LSB Financial (LSBI) 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2007
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________________ to ________________

Commission file number: 0-25070

LSB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Indiana	35-1934975
(State or other jurisdiction of	(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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]        No [   ]

Indicate by check mark whether the registrant is 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]

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 May 7, 2007
Common Stock, $.01 par value per share	1,595,999 shares

LSB FINANCIAL CORP.

INDEX

PART I	FINANCIAL INFORMATION	2
Item 1.	Financial Statements	2
	Consolidated Condensed Balance Sheets	2
	Consolidated Condensed Statements of Income	3
	Consolidated Condensed Statements of Changes in Shareholders’ Equity	4
	Consolidated Condensed Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	20
PART II.	OTHER INFORMATION	20
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 5.	Other Information	21
Item 6.	Exhibits	21
SIGNATURES
INDEX TO EXHIBITS

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PART IFINANCIAL INFORMATION

Item 1. Financial Statements

LSB FINANCIAL CORP.

Consolidated Condensed Balance Sheets

(Dollars in thousands except per share data)

	March 31, 2007			December 31, 2006
	(unaudited)
Assets
Cash and due from banks	$	1,511		$	1,391
Short-term investments		7,708			8,336
Cash and cash equivalents		9,219			9,727
Available-for-sale securities		14,407			16,316
Loans held for sale		801			992
Total loans		314,475			319,469
Less: Allowance for loan losses		(2,876	)		(2,770	)
Net loans		311,599			316,699
Premises and equipment, net		6,891			6,600
Federal Home Loan Bank stock, at cost		3,997			3,997
Bank owned life insurance		5,438			5,381
Interest receivable and other assets		9,269			8,688
Total Assets		361,621			368,400
Liabilities and Shareholders’ Equity
Liabilities
Deposits		254,151			255,304
Federal Home Loan Bank advances		70,118			76,618
Interest payable and other liabilities		2,124			1,638
Total liabilities		326,393			333,560
Commitments and Contingencies
Shareholders’ Equity
Common stock, $.01 par value
Authorized - 7,000,000 shares
Issued and outstanding 2007 - 1,595,999 shares, 2006 - 1,603,209 shares		15			15
Additional paid-in-capital		12,122			12,227
Retained earnings		23,082			22,623
Accumulated other comprehensive gain (loss)		9			(25	)
Total shareholders’ equity		35,228			34,840
Total liabilities and shareholders’ equity	$	361,621		$	368,400

See notes to consolidated condensed financial statements.

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LSB FINANCIAL CORP.

Consolidated Condensed Statements of Income

(Dollars in thousands, except per share data)

(Unaudited)

	Three months ended March 31,
	2007		2006
Interest and Dividend Income
Loans	$	5,580	$	5,602
Securities
Taxable		164		104
Tax-exempt		58		49
Other		67		31
Total interest and dividend income		5,869		5,786
Interest Expense
Deposits		2,026		1,899
Borrowings		876		766
Total interest expense		2,902		2,665
Net Interest Income		2,967		3,121
Provision for Loan Losses		250		150
Net Interest Income After Provision for Loan Losses		2,717		2,971
Non-interest Income
Deposit account service charges and fees		406		424
Net gains on loan sales		42		51
Gain on sale of securities and assets		0		0
Other		252		187
Total non-interest income		700		662
Non-interest Expense
Salaries and employee benefits		1,190		1,287
Net occupancy and equipment expense		314		290
Computer service		121		98
Advertising		41		58
Other		523		483
Total non-interest expense		2,189		2,216
Income Before Income Taxes		1,228		1,417
Provision for Income Taxes		449		509
Net Income	$	779	$	908
Basic Earnings Per Share	$	0.49	$	0.56
Diluted Earnings Per Share	$	0.48	$	0.56
Dividends Declared Per Share	$	0.20	$	0.17

See notes to consolidated condensed financial statements.

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LSB FINANCIAL CORP.

