**SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 (Mark
        One)
 
 x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 OR ̈
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE TRANSITION PERIOD FROM _________ TO
                  __________
 
 Commission
        file number: 000-25219
 
 LINCOLN
        BANCORP
 (Exact
        name of registrant specified in its charter)
 
 Indiana
                (State
                  or other jurisdiction of incorporation or organization)
              
              35-2055553
                (I.R.S.
                  Employer Identification Number)
 
 1121
        East
        Main Street
 Plainfield,
        Indiana 46168-0510
 (Address
        of principal executive offices, including Zip Code)
 
 (317)
        839-6539
 (Registrant’s
        telephone number, including area code)
 
 
 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 report), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes  [X] No [   ]
 
 Indicate
        by check mark whether the Registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act). Yes  [   ]
        No  [X]
 
 The
        number of shares of the Registrant’s common stock, without par value,
        outstanding as of June 30, 2005 was 5,400,253.
 
  
  LINCOLN
        BANCORP AND SUBSIDIARY
 FORM
        10-Q
 
 INDEX
 
 
 Page
                  No.FORWARD
                  LOOKING STATEMENT
              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
              9Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Conditionand
                  Results of Operations.
              11Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              17Item
                  4.
              Controls
                  and Procedures
              18PART
                  II.
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              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
              19Item
                  6.
              Exhibits
              20SIGNATURES
              21CERTIFICATIONS
              22
 
  2
  
 **FORWARD
        LOOKING STATEMENT**
 
 This
        Quarterly Report on Form 10-Q (“Form 10-Q”) contains statements which 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
 
 
 June
                  30,
                2005
              
              December
                  31,
                2004(Unaudited)**Assets**Cash
                  and due from banks
              
              $
              4,038,254
              
              $
              9,218,265Short-term
                  interest-bearing demand deposits in other banks
              
              
              25,891,128
              
              
              14,581,854Federal
                  funds sold
              
              
              --
              
              
              3,990,000Cash
                  and cash equivalents
              
              
              29,929,382
              
              
              27,790,119Interest-bearing
                  deposits
              
              
              --
              
              
              2,188,111Investment
                  securitiesAvailable
                  for sale
              
              
              90,283,470
              
              
              118,916,779Held
                  to maturity (market value $1,695,000 and $1,745,000)
              
              
              1,665,000
              
              
              1,695,000Total
                  investment securities
              
              
              91,948,470
              
              
              120,611,779Loans
                  held for sale
              
              
              3,614,498
              
              
              8,820,890Loans,
                  net of allowance for loan losses of $7,284,519 and
                  $5,700,702
              
              
              599,766,189
              
              
              567,182,726Premises
                  and equipment
              
              
              14,434,327
              
              
              14,416,140Investments
                  in limited partnerships
              
              
              1,046,108
              
              
              1,024,777Federal
                  Home Loan Bank stock
              
              
              10,648,200
              
              
              10,427,000Interest
                  receivable
              
              
              3,643,261
              
              
              3,194,313Goodwill
              
              
              23,906,877
              
              
              23,906,877Core
                  deposit intangible
              
              
              3,631,988
              
              
              4,017,274Cash
                  surrender value life insurance
              
              
              18,095,124
              
              
              17,751,275Other
                  assets
              
              
              6,179,716
              
              
              7,635,652Total
                  assets
              
              $
              806,844,140
              
              $
              808,966,933**Liabilities**DepositsNoninterest-bearing
              
              $
              47,253,268
              
              $
              36,956,251Interest-bearing
              
              
              512,291,265
              
              
              479,372,500Total
                  deposits
              
              
              559,544,533
              
              
              516,328,751Securities
                  sold under repurchase agreement
              
              
              7,885,242
              
              
              6,500,277Borrowings
              
              
              132,079,480
              
              
              177,829,382Interest
                  payable
              
              
              1,438,404
              
              
              1,145,877Other
                  liabilities
              
              
              5,702,053
              
              
              5,407,828Total
                  liabilities
              
              
              706,649,712
              
              
              707,212,115**Commitments
                  and Contingencies****Shareholders’
                  Equity**Common
                  stock, without par valueAuthorized
                  - 20,000,000 sharesIssued
                  and outstanding - 5,400,253 and 5,366,563 shares
              
              
              63,903,079
              
              
              63,533,976Retained
                  earnings
              
              
              40,147,831
              
              
              42,092,418Accumulated
                  other comprehensive income
              
              
              24,877
              
              
              182,864Unearned
                  recognition and retention plan (RRP) shares
              
              
              (620,489
              )
              
              (632,420
              )Unearned
                  employee stock ownership plan (ESOP) shares
              
              
              (3,260,870
              )
              
              (3,422,020
              )Total
                  shareholders’ equity
              
              
              100,194,428
              
              
              101,754,818Total
                  liabilities and shareholders’ equity
              
              $
              806,844,140
              
              $
              808,966,933
 
 See
        notes
        to consolidated condensed financial statements.
 
