LSB Financial (LSBI) 10-K 2006 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2006
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number: 0-25070

LSB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

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

(765) 742-1064

(Registrant’s telephone number, including area code)

None

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

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

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

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [   ]     No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes [   ]     No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]     No [   ]

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ] Accelerated filer [   ] Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]     No [X]

As of June 30, 2006, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $32,279,466 based on the closing sale price as reported on the NASDAQ National Market.

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

Class	Outstanding at March 29, 2007
Common Stock, $0.01 par value per share	1,595,709 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
Annual Report to Shareholders for the Fiscal Year Ended December 31, 2006	Parts I and II
Proxy Statement for the Annual Meeting of Shareholders to be held April 18, 2007	Part III

Exhibit Index on Page E-1

LSB Financial Corp.

Form 10-K

Index

			Page
Forward-Looking Statements			1
Part I			2
	Item 1.	Business	2
	Item 1A.	Risk Factors	28
	Item 1B.	Unresolved Staff Comments	29
	Item 2.	Properties	30
	Item 3.	Legal Proceedings	30
	Item 4.	Submission of Matters to a Vote of Security Holders	30
	Item 4.5.	Executive Officers of the Registrant	30
Part II			31
	Item 5.	Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
	Item 6.	Selected Financial Data	32
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	32
	Item 8.	Financial Statements and Supplementary Data	32
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	32
	Item 9A.	Controls and Procedures	32
	Item 9B.	Other Information	32
Part III			33
	Item 10.	Directors, Executive Officers and Corporate Governance	33
	Item 11.	Executive Compensation	33
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	33
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	34
	Item 14.	Principal Accountant Fees and Services	34
Part IV			35
	Item 15.	Exhibits, Financial Statement Schedules	35

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This document, including information included or incorporated by reference, contains, and future filings by LSB Financial on Form 10-Q and Form 8-K and future oral and written statements by LSB Financial and our management may contain, forward-looking statements about LSB Financial and its subsidiaries which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities, interest rates, cost savings and funding advantages expected or anticipated to be realized by management. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by LSB Financial and its management are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and are not guarantees of future performance. We disclaim any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. The important factors we discuss below and elsewhere in this document, including those set forth under “Risk Factors,” as well as other factors discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report to Shareholders attached to this Form 10-K as Exhibit 13 and identified in our filings with the Securities and Exchange Commission (“SEC”) and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document.

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

·the strength of the United States economy in general and the strength of the local economies in which we conduct our operations; 

·the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; 

·financial market, monetary and interest rate fluctuations, particularly the relative relationship of short-term interest rates to long-term interest rates;

·the timely development of and acceptance of new products and services of Lafayette Savings Bank and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services;

·the willingness of users to substitute competitors’ products and services for our products and services;

·the impact of changes in financial services laws and regulations (including laws concerning taxes, accounting standards, banking, securities and insurance); 

·the impact of technological changes;

·acquisitions; 

·changes in consumer spending and saving habits; and

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

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PART I

Item 1.Business

General

LSB Financial Corp. (“LSB Financial” or the “Company”) is an Indiana corporation which was organized in 1994 by Lafayette Savings Bank, FSB (“Lafayette Savings”) for the purpose of becoming a thrift institution holding company. Lafayette Savings is a federally chartered stock savings bank headquartered in Lafayette, Indiana. Originally organized in 1869, Lafayette Savings converted to a federal savings bank in 1984. Lafayette Savings’ deposits are insured up to the applicable limits by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the “FDIC”). In February 1995, Lafayette Savings converted to the stock form of organization through the sale and issuance of 1,029,576 shares of its common stock to LSB Financial. LSB Financial’s principal asset is the outstanding stock of Lafayette Savings. LSB Financial presently has no separate operations and its business consists only of the business of Lafayette Savings. References in this Form 10-K to “we,” “us,” and “our” refer to LSB Financial and/or Lafayette Savings as the context requires.

We have been, and intend to continue to be, a community-oriented financial institution. Our principal business consists of attracting retail deposits from the general public and investing those funds primarily in permanent first mortgage loans secured by owner-occupied, one- to four-family residences, and to a lesser extent, non-owner occupied one- to four-family residential, commercial real estate, multi-family, construction and development, consumer and commercial business loans. We currently serve Tippecanoe County, Indiana and its surrounding counties through our five retail banking offices. At December 31, 2006, we had total assets of $368.4 million, deposits of $255.3 million and shareholders’ equity of $34.8 million.

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

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

Market Area

Tippecanoe County and the eight surrounding counties comprise Lafayette Savings’ primary market area. Lafayette is the county seat of Tippecanoe County and West Lafayette is the home of Purdue University. In addition to the jobs provided by these two major employers, Greater Lafayette has a strong manufacturing sector as well as many high-tech industries attracted to the area by the presence of Purdue University. The Purdue Research Park continues to attract high-tech jobs to the area, housing over 140 companies and employing nearly 2,900 people. Further growth is expected in this area. Tippecanoe County consistently shows better growth and lower unemployment rates than Indiana or the national economy because of the diverse employment base. The unemployment rate in Tippecanoe County in December 2006 was 3.7% compared to 4.7% for the State of Indiana and 4.3% nationally. This represents an improvement from 2005 when the comparable numbers were 4.6%, 5.3% and 4.9%, respectively.

Lending Activities

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

We originate both adjustable rate loans and fixed rate loans. We generally originate adjustable rate loans for retention in our portfolio in an effort to increase the percentage of loans with more frequent repricing than traditional long-term fixed rate loans. As a result of continued consumer demand for long-term fixed rate loans, we have continued to originate such loans. We underwrite these mortgages utilizing secondary market guidelines allowing them to be salable, without recourse. The sale of these loans results in additional short-term income and improves our interest-rate risk position. We generally retain servicing rights on loans sold to Freddie Mac, but release the servicing rights on loans sold to other third parties. Furthermore, in order to limit our potential exposure to increasing interest rates caused by our traditional emphasis on originating single-family mortgage loans, we have diversified our portfolio by increasing our emphasis on the origination of short-term or adjustable rate multi-family and commercial real estate loans and commercial

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business and consumer loans. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management” in the Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K.

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

At December 31, 2006, the maximum amount we could have loaned to any one borrower and the borrower’s related entities was $5.5 million. Our largest lending relationship to a single borrower or a group of related borrowers at December 31, 2006, totaled $4.9 million, consisting of a single land development loan, two loans on commercial properties and a single unsecured line of credit. The second largest lending relationship at December 31, 2006 to a single borrower or a group of related borrowers totaled $4.8 million, consisting of a single loan on a commercial property and a loan secured by a one- to four-family residence. The third largest lending relationship to a single borrower or a group of related borrowers totaled $4.8 million, consisting of a single line of credit secured by various residential properties, a single loan on a multi-family property and two unsecured lines of credit, one of which paid off on January 2, 2007. All of these loans were performing in accordance with their terms at December 31, 2006. At December 31, 2006, we had thirty other loans or lending relationships to a single borrower or group of related borrowers with a principal balance in excess of $2.0 million.