Consolidated Condensed Statements of Changes in Shareholders’ Equity

For the Three Months Ended March 31, 2007 and 2006

(Dollars in thousands)

(Unaudited)

	Common Stock		Additional Paid-In Capital			Retained Earnings			Benefit Plans Compensation			Accumulated Other Comprehensive Income (Loss)			Total
Balance, January 1, 2006		15		10,565			22,402			(71	)		(90	)		32,821
Reclassification of unearned compensation upon adoption of SFAS 123(R)				(22	)					22
Comprehensive income
Net income							908									908
Change in unrealized appreciation (depreciation) on available-for-sale securities, net of taxes													(7	)		(7	)
Total comprehensive income																901
Dividends on common stock, $0.17 per share							(264	)								(264	)
Purchase and retirement of stock (8,000 shares)				(226	)											(226	)
Amortization of stock option compensation				6												6
Amortization of RRP expense				7												7
ESOP shares earned				52						13						65
Balance, March 31, 2006	$	15	$	10,382		$	23,046		$	(36	)	$	(97	)	$	33,310
Balance, January 1, 2007		15		12,227			22,623						(25	)		34,840
Comprehensive income
Net income							779									779
Change in unrealized appreciation (depreciation) on available-for-sale securities, net of taxes													34			34
Total comprehensive income																813
Dividends on common stock, $0.20 per share							(320	)								(320	)
Purchase and retirement of stock (7,500 shares)				(113	)											(113	)
Stock options exercised (290 shares)				4												4
Amortization of stock option compensation				4												4
Balance, March 31, 2007	$	15	$	12,122		$	23,082		$	0		$	9		$	35,228

See notes to consolidated condensed financial statements.

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LSB FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

	Three months ended March 31,
	2007			2006
Operating Activities
Net income	$	779		$	908
Items not requiring (providing) cash
Depreciation		127			117
Provision for loan losses		250			150
Amortization of premiums and discounts on securities		4			15
ESOP shares earned		---			65
Gain on sale of loans		38			25
Loans originated for sale		(238	)		(2,704	)
Proceeds on loans sold		391			2,679
Amortization of stock options		4			6
Changes in
Interest receivable and other assets		(661	)		(1,536	)
Interest payable and other liabilities		486			97
Net cash from operating activities		1,180			(178	)
Investing Activities
Purchases of available-for-sale securities		(861	)		(997	)
Proceeds from maturities of available-for-sale securities		2,823			566
Net change in loans		4,850			4,515
Purchase of premises and equipment		(418	)		(71	)
Net cash from investing activities		6,394			4,013
Financing Activities
Net change in demand deposits, money market, NOW and savings accounts		4,918			1,144
Net change in certificates of deposit		(6,071	)		4,876
Proceeds from Federal Home Loan Bank advances		5,500			11,500
Repayment of Federal Home Loan Bank advances		(12,000	)		(19,000	)
Proceeds from stock options exercised		4			---
Repurchase of stock		(113	)		(226	)
Dividends paid		(320	)		(264	)
Net cash from financing activities		(8,082	)		(1,970	)
Increase (Decrease) in Cash and Cash Equivalents		(508	)		1,865
Cash and Cash Equivalents, Beginning of Period		9,727			9,384
Cash and Cash Equivalents, End of Period	$	9,219		$	11,249
Supplemental Cash Flows Information
Interest paid		3,030			2,743
Income taxes paid		400			400
Supplemental Non-Cash Disclosures
Capitalization of mortgage servicing rights		4			35

See notes to consolidated condensed financial statements

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LSB FINANCIAL CORP.

Notes to Consolidated Financial Statements

March 31, 2007

 Note 1 - General

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

 Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

Stock Options: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123R”). SFAS 123R addresses all forms of share-based payment awards, including shares under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123R requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. The Company has elected the modified prospective application method and, as a result, has recorded approximately $4,000 in compensation expense related to vested stock options less estimated forfeitures for the three month period ended March 31, 2007.

 Note 2 - Principles of Consolidation

 The accompanying financial statements include the accounts of LSB Financial, its wholly owned subsidiary Lafayette Savings Bank, FSB (“Lafayette Savings”), and Lafayette Savings’ wholly owned subsidiaries, LSB Service Corporation and Lafayette Insurance and Investments, Inc. All significant intercompany transactions have been eliminated upon consolidation.