  4
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statements of Operations
 (Unaudited)
 
 Three
                  Months Ended
                June
                  30,
              
              Six
                  Months Ended
                June
                  30,2005
              
              2004
              
              2005
              
              2004Interest
                  IncomeLoans,
                  including fees
              
              $
              9,343,143
              
              $
              6,622,058
              
              $
              18,084,218
              
              $
              13,291,230Investment
                  securities
              
              
              1,215,916
              
              
              602,618
              
              
              2,409,771
              
              
              1,295,325Deposits
                  with financial institutions and Federal Funds sold
              
              
              167,652
              
              
              9,030
              
              
              232,143
              
              
              26,076Dividend
                  income
              
              
              112,538
              
              
              94,256
              
              
              222,370
              
              
              211,216Total
                  interest and dividend income
              
              
              10,839,249
              
              
              7,327,962
              
              
              20,948,502
              
              
              14,823,847Interest
                  ExpenseDeposits
              
              
              3,168,573
              
              
              1,393,652
              
              
              5,684,681
              
              
              2,826,837Federal
                  Home Loan Bank advances
              
              
              1,973,109
              
              
              2,029,895
              
              
              3,933,942
              
              
              4,064,089Other
                  Borrowings
              
              
              48,118
              
              
              --
              
              
              113,232
              
              
              --Total
                  interest expense
              
              
              5,189,800
              
              
              3,423,547
              
              
              9,731,855
              
              
              6,890,926Net
                  Interest Income
              
              
              5,649,449
              
              
              3,904,415
              
              
              11,216,647
              
              
              7,932,921Provision
                  for loan losses
              
              
              1,915,722
              
              
              223,281
              
              
              1,929,231
              
              
              423,453Net
                  Interest Income After Provision for Loan Losses
              
              
              3,733,727
              
              
              3,681,134
              
              
              9,287,416
              
              
              7,509,468Other
                  IncomeService
                  charges on deposit accounts
              
              
              525,483
              
              
              305,034
              
              
              982,076
              
              
              518,990Net
                  realized and unrealized gains on loans
              
              
              162,441
              
              
              68,041
              
              
              376,960
              
              
              138,407Net
                  realized losses on sales of available-for-sale securities
              
              
              (292,420
              )
              
              --
              
              
              (292,420
              )
              
              --Point
                  of sale income
              
              
              149,572
              
              
              102,575
              
              
              268,754
              
              
              189,264Loan
                  servicing fees
              
              
              102,516
              
              
              81,805
              
              
              208,952
              
              
              164,706Increase
                  in cash value of life insurance
              
              
              122,420
              
              
              116,051
              
              
              348,393
              
              
              253,387Equity
                  in income/(losses) of limited partnerships
              
              
              66,331
              
              
              (33,000
              )
              
              21,331
              
              
              (66,000
              )Other
                  income
              
              
              236,450
              
              
              159,918
              
              
              384,572
              
              
              273,156Total
                  other income
              
              
              1,072,793
              
              
              800,424
              
              
              2,298,618
              
              
              1,471,910Other
                  ExpensesSalaries
                  and employee benefits
              
              
              2,899,007
              
              
              1,641,923
              
              
              5,534,102
              
              
              3,495,524Net
                  occupancy expenses
              
              
              497,265
              
              
              230,435
              
              
              934,996
              
              
              467,538Equipment
                  expenses
              
              
              373,294
              
              
              222,263
              
              
              782,196
              
              
              408,051Advertising
                  and business development
              
              
              217,358
              
              
              132,225
              
              
              387,866
              
              
              235,222Data
                  processing fees
              
              
              609,500
              
              
              375,737
              
              
              1,231,827
              
              
              736,455Professional
                  fees
              
              
              272,853
              
              
              119,634
              
              
              396,386
              
              
              234,587Director
                  and committee fees
              
              
              2,018
              
              
              10,712
              
              
              104,538
              
              
              90,390Core
                  deposit intangibles amortization
              
              
              192,642
              
              
              23,487
              
              
              385,285
              
              
              46,974Prepayment
                  fees on Federal Home Loan Bank advances
              
              
              1,621,813
              
              
              --
              
              
              1,621,813
              
              
              --Office
                  supplies
              
              
              132,895
              
              
              45,532
              
              
              274,771
              
              
              120,993Other
                  expenses
              
              
              863,019
              
              
              418,755
              
              
              1,533,151
              
              
              826,042Total
                  other expenses
              
              
              7,681,664
              
              
              3,220,703
              
              
              13,186,931
              
              
              6,661,776Income
                  (Loss) Before Income Tax
              
              
              (2,875,144
              )
              
              1,260,855
              
              
              (1,600,897
              )
              
              2,319,602Income
                  tax expense (benefit)
              
              
              (1,236,109
              )
              
              324,656
              
              
              (940,562
              )
              
              571,655Net
                  Income (Loss)
              
              $
              (1,639,035
              )
              $
              936,199
              
              $
              (660,335
              )
              $
              1,747,947Basic
                  earnings (loss) per share
              
              $
              (.33
              )
              $
              .24
              
              $
              (.13
              )
              $
              .44Diluted
                  earnings (loss) per share
              
              
              (.33
              )
              
              .23
              
              
              (.13
              )
              
              .43Dividends
                  per share
              
              
              .14
              
              
              .13
              
              
              .28
              
              
              .26
 
 
 See
        notes
        to consolidated condensed financial statements.
  5
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statements of Comprehensive Income
 (Unaudited)
 
 Three
                    Months Ended
                  June
                    30,
                
                Six
                    Months Ended
                  June
                    30,2005
                
                2004
                
                2005
                
                2004Net
                    Income (Loss)
                
                $
                (1,639,035
                )
                $
                936,199
                
                $
                (660,335
                )
                $
                1,747,947Other
                    comprehensive income (loss), net of taxUnrealized
                    gains (losses) on securities available for saleUnrealized
                    holding gains (losses) arising during the period, net of tax
                    expense/(benefit) of $120,615, $(325,263), $(196,797), and $(99,135
                    )
                
                
                206,277
                
                
                (631,380
                )
                
                (356,125
                )
                
                (192,565
                )Less:
                    Reclassification adjustment for losses included in net loss,
                    net of tax
                    benefit of $94,282, -0-, 94,282 and -0-.
                
