4,194
Interest Expense
Deposits		569			811
Borrowings		78			99
Total interest expense		647			910
Net Interest Income		2,995			3,284
Provision for Loan Losses		400			600
Net Interest Income After Provision for Loan Losses		2,595			2,684

Non-interest Income
Deposit account service charges and fees		272			325
Net gains on loan sales		430			406
Loss on other real estate owned		(2	)		(83	)
Other		418			260
Total non-interest income		1,118			908

Non-Interest Expense
Salaries and employee benefits		1,527			1,519
Net occupancy and equipment expense		319			318
Computer service		142			148
Advertising		115			88
FDIC insurance premiums		116			119
Other		456			468
Total non-interest expense		2,675			2,660

IncomeBefore Income Taxes		1,038			932
Provision for Income Taxes		385			337
Net Income		653			595
Unrealized appreciation (depreciation) on available-for-sale securities net of taxes (credits) of $7 and $(13), for 2013 and 2012, respectively		11			(19	)
Comprehensive income	$	664		$	576

Basic Earnings Per Share	$	0.42		$	0.38
Diluted Earnings Per Share	$	0.42		$	0.38

Dividends Declared Per Share	$	0.05		$	0.00

	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income			Total

Balance, January 1, 2012	$	15	$	11,010	$	24,913		$	236		$	36,174
Net income						595						595
Other comprehensive income									(19	)		(19	)
Stock options exercised (750 shares)				7								7
Tax benefit related to stock options exercised				2								2
Share-based compensation expense				21								21
Balance, March 31, 2012	$	15	$	11,040	$	25,508		$	217		$	36,780



Balance, January 1, 2013	$	15	$	11,121	$	27,495		$	324		$	38,955
Net income						653						653
Other comprehensive income									11			11
Stock options exercised (810 shares)				9								9
Tax benefit related to stock options exercised				3								3
Dividends on common stock, $0.05 per share						(78	)					(78	)
Share-based compensation expense				1								1
Balance, March 31, 2013	$	15	$	11,134	$	28,070		$	335		$	39,554

	Three months ended March 31,
	2013			2012
Operating Activities
Net income	$	653		$	595
Items not requiring (providing) cash
Depreciation		111			113
Provision for loan losses		400			600
Amortization of premiums and discounts on securities		53			24
Loss on sale of other real estate owned		2			83
Gain on sale of loans		(430	)		(406	)
Loans originated for sale		(12,417	)		(13,201	)
Proceeds on loans sold		11,914			14,359
Amortization of stock options		1			21
Changes in
Interest receivable and other assets		(181	)		371
Interest payable and other liabilities		255			478
Net cash provided by operating activities		361			3,037

Investing Activities
Net change in interest-bearing deposits		(7	)		---
Purchases of available-for-sale securities		(10,628	)		(4,967	)
Proceeds from paydowns and maturities of available-for-sale securities		598			1,675
Net change in loans		6,633			8,755
Proceeds from sale of other real estate owned		254			1,092
Purchase of premises and equipment		(199	)		(99	)
Net cash provided by (used in) investing activities		(3,349	)		6,456

Financing Activities
Net change in demand deposits, money market, NOW and savings accounts		440			6,029
Net change in certificates of deposit		280			165
Repayment of Federal Home Loan Bank advances		(5,000	)		---
Proceeds from stock options exercised		9			7
Tax benefits related to stock options exercised		3			2
Dividends paid		(78	)		---
Net cash provided by (used in) financing activities		(4,346	)		6,203

Increase (decrease) in Cash and Cash Equivalents		(7,334	)		15,696
Cash and Cash Equivalents, Beginning of Period		31,421			21,708
Cash and Cash Equivalents, End of Period	$	24,087		$	37,404

Supplemental Cash Flows Information
Interest paid	$	594		$	901
Income taxes paid		650			---

Supplemental Non-Cash Disclosures
Capitalization of mortgage servicing rights		150			49
Loans transferred to other real estate owned		162			28

The financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all of the disclosures necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. These interim financial statements have been prepared on a basis consistent with the annual financial statements and include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of operations and financial position for and at the end of such interim periods. The consolidated condensed balance sheet of LSB Financial Corp. as of December 31, 2012 has been derived from the audited consolidated balance sheet of LSB Financial Corp. as of that date.

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission. The results of operations for the periods are not necessarily indicative of the results to be expected for the full year.

Earnings per share are based upon the weighted average number of shares outstanding during the period. Diluted earnings per share further assume the issuance of any potentially dilutive shares. For the three month period ended March 31, 2012, 6,000 shares related to stock options outstanding were dilutive and 51,433 were antidilutive. For the three month period ended March 31, 2013, 41,257 shares related to stock options outstanding were dilutive and 17,116 were antidilutive. The following table presents information about the number of shares used to compute earnings per share and the results of the computations:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
			(in Thousands)
Available-for-sale Securities:
March 31, 2013:
U.S. Government sponsored agencies	$	16,602	$	101	$	(11	)	$	16,692
Mortgage-backed securities-Government sponsored entities		9,671		192		---			9,863
State and political subdivisions		11,178		277		(12	)		11,443
	$	37,451	$	570	$	(23	)	$	37,998
Available-for-sale Securities:
December 31, 2012
U.S. Government sponsored agencies	$	10,639	$	83	$	(13	)	$	10,709
Mortgage-backed securities-Government sponsored entities		6,989		209		---			7,198
State and political subdivisions		9,840		271		(14	)		10,097
	$	27,468	$	563	$	(27	)	$	28,004

	Less Than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
March 31, 2013
U.S. Government sponsored agencies	$	3,074	$	11	$	---	$	---	$	3,074	$	11
State and political subdivisions		1,647		12		---		---		1,647		12
Total temporarily impaired securities	$	4,721	$	23	$	---	$	---	$	4,721	$	23

December 31, 2012
U.S. Government sponsored agencies	$	3,076	$	13	$	---	$	---	$	3,076	$	13
State and political subdivisions		2,541		14		---		---		2,541		14
Total temporarily impaired securities	$	5,617	$	27	$	---	$	---	$	5,617	$	27

All loans that are rated substandard and impaired, or are troubled debt restructures are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Bank. Included in the review of individual loans are those that are impaired as provided in Financial Accounting Standards Board (“FASB”) ASC 310-10 (formerly FAS 114, Accounting by Creditors for Impairment of a Loan). Any allowances for impaired loans are determined by the fair value of the underlying collateral based on the discounted appraised value. Allowances for loans that are not collateral dependent are determined by the present value of expected future cash flows discounted at the loan’s effective interest rate. Historical loss rates are applied to all loans not included in the ASC 310-10 calculation.

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

	March 31, 2013			December 31, 2012
Real Estate	(In thousands)
One- to four-family residential	$	96,958		$	99,216
Multi-family residential		61,725			62,823
Commercial real estate		76,104			82,430
Construction and land development		17,120			14,113
Commercial		13,953			13,290
Consumer and other		1,083			1,131
Home equity lines of credit		15,633			16,421
Total loans		282,576			289,424
Less
Net deferred loan fees, premiums and discounts		(441	)		(469	)
Undisbursed portion of loans		(3,010	)		(2,798	)
Allowance for loan losses		(6,062	)		(5,900	)
Net loans	$	273,063		$	280,257

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

With respect to residential loans that are secured by one- to four-family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one- to four-family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Three Months Ended March 31, 2013	Commercial			Owner Occupied 1-4			Non-owner Occupied 1-4			Multi- family			Commercial Real Estate			Construction			Land		Consumer and Home Equity			Total
							In thousands
Allowance for losses
Beginning balance	$	633		$	589		$	1,022		$	1,055		$	2,177		$	62		$	154	$	208		$	5,900
Provision charged to expense		239			(64	)		212			(74	)		9			(20	)		129		(31	)		400
Losses charged off		(29	)		---			(241	)		---			(51	)		---			---		---			(321	)
Recoveries		16			---			60			---			---			---			7		---			83
Ending balance		859			525			1,053			981			2,135			42			290		177			6,062
ALL individually evaluated		---			12			23			19			243			---			---		---			297
ALL collectively evaluated		859			513			1,030			962			1,892			42			290		177			5,765
Total ALL		859			525			1,053			981			2,135			42			290		177			6,062
Loans individually evaluated		20			1,682			5,931			2,173			4,131			---			734		91			14,762
Loans collectively evaluated		13,933			45,476			43,869			59,552			71,973			7,673			8,713		16,625			267,814
Total loans evaluated		13,953			47,158			49,800			61,725			76,104			7,673			9,447		16,716			282,576

