**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 June 30, 2006ORo
              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
              
              (I.R.S.
                  Employerincorporation
                  or organization)
              
              Identification
                  No.)**1121
                  East Main Street**
                **Plainfield,
                  Indiana**
              
              **46168-0510**(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 o Non-accelerated filer ý
 
 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 June 30, 2006 was 5,382,828.
   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 Statements 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 Condition and Results
                  of Operations
              11Item
                  3. Quantitative and Qualitative Disclosures about Market
                  Risk
              17Item
                  4. Controls and Procedures
              18PART
                  II. OTHER INFORMATIONItem
                  1. Legal Proceedings
              18Item
                  1A. Risk Factors
              18Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              18Item
                  3. Defaults Upon Senior Securities
              18Item
                  4. Submission of Matters to a Vote of Security Holders
              19Item
                  5. Other Information
              19Item
                  6. Exhibits
              19SIGNATURES
              20EXHIBIT
                  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
 
 **June
                  30,**
                **2006**
                **(Unaudited)**
              
              **December
                  31,**
                **2005****Assets**Cash
                  and due from banks
              
              $
              4,089,388
              
              $
              4,306,531Interest-bearing
                  demand deposits in other banks
              
              
              10,483,258
              
              
              12,429,266Cash
                  and cash equivalents
              
              
              14,572,646
              
              
              16,735,797Investment
                  securities available for sale
              
              
              161,490,332
              
              
              151,565,284Loans
                  held for sale
              
              
              782,034
              
              
              427,550Loans,
                  net of allowance for loan losses of $6,031,000 and
                  $5,843,000
              
              
              621,417,731
              
              
              594,546,227Premises
                  and equipment
              
              
              13,877,917
              
              
              14,372,835Investments
                  in limited partnerships
              
              
              1,217,103
              
              
              1,160,825Federal
                  Home Loan Bank stock
              
              
              10,648,200
              
              
              10,648,200Interest
                  receivable
              
              
              4,797,954
              
              
              4,270,159Goodwill
              
              
              23,906,877
              
              
              23,906,877Core
                  deposit intangible
              
              
              2,973,039
              
              
              3,297,441Cash
                  value of life insurance
              
              
              18,777,785
              
              
              18,451,167Other
                  assets
              
              
              6,334,275
              
              
              5,071,951Total
                  assets
              
              $
              880,795,893
              
              $
              844,454,313**Liabilities**DepositsNoninterest-bearing
              
              $
              59,681,929
              
              $
              53,730,336Interest-bearing
              
              
              599,690,050
              
              
              546,841,453Total
                  deposits
              
              
              659,371,979
              
              
              600,571,789Securities
                  sold under repurchase agreements
              
              
              11,819,990
              
              
              10,064,110Borrowings
              
              
              103,365,277
              
              
              127,072,378Interest
                  payable
              
              
              1,972,794
              
              
              1,895,986Other
                  liabilities
              
              
              5,455,917
              
              
              4,910,117Total
                  liabilities
              
              
              781,985,957
              
              
              744,514,380**Commitments
                  and Contingencies****Shareholders’
                  Equity**Common
                  stock, without par valueAuthorized
                  - 20,000,000 sharesIssued
                  and outstanding - 5,382,828 and 5,386,153 shares
              
              
              63,111,110
              
              
              63,772,164Retained
                  earnings
              
              
              40,968,168
              
              
              40,693,391Accumulated
                  other comprehensive loss
              
              
              (2,321,787
              )
              
              (818,104
              )Unearned
                  recognition and retention plan (RRP) shares
              
              
              --
              
              
              (607,798
              )Unearned
                  employee stock ownership plan (ESOP) shares
              
              
              (2,947,555
              )
              
              (3,099,720
              )Total
                  shareholders’ equity
              
              
              98,809,936
              
              
              99,939,933Total
                  liabilities and shareholders’ equity
              
              $
              880,795,893
              
              $
              844,454,313
   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,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Interest
                  Income**Loans
                  receivable, including fees
              
              $
              10,366,654
              
              $
              9,343,143
              
              $
              20,102,934
              
              $
              18,084,218Investment
                  securities
              
              
              2,135,844
              
              
              1,215,916
              
              
              4,059,440
              
              
              2,409,771Deposits
                  with financial institutions and Federal funds sold
              
              
              135,206
              
              
              167,652
              
              
              343,557
              
              
              232,143Dividend
                  income
              
              
              139,302
              
              
              112,538
              
              
              275,852
              
              
              222,370Total
                  interest and dividend income
              
              
              12,777,006
              
              
              10,839,249
              
              
              24,781,783
              
              
              20,948,502**Interest
                  Expense**Deposits
              
              
              5,679,864
              
              
              3,168,573
              
              
              10,713,780
              
              
              5,684,681Short-term
                  borrowings
              
              
              98,297
              
              
              48,118
              
              
              178,561
              
              
              113,232Federal
                  Home Loan Bank advances
              
              
              1,272,548
              
              
              1,973,109
              
              
              2,569,707
              
              
              3,933,942Total
                  interest expense
              
              
              7,050,709
              
              
              5,189,800
              
              
              13,462,048
              
              
              9,731,855**Net
                  Interest Income**
              
              
              5,726,297
              
              
              5,649,449
              
              
              11,319,735
              
              
              11,216,647Provision
                  for loan losses
              
              
              266,202
              
              
              1,915,722
              
              
              501,751
              
              
              1,929,231**Net
                  Interest Income After Provision for Loan Losses**
              
