**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 September 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.)**905
                  Southfield Drive**
                **Plainfield,
                  Indiana**
              
              **46168-0510**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 **(317)
        839-6539**
 (Registrant’s
        telephone number, including area code)
 
 **1121
        East Main Street, Plainfield, Indiana 46168-0510**
 (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 September 30, 2006 was 5,381,328
   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 Income
              5Consolidated
                  Condensed Statements of Comprehensive Income
              6Consolidated
                  Condensed Statement of Shareholders’ Equity
              7Consolidated
                  Condensed Statements of Cash Flows
              8Notes
                  to Unaudited Consolidated Condensed Financial Statements
              10Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              12Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              18Item
                  4.
              Controls
                  and Procedures
              19PART
                  II.
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              19Item
                  1A.
              Risk
                  Factors
              19Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              19Item
                  3.
              Defaults
                  Upon Senior Securities
              19Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              19Item
                  5.
              Other
                  Information
              20Item
                  6.
              Exhibits
              20SIGNATURES
              21EXHIBIT
                  INDEX
              21
  2
   **FORWARD-LOOKING
        STATEMENTS**
  This
        Quarterly Report on Form 10-Q (“Form 10-Q”) contains statements that constitute
        forward-looking statements within the meaning of the Private Securities
        Litigation Reform Act of 1995. These statements appear in a number of places
        in
        this Form 10-Q and include statements regarding the intent, belief, outlook,
        estimate or expectations of the Company (as defined in the notes to the
        consolidated condensed financial statements), its directors or its officers
        primarily with respect to future events and the future financial performance
        of
        the Company. Readers of this Form 10-Q are cautioned that any such forward
        looking statements are not guarantees of future events or performance and
        involve risks and uncertainties, and that actual results may differ materially
        from those in the forward looking statements as a result of various factors.
        The
        accompanying information contained in this Form 10-Q identifies important
        factors that could cause such differences. These factors include changes
        in
        interest rates; loss of deposits and loan demand to other financial
        institutions; substantial changes in financial markets; changes in real estate
        values and the real estate market; or regulatory changes.
   3
  **PART
        I FINANCIAL INFORMATION**
 **Item
        1.**  **Financial
        Statements**
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Balance Sheets
 
 **Assets**
              
              **September
                  30,**
                **2006**
                **(Unaudited)**
              
              **December
                  31,**
                **2005**Cash
                  and due from banks
              
              $
              4,357,946
              
              $
              4,306,531Interest-bearing
                  demand deposits in other banks
              
              
              11,918,664
              
              
              12,429,266Cash
                  and cash equivalents
              
              
              16,276,610
              
              
              16,735,797Investment
                  securities available for sale
              
              
              160,928,772
              
              
              151,565,284Loans
                  held for sale
              
              
              1,907,751
              
              
              427,550Loans,
                  net of allowance for loan losses of $6,134,000 and
                  $5,843,000
              
              
              630,856,181
              
              
              594,546,227Premises
                  and equipment
              
              
              13,868,519
              
              
              14,372,835Investments
                  in limited partnerships
              
              
              1,254,287
              
              
              1,160,825Federal
                  Home Loan Bank stock
              
              
              9,454,000
              
              
              10,648,200Interest
                  receivable
              
              
              4,659,686
              
              
              4,270,159Goodwill
              
              
              23,906,877
              
              
              23,906,877Core
                  deposit intangible
              
              
              2,827,486
              
              
              3,297,441Cash
                  value of life insurance
              
              
              18,946,343
              
              
              18,451,167Other
                  assets
              
              
              5,101,004
              
              
              5,071,951Total
                  assets
              
              $
              889,987,516
              
              $
              844,454,313**Liabilities**DepositsNoninterest-bearing
              
              $
              53,740,119
              
              $
              53,730,336Interest-bearing
              
              
              623,102,044
              
              
              546,841,453Total
                  deposits
              
              
              676,842,163
              
              
              600,571,789Securities
                  sold under repurchase agreements
              
              
              12,233,890
              
              
              10,064,110Borrowings
              
              
              91,461,726
              
              
              127,072,378Interest
                  payable
              
              
              2,290,553
              
              
              1,895,986Other
                  liabilities
              
              
              6,585,084
              
              
              4,910,117Total
                  liabilities
              
              
              789,413,416
              
              
              744,514,380**Commitments
                  and Contingencies****Shareholders’
                  Equity**Common
                  stock, without par valueAuthorized
                  - 20,000,000 sharesIssued
                  and outstanding - 5,381,328 and 5,386,153 shares
              
              
              63,105,668
              
              
              63,772,164Retained
                  earnings
              
              
              41,168,468
              
              
              40,693,391Accumulated
                  other comprehensive loss
              
              
              (827,066
              )
              
              (818,104
              )Unearned
                  recognition and retention plan (RRP) shares
              
              
              --
              
              
              (607,798
              )Unearned
                  employee stock ownership plan (ESOP) shares
              
              
              (2,872,970
              )
              
              (3,099,720
              )Total
                  shareholders’ equity
              
              
              100,574,100
              
              
              99,939,933Total
                  liabilities and shareholders’ equity
              
              $
              889,987,516
              
              $
              844,454,313
 
 See
        notes
        to consolidated condensed financial statements.
 
