LSB FINANCIAL CORP - FORM 10-K - EX-13 - ANNUAL REPORT TO SHAREHOLDERS

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EX-32 - JOINT CERTIFICATION - LSB FINANCIAL CORP	lsb_10kex32.htm
EX-21 - SUBSIDIARIES - LSB FINANCIAL CORP	lsb_10kex21.htm
EX-23 - CONSENT OF BKD - LSB FINANCIAL CORP	lsb_10kex23.htm
EX-31.1 - CEO CERTIFICATION - LSB FINANCIAL CORP	lsb_10kex311.htm
EX-31.2 - CFO CERTIFICATION - LSB FINANCIAL CORP	lsb_10kex312.htm
10-K - FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 - LSB FINANCIAL CORP	lsb_10k.htm

Exhibit 13

LSB FINANCIAL CORP.

TABLE OF CONTENTS

Letter to Shareholders	i
Selected Financial Information	1
Management’s Discussion and Analysis	3
Disclosure Regarding Forward-Looking Statements	30
Auditors’ Report	33
Consolidated Financial Statements	34
Directors and Executive Officers	64
Shareholder Information	66

	FINANCIAL HIGHLIGHTS

	December 31, 2009
	(Dollars in Thousands)

	Total assets	$371,050
	Total loans, net of allowance	321,163
	Securities and short-term investments	16,162
	Deposits	277,866
	Borrowings	57,000
	Shareholders’ equity	33,884
	Shareholders’ equity as percent of assets	9.13%
	Net Income	$460

ANNUAL MEETING

The Annual Meeting of Shareholders of LSB Financial Corp. will be held April 21, 2010 at 9:00 a.m. local time at the LSB Building, located at 22 N. Second Street, Lafayette, Indiana.

LSB FINANCIAL CORP.

Dear Fellow Shareholder:

Last year, I concluded my message by acknowledging we had no clear idea how much the national recession would affect the local economy. We know now that it negatively affected our market more than we hoped but much less than it did other markets throughout the country. I promised that in 2009 we would focus our attention on preserving capital, controlling expenses, and expanding the net interest margin, and that our goal would be to continue generating positive earnings. Although we are not satisfied with our earnings, we are encouraged with the progress made on the other three objectives.

First, we ended the year with a ratio of “Tier 1 capital” to assets of 9.13%, which compares favorably with the regulatory minimum level of 5.00%. This level, virtually the same as at year-end 2008, is what we hoped to accomplish when we rejected the government’s bailout in February 2009. At that time, we felt that our conservative investment strategies and philosophy of lending close to home would serve us well as we weathered the recession. It has.

In July, to help meet our second objective, we launched the “Incredible Cost Saves” program. We asked all our employees to help us come up with cost-saving ideas. Our goal was $139,000 in savings for the last half of the year. Well, when you ask the right people, the results can be amazing! Identified savings topped $150,000, with several “saves” still being implemented.

The majority of our non-interest expense increase this year relates to the $68 million in residential loans that we generated and sold on the secondary market and the additional assessments we paid to replenish the FDIC insurance fund.

Our third objective was to improve the net interest margin. Unlike Wall Street banks, we generate nearly 80% of our revenue from our net interest income—that is, the difference between what we earn on loans and investments and what we pay out to depositors. In 2008, our net interest margin dropped 45 basis points; in 2009, however, we were able to hold the decrease to just 3 basis points, a decided improvement! The margin bottomed out in the first quarter of 2009. Each quarter during the rest of the year, the net interest margin got a little better, hitting 3.27% for the fourth quarter. One of the main contributing factors to this improvement was the yearlong effort by our branch staff to become the only bank our customers need. This emphasis resulted in a $26.6 million increase in core deposits that allowed us to pay down or run off higher-priced deposits and Federal Home Loan Bank advances.

Finally, generating profits was an industrywide struggle in 2009. The FDIC reported that one out of every four FDIC-insured institutions in Indiana lost money last year. Our net income for 2009 was $460,000, or $0.30 per share, compared to $1,740,000, or $1.12 per share, in 2008. Our results equate to a return on average equity of 1.34% and a return on assets of 0.12%, slightly better than the Indiana peer average of 0.07% and 0.01%, respectively.

That our market did not avoid the effects of the national recession showed most in our non-performing assets, which increased to $14.5 million, representing 3.91% of our total assets. This level is higher than in 2008, and is the primary reason we increased our loan loss provision

to $3.2 million for the year. To put this in perspective, $7.5 million of the non-performing loans can be attributed to six borrowers. Some 95% of our non-performing loans are collateralized by real estate with an average loan-to-value of 65%.

Although working through these situations will take time, we believe they are all manageable. In the last five years, we have had to reserve over $8 million for potential loan losses; $4 million of that provision sits in our loan loss reserve, which now represents 1.16% of total loans.

Despite numerous efforts by the federal government to ignite business lending, we continue to see fewer loan opportunities and more competition than we did last year at this time. Total loans ended the year at $321 million, down 1.7%. A substantial number of borrowers did take advantage of the first-time homebuyer tax credit and low rates to purchase or refinance their homes. In total, we generated and sold $68.7 million in residential loans, most during the first half of 2009.

Now for the positives … and we do see some in the local economy. (1) Several of the larger employers have announced callbacks. (2) Our area’s year-end 8.5% unemployment rate is better than that of either the state of Indiana or the United States. (3) Federal Housing Finance Agency data show our metropolitan statistical area (MSA) in the top 10% in appreciation four of the last five quarters. Obviously, we do not expect overnight improvement in the local economy, but we do see encouraging signs.

Lafayette Savings Bank has always operated under the principle of being a community bank. Despite the difficult economic environment, we have held fast to that belief. In 2009, we financially supported 58 local not-for-profits, and one-third of our employees took active roles as volunteer leaders in these organizations. Our community involvement was recognized during the year. We received the Marquis de Lafayette award from the Lafayette Chamber of Commerce for our community involvement. We are only the third company to receive this prestigious award, after Kirby Risk and Eli Lilly. In addition, we received the Governor’s Century Award, which recognizes businesses that have been in existence for over 100 years and have demonstrated a history of community involvement.

Finally, in 2009 we celebrated our 140th anniversary as Lafayette Savings Bank. In 140 years of operation, this may well have been the second most difficult economy for the bank. However, we started as Lafayette Savings Bank, and we remain Lafayette Savings Bank—dedicated to improving our position and shareholder value by building an ever stronger franchise in Tippecanoe County.

Thank you for your continued support during this difficult economic period, and we welcome any comments or questions.

	Respectfully,



	Randolph F. Williams
	President & Chief Executive Officer

SELECTED FINANCIAL INFORMATION

The selected financial data presented below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as the audited Consolidated Financial Statements contained elsewhere in this Annual Report.

	December 31,
	2009		2008		2007		2006		2005
	(Dollars in Thousands)
Selected Financial Condition Data:
Total assets	$	371,050	$	373,012	$	342,010	$	368,400	$	372,664
Loans receivable, including loans held for sale, net		321,163		326,639		296,908		317,691		330,971
Securities available-for-sale		11,345		11,853		13,221		16,316		11,611
Short-term investments		4,817		9,179		4,846		8,336		7,687
Deposits		277,866		258,587		232,030		255,304		265,993
Total borrowings		57,000		78,500		74,256		76,618		72,033
Shareholders’ equity		33,884		34,075		33,932		34,840		32,821

	December 31,
	2009			2008			2007			2006		2005
	(Dollars in Thousands, except share data)
Selected Operations Data:
Total interest income	$	19,659		$	21,319		$	22,882		$	23,263	$	21,498
Total interest expense		9,335			11,286			11,655			11,142		9,664
Net interest income		10,324			10,033			11,227			12,121		11,834
Provision for loan losses		3,197			1,102			1,570			1,018		1,200
Net interest income after provision for loan losses		7,127			8,931			9,657			11,103		10,634
Deposit account service charges		1,525			1,736			1,838			1,766		1,423
Gain on sales of mortgage loans		1,386			117			201			214		322
Gain on call of securities		---			---			6			---		---
Loss on real estate owned		(183	)		(156	)		(1,097	)		---		---
Other non-interest income		1,059			1,194			1,098			858		764
Total non-interest income		3,787			2,891			2,046			2,838		2,509
Total non-interest expense		10,503			9,286			9,322			8,593		8,111
Income before taxes		411			2,536			2,381			5,348		5,032
Income taxes		(49	)		796			807			1,998		1,764
Net income	$	460		$	1,740		$	1,574		$	3,350	$	3,268
Earnings per share	$	0.30		$	1.12		$	1.00		$	2.08	$	2.03
Earnings per share, assuming dilution		0.30			1.12			0.99			2.07		2.02
Dividends paid per share		0.50			1.00			0.90			0.68		0.61

	December 31,
	2009			2008			2007			2006			2005
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)		0.12	%		0.48	%		0.45	%		0.91	%		0.89	%
Return on equity (ratio of net income to average equity)		1.34			5.08			4.52			9.88			10.21
Average interest rate spread during period		2.82			2.82			3.25			3.33			3.23
Net interest margin(1)		2.94			2.97			3.42			3.48			3.37
Operating expense to average total assets		2.81			2.58			2.66			2.33			2.20
Average interest-earning assets to average interest-bearing liabilities		1.04	x		1.05	x		1.05	x		1.05	x		1.05	x

Quality Ratios:
Non-performing assets to total assets at end of period		3.91	%		2.52	%		4.08	%		3.17	%		2.83	%
Allowance for loan losses to non-performing loans		29.65			46.35			37.04			23.72			27.00
Allowance for loan losses to loans receivable		1.16			1.12			1.23			0.86			0.85

Capital Ratios:
Shareholders’ equity to total assets at end of period		9.13			9.14			9.92			9.46			8.81
Average shareholders’ equity to average total assets		9.17			9.53			9.92			9.19			8.69
Dividend payout ratio		168.48			89.43			90.00			32.69			30.05

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

(1) Net interest income divided by average interest-earning assets.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

General

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

Lafayette Savings is, and intends to continue to be, an independent, community-oriented financial institution. The Bank has been in business for 140 years and differs from many of our competitors in having a local board and local decision-making in all areas of business. In general, our business consists of attracting or acquiring deposits and lending that money out primarily as real estate loans to construct and purchase single-family residential properties, multi-family and commercial properties and to fund land development projects. We also make a limited number of commercial business and consumer loans.

We have an experienced and committed staff and enjoy a good reputation for serving the people of the community and understanding their financial needs and for finding a way to meet those needs. We contribute time and money to improve the quality of life in our market area and many of our employees volunteer for local non-profit agencies. We believe this sets us apart from the other 19 banks and credit unions that compete with us. We also believe that operating independently under the same name for over 140 years is a benefit to us - especially as local offices of large banks have less local authority than was once the case. Focusing time and resources on acquiring customers who may be feeling disenfranchised by their no-longer-local or by their very large bank has proved to be a successful strategy.