              
              5,460,095
              
              
              3,733,727
              
              
              10,817,984
              
              
              9,287,416**Other
                  Income**Service
                  charges on deposit accounts
              
              
              553,810
              
              
              525,483
              
              
              1,041,693
              
              
              982,076Net
                  gains on sales of loans
              
              
              67,155
              
              
              162,441
              
              
              121,945
              
              
              376,960Net
                  realized gain (loss) on sales of available-for-sale
                  securities
              
              
              --
              
              
              (292,420
              )
              
              3,697
              
              
              (292,420
              )Equity
                  in income of limited partnerships
              
              
              14,794
              
              
              66,331
              
              
              56,278
              
              
              21,331Point
                  of sale income
              
              
              182,630
              
              
              149,572
              
              
              349,895
              
              
              268,754Loan
                  servicing fees
              
              
              85,940
              
              
              102,516
              
              
              175,973
              
              
              208,952Increase
                  in cash value of life insurance
              
              
              164,576
              
              
              122,420
              
              
              326,618
              
              
              348,393Other
                  income
              
              
              236,194
              
              
              236,450
              
              
              427,398
              
              
              384,572Total
                  other income
              
              
              1,305,099
              
              
              1,072,793
              
              
              2,503,497
              
              
              2,298,618**Other
                  Expenses**Salaries
                  and employee benefits
              
              
              2,834,179
              
              
              2,899,007
              
              
              5,645,816
              
              
              5,534,102Net
                  occupancy expenses
              
              
              491,744
              
              
              497,265
              
              
              1,026,311
              
              
              934,996Equipment
                  expenses
              
              
              383,540
              
              
              373,294
              
              
              755,809
              
              
              782,196Data
                  processing fees
              
              
              566,045
              
              
              609,500
              
              
              1,198,168
              
              
              1,231,827Professional
                  fees
              
              
              209,604
              
              
              272,853
              
              
              435,946
              
              
              396,386Director
                  and committee fees
              
              
              111,763
              
              
              2,018
              
              
              226,586
              
              
              104,538Advertising
                  and business development
              
              
              186,343
              
              
              217,358
              
              
              338,724
              
              
              387,866Core
                  deposit intangible amortization
              
              
              162,200
              
              
              192,642
              
              
              324,401
              
              
              385,285Prepayment
                  fees on Federal Home Loan Bank advances
              
              
              —
              
              
              1,621,813
              
              
              —
              
              
              1,621,813Office
                  supplies
              
              
              77,239
              
              
              132,895
              
              
              171,536
              
              
              274,771Other
                  expenses
              
              
              686,526
              
              
              863,019
              
              
              1,167,091
              
              
              1,533,151Total
                  other expenses
              
              
              5,709,183
              
              
              7,681,664
              
              
              11,290,388
              
              
              13,186,931**Income
                  (Loss) Before Income Tax**
              
              
              1,056,011
              
              
              (2,875,144
              )
              
              2,031,093
              
              
              (1,600,897
              )Income
                  tax expense (benefit)
              
              
              269,750
              
              
              (1,236,109
              )
              
              466,215
              
              
              (940,562
              )**Net
                  Income (Loss)**
              
              $
              786,261
              
              $
              (1,639,035
              )
              $
              1,564,878
              
              $
              (660,335
              )**Basic
                  Earnings (Loss) per Share**
              
              $
              0.16
              
              $
              (0.33
              )
              $
              0.31
              
              $
              (0.13
              )**Diluted
                  Earnings (Loss) per Share**
              
              $
              0.15
              
              $
              (0.33
              )
              $
              0.30
              
              $
              (0.13
              )**Dividends
                  per Share**
              
              $
              0.14
              
              $
              0.14
              
              $
              0.28
              
              $
              0.28
 
 See
        notes
        to consolidated condensed financial statements.
  5
   **LINCOLN
        BANCORP AND SUBSIDIARY**
  Consolidated
        Condensed Statements of Comprehensive Income (Loss)
 (Unaudited)
 
 **Three
                  Months Ended**
                **June
                  30,**
              
              **Six
                  Months Ended**
                **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  Income (Loss)
              
              $
              786,261
              
              $
              (1,639,035
              )
              $
              1,564,878
              
              $
              (660,335
              )Other
                  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 $(470,307), $120,615, $(847,731), and
                  $(196,797)
              
              
              (827,655
              )
              
              206,277
              
              
              (1,501,243
              )
              
              (356,125
              )Less:
                  Reclassification adjustment for realized gains (losses) included
                  in net
                  income (loss), net of tax expense (benefit) of -0-, ($94,282),
                  $1,257 and
                  ($94,282)
              
              
              -0-
              
              
              (198,138
              )
              
              2,440
              
              
              (198,138
              )(827,655
              )
              