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

	December 31,
	2002					2003					2004					2005					2006
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Real Estate Loans
One- to four-family	$	144,086		50.54	%	$	131,562		45.68	%	$	140,356		42.95	%	$	136,982		40.31	%	$	142,045		43.70	%
Multi-family		35,381		12.41			38,045		13.21			40,279		12.33			40,094		11.80			30,160		9.28
Commercial		46,295		16.24			50,906		17.68			70,644		21.62			83,834		24.67			74,710		22.98
Land and land development		11,064		3.88			12,242		4.25			14,306		4.38			17,596		5.18			18,466		5.68
Construction		18,188		6.38			21,389		7.43			21,277		6.51			18,500		5.44			19,228		5.91
Total real estate loans		255,014		89.45			254,144		88.25			286,862		87.79			297,006		87.40			284,609		87.55
Other Loans
Consumer loans:
Home equity		14,716		5.16			17,581		6.11			21,468		6.58			19,786		5.82			16,276		5.01
Home improvement		221		0.08			16		0.01			432		0.13			412		0.12			417		0.13
Automobile		2,234		0.79			2,102		0.73			1,838		0.56			2,029		0.60			2,285		0.70
Deposit account		111		0.04			66		0.02			82		0.03			121		0.04			285		0.09
Other		1,636		0.57			1,765		0.61			251		0.08			272		0.08			267		0.08
Total consumer loans		18,918		6.64			21,530		7.48			24,071		7.37			22,620		6.66			19,530		6.01
Commercial business loans		11,147		3.91			12,310		4.27			15,823		4.84			20,180		5.94			20,935		6.44
Total other loans		30,065		10.55			33,840		11.75			39,894		12.21			42,800		12.60			40,465		12.45
Total loans		285,079		100.00	%		287,984		100.00	%		326,755		100.00	%		339,806		100.00	%		325,074		100.00	%
Less:
Loans in process		4,914					6,954					5,294					5,508					4,167
Deferred fees and discounts		272					366					439					475					446
Allowance for losses		1,996					3,098					2,095					2,852					2,770
Total loans receivable, net	$	277,897				$	277,566				$	318,927				$	330,971				$	317,691

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The following table shows the composition of our loan portfolio, including loans held for sale, by fixed and adjustable rate at the dates indicated. The one- to four-family fixed rate loans include $3.2 million, $5.7 million and $5.4 million of loans at December 31, 2004, 2005 and 2006, respectively, which carry a fixed rate of interest for the initial five or seven years and then convert to a one-year adjustable rate of interest for the remaining term of the loan.

	December 31,
	2002					2003					2004					2005					2006
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Fixed Rate Loans:
Real estate:
One- to four-family	$	45,200		15.85	%	$	41,284		14.34	%	$	43,840		13.42	%	$	41,050		12.08	%	$	41,105		12.65	%
Multi-family		1,658		0.58			3,586		1.24			3,869		1.17			2,934		0.86			2,793		0.86
Commercial		7,913		2.78			6,852		2.38			10,294		3.15			13,893		4.09			10,797		3.32
Construction		4,444		1.56			3,342		1.16			3,221		0.99			2,800		0.82			1,989		0.61
Land and land development		4,478		1.57			8,899		3.09			7,862		2.41			10,629		3.13			7,358		2.26
Total real estate loans		63,693		22.34			63,963		22.21			69,086		21.14			71,306		20.98			64,042		19.70
Consumer		2,915		1.02			2,676		0.93			2,546		0.78			2,814		0.83			3,234		1.00
Commercial business		6,910		2.43			6,678		2.32			9,608		2.94			9,851		2.90			9,372		2.88
Total fixed rate loans		73,518		25.79			73,317		25.46			81,240		24.86			83,971		24.71			96,648		23.58
Adjustable Rate Loans:
Real estate:
One- to four-family		98,886		34.69			90,278		31.35			96,515		29.54			95,931		28.23			100,940		31.05
Multi-family		33,723		11.83			34,459		11.97			36,410		11.14			37,160		10.94			27,367		8.42
Commercial		38,382		13.46			44,054		15.30			60,350		18.47			69,941		20.58			63,913		19.66
Construction		6,620		2.32			8,900		3.09			11,085		3.39			14,797		4.35			16,477		5.07
Land and land development		13,710		4.81			12,490		4.33			13,416		4.11			7,871		2.32			11,870		3.65
Total real estate loans		191,321		67.11			190,182		66.04			217,776		66.65			225,700		66.42			220,567		67.85
Consumer		16,003		5.61			18,854		6.55			21,524		6.60			19,805		5.83			16,296		5.01
Commercial business		4,237		1.49			5,632		1.95			6,215		1.89			10,329		3.04			11,563		3.56
Total adjustable rate loans		211,561		74.21			214,665		74.54			245,515		75.14			255,834		75.29			248,426		76.42
Total loans		285,079		100.00	%		287,984		100.00	%		326,755		100.00	%		339,805		100.00	%		325,074		100.00	%
Less:
Loans in process		4,914					6,954					5,294					5,508					4,167
Deferred fees and discounts		272					366					439					475					446
Allowance for losses		1,996					3,098					2,095					2,852					2,770
Total loans receivable, net	$	277,897				$	277,566				$	318,927				$	330,971				$	317,691

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The following schedule illustrates the maturities of our loan portfolio at December 31, 2006. Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. 

	Real Estate
	Mortgage(1)					Construction, Land and Land Development					Consumer					Commercial Business					Total
Due During Years Ending December 31,	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
(Dollars in Thousands)
2007	$	20,538		8.11	%	$	8,868		8.04	%	$	2,891		8.48	%	$	12,055		8.77	%	$	44,352		5.36	%
2008 to 2011		9,785		7.16			13,954		8.44			16,534		8.27			7,006		7.42			47,279		7.96
2012 and following		216,591		6.64			14,873		6.87			105		7.88			1,874		7.42			233,443		6.66
TOTAL	$	246,914		6.87	%	$	37,695		7.72	%	$	19,530		8.30	%	$	20,935		8.20	%	$	325,074		7.07	%

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

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The total amount of loans due to mature after December 31, 2007 which have fixed interest rates is $52.5 million, and which have adjustable or renegotiable interest rates is $228.2 million.

One- to Four-Family Residential Real Estate Lending

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

Our one- to four-family residential adjustable rate loans are fully amortizing loans with contractual maturities of up to 30 years. The interest rates on the majority of the adjustable rate loans originated by us are subject to adjustment at one-, three- or five-year intervals. Our adjustable rate mortgage products generally carry interest rates which are reset to a stated margin over the weekly average of the one-, three- or five-year U.S. Treasury rates. Increases or decreases in the interest rate of our one-year adjustable rate loans are generally limited to 2% annually with a lifetime interest rate cap of 6% over the initial rate. Increases or decreases in the interest rate of three-year and five-year adjustable rate loans are limited to a 3% annual adjustment cap with a 5% lifetime interest rate cap over the initial rate. Our one-year adjustable rate loans may be convertible into fixed rate loans after the first year and before the sixth year upon payment of a fee, do not contain prepayment penalties and do not produce negative amortization. Initial interest rates offered on our adjustable rate loans may be below the fully indexed rate. Borrowers are qualified at 2% over the initial interest rate for our one-year adjustable rate loans and at the initial interest rate for our three-year and five-year adjustable rate loans. We generally retain adjustable rate loans in our portfolio pursuant to our asset/liability management strategy. Five-year adjustable rate mortgage loans represented $12.2 million, three-year adjustable rate mortgage loans represented $74.2 million and one-year adjustable rate mortgage loans represented $4.5 million of our adjustable rate mortgage loans at December 31, 2006. We also offer a floating rate mortgage loan based on national prime rate, generally on non-owner-occupied residential loans. These loans represented $4.7 million of our adjustable rate mortgage loans at December 31, 2006.

