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

Attached files

file	filename
10-K - FYE DECEMBER 31, 2010 - LSB FINANCIAL CORP	lsb_10k.htm
EX-23 - CONSENT - LSB FINANCIAL CORP	lsb_10kex23.htm
EX-21 - SUBSIDIARIES - LSB FINANCIAL CORP	lsb_10kex21.htm
EX-32 - SECTION 1350 CERTIFICATION - LSB FINANCIAL CORP	lsb_10kex32.htm
EX-31.2 - CFO CERTIFICATION - LSB FINANCIAL CORP	lsb_10kex312.htm
EX-31.1 - CEO CERTIFICATION - LSB FINANCIAL CORP	lsb_10kex311.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	28
Auditors’ Report	29
Consolidated Financial Statements	32
Directors and Executive Officers	65
Shareholder Information	67

	FINANCIAL HIGHLIGHTS

	December 31, 2010
	(Dollars in Thousands)

	Total assets	$371,847
	Total loans, net of allowance	323,075
	Securities and short-term investments	14,785
	Deposits	311,458
	Borrowings	22,500
	Shareholders’ equity	35,577
	Shareholders’ equity as percent of assets	9.56%
	Net Income	$2,117

ANNUAL MEETING

The Annual Meeting of Shareholders of LSB Financial Corp.
will be held April 20, 2011 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:

These days, in the banking industry, good news is especially welcome. So, let me start this annual letter by sharing positive comments about your LSB Financial stock in 2010.

Good news, part 1: At the end of 2010 the market value of our shares of LSB Financial was 38.6% higher than at the end of the previous year! By comparison, a 2010 index of 497 community banks, labeled ABA NASDAQ Community Bank Index (ABAQ), was up just 8%. The Indianapolis Business Journal named LSB Financial to their “25 best-performing Indiana stocks in 2010, ranking 14th.” This trend has continued through the first two months of 2011, as our stock price increased another 15.1%. We hope that, as 2011 progresses, markets may further normalize and an even more favorable valuation can be realized on our shares.

Good news, part 2: The December unemployment rate in Tippecanoe County was down to 7.9%, the Consumer Confidence Index hit its highest level since March 2008, and we have experienced recent announcements of new employers settling in our market and existing employers doing additional hiring. Despite the fact that many of our customers still struggle with the lasting effects of the recession, we do see improvement.

Good news, part 3: During a time when many other banks were not, Lafayette Savings Bank was profitable last year, reporting net income of $2.1 million, or $1.36 per share. This compares favorably to 2009, when we earned $0.46 million, or $0.30 per share. Measured by pre-tax, pre-provision earnings, our core business fared well in 2010. That bodes well for a return to consistently stronger earnings once loan loss provisions return to “normal” levels. In 2010 our loss provision was $2.8 million while charging off $1.4 million, resulting in an increase in our loan loss reserve to $5.3 million, or 1.65% of total loans. We believe this increase in our reserves is prudent in these uncertain times.

Adverse business cycles occur. Well-run companies, by prudent management through the adverse climate, survive these problematic periods to prosper in better times. Difficult times call for a strategy that strengthens the balance sheet and preserves capital. Consistent with the goal of fortifying capital, our Board made the hard but necessary decision in July 2010 to suspend the dividend on our common stock. That action allowed us to retain $388,000 of our earnings as capital in 2010. We believe suspension of the dividend best prepared the Bank for the predicted higher minimum capital requirements mandated by The Dodd–Frank Wall Street Reform and Consumer Protection Act. It also strengthened the financial health of the Bank generally. A strong capital position also provides a level of protection should the economy worsen and positions the Bank for growth as the economy improves. As the banking environment stabilizes, our intent is to continue to weigh the benefits of increased capital levels against the desire to pay our shareholders a competitive rate of return on their investment.

Another aspect of managing through difficult times is the control of operating expenses. In 2010 our operating expenses as a percentage of average assets were 2.62%, down from 2.81% the previous year. Much of the credit goes to our employees. After meeting the challenge of our 2009 cost-reduction initiative, “Incredible Cost Saves,” they continued finding ways to benefit from additional cost reductions in 2010.

Managing asset quality is one of our greatest responsibilities, one that we do not take lightly, and remains a top priority. While recognizing that in some cases a loss is inevitable, we work diligently to salvage relationships with customers who are struggling to get back on their feet. At year-end our non-performing assets totaled $19.3 million, or 5.18% of total loans. Although this level is higher than last year, some $5 million, or 26%, of these loans are less than 90 days past due and are actually working their way back to performing status. Another $1.2 million consists of other real estate owned, which is down from last year’s level of $1.9 million.

We intend to maintain our relevance in the market by following the community bank model and by working to be the bank of choice for all generations. For homeowners, our residential mortgage loan staff originated and sold $49 million of loans in 2010, for a gain of $1 million. In fact, mortgage data for the county in 2010 ranked us second out of some 31 mortgage lenders, with a market share of 9.2%. For those who prefer to bank online, we have introduced mobile banking along with our ongoing online bill pay and banking programs. We remain committed to providing extraordinary customer care and to doing what we can to help our customers survive and thrive.

In a 2010 survey conducted by Cross Financial Group, Lafayette Savings Bank received a “Primary Loyalty Index” score of 71.7%, compared to the industry average of 52.1%. As a company, we put our customers first and focus on understanding their needs and objectives. We believe our operating philosophy and actions all contributed to our 35% growth in core deposits, which enabled us to pay back $45 million of brokered deposits and Federal Home Loan Bank advances. Taking advantage of the low market interest rates, we increased our net interest margin to 3.68%, up 25% and the highest level in a century. We will continue to focus on core deposit growth as a means to build the value of the franchise.

Looking into the future, we remain confident. With dedicated employees and a Board of Directors that provides support, vision, and oversight, we stand ready to meet the demands of another challenging year. Our capital is strong. We are optimistic about our earnings potential. We have money to lend. Our core deposits continue to grow. And we have a dedicated management team. Like you, our directors, officers, and staff are stockholders of Lafayette Savings Bank; as such, all of us share mutual interests. You can rest assured that we will do everything possible to protect your investment and keep our company moving in the right direction.

	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,
	2010		2009		2008		2007		2006
	(Dollars in Thousands)
Selected Financial Condition Data:

Total assets	$	371,847	$	371,050	$	373,012	$	342,010	$	368,400
Loans receivable, including loans held for sale, net		323,075		321,163		326,639		296,908		317,691
Securities available-for-sale		11,805		11,345		11,853		13,221		16,316
Short-term investments		2,980		4,817		9,179		4,846		8,336
Deposits		311,458		277,866		258,587		232,030		255,304
Total borrowings		22,500		57,000		78,500		74,256		76,618
Shareholders’ equity		35,577		33,884		34,075		33,932		34,840

	December 31,
	2010			2009			2008			2007			2006
	(Dollars in Thousands, except share data)
Selected Operations Data:

Total interest income	$	18,895		$	19,659		$	21,319		$	22,882		$	23,263
Total interest expense		6,115			9,335			11,286			11,655			11,142
Net interest income		12,780			10,324			10,033			11,227			12,121
Provision for loan losses		2,759			3,197			1,102			1,570			1,018
Net interest income after provision for loan losses		10,021			7,127			8,931			9,657			11,103
Deposit account service charges		1,522			1,525			1,736			1,838			1,766
Gain on sales of mortgage loans		1,019			1,386			117			201			214
Gain on call of securities		---			---			---			6			---
Loss on real estate owned		(441	)		(183	)		(156	)		(1,097	)		---
Other non-interest income		980			1,059			1,194			1,098			858
Total non-interest income		3,080			3,787			2,891			2,046			2,838
Total non-interest expense		9,932			10,503			9,286			9,322			8,593
Income before taxes		3,169			411			2,536			2,381			5,348
Income taxes		1,052			(49	)		796			807			1,998
Net income	$	2,117		$	460		$	1,740		$	1,574		$	3,350

Earnings per share	$	1.36		$	0.30		$	1.12		$	1.00		$	2.08
Earnings per share, assuming dilution		1.36			0.30			1.12			0.99			2.07
Dividends paid per share		0.25			0.50			1.00			0.90			0.68

	December 31,
	2010			2009			2008			2007			2006
Selected Financial Ratios and Other Data:

Performance Ratios:
Return on assets (ratio of net income to average total assets)		0.56	%		0.12	%		0.48	%		0.45	%		0.91	%
Return on equity (ratio of net income to average equity)		6.09			1.34			5.08			4.52			9.88
Average interest rate spread during period		3.65			2.82			2.82			3.25			3.33
Net interest margin(1)		3.68			2.94			2.97			3.42			3.48
Operating expense to average total assets		2.62			2.81			2.58			2.66			2.33
Average interest-earning assets to average interest-bearing liabilities		1.02	x		1.04	x		1.05	x		1.05	x		1.05	x

Quality Ratios:
Non-performing assets to total assets at end of period		5.18	%		3.91	%		2.52	%		4.08	%		3.17	%
Allowance for loan losses to non-performing loans		29.53			29.65			46.35			37.04			23.72
Allowance for loan losses to loans receivable		1.65			1.16			1.12			1.23			0.86

Capital Ratios:
Shareholders’ equity to total assets at end of period		9.56			9.13			9.14			9.92			9.46
Average shareholders’ equity to average total assets		9.18			9.17			9.53			9.92			9.19
Dividend payout ratio		18.38			168.48			89.43			90.00			32.69

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 141 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, for understanding their financial needs and for finding a way to meet those needs. We contribute time and money to improve the quality of life in our market area and many of our employees volunteer for local non-profit agencies. We believe this sets us apart from the other 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 often have less local authority as their companies strive to consolidate. Focusing time and resources on acquiring customers who may be feeling disenfranchised by their no-longer-local or very large bank has proved to be a successful strategy.

In these 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 major manufacturers such as Subaru/Toyota, Caterpillar, and Wabash National; a strong education sector with Purdue University and a large local campus of Ivy Tech Community College; government offices of Lafayette, West Lafayette and Tippecanoe County; a growing high-tech presence with the Purdue Research Park; and the growth of a new medical corridor spurred by the building of two new hospitals. The area wasn’t immune to the effects of the recession but there are signs of recovery. Based on a report from Greater Lafayette Commerce, manufacturing employment is slowly returning to pre-recession levels, healthcare facility growth is continuing at a record pace and Purdue University continues an aggressive construction agenda. Capital investments announced and/or made in 2010 totaled $640 million compared to $341 million in 2009 and $593 million in 2008. Wabash National, the area’s second largest industrial employer, reported fourth quarter operating results which were the best since 2007 and noted that forecasts for 2011 showed “an approximate increase of 30 to 60 percent over 2010 levels.” Subaru, the area’s largest industrial employer and producer of the Subaru Legacy, Outback and Tribeca, announced the addition of 100 full-time production positions and projected 2010 volume to exceed 2009 by about 30%. In the education sector,

Purdue’s West Lafayette 2010 enrollment was up slightly from last year to just under 40,000 students and Ivy Tech’s 2010 enrollment set a record with over 8,000 students. 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. 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 Tippecanoe County unemployment rate peaked at 10.6% in July 2009 and ended at 7.9% for 2010 compared to 9.5% for Indiana and 9.4% nationally.

The housing market has remained fairly stable for the last several years with no price bubble and no resulting price swings. As of December 31, 2010, the five year percent change in house prices for the Lafayette Metropolitan Statistical Area according to the Federal Housing Finance Agency was a 1.89% increase with the one-year change a 0.99% increase. The number of houses sold in the county in 2010 was down 7% from last year, influenced in part by the timing of the tax credits offered to new home buyers. Building permits were virtually unchanged from last year and were in the same relatively low range for housing permits over the last four years. Some of this slowdown is believed to be in reaction to earlier overbuilding in the county as well as the increase in available properties due to foreclosure.

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 if that is not feasible, to get control of their properties through an overburdened court system. We acquired eight properties in 2010 through foreclosure or deeds-in-lieu of foreclosure and sold 26 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 fixed term FHLB advances or brokered deposits as needed. We generally prefer brokered deposits over FHLB advances when the cost of raising money locally is not competitive. The deposits are available with a range of terms, there is no collateral requirement and the money is predictable as it cannot be withdrawn early except in the case of the death of a depositor and there is no option to have the money rollover at maturity. In 2010 local deposits grew substantially including an increase of $37.8 million or 35.0% 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 2010 from 9.8% of deposits to 5.5% with the actual dollar amount decreasing from $27.3 million to $17.0 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. The Federal Reserve has held short-term rates at almost zero for the last two years while long-term rates have stayed in the 4.0% range. Because deposits are generally tied to shorter-term market rates and loans are generally tied to longer-term rates this would typically be viewed as a positive step and in fact our net interest margin 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 stimulus programs, we expect to see the money supply shrink and market rates rise. 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 2011 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.

2010 Summary

Our strategy in 2010 was to enhance credit analysis, work to manage non-performing loans and dispose of other real estate owned (OREO), control the cost of funds and other expenses, and focus on growth in other income. New lending was focused on selectively extending credit to stronger borrowers to improve credit quality and on increasing our secondary market lending, including 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.

Although the local economy fared somewhat better in 2010, the opportunity for loan production was generally lower than expected despite low market interest rates. Local unit residential real estate sales in 2010 decreased slightly from 2009, from 1,774 properties to 1,667. Commercial real estate activity was more often due to existing properties changing hands or being refinanced rather than new projects being started. New building activity was primarily in the 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. Our residential loan originators originated and sold $49.4 million of residential loans on the secondary market for a gain of $1.0 million. In 2010, we sold $911,000 of OREO properties, consisting of 26 properties.

In 2010 we allocated $2.8 million to loan loss reserves as we became more diligent in arranging or approving short sales of properties in the process of foreclosure or with identified problems. We charged off a total of $1.4 million to loan loss reserves in 2010 with recoveries of $229,000, and added $1.0 million of foreclosed properties to OREO. At December 31, 2010 our allowance for loan losses to total loans was 1.65%, compared to 1.16% at December 2009. Our non-performing loans increased from $12.6 million at December 31, 2009 to $18.1 million at December 31, 2010, including $4.9 million of loans that were less than 90 days past due but must remain as non-performing loans until they show they can continue to perform, typically by paying as agreed for six to twelve months. At December 31, 2010, our allowance for loan losses compared to non-performing loans was 29.61% compared to 29.65% at December 31, 2009. Non-performing loans, including the $4.9 million performing but non-accruing loans, compared to total loans increased from 3.92% at December 31, 2009 to 5.60% at December 31, 2010. Our OREO properties at December 31, 2010 were $1.2 million compared to $1.9 million at December 31, 2009. In 2010 we wrote off losses of $441,000 on the sale of OREO properties and $343,000 of writedowns were taken through the allowance for loan losses upon foreclosure 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 continuing upward slope of the yield curve in 2010 had the expected effect of increasing interest rate margins. All loans tied to prime remained at low rates and other repricing variable rate loans and the continuing low rates on new loans resulted in a 31 basis point decrease in the yield on loans. However, deposit rates also reacted to the lower rates as time accounts gradually repriced downward and new deposits were made at the lower market rates. The return paid on deposits and advances fell 98 basis points in 2010.

Other non-interest income, excluding the gain on sale of loans and the loss on the sale of OREO, decreased by $82,000 from December 31, 2009 to December 31, 2010 generally due to small decreases in several areas including a $38,000 decrease in the return on our Bank-owned life insurance investments and a $22,000 decrease in fees generated by our wealth management department.

The results of our loan and deposit activity in 2010 are illustrated in the chart on page 14 and include:

·	Residential mortgage loans (including loans held for sale) increasing by 1.3% from $123.5 million to $125.1 million.

·	All other real estate loans, net, including multi-family, land, land development, construction and commercial real estate loans increased 3.0% from $169.2 million to $174.3 million net of undisbursed loans.

·	Commercial business lending decreased 1.8% from $16.6 million to $16.3 million.

·	At December 31, 2010, 73.7% of our gross loan portfolio had adjustable interest rates.

·	Total deposit accounts increased 12.1% from $277.9 million at December 31, 2009 to $311.5 million at December 31, 2010, with core deposits increasing 35.0% from $108.2 million to $146.0 million over the same period.