              404,415
              
              
              (1,503,683
              )
              
              (157,987
              )Comprehensive
                  income (loss)
              
              $
              (41,394
              )
              $
              (1,234,620
              )
              $
              61,195
              
              $
              (818,322
              )
   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, 2006
 (Unaudited)
 
 **Accumulated****Common
                  Stock**
              
              
              
              **Other**
              
              
              
              **Unearned****Shares**
              
              
              
              **Retained**
              
              **Comprehensive**
              
              **Unearned**
              
              **ESOP****Outstanding**
              
              **Amount**
              
              **Earnings**
              
              **Loss**
              
              **Compensation**
              
              **Shares**
              
              **Total****Balances,
                  January 1, 2006**
              
              
              5,386,153
              
              $
              63,772,164
              
              $
              40,693,391
              
              $
              (818,104
              )
              $
              (607,798
              )
              $
              (3,099,720
              )
              $
              99,939,933Net
                  income for the period
              
              
              
              
              
              
              
              
              1,564,878
              
              
              
              
              
              
              
              
              
              
              
              1,564,878Unrealized
                  losses on securities, net of reclassification adjustment
              
              
              
              
              
              
              
              
              
              
              
              (1,503,683
              )
              
              
              
              
              
              
              
              (1,503,683
              )Purchase
                  of common stock
              
              
              (16,000
              )
              
              (289,500
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (289,500
              )Stock
                  options exercised
              
              
              12,675
              
              
              148,279
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              148,279Stock
                  option expense
              
              
              
              
              
              42,349
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              42,349ESOP
                  shares earned
              
              
              
              
              
              
              
              
              122,504
              
              
              
              
              
              
              
              
              152,165
              
              
              274,669Amortization
                  of unearned compensation expense
              
              
              
              
              
              45,616
              
              
              10,035
              
              
              
              
              
              
              
              
              
              
              
              55,651Reclassification
                  of unearned compensation to common stock upon adoption of SFAS
                  123(R)
              
              
              
              
              
              (607,798
              )
              
              
              
              
              
              
              
              607,798Cash
                  dividends ($.28 per share)
              
              
              
              
              
              
              
              
              (1,422,640
              )
              
              
              
              
              
              
              
              
              
              
              (1,422,640
              )**Balances,
                  June 30, 2006**
              
              
              5,382,828
              
              $
              63,111,110
              
              $
              40,968,168
              
              $
              (2,321,787
              )
              
              --
              
              $
              (2,947,555
              )
              $
              98,809,936
   See
        notes
        to consolidated condensed financial statements.
  7
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statements of Cash Flows
 (Unaudited)
 **Six
                  Months Ended****June
                  30,****2006**
              
              **2005****Operating
                  Activities**Net
                  income (loss)
              
              $
              1,564,878
              
              $
              (660,335
              )Adjustments
                  to reconcile net income to net cash provided by (used in) operating
                  activitiesProvision
                  for loan losses
              
              
              501,751
              
              
              1,929,231Investment
                  securities accretion, net
              
              
              15,192
              
              
              (89,415
              )Investment
                  securities losses
              
              
              (3,697
              )
              
              292,420Loans
                  originated for sale in the secondary market
              
              
              (10,814,656
              )
              
              (18,322,684
              )Proceeds
                  from sale of loans in the secondary market
              
              
              10,580,143
              
              
              17,999,008Gain
                  on sale of loans
              
              
              (121,945
              )
              
              (376,960
              )Amortization
                  of net loan origination costs
              
              
              281,798
              
              
              98,853Amortization
                  of purchase accounting adjustment
              
              
              121,839
              
              
              591,274Depreciation
                  and amortization
              
              
              904,755
              
              
              773,382Amortization
                  of unearned compensation expense
              
              
              55,651
              
              
              15,480ESOP
                  shares earned
              
              
              274,669
              
              
              290,169Net
                  change in:Interest
                  receivable
              
              
              (527,795
              )
              
              (448,948
              )Interest
                  payable
              
              
              76,808
              
              
              292,527Other
                  adjustments
              
              
              257,030
              
              
              (95,605
              )Net
                  cash provided by operating activities
              
              
              3,166,421
              
              
              2,288,397**Investing
                  Activities**Purchases
                  of securities available for sale
              
              
              (22,031,191
              )
              
              (88,819,404
              )Proceeds
                  from sales of securities available for sale
              
              
              211,577
              
              
              50,469,362Proceeds
                  from maturities of securities available for sale
              
              
              9,530,398
              
              
              66,519,844Proceeds
                  from maturities of securities held to maturity
              
              
              --
              
              
              30,000Net
                  change in loans
              
              
              (28,430,677
              )
              
              (28,716,985
              )Purchases
                  of property and equipment
              
              
              (409,837
              )
              
              (1,014,002
              )Proceeds
                  from sale of foreclosed real estate
              
              
              349,370
              
              
              1,464,941Other
                  investing activities
              
              
              --
              
              
              2,418,009Net
                  cash provided by (used in) investing activities
              
              
              (40,780,360
              )
              
              2,351,765**Financing
                  Activities**Net
                  change inNoninterest-bearing,
                  interest-bearing demand, money market and savings deposits
              
