**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
  **FORM
        10-Q**
  **(MARK
        ONE)**
  ý
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                  EXCHANGE ACT OF 1934For
                  the quarterly period ended March 31, 2007ORo
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                  EXCHANGE ACT OF 1934For
                  the transition period from ________________ to
                  ________________
 
 Commission
        file number: 000-25219
 
 **LINCOLN
        BANCORP**
 (Exact
        name of registrant as specified in its charter)
 
 **Indiana**
              
              **35-2055553**(State
                  or other jurisdiction of incorporation
                  or organization)
              
              (I.R.S.
                  Employer Identification
                  No.)**905
                  Southfield Drive, Plainfield, Indiana**
              
              **46168**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 **(317)
        839-6539**
 (Registrant’s
        telephone number, including area code)
 
 **[None]**
 (Former
        name, former address and former fiscal year, if changed since last
        report)
  Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
  Yes ý No o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
  Large
        accelerated filer o Accelerated
        filer ý Non-accelerated
        filer o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
  Yes o No ý
 
 The
        number of shares of the Registrant’s common stock, without par value,
        outstanding as of March 31, 2007 was 5,360,481
  1
   **LINCOLN
        BANCORP AND SUBSIDIARY**
  **FORM
        10-Q**
  **INDEX**
  Page
                  No.FORWARD-LOOKING
                  STATEMENTS
              3PART
                  I. FINANCIAL INFORMATION
              4Item
                  1. Financial Statements
              4Consolidated
                  Condensed Balance Sheets
              4Consolidated
                  Condensed Statements of Operations
              5Consolidated
                  Condensed Statements of Comprehensive Income
              6Consolidated
                  Condensed Statement of Shareholders’ Equity
              7Consolidated
                  Condensed Statements of Cash Flows
              8Notes
                  to Unaudited Consolidated Condensed Financial Statements
              10Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              12Item
                  3. Quantitative and Qualitative Disclosures about Market
                  Risk
              18Item
                  4. Controls and Procedures
              19PART
                  II. OTHER INFORMATIONItem
                  1. Legal Proceedings
              19Item
                  1A. Risk Factors
              19Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              19Item
                  3. Defaults Upon Senior Securities
              19Item
                  4. Submission of Matters to a Vote of Security Holders
              19Item
                  5. Other Information
              20Item
                  6. Exhibits
              20SIGNATURES
              21EXHIBIT
                  INDEX
              21
  2
   **FORWARD-LOOKING
        STATEMENTS**
  This
        Quarterly Report on Form 10-Q (“Form 10-Q”) contains statements that constitute
        forward-looking statements within the meaning of the Private Securities
        Litigation Reform Act of 1995. These statements appear in a number of places
        in
        this Form 10-Q and include statements regarding the intent, belief, outlook,
        estimate or expectations of the Company (as defined in the notes to the
        consolidated condensed financial statements), its directors or its officers
        primarily with respect to future events and the future financial performance
        of
        the Company. Readers of this Form 10-Q are cautioned that any such forward
        looking statements are not guarantees of future events or performance and
        involve risks and uncertainties, and that actual results may differ materially
        from those in the forward looking statements as a result of various factors.
        The
        accompanying information contained in this Form 10-Q identifies important
        factors that could cause such differences. These factors include changes
        in
        interest rates; loss of deposits and loan demand to other financial
        institutions; substantial changes in financial markets; changes in real estate
        values and the real estate market; or regulatory changes.
   3
  **PART
        I FINANCIAL INFORMATION**
  **Item
        1.**  **Financial
        Statements**
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Balance Sheets
 
 **Assets**
              
              **March
                  31,**
                **2007**
                **(Unaudited)**
              
              **December
                  31,**
                **2006**Cash
                  and due from banks
              
              $
              3,569,072
              
              $
              4,457,257Interest-bearing
                  demand deposits in other banks
              
              
              13,142,445
              
              
              13,951,460Cash
                  and cash equivalents
              
              
              16,711,517
              
              
              18,408,717Trading
                  securities
              
              
              29,718,011
              
              
              —Investment
                  securities available for sale
              
              
              121,543,744
              
              
              151,237,001Loans
                  held for sale
              
              
              44,808,394
              
              
              3,713,010Loans,
                  net of allowance for loan losses of $6,228,766 and
                  $6,129,069
              
              
              595,804,278
              
              
              629,283,375Premises
                  and equipment
              
              
              15,303,406
              
              
              14,296,685Investments
                  in limited partnerships
              
              
              1,241,461
              
              
              1,252,091Federal
                  Home Loan Bank stock
              
              
              8,808,200
              
              
              8,808,200Interest
                  receivable
              
              
              4,679,676
              
              
              4,785,639Goodwill
              
              
              23,906,877
              
              
              23,906,877Core
                  deposit intangible
              
              
              2,553,025
              
              
              2,690,255Cash
                  value of life insurance
              
              
              20,383,671
              
              
              20,171,426Other
                  assets
              
              
              5,498,473
              
              
              4,989,513Total
                  assets
              
              $
              890,960,733
              
              $
              883,542,789**Liabilities**DepositsNoninterest-bearing
              
              $
              55,055,122
              
              $
              51,062,255Interest-bearing
              
              
              624,268,703
              
              
              604,601,833Total
                  deposits
              
              
              679,323,825
              
              
              655,664,088Securities
                  sold under repurchase agreements
              
              
              15,245,805
              
              
              16,863,656Borrowings
              
              
              87,054,624
              
              
              103,608,175Interest
                  payable
              
              
              2,638,462
              
              
              2,460,498Other
                  liabilities
              
              
              7,429,696
              
              
              5,646,466Total
                  liabilities
              
              
              791,692,412
              
              
              784,242,883**Commitments
                  and Contingencies****Shareholders’
                  Equity**Common
                  stock, without par valueAuthorized
                  - 20,000,000 sharesIssued
                  and outstanding - 5,360,481 and 5,329,687 shares
              
              
              62,438,022
              
              
              62,020,927Retained
                  earnings
              
              
              39,974,607
              
              
              41,035,822Accumulated
                  other comprehensive loss
              
              
              (423,503
              )
              
              (961,453
              )Unearned
                  employee stock ownership plan (ESOP) shares
              
              
              (2,720,805
              )
              
              (2,795,390
              )Total
                  shareholders’ equity
              
              
              99,268,321
              
              
              99,299,906Total
                  liabilities and shareholders’ equity
              
              $
              890,960,733
              
              $
              883,542,789
 
 See
        notes
        to consolidated condensed financial statements.
 4
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statements of Operations
 (Unaudited)
 
 **Three
                  Months Ended**
                **March
                  31,****Interest
                  Income**
              
              **2007**
              
              **2006**Loans
                  receivable, including fees
              
              $
              10,950,120
              
              $
              9,736,280Investment
                  securities
              
              
              1,975,283
              
              
              1,923,596Deposits
                  with financial institutions and Federal funds sold
              
              
              185,034
              
              
              208,351Dividend
                  income
              
              
              114,857
              
              
              136,550Total
                  interest and dividend income
              
              
              13,225,294
              
              
              12,004,777**Interest
                  Expense**Deposits
              
              
              6,685,925
              
              
              5,033,916Short-term
                  borrowings
              
              
              159,696
              
              
              80,264Federal
                  Home Loan Bank advances
              
              
              1,019,056
              
              
              1,297,159Total
                  interest expense
              
              
              7,864,677
              
              
              6,411,339**Net
                  Interest Income**
              
              
              5,360,617
              
              
              5,593,438Provision
                  for loan losses
              
              
              207,000
              
              
              235,549**Net
                  Interest Income After Provision for Loan Losses**
              
              
              5,153,617
              
              
              5,357,889**Other
                  Income (Loss)**Service
                  charges on deposit accounts
              