2011 Overview

We expect to see continued slow-to-moderate growth in our residential loan portfolio through 2011 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. 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 2011 as the level of non-performing loans at the end of 2010 continued to be high and OREO properties at year end were $1.2 million. Our allowance for loan losses to non-performing loans was at 29.61% and the allowance for loan losses to total loans ended the year at 1.65%. 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 estimated incurred losses.

We intend to continue to follow a strategy in 2011 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, including FHA and VA loans to access a market not previously available to us, and (5) funding our growth by using a mix of local and brokered deposits and FHLB advances, favoring local deposits unless they are clearly less 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”), the Troubled Asset Relief Program (“TARP”) and the American Recovery and Reinvestment Act of 2009. In addition, on July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry.

The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that will profoundly affect how community banks, thrifts, and small bank and thrift holding companies, such as LSB Financial, will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve Board, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payments. The Dodd-Frank Act contains numerous other provisions affecting financial institutions of all types, many of which may have an impact on the operating environment of LSB Financial in substantial and unpredictable ways. Consequently, the Dodd-Frank Act is likely to affect our cost of doing business, it may limit or expand our permissible activities, and it may affect the competitive balance within our industry and market areas. The nature and extent of future legislative and regulatory changes affecting financial institutions, including as a result of the Dodd-Frank Act, is very unpredictable at this time. The Company’s management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on the business, financial condition, and results of operations of the Company. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Company in particular, is uncertain at this time.

It is not clear at this time what long-term impact the EESA, TARP, the ARRA, 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. There can be no assurance regarding the specific impact that such measures may have on us and no assurance whether or to what extent we will be able to benefit from such programs.

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.

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 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 a maximum amount, generally $250,000 per depositor. 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 charges us premiums to maintain the Deposit Insurance Fund. The FDIC has set the designated reserve ratio for the Deposit Insurance Fund at 2.0% of insured deposits. The Bank is also subject to assessment for the Financing Corporation (FICO) to service the interest on its bond obligations. The amount assessed is in addition to the amount paid for deposit insurance according to the risk-related assessment schedule. These assessments will continue until the FICO bonds are repaid between 2017 and 2019. Future increases in deposit insurance premiums or changes in risk classification would increase the Bank’s deposit related costs.

On December 30, 2009, banks were required to pay the quarterly risk-based FDIC assessment for the fourth quarter of 2009, and prepay estimated insurance assessments for the years 2010 through 2012. The amount of prepayment due and paid by the Bank on December 30, 2009 was $2.3 million. The prepayment did not affect the Bank’s earnings when paid. Effective April 1, 2011, the FDIC, pursuant to the Dodd-Frank Act, is changing the assessment base for deposit insurance premiums from adjusted domestic deposits to average consolidated total assets minus average tangible equity, and scaling the insurance premium rates to the increased assessment base. The Bank does not believe that its insurance premiums will increase as a result

of these changes, but has not yet been advised by the FDIC of the adjusted premiums that it will be required to pay from and after April 1, 2011.

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”). The Bank’s participation in the TLGP allows noninterest bearing transaction accounts to receive unlimited insurance coverage, for a fee, until December 31, 2010 (extended by the Dodd-Frank Act through December 31, 2012 for no additional charges).

The FDIC has authority to increase insurance assessments. Increased assessment rates and special assessments have had a material impact on the Company’s results of operations and could continue to do so.

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, with housing values increasing 0.99% in 2010 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, 2010. 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

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, 2010 compared to Financial Condition at December 31, 2009.

SELECTED FINANCIAL CONDITION DATA
(Dollars in thousands)

	December 31,		December 31,		$				%
	2010		2009		Difference			Difference

Total assets	$	371,847	$	371,050	$	797			0.21	%

Loans receivable, including loans held for sale, net		323,075		321,163		1,912			0.60
Residential mortgage loans		125,121		123,502		1,619			1.31
Home equity lines of credit		17,043		14,698		2,345			15.95
Other real estate loans net undisbursed portion of loans		174,320		169,172		5,149			3.04
Commercial business loans		16,332		16,638		(306	)		(1.84	)
Consumer loans		1,208		1,321		(113	)		(8.55	)
Loans sold		49,389		68,726		(19,337	)		(28.14	)

Non-performing loans		12,466		12,554		(116	)		(0.92	)
Loans past due 90 days, still accruing		676		---		676			---
Loans less than 90 days past due, not accruing		4,903		---		4,980			---
Other real estate owned		1,214		1,892		(678	)		(35.84	)
Non-performing assets		19,260		14,446		4,862			33.66

Available-for-sale securities		11,805		11,345		460			4.05
Short-term investments		2,980		4,817		(1,837	)		(38.14	)

Deposits		311,458		277,866		33,592			12.09
Core deposits		146,007		108,186		37,821			34.96
Time accounts		165,451		169,680		(4,229	)		(2.49	)
Brokered deposits		16,984		27,300		(10,316	)		(37.79	)

FHLB advances		22,500		57,000		(34,500	)		(60.53	)
Shareholders’ equity (net)		35,577		33,884		1,693			5.00

As shown in the chart above, the net balance in our loan portfolio increased by $1.9 million from December 31, 2009 to December 31, 2010. Loans increased primarily due to slight increases in home equity loans due to a $2.5 million increase in the committed lines and a 3% increase in line usage, and in non-one-to-four-family property loans where loans were made on higher quality projects. We sold $49.4 million of residential loans in 2010 compared to $68.7 million in 2009 as the historically low interest rates continued to lead borrowers to refinance to lower, fixed rate mortgages which we typically sell on the secondary market. 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 $460,000 increase in our available-for-sale securities was primarily due to a desire to keep investments available to use for liquidity purposes, while the $1.8 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 $33.6 million and the funds were used primarily to pay down FHLB advances. We grew core deposits by $37.8 million and we reduced time deposits by $4.2 million. Of this $4.2 million, brokered deposits, which are a subset of time deposits, decreased by $10.3 million and there was a $6.1 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, 2010, we had $22.5 million in FHLB advances outstanding compared to $57.0 million at December 31, 2009. Based on the collateral we currently have listed under a blanket collateral arrangement with the FHLB, we could borrow up to $56.7 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 $14.4 million at December 31, 2009 to $19.3 million at December 31, 2010. Non-performing assets at December 31, 2010 consisted of $8.1 million of loans on residential real estate, $10.9 million on land or commercial real estate loans, $251,000 on commercial business loans and $18,000 on consumer loans. Foreclosed assets consisted of $1.0 million of residential properties and $206,000 of commercial real estate. At December 31, 2010, our allowance for loan losses equaled 1.65% of total loans compared to 1.16% at December 31, 2009. The allowance for loan losses at December 31, 2010 totaled 27.67% of non-performing assets compared to 25.87% at December 31, 2009, and 29.61% of non-performing loans at December 31, 2010 compared to 29.65% at December 31, 2009. Our non-performing assets equaled 5.18% of total assets at December 31, 2010 compared to 3.91% at December 31, 2009. Part of this increase is because of the category of loans under 90 days past due but non-accruing. These are loans that are showing signs of recovery but are required to remain non-accruing until they have established a history of paying as agreed. In recent years, loans that became 90 days past due and were placed in non-accrual status typically ended up in foreclosure, not in recovery.

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 reviewed and updated quarterly thereafter. It may take several months or 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 2009, we acquired 24 properties through deeds-in-lieu of foreclosure and an additional 25 properties through foreclosure. In 2010, we acquired 8 properties, all through foreclosure. As a result, $343,000 was charged against loan loss reserves for these properties in 2010 to reduce the carrying value of the property to the estimated realizable value. We also facilitated sales of 14 properties through short sales. 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 increased $1.7 million, or 5.00%, during 2010 primarily as a result of net income of $2.1 million, offset by our payment of dividends on common stock. Shareholders’ equity to total assets was 9.56% at December 31, 2010 compared to 9.13% at December 31, 2009.

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.