              
              40,216,271
              
              
              21,411,699Certificates
                  of deposit
              
              
              18,675,629
              
              
              21,528,949Short
                  term borrowings
              
              
              1,755,880
              
              
              1,384,965Proceeds
                  from FHLB advances
              
              
              37,500,000
              
              
              13,000,000Repayment
                  of FHLB advances
              
              
              (61,200,000
              )
              
              (58,855,000Dividends
                  paid
              
              
              (1,423,105
              )
              
              (1,411,453
              )Purchase
                  of common stock
              
              
              (289,500
              )
              
              --Exercise
                  of stock options
              
              
              148,279
              
              
              369,103Net
                  change in advances by borrowers for taxes and insurance
              
              
              67,334
              
              
              70,838Net
                  cash provided by (used in) financing activities
              
              
              35,450,788
              
              
              (2,500,899
              )**Net
                  Change in Cash and Cash Equivalents**
              
              
              (2,163,151
              )
              
              2,139,263**Cash
                  and Cash Equivalents, Beginning of Period**
              
              
              16,735,797
              
              
              27,790,119**Cash
                  and Cash Equivalents, End of Period**
              
              $
              14,572,646
              
              $
              29,929,382**Additional
                  Cash Flows and Supplementary Information**Interest
                  paid
              
              $
              13,385,240
              
              $
              9,439,328Income
                  tax paid (refund received)
              
              
              340,000
              
              
              (438,666
              )Loan
                  balances transferred to foreclosed real estate
              
              
              879,373
              
              
              54,865Transfer
                  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, 2005 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, 2006 and for the three
        months and six months ended June 30, 2006 and 2005, 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, 2006, 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, 2005 has been derived from the audited
        consolidated balance sheet of the Company as of that date.
  Reclassifications
        of certain amounts in the 2005 consolidated financial statements have been
        made
        to conform to the 2006 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**
                **June
                  30, 2006**
              
              **Three
                  Months Ended**
                **June
                  30, 2005****Income**
              
              **Weighted
                  Average Shares**
              
              **Per
                  Share Amount**
              
              **Loss**
              
              **Weighted
                  Average Shares**
              
              **Per
                  Share Amount**Basic
                  earnings (loss) per shareIncome
                  (loss) available to common shareholders
              
              $
              786,261
              
              
              5,049,004
              
              $
              .16
              
              $
              (1,639,035
              )
              
              5,022,453
              
              $
              (.33
              )Effect
                  of dilutive RRP awards and stock options
              
              
              
              
              
              125,518
              
              
              
              
              
              
              
              
              --Diluted
                  earnings (loss) per shareIncome
                  (loss) available to common shareholders and assumed
                  conversions
              
              $
              786,261
              
              
              5,174,522
              
              $
              .15
              
              $
              (1,639,035
              )
              
              5,022,453
              
              $
              (.33
              )
  9
  
 **Six
                  Months Ended**
                **June
                  30, 2006**
              
              **Six
                  Months Ended**
                **June
                  30, 2005****Income**
              
              **Weighted
                  Average Shares**
              
              **Per
                  Share Amount**
              
              **Loss**
              
              **Weighted
                  Average Shares**
              
              **Per
                  Share Amount**Basic
                  earnings (loss) per shareIncome
                  available to common shareholders
              
              $
              1,564,878
              
              
              5,044,723
              
              $
              .31
              
              $
              (660,335
              )
              
              5,012,820
              
              $
              (.13
              )Effect
                  of dilutive RRP awards and stock options
              
              
              
              
              
              121,471Diluted
                  earnings (loss) per shareIncome
                  available to common shareholders and assumed conversions
              
              $
              1,564,878
              
              
              5,166,194
              
              $
              .30
              
              $
              (660,335
              )
              
              5,012,820
              
              $
              (.13
              )
   Option
        to
        purchase 120,000 shares of common stock at exercise prices of $18.50 to $18.75
        per share were outstanding at June 30, 2006, but were not included in the
        computation of diluted earnings per share because the options were
        anti-dilutive.
  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: Change in Accounting Principle
  The
        Company has a stock-based employee compensation plan, which is described
        in
        Notes of Financial Statements included in the December 31, 2005 Annual Report
        to
        shareholders.
  Effective
        January 1, 2006, the Company adopted Statement of Financial Accounting Standards
        No. 123(R), Share−Based Payment (“SFAS 123(R)”). SFAS 123(R) addresses all forms
        of share−based payment awards, including shares under employee stock purchase
        plans, stock options, restricted stock and stock appreciation rights. SFAS
        123(R) requires all share-based payments to be recognized as expense, based
        upon
        their fair values, in the financial statements over the vesting period of
        the
        awards. The Company has elected the modified prospective application and,
        as a
        result, has recorded approximately $42,000 in compensation expense related
        to
        vested stock options less estimated forfeitures for the six month period
        ended
        June 30, 2006. Certain disclosures required by SFAS 123(R) have been omitted
        due
        to their immaterial nature.
  Prior
        to
        the adoptions of SFAS 123(R), the Company accounted 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 was 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**
                