              
              541,796
              
              
              487,883Net
                  realized and unrealized gain (loss) on loans held for sale
              
              
              (1,006,279
              )
              
              54,790Net
                  realized and unrealized gain (loss) on securities
              
              
              (418,723
              )
              
              3,697Point
                  of sale income
              
              
              193,687
              
              
              167,265Loan
                  servicing fees
              
              
              76,930
              
              
              90,033Increase
                  in cash value of life insurance
              
              
              212,245
              
              
              162,042Other
                  income
              
              
              219,949
              
              
              232,688Total
                  other income (loss)
              
              
              (180,395
              )
              
              1,198,398**Other
                  Expenses**Salaries
                  and employee benefits
              
              
              3,095,864
              
              
              2,811,637Net
                  occupancy expenses
              
              
              545,253
              
              
              534,567Equipment
                  expenses
              
              
              425,969
              
              
              372,269Data
                  processing fees
              
              
              531,897
              
              
              632,123Professional
                  fees
              
              
              144,237
              
              
              226,342Director
                  and committee fees
              
              
              116,476
              
              
              114,823Advertising
                  and business development
              
              
              281,977
              
              
              152,381Core
                  deposit intangible amortization
              
              
              137,230
              
              
              162,201Other
                  expenses
              
              
              658,496
              
              
              574,862Total
                  other expenses
              
              
              5,937,399
              
              
              5,581,205**Income
                  (Loss) Before Income Tax**
              
              
              (964,177
              )
              
              975,082Income
                  tax expense (benefit)
              
              
              (539,053
              )
              
              196,465**Net
                  Income (loss)**
              
              $
              (425,124
              )
              $
              778,617**Basic
                  Earnings (loss) per Share**
              
              $
              (0.08
              )
              $
              0.15**Diluted
                  Earnings (loss) per Share**
              
              $
              (0.08
              )
              $
              0.15**Dividends
                  per Share**
              
              $
              0.14
              
              $
              0.14
 
 See
        notes
        to consolidated condensed financial statements.
 5
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statements of Comprehensive Income
 (Unaudited)
 
 **Three
                  Months Ended**
                **March
                  31,****2007**
              
              **2006**Net
                  Income (Loss)
              
              $
              (425,124
              )
              $
              778,617Other
                  comprehensive income, net of taxUnrealized
                  gains (losses) on securities available for saleUnrealized
                  holding gains (losses) arising during the period, net of tax
                  expense/(benefit) of $122,634 and $(377,424)
              
              
              275,418
              
              
              (673,588
              )Less:
                  Reclassification adjustment for realized and unrealized gains (losses)
                  included in net income (loss), net of tax (benefit) expense of
                  $(161,906)
                  and $1,257
              
              
              (256,817
              )
              
              2,440Reclassification
                  adjustment for amortization of additional pension liability recognized
                  in
                  expense under FAS 158 net of tax benefit of $3,748 and -0-
              
              
              5,715
              
              
              -0-537,950
              
              
              (676,028
              )Comprehensive
                  income
              
              $
              112,826
              
              $
              102,589
 
  See
        notes
        to consolidated condensed financial statements.
  6
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statement of Shareholders’ Equity
 For
        the
        Three Months Ended March 31, 2007
 (Unaudited)
 
 **Accumulated****Common
                  Stock**
              
              
              
              **Other**
              
              **Unearned****Shares**
              
              
              
              **Retained**
              
              **Comprehensive**
              
              **ESOP****Outstanding**
              
              **Amount**
              
              **Earnings**
              
              **Loss**
              
              **Shares**
              
              **Total****Balances,
                  January 1, 2007**
              
              
              5,329,687
              
              $
              62,020,927
              
              $
              41,035,822
              
              $
              (961,453
              )
              $
              (2,795,390
              )
              $
              99,299,906Net
                  loss for the period
              
              
              
              
              
              
              
              
              (425,124
              )
              
              
              
              
              
              
              
              (425,124
              )Unrealized
                  gains on securities, net of reclassification adjustment
              
              
              
              
              
              
              
              
              
              
              
              532,235
              
              
              
              
              
              532,235Purchase
                  of common stock
              
              
              (937
              )
              
              (18,750
              )
              
              
              
              
              
              
              
              
              
              
              (18,750
              )Stock
                  options exercised
              
              
              31,731
              
              
              396,638
              
              
              
              
              
              
              
              
              
              
              
              396,638Stock
                  option expense
              
              
              
              
              
              19,050
              
              
              
              
              
              
              
              
              
              
              
              19,050ESOP
                  shares earned
              
              
              
              
              
              
              
              
              70,897
              
              
              
              
              
              74,585
              
              
              145,482Amortization
                  of unearned compensation expense
              
              
              
              
              
              20,157
              
              
              4,429
              
              
              
              
              
              
              
              
              24,586Amortization
                  of additional pension liability recognized under FAS 158
              
              
              
              
              
              
              
              
              
              
              
              5,715
              
              
              
              
              
              5,715Cash
                  dividends ($.14 per share)
              
              
              
              
              
              
              
              
              (711,417
              )
              
              
              
              
              
              
              
              (711,417
              )**Balances,
                  March 31, 2007**
              
              
              5,360,481
              
              $
              62,438,022
              
              $
              39,974,607
              
              $
              (423,503
              )
              $
              (2,720,805
              )
              $
              99,268,321
 
 See
        notes
        to consolidated condensed financial statements.
 
  7
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statements of Cash Flows
 (Unaudited)
 
 **Three
                  Months Ended****March
                  31,****2007**
              
              **2006****Operating
                  Activities**Net
                  income (loss)
              
              $
              (425,124
              )
              $
              778,617Adjustments
                  to reconcile net income to net cash provided by (used in) operating
                  activitiesProvision
                  for loan losses
              
              
              207,000
              
              
              235,549Investment
                  securities (amortization) accretion, net
              
              
              5,818
              
              
              372,923Investment
                  securities losses
              
              
              418,723
              
              
              --Loans
                  originated for sale in the secondary market
              
              
              (18,757,079
              )
              
              (3,874,220
              )Proceeds
                  from sale of loans in the secondary market
              
              
              20,839,089
              
              
              4,137,598Loss
                  on sale of loans - unrealized
              
              
              1,327,359
              
              
              --Gain
                  on sale of loans - realized
              
              
              (321,080
              )
              
              (54,790
              )Amortization
                  of net loan origination costs (fees)
              
              
              118,486
              
              
              148,522Amortization
                  of purchase accounting adjustments
              
              
              79,228
              
              
              60,919Depreciation
                  and amortization
              
              
              442,578
              
              
              446,915Amortization
                  of unearned compensation expense
              
              
              24,586
              
              
              27,825ESOP
                  shares earned
              
              
              145,482
              
              
              135,212Net
                  change in:Interest
                  receivable
              
              
              105,963
              
              
              22,132Interest
                  payable
              
              
              177,964
              
              
              93,946Other
                  adjustments
              
              
              (34,929
              )
              
              846,726Net
                  cash provided by operating activities
              
              
              4,354,064
              
              
              3,377,874**Investing
                  Activities**Purchases
                  of securities available for sale
              
              
              (2,938,919
              )
              
              (19,629,951
              )Proceeds
                  from sales of securities available for sale
              
              
              --
              
              
              211,577Proceeds
                  from maturities of securities available for sale
              
              
              3,306,399
              
              
              3,843,644Net
                  change in loans
              
              
              (11,127,986
              )
              
              (10,072,584
              )Purchases
                  of property and equipment
              
              
              (1,464,299
              )
              