	2010								2009
	Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate			Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate
						(Dollars in thousands)
Interest-Earning Assets:
Loans receivable(1)	$	327,372		$	18,401		5.62	%	$	322,457		$	19,106		5.93	%
Mortgage-backed securities		2,923			112		3.83			3,472			160		4.61
Other investments		13,076			307		2.36			21,831			326		1.49
FHLB stock		3,928			75		1.91			3,997			67		1.68
Total interest-earning assets		347,299			18,895		5.44			351,757			19,659		5.59
Non-interest earning assets		31,625								22,399
Total assets	$	378,923							$	374,156

Liabilities and Shareholders’ Equity: Interest-Bearing Liabilities:
Savings deposits	$	25,934			109		0.42		$	25,773			243		0.94
Demand and NOW deposits		105,879			674		0.64			72,528			532		0.73
Time deposits		174,024			4,168		2.40			176,057			5,888		3.34
Borrowings		35,667			1,164		3.26			62,708			2,672		4.26
Total interest-bearing liabilities		341,504			6,115		1.79			337,066			9,335		2.77
Other liabilities		2,648								2,778
Total liabilities		344,152								339,844
Shareholders’ equity		34,771								34,311
Total liabilities and shareholders’ equity	$	378,923							$	374,156
Net interest income				$	12,780							$	10,324
Net interest rate spread							3.65	%							2.82	%
Net earning assets	$	5,795							$	14,691
Net yield on average interest-earning assets							3.68	%							2.94	%
Average interest-earning assets to average interest-bearing liabilities		1.02	x							1.04	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,
	2010 vs. 2009									2009 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	$	280		$	(985	)	$	(705	)	$	610		$	(1,996	)	$	(1,386	)
Mortgage-backed securities		(23	)		(25	)		(48	)		(33	)		(20	)		(53	)
Other investments		(157	)		138			(19	)		107			(193	)		(86	)
FHLB stock		(1	)		9			8			--			(135	)		(135	)
Total interest-earning assets	$	99		$	(863	)	$	(764	)	$	684		$	(2,344	)	$	(1,660	)

Interest-bearing liabilities:
Savings deposits	$	1		$	(135	)	$	(134	)	$	36		$	(30	)	$	6
Demand deposits and NOW accounts		234			(92	)		142			84			(66	)		18
Time deposits		(49	)		(1,671	)		(1,720	)		531			(1,573	)		(1,042	)
Borrowings		(1,076	)		(432	)		(1,508	)		(591	)		(343	)		(934	)
Total interest-bearing liabilities	$	(890	)	$	(2,330	)	$	(3,220	)	$	60		$	(2,012	)	$	(1,952	)

Net interest income							$	2,456								$	292

Comparison of Operating Results for the Years Ended December 31, 2010 and December 31, 2009.

General. Net income for the year ended December 31, 2010 was $2.1 million, an increase of $1.7 million or 360.22%, from net income of $460,000 for the year ended December 31, 2009. Improving areas included a $2.5 million increase in net interest income, a $571,000 decrease in non-interest expense and a $438,000 decrease in the provision for loan losses. These increases were partially offset by a $707,000 decrease in non-interest income and a $1.1 million increase in income taxes.

Our return on average assets was 0.56% for the year ended 2010, compared to 0.12% for the year ended 2009. Return on average equity was 6.09% for the year ended 2010 compared to 1.34% for 2009. During 2010 we paid quarterly cash dividends on common stock in the quarters ended March 31, 2011 and June 30, 2011 totaling $389,000, or $0.25 per share, for the year, representing a dividend payout ratio (dividends declared per share divided by diluted net income per share) of approximately 18.4%.

Net Interest Income. Net interest income for the year ended December 31, 2010 increased $2.5 million over the same period in 2009. Our net interest margin (net interest income divided by average interest-earnings assets) increased from 2.94% at December 31, 2009 to 3.68% at December 31, 2010. The largest factor in the increase in net interest income was the decrease in the average rate on deposits and FHLB advances from 2.77% in 2009 to 1.79% in 2010 caused primarily by extreme reductions in short-term interest rates due to cuts by the Federal Reserve. Separating deposits from FHLB advances, the rate on deposits decreased from 2.43% in 2009 to 1.62% in 2010 while the rate on advances decreased from 4.26% in 2009 to 3.26% in 2010. There was a smaller decrease in the average rate on interest-earning assets, and particularly loans, with the average rate on interest-earning assets decreasing only 15 basis points from 5.59% in 2009 to 5.44% in 2010. The balance of average interest-earning assets also decreased over the period from $351.7 million in 2009 to $347.3 million in 2010. Overall, the average rate on loans and investments decreased by 15 basis points while the average rate paid on advances and deposits decreased by 98 basis points.

Interest income on loans decreased $705,000 for the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily because of reduced rates partially offset by higher average loan volume. The average yield on loans decreased from 5.93% for the year ended December 31, 2009 to 5.62% for the year ended December 31, 2010. The average balance of loans held in our portfolio increased by $4.9 million from $322.5 million in 2009 to $327.4 million in 2010.

Interest income on investments decreased $58,000 taking into account an increase of $8,000 in dividends on FHLB stock for the year ended December 31, 2010 compared to the year ended December 31, 2009. The decrease in interest on investments and FHLB stock was primarily due to a decrease in average investments from $29.3 million in 2009 to $19.9 million in 2010 primarily due to the decrease in average short-term investments. This decrease was partially offset by an increase in the average rate earned from 1.92% in 2009 to 2.48% in 2010.

Interest expense for the year ended December 31, 2010 decreased $3.2 million over the same period in 2009. This decrease was primarily due to a decrease in the average rate paid on interest-bearing liabilities consisting of deposit accounts and FHLB advances from 2.77% in 2009 to 1.79% in 2010 reflecting the generally lower market rates over the period. The average interest rate on deposit accounts decreased from 2.43% in 2009 to 1.62% in 2010. The effect of the decrease in rates was offset by a $31.5 million increase in the average balance of deposit accounts. The benefit of a decrease in the average rate of FHLB advances from 4.26% in 2009 to 3.26% in 2010 was further improved by the decrease in the average balance from $62.7 million to $35.7 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.

		12/31/10		12/31/09		12/31/08
	(Dollars in thousands)

Loans delinquent 30-59 days		$	559	$	677	$	1,483
Loans delinquent 60-89 days			808		3,169		3,187
Total delinquencies			1,367		3,846		4,670

Accruing loans past due 90 days			676		---		---
Non-accruing loans			17,370		12,554		7,976
Total non-performing loans			18,046		12,554		7,976
OREO			1,214		1,892		1,412

Total non-performing assets		$	19,260	$	14,446	$	9,388

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 and loans that begin to perform after a period of nonperformance 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 $4.9 million of loans at December 31, 2010 considered non-accruing in the chart above that are troubled debt restructurings or loans that have begun to perform after a period of nonperformance. There were no such loans at December 31, 2009.

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, 2010 our largest areas of concern were loans on non-residential properties and, to a lesser extent one- to four-family non-owner occupied rental properties and multi-family properties. Loans delinquent more than 30 days at December 31, 2010 included $6.0 million of loans on non-residential properties, $3.5 million of loans on one- to four-family rental properties and $2.3 million of loans on multi-family properties. Our non-residential properties are typically smaller loans averaging about $400,000 and the borrowers are typically seeing decreased business because of the economy. 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 multifamily properties have the advantage of being more readily salable if they are in areas considered student housing. As was noted by a local realtor report in reference to multifamily housing, “the demand to purchase is held in check only by the limited supply.”

We recorded a $2.8 million provision for loan losses during 2010 as a result of our analyses of our current loan portfolios, compared to $3.2 million during 2009. 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 2010, we charged $1.4 million against loan loss reserves on 55 loans either written off, written down to fair value or taken into other real estate owned in 2010. We expect to obtain possession of more properties in 2011 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 $5.3 million reserve for loan losses in 2010 was considered adequate to cover further charge-offs based on our evaluation and our loan mix.

Our loan portfolio does not contain 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 $10.6 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 are delinquent. We also have $7.8

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, $132,000 are currently over 30 days past due. Our total high loan-to-value loans at December 31, 2010 were at 48% of capital, well under regulatory guidelines of 100% of capital. We have $17.0 million of home equity lines of credit of which seven loans totaling $192,000 are delinquent more than 30 days.