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 Note 3 - Earnings per share

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

	Three months ended March 31,
	2007		2006
Weighted average shares outstanding		1,602,174		1,618,003
Shares used to compute diluted earnings per share		1,612,091		1,629,588
Earnings per share	$	0.49	$	0.56
Diluted earnings per share	$	0.48	$	0.56

 Note 4 - Future Accounting Pronouncements

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

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

 On February 15, 2007, the FASB issued its Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No.

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

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

Executive Summary

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

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

Tippecanoe County and the eight surrounding counties comprise Lafayette Savings’ primary market area. Lafayette is the county seat of Tippecanoe County and West Lafayette is the home of Purdue University. In addition to the jobs provided by these two major employers, Greater Lafayette has a strong manufacturing sector as well as many high-tech industries attracted to the area by the presence of Purdue University. The Purdue Research Park continues to attract high-tech jobs to the area, housing over 140 companies and employing nearly 2,900 people. Further growth is expected in this area. Tippecanoe County consistently shows better growth and lower unemployment rates than Indiana or the national economy because of the diverse employment base. The unemployment rate in Tippecanoe County in December 2006 was 3.7% compared to 4.7% for the State of Indiana and 4.3% nationally. County unemployment rates spiked to 4.8% in January, dropping back to 4.4% in February due to holiday cutback as well as layoffs at Alcoa and the closing of two smaller companies, Warren Industries and Lafayette Paperboard. However, a Manpower survey showed the Lafayette area to have the seventh strongest hiring plans in the country for the second quarter of 2007 with 57% of respondents intending to hire employees compared to 3% who plan to reduce staffs.

 Our primary source of income is net interest income, which is the difference between the interest income earned on our loan and investment portfolios and the interest expense incurred on deposits and borrowings. Our net interest income depends on the balance of our loan and investment portfolios and the size of our net interest margin, which is the difference between the income generated from loans and the cost of the funding. A major area of concern in the growth of net interest income is the continuing inversion of the yield curve. Since January 2004 short-term rates have continued to increase steadily while long term rates have remained comparatively flat. Because deposits are generally tied to shorter-term market rates, and loans are generally tied to longer-term rates, the shrinking spread between the two has made it more difficult to maintain desired operating income levels. Our expectation for 2007 is that both short-term and long-term rates will be relatively flat through most of the year, with the

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possibility of both declining slightly in the third or fourth quarters resulting in a yield curve that remains inverted throughout most of the year.

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

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

Our results of operations may also be affected by general and local competitive conditions, particularly those with respect to changes in market interest rates, government policies and actions of regulatory authorities.

Critical Accounting Policies

Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of LSB Financial must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of LSB Financial's significant accounting policies, see Note 1 to the Consolidated Financial Statements as of March 31, 2007. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of LSB Financial’s Board of Directors. These policies include the following:

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable losses inherent in Lafayette Savings’ loan portfolios. In determining the appropriate amount of the

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allowance for loan losses, management makes numerous assumptions, estimates and assessments.

The strategy also emphasizes diversification on an industry and customer level, regular credit quality reviews and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.

Lafayette Savings’ allowance consists of three components: probable losses estimated from individual reviews of specific loans, probable losses estimated from historical loss rates, and probable losses resulting from economic or other deterioration above and beyond what is reflected in the first two components of the allowance.

Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to Lafayette Savings. Included in the review of individual loans are those that are impaired as provided in SFAS No. 114, Accounting by Creditors for Impairment of a Loan. Any allowances for impaired loans are determined by the present value of expected future cash flows discounted at the loan’s effective interest rate or fair value of the underlying collateral. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

Homogenous smaller balance loans, such as consumer installment and residential mortgage loans are not individually risk graded. Reserves are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are based on the average net charge-off history by loan category.

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

Allowances on individual loans are reviewed quarterly and historical loss rates are reviewed annually and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

Lafayette Savings’ primary market area for lending is Tippecanoe County, Indiana. When evaluating the adequacy of allowance, consideration is given to this regional geographic concentration and the closely associated effect of changing economic conditions on Lafayette Savings’ customers.