              (336,996
              )Proceeds
                  from sale of foreclosed real estate
              
              
              187,929
              
              
              139,392Other
                  investing activities
              
              
              2,801
              
              
              --Net
                  cash used in investing activities
              
              
              (12,034,075
              )
              
              (25,844,918
              )**Financing
                  Activities**Net
                  change inNoninterest-bearing,
                  interest-bearing demand, money market and savings deposits
              
              
              12,259,065
              
              
              27,230,360Certificates
                  of deposit
              
              
              11,423,600
              
              
              9,710,162Short
                  term borrowings
              
              
              (1,617,851
              )
              
              (1,077,004
              )Proceeds
                  from FHLB advances
              
              
              9,500,000
              
              
              6,000,000Repayment
                  of FHLB advances
              
              
              (26,050,000
              )
              
              (20,000,000
              )Dividends
                  paid
              
              
              (707,105
              )
              
              (710,665
              )Purchase
                  of common stock
              
              
              (18,750
              )
              
              --Exercise
                  of stock options
              
              
              396,638
              
              
              148,279Net
                  change in advances by borrowers for taxes and insurance
              
              
              797,214
              
              
              765,311Net
                  cash provided by financing activities
              
              
              5,982,811
              
              
              22,066,443**Net
                  Change in Cash and Cash Equivalents**
              
              
              (1,697,200
              )
              
              (400,601
              )**Cash
                  and Cash Equivalents, Beginning of Period**
              
              
              18,408,717
              
              
              16,735,797**Cash
                  and Cash Equivalents, End of Period**
              
              $
              16,711,517
              
              $
              16,335,196
  8
  
 **Additional
                  Cash Flows and Supplementary Information**Interest
                  paid
              
              $
              7,686,713
              
              $
              6,317,393Income
                  tax paid (refund received)
              
              
              --
              
              
              --Loan
                  balances transferred to foreclosed real estate
              
              
              114,578
              
              
              369,378Transfer
                  of loans held for sale to loans
              
              
              44,198,542
              
              
              --Transfer
                  of investments to trading
              
              
              29,718,011
              
              
              --See
                  notes to consolidated condensed financial statements.
 
  9
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Notes
        to
        Unaudited Consolidated Condensed Financial Statements
  Note
        1: Basis of Presentation
  The
        consolidated financial statements include the accounts of Lincoln Bancorp
        (the
“Company”), its wholly owned subsidiary, Lincoln Bank, a state chartered
        commercial bank (“Lincoln” or the “Bank”), and Lincoln’s wholly owned
        subsidiaries, LF Service Corporation (“LF Service”) and Citizens Loan and
        Service Corporation (“CLSC”), both Indiana corporations, and LF Portfolio
        Services, Inc. (“LF Portfolio”), a Delaware corporation. A summary of
        significant accounting policies is set forth in Note 1 of Notes to Financial
        Statements included in the December 31, 2006 Annual Report to Shareholders.
        All
        significant intercompany accounts and transactions have been eliminated in
        consolidation.
  The
        interim consolidated financial statements have been prepared in accordance
        with
        instructions to Form 10-Q, and therefore do not include all information and
        footnotes necessary for a fair presentation of financial position, results
        of
        operations and cash flows in conformity with generally accepted accounting
        principles.
  The
        interim consolidated financial statements at March 31, 2007 and for the three
        months ended March 31, 2007 and 2006, have not been audited by independent
        accountants, but reflect, in the opinion of management, all adjustments (which
        include only normal recurring adjustments) necessary to present fairly the
        financial position, results of operations and cash flows for such periods.
        The
        results of operations for the three-month period ended March 31, 2007, are
        not
        necessarily indicative of the results that may be expected for the entire
        year.
        The consolidated condensed balance sheet of the Company as of December 31,
        2006
        has been derived from the audited consolidated balance sheet of the Company
        as
        of that date.
  Reclassifications
        of certain amounts in the 2006 consolidated financial statements have been
        made
        to conform to the 2007 presentation.
  Note
        2: Earnings (Loss) Per Share
  Earnings
        per share have been computed based upon the weighted-average common shares
        outstanding. Unearned Employee Stock Ownership Plan shares have been excluded
        from the computation of average common shares outstanding.
  **Three
                  Months Ended**
                **March
                  31, 2007**
              
              **Three
                  Months Ended**
                **March
                  31, 2006****Income**
              
              **Weighted
                  Average Shares**
              
              **Per
                  Share Amount**
              
              **Income**
              
              **Weighted
                  Average Shares**
              
              **Per
                  Share Amount**Basic
                  earnings (loss) per shareIncome
                  available to common shareholders
              
              $
              (425,124
              )
              
              5,032,649
              
              $
              (
                  .08
              )
              $
              778,617
              
              
              5,040,440
              
              $
              .15Effect
                  of dilutive RRP awards and stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              117,424Diluted
                  earnings (loss) per shareIncome
                  (loss) available to common shareholders and assumed
                  conversions
              
              $
              (425,124
              )
              
              5,032,649
              
              $
              (
                  .08
              )
              $
              778,617
              