Three Months Ended March 31, 2012	Commercial			Owner Occupied 1-4			Non-owner Occupied 1-4			Multi- family			Commercial Real Estate		Construction			Land			Consumer and Home Equity			Total
							In thousands
Allowance for losses
Beginning balance	$	667		$	436		$	1,330		$	646		$	1,788	$	64		$	264		$	136		$	5,331
Provision charged to expense		362			(19	)		(87	)		276			212		(51	)		(121	)		28			600
Losses charged off		(313	)		(6	)		(25	)		(259	)		---		---			(17	)		(11	)		(631	)
Recoveries		---			---			3			1			---		---			1			---			5
Ending balance		716			411			1,221			664			2,000		13			127			153			5,305


Allowance for Loan Losses and Recorded Investment in Loans at December 31, 2012

ALL individually evaluated	---	14	27	24	253	---	---	---	318
ALL collectively evaluated	633	575	995	1,031	1,924	62	154	208	5,582
Total ALL	633	589	1,022	1,055	2,177	62	154	208	5,900
Loans individually evaluated	49	1,653	5,917	2,891	6,233	---	1,379	92	18,214
Loans collectively evaluated	13,241	46,892	44,754	59,932	76,197	8,928	3,806	17,460	271,210
Total loans evaluated	13,290	48,545	50,671	62,823	82,430	8,928	5,185	17,552	289,424

For all loan portfolio segments except one- to four-family residential properties and consumer, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges off one- to four-family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of one- to four-family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 120 days past due, charge-off of unsecured open-end loans when the loan is 120 days past due, and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off. Charge-offs may be taken sooner than the above-referenced timeframes if circumstances warrant.

Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

Credit Rating	Commercial		Owner Occupied 1-4		Non-owner Occupied 1-4		Multi- Family		Commercial Real Estate		Construction		Land		Consumer and Home Equity		Total
							(In thousands)
1- Superior	$	25	$	3,524	$	242	$	---	$	102	$	415	$	190	$	1,681	$	6,179
2 - Good		1,909		19,622		4,245		7,566		10,949		1,212		171		10,733		56,407
3 - Pass Low risk		5,290		15,796		12,338		31,309		19,469		4,362		4,621		3,132		96,317
4 - Pass		4,258		6,349		20,902		16,866		23,022		1,684		1,355		1,170		75,606
4W - Watch		182		641		2,745		2,928		11,206		---		2,413		---		20,115
5 - Special mention		429		---		4,965		2,985		4,636		---		594		---		13,609
6 - Substandard		1,860		1,226		4,363		71		6,720		---		103		---		14,343
7 - Doubtful		---		---		---		---		---		---		---		---		---
8 - Loss		---		---		---		---		---		---		---		---		---
Total	$	13,953	$	47,158	$	49,800	$	61,725	$	76,104	$	7,673	$	9,447	$	16,716	$	282,576

Credit Rating	Commercial		Owner Occupied 1-4		Non-owner Occupied 1-4		Multi- Family		Commercial Real Estate		Construction		Land		Consumer and Home Equity		Total
							(In thousands)
1- Superior	$	27	$	3,849	$	246	$	---	$	103	$	667	$	193	$	1,787	$	6,872
2 - Good		3,061		20,104		4,299		7,661		10,924		1,123		172		11,311		58,655
3 - Pass Low risk		7,982		16,459		12,625		31,281		31,853		5,383		286		3,374		109,243
4 - Pass		1,689		6,221		24,623		18,010		22,993		1,755		1,387		1,078		77,756
4W - Watch		186		746		2,894		2,954		5,014		---		1,769		---		13,563
5 - Special mention		296		---		2,535		2,139		4,658		---		---		---		9,628
6 - Substandard		49		1,166		3,449		778		6,885		---		1,378		2		13,707
7 - Doubtful		---		---		---		---		---		---		---		---		---
8 - Loss		---		---		---		---		---		---		---		---		---
Total	$	13,290	$	48,545	$	50,671	$	62,823	$	82,430	$	8,928	$	5,185	$	17,552	$	289,424

	Loan Portfolio Aging Analysis as of March 31, 2013
	30-59 Days		60-89 Days		Over 90 Days		Total Past Due		Current		Total Loans		Under 90 Days and Not Accruing		Total 90 Days and Accruing
							(In thousands)
Commercial	$	---	$	---	$	20	$	20	$	13,933	$	13,953	$	---	$	---
Owner occupied 1-4		50		---		585		635		46,523		47,158		448		---
Non owner occupied 1-4		304		---		735		1,039		48,761		49,800		1,472		---
Multi-family		---		---		---		---		61,725		61,725		73		---
Commercial Real Estate		107		---		111		218		75,887		76,104		17		---
Construction		---		---		---		---		7,673		7,673		---		---
Land		---		---		140		140		9,306		9,447		---		---
Consumer and home equity		---		---		---		---		16,716		16,716		---		---
Total	$	461	$	---	$	1,591	$	2,052	$	280,524	$	282,576	$	2,010	$	---

	Loan Portfolio Aging Analysis as of December 31, 2012
	30-59 Days		60-89 Days		Over 90 Days		Total Past Due		Current		Total Loans		Under 90 Days and Not Accruing		Total 90 Days and Accruing
							(In thousands)
Commercial	$	---	$	---	$	49	$	49	$	13,241	$	13,290	$	---	$	---
Owner occupied 1-4		184		406		107		697		47,848		48,545		862		---
Non owner occupied 1-4		291		216		2,124		2,631		48,040		50,671		543		---
Multi-family		700		78		---		778		62,045		62,823		76		---
Commercial Real Estate		---		---		487		487		81,943		82,430		815		---
Construction		---		---		---		---		8,928		8,928		---		---
Land		---		79		140		219		4,966		5,185		1,238		---
Consumer and home equity		1		2		---		3		17,549		17,552		2		---
Total	$	1,176	$	781	$	2,907	$	4,864	$	284,560	$	289,424	$	3,536	$	---

	Impaired Loans as of and for the Quarter Ended March 31, 2013
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Impaired Loans		Interest Income Recognized
	In thousands
Loans without a specific valuation allowance
Commercial	$	20	$	164	$	---	$	34	$	---
Owner occupied 1-4		1,452		1,545		---		1,422		7
Non-owner occupied 1-4		5,660		6,256		---		5,663		105
Multi-family		2,100		2,112		---		2,456		39
Commercial real estate		2,588		2,983		---		3,627		60
Construction		---		---		---		---		---
Land		734		988		---		1,056		---
Consumer and home equity		91		92		---		92		2
Total loans without a specific valuation allowance		12,645		14,140		---		14,350		213
Loans with a specific valuation allowance
Commercial		---		---		---		---		---
Owner occupied 1-4		230		239		12		231		---
Non-owner occupied 1-4		271		271		23		276		1
Multi-family		73		79		19		76		---
Commercial real estate		1,543		1,543		243		1,555		15
Construction		---		---		---		---		---
Land		---		---		---		---		---
Consumer and home equity		---		---		---		---		---
Total loans with a specific valuation allowance		2,117		2,132		297		2,138		16
Total
Commercial		20		164		---		34		---
Owner occupied 1-4		1,682		1,784		12		1,653		7
Non-owner occupied 1-4		5,931		6,527		23		5,939		106
Multi-family		2,173		2,191		19		2,532		39
Commercial real estate		4,131		4,526		243		5,182		75
Construction		---		---		---		---		---
Land		734		988		---		1,056		---
Consumer and home equity		91		92		---		92		2
Total impaired loans	$	14,762	$	16,272	$	297	$	16,488	$	229

	Impaired Loans as of December 31, 2012						Impaired Loans for the Quarter Ended March 31, 2012
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Impaired Loans		Interest Income Recognized
	In thousands
Loans without a specific valuation allowance
Commercial	$	49	$	521	$	---	$	1,455	$	5
Owner occupied 1-4		1,421		1,535		---		2,022		27
Non-owner occupied 1-4		5,636		5,990		---		6,410		83
Multi-family		2,813		2,865		---		3,866		44
Commercial real estate		4,667		5,720		---		8,045		76
Construction		---		---		---		---		---
Land		1,379		1,615		---		2,019		1
Consumer and home equity		92		114		---		196		3
Total loans without a specific valuation allowance		16,057		18,360		---		24,013		239
Loans with a specific valuation allowance
Commercial		---		---		---		---		---
Owner occupied 1-4		232		240		14		94		2
Non-owner occupied 1-4		281		281		27		701		5
Multi-family		78		83		24		173		3
Commercial real estate		1,566		1,567		253		3,794		31
Construction		---		---		---		---		---
Land		---		---		---		---		---
Consumer and home equity		---		---		---		---		---
Total loans with a specific valuation allowance		2,157		2,171		318		4,762		41
Total
Commercial		49		521		---		1,455		5
Owner occupied 1-4		1,653		1,775		14		2,116		29
Non-owner occupied 1-4		5,917		6,271		27		7,111		88
Multi-family		2,891		2,948		24		4,039		47
Commercial real estate		6,233		7,287		253		11,839		107
Construction		---		---		---		---		---
Land		1,379		1,615		---		2,019		1
Consumer and home equity		92		114		---		196		3
Total impaired loans	$	18,214	$	20,531	$	318	$	28,775	$	280