                
                (198,138
                )
                
                -0-
                
                
                (198,138
                )
                
                -0-404,415
                
                
                (631,380
                )
                
                (157,987
                )
                
                (192,565
                )Comprehensive
                    income (loss)
                
                $
                (1,234,620
                )
                $
                304,819
                
                $
                (818,322
                )
                $
                1,555,382
 
 See
        notes
        to consolidated condensed financial statements.
  6
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statement of Shareholders’ Equity
 For
        the
        Six Months Ended June 30, 2005
 (Unaudited)
 AccumulatedCommon
                      Stock
                  
                  
                  
                  Other
                  
                  
                  
                  UnearnedShares
                  
                  
                  
                  Retained
                  
                  Comprehensive
                  
                  Unearned
                  
                  ESOPOutstanding
                  
                  Amount
                  
                  Earnings
                  
                  Income
                  
                  Compensation
                  
                  Shares
                  
                  Total**Balances,
                      January 1, 2005**
                  
                  
                  5,366,563
                  
                  $
                  63,533,976
                  
                  $
                  42,092,418
                  
                  $
                  182,864
                  
                  $
                  (632,420
                  )
                  $
                  (3,422,020
                  )
                  $
                  101,754,818Net
                      loss for the period
                  
                  
                  
                  
                  
                  
                  
                  
                  (660,335
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (660,335
                  )Unrealized
                      losses on securities, net of reclassification adjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (157,987
                  )
                  
                  
                  
                  
                  
                  
                  
                  (157,987
                  )Stock
                      options exercised
                  
                  
                  33,690
                  
                  
                  369,103
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  369,103ESOP
                      shares earned
                  
                  
                  
                  
                  
                  
                  
                  
                  129,019
                  
                  
                  
                  
                  
                  
                  
                  
                  161,150
                  
                  
                  290,169Amortization
                      of unearned compensation expense
                  
                  
                  
                  
                  
                  
                  
                  
                  3,549
                  
                  
                  
                  
                  
                  11,931
                  
                  
                  
                  
                  
                  15,480Cash
                      dividends ($.28 per share)
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,416,820
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,416,820
                  )**Balances,
                      June 30, 2005**
                  
                  
                  5,400,253
                  
                  $
                  63,903,079
                  
                  $
                  40,147,831
                  
                  $
                  24,877
                  
                  $
                  (620,489
                  )
                  $
                  (3,260,870
                  )
                  $
                  100,194,428
 
 See
        notes
        to consolidated condensed financial statements.
 
  7
 **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statements of Cash Flows
 (Unaudited)
 Six
                    Months EndedJune
                    30,2005
                
                2004Operating
                    ActivitiesNet
                    income (loss)
                
                $
                (660,335
                )
                $
                1,747,947Adjustments
                    to reconcile net income to net cash provided by (used in) operating
                    activitiesProvision
                    for loan losses
                
                
                1,929,231
                
                
                423,453Investment
                    securities accretion, net
                
                
                (89,415
                )
                
                145,594Investment
                    securities losses
                
                
                292,420
                
                
                --Loans
                    originated for sale in the secondary market
                
                
                (18,322,684
                )
                
                (10,494,480
                )Proceeds
                    from sale of loans in the secondary market
                
                
                17,999,008
                
                
                8,759,295Gain
                    on sale of loans
                
                
                (376,960
                )
                
                (138,407
                )Amortization
                    of net loan origination fees
                
                
                (138,721
                )
                
                (130,138
                )Amortization
                    of purchase accounting adjustment
                
                
                591,274
                
                
                26,225Depreciation
                    and amortization
                
                
                773,382
                
                
                369,267Amortization
                    of unearned compensation expense
                
                
                15,480
                
                
                263,885ESOP
                    shares earned
                
                
                290,169
                
                
                322,245Net
                    change in:Interest
                    receivable
                
                
                (448,948
                )
                
                39,138Interest
                    payable
                
                
                292,527
                
                
                (70,951
                )Other
                    adjustments
                
                
                141,969
                
                
                19,258Net
                    cash provided by operating activities
                
                
                2,288,397
                
                
                1,282,331Investing
                    ActivitiesPurchases
                    of securities available for sale
                
                
                (88,819,404
                )
                
                (34,776,645
                )Proceeds
                    from sales of securities available for sale
                
                
                50,469,362
                
                
                --Proceeds
                    from maturities of securities available for sale
                
                
                66,519,844
                
                
                52,042,457Proceeds
                    from maturities of securities held to maturity
                
                
                30,000
                
                
                25,000Net
                    change in loans
                
                
                (28,716,985
                )
                
                (15,643,150
                )Purchases
                    of property and equipment
                
                
                (1,014,002
                )
                
                (980,206
                )Purchases
                    of Federal Home Loan Bank stock
                
                
                --
                
                
                --Proceeds
                    from sale of foreclosed real estate
                
                
                1,464,941
                
                
                493,218Other
                    investing activities
                
                
                2,418,009
                
                
                1,365Net
                    cash provided by investing activities
                
                
                2,351,765
                
                
                1,162,039Financing
                    ActivitiesNet
                    change inNoninterest-bearing,
                    interest-bearing demand, money market and savings deposits
                
                
                21,411,699
                
                
                (2,366,972
                )Certificates
                    of deposit
                
                
                21,528,949
                
                
                (1,846,830
                )Short
                    term borrowings
                
                
                1,384,965
                
                
                --Proceeds
                    from FHLB advances
                
                
                13,000,000
                
                
                51,800,000Repayment
                    of FHLB advances
                
                
                (58,855,000
                )
                