                **Six
                    Months Ended June 30, 2005**Net
                    loss, as reported
                
                $
                (1,639,035
                )
                $
                (660,335
                )Less:
                    Total stock-based employee compensation cost determined under
                    the fair
                    value based method, net of income taxes
                
                
                25,144
                
                
                50,288Pro
                    forma net loss
                
                $
                (1,664,179
                )
                $
                (710,623
                )Loss
                    per share:Basic
                    - as reported
                
                $
                (.33
                )
                $
                (0.13
                )Basic
                    - pro forma
                
                
                (.33
                )
                
                (0.14
                )Diluted
                    - as reported
                
                
                (.33
                )
                
                (0.13
                )Diluted
                    - pro forma
                
                
                (.33
                )
                
                (0.14
                )
  Prior
        to
        the adoption of SFAS 123(R), unearned compensation related to restricted
        stock
        awards was classified as a separate component of stockholders’ equity . In
        accordance with the provisions of SFAS 123(R) on January 1, 2006, the balance
        in
        unearned compensation was reclassified to common stock on the balance
        sheet.
   Note
        4: Recent Accounting Pronouncements
  In
        March
        2006, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standard (SFAS) No. 156. This Statement amends SFAS
        140,
        Accounting for Transfers and Servicing of Financial Assets and Extinguishments
        of Liabilities, with respect to the accounting for separately recognized
        servicing assets and servicing liabilities.
  SFAS
        No.
        156 requires an entity to initially recognize a servicing asset or servicing
        liability at fair value each time it undertakes an obligation to service
        a
        financial asset by entering into a servicing contract in other specific
        situations.
  In
        addition, SFAS No. 156 permits an entity to choose either of the following
        subsequent measurement methods for each class of separately recognized servicing
        assets and servicing liabilities:
  **·**
            Amortization
                method—Amortize servicing assets or servicing liabilities in proportion
                to
                and over the period of estimated net servicing income or net servicing
                loss and assess servicing assets or servicing liabilities for impairment
                or increased obligation based on fair value at each reporting date.  **·**
            Fair
                value measurement method—Measure servicing assets or servicing liabilities
                at fair value at each reporting date and report changes in fair value
                in
                earnings in the period in which the changes occur.  SFAS
        No.
        156 is effective at the beginning of an entity’s first fiscal year that begins
        after September 15, 2006 and should be applied prospectively for recognition
        and
        initial measurement of servicing assets and servicing liabilities. Earlier
        adoption is permitted as of the beginning of an entity’s fiscal year, provided
        the entity has not yet issued financial statements, including interim financial
        statements, for any period of that fiscal year.
  The
        Company did not elect early adoption of SFAS No. 156 as of January 1, 2006.
        The
        Company is currently evaluating the effect of adoption of this Statement
        on the
        Company’s financial condition and results of operations.
   **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 Shares was merged
        with
        and into the Company and immediately thereafter, First Bank was merged into
        Lincoln Bank.
  11
  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 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 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, 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, 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. 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 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, 2005, which was filed
        on
        Form 10-K with the Securities and Exchange Commission on March 31, 2006.
        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
   12
  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. 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.
   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. See note 4 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 $880.8 million at June 30, 2006, an increase from December 31, 2005
        of
        $36.3 million. The majority of the increase in assets occurred in net loans,
        including loans held for sale, up $27.2 million, and investment securities
        available for sale, up $9.9 million. Loan growth was experienced in commercial
        loans and residential mortgage loans, both were up $14.4 million. This growth
        was partially offset by a decline in home equity loans, down $2.9 million
        from
        the end of 2005 through the end of the second quarter in 2006. A substantial
        portion of the increase in mortgage loans was from the fixed-rate loan product
        with maturities greater than 15 years. Given other types of loan demand
        available
   13
  management
        elected to retain 30-year fixed-rate loan product originated during the first
        quarter of 2006. Several specialty products developed in late 2005 are
        experiencing small levels of success resulting in an increase in greater
        than 15
        year fixed rate product as well.
  Total
        deposits were $659.4 million at June 30, 2006, an increase of $58.8 million
        from
        the $600.6 million at December 31, 2005. Growth occurred in money market
        deposits, up $11.3 million, savings accounts, up $27.5 million,
        noninterest-bearing deposits, up $6.0 million and certificates of deposit,
        up
        $18.6 million, while interest bearing demand deposits declined by $4.5 million.
        Continued success in both our premium money market savings product and our
        Public Funds money market product has fueled the savings and the money market
        increase respectively. Borrowed funds and securities sold under agreement
        to
        repurchase declined by $23.7 million from year end 2005 to $103.4 million
        at
        June 30, 2006. This decline was the result of repayment of Federal Home Loan
        Bank advances from increased deposit balances.
  Shareholders’
        equity decreased $1.1 million from December 31, 2005 to $98.8 million at
        June
        30, 2006. The decrease was a result of dividends declared of $1.4 million,
        the
        repurchase of $.3 million of common stock as well as a $1.5 million reduction
        in
        the fair value of the available for sale investment portfolio as interest
        rates
        continue to rise. 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 June 30, 2006 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. If any of these changes occurred management would
        re-evaluate its assessment of the need for other-than-temporary
        impairment.  The decreases in shareholder’s equity noted above were