All loans rated substandard that have had an impairment allocated to them and all troubled debt restructures are considered impaired. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (both principal and interest) according to contractual terms of the loan agreement. Loans that are considered impaired are reviewed to determine if a specific allowance is required based on the borrower’s financial condition, resources and payment record, support from guarantors and the realizable value of any collateral. As a practical expedient the Bank will typically use the collateral fair market value method to determine impairments unless circumstances preclude its use. In this method, any portion of the investment above the current fair market value of the collateral should be identified as an impairment. Fair market value is determined using a current appraisal or evaluation in compliance with federal appraisal regulations.

Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. All interest accrued, but not received for loans placed on non-accrual, is reversed against interest income. Interest subsequently received on such loans is accounted for by using the cost-recovery basis for commercial loans and the cash basis for retail loans until qualifying for return to accrual status.

	Newly classified troubled debt restructurings for the three months ended March 31, 2013
	(Dollars in thousands)
	Number of loans		Pre-modification Recorded Balance		Post-modification Recorded Balance		Type of Modification

Commercial	$	---	$	---	$	---		---
Owner occupied 1-4		---		---		---		---
Non owner occupied 1-4		5		1,242		969	A/B note, payment adjustment
Multi-family		---		---		---		---
Commercial Real Estate		---		---		---		---
Construction		---		---		---		---
Land		---		---		---		---
Consumer and home equity		---		---		---		---
Total	$	5	$	1,242	$	969

	Newly classified troubled debt restructurings for the three months ended March 31, 2012
	(Dollars in thousands)
	Number of loans		Pre-modification Recorded Balance		Post-modification Recorded Balance		Type of Modification

Commercial	$	---	$	---	$	---		---
Owner occupied 1-4		1		108		108	Below market rate
Non owner occupied 1-4		---		---		---		---
Multi-family		---		---		---		---
Commercial Real Estate		1		245		245	Below market rate
Construction		---		---		---		---
Land		---		---		---		---
Consumer and home equity		---		---		---		---
Total	$	2	$	353	$	353

	Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Available-for-sale securities
March 31, 2013:
U.S. Government-sponsored agencies	$	16,692		---	$	16,692		---
Mortgage-backed securities		9,863		---		9,863		---
State and political subdivision securities		11,443		---		11,443		---
Totals		37,998		---		37,998		---
December 31, 2012:
U.S. Government-sponsored agencies	$	10,709		---	$	10,709		---
Mortgage-backed securities		7,198		---		7,198		---
State and political subdivision securities		10,097		---		10,097		---
Totals		28,004		---		28,004		---

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary. Appraisals are reviewed for accuracy and consistency. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by comparison to historical results.

			Fair Value Measurements Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
			In thousands
March 31, 2013:
Financial assets
Cash and cash equivalents	$	24,087	$	24,087	$	—	$	—
Interest bearing time deposits		1,747		—		1,747		—
Loans held for sale		2,296		—		2,296		—
Loans, net of allowance for losses		273,062		—		---		290,498
Federal Home Loan Bank stock		3,185		—		3,185		---
Accrued interest receivable		1,188		—		1,188		—

Financial liabilities
Transaction and Savings Deposits		168,144		168,144		—		—
Time Deposits		141,213		—		—		143,780
Federal Home Loan Bank advances		10,000		—		10,457		—
Accrued interest payable		40		—		40		—

December 31, 2012:
Financial assets
Cash and cash equivalents	$	31,421	$	31,421	$	—	$	—
Interest bearing time deposits		1,740		—		1,740		—
Loans held for sale		1,363		—		1,363		—
Loans, net of allowance for losses		280,257		—		---		299,010
Federal Home Loan Bank stock		3,185		—		3,185		---
Accrued interest receivable		1,133		—		1,133		—

Financial liabilities
Transaction and Savings Deposits		167,704		167,704		—		—
Time Deposits		140,933		—		—		143,181
Federal Home Loan Bank advances		15,000		—		15,515		—
Accrued interest payable		40		—		40		—

Fair value is estimated by discounting the future cash flows using the market rates at which similar notes would be made to borrowers with similar credit ratings and for the same remaining maturities. The market rates used are based on current rates the Bank would impose for similar loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of the loans along with local economic and market conditions.

Under Topic 860, the transferor may not maintain effective control over the transferred assets in order to qualify as a sale. This ASU eliminates the criteria under which the transferor must retain collateral sufficient to repurchase or redeem the collateral on substantially agreed upon terms as a method of maintaining effective control. This ASU is effective for both public and nonpublic entities for interim and annual reporting periods beginning on or after December 15, 2011, and requires prospective application to transactions or modifications of transactions which occur on or after the effective date. Early adoption is not permitted. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220); Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2015. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.

In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210);Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The main objective of this standard is to address implementation issues about the scope of Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures About offsetting Assets and Liabilities. The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative period presented. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.

ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS amends FASB ASC Topic 820, Fair Value Measurements, to bring U.S. GAAP for fair value measurements in line with International Accounting Standards. The ASU clarifies existing guidance for items such as: the application of the highest and best use concept to non-financial assets and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity’s stockholders’ equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of level 3 assets. The ASU also creates an exception to Topic 820 for entities which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell the net asset position or transfer a net liability position in an orderly

transaction. The ASU also allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value hierarchy. Lastly, the ASU contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair value hierarchy such as: disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. For public entities, this ASU is effective for interim and annual periods beginning after December 15, 2011. Early adoption was not permitted. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. The amendments do not affect how earnings per share is calculated or presented. This update is effective for fiscal years and interim periods beginning after December 15, 2011 and is to be applied retrospectively. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements. The Company has presented comprehensive income in a single continuous statement of comprehensive income for the years ended December 31, 2012 and 2011.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. Under the amendments in ASU No. 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments enacted by ASU No. 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted. The adoption of this update did not impact the Company’s financial condition or results of operations.

In December, 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, in an effort to improve comparability between U.S. GAAP and international financial reporting standards (“IFRS”) financial statements with regard to the presentation of offsetting assets and liabilities on the statement of financial position arising from financial and derivative instruments, and repurchase agreements. The ASU establishes additional disclosures presenting the gross amounts of recognized assets and liabilities, offsetting amounts, and the net balance reflected in the statement of financial position. Descriptive information regarding the nature and rights of the offset must also be disclosed. The new standard is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.

LSB Financial Corp., an Indiana corporation (“LSB Financial” or the “Company”), is the holding company of Lafayette Savings Bank, FSB (“Lafayette Savings” or the “Bank”). LSB Financial has no separate operations and its business consists only of the business of Lafayette Savings. References in this Annual Report to “we,” “us” and “our” refer to LSB Financial and/or Lafayette Savings as the context requires.

Lafayette Savings is, and intends to continue to be, an independent, community-oriented financial institution. The Bank has been in business for 144 years and differs from many of our competitors by having a local board and local decision-making in all areas of business. In general, our business consists of attracting or acquiring deposits and lending that money out primarily as real estate loans to construct and purchase single-family residential properties, multi-family and commercial properties and to fund land development projects. We also make a limited number of commercial business and consumer loans.

We have an experienced and committed staff and enjoy a good reputation for serving the people of the community, for understanding their financial needs and for finding a way to meet those needs. We contribute time and money to improve the quality of life in our market area and many of our employees volunteer for local non-profit agencies. We believe this sets us apart from the other 22 banks and credit unions that compete with us. We also believe that operating independently under the same name for over 144 years is a benefit to us - especially as local offices of large banks often have less local authority as their companies strive to consolidate. Focusing time and resources on acquiring customers who may be feeling disenfranchised by their no-longer-local or very large bank has proved to be a successful strategy.