                (60,500,000
                )Dividends
                    paid
                
                
                (1,411,453
                )
                
                (1,050,273
                )Exercise
                    of stock options
                
                
                369,103
                
                
                238,000Net
                    change in advances by borrowers for taxes and insurance
                
                
                70,838
                
                
                610,994Net
                    used in financing activities
                
                
                (2,500,899
                )
                
                (13,115,081
                )Net
                    Change in Cash and Cash Equivalents
                
                
                2,139,263
                
                
                (10,670,711
                )Cash
                    and Cash Equivalents, Beginning of Period
                
                
                27,790,119
                
                
                16,793,923Cash
                    and Cash Equivalents, End of Period
                
                $
                29,929,382
                
                $
                6,123,212Additional
                    Cash Flows and Supplementary InformationInterest
                    paid
                
                $
                9,439,328
                
                $
                6,961,877Income
                    tax paid/(refund received)
                
                
                (438,666
                )
                
                472,000Loan
                    balances transferred to foreclosed real estate
                
                
                389,371
                
                
                499,100Securitization
                    of loans
                
                
                --
                
                
                27,068,072Transfer
                    of loans held for sale to loans
                
                
                5,872,116
                
                
                --
 See
          notes
          to consolidated condensed financial statements.
 8
  **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 federally chartered
        savings 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, 2004 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 June 30, 2005, and for the three
        and six months ended June 30, 2005 and 2004, 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 and six-month
        periods ended June 30, 2005, are not necessarily indicative of the results
        which
        may be expected for the entire year. The consolidated condensed balance sheet
        of
        the Company as of December 31, 2004 has been derived from the audited
        consolidated balance sheet of the Company as of that date.
 
 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
                June
                  30, 2005
              
              Three
                  Months Ended
                June
                  30, 2004Income
              
              Weighted
                  Average Shares
              
              Per
                  Share
                Amount
              
              Income
              
              Weighted
                  Average Shares
              
              Per
                  Share
                AmountBasic
                  earnings (loss) per shareIncome
                  available to common shareholders
              
              $
              (1,639,035
              )
              
              5,022,453
              
              $
              (
                  .33
              )
              $
              936,199
              
              
              3,970,084
              
              $
              .24Effect
                  of dilutive RRP awards and stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              122,720Diluted
                  earnings (loss) per shareIncome
                  available to common shareholders and assumed conversions
              
              $
              (1,639,035
              )
              
              5,022,453
              
              $
              (
                  .33
              )
              $
              936,199
              
              
              4,092,804
              
              $
              .23
   9
 Six
                  Months Ended
                June
                  30, 2005
              
              Six
                  Months Ended
                June
                  30, 2004Income
              
              Weighted
                  Average Shares
              
              PerShare
                Amount
              
              Income
              
              Weighted
                  Average Shares
              
              PerShare
                AmountBasic
                  earnings (loss) per shareIncome
                  available to common shareholders
              
              $
              (660,335
              )
              
              5,012,820
              
              $
              (.13
              )
              $
              1,747,947
              
              
              3,960,111
              
              $
              .44Effect
                  of dilutive RRP awards and stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              141,337Diluted
                  earnings (loss) per shareIncome
                  available to common shareholders and assumed conversions
              
              $
              (660,335
              )
              
              5,012,820
              
              $
              (
                  .13
              )
              $
              1,747,947
              
              
              4,101,448
              
              $
              .43
 
  Options
        to purchase 634,502 shares of common stock at exercise prices of $7.32 to
        $19.08
        per share were outstanding at June 30, 2005, but were not included in the
        computation of diluted earnings per share because the options were
        anti-dilutive.
 
 Note
        3:  Stock
        Options
 
 The
        Company has a stock-based employee compensation plan, which is described
        more
        fully in Notes to Financial Statements included in the December 31, 2004
        Annual
        Report to Shareholders. The Company accounts for this plan under the recognition
        and measurement principles of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        related interpretations. No stock-based employee compensation cost is reflected
        in net income, as all options granted under the plan had an exercise price
        equal
        to the market value of the underlying common stock on the grant date. The
        following table illustrates the effect on net income and earnings per share
        if
        the Company had applied the fair value provisions of Statement of Financial
        Accounting Standards (“SFAS”) No. 123, *Accounting
        for Stock-Based Compensation* ,
        to
        stock-based employee compensation.
   10
  
  Three
                  Months Ended
                June
                  30, 2005
              
              Three
                  Months Ended
                June
                  30, 2004
              
              Six
                  Months Ended
                June
                  30, 2005
              
              Six
                  Months Ended
                June
                  30, 2004Net
                  income (loss), as reported
              
              $
              (1,639,035
              )
              $
              936,199
              
              $
              (660,335
              )
              $
              1,747,947Less:
                  Total stock-based employee compensation cost determined under the
                  fair
                  value based method, net of income taxes
              
              
              25,144
              
              
              7,224
              
              
              50,288
              
              
              16,328Pro
                  forma net income (loss)
              
              $
              (1,664,179
              )
              $
              928,975
              
              $
              (710,623
              )
              $
              1,731,619Earnings
                  (loss) per share:Basic
                  - as reported
              
              $
              (.33
              )
              $
              .24
              
              $
              (.13
              )
              $
              .44Basic
                  - pro forma
              
              $
              (.33
              )
              
              .23
              
              $
              (.14
              )
              
              .44Diluted
                  - as reported
              
              $
              (.33
              )
              
              .23
              
              $
              (.13
              )
              