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Mortgage Servicing Rights

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

Financial Condition

Comparison of Financial Condition at March 31, 2007 and December 31, 2006

Our total assets decreased $6.8 million or 1.84% during the three months from December 31, 2006 to March 31, 2007. Primary components of this decrease were a $5.3 million decrease in net loans receivable including loans held for sale and a $2.5 million decrease in securities and short term investments, offset by a $581,000 increase in other assets due mostly to an increase in other real estate owned. Management attributes the decrease in loans primarily to the slow recovery of the local economy, residential overbuilding in the last few years and the tightening of credit due to the interagency regulatory focus on commercial real estate lending. Because of decreased funding needs we allowed $1.2 million of deposits and $6.5 million of Federal Home Loan Bank advances to run off.

Non-performing assets, which include non-accruing loans, accruing loans 90 days past due and foreclosed assets, increased from $11.7 million at December 31, 2006 to $17.2 million at March 31, 2007. Non-performing loans and accruing loans 90 days past due totaled $12.5 million at March 31, 2007 and consisted of $9.9 million or 79.15% of one- to four-family or multi-family residential real estate loans, $2.0 million or 15.99% of loans on land or commercial property, $511,000 or 4.08%of commercial business loans and $97,000 or 0.78%of consumer loans. Non-performing assets also include $4.7 million in foreclosed assets. At March 31, 2007, our allowance for loan losses equaled 0.91% of total loans compared to 0.86% at December 31, 2006. The allowance for loan losses at March 31, 2007 totaled 16.71% of non-performing assets compared to 23.72% at December 31, 2006, and 22.97% of non-performing loans at March 31, 2007 compared to 36.88% at December 31, 2006. Our non-performing assets equaled 4.76% of total assets at March 31, 2007 compared to 3.17% at December 31, 2006. The ratio of total non-performing loans to total collateral was at 63.65% at March 31, 2007. Non-performing assets totaling $153,000 were charged off in the first three months of 2007, offset by recoveries of $9,000. These charge-offs were largely covered by existing reserves and there was no need for additional provisions to the allowance for the amounts charged off. Although we believe we use

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the best information available to determine the adequacy of our allowance for loan losses, future adjustments to the allowance may be necessary, and net income could be significantly affected, if circumstances and/or economic conditions cause substantial changes in the estimates we use in making the determinations about the levels of the allowance for losses. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. These agencies may require the recognition of additions to the allowance based upon their judgments of information available at the time of their examination.

Shareholders’ equity increased from $34.8 million at December 31, 2006 to $35.2 million at March 31, 2007, an increase of $388,000, or 1.11%, primarily as a result of net income of $779,000, partially offset by our payment of $320,000 of dividends on common stock, and the repurchase of 7,500 shares of our stock as part of a stock repurchase plan. Shareholders’ equity to total assets was 9.74% at March 31, 2007 compared to 9.46% at December 31, 2006.

Results of Operations

Comparison of Operating Results the Quarter Ended March 31, 2007 and March 31, 2006

 General. Net income for the three months ended March 31, 2007 was $779,000, a decrease of $129,000, or 14.21%, over the three months ended March 31, 2006. The decrease was primarily due to a $154,000 decrease in net interest income and a $100,000 increase in the provision for losses, partially offset by a $38,000 increase in non-interest income, a $27,000 decrease in non-interest expenses, and a $60,000 decrease in taxes on income.

 Net Interest Income. Net interest income for the three months ended March 31, 2007 decreased $154,000, or 4.93%, over the same period in 2006. This decrease was due to a 4 basis point decrease in our net interest margin (net interest income divided by average interest-earning assets) from 3.52% for the three months ended March 31, 2006 to 3.48% for the three months ended March 31, 2007 together with a $1.5 million decrease in net interest-earning assets. The decrease in net interest margin is primarily because the average rate earned on interest-earning assets increased less than the average rate paid on interest-bearing liabilities. Specifically, the average rate earned on interest-earning assets increased from 6.52% for the three months ended March 31, 2006 to 6.88% for the three months ended March 31, 2007 for an increase of 35 basis points, compared to an increase in the average rate paid on interest-bearing liabilities from 3.16% to 3.56% for the same time period.