Tippecanoe County and the eight surrounding counties comprise Lafayette Savings’ primary market area. Lafayette is the county seat of Tippecanoe County and West Lafayette is the home of Purdue University. There are three things that set Greater Lafayette apart from other urban areas of the country - the presence of a world class university, Purdue University; a government sector due to the presence of the county seat; and the mix of heavy industry and high-tech innovative start-up companies tied to Purdue University. In addition, Greater Lafayette is a regional health care center serving nine counties and has a large campus of Ivy Tech Community College.

The Tippecanoe County unemployment rate peaked at 10.6% in July 2009 and at March 31, 2013 was at 8.1% compared to 9.1% for Indiana and 7.6% nationally. The local housing market has remained fairly stable for the last several years with no price bubble and no resulting price swings. As of the most recent fourth quarter results provided by the Federal Housing Finance Agency, the five year percent change in house prices for the Lafayette Metropolitan Statistical Area (“MSA”) was a 0.18% increase with the one-year change a 1.18% increase. For the fourth quarter of 2012, the most recent report available, housing prices in the MSA increased 0.19%. Existing home sales increased 17% in Tippecanoe County in 2012, while the average price of a home sold in 2012 was 6% higher than in 2011. New home starts increased to 488 in 2012, a 6% increase over 2011.

The area’s diversity did not make us immune to the ongoing effects of the recession; however, growth continues, although not at the same rate as before the recession. Current signs of recovery, based on a report from Greater Lafayette Commerce, include increasing manufacturing employment, a continuing commitment to new facilities and renovations at Purdue University, and signs of renewed activity in residential development projects. Capital investments announced and/or made in 2012 totaled $605 million compared to $444 million in 2011 and $640 million in 2010. Purdue, the area’s largest employer, increased enrollment to over 40,000 for the 2012-2013 school year.

Subaru, the area’s largest industrial employer and producer of the Subaru Legacy, Outback and Tribeca, recently announced the addition of more production capacity for a new model to be built there. Wabash National, the area’s second largest industrial employer, continues to hire and intends to employ 60 more welders for a new line for production of bulk liquid storage containers. Nanshan America began operating its new aluminum extrusion plant in Lafayette in 2012 which will employ 200 people. Alcoa will be adding a 115,000 square foot aluminum lithium plant to begin production in 2014. Overall, about 470 new jobs were created in 2012. While the developments noted above lead us to believe the most serious problems are behind us as increased hiring and new industry moving to town have continued, we expect the recovery to be long term.

We have seen progress in our problem loans as more borrowers who had fallen behind on their loans are qualifying for troubled debt restructures, have resumed payments or we have acquired control of their properties. The majority of our delinquent loans are secured by real estate and we believe we have sufficient reserves to cover incurred losses. The challenge is to get delinquent borrowers back on a workable payment schedule or if that is not feasible, to get control of their properties through an overburdened court system. In 2012, we acquired 5 properties through deeds-in-lieu of foreclosure and 5 properties through foreclosure and sold 36 OREO properties. In the first quarter of 2013, we acquired one property through a sheriff’s sale and sold the one property we had in OREO at December 31, 2012.

The funds we use to make loans come primarily from deposits from customers in our market area, from brokered deposits and from Federal Home Loan Bank (“FHLB”) advances. In addition we maintain an investment portfolio of available-for-sale securities to provide liquidity as needed. Our preference is to rely on local deposits unless the cost is not competitive, but if the need is immediate we will acquire pre-payable FHLB advances which are immediately available for member banks within their borrowing tolerance and can then be replaced with local or brokered deposits as they become available. We will also consider purchasing fixed term FHLB advances or brokered deposits as needed. We generally prefer brokered deposits over FHLB advances when the cost of raising money locally is not competitive. The deposits are available with a range of terms, there is no collateral requirement and the money is predictable as it cannot be withdrawn early except in the case of the death of a depositor and there is no option to have the money rollover at maturity. In the first quarter of 2013 total deposits remained fairly flat, increasing $720,000, from $308.6 million to $309.4 million. This increase consisted of a $440,000 increase in our core deposits and a $280,000 increase in our higher rate time accounts. Our reliance on brokered funds remained unchanged in the first quarter of 2013 with the balance remaining at $13.7 million as we wait for maturities which give us the opportunity to repay these funds. While we always welcome local deposits, the cost and convenience of brokered funds make them a useful alternative. We will also continue to rely on FHLB advances to provide immediate liquidity and help manage interest rate risk.

portfolios and the size of our net interest margin – the difference between the income generated from loans and the cost of funding. Our net interest income also depends on the shape of the yield curve. The Federal Reserve has held short-term rates at almost zero for the last three years while long-term rates have fallen to the 3.0% range. Because deposits are generally tied to shorter-term market rates and loans are generally tied to longer-term rates this would typically be viewed as a positive step and in fact our net interest margin increased to a record high of 4.12% before falling to 3.87% at year end. The decrease was generally due to the continued decline in loan rates while deposit rates have started to level out. Our expectation for 2013 and 2014 is that deposits rates will remain at these low levels as the Federal Reserve continues to focus on strengthening the economy. Overall loan rates are expected to stay low or fall slightly.

Rate changes can typically be expected to have an impact on interest income. Because the Federal Reserve has stated it intends to keep rates low, we expect to see little change in the money supply or market rates in 2013. Low rates generally increase borrower preference for fixed rate products which we typically sell on the secondary market. Some existing adjustable rate loans can be expected to reprice to lower rates which could be expected to have a negative impact on our interest income, although many of our loans have already reached their interest rate floors. While we would expect to sell the majority of our fixed rate loans on the secondary market, we expect to book some higher quality loans to replace runoff in the portfolio. Although new loans put on the books in 2012 will be at comparatively low rates we expect they will provide a return above any other opportunities for investment.

Our primary expense is interest on deposits and FHLB advances which are used to fund loan growth. We offer customers in our market area time deposits for terms ranging from three months to 66 months, checking accounts and savings accounts. We also purchase brokered deposits and FHLB advances as needed to provide funding or improve our interest rate risk position. Generally when interest rates are low, depositors will choose shorter-term products and conversely when rates are high, depositors will choose longer-term products.

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

Also, on July 21, 2010, President Obama signed into law the Dodd-Frank Act, which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that will profoundly affect how community banks, thrifts, and small bank and thrift holding companies, such as LSB Financial, will be regulated in the future. Among other things, these provisions abolish the OTS and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, impose new capital requirements on bank and thrift holding companies, and impose limits on debit card interchange fees charged by large banks (commonly known as the Durbin Amendment).

The Dodd-Frank Act also established the Consumer Financial Protection Bureau (the “CFPB”) within the Federal Reserve, which has broad authority to regulate consumer financial products and services and entities offering such products and services, including banks. Many of the consumer financial protection functions formerly assigned to the federal banking and other designated agencies are now performed by the CFPB. The CFPB has a large budget and staff, and has broad rulemaking authority over providers of credit, savings, and payment services and products. In this regard, the CFPB has the authority to implement regulations under federal consumer protection laws and enforce those laws against, and examine, financial institutions. State officials also will be authorized to enforce consumer protection rules issued by the CFPB. This bureau also is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities. The CFPB also is directed to prevent “unfair, deceptive or abusive practices” and ensure that all consumers have access to markets for consumer financial products and services, and that such markets are fair, transparent, and competitive. Although the CFPB has begun to implement its regulatory, supervisory, examination and enforcement authority, there continues to be significant uncertainty as to how the agency’s strategies and priorities will impact the Bank and LSB Financial.

The CFPB has indicated that mortgage lending is an area of supervisory focus and that it will concentrate its examination and rulemaking efforts on the variety of mortgage-related topics required under the Dodd-Frank Act, including steering consumers to less-favorable products, discrimination, abusive or unfair lending practices, predatory lending, origination disclosures, minimum mortgage underwriting standards, mortgage loan originator compensation, and servicing practices. The CFPB recently published several final regulations impacting the mortgage industry, including rules related to ability-to-repay, mortgage servicing, escrow accounts, and mortgage loan originator compensation. The ability-to-repay rule makes lenders liable if they fail to assess ability to repay under a prescribed test, but also creates a safe harbor for so-called “qualified mortgages.” The “qualified mortgages” standards include a tiered cap structure that places limits on the total amount of certain fees that can be charged on a loan, a 43% cap on debt-to-income (i.e., total monthly payments on debt to monthly gross income), exclusion of interest-only products, and other requirements. The 43% debt-to-income cap does not apply for the first seven years the rule is in effect for loans that are eligible for sale to Fannie Mae or Freddie Mac or eligible for government guarantee through the FHA or the Veterans Administration. Failure to comply with the ability-to-repay rule may result in possible CFPB enforcement action and special statutory damages plus actual, class action, and attorneys fees damages, all of which a borrower may claim in defense of a foreclosure action at any time. LSB Financial’s management is currently assessing the impact of these requirements on its mortgage lending business.