 4
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statements of Income
 (Unaudited)
 
 **Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****Interest
                  Income**
              
              **2006**
              
              **2005**
              
              **2006**
              
              **2005**Loans
                  receivable, including fees
              
              $
              10,830,701
              
              $
              9,614,846
              
              $
              30,933,635
              
              $
              27,699,064Investment
                  securities
              
              
              2,129,479
              
              
              1,226,283
              
              
              6,188,919
              
              
              3,636,054Deposits
                  with financial institutions and Federal funds sold
              
              
              58,044
              
              
              185,695
              
              
              401,601
              
              
              417,838Dividend
                  income
              
              
              93,959
              
              
              126,535
              
              
              369,811
              
              
              348,905Total
                  interest and dividend income
              
              
              13,112,183
              
              
              11,153,359
              
              
              37,893,966
              
              
              32,101,861**Interest
                  Expense**Deposits
              
              
              6,274,287
              
              
              3,702,798
              
              
              16,988,067
              
              
              9,387,479Short-term
                  borrowings
              
              
              152,114
              
              
              63,560
              
              
              330,675
              
              
              176,792Federal
                  Home Loan Bank advances
              
              
              1,155,650
              
              
              1,526,333
              
              
              3,725,357
              
              
              5,460,275Total
                  interest expense
              
              
              7,582,051
              
              
              5,292,691
              
              
              21,044,099
              
              
              15,024,546**Net
                  Interest Income**
              
              
              5,530,132
              
              
              5,860,668
              
              
              16,849,867
              
              
              17,077,315Provision
                  for loan losses
              
              
              119,993
              
              
              145,249
              
              
              621,744
              
              
              2,074,480**Net
                  Interest Income After Provision for Loan Losses**
              
              
              5,410,139
              
              
              5,715,419
              
              
              16,228,123
              
              
              15,002,835**Other
                  Income**Service
                  charges on deposit accounts
              
              
              558,813
              
              
              553,838
              
              
              1,600,506
              
              
              1,535,914Net
                  gains on sales of loans
              
              
              179,236
              
              
              194,261
              
              
              301,181
              
              
              571,221Net
                  realized gain (loss) on sales of available-for-sale
                  securities
              
              
              --
              
              
              248,699
              
              
              3,697
              
              
              (43,721
              )Equity
                  in income of limited partnerships
              
              
              37,184
              
              
              42,535
              
              
              93,462
              
              
              63,866Point
                  of sale income
              
              
              183,439
              
              
              156,644
              
              
              533,334
              
              
              425,398Loan
                  servicing fees
              
              
              81,159
              
              
              99,319
              
              
              257,132
              
              
              308,271Increase
                  in cash value of life insurance
              
              
              168,558
              
              
              165,956
              
              
              495,176
              
              
              514,349Other
                  income
              
              
              217,449
              
              
              125,328
              
              
              644,847
              
              
              509,900Total
                  other income
              
              
              1,425,838
              
              
              1,586,580
              
              
              3,929,335
              
              
              3,885,198**Other
                  Expenses**Salaries
                  and employee benefits
              
              
              2,947,216
              
              
              2,568,002
              
              
              8,593,032
              
              
              8,102,104Net
                  occupancy expenses
              
              
              491,522
              
              
              499,450
              
              
              1,517,833
              
              
              1,434,446Equipment
                  expenses
              
              
              368,845
              
              
              323,541
              
              
              1,124,654
              
              
              1,105,737Data
                  processing fees
              
              
              538,816
              
              
              596,888
              
              
              1,736,984
              
              
              1,828,715Professional
                  fees
              
              
              268,122
              
              
              197,556
              
              
              704,068
              
              
              593,942Director
                  and committee fees
              
              
              101,863
              
              
              66,541
              
              
              328,449
              
              
              171,079Advertising
                  and business development
              
              
              257,632
              
              
              186,430
              
              
              596,356
              
              
              574,296Core
                  deposit intangible amortization
              
              
              145,554
              
              
              172,348
              
              
              469,955
              
              
              557,633Prepayment
                  fees on Federal Home Loan Bank advances
              
              
              —
              
              
              —
              
              
              —
              
              
              1,621,813Office
                  supplies
              
              
              75,770
              
              
              102,613
              
              
              247,306
              
              
              377,384Other
                  expenses
              
              
              533,302
              
              
              779,698
              
              
              1,700,393
              
              
              2,312,849Total
                  other expenses
              
              
              5,728,642
              
              
              5,493,067
              
              
              17,019,030
              
              
              18,679,998**Income
                  Before Income Tax**
              
              
              1,107,335
              
              
              1,808,932
              
              
              3,138,428
              
              
              208,035Income
                  tax expense (benefit)
              