In these years of worsening recession and extraordinary economic times, we find ourselves in a community that to some extent has been sheltered from the worst effects of the slowdown. The greater Lafayette area enjoys diverse employment including several major manufacturers; a strong education sector with Purdue University and a large local campus of Ivy Tech Community College with over 8,000 students; government offices of Lafayette, West Lafayette and Tippecanoe County; and a growing high-tech presence with the Purdue Research Park. This diversity served to insulate us from some of the severity of the effects of economic downturns felt in other parts of the country. The Purdue Research Park includes 100 high-tech and life science businesses and has more than 3,700 employees earning an average annual wage of $54,000. Eleven new life science/high-tech startups were launched in 2009 and two new high tech buildings with 150,000 square feet total space opened in 2009. With the addition of the two new buildings in May, 2009, the Purdue Research Park of West Lafayette has about 364,000 square feet of incubation space, making it the largest business incubator complex in the state. The year-end report by the Lafayette Chamber of Commerce noted $341 million in capital investments made or announced in 2009. The Tippecanoe County unemployment rate peaked at 10.6% in July 2009 and ended the year at 8.5% compared to 9.9% for Indiana and 10.0% nationally.

The local economy has stayed relatively stable thanks to the presence of Purdue University which employs almost 15,000 people and has enrollment at the West Lafayette campus of over 40,000. The county also has a relatively strong manufacturing sector. Eli Lilly sold its local pharmaceutical manufacturing site to Evonic Industries and saved 700 full-time jobs. TRW opened a second plant in south Lafayette projected to employ 200 people. Subaru of Indiana just announced 2009 was its best-ever sales year, up 15% over 2008. Wabash National, after struggling in the last few years, showed earnings improvement in 2009, received $35 million in investment funds and introduced production of a new trailer design. The other area of growth involves the addition of two new hospitals, one in operation and one ready to come on line, and the resulting medical corridor currently being developed to accommodate the office space needed for related services. Ten new medical offices and clinics opened in 2009.

The community is making progress working through the effects of the overbuilding of one- to four-family housing when housing starts increased from a somewhat typical 858 starts in 2001 to 1,219 in 2004. New construction has dropped every year since, to 405 in 2009. Many of the houses which had been sold to marginally qualified borrowers reappeared on the market as foreclosed properties, further slowing the need for new housing. Tippecanoe County’s population grew slightly in 2009 and this has helped reduce the number of unoccupied houses. Unlike other parts of the country, housing values in the Metropolitan Statistical Area of which Tippecanoe County is a part have increased by 1.94% over the last 12 months according to a report from the Office of Federal Housing Enterprise Oversight.

We continue to work with borrowers who have fallen behind on their loans. The majority of our delinquent loans are secured by real estate and we believe we have sufficient reserves to cover incurred losses. The challenge is to get delinquent borrowers back on a workable payment schedule or to get control of their properties through an overburdened court system. We acquired 49 properties in 2009 through foreclosure or deeds-in-lieu of foreclosure and sold 31 properties over the same period.

The funds we use to make loans come primarily from deposits from customers in our market area, from brokered deposits and from Federal Home Loan Bank (“FHLB”) advances. In addition we maintain an investment portfolio of available-for-sale securities to provide liquidity as needed. Our preference is to rely on local deposits unless the cost is not competitive, but if the need is immediate we will acquire pre-payable FHLB advances which are immediately available for member banks within their borrowing tolerance and can then be replaced with local or brokered deposits as they become available. We will also consider purchasing brokered deposits as needed. We generally prefer brokered deposits over FHLB advances when the cost of raising money locally is not competitive. The deposits are available with a range of terms, there is no collateral requirement and the money is predictable as it cannot be withdrawn early except in the case of the death of a depositor and there is no option to have the money rollover at maturity. In 2009 local deposits grew substantially, including an increase of $26.6 million or 32.7% in core deposits, primarily because of depositors’ preference for the safety of insured deposits. Our reliance on brokered funds as a percentage of total deposits decreased in 2009 from 23.6% of deposits to 9.8% with the actual dollar amount decreasing from $61.0 million to $27.3 million. While we always welcome local deposits, the cost and convenience of brokered funds make them a useful alternative. We will also continue to rely on FHLB advances to provide immediate liquidity and help manage interest rate risk.

Our primary source of income is net interest income, which is the difference between the interest income earned on our loan and investment portfolio 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 – the difference between the income generated from loans and the cost of funding. Our net interest income also depends on the shape of the yield curve. Since January 2007, the Federal Reserve has lowered short-term rates from around 5.0% to almost zero while long-term rates which had also been near 5.0% fell to less than 3.0% by the end of 2008. At December 2009 the yield curve was steeper with short term rates still near zero but long term rates nearing 5.0%. Because deposits are generally tied to shorter-term market rates and loans are generally tied to longer-term rates this would typically be viewed as a positive step and our net interest margin has been increasing. Our expectation for 2010 is that deposits rates will gradually increase as the Federal Reserve begins to respond to inflation concerns by raising rates. Overall loan rates are expected to gradually rise.

Rate changes can typically be expected to have an impact on interest income. Because the government is expected to discontinue some programs designed to help with the housing crisis, we expect to see higher market rates. Rising rates generally increase borrower preference for adjustable rate products which we typically keep in our portfolio, and existing adjustable rate loans can be expected to reprice to higher rates which could be expected to have a positive impact on our interest income. With fewer fixed rate loans we would expect to sell fewer loans on the secondary market. Although new loans put on the books early in 2010 will be at comparatively low rates we expect higher rates later in the year will result in an increase in the average rate of new loans.

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

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

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

2009 Summary

Our strategy in 2009 was to enhance credit analysis, work to manage non-performing loans and dispose of other real estate owned, control the cost of funds and other expenses and focus on growth in other income. We focused on selectively extending credit to stronger borrowers to improve credit quality and on increasing our secondary loan market lending, VA and FHA lending to qualified borrowers. Our credit department is now fully staffed with a department manager, two experienced credit analysts and two collectors, including one experienced in workouts and debt restructuring.

Because the local economy fared somewhat better in 2009 than the rest of the country, and because market interest rates were generally low, the opportunity for loan production was better than expected. Local unit residential real estate sales in 2009 decreased slightly from 2008, from 1,789 properties to 1,774, however home sales in the fourth quarter were up 18% over the same quarter in 2008. Commercial real estate activity was again centered in the new medical corridor connecting the two new hospitals, industrial growth on the south side of town, and ongoing building at Purdue University and in the Purdue Research Park. For the Bank, there was an increase in loan activity across all real estate related categories. Our residential loan originators originated and sold $68.7 million of residential loans on the secondary market for a gain of $1.4 million. In 2009, we sold $1.9 million of other real estate owned (OREO) properties, consisting of 31 properties. This being said, there were still weaknesses in the local economy as Wabash National informed 800 workers laid off in 2008 they would not be called back and Caterpillar laid off 439 employees for six months and reduced hours for another 985 employees because of low demand. Both companies expect improvement in 2010.

In 2009 we allocated $3.2 million to loan loss reserves as many of our non-performing loans moved into foreclosure in 2009. We charged off $3.2 million to loan loss reserves in 2009 including losses on properties sold through approved short sales where properties were sold by borrowers for less than the amount of their loan, and added $2.6 million of foreclosed properties to OREO. At December 31, 2009 our allowance for loan losses to total loans was 1.16%, up slightly from 1.12% at December 2008. Our non-performing loans increased from $8.0 million at December 31, 2008 to $12.6 million at December 31, 2009. At December 31, 2008, our allowance for loan losses compared to non-performing loans was 46.35% compared to 29.65% at December 31, 2009. Non-performing loans compared to total loans increased from 2.41% at December 31, 2008 to 3.92% at December 31, 2009. Our OREO properties at December 31, 2009 were $1.9 million compared to $1.4 million at December 31, 2008. In 2009 we wrote off losses of $183,000 on the sale of OREO properties and $570,000 of writedowns taken to adjust the value of OREO properties to the estimated, realizable value. Based on our quarterly analysis of non-performing loans, we believe our allowance for loan losses to be adequate to absorb estimated incurred losses inherent in our loan portfolio. While we continue to seek to lower our delinquencies, based on our analysis we believe we have sufficient reserves to cover incurred losses.

The return of the yield curve to a more normal shape in 2009 had the expected effect of increasing interest rate margins. All loans tied to prime remained at low rates but we began to see rate increases in other variable rate loans. Deposit rates also reacted to the lower short term rates as time accounts gradually repriced downward and new deposits were made at the lower market rates.

Other non-interest income, excluding the gain on sale of loans and the loss on the sale of OREO, decreased by $347,000 primarily from a $211,000 decrease in deposit service fees and a $124,000 decrease in mortgage loan servicing fees due to writing off the mortgage servicing rights on loans that were refinanced.

The results of our loan and deposit activity in 2009 are illustrated in the chart on page 15 and include:

Residential mortgage loans (including loans held for sale) decreasing by 15.1% from $145.4 million to $123.5 million.

All other real estate loans, net, including multi-family, land, land development, construction and commercial real estate loans increased 8.8% from $155.5 million to $169.2 million net of undisbursed loans.

Commercial business lending increased 16.5% from $14.3 million to $16.6 million, although part of this increase was due to the reclassification of existing loans.

At December 31, 2009, 74.9% of our gross loan portfolio had adjustable interest rates.

Total deposit accounts increased 7.5% from $258.6 million at December 31, 2008 to $277.9 million at December 31, 2009, with core deposits increasing 32.7% from $81.5 million to $108.2 million over the same period.

2010 Overview

We expect to see continued slow-to-moderate growth in our residential loan portfolio through 2010 with interest rates gradually increasing from historically low levels. While we expect to see a decrease in residential mortgage loan refinance activity, we intend to originate these loans for sale on the secondary market when borrowers choose long-term fixed rate terms, while keeping some of our shorter-term fixed rate loans and adjustable rate loans in our portfolio. We expect to have the opportunity to consider new commercial loans but will continue to evaluate them with an eye to credit quality. We anticipate continuing activity in commercial real estate and commercial business loan activity from the medical corridor being built around the two new hospitals and from building related to the Purdue Research Park and other areas of expansion. However, portfolio loan growth overall is expected to be modest.

Our operating results will continue to be affected by several factors involving the disposition of properties in foreclosure or held in other real estate owned, including the level of the provision for loan losses, gains and losses on the sale of properties once we acquire title to them, the loss of interest income on non-performing assets and non-interest expenses incurred in obtaining, marketing and disposing of the properties. These factors are expected to continue to have an impact in 2010 as the level of non-performing loans continues to be high and OREO properties at year end were $1.9 million. Our allowance for loan losses to non-performing loans is at 29.65% and the allowance for loan losses to total loans ended the year at 1.16%. We continue to work proactively with troubled borrowers while their situation is still salvageable. We monitor these and all other loans in our portfolio carefully and perform specific impairment

analyses on any loans over 90 days delinquent. Based on our analysis, we believe that our current loan loss reserve is sufficient to cover probable incurred losses.

We intend to continue to follow a strategy for growth in 2010 that includes (1) maintaining a strong capital position, (2) managing our vulnerability to changes in interest rates by emphasizing adjustable rate and/or shorter-term loans, (3) optimizing our net interest margin by supplementing our traditional mortgage lending with prudent multi-family and commercial real estate, consumer and construction loans, (4) working to originate and sell residential mortgage loans in the secondary market for a fee, (5) originating FHA and VA loans to access a market not previously available to us, and (6) funding our growth by using a mix of local and brokered deposits and FHLB advances, whichever is most cost-effective.