              
              5,157,864
              
              $
              .15
 
  Options
        to purchase 682,372 shares of common stock at exercise prices of $7.32 to
        $18.75
        per share were outstanding at March 31, 2007, but were not included in the
        computation of diluted earnings per share because the options were
        anti-dilutive.
   10
  Note
        3: Recent Accounting Pronouncements
  In
        March
        2006, the Financial Accounting Standards Board (FASB) issued Statement No.
        156,
        Accounting for Servicing of Financial Assets-an amendment of FASB Statement
        No.
        140. This Statement provides the following: 1) revised guidance on when a
        servicing asset and servicing liability should be recognized; 2) requires
        all
        separately recognized servicing assets and servicing liabilities to be initially
        measured at fair value, if practicable; 3) permits an entity to elect to
        measure
        servicing assets and servicing liabilities at fair value each reporting date
        and
        report changes in fair value in earnings in the period in which the changes
        occur; 4) upon initial adoption, permits a onetime reclassification of
        available-for-sale securities to trading securities for securities which
        are
        identified as offsetting the entity's exposure to changes in the fair value
        of
        servicing assets or liabilities that a servicer elects to subsequently measure
        at fair value; and 5) requires separate presentation of servicing assets and
        servicing liabilities subsequently measured at fair value in the statement
        of
        financial position and additional footnote disclosures. This standard is
        effective as of the beginning of an entity's first fiscal year that begins
        after
        September 15, 2006 with the effects of initial adoption being reported as
        a
        cumulative-effect adjustment to retained earnings. Management did not elect
        to
        carry servicing rights at fair value but instead is amortizing those servicing
        rights over the period of estimated net servicing income and assessing the
        servicing assets for impairment.
  The
        Company or one of its subsidiaries files income tax returns in the U.S. federal
        and Indiana jurisdictions. With few exceptions, the Company is no longer
        subject
        to U.S. federal, state and local examinations by tax authorities for years
        before 2003.
  The
        Company adopted the provisions of the Financial Accounting Standards Board
        (FASB) Interpretation No. 48 (FIN 48), *Accounting
        for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
        109* ,
        on
        January 1, 2007. FIN 48 prescribes a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken or expected to be taken in a tax return. FIN 48 also provides
        guidance on derecognition, classification, interest and penalties, accounting
        in
        interim periods, disclosure and transition. As a result of the implementation
        of
        FIN 48, the Company did not identify any uncertain tax positions that it
        believes should be recognized in the financial statements.
  In
        September 2006, the FASB issued Statement No. 157, *Fair
        Value Measurements* .
        This
        Statement defines fair value, establishes a framework for measuring fair
        value
        and expands disclosures about fair value measurements. This Statement
        establishes a fair value hierarchy about the assumptions used to measure
        fair
        value and clarifies assumptions about risk and the effect of a restriction
        on
        the sale or use of an asset. The standard is effective for fiscal years
        beginning after November 15, 2007. The Company is currently evaluating and
        has
        not yet determined the impact the new standard is expected to have on its
        financial position and results of operations.
  In
        September 2006, the FASB Emerging Issues Task Force (EITF) finalized Issue
        No.
        06−5, *Accounting
        for Purchases of Life Insurance - Determining the Amount That Could Be Realized
        in Accordance with FASB Technical Bulletin No. 85−4* (Accounting for Purchases of Life Insurance). This issue requires that a
        policyholder consider contractual terms of a life insurance policy in
        determining the amount that could be realized under the insurance contract.
        It
        also requires that if the contract provides for a greater surrender value
        if all
        individual policies in a group are surrendered at the same time, that the
        surrender value be determined based on the assumption that policies will
        be
        surrendered on an individual basis. Lastly, the issue discusses whether the
        cash
        surrender value should be discounted when the policyholder is contractually
        limited in its ability to surrender a policy. This issue is effective for
        fiscal
        years beginning after December 15, 2006. The Company does not expect that
        the
        adoption EITF No. 06-5 will have a material impact on financial condition
        of
        results of operations.
  On
        February 15, 2007, the FASB issued its Statement No. 159, *The
        Fair Value Option for Financial Assets and Financial Liabilities—Including an
        Amendment of FASB Statement No. 115* .
        FAS 159
        permits entities to elect to report most financial assets and liabilities
        at
        their fair value with changes in fair value included in net income. The fair
        value option may be applied on an instrument-by-instrument or instrument
        class-by-class basis. The option is not available for deposits withdrawable
        on
        demand, pension plan assets and obligations, leases, instruments classified
        as
        stockholders’ equity, investments in consolidated subsidiaries and variable
        interest entities and certain insurance policies. The new standard is effective
        at the beginning of the Company’s fiscal year beginning January 1, 2008, and
        early application may be elected in certain circumstances. The Company expects
        to first apply the new standard at the beginning of its 2008 fiscal year.
        The
        Company is currently evaluating and has not yet determined the impact the
        new
        standard is expected to have on its financial position and results of
        operations.
   11
  **Item
        2: Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
  **General**
  The
        Company was organized in September 1998. On December 30, 1998, it acquired
        the
        common stock of Lincoln upon the conversion of Lincoln from a federal mutual
        savings bank to a federal stock savings bank. The Bank converted from a federal
        thrift charter to a state commercial bank charter on November 1,
        2006.
  Lincoln
        Bank was originally organized in 1884 as Ladoga Federal Savings and Loan
        Association, located in Ladoga, Indiana. In 1979 Ladoga Federal merged with
        Plainfield First Federal Savings and Loan Association, a federal savings
        and
        loan association located in Plainfield, Indiana, which was originally organized
        in 1896. Following the merger, the Bank changed its name to Lincoln Federal
        Savings and Loan Association and, in 1984, adopted the name, Lincoln Federal
        Savings Bank. On September 1, 2003, the Bank adopted the name Lincoln Bank.
        On
        August 2, 2004, the Company acquired First Shares Bancorp, Inc., the holding
        company of First Bank, an Indiana commercial Bank. First Shares was merged
        with
        and into the Company and immediately thereafter, First Bank was merged into
        Lincoln Bank. As noted above, the Bank converted from a federal thrift charter
        to a state commercial bank charter on November 1, 2006, and provides full
        banking services in a single significant business segment. As a state chartered
        bank, the Bank is subject to regulation by the Department of Financial
        Institutions, State of Indiana and the Federal Deposit Insurance
        Corporation.
  Lincoln
        currently conducts its business from 17 full-service offices located in
        Hendricks, Johnson, Morgan, Clinton, Montgomery, and Brown Counties, Indiana,
        with its main office located in Plainfield. The Bank also has 2 loan production
        offices located in Carmel and Greenwood, Indiana. Lincoln offers a variety
        of
        lending, deposit and other financial services to its retail and commercial
        customers. The Bank’s principal business consists of attracting deposits from
        the general public and originating fixed-rate and adjustable-rate loans secured
        by commercial real estate, inventory, accounts receivable as well as first
        mortgage liens on one- to four-family residential real estate. Lincoln’s deposit
        accounts are insured up to applicable limits by the Deposit Insurance Fund
        of
        the Federal Deposit Insurance Corporation. Lincoln offers a number of financial
        services, which includes: (i) one-to four-family residential real estate
        loans;
        (ii) commercial real estate loans; (iii) real estate construction loans;
        (iv)
        land loans; (v) multi-family residential loans; (vi) consumer loans, including
        home equity loans and automobile loans; (vii) commercial loans; (viii) money
        market demand accounts; (ix) savings accounts; (x) checking accounts; (xi)
        NOW
        accounts; (xii) certificates of deposit; and (xiii) financial
        planning.
  Lincoln
        currently owns three subsidiaries. First, LF Service, whose assets consist
        of an
        investment in Bloomington Housing Associates, L.P. (“BHA”). BHA is an Indiana
        limited partnership that was organized to construct, own and operate a 130-unit
        apartment complex in Bloomington, Indiana (the “BHA Project”). Development of
        the BHA Project was completed in 1993 and the project is performing as planned.
        Second, Citizens Loan and Service Corporation (“CLSC”), which primarily engages
        in the purchase and development of tracts of undeveloped land. Because CLSC
        engages in activities that are not permissible for a national bank, FDIC
        regulations prohibit Lincoln from including its investment in CLSC in its
        calculation of regulatory capital. CLSC purchases undeveloped land, constructs
        improvements and infrastructure on the land, and then sells lots for residential
        home construction. Third, LF Portfolio, which is located in Nevada, holds
        and
        manages a significant portion of Lincoln’s investment portfolio. As noted above,
        effective November 1, 2006, the Bank changed its charter from a federal savings
        bank charter to an Indiana commercial bank charter. Unlike federal savings
        banks, commercial banks are not permitted to participate in real estate
        development joint ventures. Under terms of the approval granted by the Federal
        Reserve Bank of Chicago the Company agreed to cause Lincoln Bank to conform
        the
        existing direct and indirect nonbanking activities and investments conducted
        by
        CLSC, including by divestiture if necessary, to the requirements of the Bank
        Holding Company Act within two years of the consummation of the charter
        conversion.
  Lincoln’s
        results of operations depend primarily upon the level of net interest income,
        which is the difference between the interest income earned on interest-earning
        assets, such as loans and investments, and costs incurred with respect to
        interest-bearing liabilities, primarily deposits and borrowings. We have
        experienced a decline in our net interest margin and net interest spread
        as
        discussed more fully below in our comparison of operating results. The “flat”,
        to at some points, “inverted” interest rate yield curve has put stress on our
        net interest margin as shorter term interest bearing deposits have generally
        repriced at a faster pace than our interest earning assets. Although we do
        not
        expect this stress to abate in the near term, we are working to grow our
        higher
        yielding loan portfolio and, as funding needs demand, use proceeds from lower
        yielding securities maturities and repayments. We are also reemphasizing
        our
        focus on the entire
  12
  customer
        relationship, which we anticipate will include a component of lower cost
        demand
        deposits. Results of operations also depend upon the level of Lincoln’s
        non-interest income, including fee income and service charges and the level
        of
        its non-interest expenses, including general and administrative
        expenses.
   **Critical
        Accounting Policies**
  Note
        1 to
        the consolidated financial statements contains a summary of the Company’s
        significant accounting policies presented on pages 32 and 33 of the Annual
        Report to Shareholders for the year ended December 31, 2006, which was filed
        on
        Form 10-K with the Securities and Exchange Commission on March 16, 2007.
        Certain
        of these policies are important to the portrayal of the Company’s financial
        condition, since they require management to make difficult, complex or
        subjective judgments, some of which may relate to matters that are inherently
        uncertain. Management believes that its critical accounting policies include
        determining the allowance for loan losses, the valuation of mortgage servicing
        rights, and the valuation of intangible assets.
  Allowance
        for loan losses
  The
        allowance for loan losses represents management’s estimate of probable losses
        inherent in the Company’s loan portfolios. In determining the appropriate amount
        of the allowance for loan losses, management makes numerous assumptions,
        estimates and assessments.
  The
        Company’s strategy for credit risk management includes conservative, centralized
        credit policies, and uniform underwriting criteria for all loans as well
        as an
        overall credit limit for each customer below legal lending limits. The strategy
        also emphasizes diversification on a geographic, industry and customer level,
        regular credit quality reviews and quarterly management reviews of large
        credit
        exposures and loans experiencing deterioration of credit quality. A standard
        credit scoring system is used to assess credit risks during the loan approval
        process of all consumer loans while commercial loans are individually reviewed
        by a credit analyst with formal presentations to the Bank’s Loan Committee.
  The
        Company’s allowance consists of three components. The Company estimates probable
        losses from individual reviews of specific loans and probable losses from
        historical loss rates. Also, factors affecting probable losses resulting
        from
        economic or environmental factors that may not be captured in the first two
        components of the allowance are considered.
  Larger
        commercial loans that exhibit probable or observed credit weaknesses are
        subject
        to individual review. Where appropriate, reserves are allocated to individual
        loans based on management’s estimate of the borrower’s ability to repay the loan
        given the availability of collateral, other sources of cash flow and legal
        options available to the Company. Included in the review of individual loans
        are
        those that are impaired as provided in SFAS No. 114, Accounting by Creditors
        for
        Impairment of a Loan. Any allowances for impaired loans are measured based
        on
        the present value of expected future cash flows discounted at the loan’s
        effective interest rate or fair value of the underlying collateral.
  The
        Company evaluates the collectibility of both principal and interest when
        assessing the need for a loss accrual. Estimated loss rates are applied to
        other
        commercial loans not subject to specific reserve allocations.
  Homogenous
        loans, such as consumer installment and residential mortgage loans are not
        individually risk graded. Rather, standard credit scoring systems are used
        to
        assess credit risks. Loss rates are based on the average net charge-off
        estimated by loan category. Allowances on individual loans and historical
        loss
        rates are reviewed quarterly and adjusted as necessary based on changing
        borrower and/or collateral conditions.
  The
        Company’s primary market area for lending is central Indiana. When evaluating
        the adequacy of allowance, consideration is given to this regional geographic
        concentration and the closely associated effect changing economic conditions
        have on the Company’s customers. The Company has not substantively changed any
        aspect to its overall approach in the determination of the allowance for
        loan
        losses. There have been no material changes in assumptions or estimation
        techniques as compared to prior periods that impacted the determination of
        the
        current period allowance.
  Mortgage
        servicing rights
  The
        Company recognizes the rights to service sold mortgage loans as separate
        assets
        in the consolidated balance sheet. The total cost of loans when sold is
        allocated between loans and mortgage servicing rights based on the relative
        fair
        values of each. Mortgage servicing rights are subsequently carried at the
        lower
        of the initial carrying value, adjusted for amortization, or fair value.
        Mortgage servicing rights are evaluated for impairment based on the fair
        value
        of those rights.
 13
  Factors
        included in the calculation of fair value of the mortgage servicing rights
        include, estimating the present value of future net cash flows, market loan
        prepayment speeds for similar loans, discount rates, servicing costs, and
        other
        economic factors. Servicing rights are amortized over the estimated period
        of
        net servicing revenue. It is likely that these economic factors will change
        over
        the life of the mortgage servicing rights, resulting in different valuations
        of
        the mortgage servicing rights. The differing valuations will affect the carrying
        value of the mortgage servicing rights on the consolidated balance sheet
        as well
        as the amounts recorded in the consolidated income statement. See Note 3
        for a
        discussion of (SFAS) No. 156, Accounting for Transfers and Servicing of
        Financial Assets.
  Intangible
        assets
  Management
        periodically assesses the impairment of its goodwill and the recoverability
        of
        its core deposit intangible. Impairment is the condition that exists when
        the
        carrying amount of goodwill exceeds its implied fair value. If actual external
        conditions and future operating results differ from management’s judgments,
        impairment and/or increased amortization charges may be necessary to reduce
        the
        carrying value of these assets to the appropriate value.
   **Financial
        Condition**
  Assets
        totaled $891.0 million at March 31, 2007, an increase from December 31, 2006
        of
        $7.4 million. The majority of the increase in assets occurred in net loans,
        including loans held for sale, up $7.6 million. Loan growth was experienced
        in
        commercial loans while all other categories of loans declined from balances
        at
        December 31, 2006. The reduction in residential mortgage loans was planned
        as we
        continue to sell the majority of our residential mortgage loan production
        in the
        secondary market. As part of a restructuring strategy discussed below, loans
        with a cost basis of $44.2 million and a fair market value of approximately
        $42.9 million were transferred from our portfolio of loans into loans held
        for
        sale to be sold during the second quarter of 2007. Additionally,
        available-for-sale securities with an amortized cost basis of $30.1 million
        and
        a market value of $29.7 million were transferred to trading securities and
        will
        be sold during the second quarter of 2007.
  Restructuring
        Strategy: Lincoln
        Bank is continuing its transformation from a traditional savings and loan
        to a
        commercial bank. As previously announced, the Bank converted its charter
        from a
        thrift to a state-chartered commercial bank in early November, 2006. In late
        March, 2007, management approved a strategic restructuring of a portion of
        the
        Bank’s balance sheet effective March 31, 2007 including the sale of certain
        securities as well as a portion of the Bank’s fixed rate mortgage loan
        portfolio. The sale of these securities and loans is planned for the second
        quarter of 2007.
 