In addition, the Federal Reserve and other federal bank regulatory agencies have issued a proposed rule under the Dodd-Frank Act that would exempt “qualified residential mortgages” from the securitization risk retention requirements of the Dodd-Frank Act. The final definition of what constitutes a “qualified residential mortgage” may impact the pricing and depth of the secondary market into which we may sell mortgages we originate. At this time, we cannot predict the content of final CFPB and other federal agency regulations or the impact they might have on the Company’s financial results. The CFPB’s authority over mortgage lending, and its authority to change regulations adopted in the past by other regulators (i.e., regulations issued under the Truth in Lending Act, for example), or to rescind or ignore past regulatory guidance, could increase the Company’s compliance costs and litigation exposure.

The January 25, 2013 decision of the D.C. Circuit Court of Appeals invalidating recess appointments to the National Labor Relations Board, calls into question the recess appointment of Richard Cordray as head of the CFPB. What impact this potentially invalid appointment will have on the CFPB regulations promulgated in January, 2013 or actions taken prior to that time is undetermined at this time. The decision may also play a part in determining whether new legislation will be passed respecting the structure and funding of the CFPB, and whether Director Cordray will be appointed when his current term expires. Though it is not possible to predict the outcome of the recess appointment controversy, the decision will have implications for the Company and the Bank with respect to regulations that apply to them and to competition from other entities that may or may not be subject to regulations promulgated by the CFPB.

In addition to the CFPB’s authority over mortgage lending, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payments. Moreover, the Dodd-Frank Act requires public companies like the Company to hold shareholder advisory “say-on-pay” votes on executive compensation at least once every three years and submit related proposals to a vote of shareholders. LSB Financial held its first such “say-on-pay” vote at its 2013 annual meeting. At the annual meeting, shareholders cast over 76% of votes in favor of holding future say-on-pay votes on an annual basis. The Company’s Board of Directors had recommended a vote for annual frequency of say-on-pay votes. In light of this result and other factors it considered, the Board has determined that the Corporation will hold future say-on-pay votes on an annual basis until the next advisory vote on the frequency of say-on-pay votes occurs. The next advisory vote regarding the frequency of say-on-pay votes is required to occur no later than the Corporation’s 2019 Annual Meeting of Shareholders.

The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on the operating environment of the Company in substantial and unpredictable ways. Consequently, the Dodd-Frank Act is expected to increase our cost of doing business, it may limit or expand our permissible activities, and it may affect the competitive balance within our industry and market areas. The nature and extent of future legislative and regulatory changes affecting financial institutions, including as a result of the Dodd-Frank Act, is very unpredictable at this time. The Company’s management continues to actively monitor the implementation of the Dodd-Frank Act and the regulations promulgated thereunder and assess its probable impact on the business, financial condition, and results of operations of the Company. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Company in particular, remains uncertain.

The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to the Bank under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the proposed rules permit the countercyclical buffer to be applied only to “advanced approach banks” ( i.e. , banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Bank. The proposed rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which would be phased out over time.

The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions would be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

The proposed rules set forth certain changes for the calculation of risk-weighted assets, which we would be required to utilize beginning January 1, 2015. The standardized approach proposed rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) a proposed alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.

The proposed rules received extensive comments during a comment period that ran through October 2012. In November 2012, the federal bank regulatory agencies jointly stated that they did not expect any of the proposed rules to become effective on the original target date of January 1, 2013. Basel III specified that banks should be compliant with the new capital requirements by January 2015, but on January 6, 2013, the restrictions were eased to provide for annual increases that would result in full compliance in 2019.

Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of LSB Financial must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of LSB Financial’s significant accounting policies, see Note 1 to the Consolidated Financial Statements as of December 31, 2012 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of LSB Financial’s Board of Directors. These policies include the following:

Larger commercial loans that exhibit probable or observed credit weaknesses and all loans that are rated substandard or lower are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Bank. Included in the review of individual loans are those that are impaired as provided in FASB ASC 310-10 (formerly FAS 114, Accounting by Creditors for Impairment of a Loan). Any allowances for impaired loans are determined by the present value of expected future cash flows discounted at the loan’s effective interest rate or fair value of the underlying collateral based on the discounted appraised value. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

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

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

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

SELECTED FINANCIAL CONDITION DATA
(Dollars in Thousands)

	March 31,	December 31,	$		%
	2013	2012	Difference		Difference

Total assets	$361,190	$364,610	$(3,420	)	(0.94	)%

Loans receivable, including loans held for sale, net	275,358	281,620	(6,262	)	(2.22	)
1-4 family residential mortgage loans	99,254	100,579	(1,325	)	(1.32	)
Home equity lines of credit	15,633	16,421	(788	)	(4.80	)
Other real estate loans net of undisbursed portion of loans	154,949	159,367	(4,418	)	(2.77	)
Commercial business loans	13,953	13,290	663		4.99
Consumer loans	1,083	1,131	(48	)	(4.24	)
Loans sold (for quarter and year, respectively)	11,914	84,144	(72,230	)	(85.84	)

Non-performing loans over 90 days past due	1,834	2,907	(1,073	)	(36.91	)
Loans past due 90 days, still accruing	--	--	---		---
Loans less than 90 days past due, not accruing	2,011	3,536	(1,525	)	(43.13	)
Other real estate owned	162	256	(94	)	(36.72	)
Non-performing assets	4,007	6,699	(2,692	)	(40.19	)

Cash and due from banks	1,249	25,643	(24,394	)	(95.13	)
Available-for-sale securities	37,998	28,004	9,994		35.69
Short-term investments	22,838	5,778	17,060		295.26
Interest bearing time deposits	1,747	1,740	7		0.40

Deposits	309,357	308,637	720		0.23
Core deposits	168,144	167,704	440		0.26
Time accounts	141,213	140,933	280		0.20
Brokered deposits	13,690	13,690	---		---

FHLB advances	10,000	15,000	(5,000	)	(33.33	)
Shareholders’ equity (net)	39,554	38,955	599		1.54

Our total assets decreased $3.4 million, or 0.94%, during the three months from December 31, 2012 to March 31, 2013. Primary components of this decrease were a $7.3 million net decrease in cash and due from banks and short-term investments, a $6.3 million decrease in net loans receivable including loans held for sale, offset by a $10.0 million increase in available for sale securities. Federal Home Loan Bank advances decreased by $5.0 million and deposits increased $720,000. The net decrease in cash and short-term investments was generally due to the repayment of the maturing FHLB advance and the purchase of securities. The remaining purchase of securities was funded by loan repayments as borrowers continued to take advantage of unprecedented low rates to refinance their mortgages to lower rate fixed rate mortgages which we sell on the secondary market, and to continuing low loan demand. In addition, despite the very low rates on deposits we continued to see increases in core transaction and savings accounts as depositors’ uncertainty about the economy led them to place the money in accounts where it was readily available if needed.

Non-performing assets, which include non-accruing loans and foreclosed assets, decreased from $6.7 million at December 31, 2012 to $4.0 million at March 31, 2012. Non-accruing loans at March 31, 2013 were comprised of $3.5 million, or 90.59%, of one- to four-family residential real estate loans; $140,000, or 3.65%, of loans on land; $128,000 or 3.32%, of commercial property loans, $73,000, or 1.91%, of multi-family property loans, and $20,000, or 0.55%, of non real estate loans. Non-performing assets at March 31, 2013 also included one $162,000 foreclosed property compared to $256,000 at December 31, 2012. At March 31, 2013, our allowance for loan losses equaled 2.17% of total loans compared to 2.06% at December 31, 2012. The allowance for loan losses at March 31, 2013 totaled 151.29% of non-performing assets compared to 88.06% at December 31, 2012, and 157.66% of non-performing loans at March 31, 2013 compared to 91.57% at December 31, 2012. Our non-performing assets equaled 1.11% of total assets at March 31, 2013 compared to 1.84% at December 31, 2012. Non-performing loans totaling $321,000 were charged off in the first three months of 2013, offset by $83,000 of recoveries.