Possible Implications of Current Events

Significant external factors impact our results of operations including the general economic environment, changes in the level of market interest rates, government policies, actions by regulatory authorities and competition. Our cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by the demand for real estate loans and other types of loans, which are in turn affected by the interest rates at which such loans are made, general economic conditions affecting loan demand and the availability of funds for lending activities.

Management continues to assess the impact on the Company of the uncertain economic and regulatory environment affecting the country at large and the financial services industry in particular. The level of turmoil in the financial services industry does present unusual risks and challenges for the Company, as described below:

The Current Economic Environment Poses Challenges For Us and Could Adversely Affect Our Financial Condition and Results of Operations. We are operating in a challenging and uncertain economic environment, including generally uncertain national conditions which could have implications for our local markets. The capital and credit markets have been experiencing volatility and disruption for more than 24 months. The risks associated with our business become more acute in periods of a slowing economy or slow growth. Financial institutions continue to be affected by sharp declines in the real estate market and constrained financial markets. While we are taking steps to decrease and limit our exposure to problem loans, and while our local economy has remained somewhat insulated from the most severe effects of the current economic environment, all financial institutions nonetheless retain direct exposure to the residential and commercial real estate markets and are affected by these events.

Our loan portfolio includes commercial real estate loans, residential mortgage loans, and construction and land development loans. Continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses, could have an adverse effect on our borrowers or their customers, which could adversely affect our financial condition and results of operations. In addition, deterioration in local economic conditions in our markets could drive losses beyond that which is provided for in our allowance for loan losses and result in the following other consequences: loan delinquencies, problem assets and foreclosures may increase; demand for our products and services may decline; deposits may decrease, which would adversely impact our liquidity position; and collateral for our loans, especially real estate, may decline in value, in turn reducing

customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans.

Impact of Recent and Future Legislation. Congress and the U.S. Treasury Department have adopted legislation and taken actions to address the disruptions in the financial system and declines in the housing market, including the Emergency Economic Stabilization Act of 2008 (“EESA”) and the Troubled Asset Relief Program (“TARP”). It is not clear at this time what impact EESA, TARP, other liquidity and funding initiatives of the Treasury and other bank regulatory agencies that have been previously announced, and any additional programs that may be initiated in the future, will have on the financial markets and the financial services industry. The actual impact that EESA and such related measures undertaken to alleviate the credit crisis will have generally on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced, is unknown. The failure of such measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect all financial institutions, including the Company.

In addition to the legislation mentioned above, federal and state governments could pass additional legislation responsive to current credit conditions. As an example, the Bank could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Bank could experience higher credit losses because of federal or state legislation or regulatory action that limits its ability to foreclose on property or other collateral or makes foreclosure less economically feasible.

Already, at this time, the House of Representatives has passed on to the Senate the Wall Street Reform and Consumer Protection Act of 2009 that, among other things, would create a Consumer Financial Protection Agency, a new federal banking agency with the mission of protecting consumers when they borrow money, make deposits, or obtain other financial products and services. The bill also targets systemic risk in the financial system. Members of the Senate Banking Committee have announced that a bipartisan bill comprehensively reforming the financial sector is imminent. We cannot predict whether or in what form Congress may adopt this financial reform legislation, or the extent to which our business may be affected.

On June 17, 2009, the Obama Administration published a comprehensive regulatory reform plan that is intended to modernize and protect the integrity of the United States financial system. The President’s plan contains several elements that would have a direct effect on the Company and Lafayette Savings. Under the reform plan, the federal thrift charter and the Office of Thrift Supervision would be eliminated and all companies that control an insured depository institution must register as a bank holding company. Draft legislation would require Lafayette Savings to become a national bank or adopt a state charter. Registration as a bank holding company would represent a significant change, as there currently exist significant differences between savings and loan holding company and bank holding company supervision and regulation. For example, the Federal Reserve imposes leverage and risk-based capital requirements on bank holding companies whereas the Office of Thrift Supervision does not impose any capital requirements on savings and loan holding companies. If implemented, the foregoing regulatory reforms may have a material impact on our operations. However, at this time, we cannot determine the likelihood that the proposed regulatory reform will be adopted in

the form proposed by the Obama Administration or the specific impact that any adopted legislation will have on the Company or Lafayette Savings.

In February 2010, President Obama also proposed additional reforms, including a reform known as the “Volcker Rule” that would prevent banks from owning, investing or sponsoring hedge funds, private equity funds or proprietary trading operations for their own profit. Further, the reforms would discourage certain consolidation in the industry to prevent concentrations of too much risk in single organizations. We cannot predict whether, when or in what form these proposals may be adopted, so we cannot determine what impact they may have on us.

Adverse Effect on Our Industry from Difficult Market Conditions. Although the Metropolitan Statistical Area of which Tippecanoe County is a part has experienced a slight increase in housing values over the past 12 months, widespread downturns in the U.S. housing market may have an effect here. The market turmoil and tightening of credit generally have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity. We do not expect that the difficult conditions in the financial markets are likely to dissipate in the near future. A worsening of these conditions would likely have adverse effects on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:

We expect to face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage and underwrite our customers become less predictive of future behaviors.

The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, which may no longer be capable of accurate estimation which may, in turn, impact the reliability of the process.

Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions.

We may be required to pay even higher deposit insurance premiums than the increases we experienced in 2009 because market developments continue to significantly deplete the insurance fund of the Federal Deposit Insurance Corporation and reduce the ratio of reserves to insured deposits.

Additional Increases in Insurance Premiums. The Federal Deposit Insurance Corporation (“FDIC”) insures the Bank’s deposits up to certain limits. The FDIC charges us premiums to maintain the Deposit Insurance Fund. The Bank elected to obtain unlimited deposit insurance protection for non-interest bearing transaction deposit accounts under the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”), which increased its insurance premiums by 10 basis points per annum during 2009. The Company’s participation in the TLGP allows

noninterest bearing transaction accounts to receive unlimited insurance coverage until June 30, 2010 (recently extended from December 31, 2009).

Current economic conditions have increased expectations for bank failures. The FDIC takes control of failed banks and ensures payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. The FDIC has designated the Deposit Insurance Fund long-term target reserve ratio at 1.25% of insured deposits. Due to recent bank failures, the FDIC insurance fund reserve ratio has fallen below 1.15%, the statutory minimum. The FDIC has implemented a restoration plan, beginning January 1, 2009, that is intended to return the reserve ratio to an acceptable level over 8 years. The restoration plan has uniformly increased insurance assessments by 7 basis points (annualized) and will increase them again by 3 basis points (annualized) effective January 1, 2011. Further increases in premium assessments are also possible and would increase the Company’s expenses.

The Board of the FDIC also adopted an interim rule imposing a 5 basis point special assessment on insured institutions as of June 30, 2009 which was payable on September 30, 2009. The special assessment due in September was $171,000. In addition, the FDIC adopted a final rule mandating prepayment on December 30, 2009, of all quarterly risk-based assessments for the fourth quarter of 2009, and all of 2010, 2011 and 2012 (along with the third quarter assessment regularly due on that date). The amount of prepayment due and paid on December 30, 2009 was $2.3 million.

In September 2009, the Board of Directors of the FDIC also approved an extension of the temporary increase in the standard maximum deposit insurance amount of $250,000 through December 31, 2013.

Increased assessment rates and special assessments have had a material impact on the Company’s results of operations.

Future Reduction in Liquidity in the Banking System. The Federal Reserve Bank has been providing vast amounts of liquidity into the banking system to compensate for weaknesses in short-term borrowing markets and other capital markets. A reduction in the Federal Reserve’s activities or capacity could reduce liquidity in the markets, thereby increasing funding costs to the Bank or reducing the availability of funds to the Bank to finance its existing operations.

Concentrations of Real Estate Loans Could Subject the Company to Increased Risks in the Event of a Real Estate Recession or Natural Disaster. A significant portion of the Company’s loan portfolio is secured by real estate. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. While property values in this area have been relatively unaffected by the economic downturn, increasing 2.28% in 2008 and 1.94% through September 2009 in the Lafayette Metropolitan Statistical Area, a weakening of the real estate market in our primary market area could result in an increase in the number of borrowers unable to refinance or who may default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality.

If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.

Significant natural disasters can also negatively affect the value of real estate that secures our loans or interrupt our business operations, also negatively impacting our operating results or financial condition.

Credit Risk Could Adversely Affect Our Operating Results or Financial Condition. 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. During the last few years, the banking industry has experienced increasing trends in problem assets and credit losses which have resulted from weakening national economic trends and a decline in housing values. 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.

Interest Rate Risk Could Adversely Affect Our Operations. The Company’s earnings depend to a great extent upon the level of net interest income, which is the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings. Interest rate risk is the risk that the earnings and capital will be adversely affected by changes in interest rates. While the Company attempts to adjust its 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. From time to time, maturities of assets and liabilities are not balanced, and a rapid increase or decrease in interest rates could have an adverse effect on net interest margins and results of operations of the Company. Volatility in interest rates can also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as U.S. Government and corporate securities and other investment vehicles, including mutual funds, which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than financial institutions.

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 December 31, 2009. 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 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 and all loans that are rated substandard or lower are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Bank. Included in the review of individual loans are those that are impaired as provided in FASB ASC 310-10 (formerly FAS 114, Accounting by Creditors for Impairment of a Loan). Any allowances for impaired loans are determined by the present value of expected future cash flows discounted at the loan’s effective interest rate or fair value of the underlying collateral based on the discounted appraised value. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

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 non-accrual 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 the Bank’s 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 and to a lesser extent the eight surrounding counties. 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.

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.

Accounting for Foreclosed Assets

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

Financial Condition at December 31, 2009 compared to Financial Condition at December 31, 2008.

SELECTED FINANCIAL CONDITION DATA
(Dollars in thousands)

	December 31, 2009		December 31, 2008		$ Difference			% Difference

Total assets	$	371,050	$	373,012	$	(1,962	)		(0.53	)%

Loans receivable, including loans held for sale, net		321,163		326,639		(5,476	)		(1.68	)
Residential mortgage loans		123,502		145,400		(21,940	)		(15.01	)
Home equity lines of credit		14,698		13,610		1,088			7.99
Other real estate loans net undisbursed portion of loans		169,172		155,510		13,662			8.79
Commercial business loans		16,638		14,277		2,361			16.54
Consumer loans		1,321		1,843		(522	)		(28.32	)
Loans sold		68,726		10,247		58,479			570.69

Non-performing loans		12,554		7,976		4,578			57.40
Loans past due 90 days, still accruing		---		---		---			---
Other real estate owned		1,892		1,412		480			33.99
Non-performing assets		14,446		9,388		5,058			53.88

Available-for-sale securities		11,345		11,853		(508	)		(4.29	)
Short-term investments		4,817		9,179		(4,362	)		(47.52	)

Deposits		277,866		258,587		19,279			7.46
Core deposits		108,186		81,540		26,646			32.68
Time accounts		169,680		177,046		(7,366	)		(4.16	)
Brokered deposits		27,300		61,001		(33,701	)		(55.25	)

FHLB advances		57,000		78,500		(21,500	)		(27.39	)
Shareholders’ equity (net)		33,884		34,075		(191	)		(0.56	)

As shown in the chart above, the net balance in our loan portfolio decreased by $5.5 million from December 31, 2008 to December 31, 2009. Loans decreased primarily due to the historically low interest rates which led borrowers to refinance to lower, fixed rate mortgages which we typically sell on the secondary market. We sold $68.7 million of residential loans in 2009 compared to $10.2 in 2008. These loans were sold based on asset/liability considerations and to increase income from the gain on sale of loans. See “Asset/Liability Management.” The decrease also can be attributed to the $2.6 million in properties taken into OREO in 2009.