Interest income on loans decreased $22,000, or 0.39%, for the three months ended March 31, 2007 compared to the same three months in 2006. While the average yield on loans increased from 6.77% for the first three months of 2006 to 7.14% for the first three months of 2007, due to increasing interest rates in the economy which caused both new and adjustable rate mortgages to price and reprice higher, the average balance of new loans decreased by $18.0 million due to a tightening of underwriting standards as well as the continuing sluggish local economy.

Interest earned on other investments and Federal Home Loan Bank stock increased by $105,000, or 57.07%, for the three months ended March 31, 2007 compared to the same period in 2006. This was the result of a $4.6 million increase in average balances and a 98 basis point

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increase in the average yield on other investments and Federal Home Loan Bank stock. We purchased additional investment securities to offset the slower loan growth, increasing investment securities from $24.0 million to $28.5 million and increasing the average yield from 3.07% for the first three months of 2006 to 4.05% over the same period in 2007 due to higher interest rates in the economy.

 Interest expense for the three months ended March 31, 2007 increased $237,000, or 8.89%, over the same period in 2006. This increase was due to an increase in the average rate paid on interest-bearing liabilities from 3.16% for the first three months of 2006 to 3.56% for the first three months of 2007 which more than offset the $11.9 million decrease in average interest-bearing liabilities. The increase in rates was due to generally higher interest rates in the economy, especially for shorter-term products which depositors preferred. $110,000 of the increase was caused by an increase in the average rate of Federal Home Loan Bank advances from 4.61% to 4.92%.

 Provision for Loan Losses. We establish our provision for loan losses based on a systematic analysis of risk factors in the loan portfolio. The analysis includes consideration of concentrations of credit, past loss experience, current economic conditions, the amount and composition of the loan portfolio, estimated fair value of the underlying collateral, delinquencies and industry standards. On at least a quarterly basis, a formal analysis of the adequacy of the allowance is prepared and reviewed by management and the Board of Directors. This analysis serves as a point in time assessment of the level of the allowance and serves as a basis for provisions for loan losses.

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

 We recorded a $250,000 provision for loan losses for the three months ended March 31, 2007 as a result of our analysis of our current loan portfolios compared to $150,000 for the same period in 2006. The increased provision was deemed necessary to maintain the allowance for loan losses at a level considered adequate to absorb losses inherent in the loan portfolio and cover anticipated charge-offs. During the first three months of 2007 we recorded charge-offs of $153,000 offset by recoveries of $9,000.

At March 31, 2007, non-performing assets, consisting of non-accruing loans, accruing loans 90 or more days delinquent and other real estate owned, totaled $17.2 million compared to $11.7 million at December 31, 2006. In addition to our non-performing assets, we identified $2.6 million in other loans of concern, compared to $4.6 million identified at December 31,

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2006, where known information about possible credit problems of borrowers causes management to have doubts as to the ability of the borrowers to comply with present repayment terms, and may result in disclosure of such loans as non-performing assets in the future. The vast majority of these loans, as well as our non-performing assets, are well collateralized.

 Non-Interest Income. Non-interest income for the three months ended March 31, 2007 increased by $38,000, or 5.74%, compared to the same period in 2006. This was primarily due to a $65,000 increase in other income consisting of, among other things, a $29,000 decrease in reserve for losses and other adjustments on our overdraft program, a $21,000 increase in income recognized from bank owned life insurance and an $11,000 increase in debit card fees. This increase was partially offset by an $18,000 decrease in fees on deposit accounts and a $9,000 decrease in the gain on the sale of mortgage loans due to a decrease in loans sold.