When a loan is added to our classified loan list, an impairment analysis is completed to determine expected losses upon final disposition of the property. An adjustment to loan loss reserves is made at that time for any anticipated losses. This analysis is updated quarterly thereafter. It may take up to two years to move a foreclosed property through the system to the point where we can obtain title to the property and dispose of it. We attempt to acquire properties through deeds in lieu of foreclosure if there are no other liens on the properties. We acquired one property in the first quarter of 2013 through a sheriff’s sale. Although we believe we use the best information available to determine the adequacy of our allowance for loan losses, future adjustments to the allowance may be necessary, and net income could be significantly affected if circumstances and/or economic conditions cause substantial changes in the estimates we use in making the determinations about the levels of the allowance for losses. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. These agencies may require the recognition of additions to the allowance based upon their judgments of information available at the time of their examination. Effective August 31, 2010, the Bank entered into a Supervisory Agreement (the “Supervisory Agreement”) with the OTS requiring the Bank, among other things, to submit for review by the OTS revised policies and procedures related to the allowance for loan losses. The Bank has implemented the revised policy which it presumes will address the concerns expressed by the OTS and has not been notified of any concerns. The Supervisory Agreement did not require an additional provision for loan loss reserves. As of July 21, 2011, all functions and all rulemaking authority of the OTS relating to federal savings associations were transferred to the OCC. As a result, the OCC will now enforce the Supervisory Agreement with the Bank.

The following two tables present, for the periods indicated, the total dollar amount of interest income earned on average interest-earning assets and the resulting yields on such assets, as well as the interest expense paid on average interest-bearing liabilities, and the rates paid on such liabilities. No tax equivalent adjustments were made. All average balances are monthly average balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Please note that beginning on January 1, 2013, deposits at the Federal Reserve were included in interest earning assets and not in cash accounts. The average balance of deposits at the Federal Reserve in the first three months of 2013 was $24.8 million compared to $28.8 million for the same period in 2012. The 2012 average balances were adjusted to include that balance.

	Three months ended March 31, 2013								Three months ended March 31, 2012
	Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate			Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate
	(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable(1)	$	277,883		$	3,477		5.00	%	$	297,733		$	4,075		5.47	%
Other investments		64,730			165		1.02			50,037			119		0.95
Total interest-earning assets		342,613			3,642		4.25			347,770			4,194		4.82

Interest-Bearing Liabilities
Savings deposits	$	30,078			4		0.05		$	26,322			6		0.09
Demand and NOW deposits		135,888			77		0.23			130,345			140		0.43
Time deposits		141,829			488		1.38			154,816			665		1.72
Borrowings		13,333			78		2.34			18,000			99		2.20
Total interest-bearing liabilities		321,128			647		0.81			329,483			910		1.10

Net interest income				$	2,995							$	3,284
Net interest rate spread							3.45	%							3.72	%
Net earning assets	$	21,485							$	18,287
Net yield on average interest-earning assets							3.50	%							3.78	%
Average interest-earning assets to average interest-bearing liabilities		1.07	x							1.06	x

General. Net income for the three months ended March 31, 2013 was $653,000, an increase of $58,000, or 9.75%, from the three months ended March 31, 2012. The increase was primarily due to a $200,000, or 33.33%, decrease in the provision for loan losses and a $210,000 increase in noninterest income, partially offset by a $289,000 decrease in net interest income and a $48,000, or 14.24%, decrease in taxes. Noninterest expenses increased by $15,000 or 0.56%.

months ended March 31, 2013, offset by a $3.2 million increase in average net interest-earning assets. The decrease in net interest margin is primarily due to the 57 basis point decrease in the average rate on interest-earning assets from 4.82% for the three months ended March 31, 2012 to 4.25% for the three months ended March 31, 2013. This was offset by a 29 basis point decrease in the average rate on interest-bearing liabilities from 1.10% to 0.81% for the same respective periods.

Interest income on loans decreased $598,000 for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 because of both lower average loan volume and a lower average yield. The average balance of loans held in our portfolio decreased by $19.9 million from $297.7 million from the three month period in 2012 to $277.9 million in 2013. The average yield on loans decreased by 47 basis points from 5.47% to 5.00% over the same period.

Interest earned on other investments and Federal Home Loan Bank stock increased by $46,000 for the three months ended March 31, 2013 compared to the same period in 2012. This was primarily the result of a $14.7 million increase in the average balance of investments and Federal Home Loan Bank stock from $50.0 million to $64.7 million over the same periods. The average yield increased from 0.95% to 1.02% over the comparable periods.

Interest expense for the three months ended March 31, 2013 decreased $263,000, or 28.90%, compared to the same period in 2012 consisting of a $242,000 decrease in interest paid on deposits and a $21,000 decrease in interest expenses on Federal Home Loan Bank advances. The lower deposit costs were primarily due to a decrease in the average rate paid on deposits from 1.04% for the first three months of 2012 to 0.74% for the first three months of 2013. Average deposits decreased by $3.7 million over this period which included a $13.0 million decrease in the average balance of higher rate time deposits offset by a $9.3 million increase in the average balance of comparatively lower rate demand deposit accounts. The increase in demand accounts was largely due to depositors opting for fund availability over higher rates until they feel more confident about the economic situation. The decrease in Federal Home Loan Bank advance expense was primarily due to a decrease in the average balance of advances from $18.0 million for the three months of 2012 to $13.3 million for the first three months of 2013 as we paid off a maturing advance as slow loan demand reduced our need for additional funds. The average rate on advances increased from 2.20% to 2.34% as the maturing advance had a shorter term and a corresponding lower rate.

The accrual of interest income is generally discontinued when a loan becomes 90 days past due. Loans 90 days past due but not yet three payments past due will continue to accrue interest as long as it has been determined that the loan is well secured and in the process of collection. Troubled debt restructurings that were non-performing at the time of their restructure are considered non-accruing loans until sufficient time has passed for them to establish a pattern of compliance with the terms of the restructure.

Changes in non-performing loans at March 31, 2013 compared to December 31, 2012 were primarily due to the Bank restoring two relationships representing $2.1 million of loans to accrual status due to greatly improved financial situations making full collectability of principal and interest likely, taking $205,000 into OREO, charging off $185,000 of non-performing loans, and receiving payoffs of $166,000. In addition we received principal payments of $97,000. Over this period we also had $106,000 of loans on residential properties become non-performing during the first quarter.

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 relevant factors. From time to time, we also use the services of a consultant to assist in the evaluation of our growing commercial real estate 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.

More specifically, our analysis of the loan portfolio will begin at the time the loan is originated, at which time each loan is assigned a risk rating. If the loan is a commercial credit, the borrower will also be assigned a similar rating. Loans that continue to perform as agreed will be included in one of the non-classified loan categories. Portions of the allowance are allocated to loan portfolios in the various risk grades, based upon a variety of factors, including historical loss experience, trends in the type and volume of the loan portfolios, trends in delinquent and non-performing loans, and economic trends affecting our market. Loans no longer performing as agreed are assigned a higher risk rating, eventually resulting in their being regarded as classified loans. A collateral re-evaluation is completed on all classified loans. This process results in the allocation of specific amounts of the allowance to individual problem loans, generally based on an analysis of the collateral securing those loans. These components are added together and compared to the balance of our allowance at the evaluation date.

At March 31, 2013 our largest areas of concern were loans on one- to four-family non-owner occupied rental properties and loans on one- to four-family owner occupied properties, and, to a lesser extent loans on non-residential properties. Loans totaling $1.0 million on one- to four-family rental properties, $635,000 on one- to four-family owner occupied properties and $217,000 on non-residential properties were past due more than 30 days at March 31, 2013. Because of the presence of Purdue University, student housing has been a niche for us, but because of the economy we are seeing problems with vacancies, especially in non-campus housing. The owner occupied property delinquencies typically reflect the elevated

We recorded a $400,000 provision for loan losses for the three months ended March 31, 2013 as a result of our analyses of our current loan portfolios, compared to $600,000 during the same period in 2012. The provisions in the quarter were necessary to maintain the allowance for loan losses at a level considered appropriate to absorb probable incurred losses in the loan portfolio. The main reason for the decrease for the first three months of 2013 compared to the same period in 2012 was the improvement in non-accruing and delinquent loans during the period. During the first three months of 2013, we charged $321,000 against loan loss reserves and had recoveries of $83,000. We expect to obtain possession of more properties in 2013 that are currently in the process of foreclosure. The final disposition of these properties may result in a loss. The $6.1 million allowance for loan losses was considered appropriate to cover probable incurred losses based on our evaluation and our loan mix. Our ratio of allowance for loan losses to non-performing assets increased from 41.46% at March 31, 2012 to 151.29% at March 31, 2013. That ratio at December 31, 2012 was 88.06%.