              .43Diluted
                  - pro forma
              
              $
              (.33
              )
              
              .23
              
              $
              (.14
              )
              
              .42
 
  In
        December, 2004, the Financial Accounting Standards Board (FASB) issued an
        amendment to SFAS 123 (SFAS 123R) which eliminates the ability to account
        for
        share-based compensation transactions using Accounting Principles Board Opinion
        No. 25 and generally requires that such transactions be accounted for using
        a
        fair value-based method. SFAS 123R will be effective for the Company beginning
        January 1, 2006. SFAS 123R applies to all awards granted after the required
        effective date and to awards modified, repurchased, or cancelled after that
        date. The cumulative effect of initially applying this Statement, if any,
        is
        recognized as of the required effective date.
  As
        of the
        required effective date, the Company will apply SFAS 123R using either the
        modified version of prospective application or the modified version of
        retrospective application. Under the prospective transition method, compensation
        cost is recognized on or after the required effective date for the portion
        of
        outstanding awards for which the requisite service has not yet been rendered,
        based on the grant-date fair value of those awards calculated under SFAS
        123 for
        either recognition or pro forma disclosures. For periods before the required
        effective date, a company may elect to apply a modified version of retrospective
        application under which financial statements for prior periods are adjusted
        on a
        basis consistent with the pro forma disclosures required for those periods
        by
        SFAS 123.
  The
        Company is currently evaluating the effect of the recognition and measurement
        provisions of SFAS 123R but believes the adoption of SFAS 123R will not result
        in a material impact on the Company’s results of operations, cash flows or
        financial position.
  
 **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.
 
 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
  11
  Shares
        was merged with and into the Company and immediately thereafter, First Bank
        was
        merged into Lincoln Bank. 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.
 
 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 primarily by first mortgage liens on one- to four-family
        residential real estate. Lincoln’s deposit accounts are insured up to applicable
        limits by the Savings Association 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 Family Financial Holdings, Inc. (“Family Financial”) and in
        Bloomington Housing Associates, L.P. (“BHA”). Family Financial primarily engages
        in retail sales of insurance products in connection with loans originated
        by its
        shareholder financial institutions. 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, 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,
        OTS 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.
 
 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. 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 28 through 31 of the Annual
        Report to Shareholders for the year ended December 31, 2004, which was filed
        on
        Form 10-K with the Securities and Exchange Commission on March 31, 2005.
        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 significantly 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.
  12
  The
        Company's allowance consists of three components: probable losses estimated
        from
        individual reviews of specific loans and probable losses estimated from
        historical loss rates. Also, probable losses resulting from economic or other
        deterioration above and beyond what is reflected 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. Reserves are established for each category of loans
        based
        on the expected net charge-offs for one year. 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.
 
 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. 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.
  *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.
  13
  **Financial
        Condition**
 
 Assets
        totaled $806.8 million at June 30, 2005, a decrease from December 31, 2004
        of
        $2.1 million. By the end of the second quarter, securities had declined by
        $28.7
        million from yearend 2004. This was as a result of a restructuring of the
        balance sheet designed to strategically sell certain lower yielding investments
        totaling $37.5 million during the quarter and to utilize the cash flow generated
        from this sale to extinguish certain higher cost advances from the Federal
        Home
        Loan Bank of Indianapolis totaling $33.9 million. The decrease in assets
        due to
        the described restructuring was partially offset by an increase of $27.4
        million
        in loans and loans held for sale, net of allowance for loan losses. Loan
        growth
        during the quarter was primarily in commercial and consumer lending, up $10.5
        and $26.7 million, respectively. Residential mortgage loans declined $5.3
        million from December 31, 2004.
 
 Deposits
        totaled $559.5 million at June 30, 2005, an increase of $43.2 million from
        December 31, 2004. Growth was experienced in all categories of deposits except
        money market deposits. The largest growth occurred in certificates of deposit,
        up $36.4 million with $18.1 million of this growth from public funds. Money
        market deposits declined by $7.4 million as a result of high competitive
        pricing
        in the market for money market deposits and the migration of funds into
        certificates of deposit. Borrowed funds declined by $44.4 million from year
        end
        2004 to $140.0 million at June 30, 2005, primarily as a result of the balance
        sheet restructuring mentioned above and the retirement of other
        debt.
 
 Shareholders’
        equity decreased $1.6 million from December 31, 2004 to June 30, 2005. The
        decrease was a result of the net loss of $660,000 and dividends paid of $1.4
        million. These decreases were partially offset by stock options exercised
        and
        Employee stock ownership shares earned.
 
 **Comparison
        of Operating Results for the Three Months Ended June 30, 2005 and
        2004**
 
 Net
        loss
        for the second quarter ended June 30, 2005 was $1,639,000, or $.33 for both
        basic and diluted loss per share. This compared to net income for the comparable
        period in 2004 of $936,000 or $.24 for basic and $.23 for diluted earnings
        per
        share. The decline in net income was primarily due to an increase in the
        provision for loan losses, costs associated with the balance sheet restructuring
        and contract costs.
 
 Costs
        associated with the balance sheet restructuring noted above included $1.6
        million of prepayment fees and adjustments associated with the early
        extinguishment of debt. In addition, the sale of a group of lower yielding
        securities associated with the restructuring resulted in a pre-tax loss of
        $485,000 that was partially offset by a security sale unrelated to the
        restructuring that resulted in a gain of $192,000. In total the restructuring
        of
        the balance sheet resulted in an after-tax charge to earnings of
        $1,302,000.
 