              
              267,057
              
              
              593,621
              
              
              733,272
              
              
              (346,941
              )**Net
                  Income**
              
              $
              840,278
              
              $
              1,215,311
              
              $
              2,405,156
              
              $
              554,976**Basic
                  Earnings per Share**
              
              $
              0.17
              
              $
              0.24
              
              $
              0.48
              
              $
              0.11**Diluted
                  Earnings per Share**
              
              $
              0.16
              
              $
              0.24
              
              $
              0.47
              
              $
              0.11**Dividends
                  per Share**
              
              $
              0.14
              
              $
              0.14
              
              $
              0.42
              
              $
              0.42
 
 See
        notes
        to consolidated condensed financial statements.
  5
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statements of Comprehensive Income
 (Unaudited)
 
 **Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  Income
              
              $
              840,278
              
              $
              1,215,311
              
              $
              2,405,156
              
              $
              554,976Other
                  comprehensive income, net of taxUnrealized
                  gains (losses) on securities available for saleUnrealized
                  holding gains (losses) arising during the period, net of tax
                  expense/(benefit) of $847,718, $(81,541), $(13), and
                  $(278,337)
              
              
              1,494,721
              
              
              (172,717
              )
              
              (6,522
              )
              
              (528,842
              )Less:
                  Reclassification adjustment for realized gains (losses) included
                  in net
                  income (loss), net of tax expense (benefit) of -0-, ($99,186),
                  $1,257 and
                  ($4,904)
              
              
              -0-
              
              
              149,512
              
              
              2,440
              
              
              (48,626
              )1,494,721
              
              
              (322,229
              )
              
              (8,962
              )
              
              (480,216
              )Comprehensive
                  income
              
              $
              2,334,999
              
              $
              893,082
              
              $
              2,396,194
              
              $
              74,760
  See
        notes
        to consolidated condensed financial statements.
  6
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statement of Shareholders’ Equity
 For
        the
        Nine Months Ended September 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
              
              
              
              
              
              
              
              
              2,405,156
              
              
              
              
              
              
              
              
              
              
              
              2,405,156Unrealized
                  losses on securities, net of reclassification adjustment
              
              
              
              
              
              
              
              
              
              
              
              (8,962
              )
              
              
              
              
              
              
              
              (8,962
              )Purchase
                  of common stock
              
              
              (21,000
              )
              
              (379,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (379,000
              )Stock
                  options exercised
              
              
              16,175
              
              
              188,355
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              188,355Stock
                  option expense
              
              
              
              
              
              63,522
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              63,522ESOP
                  shares earned
              
              
              
              
              
              
              
              
              187,498
              
              
              
              
              
              
              
              
              226,750
              
              
              414,248Amortization
                  of unearned compensation expense
              
              
              
              
              
              68,425
              
              
              15,052
              
              
              
              
              
              
              
              
              
              
              
              83,477Reclassification
                  of unearned compensation to common stock upon adoption of SFAS
                  123(R)
              
              
              
              
              
              (607,798
              )
              
              
              
              
              
              
              
              607,798Cash
                  dividends ($.42 per share)
              
              
              
              
              
              
              
              
              (2,132,629
              )
              
              
              
              
              
              
              
              
              
              
              (2,132,629
              )**Balances,
                  September 30, 2006**
              
              
              5,381,328
              
              $
              63,105,668
              
              $
              41,168,468
              
              $
              (827,066
              )
              
              --
              
              $
              (2,872,970
              )
              $
              100,574,100
 
 See
        notes
        to consolidated condensed financial statements.
 
  7
 **LINCOLN
        BANCORP AND SUBSIDIARY**
 Consolidated
        Condensed Statements of Cash Flows
 (Unaudited)
 **Nine
                    Months EndedSeptember
                    30,****2006**
              
              **2005****Operating
                  Activities**Net
                  income
              
              $
              2,405,156
              
              $
              554,976Adjustments
                  to reconcile net income to net cash provided by (used in) operating
                  activitiesProvision
                  for loan losses
              
              
              621,744
              
              
              2,074,480Investment
                  securities (amortization) accretion, net
              
              
              19,987
              
              
              (66,223
              )Investment
                  securities gains (losses)
              
              
              (3,697
              )
              
              43,721Loans
                  originated for sale in the secondary market
              
              
              (30,356,061
              )
              
              (49,521,375
              )Proceeds
                  from sale of loans in the secondary market
              
              
              29,166,690
              
              
              49,976,889Gain
                  on sale of loans
              
              
              (301,181
              )
              
              (571,221
              )Amortization
                  of net loan origination costs (fees)
              
              
              449,767
              
              
              (235,605
              )Amortization
                  of purchase accounting adjustment
              
              
              192,308
              
              
              (26,898
              )Depreciation
                  and amortization
              
              
              1,336,721
              
              
              1,170,902Amortization
                  of unearned compensation expense
              
              
              83,477
              
              
              23,220ESOP
                  shares earned
              
              
              414,248
              
              
              423,826Net
                  change in:Interest receivable
              
              
              (389,527
              )
              
              (632,831
              )Interest payable
              
              
              394,567
              
              
              651,598Other
                  adjustments
              
              
              502,078
              
              
              600,058Net
                  cash provided by operating activities
              
              
              4,536,277
              
              
              4,465,517**Investing
                  Activities**Purchases
                  of securities available for sale
              