We offer fixed rate mortgage loans to owner-occupants with maturities up to 30 years and which conform to Freddie Mac standards. We currently sell in the secondary market the majority of our long-term, conforming, fixed rate loans with terms over 15 years. Loans designated as held for sale are carried on the balance sheet at the lower of cost or market value. At December 31, 2006, we had $1.0 million in loans held for sale. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management” in the Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K. Interest rates charged on these fixed rate loans are priced on a daily basis in accordance with Freddie Mac pricing standards. These loans do not include prepayment penalties.

We also offer 30-year fixed rate mortgage loans, which, after five or seven years, convert to our standard one-year adjustable rate mortgage for the remainder of the term. Of these, $5.4 million have less than three years to their adjustment date and are included in adjustable rate loans.

We had $89.1 million in non-owner occupied one- to four-family residential loans at December 31, 2006. These loans are underwritten using the same criteria as owner-occupied, one- to four-family residential loans, but are provided at higher rates than owner-occupied loans. We offer fixed rate, adjustable rate and convertible rate loans, with terms of up to 30 years.

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

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

Multi-Family and Commercial Real Estate Lending

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

Permanent multi-family and commercial real estate loans are originated as three-year and five-year adjustable rate loans with up to a 24-year amortization. To a substantially lesser extent, such loans are originated as fixed rate or balloon loans or at a floating rate based on national prime rate, at terms up to 15 years. The adjustable rate loans are tied to an index based on the weekly average of the three-year or five-year U.S. Treasury rate, respectively, plus a stated margin over the index. Multi-family loans and commercial real estate loans have been written in amounts of up to 80% of the lesser of the appraised value of the property or the purchase price, and borrowers are generally personally liable for all or part of the indebtedness.

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

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

Construction, Land and Land Development Lending

We make construction loans to individuals for the construction of their residences as well as to builders and developers for the construction of one- to four-family residences, multi-family dwellings and commercial real estate projects. At December 31, 2006, substantially all of these loans were secured by property located within our primary market area.

Construction loans to individuals for their residences typically run six to eight months and are generally structured to be converted to permanent loans at the end of the construction phase. These construction loans are fixed rate loans, with interest rates higher than those we offer on one- to four-family loans. During the construction phase, the borrower pays interest only. Residential construction loans are underwritten pursuant to the same guidelines used for originating permanent residential loans. At December 31, 2006, we had $5.4 million of construction loans to borrowers intending to live in the properties upon completion of construction.

Construction loans to builders of one- to four-family residences generally have terms of six to eight months and require the payment of interest only at a fixed rate for the loan term. We limit builders to one home construction loan at a time, but would consider requests for more than one if the homes are presold. At December 31, 2006, we had $6.5 million of construction loans to builders of one- to four-family residences.

7

We make construction loans to builders of multi-family dwellings and commercial projects with terms up to one year and require payment of interest only at a fixed rate for the construction phase of the loan. These loans are generally structured to be converted to one of our permanent commercial loan products at the end of the construction phase. At December 31, 2006, we had $7.3 million of loans to finance the construction of multi-family dwellings and commercial projects.

We also make loans to builders for the purpose of developing one- to four-family lots and residential condominium projects. These loans typically have terms of two to three years with interest rates tied to national prime. The maximum loan-to-value ratio is 75%. The principal in these loans is typically paid down as lots or units are sold. These loans may be structured as revolving lines of credit with maturities of generally two years or less. At December 31, 2006, we had $14.8 million of development loans to builders. We also make land acquisition loans. At December 31, 2006, we had $3.7 million in loans secured by land.

Construction and development loans are obtained principally through continued business from developers and builders who have previously borrowed from us, as well as referrals from existing customers and realtors, and walk-in customers. The application process includes a submission to us of accurate plans, specifications and costs of the project to be constructed/developed which are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction, which is the land plus the building. At December 31, 2006, our largest construction and development loan was a development loan for a mixed use project for $2.6 million.

Construction and land development loans generally present a higher level of risk than loans secured by one- to four-family residences. Because of the uncertainties inherent in estimating land development and construction costs and the market for the project upon completion, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project. Construction and land development loans to borrowers other than owner-occupants also involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. We had one non-performing construction and development loan totaling $93,000 at December 31, 2006.

Consumer Lending

We originate a variety of different types of consumer loans, including home equity loans, direct automobile loans, home improvement loans, deposit account loans and other secured and unsecured loans for household and personal purposes. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The largest component of consumer lending is home equity loans, which totaled $16.3 million or 5.0% of the total loan portfolio at December 31, 2006. We are currently offering a revolving line of credit home equity loan on which the total commitment amount, when combined with the balance of the first mortgage lien and other priority liens, may not exceed 90% of the appraised value of the property, with a five-year term and minimum monthly payment requirement of interest only. At December 31, 2006, we had $18.4 million of unused credit available under our home equity line of credit program.

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

8

Commercial Business Lending

Our current commercial business lending activities encompass predominantly secured and unsecured lines of credit and loans secured by small business equipment and vehicles. At December 31, 2006, we had $4.0 million of unsecured loans and lines of credit outstanding (with $2.7 million of unused credit available) and $8.8 million of loans and lines of credit (with $1.4 million of unused credit available) secured by inventory or accounts receivable, small business equipment and vehicles. We also had $1.1 million of unused credit available on letters of credit.

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

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

Loan Originations, Purchases and Sales

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

When loans are sold to Freddie Mac, we retain the responsibility for collecting and remitting loan payments, inspecting the properties, making certain that insurance and real estate tax payments are made on behalf of borrowers, and otherwise servicing the loans. We receive a servicing fee for performing these services. We serviced mortgage loans for others totaling $148.8 million at December 31, 2006.

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

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

9

The following table shows our loan and mortgage-backed security origination, purchase, sale and repayment activities for the periods indicated. One- to four-family fixed rate loans include $2.2 million, $1.3 million and $1.5 million of loans originated during 2004, 2005 and 2006 respectively, which carry a fixed rate of interest for the initial five or seven years and then convert to a one-year adjustable rate of interest for the remaining term of the loan.

	Year Ended December 31,
	2004		2005		2006
	(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family	$	23,355	$	17,065	$	14,408
- multi-family		7,857		4,734		1,027
- commercial		22,547		17,575		14,156
- construction, land and land development		22,377		17,864		17,896
Non-real estate - consumer		6,703		224		3,105
- commercial business		3,821		4,243		8,651
Total adjustable rate		86,660		61,705		59,243
Fixed rate:
Real estate - one- to four-family		39,640		25,300		25,932
- multi-family		1,229		450		653
- commercial		5,355		10,577		7,610
- construction, land and land development		18,330		15,922		8,904
Non-real estate - consumer		2,096		2,614		2,435
- commercial business		8,204		6,609		5,708
Total fixed rate		74,855		61,472		51,242
Total loans originated		161,515		123,177		110,485
Purchases:
Total loans purchased		2,267		1,958		403
Total mortgage-backed securities purchased		---		---		5,547
Total purchases		2,267		1,958		5,950
Sales and Repayments:
Real estate - one- to four-family		28,966		19,193		16,645
- multi-family		---		333		---
- commercial		---		3,368		1,000
Total loans sold		28,966		22,894		17,645
Principal repayments		94,695		88,367		107,805
Total loans sold and repayments		123,661		111,261		125,450
Mortgage-backed securities:
Principal repayments		519		355		411
Increase (decrease) in other items, net		230		153		(150	)
Net increase (decrease)	$	39,832	$	13,672	$	(9,576	)

10

Asset Quality

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

Delinquent Loans. The following table sets forth information concerning delinquent loans at December 31, 2006, in dollar amounts and as a percentage of each category of our loan portfolio. The amounts represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.