The $508,000 decrease in our available-for-sale securities was primarily due to runoff while the $4.4 million decrease in short-term investments was the result of our decision to pay down brokered deposits and FHLB advances because of the low return on short-term investments.

Deposit balances increased by $19.3 million and the funds were used primarily to pay down FHLB advances. We grew core deposits by $26.6 million and we reduced time deposits by $7.4 million. Brokered deposits, which are a subset of time deposits, decreased by $33.7 million and there was a $26.3 million increase in time deposits from local depositors.

We utilize advances available through the FHLB to provide additional funding for loan growth as well as for asset/liability management purposes. At December 31, 2009, we had $57.0 million in FHLB advances outstanding compared to $78.5 million at December 31, 2008. Based on the collateral we currently have listed under a blanket collateral arrangement with the FHLB, we could borrow up to $20.8 million in additional advances. We have other collateral available if needed. These advances are generally available on the same day as requested and allow us the flexibility of keeping our daily cash levels tighter than might otherwise be prudent.

Non-performing assets, which include non-accruing loans, accruing loans 90 days past due and foreclosed assets, increased from $9.4 million at December 31, 2008 to $14.4 million at December 31, 2009. Non-performing assets at December 31, 2009 consisted of $7.3 million of loans on residential real estate, $5.2 million on land or commercial real estate loans, $366,000 on commercial business loans and $3,000 on consumer loans. Foreclosed assets consisted of $1.7 million of residential property and $206,000 of commercial real estate. At December 31, 2009, our allowance for losses equaled 1.16% of total loans (including loans held for sale) compared to 1.12% at December 31, 2008. The allowance for loan losses at December 31, 2009 totaled 25.87% of non-performing assets compared to 39.38% at December 31, 2008, and 29.65% of non-performing loans at December 31, 2009 compared to 46.35% at December 31, 2008. Our non-performing assets equaled 3.91% of total assets at December 31, 2009 compared to 2.52% at December 31, 2008.

When a non-performing loan is added to our classified loan list, an impairment analysis is completed to determine expected losses upon final disposition of the property. An adjustment to loan loss reserves is made at that time for any anticipated losses. This analysis is updated quarterly thereafter. Because of the large numbers of foreclosures - according to RealtyTrac, Indiana’s reported foreclosure rate was 20th in the nation in the third quarter of 2009 - the court systems frequently have backlogs in scheduling loan hearings. It may take up to two years to move a foreclosed property through the system to the point where we can obtain title to and dispose of it. We attempt to acquire properties through deeds-in-lieu of foreclosure if there are no other liens on the properties. In 2008, we acquired 25 properties through deeds-in-lieu of foreclosure and an additional 9 properties through foreclosure. In 2009, we acquired 24 properties through deeds-in-lieu of foreclosure and an additional 25 properties through foreclosure. As a result, $570,000 was charged against loan loss reserves for these properties in 2009 to reduce the carrying value of the property to the estimated realizable value. Although we believe we use the best information available to determine the adequacy of our allowance for loan losses, future adjustments to the allowance may be necessary, and net income could be significantly affected if circumstances and/or economic conditions cause substantial changes in the estimates we use in making the determinations about the levels of the allowance for losses. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. These agencies may require the recognition of additions to the allowance based upon their judgments of information available at the time of their examination.

Shareholders’ equity decreased $191,000, or 0.56%, during 2009 primarily as a result of net income of $460,000, offset by our payment of dividends on common stock. Shareholders’ equity to total assets was 9.13% at December 31, 2009 compared to 9.14% at December 31, 2008.

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. Our results of operations are also dependent upon the level of our non-interest income, including fee income and service charges, gains or losses on the sale of loans and the level of our non-interest expenses, including general and administrative expenses. 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. Our results of operations are also affected by the level of the provision for loan losses. We, like other financial institutions, 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.

Average Balances, Interest Rates and Yields

The following table presents for the periods indicated the total dollar amount of interest income earned on average interest-earning assets and the resultant yields on such assets, as well as the interest expense paid on average interest-bearing liabilities, and the rates paid on such liabilities. No tax equivalent adjustments were made. All average balances are monthly average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.

	2009								2008
	Average Outstanding Balance			Interest Earned/Paid		Yield/Rate			Average Outstanding Balance			Interest Earned/Paid		Yield/Rate

Interest-Earning Assets:
Loans receivable(1)	$	322,457		$	19,106		5.93	%	$	312,923		$	20,492		6.55	%
Mortgage-backed securities		3,472			160		4.61			4,171			213		5.11
Other investments		21,831			326		1.49			16,594			412		2.48
FHLB stock		3,997			67		1.68			3,997			202		5.05
Total interest-earning assets		351,757			19,659		5.59			337,686			21,319		6.31
Non-interest earning assets		22,399								21,611
Total assets	$	374,156							$	359,296

Liabilities and Shareholders’ Equity:
Interest-Bearing Liabilities:
Savings deposits	$	25,773			243		0.94		$	22,135			237		1.07
Demand and NOW deposits		72,528			532		0.73			61,710			514		0.83
Time deposits		176,057			5,888		3.34			162,789			6,930		4.26
Borrowings		62,708			2,672		4.26			76,025			3,605		4.74
Total interest-bearing liabilities		337,066			9,335		2.77			322,659			11,286		3.50
Other liabilities		2,778								3,402
Total liabilities		339,844								325,061
Shareholders’ equity		34,311								34,235
Total liabilities and shareholders’ equity	$	374,156							$	359,296
Net interest income				$	10,324							$	10,033
Net interest rate spread							2.82	%							2.82	%
Net earning assets	$	14,691							$	15,027
Net yield on average interest-earning assets							2.94	%							2.97	%
Average interest-earning assets to average interest-bearing liabilities		1.04	x							1.05	x

_________________

(1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.

Rate/Volume Analysis of Net Interest Income

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. The change in total interest income and total interest expense is allocated between those related to changes in the outstanding balances and those due to changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and change due to rate.

	Year Ended December 31,
	2008 vs. 2009									2007 vs. 2008
	Increase (Decrease) Due to						Total Increase			Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(In thousands)

Interest-earning assets:
Loans receivable	$	610		$	(1,996	)	$	(1,386	)	$	703		$	(2,105	)	$	(1,402	)
Mortgage-backed securities		(33	)		(20	)		(53	)		(56	)		(3	)		(59	)
Other investments		107			(193	)		(86	)		12			(134	)		(122	)
FHLB stock		--			(135	)		(135	)		--			20			20
Total interest-earning assets	$	684		$	(2,344	)	$	(1,660	)	$	659		$	(2,222	)	$	(1,563	)

Interest-bearing liabilities:
Savings deposits	$	36		$	(30	)	$	6		$	30		$	8		$	38
Demand deposits and NOW accounts		84			(66	)		18			32			(119	)		(87	)
Time deposits		531			(1,573	)		(1,042	)		(112	)		(243	)		(355	)
Borrowings		(591	)		(343	)		(934	)		256			(221	)		35
Total interest-bearing liabilities	$	60		$	(2,012	)	$	(1,952	)	$	206		$	(575	)	$	(369	)

Net interest income							$	292								$	(1,194	)

Comparison of Operating Results for the Years Ended December 31, 2009 and December 31, 2008.

General. Net income for the year ended December 31, 2009 was $460,000, a decrease of $1.3 million or 73.56%, from net income for the year ended December 31, 2008. This decrease was primarily due to a $2.1 million increase in the provision for loan losses and a $1.2 million increase in non-interest expense partially offset by a $896,000 increase in non-interest income, a $291,000 increase in net interest income and an $845,000 decrease in income taxes.

Our return on average assets was 0.12% for the year ended 2009, compared to 0.48% for the year ended 2008. Return on average equity was 1.34% for the year ended 2009 compared to

5.08% for 2008. During 2009 we paid regular quarterly cash dividends on common stock totaling $775,000, or $0.50 per share, for the year, representing a dividend payout ratio (dividends declared per share divided by diluted net income per share) of approximately 168.48%.

Net Interest Income. Net interest income for the year ended December 31, 2009 increased $291,000 over the same period in 2008. Our net interest margin (net interest income divided by average interest-earnings assets) decreased slightly from 2.97% at December 31, 2008 to 2.94% at December 31, 2009. The largest factor in the increase in net interest income was the decrease in the average rate on deposits and FHLB advances from 3.50% in 2008 to 2.77% in 2009 caused primarily by the fact that the extreme short term rate cuts by the Federal Reserve finally began to affect local and national deposit rates as the very large banks no longer forced rates back up as they scoured the markets to fill their liquidity needs. Breaking this into the two components, the rate on deposits decreased from 3.11% in 2008 to 2.43% in 2009 while advances decreased from 4.74% in 2008 to 4.26% in 2009. This decrease in expenses was partially offset by a decrease in the average rate on interest earning assets, and particularly loans. The average rate on earning assets decreased 72 basis points from 6.31% in 2008 to 5.59% in 2009. This decrease was mitigated somewhat by the increase in average interest earning assets from $337.7 million in 2008 to $351.7 million in 2009. Overall, the average rate on loans and investments decreased by 72 basis points while the average rate on investments and advances decreased by 73 basis points.

Interest income on loans decreased $1.4 million for the year ended December 31, 2009 compared to the year ended December 31, 2008 primarily because of reduced rates partially offset by higher average loan volume. The average yield on loans decreased from 6.55% for the year ended December 31, 2008 to 5.93% for the year ended December 31, 2009. The average balance of loans held in our portfolio increased by $9.5 million from $312.9 million in 2008 to $322.5 million in 2009.

Interest income on investments decreased $274,000 including a decrease of $135,000 in dividends on FHLB stock for the year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease in interest on investments was primarily due to a decrease in the average rate earned from 3.01% in 2008 to 1.92% in 2009 offset by a $4.5 million increase in average investments from 2008 to 2009. The decrease in interest income on FHLB stock was due to a decrease in the average rate paid from 5.05% in 2008 to 1.68% in 2009 partly due to the delay by the FHLB in declaring the dividend for the fourth quarter.

Interest expense for the year ended December 31, 2009 decreased $2.0 million over the same period in 2008. This decrease was primarily due to a decrease in the average rate paid on interest-bearing liabilities from 3.50% in 2008 to 2.77% in 2009 reflecting the generally lower rates over the period. The average interest rate on deposit accounts decreased from 3.11% in 2008 to 2.43% in 2009. The effect of the decrease in rates was offset by a $14.5 million increase in the average balance of deposit accounts. The benefit of a decrease in the average rate of FHLB advances from 4.74% in 2008 to 4.26% in 2009 was further improved by the decrease in the average balance from $76.0 million to $62.7 million over the same period.