              
              (24,029,192
              )
              
              (149,770,673
              )Proceeds
                  from sales of securities available for sale
              
              
              211,577
              
              
              79,391,563Proceeds
                  from maturities of securities available for sale
              
              
              14,427,604
              
              
              55,620,929Proceeds
                  from maturities of securities held to maturity
              
              
              --
              
              
              1,695,000Net
                  change in loans
              
              
              (38,271,182
              )
              
              (27,179,018
              )Redemption
                  of Federal Home Loan Bank of Indianapolis stock
              
              
              1,194,200
              
              
              --Purchases
                  of property and equipment
              
              
              (835,212
              )
              
              (1,156,872
              )Proceeds
                  from sale of foreclosed real estate
              
              
              997,950
              
              
              2,161,761Other
                  investing activities
              
              
              (1,100
              )
              
              2,435,434Net
                  cash used in investing activities
              
              
              (46,305,355
              )
              
              (36,801,876
              )**Financing
                  Activities**Net
                  change inNoninterest-bearing,
                  interest-bearing demand, money market and savings deposits
              
              
              28,071,033
              
              
              1,461,826Certificates
                  of deposit
              
              
              48,321,623
              
              
              71,588,495Short
                  term borrowings
              
              
              3,569,780
              
              
              4,714,771Proceeds
                  from FHLB advances
              
              
              92,550,000
              
              
              13,000,000Repayment
                  of FHLB advances
              
              
              (129,550,000
              )
              
              (58,855,000
              )Dividends
                  paid
              
              
              (2,133,304
              )
              
              (2,119,581
              )Purchase
                  of common stock
              
              
              (379,000
              )
              
              --Exercise
                  of stock options
              
              
              188,355
              
              
              409,631Net
                  change in advances by borrowers for taxes and insurance
              
              
              671,404
              
              
              674,246Net
                  cash provided by financing activities
              
              
              41,309,891
              
              
              30,874,388**Net
                  Change in Cash and Cash Equivalents**
              
              
              (459,187
              )
              
              (1,461,971
              )**Cash
                  and Cash Equivalents, Beginning of Period**
              
              
              16,735,797
              
              
              27,790,119
  8
    **Nine
                  Months Ended****September
                  30,****2006**
              
              **2005****Cash
                  and Cash Equivalents, End of Period**
              
              $
              16,276,610
              
              $
              26,328,148**Additional
                  Cash Flows and Supplementary Information**Interest
                  paid
              
              $
              20,649,532
              
              $
              14,372,948Income
                  tax paid (refund received)
              
              
              780,000
              
              
              (577,298
              )Loan
                  balances transferred to foreclosed real estate
              
              
              1,034,428
              
              
              562,611Transfer
                  of loans held for sale to loans
              
              
              --
              
              
              5,872,116
 
 See
        notes
        to consolidated condensed financial statements.
  9
  **LINCOLN
        BANCORP AND SUBSIDIARY**
 Notes
        to
        Unaudited Consolidated Condensed Financial Statements
  Note
        1: Basis of Presentation
  The
        consolidated financial statements include the accounts of Lincoln Bancorp
        (the
“Company”), its wholly owned subsidiary, Lincoln Bank, a 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 September 30, 2006 and for the
        three months and nine months ended September 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 nine-month
        periods ended September 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 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**
                **September
                  30, 2006**
              
              **Three
                  Months Ended**
                **September
                  30, 2005****Income**
              
              **Weighted
                  Average Shares**
              
              **Per
                  Share Amount**
              
              **Income**
              
              **Weighted
                  Average Shares**
              
              **Per
                  Share Amount**Basic
                  earnings per shareIncome
                  available to common shareholders
              
              $
              840,278
              
              
              5,044,820
              
              $
              .17
              
              $
              1,215,311
              
              
              5,030,934
              
              $
              .24Effect
                  of dilutive RRP awards and stock options
              
              
              
              
              
              125,577
              
              
              
              
              
              
              
              
              102,307Diluted
                  earnings per shareIncome
                  available to common shareholders and assumed conversions
              
              $
              840,278
              
              
              5,170,397
              
              $
              .16
              
              $
              1,215,311
              
              
              5,133,241
              
              $
              .24
  10
  
 **Nine
                  Months Ended**
                **September
                  30, 2006**
              
              **Nine
                  Months Ended**
                **September
                  30, 2005****Income**
              
              **Weighted
                  Average Shares**
              
              **Per
                  Share Amount**
              
              **Income**
              
              **Weighted
                  Average Shares**
              
              **Per
                  Share Amount**Basic
                  earnings per shareIncome
                  available to common shareholders
              
              $
              2,405,156
              
              
              5,044,712
              
              $
              .48
              
              $
              554,976
              
              
              5,018,880
              
              $
              .11Effect
                  of dilutive RRP awards and stock options
              
              
              
              
              
              122,819
              
              
              
              
              
              
              
              
              117,200Diluted
                  earnings per shareIncome
                  available to common shareholders and assumed conversions
              