	Loans Delinquent For:
	60-89 Days							90 Days and Over							Total Delinquent Loans
	Number		Amount		Percent of Loan Category			Number		Amount		Percent of Loan Category			Number		Amount		Percent of Loan Category
	(Dollars in Thousands)
Real Estate:
One- to four-family		25	$	1,985		1.40	%		100	$	6,811		4.80	%		125	$	8,796		6.19	%
Multi-family		1		131		0.43			1		328		1.09			2		458		1.52
Commercial		3		1,103		1.48			1		267		0.36			4		1,370		1.83
Construction and land development		4		612		1.62			2		61		0.16			6		673		1.78
Consumer		2		8		0.04			2		41		0.21			4		49		0.25
Commercial Business		3		36		0.17			1		3		0.01			4		39		0.19
Total		38	$	3,875		1.19	%		107	$	7,511		2.31	%		145	$	11,385		3.50	%

11

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

	December 31,
	2002			2003			2004			2005			2006
	(Dollars in Thousands)
Non-accruing loans:
One- to four-family	$	2,417		$	2,146		$	2,863		$	5,309		$	6,851
Multi-family		137			0			0			841			328
Commercial real estate		173			102			501			1,652			---
Construction and land development		258			1,307			547			547			93
Consumer		93			69			34			76			89
Commercial business		232			104			262			8			3
Total		3,310			3,728			4,207			8,432			7,364
Accruing loans delinquent more than 90 days:
One- to-four-family		---			456			484			127			147
Commercial real estate		---			62			---			---			---
Total		---			518			484			127			147
Foreclosed assets:
One- to four-family		79			167			742			1,366			2,228
Commercial real estate								102			331			1,709
Construction or development		163			163			387			300			232
Consumer		37			---			---			7			---
Commercial business		---			10			---			---			---
Total		279			340			1,231			2,003			4,169
Total non-performing assets	$	3,589		$	4,586		$	5,922		$	10,563		$	11,680
Total as a percentage of total assets		1.12	%		1.44	%		1.67	%		2.83	%		3.17	%
Total assets	$	319,096		$	319,272		$	355,045		$	372,664		$	368,400

12

For the year ended December 31, 2006, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms was $494,000, none of which was included in interest income.

Other Loans of Concern. In addition to the non-performing assets set forth in the table above under the caption “Non-Performing Assets,” as of December 31, 2006, there was also an aggregate of $21.8 million in net book value of loans with respect to which past payment history of the borrowers may cause management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. Included in the other loans of concern are (i) 92 loans to six borrowers who each had an average of 15 one- to four-family rental properties with a total outstanding balance of $6.4 million, where management has concerns about the ability of the borrowers to keep the rental properties leased and about the cash flow of the borrowers; (ii) a land development loan to a single borrower with an outstanding balance of $2.5 million, where management has concerns about the scheduled take-down of the lots; and (iii) four commercial business loans to a single borrower with an outstanding balance of $2.0 million, secured by various types of collateral, where management has concerns about the cash flow of the borrower.

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

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

In connection with the filing of our periodic reports with the OTS and in accordance with our classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. At December 31, 2006, we had classified $17.4 million of our loans as substandard, $4 million as doubtful and none as loss. At December 31, 2006, we had designated $4.6 million in loans as special mention.

Allowance for Loan Losses. We establish our provision for loan losses based on a systematic analysis of risk factors in the loan portfolio. The analysis includes consideration of concentrations of credit, past loss experience, current economic conditions, the amount and composition of the loan portfolio, estimated fair value of the underlying collateral, delinquencies, and other factors. We also consider the loss experience of similar portfolios in comparable lending markets as well as using the services of a consultant to assist in the evaluation of our growing commercial loan portfolio. On at least a quarterly basis, a formal analysis of the adequacy of the allowance is prepared and reviewed by management and the Board of Directors. This analysis serves as a point-in-time assessment of the level of the allowance and serves as a basis for provisions for loan losses.

Our analysis of the loan portfolio begins by assigning each new loan a risk rating at the time the loan is originated, corresponding to one of ten risk categories. If the loan is a commercial credit, the borrower will also be assigned a rating. Adjustments are made to these ratings on a quarterly basis, based on the performance of the individual loan. Loans no longer performing as agreed are assigned a lower risk rating, eventually resulting in their being regarded as classified loans. A collateral re-evaluation form is completed on all classified loans, identifying expected losses, generally based on an analysis of the collateral securing those loans. A portion of the loan loss reserve is allocated to the classified loans in the amount identified as at risk.

13

Portions of the allowance are also allocated to non-classified loan portfolios which have been segregated into categories of loans having similar characteristics and similar inherent risk. These categories include loans on: one- to four-family owner-occupied properties, one- to four-family non-owner-occupied properties, multi-family rental properties, non-residential properties, land and land development projects, construction projects, second mortgages and home equity loans, unsecured commercial business loans, secured commercial business loans, and consumer loans. Factors considered in determining the percentage allocation for each category include: historical loss experience, underwriting standards, trends in property values, trends in delinquent and non-performing loans, and economic trends affecting our market. Although we believe we use the best information available to make such determinations, future adjustments to reserves may be necessary, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Provision for Loan Losses” in the Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K.

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

	Year Ended December 31,
	2002			2003			2004			2005			2006
	(Dollars in Thousands)
Balance at beginning of period	$	1,432		$	1,996		$	3,098		$	2,095		$	2,852
Charge-offs:
One- to four-family		15			---			566			218			585
Commercial real estate		---			---			---			16			274
Construction or development		75			---			876			184			278
Consumer		56			84			76			52			4
Commercial business		--			45			2			22			8
Total charge-offs		146			129			1,520			492			1,149
Recoveries:
One- to four-family		3			---			---			---			---
Construction or development		---			---			3			42			46
Consumer		7			6			11			7			3
Commercial business		---			---			3			---			---
Total recoveries		10			6			17			49			49
Net charge-offs		136			123			1,503			443			1,100
Additions charged to operations		700			1,225			500			1,200			1,018
Balance at end of period	$	1,996		$	3,098		$	2,095		$	2,852		$	2,770
Net charge-offs to average loans outstanding		0.05	%		0.05	%		0.50	%		0.13	%		0.34	%
Allowance for loan losses to non-performing assets		55.61	%		67.55	%		35.37	%		26.99	%		23.72	%
Allowance for loan losses to net loans at end of period		0.72	%		1.12	%		0.66	%		0.86	%		0.87	%