At December 31, 2010, non-performing assets, consisting of non-performing loans, accruing loans 90 days or more delinquent, loans less than 90 days past due still on nonaccrual, and other real estate owned, totaled $19.3 million compared to $14.4 million at December 31, 2009. In addition to our non-performing assets, we identified $17.3 million in other loans of concern where information about possible credit problems of the 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, 2010, we believe that our allowance for loan losses was adequate to absorb estimated losses inherent in our loan portfolio. Our allowance for losses equaled 1.65% of net loans receivable and 29.61% of non-performing loans at December 31, 2010, compared to 1.16% and 29.65% at December 31, 2009, respectively. Our non-performing assets equaled 5.18% of total assets at December 31, 2010 compared to 3.91% at December 31, 2009. We typically sustain losses averaging about 30% of the total principal balance on non-performing loans that progress to foreclosure and are then sold as OREO properties. At December 31, 2010 our reserve for loan losses was within 1.0% of this amount.

Non-Interest Income. Non-interest income for the year ended December 31, 2010 decreased by $707,000, or 18.67%, compared to the same period in 2009. The decrease was primarily due to a $367,000 decrease in the gain on sale of loans due to the decrease in the volume of loans sold from $68.7 million in 2009 to $49.4 million in 2010, a $258,000 increase in the loss recognized on the sale of OREO properties and by an $82,000 decrease in deposit account service charges and other fees. The decreases in other non-interest income were due primarily to a $38,000 decrease in the return on Bank-owned life insurance investments and a $22,000 decrease in fees generated by our in-house wealth management department and small decreases in several other accounts.

Non-Interest Expense. Non-interest expense for the year ended December 31, 2010 decreased $571,000 over the same period in 2009. The decrease was primarily due to a $542,000 decrease in the costs related to acquiring, maintaining and disposing of foreclosed and OREO properties because of the decrease in the number of these properties; a $106,000 decrease in other expenses due to a 2009 chargeoff of a $110,000 leasehold property; an $81,000 decrease in the expenses from a low income housing project held for tax credit purposes; and a $76,000 decrease in FDIC insurance partially attributable to the absence of a special assessment by the FDIC comparable to the $171,000 paid in 2009. These decreases in expense were partially offset by a $151,000 increase in salaries due primarily to continuing loan origination activity by commission-based loan originators. Occupancy and computer costs remained virtually flat with a net increase of $3,000 and advertising costs decreased $19,000 as we try to monitor our use of advertising dollars to get the most benefit for the least expense.

Income Tax Expense. Our income tax provision increased by $1.1 million for the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily due to increased 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, 2010 and 2009, 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 100 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, 2010				At December 31, 2009
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	%	11.90	%	(58	)	10.70	%	(139	)
200		7.00		12.45		(3	)	11.46		(62	)
100		8.00		12.64		16		11.87		(22	)
0		8.00		12.48		---		12.09		---
-100		8.00		12.34		(14	)	12.31		22

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, 2010, the Bank originated loans totaling $116.5 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 $67.5 million. The proceeds from the sale of loans totaled $49.4 million for the year ended December 31, 2010. There were no security sales in 2010 or 2009.

Because there was an increase in the balance of loans in our portfolio in 2010, we used some of the increases in our deposits to fund loans. We also 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 5%. Our liquidity ratio at December 31, 2010 was 6.06% as a percentage of total assets.

We anticipate that we will have sufficient funds available to meet current loan commitments. At December 31, 2010 we had outstanding commitments to originate loans and available lines of credit totaling $35.7 million and commitments to provide borrowers the funds needed to complete current construction projects in the amount of $5.1 million. Certificates of deposit that will mature in one year or less at December 31, 2010 totaled $86.8 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, 2010, $3.4 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 as needed. At December 31, 2010, LSB Financial had $178,000 in liquid assets on hand. The primary source of liquidity on an ongoing basis is dividends from Lafayette Savings. Dividends totaling $879,000 were paid from the Bank to LSB Financial during the year ended December 31, 2010. For the year ended December 31, 2010, LSB Financial paid dividends to shareholders totaling $389,000 due to dividends declared and paid during the quarters ended March 31, 2010 and June 30, 2010. Under the Bank’s Supervisory Agreement and LSB Financial’s Memorandum of Understanding with the OTS any declaration or payment of dividends or other capital distributions by the Bank or LSB Financial must be approved by the OTS. LSB Financial is currently not paying dividends to its shareholders.

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, 2010.

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.

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

2010
March	$	4,671	$	1,723	$	2,948	$	434	$	532		$	0.34		$	0.34
June		4,721		1,572		3,149		465		457			0.29			0.29
September		4,877		1,489		3,388		910		526			0.34			0.34
December		4,626		1,331		3,295		950		602			0.39			0.39
	$	18,895	$	6,115	$	12,780	$	2,759	$	2,117

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

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, 2010 and 2009

LSB Financial Corp.

December 31, 2010 and 2009

Contents

Report of Independent Registered Public Accounting Firm		31

Consolidated Financial Statements
	Balance Sheets	32
	Statements of Income	33
	Statements of Stockholders’ Equity	34
	Statements of Cash Flows	35
	Notes to Financial Statements	36

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

LSB Financial Corp.

Lafayette

We have audited the accompanying consolidated balance sheets of LSB Financial Corp. as of December 31, 2010 and 2009, 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, 2010, and 2009, 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 16, 2011

LSB Financial Corp.

Consolidated Balance Sheets

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Assets	2010		2009

Cash and due from banks	$	10,593	$	8,084
Short-term investments		2,980		4,817
Cash and cash equivalents		13,573		12,901
Available-for-sale securities		11,805		11,345
Loans held for sale		2,265		3,303
Loans, net of allowance for loan losses of $5,343 and $3,737 at December 31, 2010 and 2009, respectively		320,810		317,860
Premises and equipment, net		6,116		6,209
Federal Home Loan Bank stock		3,583		3,997
Bank-owned life insurance		6,264		6,071
Interest receivable and other assets		7,431		9,364
Total assets	$	371,847	$	371,050

Liabilities and Stockholders’ Equity

Liabilities
Deposits	$	311,458	$	277,866
Federal Home Loan Bank advances		22,500		57,000
Interest payable and other liabilities		2,312		2,300
Total liabilities		336,270		337,166

Commitments and Contingencies

Stockholders’ Equity
Common stock, $.01 par value; authorized 7,000,000 shares; issued and outstanding 2010 -1,553,525 shares, 2009 - 1,553,525 shares		15		15
Additional paid-in capital		10,987		10,985
Retained earnings		24,374		22,646
Accumulated other comprehensive income		201		238
Total stockholders’ equity		35,577		33,884

Total liabilities and stockholders’ equity	$	371,847	$	371,050

See Notes to Consolidated Financial Statements

LSB Financial Corp.

Consolidated Statements of Income

Years Ended December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

	2010			2009
Interest and Dividend Income
Loans	$	18,401		$	19,106
Securities
Taxable		232			279
Tax-exempt		239			262
Other		23			12
Total interest and dividend income		18,895			19,659

Interest Expense
Deposits		4,951			6,663
Borrowings		1,164			2,672
Total interest expense		6,115			9,335

Net Interest Income		12,780			10,324

Provision for Loan Losses		2,759			3,197

Net Interest Income After Provision for Loan Losses		10,021			7,127

Noninterest Income
Deposit account service charges and fees		1,522			1,525
Net gains on loan sales		1,019			1,386
Net loss on other real estate owned		(441	)		(183	)
Other		980			1,059
Total noninterest income		3,080			3,787

Noninterest Expense
Salaries and employee benefits		5,288			5,137
Net occupancy and equipment expense		1,303			1,307
Computer service		569			562
Advertising		282			301
Other		2,490			3,196
Total noninterest expense		9,932			10,503

Income Before Income Tax		3,169			411

Provision (Benefit) for Income Taxes		1,052			(49	)

Net Income	$	2,117		$	460

Basic Earnings Per Share	$	1.36		$	0.30

Diluted Earnings Per Share	$	1.36		$	0.30

See Notes to Consolidated Financial Statements

LSB Financial Corp.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)


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

Balance, January 1, 2009	$	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
Comprehensive income
Net income						2,117						2,117
Change in unrealized appreciation on available-for-sale securities, net of taxes									(37	)		(37	)
Total comprehensive income												2,080
Dividends on common stock, $0.25 per share						(389	)					(389	)
Amortization of stock option compensation				2								2

Balance, December 31, 2010	$	15	$	10,987	$	24,374		$	201		$	35,577

See Notes to Consolidated Financial Statements

LSB Financial Corp.