        partially offset by current income of $1.6 million and the net amortization
        of
        unearned compensation expense, stock option expense, stock options exercised
        and
        employee stock ownership shares earned totaling $.5 million.
   **Comparison
        of Operating Results for the Three Months Ended** **June
        30, 2006 and 2005**
  Net
        income for the quarter ended June 30, 2006 was $786,000, or $.16 basic earnings
        per share and $.15 diluted earnings per share. This compared to a net loss
        of
        $1,639,000 for the second quarter of 2005 or $.33 for both the basic and
        diluted
        loss per share.
  As
        announced in a press release issued on July 7, 2005, the loss incurred for
        the
        second quarter of 2005 was the result of: 1) a $1.3 million additional provision
        to the allowance for loan losses for a deteriorated credit; 2) prepayment
        fees
        and adjustments of $1.6 million paid to the Federal Home Loan Bank of
        Indianapolis for the early extinguishment of certain high-cost advances totaling
        $33.9 million with funding of the prepayment derived from the sale of $37.5
        million of low-yielding available-for-sale securities at a loss of approximately
        $497,000; and, 3) the recognition of contract costs relating to the retirement
        of the Company’s CEO and another senior officer totaling $248,000.
  Net
        interest income for the second quarter of 2006 was $5,726,000 compared to
        $5,649,000 for the same period in 2005. Net interest margin fell to 2.81%
        for
        the three-month period ended June 30, 2006 compared to 2.92% for the same
        period
        in 2005. The average yield on earning assets increased 67 basis points for
        the
        second quarter of 2006 compared to the same period in 2005. The average cost
        of
        interest-bearing liabilities increased 90 basis point for the second quarter
        of
        2006 compared to the same period in 2005. This decreased interest rate spread
        from 2.60% for the 2005 period to 2.37% for the 2006 period, or 23 basis
        points.
        Competitive pressures in the current flat yield curve environment combined
        with
        the customers’ perceived lack of benefit in locking up their money 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 second quarter of 2006 was $266,000
        compared to $1,916,000 for the same period in 2005. The large provision in
        the
        second quarter of 2005 was discussed above. Non-performing loans to total
        loans
        at June 30, 2006 were .44% compared to .59% at December 31, 2005, while
        non-performing assets to total assets were .40% at June 30, 2006 compared
        to
        .45% at December 31, 2005. The allowance for loan losses as a percent of
        loans
        was .96% at June 30, 2006 compared to .97% at December 31, 2005. During the
        second quarter of 2006, the Bank incurred $91,000 in net charged off loans.
   14
  Other
        income for the three months ended June 30, 2006 was $1,305,000 compared to
        $1,073,000 for the same quarter of 2005. The increase of $232,000 compared
        to
        2005 in other income was primarily the result of a $292,000 loss during 2005
        on
        the sale of available-for-sale securities as part of the balance sheet
        restructuring discussed above and other sales. Increases in point of sale
        income, up $33,000 from 2005, and increase in cash value of life insurance,
        up
        $42,000 from 2005 were not enough to offset decreases in gain on sale of
        loans,
        down $95,000 from 2005 and equity in income of limited partnerships, down
        $52,000 from 2005. Our point of sale income continues its steady increase
        since
        the merger as customers continue to increase usage of ATM and debit cards.
        The
        increase in cash value of life insurance is affected indirectly by increasing
        market interest rates although typically on a lagged basis. As noted last
        quarter, management elected to retain rather than sell the 30-year conventional
        mortgage loan product for part of the first quarter. During the first quarter
        this decision was reversed as other categories of loan demand increased.
        However, there was some carry-over into the second quarter of conventional
        product being held rather than sold. In addition, a non-conventional specialty
        product developed in late 2005 is proving popular with our borrowers. These
        issues have resulted in fewer loans sold and along with thinner gain margins,
        has resulted in lower gain on sales of loans.
  Other
        expenses were $5,709,000 for the three months ended June 30, 2006 a $1,973,000
        decrease compared to $7,682,000 for the same three months of 2005. As noted
        above a restructuring of the balance sheet, including prepayment fees on
        certain
        Federal Home Loan Bank advances and certain contract retirement costs were
        responsible for $1,622,000 and $248,000 respectively of expense in 2005 that
        were not repeated in 2006. Excluding these items the majority of other expenses
        were held to little change for the three months ended June 30, 2006 from
        the
        three months ended June 30, 2005. Those with notable changes included Data
        Processing fees that decreased from $610,000 to $566,000 as a new contract
        was
        negotiated with our data processor in the second quarter resulting in slightly
        lower costs. Professional fees decreased slightly from $273,000 to $210,000
        for
        the quarter ending June 30, 2006. Office supplies decreased from $133,000
        for
        the quarter ended June 30, 2005 to $77,000 for the quarter ended June 30,
        2006.
        This was the result of switching to a new provider as well as continued
        efficiencies gained as a result of the First Bank merger in 2004. Director
        and
        committee fees increased $110,000 on a linked quarter basis. An adjustment
        related to the director’s self employment retirement plan accrual in the second
        quarter of 2005 resulted in lower expense in 2005. In addition, a change
        in the
        estimates for the director’s supplemental retirement plan during the fourth
        quarter of 2005 resulted in increased expense in 2006. Other expense fell
        from
        $863,000 in 2005 to $687,000 in 2006. This linked quarter reduction was spread
        across several categories but the settlement of a depositor dispute in 2005
        was
        responsible for $73,000 of the decrease. Total expense recognized in salary
        expense during the second quarter of 2006 related to the adoption of FAS
        123(R)
        as of January 1, 2006 was $24,000.
  The
        income tax expense was approximately 26% of pretax income for the second
        quarter
        of 2006 as compared to income tax benefit of approximately 43% of pretax
        loss
        for the second quarter of 2005. Various tax credits and permanent timing
        differences cause the rates to be lower than statutory income tax
        rate.
   **Comparison
        of Operating Results for the** **Six
        Months Ended June 30, 2006 and 2005**
  Net
        income for the six-month period ended June 30, 2006 was $1,565,000, or $.31
        for
        basic earnings per share and $.30 diluted earnings per share. This compared
        to a
        net loss of $660,000 or $.13 for both basic and diluted loss per share for
        the
        same period in 2005. 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.
  Net
        interest income year-to-date through June 30, 2006 was $11,320,000 compared