14

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

	At December 31,
	2002							2003							2004							2005							2006
	Amount of Loan Loss Allowance		Loan Amounts by Category		Percent of Loans in Each Category to Total Loans			Amount of Loan Loss Allowance		Loan Amounts By Category		Percent of Loans in Each Category to Total Loans			Amount of Loan Loss Allowance		Loan Amounts By Category		Percent of Loans in Each Category to Total Loans			Amount of Loan Loss Allowance		Loan Amounts By Category		Percent of Loans in Each Category to Total Loans			Amount of Loan Loss Allowance		Loan Amounts By Category		Percent of Loans in Each Category to Total Loans
	(Dollars in Thousands)
Real estate:
One- to four-family	$	698	$	144,086		50.54	%	$	815	$	131,562		45.68	%	$	470	$	140,355		42.95	%	$	636	$	136,981		40.31	%	$	1,201	$	142,045		43.70	%
Multi-family		180		35,381		12.41			225		38,045		13.21			211		40,279		12.33			219		40,094		11.80			116		30,160		9.28
Commercial real estate		325		46,295		16.24			500		50,906		17.68			586		70,644		21.62			620		83,834		24.67			459		74,710		22.98
Land and land development		362		11,064		3.88			372		12,242		4.25			253		14,306		4.38			354		17,596		5.18			390		18,466		5.68
Construction		33		18,188		6.38			651		21,389		7.43			162		21,277		6.51			192		18,500		5.44			260		19,228		5.91
Consumer		193		18,918		6.64			145		21,530		7.48			155		24,071		7.37			171		22,620		6.66			126		19,530		6.01
Commercial business		163		11,147		3.91			107		12,310		4.27			143		15,823		4.84			363		20,180		5.94			120		20,935		6.44
Unallocated		42		---		---			283		---		---			114		---		---			297		---		---			98		---		---
Total	$	1,996	$	285,079		100.00	%	$	3,098	$	287,984		100.00	%	$	2,094	$	326,755		100.00	%	$	2,852	$	339,805		100.00	%	$	2,770	$	325,074		100.00	%

15

Investment Activities

We must maintain minimum levels of securities that qualify as liquid assets under the OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets at levels we believe adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. At December 31, 2006 our liquidity ratio, liquid assets as a percentage of net withdrawable savings deposits and current borrowings was 6.09%. Our level of liquidity is a result of management’s asset/liability strategy. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management” and “- Liquidity and Capital Resources” in the Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K.

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

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

16

The following table sets forth the composition of our securities portfolio at the dates indicated. As of December 31, 2006, our investment portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our shareholders’ equity, excluding those issued by the U.S. Government and its agencies.

	December 31,
	2004					2005					2006
	Carrying Value		% of Total			Carrying Value		% of Total			Carrying Value		% of Total
	(Dollars in Thousands)
Debt securities:
Federal agency obligations	$	2,345		21.49	%	$	4,480		29.79	%	$	3,159		21.96	%
Municipal bonds		4,458		40.85			6,361		42.30			7,228		50.25
Subtotal		6,803		62.34			10,841		72.09			10,387		72.21
Other:
Federal Home Loan Bank stock		4,110		37.66			4,197		27.91			3,997		27.79
Total debt securities and Federal Home Loan Bank stock	$	10,913		100.00	%	$	15,038		100.00	%		14,384		100.00	%
Average remaining life of debt securities	3.83 years					3.52 years					4.30 years
Other interest-earning assets:
Interest-bearing deposits with Federal Home Loan Bank	$	6,818		100.00	%	$	7,687		100.00	%	$	8,336		100.00	%
Mortgage-backed securities:
Fannie Mae certificates	$	307		26.85	%	$	234		30.35	%	$	3,101		52.31	%
Freddie Mac certificates		837		73.15	%		536		69.65	%		2,828		47.69	%
Total mortgage-backed securities	$	1,144		100.00	%	$	770		100.00	%		5,929		100.00	%

17

The following table sets forth the composition and contractual maturities of our securities portfolio at December 31, 2006. Expected maturities will differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2006, all of our securities were classified as available for sale and as such were reported at fair value. The weighted average yields on tax exempt obligations have been computed on a tax equivalent basis.

	December 31, 2006
	Less than 1 year			1 to 5 Years			5 to 10 Years			Over 10 Years			Total Investment Securities
	(Dollars in Thousands)
Federal agency obligations	$	2,159		$	1,000		$	---		$	---		$	3,159
Municipal bonds		781			2,819			2,256			1,372			7,228
Fannie Mae certificates		---			188			---			2,913			3,101
Freddie Mac certificates		344			52			---			2,432			2,828
Total investment securities	$	3,284		$	4,059		$	2,256		$	6,717		$	16,316
Weighted average yield		3.74	%		4.71	%		5.60	%		5.30	%		4.66	%

Sources of Funds

General. Our primary sources of funds are deposits, repayment and prepayment of loans, interest earned on or maturation of investment securities and short-term investments, borrowings and funds provided from operations.

Deposits. We offer a variety of deposit accounts. Our deposits consist of passbook and statement savings accounts, money market accounts, NOW accounts and certificate accounts. In addition, we periodically solicit broker originated certificates of deposit when issues are available that meet our interest rate and liquidity needs. Brokered deposits at December 31, 2006 totaled $65.6 million. We rely primarily on competitive pricing policies, on-line and off-line advertising, and customer service to attract and retain these deposits.

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

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

	Year Ended December 31,
	2004			2005			2006
	(Dollars in Thousands)
Opening balance	$	225,485		$	256,631		$	265,993
Deposits		1,190,435			1,188,778			1,165,305
Withdrawals		(1,163,515	)		(1,184,682	)		(1,182,612	)
Interest credited		4,226			5,266			6,618
Ending balance	$	256,631		$	265,993		$	255,304
Net increase (decrease)	$	31,146		$	9,362		$	(10,689	)
Percent increase (decrease)		13.81	%		3.65	%		(4.02	)%

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

	December 31,
	2004					2005					2006
	Amount		Percent of Total			Amount		Percent of Total			Amount		Percent of Total
	(Dollars in Thousands)
Transaction and Savings Deposits:
Noninterest-bearing	$	16,502		6.43	%	$	18,401		6.91	%	$	18,358		7.18	%
Savings accounts (0.50% - 0.75% at December 31, 2006)		18,775		7.31			18,633		7.00			18,764		7.34
NOW Accounts (0.00% - 0.50% at December 31, 2006)		29,550		11.51			26,977		10.13			25,881		10.12
Money Market Accounts (1.0% - 4.40% at December 31, 2006)		18,393		7.16			13,099		4.92			12,273		4.80
Total Non-Certificates		83,220		32.41			77,110		28.96			75,276		29.44
Certificates:
0.00 - 1.99%		38,599		15.04			4,727		1.78			642		0.25
2.00 - 3.99%		103,810		40.43			125,744		47.23			90,877		35.55
4.00 - 5.99%		30,876		12.02			58,395		21.93			88,493		34.62
6.00 - 7.99%		126		0.05			17		0.00			17		0.01
Total certificates		173,411		67.53			188,883		70.94			180,029		70.43
Accrued interest		157		0.06			266		0.10			323		0.13
Total deposits	$	256,788		100.00	%	$	266,259		100.00	%		255,628		100.00	%

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The following table shows rate and maturity information for our certificates of deposit as of December 31, 2006.