 Repositioning
        the Balance Sheet: The sale
        of mortgage loans will continue the process of transforming the balance sheet
        from a traditional thrift asset and liability mix to a commercial bank
        structure. In addition, the planned reinvestment into securities will allow
        the
        Bank to structure expected cash flows that will support its planned increase
        in
        commercial and commercial real estate lending. Both the mortgages and the
        securities to be sold are generally those of lower yield in our portfolio
        of
        assets. The Company expects to realize immediate benefit in current earnings
        as
        a result of reinvesting in the new securities and additional benefit as cash
        flows from the new securities are received over the next several years,
        providing funding for our expected commercial growth. Lastly, the sale of
        mortgages and the reinvestment into securities should have a risk based capital
        benefit, helping offset some of the capital pressures caused by our current
        commercial growth.
 
 Restructuring
        Securities: As a
        part of the planned restructuring, the Bank transferred securities with a
        market
        value at March 31, 2007 of $29.7 million from available for sale securities
        into
        trading securities and recognized a pretax loss of $419,000. It is planned
        for
        these securities to be sold during the second quarter of 2007. The average
        yield
        for this group of securities is approximately 4.64%. The expected reinvestment
        opportunities for securities range between 5.25% and 5.50% and 7.75% for
        commercial loans at this time, although there is no guarantee what rates
        will be
        applicable at the time the reinvestments and loans are made. Approximately
        70 to
        80% of the sale proceeds will be reinvested in securities and the remainder will
        be used to fund current commercial growth. The transaction is expected to
        improve net interest margin through redeployment of the proceeds into higher
        yielding assets.
 