        to
        $11,217,000 for the same period in 2005. Net interest margin fell to 2.81%
        for
        the six-month period ended June 30, 2006 compared to 2.96% for the same period
        in 2005. The average yield on earning assets increased .62% for the six months
        ending June 30, 2006 compared to the same period in 2005. The average cost
        of
        interest-bearing liabilities increased .89% for the six months ending June
        30,
        2006 compared to same period in 2005. This decreased spread from 2.66% for
        the
        2005 period to 2.39% for the 2006 period, or .27%. As noted above competitive
        pressures in the current flat yield curve environment combined with the
        customers’ perceived lack of benefit in locking up their money 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 year-to-date through June 30, 2006 was $502,000
        compared to $1,929,000 for the same period in 2005. The large provision in
        the
        second quarter of 2005 was discussed above.
   15
  Other
        income year-to-date through June 30, 2006 was $2,503,000 compared to $2,299,000
        for the same period in 2005. The increase of $204,000 compared to 2005 in
        other
        income was primarily the result of a $292,000 loss during 2005 on the sale
        of
        available-for-sale securities as part of the balance sheet restructuring
        discussed above and other sales. Increases in point of sale income, up $81,000
        from 2005, an increase in service charges on deposits of $60,000 and an increase
        in equity in income of limited partnerships, up $35,000 over 2005 were offset
        by
        decreases in gain on sale of loans, down $255,000 from the same period in
        2005
        and lower loan servicing fees, down $33,000 from 2005. Our point of sale
        income
        continues its steady increase since the merger and as customers continue
        to
        increase usage of ATM and debit cards. Service charges on deposit are affected
        by customer behaviors and also benefited from the popularity of our courtesy
        overdraft program. Our limited partnership income is dependent on the
        performance of the limited partnership which performed slightly better
        year-to-date 2006 as compared to 2005. As noted above gain on sale of loans
        has
        been affected by early in the year retention of all production as well as
        year-to-date success of our specialty non-conventional mortgage product.
        Thinner
        gain margins have also affected us in this category. Servicing income of
        mortgage loans has also been negatively affected by our lower sale activity
        in
        2006 as compared to 2005.
  Other
        expenses year-to-date through June 30, 2006 were $11,290,000 compared to
        $13,187,000 for the same period in 2005. As noted above a restructuring of
        the
        balance sheet, including prepayment fees on certain Federal Home Loan Bank
        advances and certain contract retirement costs were responsible for $1,622,000
        and $248,000 respectively of expense in 2005 that were not repeated in 2006.
        As
        in the case of the quarterly comparison many of the year-to-date expenses
        have
        not fluctuated significantly when those restructuring charges are considered.
        Salaries and employee benefits expense has increased $112,000 or $360,000
        excluding the 2005 contract retirement costs. Staff additions in certain
        key
        areas, along with normal annual increases, are responsible for this increase.
        Director and committee fees increased $122,000 year over year. As noted above
        an
        adjustment related to the director’s self employment retirement plan accrual in
        the second quarter of 2005 resulted in lower expense in 2005. Also, as noted
        above, a change in the estimates for the director’s supplemental retirement plan
        during the fourth quarter of 2005 resulted in increased expense in 2006.
        Office
        supplies decreased from $275,000 in 2005 to $172,000 year-to-date in 2006.
        As
        noted above, this was the result of switching to a new provider as well as
        continued efficiencies gained as a result of the First Bank merger in 2004.
        Other expenses fell from $1,533,000 in 2005 to $1,167,000 in 2006. This $366,000
        reduction was spread across several categories including mortgage servicing
        rights, amortization, telephone expense and other. As rates have increased
        and
        mortgage loan sales have slowed the amortization expense of our mortgage
        servicing asset has declined. In addition, we have experienced reduced telephone
        expense over 2005 as surplus lines as a result of the merger with First Bank
        were gradually eliminated over time. As noted above the settlement of a
        depositor dispute in 2005 was responsible for $73,000 of the decrease as
        well.
        Total expense recognized in salary expense year-to-date in 2006 related to
        the
        adoption of FAS 123(R) as of January 1, 2006 was $42,000.
  The
        income tax expense was approximately 23% of pretax income year-to-date 2006
        as
        compared to income tax benefit of approximately 59% of pretax loss for the
        same
        period in 2005. Various tax credits and permanent timing differences cause
        the
        rates to be lower than statutory income tax rate.
   **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
        $11.4 million and $14.7 million of loans classified as special mention as
        of
        June 30, 2006 and December 31, 2005, respectively. In addition, Lincoln had
        $2.6
        million and $3.2 million of loans classified as substandard at June 30, 2006
        and
        December 31, 2005, respectively. Loans classified as doubtful totaled $397,000
        at June 30, 2006 and $817,000 at December 31, 2005. At June 30, 2006 there
        were
        $79,000 of loans classified as loss. No loans were classified loss at December
        31, 2005. At June 30, 2006, and December 31, 2005, respectively, non-accrual
        loans were $1.8 million and $2.8 million. At June 30, 2006 and December 31,
        2005, respectively, accruing loans delinquent 90 days or more totaled $18,000
        and $759,000. At June 30, 2006 and December 31, 2005, the allowance for loan
        losses was $6.0 million and $5.8 million, respectively or approximately .96%
        and
        .97% 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, 2006, 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, 2006, 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, 2006 and 2005, 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.
 **March
                      31, 2006****Changes**
                  **Net
                      Portfolio Value**
                  **NPV
                      as % of PV of Assets****In
                      Rates**
                  **$
                      Amount**
                  **$
                      Change**
                  **%Change**
                  **NPV
                      Ratio**
                  **Change**(Dollars
                      in thousands)+300
                      bp
                  $53,033
                  $(36,515)
                  (41)%
                  6.54%
                  (393)
                      bp+200
                      bp
                  65,926
                  (23,622)
                  (26)
                  7.98
                  (249)
                      bp+100
                      bp
                  78,537
                  (11,011)
                  (12)
                  9.34
                  (113)
                      bp0 bp
                  89,548
                  