	0.00- 1.99%			2.00- 3.99%			4.00- 5.99%			6.00- 7.99%			Total			Percent of Total
	(Dollars in Thousands)
Certificate accounts maturing in quarter ending:
March 31, 2007	$	347		$	26,873		$	8,400		$	---		$	35,620			19.79	%
June 30, 2007		225			15,863			16,014			---			32,102			17.83
September 30, 2007		70			16,391			19,625			---			36,086			20.04
December 31, 2007		---			4,761			22,664			---			27,425			15.23
March 31, 2008		---			12,196			1,389			---			13,585			7.55
June 30, 2008		---			3,372			4,559			---			7,931			4.41
September 30, 2008		---			2,473			6,682			---			9,155			5.09
December 31, 2008		---			2,954			1,743			---			4,697			2.61
March 31, 2009		---			2,216			4,112			---			6,328			3.52
June 30, 2009		---			705			32			---			737			0.41
September 30, 2009		---			661			267			---			928			0.52
December 31, 2009		---			724			232			---			956			0.53
Thereafter		---			1,688			2,774			17			4,479			2.49
Total	$	642		$	90,877		$	88,493		$	17		$	180,029			100.00	%
Percent of total		0.36	%		50.48	%		49.15	%		0.01	%		100.00	%		100.00	%

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The following table indicates the amount of our certificates of deposit by time remaining until maturity as of December 31, 2006.

	Maturity
	3 Months or Less		Over 3 to 6 Months		Over 6 to 12 Months		Over 12 months		Total
	(In Thousands)
Certificates of deposit less than $100,000, excluding public funds	$	15,975	$	18,262	$	23,648	$	19,963	$	77,848
Certificates of deposit of $100,000 or more, excluding public funds		18,974		13,792		35,651		27,714		96,132
Public funds		670		48		4,212		1,120		6,049
Total certificates of deposit	$	35,619	$	32,103	$	63,511	$	48,796	$	180,029

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

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

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

	Year Ended December 31,
	2004		2005		2006
	(Dollars in Thousands)
Maximum Balance Federal Home Loan Bank Advances	$	72,351	$	74,008	$	76,618
Average Balance Federal Home Loan Bank Advances		67,965		70,906		70,513

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

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	Year Ended December 31.
	2004			2005			2006
	(Dollars in Thousands)
Federal Home Loan Bank Advances	$	66,808		$	72,033		$	76,618
Weighted average interest rate of Federal Home Loan Bank Advances		4.50	%		4.39	%		4.96	%

Subsidiaries and Other Activities

Lafayette Savings owns a service corporation, L.S.B. Service Corporation. In April 1994, Lafayette Savings made an initial investment of $51,000 in L.S.B. Service Corporation when it became a 14.16% limited partner in a low-income housing project in Lafayette, Indiana, pursuant to a 10-year commitment totaling $500,000. During 2006, L.S.B. Service Corporation received a $5,000 tax credit related to its investment in the project and recorded net losses of $525. At December 31, 2006, our total investment in L.S.B. Service Corporation was $512,000.

Lafayette Savings formed Lafayette Insurance and Investments, Inc., an Indiana corporation, on December 31, 1996. Lafayette Insurance and Investments, Inc. began offering various insurance, annuity and investment products and services to our customers in June of 1997. At December 31, 2006, our total investment in Lafayette Insurance and Investments, Inc. was $23,000. During 2002, Lafayette Insurance and Investments, Inc. became inactive and remained so in 2006.

Competition

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

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

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

Regulation

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

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

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

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

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

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

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

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

FDIC-insured institutions remain subject to the requirement to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017. For the quarter ended December 31, 2006, the FICO assessment rate was equal to 1.24 cents for each $100 in domestic deposits maintained at an institution.

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

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

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Lafayette Savings’ general permissible lending limit for loans to one borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus, except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus. At December 31, 2006, our lending limit under this restriction was $5.5 million.

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

Tier 1 capital generally consists of common stockholders’ equity, noncumulative perpetual preferred stock and other tangible capital plus certain intangible assets, including a limited amount of purchased credit card receivables. Tier 2 capital consists generally of certain permanent and maturing capital instruments and allowances for loan and lease losses up to 1.25% of risk-weighted assets. When determining total capital, Tier 2 capital may not exceed Tier 1 capital. At December 31, 2006, we had no intangible assets which were included in Tier 1 capital, other than mortgage servicing rights of $1.2 million.

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

To be considered well capitalized, a savings association must have a leverage ratio of at least 5%, a Tier 1 risk-based ratio of at least 6% and a total risk-based capital ratio of 10%. As of December 31, 2006, Lafayette Savings qualified as well capitalized, with a leverage ratio of 9.2%, a Tier 1 risk-based capital ratio of 12.1% and a total risk-based capital ratio of 13.0%. The OTS may reclassify a savings association in a lower capital category or require it to hold additional capital based upon supervisory concerns on a case-by-case basis.

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

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

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

Qualified Thrift Lender Test. All savings institutions are required to meet a qualified thrift lender test to avoid certain restrictions on their operations. This test requires a savings institution to have at least 65% of its portfolio assets in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended. Under either test, these assets primarily consist of residential housing related loans and investments. At December 31, 2006, Lafayette Savings met the test.

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

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

Community Reinvestment Act. Under the Community Reinvestment Act, every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The Community Reinvestment Act requires the OTS, in connection with our examination, to assess our record of meeting the credit needs of our community and to take this record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by Lafayette Savings. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. We were examined for Community Reinvestment Act compliance in 2004 and received a rating of “Outstanding.”

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

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

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

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

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

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

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

Other Recent Legislative Developments. The Securities and Exchange Commission in 2006 adopted significant changes to its proxy statement disclosure rules relating to executive compensation. Among other things, several tables, more detailed narrative disclosures, and a new compensation discussion and analysis section are required in proxy statements. These changes have required and will require a significant commitment of managerial resources and will result in increased costs to us which could adversely affect results of operations, or cause fluctuations in results of operations, in the future.

Federal and State Taxation

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

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

A portion of our reserves for losses on loans which are presented on the statement of financial condition of retained earnings, may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder, including distributions on redemption, dissolution or liquidation, or for any other purpose except to absorb bad debt losses. As of December 31, 2006, the portion of our reserves subject to this treatment for tax purposes totaled approximately $1.9 million. We file consolidated federal income tax returns with our subsidiaries on a calendar year basis using the accrual method of accounting. We have not been audited by the IRS during the last five fiscal years.

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

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Employees

At December 31, 2006, we had a total of 96 employees, including 7 part-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.

Item 1A.    Risk Factors

Investors should consider carefully the risks and uncertainties described below, which are some of the factors that could materially adversely affect our operating results and financial condition. The risks and uncertainties described below are not necessarily the only ones that we may face.

Changes in market interest rates could adversely affect our financial condition and results of operations.

Our results of operations depend primarily on the levels of net interest income, which is the difference between the interest income earned on loans and securities and other interest-earning assets, and the interest expense on deposits and borrowed funds. Net interest income is dependent upon the volume of interest-earning assets and interest-bearing liabilities and upon the interest rate which is earned or paid on these items.

We are subject to interest-rate risk to the degree that our interest-bearing liabilities mature or reprice at different times, or on a different basis, than our interest-earning assets. Rising rates generally increase borrower preference for variable rate products which we typically keep in our portfolio. Additionally, existing adjustable rate loans can be expected to reprice to higher rates, both of which could be expected to have a favorable impact on interest income. Alternatively, continuing low interest rates could have a negative impact on our interest income as new loans are put on the books at comparatively low rates and our existing adjustable rate loans reprice to lower rates.