              $
              2,405,156
              
              
              5,167,531
              
              $
              .47
              
              $
              554,976
              
              
              5,136,080
              
              $
              .11
 
  Options
        to purchase 126,500 shares of common stock were outstanding at September
        30,
        2006 and 120,000 shares of stock at September 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 $64,000 in compensation expense related
        to
        vested stock options less estimated forfeitures for the nine month period
        ended
        September 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.
   11
  **Three
                  Months EndedSeptember 30, 2005**
              
              **Nine
                  Months EndedSeptember 30, 2005**Net
                  income, as reported
              
              $
              1,215,311
              
              $
              554,976Less:
                  Total stock-based employee compensation cost determined under the
                  fair
                  value based method, net of income taxes
              
              
              54,044
              
              
              104,332Pro
                  forma net income
              
              $
              1,161,267
              
              $
              450,644Income
                  per share:Basic
                  - as reported
              
              $
              .24
              
              $
              0.11Basic
                  - pro forma
              
              
              .23
              
              
              0.09Diluted
                  - as reported
              
              
              .24
              
              
              0.11Diluted
                  - pro forma
              
              
              .23
              
              
              0.09
  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.
 12
 As
        previously reported , the B b ank
        applied to with the
        Indiana Department of Financial Institutions (the “DFI”) to convert the Bank
        from a federally chartered savings bank to a state chartered commercial bank
        and
        filed an application with the Federal Reserve Bank of Chicago to convert
        Lincoln
        Bancorp to a bank holding company and a financial holding company. As of
        September 30, 2006 , all
        necessary approvals had been granted , and
        certain statutory waiting periods ha ve ve elapsed
        prior to filing of this report. Lincoln completed the conversion on October
        31,
        2006. Lincoln currently conducts its business from 17 full-service offices
        located in Hendricks, Johnson, Morgan, Clinton, Montgomery, Hamilton 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. As of September 30, 2006, LF Service
        had
        petitioned Family Financial to re-purchase LF Service’s interest in that
        company. Subsequent to September 30, 2006, the re-purchase of LF Services
        interest by Family Financial has been completed. 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.
  13
  Allowance
        for loan losses
  The
        allowance for loan losses represents management’s estimate of probable losses
        inherent in the Company’s loan portfolios. In determining the appropriate amount
        of the allowance for loan losses, management makes numerous assumptions,
        estimates and assessments.
  The
        Company’s strategy for credit risk management includes conservative, centralized
        credit policies, and uniform underwriting criteria for all loans as well
        as an
        overall credit limit for each customer below legal lending limits. The strategy
        also emphasizes diversification on a geographic, industry and customer level,
        regular credit quality reviews and quarterly management reviews of large
        credit
        exposures and loans experiencing deterioration of credit quality. A standard
        credit scoring system is used to assess credit risks during the loan approval
        process of all consumer loans while commercial loans are individually reviewed
        by a credit analyst with formal presentations to the Bank’s Loan Committee.
  The
        Company’s allowance consists of three components. The Company estimates probable
        losses from individual reviews of specific loans and probable losses from
        historical loss rates. Also, factors affecting probable losses resulting
        from
        economic or environmental factors that may not be captured in the first two
        components of the allowance are considered.
  Larger
        commercial loans that exhibit probable or observed credit weaknesses are
        subject
        to individual review. Where appropriate, reserves are allocated to individual
        loans based on management’s estimate of the borrower’s ability to repay the loan
        given the availability of collateral, other sources of cash flow and legal
        options available to the Company. Included in the review of individual loans
        are
        those that are impaired as provided in SFAS No. 114, Accounting by Creditors
        for
        Impairment of a Loan. Any allowances for impaired loans are measured based
        on
        the present value of expected future cash flows discounted at the loan’s
        effective interest rate or fair value of the underlying collateral.
  The
        Company evaluates the collectibility of both principal and interest when
        assessing the need for a loss accrual. Estimated loss rates are applied to
        other
        commercial loans not subject to specific reserve allocations.
  Homogenous
        loans, such as consumer installment and residential mortgage loans are not
        individually risk graded. Rather, standard credit scoring systems are used
        to
        assess credit risks. 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.
   14
  **Financial
        Condition**
  Assets
        totaled $890.0 million at September 30, 2006, an increase from December 31,
        2005
        of $45.5 million. The majority of the increase in assets occurred in net
        loans,
        including loans held for sale, up $37.8 million, and investment securities
        available for sale, up $9.4 million. Loan growth was experienced in commercial
        loans and residential mortgage loans, $19.2 million and $18.4 million,
        respectively. This growth was partially offset by a decline in home equity
        loans, down $3.1 million from the end of 2005. Indirect loans have grown
        $3.1
        million since December 31, 2005. 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, 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. During the third quarter our commercial loan growth has
        increased and as a result nearly all of our qualifying mortgage production