 Non-Interest Expense. Non-interest expense for the three months ended March 31, 2007 decreased $27,000 over the same period in 2006 due primarily to a $97,000 decrease in salaries due to lower benefit costs resulting from a change from an Employee Stock Ownership Plan to a 401(k) match program and lower health insurance costs due to a change in carrier, partially offset by a $40,000 increase in other expenses primarily related to foreclosed property expenses and to a $47,000 increase in occupancy and computer service expenses.

 Income Tax Expense.  Our income tax provision decreased by $60,000 for the three months ended March 31, 2007 compared to the three months ended March 31, 2006, due partly to decreased income.

Liquidity

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

We monitor our cash flow carefully and strive to minimize the level of cash held in low-rate overnight accounts or in cash on hand. We also carefully track the scheduled delivery of loans committed for sale to be added to our cash flow calculations. Our current internal policy for liquidity requires minimum liquidity of 4.0% of total assets.

Liquidity management is both a daily and long-term function for our senior management. We adjust our investment strategy, within the limits established by the investment policy, based upon assessments of expected loan demand, expected cash flows, Federal Home Loan Bank advance opportunities, market yields and objectives of our asset/liability management program. Base levels of liquidity have generally been invested in interest-earning overnight and time deposits with the Federal Home Loan Bank of Indianapolis. Funds for which a demand is not foreseen in the near future are invested in investment and other securities for the purpose of yield enhancement and asset/liability management.

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Our liquidity ratios at December 31, 2006 and March 31, 2007 were 7.79% and 7.53%, respectively, compared to a regulatory liquidity base, and 6.09% and 5.97% compared to total assets at the end of each period.

We anticipate that we will have sufficient funds available to meet current funding commitments. At March 31, 2007, we had outstanding commitments to originate loans and available lines of credit totaling $37.2 million and commitments to provide funds to complete current construction projects in the amount of $2.7 million. We had no outstanding commitments to sell residential loans. Certificates of deposit which will mature in one year or less at March 31, 2007 totaled $130.9 million. Included in that number are $39.6 million of brokered deposits. Based on our experience, certificates of deposit held by local depositors have been a relatively stable source of long-term funds as such certificates are generally renewed upon maturity since we have established long-term banking relationships with our customers. Therefore, we believe a significant portion of such deposits will remain with us, although this cannot be assured. Brokered deposits can be expected not to renew at maturity and will have to be replaced with other funding upon maturity. We also have $24.0 million of Federal Home Loan Bank advances maturing in the next twelve months.

Capital Resources

Shareholders’ equity totaled $35.2 million at March 31, 2007 compared to $34.8 million at December 31, 2006, an increase of $388,000, or 1.11%, due primarily to net income of $779,000, partially offset by our payment of dividends on common stock and the repurchase of 7,500 shares of our stock as part of a stock repurchase plan. Shareholders’ equity to total assets was 9.74% at March 31, 2007 compared to 9.46% at December 31, 2006.

Federal insured savings institutions are required to maintain a minimum level of regulatory capital. If the requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. As of December 31, 2006 and March 31, 2007, Lafayette Savings was categorized as well capitalized. Our actual and required capital amounts and ratios at December 31, 2006 and March 31, 2007 are presented below:

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	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2007
Total risk-based capital     (to risk-weighted assets)	$	36,880		13.1	%	$	22,502		8.0	%	$	28,128		10.0	%
Tier I capital      (to risk-weighted assets)		34,423		12.2			11,251		4.0			16,877		6.0
Tier I capital      (to adjusted total assets)		34,423		9.5			10,852		3.0			18,087		5.0
Tier I capital      (to adjusted tangible assets)		34,423		9.5			7,235		2.0			N/A		N/A
Tangible capital      (to adjusted tangible assets)		34,423		9.5			5,426		1.5			N/A		N/A
As of December 31, 2006
Total risk-based capital      (to risk-weighted assets)	$	36,533		13.0	%	$	22,532		8.0	%	$	28,164		10.0	%
Tier I capital      (to risk-weighted assets)		34,037		12.1			11,266		4.0			16,899		6.0
Tier I capital      (to adjusted total assets)		34,037		9.2			11,055		3.0			18,425		5.0
Tier I capital      (to adjusted tangible assets)		34,037		9.2			7,370		2.0			N/A		N/A
Tangible capital      (to adjusted tangible assets)		34,037		9.2			5,527		1.5			N/A		N/A