While we attempt to adjust our asset/liability mix in order to limit the magnitude of interest-rate risk, interest-rate risk management is not an exact science. Rather, it involves estimates as to how changes in the general level of interest rates will impact the yields earned on assets and the rates paid on liabilities. Moreover, rate changes can vary depending upon the level of rates and competitive factors. Further discussion of interest-rate risk can be found under the caption “Asset/Liability Management” in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K.

The preparation of our financial statements requires the use of estimates that may vary from actual results.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for loan losses. Due to the inherent nature of these estimates, we cannot provide absolute assurance that we will not have to increase the allowance for loan losses and/or sustain loan losses that are significantly higher than the provided allowance. While management attempts to provide an allowance for loan losses at a level adequate to cover probable incurred losses based on loan portfolio growth, past loss experience, general economic conditions, information about specific borrower situations, and other factors, future adjustments to reserves may become necessary, and net income could be significantly affected if circumstances differ substantially from assumptions used with respect to such factors. 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.

An economic slowdown in Tippecanoe County could affect our business.

Our primary market area for deposits and loans is Tippecanoe County, Indiana. An economic slowdown in this area could hurt our business. Possible consequences of such a downturn could include the following:

·increases in loan delinquencies and foreclosures;

·declines in the value of real estate and other collateral for loans; and

·a decline in the demand for our products and services.

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We are subject to extensive regulation which limits the manner and scope of our business activities.

Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on them. Policies adopted or required by these governmental authorities can affect our business operations and the availability, growth and distribution of Lafayette Savings’ investments, borrowings and deposits. In addition, the OTS periodically conducts examinations of LSB Financial and Lafayette Savings and may impose various requirements or sanctions. See “Regulation” in the description of our Business in Item 1 above for detailed information on the laws and regulations to which we are subject.

Changes in laws, regulations and policies could adversely affect our business.

Proposals to change the laws governing financial institutions are frequently raised in Congress and before bank regulatory authorities. Changes in applicable laws or policies could materially affect our business, and the likelihood of any major changes in the future and their effects are impossible to determine. Moreover, it is impossible to predict the ultimate form any proposed legislation might take or how it might affect us.

Our increased emphasis on short-term or adjustable rate multi-family, commercial real estate and land development lending and commercial business and consumer lending may expose us to increased credit risk.

One of the greatest risks facing lenders is credit risk, that is, the risk of losing principal and interest due to a borrower’s failure to perform according to the terms of a loan agreement. At December 31, 2006, $123.4 million, or 37.94%, of our total loan portfolio consisted of multi-family, commercial real estate and land development loans. Multi-family, commercial real estate and land development loans generally involve a greater degree of credit risk than one- to four-family loans because they typically have large balances and are more affected by adverse conditions in the economy. Because payments on land development loans, loans secured by multi-family properties and commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation.

At December 31, 2006, $20.9 million, or 6.44%, of our total loan portfolio consisted of commercial loans. Commercial loans generally have greater credit risk than residential mortgage loans because repayment of these loans often depends on the successful business operations of the borrowers. These loans also typically have much larger loan balances than residential mortgage loans.

At December 31, 2006, $19.5 million, or 6.01%, of our total loan portfolio consisted of consumer loans. Consumer loans generally involve greater risk than residential mortgage loans because they are unsecured or secured by assets that depreciate in value. Although we undertake a variety of underwriting, monitoring and reserving protections with respect to these types of loans, there can be no guarantee that we will not suffer unexpected losses.

Competition in our primary market area may reduce our ability to attract and retain deposits and obtain loans.

We operate in a competitive market for both originating real estate and other loans and attracting deposits. Competition in originating real estate loans comes primarily from other savings institutions, commercial banks, credit unions and mortgage bankers making loans secured by real estate located in our primary market area. Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in consumer lending. In addition, non-bank competitors are generally not subject to the extensive regulation applicable to us. Competition for loan originations and deposits may limit our future growth and earnings prospects.

Item 1B.  Unresolved Staff Comments

Not Applicable.

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Item 2.   Properties

We conduct our business at our main office and four other locations in Lafayette and West Lafayette, Indiana. We own our main office and three branch offices. The fourth branch office is leased with the term of the lease expiring in 2009. The total net book value of our premises and equipment (including land, building and leasehold improvements and furniture, fixtures and equipment) at December 31, 2006 was approximately $6.8 million. We have also purchased an office building adjacent to the main office location as our growth rate has required space for additional personnel and will for the next few years.

We maintain an on-line database of depositor and borrower customer information. The net book value of our data processing, computer equipment and software at December 31, 2006 was $323,000.

Item 3.   Legal Proceedings

We are, from time to time, involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing us in the proceedings, that the resolution of any prior and pending proceedings should not have a material effect on our financial condition or results of operations.

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

No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2006.

Item 4.5   Executive Officers of the Registrant

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

Randolph F. Williams (age 58). Mr. Williams is President and Chief Executive Officer of LSB Financial and its wholly-owned subsidiary, Lafayette Savings. Mr. Williams was appointed to the Board of Directors of LSB Financial in September 2001. He was appointed President of LSB Financial in September 2001 and Chief Executive Officer in January 2002. Mr. Williams served as President and Chief Operating Officer of Delaware Place Bank in Chicago, Illinois from 1996 until joining LSB Financial. Mr. Williams has over 25 years of banking-related experience.

Mary Jo David (age 57). Ms. David is Vice President, Chief Financial Officer and Secretary of LSB Financial and Lafayette Savings. She has held these positions with the Company since its formation in 1994 and with Lafayette Savings since 1992 and was elected a Director of LSB Financial and Lafayette Savings in 1999.

Harry A. Dunwoody (age 60). Mr. Dunwoody has served as Senior Vice President of Lafayette Savings since 1989 and was elected as a Director of the Bank in 1993. He has held the same positions with the Company since its formation in 1994. He is responsible for residential and consumer lending originations for the bank.

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PART II

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

(a)We have not sold any equity securities during the period covered by this report that were not registered under the Securities Act of 1933. Additionally, pages 59-60 of our 2006 Annual Report to Shareholders attached to this document as Exhibit 13 is incorporated herein by reference. In addition, the “Equity Compensation Plan Information” contained in Part III, Item 12 of this Form 10-K is incorporated herein by reference.

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

(c)The following table sets forth the number and price paid for repurchased shares.

Issuer Purchases of Equity Securities
Month of Purchase	Total Number of Shares Purchased1	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plan2	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan
October 1 - October 31, 2006	--	--	--	12,217
November 1 - November 30, 2006	3,000	$25.40	3,000	9,217
December 1 - December 31, 2006	--	--	--	--
Total	3,000	$25.40	3,000	9,217

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

2 We have in place a plan, announced September 27, 2004, to repurchase 5% of our common stock.

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Item 6.   Selected Financial Data

The material under the heading “Selected Financial Information” on pages 2 and 3 of our 2006 Annual Report to Shareholders attached to this document as Exhibit 13 is incorporated herein by reference.