        is
        being sold into the secondary market.
  Total
        deposits were $676.8 million at September 30, 2006, an increase of $76.2
        million
        from the $600.6 million at December 31, 2005. Growth occurred in money market
        deposits, up $16.2 million, savings accounts, up $20.2 million and certificates
        of deposit, up $48.2 million, while interest bearing demand deposits declined
        by
        $8.4 million. Continued success in both our premium money market savings
        product
        and our Public Funds money market product have fueled the savings and the
        money
        market increase respectively. Borrowed funds and securities sold under agreement
        to repurchase declined by $33.4 million from year end 2005 to $103.7 million
        at
        September 30, 2006. This decline was the result of repayment of Federal Home
        Loan Bank advances from increased deposit balances.
  Shareholders’
        equity increased $.6 million from December 31, 2005 to $100.6 million at
        September 30, 2006. The increase was a result $2.4 million of current income
        and
        the net amortization of unearned compensation expense, stock option expense,
        stock options exercised and employee stock ownership shares earned totaling
        $.7
        million. Offsetting these increases were dividends declared of $2.1 million
        and
        common stock was repurchased at a cost of $.4 million. Accumulated other
        comprehensive loss is unchanged from December 31, 2005 at $.8 million but
        has
        improved from a loss position of $1.5 million at June 30, 2006. The sole
        component of other comprehensive income is the tax effected unrecognized
        loss on
        the Company’s investment portfolio. 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 September 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.
   **Comparison
        of Operating Results for the Three Months Ended** **September
        30, 2006 and 2005**
  Net
        income for the quarter ended September 30, 2006 was $840,000, or $.17 basic
        earnings per share and $.16 diluted earnings per share. This compared to
        net
        income of $1,215,000 for the third quarter of 2005 or $.24 for both the basic
        and diluted loss per share.
  Net
        interest income for the third quarter of 2006 was $5,530,000 compared to
        $5,861,000 for the same period in 2005. Net interest margin fell to 2.70%
        for
        the three-month period ended September 30, 2006 compared to 3.09% for the
        same
        period in 2005. The average yield on earning assets increased 50 basis points
        for the third quarter of 2006 compared to the same period in 2005. The average
        cost of interest-bearing liabilities increased 98 basis points for the third
        quarter of 2006 compared to the same period in 2005. This decreased interest
        rate spread from 2.71% for the 2005 period to 2.23% for the 2006 period,
        or 48
        basis points. Competitive pressures in the current flat yield curve environment
        combined with the customers’ perceived lack of benefit 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.
   15
  The
        Bank’s provision for loan losses for the third quarter of 2006 was $120,000
        compared to $145,000 for the same period in 2005. Non-performing loans to
        total
        loans at September 30, 2006 were .45% compared to .59% at December 31, 2005,
        while non-performing assets to total assets were .36% at September 30, 2006
        compared to .45% at December 31, 2005. The allowance for loan losses as a
        percent of loans was .96% at September 30, 2006 compared to .97% at December
        31,
        2005. During the third quarter of 2006, the Bank incurred $17,000 in net
        charged
        off loans compared to net charged off loans in the third quarter of 2005
        totaling $1,624,000.
  Other
        income for the three months ended September 30, 2006 was $1,426,000 compared
        to
        $1,587,000 for the same quarter of 2005. The decrease of $161,000 in 2006
        compared to 2005 in other income was primarily the result of a $249,000 gain
        on
        sale of securities sold during 2005. This decline was partially offset by
        increases in point of sale income and other income up $27,000 and $92,000,
        respectively. Point of sale income continues its steady increase since the
        merger as customers continue to increase usage of ATM and debit cards. As
        noted
        last quarter, management reversed its policy to hold in its portfolio certain
        mortgage loans. We are now selling the majority of qualifying mortgage loans
        originated, regardless of interest rate structure or term. We continue to
        emphasize commercial loan growth and as we move towards a commercial bank
        asset
        mix, emphasizing commercial growth, we expect fewer residential mortgage
        loans
        to be added to our loan portfolio. Gains on sale of loans was $15,000 less
        than
        third quarter of 2005, but is trending upward from second quarter of 2006.
  Other
        expenses were $5,729,000 for the three months ended September 30, 2006, a
        $236,000 increase compared to $5,493,000 for the same three months of 2005.
        Increases in salary and benefits cost of $379,000, professional fees of $71,000
        and advertising of $71,000 were partially offset by decreases in data processing
        fees of $58,000 and other expenses reduction of $246,000. The increase in
        salary
        and benefits was due to several factors including additional full time
        equivalent employees, additional benefit costs, primarily hospitalization,
        incentives related to our increased commercial banking focus and normal annual
        increases. Total expense recognized in salary expense during the third quarter
        of 2006 related to the adoption of FAS 123(R) as of January 1, 2006 was $21,000.
        External consulting costs related to Sarbanes-Oxley internal control
        documentation and testing are responsible for the majority of the increased
        professional fee costs. Our advertising costs are generally campaign driven
        and
        the timing of campaigns resulted in higher expense in the quarter ended
        September 30, 2006 than in the 2005 linked quarter. The decrease in data
        processing is primarily the result of our renegotiated primary servicer
        contract. The other expense reduction includes over $100,000 less other real
        estate expense than in 2005. This is primarily due to a property that was
        sold
        at a gain during the third quarter of 2006.
  The
        income tax expense was approximately 24% of pretax income for the third quarter
        of 2006 as compared to income tax expense of approximately 33% of pretax
        income