 Also,
        the
        Company recognized contract costs in the second quarter of 2005 relating
        to the
        retirement of the Company’s Chief Executive Officer and another senior officer.
        T. Tim Unger, who retired as President and Chief Executive Officer of the
        Company and the Bank, and who will continue to serve on the Board of Directors
        until the next annual meeting of shareholders scheduled for April 2006, is
        entitled to compensation and benefits through the end of 2005. Former Senior
        Vice President Rebecca J. Morgan, who left the Bank effective June 1, 2005,
        is
        entitled to compensation and benefits through January 15, 2006. This recognition
        of contract costs in connection with Mr. Unger and Ms. Morgan reduced net
        income
        for the second quarter by $150,000.
 
 Net
        interest income for the second quarter of 2005 was $5,649,000 compared to
        $3,904,000 for the same period in 2004. Net interest margin was 2.92% for
        the
        three-month period ended June 30, 2005 compared to 2.79% for the same period
        in
        2004. The average yield on earning assets increased .36% for the second quarter
        of 2005 compared to the same period in 2004. The average cost of
        interest-bearing liabilities increased .15% from the second quarter of 2004
        to
        the second quarter of 2005. This increased spread from 2.40% for the 2004
        period
        to 2.60% for the 2005 period, or .20%. The acquisition of First Shares Bancorp,
        effective August 2, 2004, provided a boost to earning assets and net interest
        margin. The merger provided a greater mix of commercial and consumer loans
        with
        higher yields.
 
  The
        Bank’s provision for loan losses for the second quarter 2005 was $1,916,000
        compared to $223,000 for the same period in 2004. Non-performing loans to
        total
        loans at June 30, 2005 were .88% compared to .87% at December 31, 2004, while
        non-performing assets to total assets were .75% at June 30, 2005 compared
        to
        .85% at December 31, 2004. The decrease in non-performing assets was due
        to a
        reduction in other real estate owned as one larger property was
        sold.
   14
   As
        filed
        July 12, 2005 on Form 8-K, the Company originally announced an additional
        $1.30
        million of provision to the allowance for loan losses to cover the risk exposure
        for a specific loan. The Registrant's bank subsidiary, Lincoln Bank (the
        "Bank")
        was informed that an electrical contractor (the "Borrower") in Indianapolis
        had
        filed for liquidation under Chapter 7 of the bankruptcy statutes. Bank
        management had initially estimated potential losses with regard to the Borrower
        of $1.64 million. Current analysis indicates a potential loss of approximately
        $1.55 million; however, it is too early in the bankruptcy process to determine
        the Bank's final loss position. The Borrower and a related company have four
        commercial loans with the Bank totaling $2.18 million. The Borrower has a
        line
        of credit with a balance of $1.84 million that is secured primarily by accounts
        receivable. This collateral has the largest risk of loss and it is difficult
        to
        measure ultimate collectibility. The Bank continues to monitor potential
        collection opportunity but at this time anticipates collecting approximately
        15%
        of these accounts receivable which would result in an estimated loss of
        approximately $1.55 million. An SBA loan to the Borrower secured by equipment
        and working assets with a principal balance of $159,000 appears to have no
        exposure. A term loan to the Borrower with a balance of $30,000 is secured
        by
        service vehicles and no loss is anticipated on that loan. Another SBA loan
        to a
        related company of the Borrower and secured by commercial real estate in
        Indianapolis totals $153,000 and no loss is anticipated on the loan.
  The
        Bank's management had previously allocated $333,000 to the allowance for
        loan
        losses with respect to these loans. Because of the Borrower's decision to
        file
        for protection under the bankruptcy laws and information that became available
        on the status of the collateral for these loans, the Bank considered it
        necessary and prudent to initially provide an additional $1,304,000 provision
        in
        the allowance for loan losses for this credit. Subsequent review has caused
        the
        bank to reduce the additional provision to $1,217,000. The Bank continues
        to
        pursue several possible courses of action to mitigate the ultimate losses
        on
        these loans. However, it is currently too early to determine if any of these
        actions will be successful. The allowance for loan losses as a percentage
        of
        loans at June 30, 2005 was 1.19% compared to .98% at December 31, 2004.
  Other
        income for the three months ended June 30, 2005 was $1,073,000 compared to
        $800,000 for the same quarter of 2004. The increase of $273,000 in other
        income
        was primarily from the increase in service charges on deposit accounts, up
        $220,000; net realized and unrealized gains on sale of loans, up $94,000;
        and
        equity in income and losses of limited partnerships, up $99,000. The majority
        of
        the service charge increase was the result of the acquisition and the
        implementation of the Bank’s courtesy overdraft program, Lincoln Advantage,
        during the second quarter of 2004. The increase in gain on sale of loans
        was the
        result of greater loan sale volume during the second quarter of 2005 versus
        the
        same quarter of 2004. These increases in other income were partially offset
        by
        the $292,000 net loss realized on the sale of securities during the second
        quarter of 2005 due to the balance sheet restructuring discussed above and
        other
        sales.
  Other
        expenses were $7,682,000 for the three months ended June 30, 2005 compared
        to
        $3,221,000 for the same three months of 2004. The primary reason for the
        increase in expenses was the acquisition of First Shares Bancorp during the
        third quarter of 2004. Full-time equivalent employees have increased from
        130 at
        June 30, 2004 to 228 at June 30, 2005. Our branch locations have increased
        from
        nine to seventeen from the end of the second quarter in 2004 to the end of
        the
        same quarter in 2005. In addition, the costs relative to the balance sheet
        restructuring and the contract cost recognition discussed earlier added
        $1,870,000 to other expenses for the quarter. All categories of expenses
        reflect
        the growth of our business from the acquisition and the restructuring costs
        mentioned previously.
  The
        income tax benefit was approximately 43% of the pretax loss for the second
        quarter of 2005 as compared to income tax expense of approximately 26% of
        pretax
        income for the second quarter of 2004. The change in the effective tax rates
        from period to period was a result of tax credits available to the Company
        and
        increases in tax-exempt income.
 