Consolidated Statements of Cash Flows

Years Ended December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

	2010			2009
Operating Activities
Net income	$	2,117		$	460
Items not requiring (providing) cash
Depreciation		425			472
Provision for loan losses		2,759			3,197
Amortization of premiums and discounts on securities		49			49
Deferred income taxes		(485	)		(474	)
Loss on other real estate owned		441			183
Gain on sale of loans		(1,019	)		(1,386	)
Loans originated for sale		(47,528	)		(69,741	)
Proceeds on loans sold		49,389			68,726
Compensation cost of stock options		2			2
Changes in
Interest receivable and other assets		1,744			(1,687	)
Interest payable and other liabilities		36			842
Net cash provided by operating activities		7,930			643

Investing Activities
Purchases of available-for-sale securities		(2,901	)		(2,894	)
Proceeds from maturities of available-for-sale securities		2,330			3,557
Net change in loans		(6,383	)		1,645
Proceeds from sale of real estate owned		911			1,941
Reclamation of Federal Home Loan Bank stock		414			---
Purchase of premises and equipment		(332	)		(220	)
Net cash provided by (used in) investing activities		(5,961	)		4,029

Financing Activities
Net change in demand deposits, money market, NOW and savings accounts		37,821			26,645
Net change in certificates of deposit		(4,229	)		(7,366	)
Proceeds from Federal Home Loan Bank advances		16,000			13,000
Repayment of Federal Home Loan Bank advances		(50,500	)		(34,500	)
Dividends paid		(389	)		(775	)
Net cash used in financing activities		(1,297	)		(2,996	)

Increase in Cash and Cash Equivalents		672			1,676

Cash and Cash Equivalents, Beginning of Year		12,901			11,225

Cash and Cash Equivalents, End of Year	$	13,573		$	12,901

Supplemental Cash Flows Information
Interest paid	$	6,224		$	9,480
Income taxes paid		1,210			289

Supplemental NonCash Disclosures
Capitalization of mortgage-servicing rights	$	196		$	440
Loans transferred to other real estate		1,017			2,595

See Notes to Consolidated Financial Statements

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(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, and the Bank’s two subsidiaries, LSB Service Corp. (“LSBSC”) and Lafayette Insurance &Investments (“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, 2010 and 2009

(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 noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

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.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

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, carried at cost and evaluated for impairment.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Foreclosed Assets Held for Sale

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.

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.

Income Taxes

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. 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.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Uncertain tax positions 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.

Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during each period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

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 protracted economic decline continues to present financial institutions with circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans.

At December 31, 2010, the Company held $143 in commercial real estate held in other real estate owned and $104.9 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.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

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, 2010 was $1,282.

Effective July 21, 2010, the FDIC’s insurance limits were permanently increased to $250. At December 31, 2010, the Company’s interest-bearing cash accounts do not exceed federally insured limits. Additionally, approximately $1,543 and $9,483 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, together with unrealized gains and losses, of securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value
Available-for-sale Securities:
December 31, 2010
U.S. Government sponsored agencies	$	2,081	$	19	$	(4	)	$	2,096
Mortgage-backed securities		2,529		145		---			2,674
State and political subdivisions		6,860		181		(6	)		7,035

	$	11,470	$	345	$	(10	)	$	11,805
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

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

The amortized cost and fair value of available-for-sale securities at December 31, 2010, 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	$	1,279	$	1,287
One to five years		4,803		4,886
Five to ten years		2,377		2,461
After ten years		482		497
		8,941		9,131
Mortgage-backed securities		2,529		2,674

Totals	$	11,470	$	11,805

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, 2010 was $1,916 which is approximately 16% 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, 2010. 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
U.S. Government sponsored agencies	$	1,042	$	4	$	---	$	---	$	1,042	$	4
State and political subdivisions		874		6		---		---		874		6

Total temporarily impaired securities	$	1,916	$	10	$	---	$	---	$	1,916	$	10

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31 include:

	2010			2009
Real Estate
One-to-four family residential	$	122,856		$	120,199
Multi-family residential		53,458			52,790
Commercial real estate		90,395			90,571
Construction and land development		30,467			30,194
Commercial		16,332			16,638
Consumer and other		1,208			1,321
Home equity lines of credit		17,043			14,698
Total loans		331,759			326,411

Less
Net deferred loan fees, premiums and discounts		(499	)		(431	)
Undisbursed portion of loans		(5,107	)		(4,383	)
Allowance for loan losses		(5,343	)		(3,737	)

Net loans	$	320,810		$	317,860

Activity in the allowance for loan losses was as follows:

	2010			2009

Balance, beginning of year	$	3,737		$	3,697
Provision charged to expense		2,759			3,197
Losses charged off, net of recoveries of $229 for 2010 and $28 for 2009		(1,153	)		(3,157	)

Balance, end of year	$	5,343		$	3,737

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Additional information on the allocation of loan loss reserves by loan category, which does not include loans held for sale, for 2010 is provided below.

Allowance for Loan Losses and Recorded Investment in Loans for the Year Ended December 31, 2010
2010	Commercial		Owner Occupied 1-4			Non-owner Occupied 1-4		Multi-family		Commercial RE		Construction			Land		Consumer and Home Equity	Total
Allowance for losses
Beginning balance	$	103	$	402		$	1,214	$	344	$	1,095	$	38		$	518	23	3,737
Provision charged to expense		527		(61	)		3		794		1,140		(46	)		337	65	2,759
Losses charged off		68		117			579		---		211		---			402	5	1,382
Recoveries		3		18			135		---		37		8			27	1	229

Ending balance		565		242			773		1,138		2,061		---			480	84	5,343
ALL individually evaluated		285		122			390		574		1,039		---			242	42	2,694
ALL collectively evaluated		280		120			383		564		1,022		---			238	42	2,649
Loans individually evaluated		4,334		3,365			16,529		11,491		21,828		---			6,865	279	64,691
Loans collectively evaluated		11,998		56,941			46,021		41,967		68,567		15,957			7,645	17,972	267,068

We rate all loans by credit quality using the following designations:

GRADE 1 - Pass, superior credit quality

Loans of the highest quality. Financial strength of the borrower (exhibited by extremely low debt-to-income ratios/high debt-service coverage, low loan-to-value ratio, and clean credit history) is such that no loss is anticipated. Probability of serious or rapid deterioration is extremely small.

GRADE 2 - Pass, good credit quality

Loans of good quality. Overall above average credit, with strong capacity to repay (exhibited by higher debt-to-income ratios/lower debt-service coverage than Grade 1, but still better than average levels), sound credit history and employment. Loan-to-value is not as strong as Grade 1, but is greater than Grade 3. Minor loss exposure with the probability of serious financial deterioration unlikely.

GRADE 3 - Pass, low risk

Loans of satisfactory quality. Average quality due to average capacity to repay (exhibited by higher debt-to-income ratios/lower debt-service coverage than Grade 2 but better than levels requiring Loan Committee approval), employment, credit history, loan-to-value ratio, or paying habits. Deterioration possible if adverse factors occur.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

GRADE 4 - Pass, acceptable risk

Loans of marginal, but acceptable quality due to below average capacity to repay (exhibited by high debt-to-income ratios/low debt-service coverage), high loan-to-value, or poor paying habits. Deterioration likely if adverse factors occur.

GRADE W-4 - Pass, watch list credit

These loans have the same characteristics as standard Grade 4 loans, with an added significant weakness such as the global debt-service coverage of the borrower being below 1.00. Such loans should have no delinquencies within the previous 12 months.

GRADE 5- Special Mention

Loans in this classification are in a state of change that could adversely affect paying ability, collateral value or which require monthly monitoring to protect the asset value.

GRADE 6- Substandard

A substandard asset with a defined weakness. Heavy debt condition, deterioration of collateral, poor paying habits, or conditions present that unless deficiencies are corrected will result in some loss. Loans 90 or more days past due should be automatically included in this grade.

GRADE 7- Doubtful

Poor quality. Loans in this group are characterized by less than adequate collateral and all of the characteristics of a loan classified as substandard. The possibility of a loss is extremely high, but factors may be underway to minimize the loss or maximize the recovery.

GRADE 8 - Loss

Loans classified loss are considered uncollectible and of such little value that their continuance as an asset is not warranted.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

The following table provides an analysis of loan quality using the above designations, based on property type at December 31, 2010.