Disclosure Regarding Forward-Looking Statements

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

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:

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

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

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

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

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

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

· the impact of technological changes;

· acquisitions;

· changes in consumer spending and saving habits; and

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

Presented below, as of December 31, 2006 and December 31, 2005, is an analysis of our interest rate risk as measured by the effect on NPV caused by instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up 300 basis points and down 200 basis points, and compared to Board policy limits. The Board Limit column indicates the lowest allowable limits for NPV after each interest rate shock. Assumptions used in calculating the amounts in this table are OTS assumptions. No information is provided for a negative 300 basis point shift in interest rates, due to a low prevailing interest rate environment making such scenarios unlikely.

Change in	Board Limit	At December 31, 2006		At December 31, 2005
Interest Rate	Post-shock	Post-shock	Change	Post-shock	Change
(Basis Points)	NPV Ratio	NPV Ratio	(Basis Points)	NPV Ratio	(Basis Points)
300 bp	6.00%	10.38%	(156) bp	10.16%	(80) bp
200	7.00	11.25	(68)	10.58	(38)
100	8.00	11.92	(1)	10.87	(8)
0	8.00	11.94		10.96
-100	8.00	11.96	3	10.74	(22)
-200	7.00	11.92	(2)	10.31	(65)

In evaluating our exposure to interest rate risk, certain shortcomings inherent in the method of analysis presented in the foregoing table must be noted. For example, although

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certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, prepayments and early withdrawal levels may deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. As a result, the actual effect of changing interest rates may differ from that presented in the foregoing table.

Management believes that at March 31, 2007 there have been no material changes in Lafayette Savings’ interest rate sensitivity which would cause a material change in the market risk exposures that affect the quantitative and qualitative risk disclosures as presented above, from the Company’s Annual Report on Form 10-K for the period ended December 31, 2006.

Item 4. Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the Securities Exchange Act of 1934, as amended (the “Act”)), as of March 31, 2007, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) identified in connection with the Company’s evaluation of controls that occurred during the quarter ended March 31, 2007, that have materially affected, or are reasonably likely to affect, our internal control over the financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Supervisory Agreement between Lafayette Savings and the OTS (the “Agreement”) described in the Form 10-Q for the quarter ended March 31, 2006 was executed on May 15, 2006. See LSB Financial’s report on Form 10-Q for the quarter ended March 31, 2006 for a detailed description of the terms and conditions of the Agreement.

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in our Form 10-K Report for the fiscal year ended December 31, 2006.

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

The following table sets forth the number and prices paid for repurchased shares.

Issuer Purchases of Equity Securities
Month of Purchase	Total Number of Shares Purchased1		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs2		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs2
January 1 - January 31, 2007		---		---		---		9,217
February 1 - February 28, 2007		---		---		---		109,217
March 1 - March 31, 2007		7,500		26.77		7,500		101,717
Total		7,500	$	26.77		7,500		101,717

_______________________

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

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed in the Index to Exhibits are incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LSB FINANCIAL CORP.
	(Registrant)
Date: May 14, 2007	By:	/s/ Randolph F. Williams
		Randolph F. Williams, President
		(Principal Executive Officer)
Date: May 14, 2007	By:	/s/ Mary Jo David
		Mary Jo David, Treasurer
		(Principal Financial and Accounting Officer)

INDEX TO EXHIBITS

Regulation S-K Exhibit Number	Document
10.1	Form of 2007 Stock Option and Incentive Plan Incentive Stock Option Agreement
10.2	Form of 2007 Stock Option and Incentive Plan Non-qualified Stock Option Agreement
10.3	Form of Agreement for Restricted Stock Granted under LSB Financial Corp. 2007 Stock Option and Incentive Plan
31.1	Rule 13(a)-14(a) Certification (Chief Executive Officer)
31.2	Rule 13(a)-14(a) Certification (Chief Financial Officer)
32	Section 906 Certification