March 11, 2011

Dear Loyal Customers,

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/CEO

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