 Restructuring
        Loans: The
        sale
        of approximately $44.2 million of residential mortgage loans with an average
        yield of approximately 5.01% was also approved as part of the restructuring.
        The
        loans were transferred from our held for
   14
  investment
        portion of our loan portfolio to held for sale at the lower of cost or market.
        We recognized a pretax loss of $1,327,000 when we marked the loans to market
        value. The loss was recognized in the gains/losses on sale of loans including
        unrealized gains/losses in the income statement at March 31, 2007. These
        loans
        had an original maturity of 10 and 15 years and were seasoned an average
        of
        nearly 3 1⁄2 years. Approximately 80% to 90% of the proceeds from this sale will
        be reinvested into higher yielding securities and the remainder into commercial
        loan growth.
  Estimated
        EPS Increase from Restructuring: Based on
        our estimates and the timing of sales, we believe that the result of this
        restructuring will positively impact annual earnings per share in the range
        of
        $.06 to $.09 after reinvestment of the proceeds from these sales.
  Total
        deposits were $679.3 million at March 31, 2007, an increase of $23.6 million
        from the $655.7 million at December 31, 2006. Growth occurred in nearly all
        deposit categories. Noninterest-bearing deposits increased $4.0 million,
        interest-bearing checking deposits increased $.5 million, money market deposits
        were up $8.1 million and certificates of deposit were up $11.4 million, while
        savings accounts declined by $.3 million. We introduced new deposit accounts
        during the latter portion of the first quarter of 2007. We have been very
        successful in attracting new accounts, but much of the growth has been at
        the
        cost of adding higher interest rate accounts and offering premiums to customers.
        Securities sold under agreement to repurchase were $15.2 million and borrowings
        were $87.1 million at March 31, 2007. Both declined by $1.6 million and $16.5
        million, respectively, from year end 2006. The decline in borrowings was
        the
        result of repayment of short-term Federal Home Loan Bank advances from cash
        as a
        result of increased deposit balances.
  Shareholders’
        equity remained essentially the same balance from December 31, 2006 to March
        31,
        2007. Increases included a reduction in unrealized losses on securities of
        $.5
        million and $.6 million from the net amortization of unearned compensation
        expense, stock option expense, stock options exercised and employee stock
        ownership shares earned. Offsetting these increases were dividends declared
        of
        $.7 million and net loss for the quarter of $.4 million. Accumulated other
        comprehensive loss was $.4 million at March 31, 2007 or $.5 million less
        than at
        December 31, 2006. Management’s review of available-for-sale securities in a
        loss position determined that the impairments were not other-than-temporary
        impairment because the fluctuation in values was primarily the result of
        changes
        in interest rates.  As of March 31, 2007 management has both the ability
        and the intent to hold these securities until recovery.  Management does
        classify these securities as “available-for-sale” under the definition of
        Statement of Financial Accounting Standards No. 115, *Accounting
        for Certain Investments in Debt and Equity Securities* so
        certain circumstances, such as changes in market interest rates and related
        changes in the security's prepayment risk, needs for liquidity (for example,
        due
        to the withdrawal of deposits, increased demand for loans), changes in the
        availability of and the yield on alternative investments or changes in funding
        sources and terms could change management’s assessment of its ability and intent
        to hold these securities. As noted above the Company began a major restructuring
        of its balance sheet during the first quarter of 2007. As a part of this
        process
        management identified certain securities that its intent to hold until maturity
        has changed. As a result of this change in intent these securities were
        immediately moved to the Company’s trading portfolio and appropriate losses were
        recognized through the income statement as of March 31, 2007. Also as noted
        above it is management’s intent to sell these securities during the second
        quarter of 2007 and reinvest the proceeds. Subsequent changes in value and/or
        additional gains or losses will recognized through the income statement at
        that
        time.
   **Comparison
        of Operating Results for the Three Months Ended March 31, 2007 and
        2006**
  The
        net
        loss for the quarter ended March 31, 2007 was $425,000, or $.08 for both
        basic
        and diluted loss per share. The loss was the result of the first step in
        a
        strategic restructuring of a portion of the balance sheet discussed in greater
        detail above. The after-tax loss recognized on this balance sheet repositioning
        totaled $1,073,000 or $.21 for both basic and diluted earnings per share.
        This
        compared to net income for the comparable period in 2006 of $779,000, or
        $.15
        for both basic and diluted earnings per share. Excluding this one time charge
        to
        the income statement for the first quarter of 2007, earnings would have been
        $649,000 or $.13 per share for both basic and diluted earnings per
        share.
  Net
        interest income for the first quarter of 2007 was $5,361,000 compared to
        $5,593,000 for the same period in 2006. Net interest margin fell to 2.60%
        for
        the three-month period ended March 31, 2007 compared to 2.81% for the same
        period in 2006. The average yield on earning assets increased 38 basis points
        for the first quarter of 2007 compared to the same period in 2006 while the
        average cost of interest-bearing liabilities increased 66 basis points in
        2007
        compared to 2006. This decreased interest rate spread from 2.41% for the
        2006
        period to 2.14% for the 2007 period, or 27 basis points. Competitive pressures
        in the current flat yield curve environment combined with the customers’
perceived lack of benefit
   15
  in
        longer
        maturity certificates of deposit over the last year has resulted in a more
        liability sensitive position for the Bank. Consequently our shorter-term
        liabilities are repricing at a faster rate than our earning assets in a rising
        interest rate environment.
  The
        Bank’s provision for loan losses for the first quarter of 2007 was $207,000
        compared to $236,000 for the same period in 2006. Non-performing loans to
        total
        loans at March 31, 2007 were .45% compared to .38% at December 31, 2006,
        while
        non-performing assets to total assets were .35% at March 31, 2007 compared
        to
        .31% at December 31, 2006. The allowance for loan losses as a percent of
        loans
        was .96% at March 31, 2007 and December 31, 2006. During the first quarter
        of
        2007, the Bank incurred $107,000 in net charged off loans compared to net
        charged off loans in the same quarter of 2006 totaling $222,000.
  Other
        income for the three months ended March 31, 2007 was a loss of $180,000 compared
        to income of $1,198,000 for the same quarter of 2006. The decrease of $1,378,000
        in 2007 compared to 2006 was the result of losses recognized in connection
        with
        the reclassification of assets described in the balance sheet restructuring
        discussion above (“the restructuring”). Excluding these charges, other income
        would have been $1,566,000 or an improvement of $368,000 from the first quarter
        of 2006. Net realized and unrealized losses on sales of loans was $1,006,000
        for
        the first quarter of 2007 compared to $55,000 net realized gains for the
        same
        period in 2006. The first quarter 2007 loss was the result of a $1,327,000
        unrealized loss from marking to market residential mortgage loans with a
        cost of $44.2 million. Excluding this charge, net realized gains on sale of
        loans would have been $321,000. The increase in realized gains in the first
        quarter of 2007 over 2006 was the result of a change in Bank policy from
        holding
        residential mortgage loans in our loan portfolio during the first quarter
        of
        2006 to selling substantially all of our residential loan production during
        the
        first quarter of 2007. We continue to emphasize commercial loan growth and
        as we
        move towards a commercial bank asset mix. We expect less residential mortgage
        loans to be added to our loan portfolio. Net realized and unrealized losses
        on
        securities for the three months ended March 31, 2007 were $419,000 compared
        to
        net realized and unrealized gains of $4,000 for the same three months in
        2006.
        For the first quarter of 2007, there were no realized securities gains or
        losses. The loss recognized in 2007 was the result of marking to market
        investments valued at $29.7 million that were transferred to trading securities
        as part of the balance sheet restructuring discussed above. Service charges
        on
        deposit accounts and point of sale income continue steady increases as we
        add
        more checking customers and as customers continue to increase usage of ATMs
        and
        debit cards. Increase in cash value of life insurance was $212,000 during
        the
        first quarter of 2007, an increase of $50,000 over the same period in 2006.
        This
        resulted from additional investments in life insurance during the third quarter
        of 2006 as well as improved earnings from certain polices that were restructured
        at that time. Other expenses were $5,937,000 for the three months ended March
        31, 2007, a $356,000 increase compared to $5,581,000 for the same three months
        of 2006. The largest increase of $284,000 was in salaries and employee benefits
        totaling $3,096,000 for the first quarter of 2007 compared to $2,812,000
        during
        the same quarter of 2006. The primary reason for the increase was due to
        increased commissioned sales and the increase of higher compensated employees
        in
        our sales force. We opened a loan production office in Carmel, Indiana on
        the
        north side of Indianapolis during the second quarter of 2006. We were able
        to
        staff this location without increasing overall full-time equivalent employees
        which were 235 for the first quarter of 2006 and 2007. We incurred an additional
        increase in advertising and business development of $130,000 for the quarter
        to
        $282,000 for the three months ending March 31, 2007 from $152,000 for the
        same
        quarter in 2006. This increase was the result of expanded marketing for our
        new
        checking products and our efforts to increase core deposit relationships
        through
        direct marketing. These increases were partially offset by a reduction in
        data
        processing expenses, down $100,000 to $532,000 in the first quarter of 2007
        compared the same quarter in 2006 as a result of renegotiating the contract
        with
        our third-party service provider in the second quarter of 2006.
   **Asset
        Quality**
  The
        Company currently classifies loans as special mention, substandard, doubtful
        and
        loss to assist management in addressing collection risks and pursuant to
        regulatory requirements. Special mention loans represent credits that have
        potential weaknesses that deserve management’s close attention. If left
        uncorrected, these potential weaknesses may result in deterioration of the
        repayment prospects or Lincoln’s credit position at some future date.
        Substandard loans represent credits characterized by the distinct possibility
        that some loss will be sustained if deficiencies on the loans are not corrected.
        Doubtful loans possess the characteristics of substandard loans, but collection
        or liquidation in full is doubtful based upon existing facts, conditions
        and
        values. A loan classified as a loss is considered uncollectible. Lincoln
        had
        $13.1 million and $7.4 million of loans classified as special mention as
        of
        March 31, 2007 and December 31, 2006,
   16
  respectively.
        In addition, Lincoln had $4.9 million and $5.6 million of loans classified
        as
        substandard at March 31, 2007 and December 31, 2006, respectively. Loans
        classified as doubtful totaled $.3 million at March 31, 2007 and $.4 million
        at
        December 31, 2006. At March 31, 2007 and December 31, 2006 there were no
        loans
        classified as loss. At March 31, 2007, and December 31, 2006, respectively,
        non-accrual loans were $2.6 million and $2.5 million. At March 31, 2007 and
        December 31, 2006, respectively, accruing loans delinquent 90 days or more
        totaled $283,000 and $1,000. At March 31, 2007 and December 31, 2006, the
        allowance for loan losses was $6.2 million and $6.1 million, respectively
        or
        approximately .96% of loans at December 31, 2006 and 1.03% at March 31,
        2007.
   **Liquidity
        and Capital Resources**
  The
        Company’s primary sources of funds are deposits, borrowings and the proceeds
        from principal and interest payments on loans. In addition, securities
        maturities and amortization of mortgage-backed securities are structured
        to
        provide a source of liquidity. Sales of loans and available for sale securities
        can also provide liquidity should the need arise. While maturities and scheduled
        amortization of loans and mortgage-backed securities are a predictable source
        of
        funds, deposit flows and mortgage and mortgage-backed securities prepayments
        are
        greatly influenced by general interest rates, economic conditions and
        competition. Liquidity management is both a daily and long-term function
        of the
        Company’s management strategy. In the event that the Company should require
        funds beyond its ability to generate them internally, additional funds are
        available through the use of FHLB advances, brokered deposits and federal
        funds
        purchased.
  Quantitative
        measures established by regulation to ensure capital adequacy require the
        Company and the subsidiary bank to maintain minimum amounts and ratios (set
        forth in the table below) of total and Tier I capital (as defined in the
        regulations) to risk-weighted assets (as defined), and of Tier I capital
        (as
        defined) to average assets (as defined).
 Management
        believes, as of March 31, 2007, that the Company and the Bank meet all capital
        adequacy requirements to which they are subject. The Company and Bank’s actual
        capital amounts and ratios under the state charter are presented in the
        following table.
  **Actual**
              