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

Pages 4 through 25 of our 2006 Annual Report to Shareholders attached to this document as Exhibit 13 are incorporated herein by reference.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

Pages 19 and 20 of our 2006 Annual Report to Shareholders attached to this document as Exhibit 13 are incorporated herein by reference.

Item 8.   Financial Statements and Supplementary Data

Pages 25 and 28 through 55 of our 2006 Annual Report to Shareholders attached to this document as Exhibit 13 are incorporated herein by reference.

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

Not applicable.

Item 9A.   Controls and Procedures

Evaluation of disclosure controls and procedures. An evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), as of December 31, 2006 (the “Evaluation Date”), was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures in effect as of the Evaluation Date are effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in internal controls over financial reporting. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) identified in connection with our evaluation of controls that occurred during the quarter ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.   Other Information

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

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PART III

Item 10.Directors, Executive Officers and Corporate Governance

Information concerning LSB Financial directors is incorporated herein by reference to the sections of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2007 under the caption “Proposal I - Election of Directors.” Information concerning LSB Financial executive officers is included in Item 4.5 in Part I of this Form 10-K and is incorporated herein by reference.

The information relating to corporate governance required by this item is incorporated herein by reference to the section of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2007 under the caption “Corporate Governance.”

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

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2006, all Section 16(a) filing requirements applicable to our officers, directors and 10% beneficial owners were complied with except as disclosed in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2007 under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” incorporated herein by reference.

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

Item 11.Executive Compensation

Information concerning executive compensation is incorporated herein by reference to the sections of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2007 with the captions “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation of Directors,” and “Compensation Committee Report.”

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

Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to the section of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2007 with the caption “Principal Holders of Common Stock.”

33

Equity Compensation Plan Information. The following table summarizes our equity compensation plans as of December 31, 2006.

Plan Category	Number of securities to be issued upon exercise of outstanding options warrants and rights (a)		Weighted-average exercise price of outstanding options warrants and rights (b)		Number of Securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders(1)		43,575(2)		18.34 (3)		0
Equity compensation plans not approved by security holders		---		---		---
(1) LSB Financial Corp.’s 1995 Stock Option and Incentive Plan terminated on August 22, 2005 so no further options may be granted under the Stock Option and Incentive Plan. LSB Financial Corp.’s Recognition and Retention Plan terminated by its terms on August 22, 2005, so no further awards may be made under the Recognition and Retention Plan. (2) Includes 43,575 shares under LSB Financial Corp.’s Stock Option and Incentive Plan and no shares under LSB Financial Corp.’s Recognition and Retention Plan. (3) The total in Column (b) includes only the weighted-average price of stock options, as the restricted shares awarded under the Recognition and Retention Plan have no exercise price.

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

Information concerning director independence and certain relationships and transactions is incorporated herein by reference to the sections of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2007 with the captions “Corporate Governance” and “Transactions with Related Persons.”

Item 14.Principal Accountant Fees and Services

Information concerning principal accountant fees and services are incorporated herein by reference to the sections of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held in April 2007 with the captions “Accountants” and “Accountant’s Fees.”

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PART IV

Item 15.Exhibits, Financial Statement Schedules

(a)The following documents are filed as part of this report:

	Annual Report Page No(s).
Financial Statements:
Report of BKD, LLP, Independent Registered Public Accounting Firm	27
Consolidated Balance Sheets at December 31, 2006 and 2005	28
Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004	29
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004	30
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004	31
Notes to Consolidated Financial Statements	32-55
Financial Statement Schedules: All schedules are omitted as the required information either is not applicable or is included in the consolidated financial statements or related notes.

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		LSB FINANCIAL CORP.
Date:	3/26/07	By:	/s/ Randolph F. Williams
			Randolph F. Williams, President,
			Chief Executive Officer and Director
			(Duly Authorized Representative)

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

/s/ Mariellen M. Neudeck		/s/ Randolph F. Williams
Mariellen M. Neudeck, Chairman of the Board		Randolph F. Williams, President, Chief
		Executive Officer and Director
		(Principal Executive and Operating Officer)
Date:	3/29/07	Date:	3/26/07
/s/ Harry A. Dunwoody		/s/ James A. Andrew
Harry A. Dunwoody, Senior Vice President and Director		James A. Andrew, Director
Date:	3/27/07	Date:	3/27/07
/s/ Philip W. Kemmer		/s/ Peter Neisel
Philip W. Kemmer, Director		Peter Neisel, Director
Date:	3/27/07	Date:	3/27/07
/s/ Jeffrey A. Poxon		/s/ Thomas R. McCully
Jeffrey A. Poxon, Director		Thomas R. McCully, Director
Date:	3/27/07	Date:	3/27/07
/s/ Mary Jo David		/s/ Kenneth P. Burns
Mary Jo David, Vice President, Chief		Kenneth P. Burns, Director
Financial Officer, Secretary-Treasurer and Director
(Principal Financial and Accounting Officer)
Date:	3/29/07	Date:	3/27/07

36

INDEX TO EXHIBITS

Regulation S-K Exhibit Number	Document
3.1	Articles of Incorporation, filed on September 21, 1994 as an exhibit to Registrant’s Registration Statement on Form S-1 (File No. 33-84266), are incorporated by reference.
3.2	Bylaws, as amended and restated, filed as Exhibit 3.2 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002 (File No. 0-25070) are incorporated herein by reference.
4	Registrant’s Specimen Stock Certificate, filed on September 21, 1994 as an exhibit to Registrant’s Registration Statement on Form S-1 (File No. 33-84266), is incorporated herein by reference.
10.1*	Registrant’s 1995 Stock Option and Incentive Plan, filed as Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25070), is incorporated herein by reference.
10.2*	Registrant’s 1995 Recognition and Retention Plan, filed as Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (File No. 0-25070), is incorporated herein by reference.
10.3*	Form of 1995 Stock Option and Incentive Plan Non-Qualified Stock Option Agreement, filed as Exhibit 10.4 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 (File No. 0-25070), is incorporated herein by reference.
10.4*	Form of 1995 Stock Option and Incentive Plan Incentive Stock Option Agreement, filed as Exhibit 10.5 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 (File No. 0-25070), is incorporated herein by reference.
10.5*	Form of Recognition and Retention Plan Restricted Stock Agreement, filed as Exhibit 10.6 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 (File No. 0-25070), is incorporated herein by reference.
10.6*	Deferred Compensation Agreement between Lafayette Savings Bank and Randolph F. Williams, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K for the event occurring on September 29, 2005 (File No. 0-25070), is incorporated herein by reference.
10.7*	Employment Agreement dated February 9, 2006 between LSB Financial Corp. and Randolph F. Williams filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 14, 2006 (File No. 0-25070) is incorporated herein by reference.
10.8*	Employment Agreement dated February 9, 2006 between LSB Financial Corp. and Mary Jo David filed as Exhibit 10.2 to the Registrant’s 8-K filed on February 14, 2006 (File No. 0-25070) is incorporated herein by reference.
13	Annual Report to Shareholders for the Year Ended December 31, 2006.
21	Subsidiaries of Registrant.
23	Consent of BKD, LLP, Independent Registered Public Accounting Firm.

E-1

31.1	Rule 13a - 14(a) Certification (Chief Executive Officer).
31.2	Rule 13a - 14(a) Certification (Chief Financial Officer).
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Indicates exhibits that describe or evidence management contracts and plans required to be filed as exhibits.

E-2