Our loan portfolio contains no option ARM products, interest-only loans, or loans with initial teaser rates. While we occasionally make loans with credit scores in the subprime range, these loans are only made if there are sufficient mitigating factors, not as part of a subprime mortgage plan. We occasionally make mortgages that exceed high loan-to-value regulatory guidelines for property type. We currently have $7.1 million of mortgage loans that are other than one- to four-family loans that qualify as high loan-to-value. We typically make these loans only to well-qualified borrowers. None of these loans are delinquent more than 30 days. We also have $6.3 million of one- to four-family loans which either alone or combined with a second mortgage exceed high loan-to-value guidelines. Of these loans, one loan of $19,000 was delinquent more than 30 days. Our total high loan-to-value loans at March 31, 2013 were at 32% of capital, well under regulatory guidelines of 100% of capital. We have $15.63 million of Home Equity Lines of Credit, none of which were delinquent more than 30 days at March 31, 2013.

At March 31, 2013, non-performing assets, consisting of non-accruing loans, accruing loans 90 days or more delinquent and other real estate owned, totaled $4.0 million compared to $6.7 million at December 31, 2012. In addition to our non-performing assets, we identified $20.1 million in other loans of concern where information about possible credit problems of borrowers causes management to have doubts as to the ability of the borrowers to comply with present repayment terms and may result in disclosure of such loans as non-performing assets in the future. The vast majority of these loans, as well as our non-performing assets, are well collateralized.

At March 31, 2013, we believe that our allowance for loan losses was appropriate to absorb probable incurred losses inherent in our loan portfolio. Our allowance for losses equaled 2.17% of net loans receivable and 157.66% of non-performing loans at March 31, 2013 compared to 2.06% and 88.06% at December 31, 2012, respectively. Our non-performing assets equaled 1.11% of total assets at March 31, 2013 compared to 1.84% at December 31, 2012.

Non-Interest Income. Non-interest income for the three months ended March 31, 2013 increased by $210,000, or 23.13%, compared to the same period in 2012. This was primarily due to a $158,000 increase in other income, an $81,000 decrease in the loss recognized on the sale of OREO, and a $24,000 gain on the sale of mortgage loans offset by a $53,000 decrease in service charges and fee income. The increase in other income was due primarily to a $102,000 increase in the gain on the sale of non-bank investment products through our Money Concepts program and from a $55,000 increase in mortgage loan servicing fees primarily due to a $21.4 increase in our servicing portfolio. The decrease in losses on the sale or writedown of OREO properties was primarily due the reduction in the number of OREO properties resulting in the sale of only one OREO property in the first quarter of 2013 for a loss of $2,000 compared to the sale of 21 properties in the first quarter of 2012 for a loss of $83,000. The increase in the gain on sale of mortgage loans was due primarily to generally higher fees received on loan sales including an increase in the sale of federally insured loans which typically generate higher fee income offset by a slight decrease in the number of loans sold. The decrease in service fees was primarily due to a lower volume of customer overdrafts.

Non-Interest Expense. Non-interest expense for the three months ended March 31, 2013 increased $15,000, or 0.56%, compared to the same period in 2012 due primarily to a $27,000 increase in advertising expenses connected to production of our annual report and the signing of a new bank spokesperson, and an $8,000 increase in salaries and employee benefits, offset by a $12,000 decrease in other expenses primarily due to loan related legal fees, and a $6,000 decrease in computer expenses due to the receipt of a smart phone mobile application credit.

Our primary sources of funds are deposits, repayment and prepayment of loans, interest earned on or maturation of investment securities and short-term investments, borrowings and funds provided from operations. While maturities and the scheduled amortization of loans, investments and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general market interest rates, economic conditions and competition.

Liquidity management is both a daily and long-term function for our senior management. We adjust our investment strategy, within the limits established by the investment policy, based upon assessments of expected loan demand, expected cash flows, Federal Home Loan Bank advance opportunities, market yields and objectives of our asset/liability management program. Base levels of liquidity have generally been invested in interest-earning overnight and time deposits with the Federal Home Loan Bank of Indianapolis and more recently at the Federal Reserve since they have started to pay interest on deposits in excess of reserve requirements and

We anticipate that we will have sufficient funds available to meet current funding commitments. At March 31, 2013, we had outstanding commitments to originate loans and available lines of credit totaling $36.1 million and commitments to provide funds to complete current construction projects in the amount of $3.0 million. We had $1.8 million of outstanding commitments to sell residential loans. Certificates of deposit which will mature in one year or less totaled $80.1 million at March 31, 2013. Included in that number are $2.1 million of brokered deposits. Based on our experience, certificates of deposit held by local depositors have been a relatively stable source of long-term funds as such certificates are generally renewed upon maturity since we have established long-term banking relationships with our customers. Therefore, we believe a significant portion of such deposits will remain with us, although this cannot be assured. Brokered deposits can be expected not to renew at maturity and will have to be replaced with other funding upon maturity. We have no Federal Home Loan Bank advances maturing in the next twelve months.

Federal insured savings institutions are required to maintain a minimum level of regulatory capital. If the requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. As of March 31, 2013 and December 31, 2012, Lafayette Savings was categorized as well capitalized. Our actual and required capital amounts and ratios at March 31, 2013 and December 31, 2012 are presented below:

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2013	(Dollars in Thousands)
Total risk-based capital (to risk-weighted assets)	$	42,109		16.2	%	$	20,790		8.0	%	$	25,987		10.0	%
Tier I capital (to risk-weighted assets)		38,826		14.9			10,394		4.0			15,592		6.0
Tier I capital (to adjusted total assets)		38,826		10.7			10,841		3.0			18,068		5.0

As of December 31, 2012
Total risk-based capital (to risk-weighted assets)	$	41,400		16.0	%	$	20,694		8.0	%	$	25,868		10.0	%
Tier I capital (to risk-weighted assets)		38,134		14.7			10,347		4.0			15,521		6.0
Tier I capital (to adjusted total assets)		38,134		10.5			10,928		3.0			18,213		5.0

Effective August 31, 2010, the Company entered into a Memorandum of Understanding (“MOU”) with the OTS, requiring the Company to submit to the OTS by October 31, 2010 a capital plan for enhancing the consolidated capital of the Company for the period January 1, 2011 through December 31, 2012. In its submitted capital plan, the Company proposes to maintain risk-based capital ratios above twelve percent (200 basis points above the ten percent well-capitalized level), and core capital above eight percent (300 basis points above the five percent well-capitalized level). The current capital levels shown in the table above are at least 1% above these levels. On July 14, 2011, the OTS notified the Company that certain revisions to the capital plan primarily relating to consolidated capital ratios and consolidated financial statements of the Company were needed. As noted above, as a result of the Dodd-Frank Act, the Bank is being supervised by the OCC and the Company is being supervised by the Federal Reserve from and after July 21, 2011. The Company requested clarification from the Federal Reserve regarding the requested information and submitted a response on August 30, 2011 explaining a labeling correction that the Company believes addresses the concerns noted by the OTS.

The Bank’s Supervisory Agreement and the MOU require prior written non-objection of the OCC and the Federal Reserve (formerly the OTS) of the declaration or payment of dividends or other capital distributions by the Bank or the Company, respectively. In addition, the MOU requires prior approval by the Federal Reserve of any debt at the holding company level not in the ordinary course (including loans, cumulative preferred stock and subordinated debt), unless such debt is contemplated by the capital plan. LSB Financial does not now hold any such debt. The Company paid a quarterly cash dividend to its shareholders in March 2013. All required regulatory non-objections to the dividend were obtained.

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

Evaluation of Disclosure Controls and Procedures. An evaluation of the Company’s disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the Securities Exchange Act of 1934, as amended (the “Act”)), as of March 31, 2013, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Controls over Financial Reporting. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) identified in connection with the Company’s evaluation of controls that occurred during the quarter ended March 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over the financial reporting.

Effective August 31, 2010, the Bank executed an updated Supervisory Agreement (the “Supervisory Agreement”) with the Office of Thrift Supervision (“OTS”) and LSB Financial Corp. (the “Company”) entered into a Memorandum of Understanding (the “MOU”) with the OTS under which the Bank and the Company have agreed to take a number of actions within specified timeframes to address concerns identified by the OTS in connection with its 2010 examination of the Bank. These agreements replace the prior Memorandum of Understanding and Supervisory Agreement between the Bank and the OTS. As a result of the Dodd-Frank Act, from and after July 21, 2011, the Bank is being supervised by the OCC and the Company is being supervised by the Federal Reserve. As a result, the OCC will now enforce the Bank’s Supervisory Agreement and the Federal Reserve will enforce the MOU. The Supervisory Agreement and the MOU will remain in effect until terminated, modified or superseded by the OCC or Federal Reserve, respectively.