              **For
                  Capital Adequacy Purposes**
              
              **To
                  Be Well Capitalized Under Prompt Corrective Action
                  Provisions****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**As
                  of March 31, 2007Total
                  Capital(to
                  Risk-Weighted Assets)Consolidated
              
              $
              78,847
              
              
              12.5
              %
              $
              55,212
              
              
              8.0
              %
              
              
              
              $
              N/ABank
              
              
              75,832
              
              
              11.6
              
              
              55,155
              
              
              8.0
              
              
              68,944
              
              
              10.0
              %Tier
                  I Capital(to
                  Risk-Weighted Assets)Consolidated
              
              
              73,041
              
              
              11.6
              
              
              27,606
              
              
              4.0
              
              
              
              
              
              N/ABank
              
              
              69,603
              
              
              10.7
              
              
              27,578
              
              
              4.0
              
              
              41,366
              
              
              6.0Tier
                  I Capital(to
                  Average Assets)Consolidated
              
              
              72,619
              
              
              8.4
              %
              
              34,684
              
              
              4.0
              
              
              
              
              
              N/ABank
              
              
              69,603
              
              
              8.1
              
              
              34,600
              
              
              4.0
              
              
              43,250
              
              
              5.0
  **Other**
  The
        Securities and Exchange Commission maintains a Web site that contains reports,
        proxy information statements, and other information regarding registrants
        that
        file electronically with the Commission, including the Company. The address
        is
        http://www.sec.gov.
   17
  **Item
        3.**  **Quantitative
        and Qualitative Disclosures About Market Risk**
  An
        important component of Lincoln Bank’s asset/liability management policy includes
        examining the interest rate sensitivity of its assets and liabilities and
        monitoring the expected effects of interest rate changes on the economic
        value
        of its assets. An asset or liability is interest rate sensitive within a
        specific time period if it will mature or reprice within that time period.
        If
        Lincoln Bank’s assets mature or reprice more quickly or to a greater extent than
        its liabilities, economic value and net interest income would tend to increase
        during periods of rising interest rates, but decrease during periods of falling
        interest rates. Conversely, if Lincoln Bank’s assets mature or reprice more
        slowly or to a lesser extent than its liabilities, economic value and net
        interest income would tend to decrease during periods of rising interest
        rates
        but increase during periods of falling interest rates.
  The
        Bank’s board of directors has delegated responsibility for the day-to-day
        management of interest rate risk to the Asset/Liability (“ALCO”) Committee. The
        ALCO Committee meets weekly to manage and review Lincoln Bank’s assets and
        liabilities. The ALCO Committee establishes interest rates for deposits and
        reviews loan product pricing. The committee considers the bank’s interest rate
        risk position, liquidity needs and competitive pricing.
  Presented
        below, as of March 31, 2007, is an analysis showing the present value impact
        of
        changes in interest rates, assuming a comprehensive mark-to-market environment.
        Noninterest sensitive assets and liabilities such as cash, accounts receivable,
        fixed assets, and other liabilities are excluded from the analysis.
  