Credit Rating	Commercial		Owner Occupied 1-4		Non-owner Occupied 1-4		Multi- Family		Commercial Real Estate		Construction		Land		Consumer and Home Equity		Total

1- Superior	$	42	$	3,364	$	160	$	112	$	207	$	---	$	218	$	1,458	$	5,565
2 - Good		3,227		20,113		5,353		8,248		10,690		3,073		953		11,079		63,736
3 - Pass Low risk		3,767		26,149		15,514		26,040		31,532		8,843		1,150		4,404		117,399
4 - Pass		4,960		7,113		25,016		7,567		26,414		4,040		5,325		930		81,364
4W - Watch		172		1,351		5,591		4,353		8,331		---		2,483		116		22,398
5 - Special mention		3,899		462		5,535		2,478		4,799		---		---		97		17,269
6 - Substandard		265		1,753		5,382		4,660		8,421		---		4,382		164		25,027
7 - Doubtful		---		---		---		---		---		---		---		---		---
8 - Loss		---		---		---		---		---		---		---		---		---
Total	$	16,332	$	60,306	$	62,550	$	53,458	$	90,395	$	15,957	$	14,510	$	18,251	$	331,759

An analysis of past due loans segregated by loan type as of December 31, 2010 is provided below.

	Loan Portfolio Aging Analysis as of December 31, 2010

	30-59 Days		60-89 Days		Over 90 Days		Total Past Due		Current		Total Loans		Under 90 Days and Not Accruing		Total 90 Days and Accruing

Commercial	$	60	$	---	$	251	$	311	$	16,021	$	16,332	$	---	$	---
Owner occupied 1-4		139		539		515		1,193		59,113		60,306		715		---
Non owner occupied 1-4		---		176		3,293		3,469		59,080		62,550		1,918		48
Multi-family		---		---		2,289		2,289		51,168		53,458		559		---
Commercial RE		338		55		5,639		6,032		84,363		90,395		213		628
Construction		---		---		---		---		15,957		15,957		---		---
Land		16		---		1,022		1,039		12,472		14,510		1,468		---
Consumer and home equity		5		39		134		178		18,073		18,251		30		---

Total	$	559	$	809	$	13,143	$	14,511	$	317,248	$	331,759	$	4,903	$	676

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Impaired loans are those for which we believe it is probable that we will not collect all principal and interest due in accordance with the original terms of the loan agreement. The following table presents impaired loans and interest recognized on them for 2010.

Impaired Loans as of and for the Year Ended December 31, 2010
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Impaired Loans		Interest Income Recognized
Loans without specific valuation allowance
Residential Real Estate	$	7,485	$	6,385	$	---	$	7,661	$	391
Commercial Real Estate		7,238		7,765		---		6,765		343
Non real estate		---		---		---		46		8

Loans with a specific valuation allowance
Residential Real Estate		1,128		1,128		70		818		21
Commercial Real Estate		4,534		4,534		1,125		2,628		77
Non real estate		239		239		169		197		12

Total
Residential Real Estate		8,613		7,513		70		8,479		412
Commercial Real Estate		11,772		12,299		1,125		9,393		420
Non real estate		239		239		169		243		12

The following table gives a comparison of nonaccruing loans by loan class at December 31, 2010.

Loan Class	2010

Commercial	$	251
Owner occupied 1-4		1,230
Non owner occupied 1-4		5,163
Multi-family		2,848
Commercial RE		5,224
Construction		---
Land		2,490
Consumer and home equity		164

Total	$	17,370

At December 31, 2010, there were $676 accruing loans delinquent 90 days or more. There were no accruing loans delinquent 90 days or more in 2009. Non-accruing loans at December 31, 2010 and 2009 were $17,370 and $12,554, respectively.

Loans to related parties at December 31, 2009 totaled $2,097 reduced by paydowns of $913 and increased by new debt of $1,272. Loans to related parties at December 31, 2010 totaled $2,456.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Note 5: Premises and Equipment

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

	2010			2009

Land	$	1,681		$	1,681
Buildings and improvements		6,450			6,417
Equipment		3,422			3,773
		11,553			11,871
Less accumulated depreciation		(5,437	)		(5,662	)

Net premises and equipment	$	6,116		$	6,209

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 were $119,344 and $126,963 at December 31, 2010 and 2009, 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.

	2010			2009
Mortgage servicing rights
Balance, beginning of year	$	1,154		$	991
Additions		196			440
Amortization of servicing rights		(258	)		(277	)

Balance, end of year	$	1,092		$	1,154

	2010		2009

Fair value, beginning of period	$	1,411	$	1,340
Fair value, end of period		1,172		1,411

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Note 7: Deposits

Deposits at year-end are summarized as follows:

	2010					2009
	Amount		Percent			Amount		Percent

Non interest-bearing deposits	$	25,023		8.04	%	$	21,359		7.69	%
NOW accounts		95,687		30.72			59,728		21.49
Savings accounts		25,297		8.12			27,099		9.75
		146,007		46.88			108,186		38.93
Certificates of deposit
0.00% to 1.99%		74,582		23.95			63,177		22.74
2.00% to 3.99%		79,303		25.46			74,326		26.75
4.00% to 5.99%		11,560		3.71			32,158		11.57
6.00% to 7.99%		6		.00			19		.01
		165,451		53.12			169,680		61.07

	$	311,458		100.00	%	$	277,866		100.00	%

At December 31, 2010, scheduled maturities of certificates of deposit are as follows:

2011	$	86,843
2012		27,524
2013		16,526
2014		13,112
2015		21,446

	$	165,451

Time deposits of $100 or more, including brokered deposits, were $74,171 and $88,315 at December 31, 2010 and 2009, respectively.

Deposits from related parties held by the Company at December 31, 2010 and 2009 totaled $1,593 and $1,176, respectively.

Brokered deposits totaled approximately $16,984 and $27,300 at December 31, 2010 and 2009, respectively.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Note 8: Federal Home Loan Bank Advances

Federal Home Loan Bank advances totaled $22,500 and $57,000 at December 31, 2010 and 2009, respectively. At December 31, 2010, the advances range in interest rates from 1.55% to 4.82% and are secured by mortgage loans totaling $124,430.

Aggregate annual maturities of the advances at December 31, 2010, are:

2011	$	11,500
2012		3,000
2013		5,000
2015		3,000

	$	22,500

Advances totaling $2,500 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:

	2010			2009

Taxes currently payable	$	1,537		$	423
Deferred income taxes		(485	)		(474	)

Income tax expense (benefit)	$	1,052		$	(49	)

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

	2010			2009

Computed at the statutory rate (34%)	$	1,077		$	140
Increase (decrease) resulting from
Tax exempt interest		(75	)		(78	)
State income taxes		97			(49	)
Other		(47	)		(62	)

Actual tax expense (benefit)	$	1,052		$	(49	)

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

The tax effects of temporary differences related to deferred taxes were:

	2010		2009
Deferred tax assets
Allowance for loan losses	$	1,881	$	1,586
Non-accrual loan income		171		85
Other		350		257
		2,402		1,910
Deferred tax liabilities
Depreciation		131		185
Mortgage servicing rights		463		489
FHLB stock dividends		148		165
Unrealized gain on available-for-sale securities		134		159
Other		286		200
		1,162		1,198

Net deferred tax asset	$	1,240	$	712

Retained earnings at December 31, 2010 and 2009 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, 2010 and 2009.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Note 10: Other Comprehensive Income (Loss)

Other comprehensive income (loss) components and related taxes were as follows:

	2010			2009

Unrealized holding gains (losses) on available-for-sale securities	$	(62	)	$	204
Tax expense (benefit)		(25	)		82

Other comprehensive income (loss)	$	(37	)	$	122

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, 2010 and 2009 that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2010, 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, 2010 and 2009

(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, 2010
Total risk-based capital (to risk-weighted assets)	$	38,288		13.8	%	$	22,124		8.0	%	$	27,655		10.0	%
Tier I capital (to risk-weighted assets)		34,975		12.6			11,062		4.0			16,593		6.0
Tier I capital (to adjusted total assets)		34,975		9.4			11,148		3.0			18,581		5.0
Tier I capital (to adjusted tangible assets)		34,975		9.4			7,432		2.0			N/A		N/A
Tangible capital (to adjusted tangible assets)		34,975		9.4			5,574		1.5			N/A		N/A

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

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2010, 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, 2010 and 2009

(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 retaied earnings.