        for the third quarter of 2005. The impact of various tax credits and permanent
        timing differences cause the rates to be lower on the lesser 2006 third quarter
        pre-tax net income than on the higher 2005 quarterly pre-tax net
        income.
   **Comparison
        of Operating Results for the** **Nine
        Months Ended September 30, 2006 and 2005**
  Net
        income for the nine-month period ended September 30, 2006 was $2,405,000,
        or
        $.48 for basic earnings per share and $.47 diluted earnings per share. This
        compared to net income of $555,000 or $.11 for both basic and diluted income
        per
        share for the same period in 2005. A restructuring of the balance sheet and
        its
        related costs, a large provision for loan losses and the recognition of contract
        costs related to the retirement of certain senior officers all during the
        second
        quarter of 2005 negatively impacted the year-to-date results.
  Net
        interest income year-to-date through September 30, 2006 was $16,850,000 compared
        to $17,077,000 for the same period in 2005. Net interest margin fell to 2.77%
        for the nine-month period ended September 30, 2006 compared to 3.00% for
        the
        same period in 2005. The average yield on earning assets increased .59% for
        the
        nine months ending September 30, 2006 compared to the same period in 2005.
        The
        average cost of interest-bearing liabilities increased .93% for the nine
        months
        ending September 30, 2006 compared to same period in 2005. This decreased
        spread
        from 2.67% for the 2005 period to 2.33% for the 2006 period, or .34%. As
        noted
        above competitive pressures in the current flat yield curve environment combined
        with the customers’ perceived lack of benefit 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 September 30, 2006 was
        $622,000 compared to $2,074,000 for the same period in 2005. A large provision
        in the second quarter of 2005 that related to one specific borrower relationship
        was responsible for most of the 2005 expense.
   16
  Other
        income year-to-date through September 30, 2006 was $3,929,000 compared to
        $3,885,000 for the same period in 2005. Increases include service charges
        on
        deposit accounts, up $65,000, point of sale income, up $108,000 and other
        income, up $135,000. Continued success with our customer courtesy overdraft
        program and increased point of sale usage by our customers have helped fuel
        these increases. Gain on sale of loans declined from $571,000 year-to-date
        in
        2005 to $301,000 for the like period in 2006. Earlier in 2006 we elected
        to
        retain certain mortgage production resulting in fewer sales of loans. Also,
        loan
        servicing fees declined in 2006 to $257,000 compared to $308,000 for the
        nine
        months ended September 30, 2005. Certain mortgage loans were retained in
        our
        loan portfolio earlier in 2006, along with generally selling loans on a
        servicing released basis has caused this income to decline.
  Other
        expenses year-to-date through September 30, 2006 were $17,019,000 compared
        to
        $18,680,000 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 expenses in 2005 that were not repeated in
        2006.
        Excluding these 2005 items, other expenses increased $209,000 year-to-date
        through September 30, 2006 over the same period in 2005. Salaries and employee
        benefits expense has increased $491,000 or $739,000 excluding the 2005 contract
        retirement costs. Staff additions in certain key areas, along with normal
        annual
        increases, are responsible for this increase. 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 $63,000. Director and committee fees increased $157,000 year
        over
        year. 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, a
        change in the estimates for the director’s supplemental retirement plan during
        the fourth quarter of 2005 resulted in increased expense in 2006. Professional
        fees has increased from $594,000 year-to-date through September 30, 2005
        to
        $704,000 for the same period in 2006. As noted above, external consulting
        expense related to our Sarbanes-Oxley efforts is responsible for this increase.
        Office supplies decreased from $377,000 in 2005 to $247,000 year-to-date
        in
        2006. This is the result of switching to a new provider as well as continued
        efficiencies gained as a result of the First Bank merger in 2004. Core deposit
        intangible amortization has fallen from $558,000 year-to-date 2005 to $470,000
        year-to-date 2006. This is a result of the asset being amortized using an
        accelerated method. Other expenses fell from $2,313,000 in 2005 to $1,700,000
        in
        2006. This $613,000 reduction was spread across several categories, including
        mortgage servicing rights amortization, telephone expense, courier, postage
        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.
        The
        settlement of a depositor dispute in 2005 was responsible for $73,000 of
        the
        decrease as well.
  The
        income tax expense was approximately 23% of pretax income year-to-date in
        2006
        as compared to an income tax benefit of approximately $347,000 on book income
        of
        $208,000 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
        $12.1 million and $14.7 million of loans classified as special mention as
        of
        September 30, 2006 and December 31, 2005, respectively. In addition, Lincoln
        had
        $3.5 million and $3.2 million of loans classified as substandard at September
        30, 2006 and December 31, 2005, respectively. Loans classified as doubtful
        totaled $.5 million at September 30, 2006 and $.8 million at December 31,
        2005.
        At September 30, 2006 there were $79,000 of loans classified as loss. No
        loans
        were classified loss at December 31, 2005. At September 30, 2006, and December
        31, 2005, respectively, non-accrual loans were $2.7 million and $2.8 million.
        At
        September 30, 2006 and December 31, 2005, respectively, accruing loans
        delinquent 90 days or more totaled $173,000 and $759,000. At September 30,
        2006
        and December 31, 2005, the allowance for loan losses was $6.1 million and
        $5.8
        million, respectively or approximately .96% and .97% of loans, including
        loans
        held for sale, respectively.
   17
  **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 September 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 September 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 June 30, 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.
  **June
                  30, 2006****Changes**
              