Under the Supervisory Agreement, by September 30, 2010, the Bank’s board of directors was required to provide to the OTS written workout plans for each adversely classified asset or group of classified assets to any one borrower or loan relationship of $500,000 or greater certain classified assets. The Bank must also present quarterly status reports to the OCC (formerly, the OTS). The Bank timely submitted the required workout plans and has provided, and will continue to provide, the quarterly written asset status reports as required. The Bank believes it is in compliance with this provision of the Supervisory Agreement and that these plans are a useful tool in monitoring the progress of its workouts of classified assets.

The Bank’s board of directors was also required to revise its policy on concentrations of credit and, in the event the revised limits are lower, adopt a plan to bring the Bank into compliance with the revised policy. The Bank’s board must also, on a quarterly basis, review the Bank’s compliance with the revised policy and the appropriateness of its concentration limits given current economic conditions and the Bank’s capital position. On September 20, 2010, the Bank’s board of directors approved a revised Concentrations of Credit Policy and Reduction Plan and continues to review the policy and compliance therewith on a quarterly basis. The Bank believes it is in compliance with these provisions of the Supervisory Agreement, and that its concentrations in the area of one- to four-family non-owner occupied rental properties have been reduced as a result of these actions.

The Bank was also required to revise its policies and procedures related to the establishment and maintenance of its allowance for loan losses and submit the revised policy to the Regional Director of the OTS for review and comment. However, the Supervisory Agreement did not require an additional provision for loan loss reserves. The Bank revised its allowance for loan losses policy on September 21, 2010. On June 20, 2011, the Bank’s board of directors further revised the policy to add clarification with respect to the requirement for outside appraisals. As a result of these actions, the Bank now obtains appraisals performed by a state-certified appraiser on all higher risk transactions. The Bank believes that it is in compliance with this provision of the Supervisory Agreement.

The Bank was required to submit to the OTS an updated business plan for the period beginning January 1, 2011 through December 31, 2012. The Bank submitted a three-year Business Plan to the OTS by October 31, 2010 which sets forth minimum capital goals of 8 percent and 12 percent for Tier 1 (Core) and risk-based capital, respectively. The Plan outlines strategies that will be employed to boost earnings and preserve capital, and includes pro-forma financial projections and budget assumptions. Any material modifications to the Business Plan must receive prior, written non-objection of the OCC (formerly the OTS). By December 31, 2011, and each December 31st thereafter while the Supervisory Agreement remains in effect, the Business Plan must be updated and submitted to the OCC (formerly the OTS). The OTS Regional Director notified the Bank on July 14, 2011 that the Plan was acceptable and should be implemented immediately. The Bank has implemented the Business Plan and there have been no material modifications to the Business Plan since submission. The Bank believes it is in compliance with this provision of the Supervisory Agreement, except to the extent not yet applicable. The Bank believes that these actions relating to its Business Plan have improved its budgeting process.

The Bank’s board of directors is also required to review written quarterly variance reports on the Bank’s compliance with the Business Plan. A copy of each variance report is to be provided to the OCC (formerly the OTS) within five (5) days after review by the board. A budget variance report explaining the reasons for material variances from original projections is submitted to the Bank’s board of directors within 45 days of the quarter end. The board discusses the impact of noted variances and determines whether or not corrective action is required. The Bank believes it is in compliance with this provision of the Supervisory Agreement.

The Supervisory Agreement requires prior written non-objection of the OCC (formerly the OTS) of the declaration or payment of dividends or other capital distributions by the Bank. The Bank has not declared or paid dividends, nor has it made any other capital distribution to the Company without the required prior approval. The Bank’s last approved dividend to the Company was paid on March 1, 2013. All required regulatory non-objections to the dividend declaration were obtained. The Bank is in compliance with this provision of the Supervisory Agreement.

The Supervisory Agreement places restrictions on the Bank with respect to certain operating activities, requiring prior notice to the OCC (formerly the OTS) of changes in directors and senior executive officers and prior written non-objection from the OCC (formerly the OTS) with respect to senior executive officer or director compensation, material third party service provider contracts, and asset growth over certain levels until the approval of the Bank’s Business Plan. Asset growth resulting from lending activities has not exceeded interest credited since third quarter 2010 (the quarter in which the Supervisory Agreement was executed). No payments covered by the Supervisory Agreement’s restriction on “golden parachute payments” as defined in 12 CFR § 359.1(f) have been made or requested since the effective date of the Supervisory Agreement. The appointment of Thomas Parent and Sarah Byrn to the Board of Directors were approved by the OCC. The Bank believes it is in compliance with these provisions of the Supervisory Agreement.

MOU is effective. On July 14, 2011, the OTS notified the Company that certain revisions to the capital plan primarily relating to consolidated capital ratios and consolidated financial statements of the Company were needed. The Company requested clarification from the Federal Reserve regarding the requested information and submitted a response on August 30, 2011 explaining a labeling correction that the Company believes addresses the concerns noted by the OTS.

The MOU also requires prior written non-objection of the Federal Reserve (formerly the OTS) of the declaration or payment of dividends or other capital distributions by the Company and of any Company debt not in the ordinary course (including loans, cumulative preferred stock and subordinated debt) unless such debt is contemplated by the capital plan. The Company does not now hold any such debt. The Company believes it is in compliance with the provisions of the MOU. The Company paid a quarterly cash dividend to its shareholders in March 2013 after receiving all required regulatory non-objections.

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.

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 Plans or Programs2	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs2

January1 – January 31, 2013	---	---	---	52,817
February 1 – February 28, 2013	---	---	---	52,817
March 1 – March 31, 2013	---	---	---	52,817
Total	---	---	---	52,817

Regulation S-K Exhibit Number		Document

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

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

32		Section 906 Certification

101		The following materials from the Company’s Form 10-Q for the quarterly period ending March 31, 2013, formatted in an XBRL Interactive Data File: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income and Comprehensive Income; (iii) Consolidated Statements of Changes in Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.*

* Users of the XBRL-related information in Exhibit 101 of this Quarterly Report on Form 10-Q are advised, in accordance with Regulation S-T Rule 406T, that this Interactive Data File is deemed not filed as a part of a registration statement for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. The financial information contained in the XBRL-related documents is unaudited and unreviewed.

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

		For the quarterly period ended March 31, 2013

		OR

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

		For the transition period from _____________ to ______________

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)

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

Class		Outstanding at May 10, 2012
Common Stock, $.01 par value per share		1,556,782 shares

	Available for Sale
	Amortized Cost		Fair Value
	March 31,2013
	(in thousands)

Within one year	$	357	$	357
One to five years		12,496		12,679
Five to ten years		14,927		15,099
After ten years		---		---
		27,780		28,135

Mortgage-backed securities		9,671		9,863

Totals	$	37,451	$	37,998

Loan Class	March 31, 2013		December 31, 2012
	(In thousands)

Commercial	$	21	$	49
Owner occupied 1-4		1,033		969
Non owner occupied 1-4		2,450		2,667
Multi-family		73		76
Commercial Real Estate		128		1,302
Construction		---		---
Land		140		1,378
Consumer and home equity		---		2
Total	$	3,845	$	6,443

	Fair Value at 12/31/12	Valuation Technique	Unobservable Inputs	Range (Weighted Average)
		In thousands
March 31, 2013:
Collateral-dependent impaired loans	$2,260	Market comparable properties	Marketability discount	10%

December 31, 2012:
Collateral-dependent impaired loans	$527	Market comparable properties	Marketability discount	10%

	03/31/13		12/31/12		03/31/12
	(Dollars in Thousands)

Loans delinquent 30-59 days	$	461	$	1,176	$	870
Loans delinquent 60-89 days		---		781		1,178
Total delinquencies		461		1,957		2,048
Accruing loans past due 90 days		---		---		---
Non-accruing loans		3,845		6,443		12,195
Total non-performing loans		3,845		6,443		12,195
OREO		162		256		599

Total non-performing assets	$	4,007	$	6,699	$	12,794

	LSB FINANCIAL CORP.
	(Registrant)


Date: May 15, 2013	By:	/s/ Randolph F. Williams
		Randolph F. Williams, President
		(Principal Executive Officer)


Date: May 15, 2013	By:	/s/ Mary Jo David
		Mary Jo David, Treasurer
		(Principal Financial and Accounting Officer)