There was no ESOP expense recorded for 2010 and 2009.

	2010	2009

ESOP shares allocated	106,908	106,968

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 2010 and 2009 were $120 and $129, respectively.

Note 13: Stock Option Plans

The Company’s original Incentive Stock Option Plan (the “1995 Plan”), which was shareholder approved, permitted the grant of stock options to its directors, officers and other key employees. The 1995 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. 33,034 shares from the 1995 Plan were outstanding at December 31, 2010. The Company’s 2007 Incentive Stock Option Plan (“2007 Plan”), which is shareholder approved, also permits the grant of stock options to its directors, officers and other key employees. The 2007 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 the 2007 Plan were outstanding at December 31, 2010. 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 1995 and 2007 Plans). The Company issues shares from its authorized shares to satisfy option exercises. There were no options granted in 2010.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

A summary of option activity under the 1995 and 2007 Plans as of December 31, 2010, and changes during the year then ended, is presented below:

	2010
	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value

Outstanding, beginning of year		37,248		$	17.73
Granted		---			---
Forfeited or expired		(463	)		10.37

Outstanding, end of year		36,785		$	17.82	3.16 years	$	0

Exercisable, end of year		33,785		$	18.51	2.44 years	$	0

There were no options exercised during the years ended December 31, 2010 and 2009.

As of December 31, 2010, there was $3 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.

Note 14: Earnings Per Share

Earnings per share (EPS) were computed as follows:

	Year Ended December 31, 2010
	Income		Weighted-Average Shares		Per Share Amount

Net income	$	2,117		1,553,525

Basic earnings per share
Income available to common stockholders					$	1.36

Effect of dilutive securities
Stock options				1,195

Diluted earnings per share
Income available to common stockholders and assumed conversions	$	2,117		1,554,720	$	1.36

33,034 options outstanding at December 31, 2010 were considered anti-dilutive.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

	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.

Note 15: Disclosures About Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurements, 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

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

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 sheets, 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. government sponsored agency securities, mortgage-backed agency securities, and 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.

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2010 and 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)

Available-for-sale securities
December 31, 2010
U.S. government agencies	$	2,096	$	---	$	2,096	$	---
Mortgage-backed securities		2,674		---		2,674		---
State and political subdivisions		7,035		---		7,035		---

Totals	$	11,805	$	---	$	11,805	$	---

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	$	---

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(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 sheets, as well as the general classification of those instruments under the valuation hierarchy.

Impaired Loans (collateral dependent)

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 recognized in the accompanying consolidated balance sheets 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, 2010 and 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, 2010	$	12,013	$	---	$	---	$	12,013

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

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(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, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	13,573	$	13,573	$	12,901	$	12,901
Available-for-sale securities		11,805		11,805		11,345		11,345
Loans held for sale		2,265		2,265		3,303		3,303
Loans, net of allowance for loan losses		320,810		331,913		317,860		328,436
Federal Home Loan Bank stock		3,583		3,583		3,997		3,997
Interest receivable		1,421		1,421		1,447		1,447
Financial liabilities
Deposits		311,458		316,112		277,866		281,663
Federal Home Loan Bank advances		22,500		22,920		57,000		57,993
Interest payable		62		62		171		171

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

Cash and Cash Equivalents and Federal Home Loan Bank Stock

The carrying amount approximates fair value.

Loans Held for Sale

The carrying amount approximates fair value.

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.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

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, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

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

	2010		2009
Commitments to extend credit
Fixed rate	$	9,748	$	2,938
Variable rate		4,090		5,350
Unused portions of lines of credit		26,277		28,777
Letters of credit		663		286

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, 2010, the fixed rate loan commitments were at rates ranging from 3.50% to 6.25%. 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
	2010		2009
Assets
Cash	$	178	$	10
Securities available-for-sale		144		158
Investment in the Bank		35,176		33,840
Other assets		117		182

Total assets	$	35,615	$	34,190

Liabilities	$	38	$	306

Stockholders’ Equity		35,577		33,884

Total liabilities and stockholders’ equity	$	35,615	$	34,190

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Condensed Statements of Income
	Years Ending December 31
	2010			2009
Income
Dividends from the Bank	$	879		$	762
Other income		9			10
Total income		888			772

Expenses		(232	)		(242	)

Income Before Income Tax and Equity in Undistributed Income of Subsidiaries		656			530

Income Tax Benefit		90			94

Income Before Equity in Undistributed Income of Subsidiaries		746			624

Equity in Undistributed (Distribution in Excess of) Income of Subsidiaries		1,371			(164	)

Net Income	$	2,117		$	460

Condensed Statements of Cash Flows
	Years Ending December 31
	2010			2009
Operating Activities
Net income	$	2,117		$	460
Equity in undistributed (distributions in excess of) income of the Bank		(1,371	)		164
Change in other assets		(203	)		138
Net cash provided by operating activities		543			762

Investing Activity - proceeds from paydowns of securities		14			13

Financing Activity - dividends paid		(389	)		(775	)

Net Change in Cash		168			---

Cash at Beginning of Year		10			10

Cash at End of Year	$	178		$	10

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

Note 18: Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets, which pertains to securitizations. ASU 2009-16 requires more information about transfers of financial assets, including securitization transactions, and where entities have continued exposure to the risks related to transferred assets. The Company adopted this ASU effective January 1, 2010 and adoption did not have a material effect on its financial position or results of operations.

In June 2009, the FASB issued ASU No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with a qualitative approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity. The Company adopted this ASU effective January 1, 2010 and adoption did not have a material effect on its financial position or results of operations since the Company does not have any special purpose entities.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It also requires the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The Company’s disclosures about fair value measurements are presented in Note 15: Fair Value Measurements. These new disclosure requirements were effective for the period ended March 31, 2010, except for the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. There was no significant effect to the Company’s financial statement disclosure upon adoption of this ASU.

In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated as this requirement would have potentially conflicted with SEC reporting requirements. Removal of the disclosure requirement did not have an affect on the nature or timing of subsequent events evaluations performed by the Company. ASU 2010-09 became effective upon issuance.

LSB Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2010 and 2009

(Dollars in Thousands, Except Per Share Data)

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires that more information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. A company will need to disaggregate new and existing disclosures based on how it develops its allowance for loan losses and how it manages credit exposures. The existing disclosures to be presented on a disaggregated basis include a rollforward of the allowance for loan losses, the related recorded investment in such loans, the nonaccrual status of loans, and impaired loans. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class. For public companies, ASU 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company adopted this standard effective December 31, 2010. Since the adoption of this standard was disclosure related, it did not have a material effect on its financial position or results of operations.

In January 2011, the FASB issued ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. ASU 2011-01 temporarily delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. That guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.

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 Stephen E. Belter President, Indiana Dataline Corp. 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 Thomas R. McCully Partner, Stuart & Branigin 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

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 of Indiana Dataline Corp., an Indiana corporation engaged in the construction and operation of 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.

Thomas R. McCully. Mr. McCully is a partner in the law firm of Stuart & Branigin LLP and has worked there since 1966.

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.

Jeffrey A. Poxon. Mr. Poxon retired April 1, 2011 as the Senior Vice President-Investments and Chief Investment Officer of The Lafayette Life Insurance Company, retaining the position of Vice President-Investment Research.

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, 2010, 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 24, 2010, there were approximately 875 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, 2009	11.75	8.50	0.125
June 30, 2009	14.40	11.00	0.125
September 30, 2009	13.49	10.30	0.125
December 31, 2009	12.66	8.27	0.125
March 31, 2010	10.70	9.80	0.125
June 30, 2010	12.74	9.89	0.125
September 30, 2010	11.42	9.00	0.0
December 31, 2010	13.73	9.50	0.0

Dividend payment decisions are made with consideration of a variety of factors including earnings, financial condition, market considerations and regulatory restrictions. Under the Bank’s Supervisory Agreement and LSB Financial’s Memorandum of Understanding with the OTS any declaration or payment of dividends or other capital distributions by the Bank or LSB Financial must be approved by the OTS. LSB Financial is currently not paying dividends to its shareholders. Restrictions on dividend payments are described in Note 11 of the Notes to Consolidated Financial Statements included in this Annual Report.

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