 **Comparison
        of Operating Results for the Six Months Ended June 30, 2005 and
        2004**
 
 Net
        loss
        for the six-month period ended June 30, 2005 was $660,336, or $.13 for both
        basic and diluted loss per share. This compared to $1,748,000 or $.44 for
        basic
        and $.43 for diluted earnings per share for the same period of 2004. As
        discussed above the net loss incurred for the six month period ending June
        30,
        2005 was affected by the increased provision for loan losses, the balance
        sheet
        restructuring and the recognition of contract costs related to the retirement
        of
        certain senior officers.
  15
  Net
        interest income year-to-date through June 30, 2005 was $11,216,000 compared
        to
        $7,933,000 for the same period in 2004. Net interest margin was 2.96% through
        June 30, 2005 up from 2.83% for the same six-month period one year ago. Net
        interest income was up from one year ago as a result of the First Shares
        Bancorp
        acquisition and widening spreads. The average yield on earning assets increased
        .24% for the six months ending June 30, 2005 compared to the same period
        in
        2004. The average cost of interest-bearing liabilities increased .02% for
        the
        six months ending June 30, 2005 compared to same period in 2004. This increased
        spread from 2.44% for the 2004 period to 2.66% for the 2005 period, or .22%
        As
        noted above, the acquisition of First Shares Bancorp, effective August 2,
        2004,
        provided a boost to earning assets and net interest margin. The merger provided
        a greater mix of commercial and consumer loans with higher yields.
 
 The
        provision for the first six months of 2005 was $1,929,000 compared to $423,000
        last year for the same six-month period. As noted above, a specific troubled
        credit recognized during the second quarter of 2005 was responsible for the
        majority of the increase in provision.
  Other
        income for the six months ended June 30, 2005 was $2,299,000 compared to
        $1,472,000 during the same period in 2004. The increase of $827,000 in other
        income was primarily from the increase in service charges on deposit accounts,
        up $463,000 and net realized and unrealized gains on sale of loans, up $239,000.
        The majority of the service charge increase was the result of the First Shares
        acquisition and the implementation of the Bank’s courtesy overdraft program
        Lincoln Advantage during the second quarter of 2004. The increase in gain
        on
        sale of loans was the result of greater loan sale volume during 2005 versus
        the
        same period of 2004. These increases in other income were partially offset
        by
        the $292,000 net loss realized on the sale of securities during the second
        quarter of 2005 due to the balance sheet restructuring discussed above and
        other
        sales.
  Other
        expenses for the six months ended June 30, 2005 were $13,187,000 compared
        to
        $6,662,000 for the same period last year. The primary reason for the increase
        in
        expenses was the acquisition of First Shares Bancorp during the third quarter
        of
        2004. Full-time equivalent employees have increased from 130 at June 30,
        2004 to
        228 at June 30, 2005. Our branch locations have increased from nine to seventeen
        from the end of the second quarter in 2004 to the end of the same quarter
        in
        2005. In addition, the costs relative to the balance sheet restructuring
        and the
        contract cost recognition discussed earlier added $1,870,000 to other expenses
        during the second quarter of 2005. All categories of expenses reflect the
        growth
        of our business from the acquisition and the restructuring costs mentioned
        previously.
  Income
        tax benefit was approximately 59% of the pretax loss for the six months ended
        June 30, 2005 and income tax expense was approximately 25% of the pre-tax
        income
        for the six months ended June 30, 2004. The change in the effective tax rates
        from period to period was a result of tax credits available to the Company
        and
        increases in tax-exempt income.
 
 **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
        $12.1 million and $14.9 million of loans classified as special mention as
        of
        June 30, 2005 and December 31, 2004, respectively. In addition, Lincoln had
        $6.3
        million and $5.7 million of loans classified as substandard at June 30, 2005
        and
        December 31, 2004, respectively. Loans classified as doubtful totaled $2,467,000
        at June 30, 2005 and $233,000 at December 31, 2004. At June 30, 2005 and
        December 31, 2004, no loans were classified as loss. At June 30, 2005, and
        December 31, 2004, respectively, non-accrual loans were $4.9 million and
        $4.8
        million. At June 30, 2005 and December 31, 2004, respectively, accruing loans
        delinquent 90 days or more totaled $550,000 and $314,000. At June 30, 2005
        and
        December 31, 2004, the allowance for loan losses was $7.3 million and $5.7
        million, respectively or approximately 1.19% and .98% of loans, including
        loans
        held for sale, respectively.
  16
  **Liquidity
        and Capital Resources**
 
 The
        Financial Regulatory Relief and Economic Efficiency Act of 2000, which was
        signed into law on December 27, 2000, repealed the former statutory requirement
        that all savings associations maintain an average daily balance of liquid
        assets
        in a minimum amount of not less than 4% or more than 10% of their withdrawable
        accounts plus short-term borrowings. The OTS adopted a rule that implemented
        this revised statutory requirement, although savings associations remain
        subject
        to the OTS regulation that requires them to maintain sufficient liquidity
        to
        ensure their safe and sound operation.
 Pursuant
        to OTS capital regulations in effect at June 30, 2005, savings associations
        were
        required to maintain a 1.5% tangible capital requirement, a 4% leverage ratio
        (or core capital) requirement, and a total risk-based capital to risk-weighted
        assets ratio of 8%. At June 30, 2005, Lincoln’s capital levels exceeded all
        applicable regulatory capital requirements in effect as of that
        date.
 