Provision for Loan Losses. The evaluation of the level of loan loss reserves is an ongoing process that includes closely monitoring loan delinquencies. The following chart shows delinquent loans as well as a breakdown of non-performing assets.

	12/31/09		12/31/08		12/31/07
Loans delinquent 30-59 days	$	677	$	1,483	$	364
Loans delinquent 60-89 days		3,169		3,187		1,763
Total delinquencies		3,846		4,670		2,127

Accruing loans past due 90 days		---		---		59
Non-accruing loans		12,554		7,976		9,935
Total non-performing loans		12,554		7,976		9,994
OREO		1,892		1,412		3,944

Total non-performing assets	$	14,446	$	9,388	$	13,938

The accrual of interest income is discontinued when a loan becomes 90 days and three payments past due. Loans 90 days past due but not yet three payments past due will continue to accrue interest as long as it has been determined that the loan is well secured and the borrower has the capacity to repay. Troubled debt restructurings are considered non-accruing loans until sufficient time has passed for them to establish a pattern of compliance with the terms of the restructure. There are $1.8 million of loans considered non-accruing in the chart above that are troubled debt restructurings which are currently performing as agreed.

The increase in non-performing loans at December 31, 2009 compared to December 31, 2008 was primarily due to the addition of four borrowers with multiple properties where we are working with the borrowers to restructure their loans if possible or will proceed with foreclosure. In addition we took $2.6 million of foreclosed properties into OREO in 2009 and sold a total of $1.9 million of OREO properties.

We establish our provision for loan losses based on a systematic analysis of risk factors in the loan portfolio. The analysis includes consideration of concentrations of credit, past loss experience, current economic conditions, the amount and composition of the loan portfolio, estimated fair value of the underlying collateral, delinquencies and other relevant factors. From time to time, we also use the services of a consultant to assist in the evaluation of our growing commercial real estate loan portfolio. On at least a quarterly basis, a formal analysis of the adequacy of the allowance is prepared and reviewed by management and the Board of Directors.

This analysis serves as a point-in-time assessment of the level of the allowance and serves as a basis for provision for loan losses.

More specifically, our analysis of the loan portfolio will begin at the time the loan is originated, at which time each loan is assigned a risk rating. If the loan is a commercial credit, the borrower will also be assigned a similar rating. Loans that continue to perform as agreed will be included in one of 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 higher risk rating, eventually resulting in their being regarded as classified loans. A collateral re-evaluation is completed on all classified loans. This process results in the allocation of specific amounts of the allowance to individual problem loans, generally based on an analysis of the collateral securing those loans. These components are added together and compared to the balance of our allowance at the evaluation date.

At December 31, 2009 our largest areas of concern were loans on 1-4 family non-owner occupied rental properties and, to a lesser extent, non-residential properties. $6.6 million of loans on 1-4 family rental properties and $3.5 million of loans on non-residential properties were delinquent more than 30 days at December 31, 2009. Because of the presence of Purdue University, student housing has been a niche for us, but because of the economy we are seeing problems with vacancies and delinquent rents, especially in non-campus housing. The non-residential properties are typically smaller loans averaging about $165,000 and the borrowers are typically seeing decreased business because of the economy.

We recorded a $3.2 million provision for loan losses during 2009 as a result of our analyses of our current loan portfolios, compared to $1.1 million during 2008. The provisions were necessary to maintain the allowance for loan losses at a level considered adequate to absorb losses inherent and incurred in the loan portfolio. During the year 2009, we charged $3.2 million against loan loss reserves on 113 loans either written off, written down to fair value or taken into other real estate owned in 2009. We expect to obtain possession of more properties in 2010 that are currently in the process of foreclosure. The final disposition of these properties may be expected to result in a loss in some cases. The $3.7 million reserve for loan losses in 2009 was considered adequate to cover further charge-offs based on our evaluation and our loan mix.

Our loan portfolio contains no option ARM products, interest only loans, or loans with initial teaser rates. While we occasionally make loans to borrowers with credit scores in the subprime range, these loans are only made if there are sufficient mitigating factors, not as part of a subprime mortgage plan. We occasionally make mortgages that exceed high loan-to-value regulatory guidelines for property type. We currently have $8.7 million of mortgage loans that are not one- to four-family loans that qualify as high loan-to-value. We typically make these loans only to well-qualified borrowers and none of these loans is delinquent. We also have $7.6 million of one- to four-family loans which either alone or combined with a second mortgage exceed high loan-to-value guidelines. Of these loans, $668,000 are currently over 30 days past due. Our total high loan-to-value loans at December 31, 2009 were at 44% of capital, well under

regulatory guidelines of 100% of capital. We have $14.8 million of home equity lines of credit of which seven loans totaling $124,000 are delinquent more than 30 days.

At December 31, 2009, non-performing assets, consisting of non-performing loans, accruing loans 90 days or more delinquent and other real estate owned, totaled $14.4 million compared to $9.4 million at December 31, 2008. In addition to our non-performing assets, we identified $4.7 million in other loans of concern where information about possible credit problems of borrowers causes management to have doubts as to the ability of the borrowers to comply with present repayment terms and that may result in disclosure of such loans as non-performing assets in the future. The vast majority of these loans, as well as our non-performing assets, are well collateralized.

At December 31, 2009, we believe that our allowance for loan losses was adequate to absorb probable losses inherent in our loan portfolio. Our allowance for losses equaled 1.16% of net loans receivable and 29.65% of non-performing loans at December 31, 2009, compared to 1.12% and 46.35% at December 31, 2008, respectively. Our non-performing assets equaled 3.91% of total assets at December 31, 2009 compared to 2.52% at December 31, 2008. Our average loss on non-performing loans that progress to foreclosure and are then sold as OREO properties is about 30%, which is close to the amount of our loan loss reserves.

Non-Interest Income. Non-interest income for the year ended December 31, 2009 increased by $896,000, or 30.99%, compared to the same period in 2008. The increase was primarily due to a $1.3 million increase in the gain on sale of loans due to the increase in the volume of loans sold from $10.2 million in 2008 to $68.7 million in 2009 and a decrease in the loss recognized on the sale of OREO properties. These increases were partially offset by a $211,000 decrease in deposit account service charges and a $135,000 decrease in other non-interest income due primarily to a $124,000 decrease in mortgage loan servicing fees due to writing off the mortgage servicing rights on loans that were refinanced, and by a $56,000 decrease in loan modification fees, partially offset by a $15,000 increase in fees generated by our in-house wealth management department and a $17,000 increase in debit card fees.

Non-Interest Expense. Non-interest expense for the year ended December 31, 2009 increased $1.2 million over the same period in 2008. The increase was primarily due to a $552,000 increase in salaries due to an increase in loan origination activity by commission-based loan originators, and by a $490,000 increase in FDIC insurance, partially attributable to a special assessment as of September 30, 2009 by the FDIC in the amount of $171,000. Other expenses excluding FDIC insurance increased $230,000 largely due to the bank charging off a $110,000 leasehold property originally taken as part of the process of working through the bankruptcy of a local housing service agency and to a $66,000 increase in other expenses largely due to the costs of acquiring, maintaining and disposing of foreclosed properties. Occupancy costs decreased $75,000 primarily due to an $89,000 decrease in depreciation of furniture and fixtures due to $492,000 of furniture and fixtures becoming fully depreciated.

Income Tax Expense. Our income tax provision decreased by $845,000 for the year ended December 31, 2009 compared to the year ended December 31, 2008 primarily due to decreased income.

Asset/Liability Management

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 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 FHLB 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, 2009 and 2008, 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 our Board policy limits. (One hundred basis points equals one percent.) 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 200 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, 2009		At December 31, 2008
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%	10.70%	(139)	9.27%	(113)
200	7.00	11.46	(62)	9.81	(59)
100	8.00	11.87	(22)	10.18	(22)
0	8.00	12.09	---	10.40	---
-100	8.00	12.31	22	10.40	---
-200	7.00

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

Liquidity and Capital Resources

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 primary investing activities are the origination of loans and the purchase of securities. During the year ended December 31, 2009, the Bank originated loans totaling $127.7 million and purchased $2.9 million of securities. These activities were funded primarily by principal repayments and prepayments on loans and maturities of investment securities totaling $68.0 million. The proceeds from the sale of loans totaled $68.7 million for the year ended December 31, 2009. There were no security sales in 2008 or 2009.

Because there was a decrease in the balance of loans in our portfolio in 2009, we used some of the increases in our deposits to pay down maturing FHLB advances. However we intend to continue to use FHLB advances as a source of funding for loans when advantages on interest rate risk matches can be found.

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, FHLB advance opportunities, market yields and the 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.

Our current internal policy for liquidity is 4%. Our liquidity ratio at December 31, 2009 was 5.93% as a percentage of total assets.

We anticipate that we will have sufficient funds available to meet current loan commitments. At December 31, 2009 we had outstanding commitments to originate loans and available lines of credit totaling $37.4 million and commitments to provide borrowers the funds needed to complete current construction projects in the amount of $4.4 million. Certificates of deposit that will mature in one year or less at December 31, 2009 totaled $111.8 million. Based on our experience, our certificates of deposit have been a relatively stable source of long-term funds as such certificates are generally renewed upon maturity since we have established long-term banking relationships with our customers. Therefore, we believe a significant portion of such deposits will remain with us, although that cannot be assured. An exception to this rule would be the brokered certificates of deposit. Of the certificates maturing in one year or less at December 31, 2009, $21.3 million were brokered deposits which will be leaving the bank at maturity. However, there is no reason to expect that replacement funds would not be available in the brokered market.

LSB Financial also has a need for, and sources of, liquidity. Liquidity is required to fund our operating expenses and fund stock repurchase programs, as well as for the payment of dividends to shareholders. At December 31, 2009, LSB Financial had $10,000 in liquid assets on hand. The primary source of liquidity on an ongoing basis is dividends from Lafayette Savings. Dividends totaling $762,000 were paid from the Bank to LSB Financial during the year ended December 31, 2009. For the year ended December 31, 2009, LSB Financial paid dividends to shareholders totaling $775,000.

Regulatory agencies have established capital adequacy standards which are used in their monitoring and control of the industry. These standards relate capital to levels of risk by assigning different weightings to assets and certain off-balance-sheet activity. As shown in Note 11 to the Consolidated Financial Statements (“Regulatory Matters”), our capital levels exceed the requirements to be considered well capitalized at December 31, 2009.

Off-Balance-Sheet Arrangements

As of the date of this Annual Report, we do not have any off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance-sheet arrangement” generally means any transaction, agreement, or other contractual arrangement to which any entity unconsolidated with the Company is a party and under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

See Note 16 to the Consolidated Financial Statements regarding off-balance-sheet commitments.

Future Accounting Matters

FASB Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The FASB has issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require the following disclosures: a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures: for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. It is not expected that ASU 2010-06 will have a material effect on the Company’s consolidated financial condition or results of operations.

FASB Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. The FASB has issued ASU No. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments to the Codification in this ASU clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. This ASU codifies the consensus reached in EITF Issue No. 09-E, “Accounting for Stock Dividends, Including Distributions to Shareholders with Components of Stock and Cash.” ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. It is not expected that ASU 2010-01 will have a material effect on the Company’s consolidated financial condition or results of operations.