              **Net
                  Portfolio Value**
              
              **NPV
                  as % of PV of Assets****In
                  Rates**
              
              **$
                  Amount**
              
              **$
                  Change**
              
              **%Change**
              
              **NPV
                  Ratio**
              
              **Change**(Dollars
                  in thousands)+300
              bp
              
              $
              50,036
              
              
              $
              (39,130
              )
              
              (44
              )%
              
              6.10
              %
              
              (419
              )
                  bp+200
              bp
              
              
              63,076
              
              
              
              (26,090
              )
              
              (29
              )
              
              7.55
              
              
              (274
              )
                  bp+100
              bp
              
              
              76,318
              
              
              
              (12,848
              )
              
              (14
              )
              
              8.97
              
              
              (132
              )
                  bp0
              bp
              
              
              89,166
              
              
              
              
              
              
              
              
              
              10.29-100
              bp
              
              
              97,997
              
              
              
              8,831
              
              
              10
              
              
              11.15
              
              
              86
              bp-200
              bp
              
              
              102,126
              
              
              
              12,960
              
              
              15
              
              
              11.49
              
              
              120
              bp
 
 **June
                  30, 2005****Changes**
              
              **Net
                  Portfolio Value**
              
              **NPV
                  as % of PV of Assets****In
                  Rates**
              
              **$
                  Amount**
              
              **$
                  Change**
              
              **%Change**
              
              **NPV
                  Ratio**
              
              **Change**(Dollars
                  in thousands)+300
              bp
              
              $
              48,461
              
              
              $
              (22,847
              )
              
              (32
              )%
              
              6.48
              %
              
              (262
              )
                  bp+200
              bp
              
              
              57,333
              
              
              
              (13,976
              )
              
              (20
              )
              
              7.54
              
              
              (156
              )
                  bp+100
              bp
              
              
              65,267
              
              
              
              (6,041
              )
              
              (8
              )
              
              8.45
              
              
              (65
              )
                  bp0
              bp
              
              
              71,308
              
              
              
              
              
              
              
              
              
              9.10-100
              bp
              
              
              72,408
              
              
              
              1,100
              
              
              2
              
              
              9.14
              
              
              4
              bp-200
              bp
              
              
              70,106
              
              
              
              (1,202
              )
              
              (2
              )
              
              8.78
              
              
              -32
              bp
  Management
        believes at September 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.
   18
 **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**July
                  1-31, 2006
              
              
              --
              
              
              --
              
              
              --
              
              
              103,663August
                  1-31, 2006
              
              
              5,000
              
              $
              17.90
              
              
              5,000
              
              
              98,663September
                  1-30, 2006
              
              
              --
              
              
              --
              
              
              --
              
              
              98,663Total
              
              
              5,000
              
              $
              17.90
              
              
              5,000
 
 (1)
            The
                Company announced a stock repurchase program on April 23, 2003, and
                up to
                98,663 additional shares may still be repurchased under that program.
                The
                repurchase program does not have an expiration date.   **Item
        3.**  **Defaults
        Upon Senior Securities.**
  None
  **Item
        4.**  **Submission
        of Matters to Vote of Security Holders.**
  None
  **Item
        5.**  **Other
        Information.**
  None
 19
  **Item
                  6. Exhibits**10.1
              Special
                  Termination Agreement, dated August 7, 2006, between Lincoln Bank
                  and
                  James Douglas Bennett31(1)
              Certification
                  required by 17 C.F.R. § 240.13a-14(a)31(2)
              Certification
                  required by 17 C.F.R. § 240.13a-14(a)32
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of
                  the
                  Sarbanes-Oxley Act of 2002
  20
   **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, as amended, the
        Registrant has duly caused this report to be signed on its behalf by the
        undersigned thereunto duly authorized.
  **LINCOLN
                  BANCORP**Date:  November
                  9, 2006
              By:
              /s/
                  Jerry R. EngleJerry
                  R. EnglePresident
                  and Chief Executive OfficerDate:  November
                  9, 2006
              By:
              /s/
                  John M. BaerJohn
                  M. BaerSecretary
                  and Treasurer
        21




**EXHIBIT
      INDEX**




**No.**
            
            **Description**
            
            **Location**10.1
            
            Special
                Termination Agreement, dated August 7, 2006, between Lincoln Bank
                and
                James Douglas Bennett
            
            Incorporated
                by reference to Registrant’s Current Report on Form 8-K filed August 9,
                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











22