 
 **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.
 
 **Item
        3.**  **Quantitative
        and Qualitative Disclosures About Market Risk**
 
 Presented
        below, as of March 31, 2005 and 2004, is an analysis performed by the OTS
        of
        Lincoln’s interest rate risk as measured by changes in Lincoln’s net portfolio
        value (“NPV”) for instantaneous and sustained parallel shifts in the yield
        curve, in 100 basis point increments, up 300 basis points and down 200 basis
        points. As a result of low interest rates in 2004 the OTS had not presented
        the
        down 200 basis points scenario.
 
 March
        31, 2005
 
 Net
                  Portfolio Value
              NPV
                  as % of PV of AssetsChangesIn
                  Rates
              $
                  Amount
              $
                  Change
              %Change
              NPV
                  Ratio
              Change(Dollars
                  in thousands)+300
              bp
              $58,987
              $(21,028)
              (26)%
              7.70%
              (229)
                  bp+200
              bp
              67,216
              (12,800)
              (16)
              8.64
              (135)
                  bp+100
              bp
              74,539
              (5,477)
              (7)
              9.44
              (55)
                  bp0
              bp
              80,016
              
              
              9.99-100
              bp
              81,696
              1,681
              2
              10.08
              9
                  bp-200
              bp
              78,116
              (1,900)
              (2)
              9.57
              (42)
                  bp
 
 March
        31, 2004
 
 Net
                  Portfolio Value
              NPV
                  as % of PV of AssetsChangesIn
                  Rates
              $
                  Amount
              $
                  Change
              %Change
              NPV
                  Ratio
              Change(Dollars
                  in thousands)+300
              bp
              $57,463
              $(15,678)
              (21)%
              10.08%
              (204)
                  bp+200
              bp
              64,278
              (8,863)
              (12)
              11.04
              (107)
                  bp+100
              bp
              70,145
              (2,996)
              (4)
              11.81
              (30)
                  bp0
              bp
              73,141
              
              
              12.12-100
              bp
              70,819
              (2,322)
              (3)
              11.61
              (50)
                  bp
  17
  Management
        believes at June 30, 2005 there have been no material changes in Lincoln’s
        interest rate sensitive instruments which would cause a material change in
        the
        market risk exposures which affect the quantitative and qualitative risk
        disclosures as presented in Item 7A of the Company’s Annual Report on Form 10-K
        for the period ended December 31, 2004.
 
 **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), 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 were adequate and are designed to ensure that material
        information relating to the Company would be made known to such officers
        by
        others within the Company on a timely basis.
 
 (b) Changes
        in internal controls .
        There
        were no significant changes in the Company’s internal control over financial
        reporting identified in connection with the Company’s evaluation of controls
        that occurred during the Company’s last fiscal quarter that has materially
        affected, or is reasonably likely to materially affect, the Company’s internal
        control over financial reporting.
 
  18
  **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
          2.   Unregistered Sales of Equity Securities and Use
          of
          Proceeds
 
 The
          Company announced a stock repurchase program on April 23, 2003, and up
          to
          127,963 additional shares may still be repurchased under that program.
          No shares
          were repurchased during the quarter ended June 30, 2005. 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.
 
 On
          May
          17, 2005, the Company held its Annual Meeting of the Shareholders, at which
          the
          following proposals were voted upon:
 
 (1)
          Approval of Stock Option Plan. A total of 4,848,562 shares were represented
          in
          person or by proxy at the meeting. The shareholders approved the Lincoln
          Bancorp
          2005 Stock Option Plan (the “2005 Option Plan”), 2,735,273 shares were voted in
          favor of the plan, 793,022 shares were voted against the plan, 140,704
          shares
          abstained from voting and 1,179,563 broker non-votes.
 
 (2)
          Election of Directors. David E. Mansfield was elected to the Board of Directors
          for a three-year term expiring in 2008. 4,597,445 shares were voted in
          favor of
          the election of the nominee and 251,117 votes were withheld. John L. Wyatt
          was
          elected to the Board of Directors for a three-year term expiring in 2008.
          4,622,197 shares were voted in favor of the election of the nominee and
          225,365
          votes were withheld. T. Tim Unger was elected to the Board of Directors
          for a
          one-year term expiring in 2006. 4,584,644 shares were voted in favor of
          the
          nominee and 263,918 votes were withheld.
 
 The
          term
          of office of the following directors of Lincoln Bancorp continued after
          the
          Annual Shareholder Meeting:
 
 Name
                Term
                    Expires InLester
                    N. Bergum, Jr.
                2006Dennis
                    W. Dawes
                2006R.
                    J. McConnell
                2006T.
                    Tim Unger
                2006Jerry
                    R. Engle
                2007W.
                    Thomas Harmon
                2007Jerry
                    R. Holifield
                2007John
                    C. Milholland
                2007David
                    Mansfield
                2008John
                    L. Wyatt
                2008
 
 Item
          5.   Other Information.
 
 None
 19
  Item
        6.  Exhibits
 
 31(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:
              August
                  12, 2005
              
              By:
              /s/
                  Jerry R. EngleJerry
                  R. EnglePresident
                  and Chief Executive OfficerDate:
              August
                  12, 2005
              
              By:
              /s/
                  John M. BaerJohn
                  M. BaerSecretary
                  and Treasurer