FASB Accounting Standards Update 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The FASB has issued ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which codifies FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). ASU 2009-17 represents a revision to former FASB Interpretation No. 46 (Revised December 2003), Consolidation of

Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. ASU 2009-17 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. It is not expected that ASU 2009-17 will have a material effect on the Company’s consolidated financial condition or results of operations.

FASB Accounting Standards Update 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. The FASB has issued ASU 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets, which formally codifies FASB Statement No. 166, Accounting for Transfers of Financial Assets, into the FASB Accounting Standards Codification. ASU 2009-16 represents a revision to the provisions of former FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. Among other things, ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity”; changes the requirements for derecognizing financial assets; and enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. ASU 2009-16 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. It is not expected that ASU 2009-16 will have a material effect on the Company’s consolidated financial condition or results of operations.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

The Company’s primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities structures of our assets and liabilities are critical to the maintenance of acceptable performance levels.

The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of noninterest expense. Such expense items as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that the Company has made. The Company is unable to determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to inflation.

Quarterly Results of Operations

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

2009
March	$	4,973	$	2,586	$	2,387	$	569	$	302		$	0.20		$	0.20
June		5,059		2,523		2,536		389		312			0.20			0.20
September		4,874		2,262		2,612		865		24			0.02			0.02
December		4,753		1,964		2,789		1,375		(178	)		(0.11	)		(0.11	)
	$	19,659	$	9,335	$	10,324	$	3,197	$	460

2008
March	$	5,421	$	2,878	$	2,543	$	250	$	515		$	0.33		$	0.33
June		5,374		2,774		2,600		250		521			0.34			0.33
September		5,295		2,855		2,440		352		392			0.25			0.25
December		5,229		2,779		2,450		250		312			0.20			0.20
	$	21,319	$	11,286	$	10,033	$	1,102	$	1,740

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:

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 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.

LSB Financial Corp.

Accountants’ Report and Consolidated Financial Statements

December 31, 2009 and 2008

LSB Financial Corp.

December 31, 2009 and 2008

Contents

	Report of Independent Registered Public Accounting Firm	33

	Consolidated Financial Statements
	Balance Sheets	34
	Statements of Income	35
	Statements of Stockholders’ Equity	36
	Statements of Cash Flows	37
	Notes to Financial Statements	38

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

LSB Financial Corp.

Lafayette, Indiana

We have audited the accompanying consolidated balance sheets of LSB Financial Corp. as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LSB Financial Corp. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

BKD, LLP

Indianapolis, Indiana

March 17, 2010

LSB Financial Corp.

Consolidated Balance Sheets

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Assets	2009		2008

Cash and due from banks	$	8,084	$	2,046
Short-term investments		4,817		9,179
Cash and cash equivalents		12,901		11,225
Available-for-sale securities		11,345		11,853
Loans held for sale		3,303		1,342
Loans, net of allowance for loan losses of $3,737 and $3,697		317,860		325,297
Premises and equipment, net		6,209		6,461
Federal Home Loan Bank stock		3,997		3,997
Interest receivable and other assets		9,364		6,996
Bank-owned life insurance		6,071		5,841

Total assets	$	371,050	$	373,012
Liabilities and Stockholders’ Equity
Liabilities
Deposits	$	277,866	$	258,587
Federal Home Loan Bank advances		57,000		78,500
Interest payable and other liabilities		2,300		1,850
Total liabilities		337,166		338,937

Commitments and Contingencies

Stockholders’ Equity
Common stock, $.01 par value; authorized 7,000,000 shares; issued and outstanding 2009 -1,553,525 shares, 2008 - 1,553,525 shares		15		15
Additional paid-in capital		10,985		10,983
Retained earnings		22,646		22,961
Accumulated other comprehensive income		238		116
Total stockholders’ equity		33,884		34,075
Total liabilities and stockholders’ equity	$	371,050	$	373,012

See Notes to Consolidated Financial Statements

LSB Financial Corp.

Consolidated Statements of Income

Years Ended December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

	2009			2008
Interest and Dividend Income
Loans	$	19,106		$	20,492
Securities
Taxable		279			463
Tax-exempt		262			273
Other		12			91
Total interest and dividend income		19,659			21,319

Interest Expense
Deposits		6,663			7,681
Borrowings		2,672			3,605
Total interest expense		9,335			11,286

Net Interest Income		10,324			10,033

Provision for Loan Losses		3,197			1,102

Net Interest Income After Provision for Loan Losses		7,127			8,931

Noninterest Income
Deposit account service charges and fees		1,525			1,736
Net gains on loan sales		1,386			117
Net loss on other real estate owned		(183	)		(156	)
Other		1,059			1,194
Total noninterest income		3,787			2,891

Noninterest Expense
Salaries and employee benefits		5,137			4,585
Net occupancy and equipment expense		1,307			1,382
Computer service		562			549
Advertising		301			294
Other		3,196			2,476
Total noninterest expense		10,503			9,286

Income Before Income Tax		411			2,536

Provision (Benefit) for Income Taxes		(49	)		796

Net Income	$	460		$	1,740

Basic Earnings Per Share	$	0.30		$	1.12

Diluted Earnings Per Share	$	0.30		$	1.12

See Notes to Consolidated Financial Statements

LSB Financial Corp.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

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

Balance, January 1, 2008	$	15	$	11,066		$	22,777		$	74	$	33,932
Comprehensive income
Net income							1,740					1,740
Change in unrealized appreciation on available-for-sale securities, net of taxes										42		42
Total comprehensive income												1,782
Dividends on common stock, $1.00 per share							(1,556	)				(1,556	)
Purchase and retirement of stock (8,900 shares)				(165	)							(165	)
Stock options exercised (4,457 shares)				68								68
Tax benefit related to stock options exercised				6								6
Amortization of stock option compensation				8								8

Balance, December 31, 2008		15		10,983			22,961			116		34,075
Comprehensive income
Net income							460					460
Change in unrealized appreciation on available-for-sale securities, net of taxes										122		122
Total comprehensive income												582
Dividends on common stock, $0.50 per share							(775	)				(775	)
Amortization of stock option compensation				2								2

Balance, December 31, 2009	$	15	$	10,985		$	22,646		$	238	$	33,884

See Notes to Consolidated Financial Statements

LSB Financial Corp.

Consolidated Statements of Cash Flows

Years Ended December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

	2009			2008
Operating Activities
Net income	$	460		$	1,740
Items not requiring (providing) cash
Depreciation		472			561
Provision for loan losses		3,197			1,102
Amortization of premiums and discounts on securities		49			21
Deferred income taxes		(474	)		12
Loss on other real estate owned		183			156
Gain on sale of loans		(1,386	)		(117	)
Loans originated for sale		(69,741	)		(11,488	)
Proceeds on loans sold		68,726			10,247
Compensation cost of stock options		2			8
Tax benefit related to stock options exercised		---			(6	)
Changes in
Interest receivable and other assets		(1,687	)		(789	)
Interest payable and other liabilities		842			58
Net cash provided by operating activities		643			1,505

Investing Activities
Purchases of available-for-sale securities		(2,894	)		—
Proceeds from maturities of available-for-sale securities		3,557			1,417
Net change in loans		1,645			(31,779	)
Proceeds from sale of real estate owned		1,941			4,645
Purchase of premises and equipment		(220	)		(207	)
Net cash provided by (used in) investing activities		4,029			(25,924	)

Financing Activities
Net change in demand deposits, money market, NOW and savings accounts		26,645			5,602
Net change in certificates of deposit		(7,366	)		20,955
Proceeds from Federal Home Loan Bank advances		13,000			40,000
Repayment of Federal Home Loan Bank advances		(34,500	)		(35,756	)
Proceeds from stock options exercised		---			68
Tax benefit related to stock options exercised		---			6
Repurchase of stock		---			(165	)
Dividends paid		(775	)		(1,556	)
Net cash provided by (used in) financing activities		(2,996	)		29,154

Increase in Cash and Cash Equivalents		1,676			4,735

Cash and Cash Equivalents, Beginning of Year		11,225			6,490

Cash and Cash Equivalents, End of Year	$	12,901		$	11,225

Supplemental Cash Flows Information
Interest paid	$	9,480		$	11,390
Income taxes paid		289			387

Supplemental Non-Cash Disclosures
Capitalization of mortgage servicing rights	$	440		$	16
Loans transferred to other real estate		2,595			2,288

See Notes to Consolidated Financial Statements

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

LSB Financial Corp. (“Company”) is a thrift holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Lafayette Savings Bank (“Bank”). The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers in Tippecanoe and surrounding counties in Indiana. The Bank is subject to competition from other financial institutions. The Bank is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Bank, LSBSC and LI&I. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, fair value of servicing rights and financial instruments. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties. A substantial portion of the loan portfolio is secured by single and multi-family residential mortgages.

Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents.

Securities

Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income.

Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on non-accrual status at ninety days past due and interest is considered a loss, unless the loan is well-secured. Accrued interest for loans placed on non-accrual status is reversed against interest income.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements.

Premises and Equipment

Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line and accelerated methods over the estimated useful lives of the assets ranging from 3 to 39 years.

Federal Home Loan Bank Stock

Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula.

Foreclosed Assets Held for Sale

Servicing Rights

Servicing rights on originated loans that have been sold are initially recorded at fair value. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the predominant risk characteristics of the underlying loans. The predominant characteristic currently used for stratification is type of loan. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value and is recorded through a valuation allowance.

Stock Options

The Company has a stock-based employee compensation plan, which is described more fully in Note 13. The Company has adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment which was subsequently incorporated into the FASB Accounting Standards Codification (ASC) as Topic 718.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Income Taxes

Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. The Company files consolidated income tax returns with its subsidiary.

Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company’s tax years still subject to examination by authorities are years subsequent to 2005.

Earnings Per Share

Earnings per share have been computed based upon the weighted-average common shares outstanding during each year.

Operating Segments

While the chief decision-makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Current Economic Conditions

The current economic environment presents financial institutions with unprecedented circumstances and challenges which in some cases have resulted in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

At December 31, 2009, the Company held $206 in commercial real estate held in other real estate owned and $107.8 million in loans collateralized by commercial and development real estate. Due to national, state and local economic conditions, values for commercial and development real estate have declined, and the market for these properties is less strong than in the past.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

Note 2: Restriction on Cash and Due From Banks

The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2009 was $1,218.

Effective October 3, 2008, the FDIC’s insurance limits increased to $250. The increase in federally insured limits is currently set to expire December 31, 2013. At December 31, 2009, the Company’s interest-bearing cash accounts do not exceed federally insured limits. Additionally, approximately $2,685 and $6,920 of cash is held by the FHLB of Indianapolis and Federal Reserve Bank of Chicago, respectively, which is not federally insured.