                  
                  10.47-100
                      bp
                  97,931
                  8,383
                  9
                  11.28
                  81 bp-200
                      bp
                  99,112
                  9,564
                  11
                  11.32
                  85 bp
 
 **March
                      31, 2005****Changes**
                  **Net
                      Portfolio Value**
                  **NPV
                      as % of PV of Assets****In
                      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
 
  Management
        believes at June 30, 2006 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, 2005.
   17
   **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 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,
        2005.
   **Item
        2.**  **Unregistered
        Sales of Equity Securities and Use of Proceeds**
  **ISSUER
        PURCHASES OF EQUITY SECURITIES**
  **Period**
              
              **Total
                  Number of Shares Purchased**
              
              **Average
                  Price Paid per Share**
              
              **Total
                  Number of Shares Purchased as Part of Publicly Announced
                  Plan****(1)**
              
              **Maximum
                  Number of Shares Yet to Be Purchased Under the
                  Plan**April
                  1-30, 2006
              
              --
              
              --
              
              --
              
              --May
                  1-31, 2006
              
              10,000(2)
              
              $18.00
              
              --
              
              --June
                  1-30, 2006
              
              --
              
              --
              
              --
              
              --Total
              
              10,000
              
              $18.00
              
              --
              
              --
 
 (1)
            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 pursuant to the program during the quarter
                ended
                June 30, 2006. The repurchase program does not have an expiration
                date.  (2)
            The
                purchase of the shares was not made pursuant to a publicly announced
                plan.   **Item
        3.**  **Defaults
        Upon Senior Securities.**
  None
   18
   **Item
        4.**  **Submission
        of Matters to Vote of Security Holders.**
  On
        April
        18, 2006, the Company held its Annual Meeting of Shareholders. Three directors
        were elected to serve three-year terms expiring in 2009 as follows:
  **Name**
              
              **Votes
                  For**
              
              **Votes
                  Withheld**Lester
                  N. Bergum, Jr.
              
              3,860,569
              
              357,893Dennis
                  W. Dawes
              
              4,099,926
              
              118,536R.J.
                  McConnell
              
              3,858,233
              
              360,229
  
   **Item
        5.**  **Other
        Information.**
  None
  
  **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
  19
   **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
                  14, 2006
              By:
              /s/
                  Jerry R. EngleJerry
                  R. EnglePresident
                  and Chief Executive OfficerDate:  August
                  14, 2006
              By:
              /s/
                  John M. BaerJohn
                  M. BaerSecretary
                  and Treasurer
  20
  **EXHIBIT
        INDEX**
  **No.**
              
              **Description**
              
              **Location**10.1
              
              Lincoln
                  Bancorp Incentive Plan
              
              Incorporated
                  by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant
                  on
                  April 21, 200631.1
              
              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