 **Economic
                  Value****Present
                  Value at March 31, 2007**
                **Change
                  in Interest Rates of:**-2%
              
              -1%
              
              Current
              
              +1%
              
              +2%(In
                  Thousands)**Interest
                  Sensitive Assets**Investments
              
              $
              165,067
              
              $
              163,356
              
              $
              160,070
              
              $
              152,915
              
              $
              146,914Loans
              
              
              666,672
              
              
              653,207
              
              
              636,918
              
              
              618,452
              
              
              600,419Total
                  interest sensitive assets
              
              
              831,739
              
              
              816,563
              
              
              796,988
              
              
              771,367
              
              
              747,333**Interest
                  Sensitive Liabilities**Deposits
              
              
              (659,264
              )
              
              (649,189
              )
              
              (639,998
              )
              
              (631,446
              )
              
              (623,473
              )Borrowings
                  and repurchase agreements
              
              
              (103,645
              )
              
              (102,838
              )
              
              (102,215
              )
              
              (98,400
              )
              
              (94,475
              )Total
                  interest sensitive liabilities
              
              
              (762,909
              )
              
              (752,027
              )
              
              (742,213
              )
              
              (729,846
              )
              
              (717,948
              )Net
                  market value as of March 31, 2007
              
              
              68,830
              
              
              64,536
              
              
              54,775
              
              
              41,521
              
              
              29,385Change
                  from current
              
              
              14,055
              
              
              9,761
              
              
              ---
              
              
              (13,254
              )
              
              (25,390
              )
  
  18
  The
        same
        information as of December 31, 2006 is presented below.
 
 **Economic
                  Value****Present
                  Value at December 31, 2006**
                **Change
                  in Interest Rates of:**-2%
              
              -1%
              
              Current
              
              +1%
              
              +2%(In
                  Thousands)**Interest
                  Sensitive Assets**Investments
              
              $
              164,398
              
              $
              162,623
              
              $
              160,045
              
              $
              154,521
              
              $
              148,496Loans
              
              
              645,847
              
              
              637,404
              
              
              624,753
              
              
              608,960
              
              
              592,438Total
                  interest sensitive assets
              
              
              810,245
              
              
              800,027
              
              
              784,798
              
              
              763,481
              
              
              740,934**Interest
                  Sensitive Liabilities**Deposits
              
              
              (640,002
              )
              
              (629,328
              )
              
              (619,314
              )
              
              (609,910
              )
              
              (601,070
              )Borrowings
                  and repurchase agreements
              
              
              (127,439
              )
              
              (123,547
              )
              
              (120,660
              )
              
              (118,874
              )
              
              (118,014
              )Total
                  interest sensitive liabilities
              
              
              (767,441
              )
              
              (752,875
              )
              
              (739,974
              )
              
              (728,784
              )
              
              (719,084
              )Net
                  market value as of December 31, 2006
              
              
              42,804
              
              
              47,152
              
              
              44,824
              
              
              34,697
              
              
              21,850Change
                  from current
              
              
              (2,020
              )
              
              2,328
              
              
              ---
              
              
              (10,127
              )
              
              (22,974
              )
   **Item
        4.**  **Controls
        and Procedures**
  (a)
            Evaluation
                of disclosure controls and procedures.
                The Company’s chief executive officer and chief financial officer, after
                evaluating the effectiveness of the Company’s disclosure controls and
                procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the
                regulations promulgated under the Securities Exchange Act of 1934,
                as
                amended (the “Exchange Act”)) as of the end of the most recent fiscal
                quarter covered by this quarterly report (the “Evaluation Date”), have
                concluded that as of the Evaluation Date, the Company’s disclosure
                controls and procedures are effective in ensuring that information
                required to be disclosed by the Company in reports that it files
                or
                submits under the Exchange Act is recorded, processed, summarized
                and
                reported within the time periods specified in the Securities and
                Exchange
                Commission’s rules and forms and are designed to ensure that information
                required to be disclosed in those reports is accumulated and communicated
                to management as appropriate to allow timely decisions regarding
                required
                disclosure.  (b)
            Changes
                in internal control over financial reporting.
                There were no changes in the Company’s internal control over financial
                reporting identified in connection with the Company’s evaluation of
                controls that   19
  occurred
        during the Company’s last fiscal quarter that have materially affected, or are
        reasonably likely to materially affect, the Company’s internal control over
        financial reporting.
   **PART
        II. OTHER INFORMATION**
 **Item
        1.**  **Legal
        Proceedings**
  Although
        the Company and its subsidiaries are involved, from time to time, in various
        legal proceedings arising in the ordinary course of business, there are no
        material legal proceedings to which they are a party or to which their property
        is subject.
  **Item
        1A. Risk Factors**
  There
        have been no material changes with respect to the risk factors disclosed
        in the
        Company’s Annual Report on Form 10-K for the year ended December 31,
        2006.
  **Item
        2.**  **Unregistered
        Sales of Equity Securities and Use of Proceeds**
  **ISSUER
        PURCHASES OF EQUITY SECURITIES**
  **Period**
              
              **Total
                  Number ofShares Purchased (1)**
              
              **Average
                  PricePaid per Share**
              
              **Total
                  Number ofShares Purchased asPart of PubliclyAnnounced
                  Plan****(2)**
              
              **Maximum
                  Numberof Shares Yet to BePurchased Under the
                  Plan**January
                  1-31, 2007
              
              
              --
              
              
              --
              
              
              --
              
              
              44,433February
                  1-28, 2007
              
              
              937
              
              $
              20.00
              
              
              --
              
              
              44,433March
                  1-31, 2007
              
              
              --
              
              
              --
              
              
              --
              
              
              44,433Total
              
              
              937
              
              $
              20.00
              
              
              --
              
              
              44,433
  (1)
            The
                937 shares redeemed were not part of a publicly announced repurchase
                plan
                or program. These shares were owned and tendered as payment by an
                employee
                as payment for an option exercise.  (2)
            The
                Company announced a stock repurchase program on April 23, 2003, and
                up to
                44,433 additional shares may still be repurchased under that program.
                The
                repurchase program does not have an expiration
                date.   **Item
        3.**  **Defaults
        Upon Senior Securities.**
  None
  **Item
        4.**  **Submission
        of Matters to Vote of Security Holders.**
  None
  **Item
        5.**  **Other
        Information.**
  None
  **Item
                  6.   Exhibits**10(1)
              Amended
                  Lincoln Bancorp Incentive Plan31(1)
              Certification
                  required by 17 C.F.R. § 240.13a-14(a)31(2)
              Certification
                  required by 17 C.F.R. § 240.13a-14(a)32
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of
                  the
                  Sarbanes-Oxley Act of 2002
  20
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, as amended, the
        Registrant has duly caused this report to be signed on its behalf by the
        undersigned thereunto duly authorized.
  **LINCOLN
                  BANCORP**Date:  May
                  9, 2007
              By:
              /s/
                  Jerry R. EngleJerry
                  R. EnglePresident
                  and Chief Executive OfficerDate:  May
                  9, 2007
              By:
              /s/John
                  M. BaerJohn
                  M. BaerSecretary
                  and Treasurer
 
   21
  **EXHIBIT
        INDEX**
  **No.**
              
              **Description**
              
              **Location**10
                  (1)
              
              Amended
                  Lincoln Bancorp Incentive Plan
              
              Attached31(1)
              
              CEO
                  Certification required by 17 C.F.R. Section 240.13a-14(a)
              
              Attached31(2)
              
              CFO
                  Certification required by 17 C.F.R. Section 240.13a-14(a)
              
              Attached32
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002
              
              Attached
     22