Note 3: Securities

The amortized cost and approximate fair values of securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
Available-for-sale Securities:
December 31, 2009
U.S. Government sponsored agencies	$	529	$	7	$	---		$	536
Mortgage-backed securities		3,131		176		---			3,307
State and political subdivisions		7,288		214		---			7,502
	$	10,948	$	397	$	---		$	11,345
December 31, 2008
U.S. Government sponsored agencies	$	500	$	9	$	—		$	509
Mortgage-backed securities		3,661		61		(17	)		3,705
State and political subdivisions		7,498		151		(10	)		7,639
	$	11,659	$	221	$	(27	)	$	11,853

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

The amortized cost and fair value of available-for-sale securities at December 31, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value

Within one year	$	1,361	$	1,372
One to five years		3,129		3,230
Five to ten years		2,838		2,919
After ten years		489		517
		7,817		8,038
Mortgage-backed securities		3,131		3,307
Totals	$	10,948	$	11,345

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2009 and 2008 was $0 and $2,162, which is approximately 0% and 18% of the Company’s available-for-sale investment portfolio.

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at December 31, 2008. There were no investments with unrealized losses at December 31, 2009.

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

Mortgage-backed securities	$	1,757	$	16	$	59	$	1	$	1,816	$	17
State and political subdivisions		346		10		—		—		346		10
Total temporarily impaired securities	$	2,103	$	26	$	59	$	1	$	2,162	$	27

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31 include:

	2009			2008
Real Estate
One-to-four family residential	$	120,199		$	144,100
Multi-family residential		52,790			39,892
Commercial real estate		90,571			90,606
Construction and land development		30,194			29,192
Commercial		16,638			14,277
Consumer and other		1,321			1,843
Home equity lines of credit		14,698			13,611
Total loans		326,411			333,521
Less
Net deferred loan fees, premiums and discounts		(431	)		(346	)
Undisbursed portion of loans		(4,383	)		(4,180	)
Allowance for loan losses		(3,737	)		(3,697	)
Net loans	$	317,860		$	325,297

Activity in the allowance for loan losses was as follows:

	2009			2008

Balance, beginning of year	$	3,697		$	3,702
Provision charged to expense		3,197			1,102
Losses charged off, net of recoveries of $28 for 2009 and $77 for 2008		(3,157	)		(1,107	)
Balance, end of year	$	3,737		$	3,697

Loans to related parties at December 31, 2008 totaled $2,125 reduced by paydowns of $416 and increased by new debt of $388. Loans to related parties at December 31, 2009 totaled $2,097.

Impaired loans totaled $10,954 and $5,740 at December 31, 2009 and 2008, respectively. An allowance for loan losses of $305 and $811 relates to impaired loans of $10,214 and $5,490 at December 31, 2009 and 2008, respectively.

Interest of $653 and $234 was recognized on average impaired loans of $8,403 and $6,243 for 2009 and 2008, respectively. Interest of $373 and $234 was recognized on impaired loans on a cash basis during 2009 and 2008, respectively.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

At December 31, 2009 and 2008, there were no accruing loans delinquent 90 days or more. Non-accruing loans at December 31, 2009 and 2008 were $12,554 and $7,976, respectively.

Note 5: Premises and Equipment

Major classifications of premises and equipment, stated at cost, are as follows:

	2009			2008

Land	$	1,681		$	1,681
Buildings and improvements		6,417			6,386
Equipment		3,773			3,584
		11,871			11,651
Less accumulated depreciation		(5,662	)		(5,190	)
Net premises and equipment	$	6,209		$	6,461

Note 6: Loan Servicing

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was $126,963 and $114,612 at December 31, 2009 and 2008, respectively.

The following summarizes the activity pertaining to mortgage servicing rights measured using the amortization method. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value of the mortgage servicing rights. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates, were used to stratify the originated mortgage servicing rights.

	2009			2008
Mortgage servicing rights
Balance, beginning of year	$	991		$	1,132
Additions		440			16
Amortization of servicing rights		(277	)		(157	)
Balance, end of year	$	1,154		$	991

	2009		2008
Fair value, beginning of period	$	1,340	$	1,354
Fair value, end of period		1,411		1,340

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Note 7: Deposits

Deposits at year-end are summarized as follows:

	2009					2008
	Amount		Percent			Amount		Percent

Non interest-bearing deposits	$	21,359		7.69	%	$	16,739		6.47	%
NOW accounts		59,728		21.49			42,006		16.24
Savings accounts		27,099		9.75			22,796		8.82
		108,186		38.93			81,541		31.53
Certificates of deposit
0.00% to 1.99%		63,177		22.74			3,037		1.17
2.00% to 3.99%		74,326		26.75			105,400		40.76
4.00% to 5.99%		32,158		11.57			68,590		26.53
6.00% to 7.99%		19		.01			19		.01
		169,680		61.07			177,046		68.47
	$	277,866		100.00	%	$	258,587		100.00	%

At December 31, 2009, scheduled maturities of certificates of deposit are as follows:

2010	$	111,756
2011		29,517
2012		17,078
2013		3,512
2014		7,817
	$	169,680

Time deposits of $100 or more, including brokered deposits, were $88,315 and $103,470 at December 31, 2009 and 2008.

Deposits from related parties held by the Company at December 31, 2009 and 2008 totaled $1,176 and $1,296, respectively.

Total brokered deposits totaled approximately $27,300 and $61,001 at December 31, 2009 and 2008, respectively.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Note 8: Federal Home Loan Bank Advances

Federal Home Loan Bank advances totaled $57,000 and $78,500 at December 31, 2009 and 2008. At December 31, 2009, the advances range in interest rates from 0.47% to 6.03% and are secured by mortgage loans totaling $113,748.

Aggregate annual maturities of the advances at December 31, 2009, are:

2010	$	42,500
2011		11,500
2012		3,000
	$	57,000

Advances totaling $12,500 may, at certain dates, be converted to adjustable rate advances by the FHLB. If converted, the advances may be prepaid without penalty.

Note 9: Income Taxes

The provision for income taxes includes these components:

	2009			2008

Taxes currently payable	$	423		$	784
Deferred income taxes		(474	)		12
Income tax expense (benefit)	$	(49	)	$	796

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:

	2009			2008

Computed at the statutory rate (34%)	$	140		$	862
Increase (decrease) resulting from
Tax exempt interest		(78	)		(85	)
State income taxes		(49	)		62
Other		(62	)		(43	)
Actual tax expense(benefit)	$	(49	)	$	796

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

	2009		2008
Deferred tax assets
Allowance for loan losses	$	1,586	$	1,115
Non-accrual loan income		85		90
Other		257		143
		1,910		1,348
Deferred tax liabilities
Depreciation		185		181
Mortgage servicing rights		489		417
FHLB stock dividends		165		164
Unrealized gain on available-for-sale securities		159		77
Other		200		174
		1,198		1,013
Net deferred tax asset	$	712	$	335

Retained earnings at December 31, 2009 and 2008, include approximately $1,861 for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The deferred income tax liabilities on the preceding amounts that would have been recorded if they were expected to reverse into taxable income in the foreseeable future were approximately $737 at December 31, 2009 and 2008.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Note 10: Other Comprehensive Income

Other comprehensive income components and related taxes were as follows:

	2009		2008
Unrealized gains on available-for-sale securities	$	204	$	70
Less: reclassification adjustment for gain realized in the income statement		—		—
Net unrealized gains on available-for-sale securities		204		70
Tax expense		82		28
Other comprehensive income	$	122	$	42

The only component of accumulated other comprehensive income was unrealized gains on securities available for sale.

Note 11: Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of December 31, 2009 and 2008, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2009, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

The Bank’s actual capital amounts and ratios are also presented in the table.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2009
Total risk-based capital (to risk-weighted assets)	$	37,223		12.9	%	$	23,132		8.0	%	$	28,915		10.0	%
Tier I capital (to risk-weighted assets)		33,609		11.6			11,566		4.0			17,349		6.0
Tier I capital (to adjusted total assets)		33,609		9.1			11,123		3.0			18,538		5.0
Tier I capital (to adjusted tangible assets)		33,609		9.1			7,415		2.0			N/A		N/A
Tangible capital (to adjusted tangible assets)		33,609		9.1			5,561		1.5			N/A		N/A

As of December 31, 2008
Total risk-based capital (to risk-weighted assets)	$	36,409		12.8	%	$	22,763		8.0	%	$	28,453		10.0	%
Tier I capital (to risk-weighted assets)		33,763		11.9			11,381		4.0			17,072		6.0
Tier I capital (to adjusted total assets)		33,763		9.1			11,158		3.0			18,597		5.0
Tier I capital (to adjusted tangible assets)		33,763		9.1			7,439		2.0			N/A		N/A
Tangible capital (to adjusted tangible assets)		33,763		9.1			5,579		1.5			N/A		N/A

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2009, regulatory approval was required for all dividend declarations.

The Company converted from a mutual to a stock institution, and a “liquidation account” was established at $8,066, which was net worth reported in the conversion prospectus. Eligible depositors who have maintained their accounts, less annual reduction to the extent they have reduced their deposits, would receive a distribution from this account if the Bank liquidated. Dividends may not reduce shareholders’ equity below the required liquidation account balance.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Note 12: Employee Benefits

The Bank maintains an ESOP, which purchased 8% of the stock offered in the conversion using funds provided by an $824 loan from the Company, which was repaid by contributions to the ESOP by the Bank. Dividends paid on allocated shares are charged to retained earnings.

There was no ESOP expense recorded for 2009 and 2008.

	2009	2008

ESOP shares allocated	106,968	96,098

The Company has a retirement savings 401(k) plan covering substantially all employees. Employees may contribute up to 100% of their compensation with the Company matching 100% of the employee’s contribution on the first 4% of the employee’s compensation. Employer contributions charged to expense for 2009 and 2008 were $129 and $97, respectively.

Note 13: Stock Option Plan

The Company’s original Incentive Stock Option Plan, which was shareholder approved, permitted the grant of stock options to its directors, officers and other key employees. The plan authorized the grant of options for up to 238,050 shares of the Company’s common stock which generally vested at a rate of 20 percent a year and have a 10-year contractual life. 33,498 shares from this plan were outstanding at December 31, 2009. The Company’s 2007 Incentive Stock Option Plan (“Plan”), which is shareholder approved, also permits the grant of stock options to its directors, officers and other key employees. The Plan authorized the grant of options for up to 81,000 shares of the Company’s common stock, which generally vest at a rate of 20 percent a year and have a 10-year contractual term. 3,750 shares from this plan were outstanding at December 31, 2009. The Company believes that such awards better align the interests of its directors and employees with those of its shareholders. Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company issues shares from its authorized shares to satisfy option exercises.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted represents the period of time that options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The discount rate for post-vesting restrictions is estimated based on the Company’s credit-adjusted risk-free rate of return.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

A summary of option activity under the Plan as of December 31, 2009, and changes during the year then ended, is presented below:

	2009
	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value

Outstanding, beginning of year		35,701		$	18.77
Granted		3,750			10.10
Forfeited or expired		(2,203	)		21.62

Outstanding, end of year		37,248		$	17.73	4.11 years	$	0
Exercisable, end of year		31,347		$	18.24	3.34 years	$	0

The total intrinsic value of options exercised during the years ended December 31, 2008 and 2009 was $0 and $16, respectively. The weighted average fair value of grants during the year was $2.37.

As of December 31, 2009, there was $5 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of two years.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Note 14: Earnings Per Share

Earnings per share (EPS) were computed as follows:

	Year Ended December 31, 2009
	Income		Weighted- Average Shares		Per Share Amount

Net income	$	460		1,553,525
Basic earnings per share
Income available to common stockholders					$	0.30
Effect of dilutive securities
Stock options				1,182
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	460		1,554,707	$	0.30

33,034 options outstanding at December 31, 2009 were considered anti-dilutive.

	Year Ended December 31, 2008
	Income		Weighted- Average Shares		Per Share Amount

Net income	$	1,740		1,555,206
Basic earnings per share
Income available to common stockholders					$	1.12
Effect of dilutive securities
Stock options				963
Diluted earnings per share
Income available to common stockholders and assumed conversions	$	1,740		1,556,169	$	1.12

23,140 options outstanding at December 31, 2008 were considered anti-dilutive.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Note 15: Disclosures About Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 (FAS 157), Fair Value Measurements, which was subsequently incorporated into the FASB Accounting Standards Codification (ASC) as Topic 820. Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Topic 820 has been applied prospectively as of the beginning of the year.

Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are not available, fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no Level 3 securities.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Available-for-sale securities
December 31, 2009
U.S. government agencies	$	536	$	---	$	536	$	---
Mortgage-backed securities		3,307		---		3,307		---
State and political subdivisions		7,502		---		7,502		---
Totals	$	11,345	$	---	$	11,345	$	---

Available-for-sale securities
December 31, 2008
U.S. government agencies	$	509	$	---	$	509	$	---
Mortgage-backed securities		3,705		---		3,705		---
State and political subdivisions		7,639		---		7,639		---
Totals	$	11,853	$	---	$	11,853	$	---

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of those instruments under the valuation hierarchy.

Impaired Loans

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheet measured at fair value on a nonrecurring basis and the level within the Topic 820 fair value hierarchy in which the fair value measurements fall at December 31, 2009:

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Impaired loans December 31, 2009	$	9,218	$	---	$	---	$	9,218

Impaired loans December 31, 2008	$	4,803	$	---	$	---	$	4,803

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

The following table presents estimated fair values of the Company’s financial instruments recognized in the accompanying balance sheets at amounts other than fair value. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

	December 31, 2009				December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	12,901	$	12,901	$	11,225	$	11,225
Available-for-sale securities		11,345		11,345		11,853		11,853
Loans including loans held for sale, net of allowance for loan losses		321,163		331,739		326,639		336,892
Federal Home Loan Bank stock		3,997		3,997		3,997		3,997
Interest receivable		1,447		1,447		1,627		1,627
Financial liabilities
Deposits		277,866		281,663		258,587		264,228
Federal Home Loan Bank advances		57,000		57,993		78,500		80,556
Interest payable		171		171		317		317

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents, Interest-Bearing Deposits and Federal Home Loan Bank Stock

The carrying amount approximates fair value.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Interest Receivable and Interest Payable

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

Commitments to Originate Loans, Letters of Credit and Lines of Credit

Loan commitments and letters-of-credit generally have short-term, variable rate features and contain clauses which limit the Bank’s exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value.

Note 16: Commitments and Contingent Liabilities

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

At year-end, these financial instruments are summarized as follows:

	2009		2008
Commitments to extend credit
Fixed rate	$	2,938	$	7,678
Variable rate		5,350		2,803
Unused portions of lines of credit		28,777		31,039
Letters of credit		286		238

The commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established under the contract. Generally, such commitments are for no more than 60 days. At December 31, 2009, the fixed rate loan commitments were at rates ranging from 4.25% to 7.50%. Unused portions of lines of credit include balances available on commercial and home equity loans and are variable rate.

Note 17: Condensed Financial Information (Parent Company Only)

Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:

Condensed Balance Sheets
	December 31
	2009		2008
Assets
Cash	$	10	$	10
Securities available-for-sale		158		171
Investment in the Bank		33,840		33,880
Other assets		182		35
Total assets	$	34,190	$	34,096

Liabilities	$	306	$	21

Stockholders’ Equity		33,884		34,075
Total liabilities and stockholders’ equity	$	34,190	$	34,096

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Condensed Statements of Income
	Years Ending December 31
	2009			2008
Income
Dividends from the Bank	$	762		$	1,606
Other income		10			10
Total income		772			1,616

Expenses		(242	)		(231	)

Income Before Income Tax and Equity in Undistributed Income of Subsidiaries		530			1,385

Income Tax Benefit		94			90

Income Before Equity in Undistributed Income of Subsidiaries		624			1,475

Equity in Undistributed (Distribution in Excess of) Income of Subsidiaries		(164	)		265

Net Income	$	460		$	1,740

Condensed Statements of Cash Flows
	Years Ending December 31
	2009			2008

Operating Activities
Net income (distributions in excess of)	$	460		$	1,740
Equity in undistributed (distributions in excess of) income of the Bank		164			(265	)
Change in other assets		138			131
Net cash provided by operating activities		762			1,606

Investing Activities
Proceeds from paydowns of securities		13			13
Net cash provided by investing activities		13			13

Financing Activities
Dividends paid		(775	)		(1,556	)
Stock options exercised		---			74
Repurchase of stock		---			(165	)
Net cash used in financing activities		(775	)		(1,647	)

Net Change in Cash		---			(28	)

Cash at Beginning of Year		10			38

Cash at End of Year	$	10		$	10

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

Note 18: Recent Accounting Pronouncements

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

(Dollars in Thousands, Except Per Share Data)

No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. ASU 2009-17 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. It is not expected that ASU 2009-17 will have a material effect on the Company’s consolidated financial condition or results of operations.

LSB FINANCIAL CORP.

and

Lafayette Savings Bank, FSB

Directors and Executive Officers

Directors

Randolph F. Williams

President and Chief Executive Officer,

LSB Financial and Lafayette Savings

Mariellen M. Neudeck

Chairman of the Board, LSB Financial and Lafayette Savings

Vice President, Greater Lafayette Health Services, Inc., retired

James A. Andrew

President and Owner, Henry Poor Lumber Co. and Homeworks

Kenneth P. Burns

Executive Vice President and Treasurer,

Purdue University, retired

Mary Jo David

Vice President, Chief Financial Officer

and Secretary-Treasurer of LSB Financial and Lafayette Savings

Philip W. Kemmer

Transportation Supervisor,

Lafayette School Corp., retired

Peter Neisel

Owner, President and CEO, Schwab Corp., retired

Jeffrey A. Poxon

Senior Vice President, Investments and

Chief Investment Officer, The Lafayette Life Insurance Company

Charles W. Shook

President and Owner, The Shook Agency

Stephen E. Belter

President and Managing Member,

Indiana Datapipe, LLC

Executive Officers

Randolph F. Williams

President and Chief Executive Officer

Mary Jo David

Vice President, Chief Financial Officer

and Secretary-Treasurer

DIRECTORS AND OFFICERS

James A. Andrew. Mr. Andrew is President and owner of Henry Poor Lumber Co. and Homeworks, retailers of building materials. He is also involved in residential and commercial land development.

Stephen E. Belter. Mr. Belter is the President and Managing Member of Indiana Datapipe, LLC, an Indiana limited liability company engaged in the business of building a fiber-optic data network in the Lafayette area.

Kenneth P. Burns. Mr. Burns served as Executive Vice President and the Treasurer of Purdue University prior to his retirement on August 31, 2005.

Philip W. Kemmer. Mr. Kemmer is currently employed by Greater Lafayette Public Transportation Corporation. Formerly he served as Transportation Supervisor for the Lafayette School Corp. until his retirement from that position in July 2003. Prior to joining the Lafayette School Corp., Mr. Kemmer was the business administrator for the Assembly of God Church from July 1995 through December 1999.

Randolph F. Williams. 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. Ms. David is Vice President, Chief Financial Officer and Secretary of LSB Financial and Lafayette Savings. She has held these positions with LSB Financial since its formation in 1994 and with Lafayette Savings since 1992 and was elected a Director of LSB Financial and Lafayette Savings in 1999.

Mariellen M. Neudeck. Ms. Neudeck, retired as of June 30, 2001, was a Vice President of Greater Lafayette Health Services, Inc. where she was responsible for 18 professional services departments operating in two hospitals. She was elected as Chairman of the Board of Lafayette Savings in 1993 and of LSB Financial in 1994.

Peter Neisel. Mr. Neisel, retired as of December 31, 2002, was the Owner, President and Chief Executive Officer of Schwab Corp., a manufacturer and seller of office equipment.

Jeffrey A. Poxon. Mr. Poxon is the Senior Vice President-Investments and Chief Investment Officer of The Lafayette Life Insurance Company.

Charles W. Shook. Mr. Shook is the President and owner of the Shook Agency, a residential and commercial real estate brokerage firm based in Lafayette, Indiana.

SHAREHOLDER INFORMATION

Corporate Office

101 Main Street

Lafayette, Indiana 47902

Branch Offices

1020A Sagamore Park Centre

West Lafayette, IN 47906

1501 Sagamore Parkway North

Lafayette, Indiana 47905

833 Twyckenham Boulevard

Lafayette, Indiana 47905

3510 S.R. 38 E

Lafayette, Indiana 47905

Independent Auditors

BKD, LLP

201 N. Illinois Street, Suite 700

P.O. Box 44998

Indianapolis, Indiana 46244-0998

Transfer Agent

Computershare Investor Services

350 Indiana Street, Suite 800

Golden, Colorado 80401

Local Counsel

Stuart & Branigin LLP

300 Main Street, Suite 800

Lafayette, Indiana 47902

Special Counsel

Barnes & Thornburg LLP

11 South Meridian Street

Indianapolis, Indiana 46204

Form 10-K Report

A copy of LSB Financial’s Annual Report on Form 10-K without exhibits for the fiscal year ended December 31, 2009, as filed with the SEC, will be furnished without charge to shareholders of LSB Financial upon written request to the Secretary, LSB Financial Corp., 101 Main Street, P.O. Box 1628, Lafayette, Indiana 47902, or by calling (765) 742-1064. Copies of the exhibits filed with the Form 10-K may be obtained by shareholders at a charge of $0.25 per page.

Common Stock

As of February 25, 2010, there were approximately 945 holders of record of LSB Financial Common Stock and 1,553,525 shares of issued and outstanding common stock. LSB Financial’s stock is quoted on the Nasdaq Global Market under the symbol “LSBI.”

The following table sets forth, for the periods shown, the high and low sale price of the common stock and cash dividends per share declared. All amounts have been adjusted to reflect stock dividends and stock splits declared by the Company to date. The last stock dividend was declared in 2006.

Quarter Ended	High	Low	Cash Dividends Declared

March 31, 2008	19.94	18.15	0.25
June 30, 2008	19.35	16.21	0.25
September 30, 2008	19.50	14.52	0.25
December 31, 2008	17.00	9.94	0.25
March 31, 2009	11.75	8.50	0.125
June 30, 2009	21.43	11.00	0.125
September 30, 2009	13.49	10.30	0.125
December 31, 2009	12.66	8.27	0.125

Dividend payment decisions are made with consideration of a variety of factors including earnings, financial condition, market considerations and regulatory restrictions. Restrictions on dividend payments are described in Note 11 of the Notes to Consolidated Financial Statements included in this Annual Report.

Expected volatility

Expected dividends

Expected term (in years)

Risk-free rate