Church Loans 10-Q


CHURCH LOANS & INVESTMENTS TRUST FORM 10-Q For the Quarter Ended September 30, 2006
INDEX
Page
*Part I.*	*Financial Information*

		Item 1.				Financial Statements:

			a)				Condensed Balance Sheets (Unaudited) September 30, 2006 and March 31, 2006	1
			b)				Condensed Statements of Income (Unaudited) for the three-month and six-month periods ended September 30, 2006 and 2005	2
			c)				Condensed Statements of Cash Flows (Unaudited) for the six-month periods ended September 30, 2006 and 2005	3
			d)				Notes to Condensed Financial Statements (Unaudited)	4

		Item 2.			Management’s Discussion and Analysis or Plan of Operation			6

		Item 3.			Quantitative and Qualitative Disclosures About Market Risk			13

		Item 4.			Controls and Procedures			13

*Part II.*	*Other Information*

		Item 1.		Legal Proceedings				13

		Item 1A.		Risk Factors				13

		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds				14

		Item 3.		Defaults Upon Senior Securities				14

		Item 4.		Submission of Matters to a Vote of Security Holders				14

		Item 5.		Other Information				14

		Item 6.		Exhibits				14

Index to Exhibits									15

Signatures									16


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Condensed Balance Sheets (Unaudited)
September 30, 2006 and March 31, 2006

ASSETS
			September 30, 2006				March 31, 2006

CASH AND CASH EQUIVALENTS	$		195,723		$		128,955
RECEIVABLES
Mortgage loans and church bonds – performing			44,923,477				48,835,293
Interim construction loans – performing			17,779,159				20,268,706
Nonperforming mortgage loans, church bonds and interim construction loans			7,396,491				1,959,450
Less: Allowance for credit losses			(1,713,249)				(1,713,249)
			68,385,878				69,350,200
Accrued interest receivable			443,671				558,217
Notes receivable			4,000				5,902
Net receivables			68,833,549				69,914,319
PROPERTY AND EQUIPMENT, net			220,092				221,124
OTHER REAL ESTATE OWNED			916,694				1,180,618
OTHER ASSETS			54,015				46,050
TOTAL ASSETS	$		70,220,073		$		71,491,066


LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Notes payable and line of credit:
Related parties		$		3,292,418		$		2,845,753
Other				33,705,348				36,044,357
				36,997,766				38,890,110
Accrued interest payable				111,559				130,229
Other				1,643,510				1,503,044
Total liabilities				38,752,835				40,523,383

SHAREHOLDERS’ EQUITY
Shares of beneficial interest, no par value; authorized shares unlimited, 10,223,690 shares issued				29,762,291				29,762,291
Undistributed net income				1,721,437				1,221,882
Treasury shares, at cost (6,596 shares)				(16,490)				(16,490)
Total shareholders’ equity				31,467,238				30,967,683
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$		70,220,073		$		71,491,066

These condensed financial statements should be read only in connection with the accompanying notes to condensed financial statements. -1-


CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Condensed Statements of Income (Unaudited)
Three-month and Six-month periods ended September 30, 2006 and 2005



		Three-month periods ended September 30,						Six-month periods ended September 30,
			2006		2005		2006			2005
INTEREST INCOME AND FEES
Interest and fees on mortgage loans, church bonds and interim construction loans	$		1,544,685	$	1,731,251	$	3,067,974		$	3,021,895
Total interest income and fees			1,544,685		1,731,251		3,067,974			3,021,895

INTEREST EXPENSE			684,201		424,319		1,324,909			787,825
Net interest income			860,484		1,306,932		1,743,065			2,234,070

OTHER INCOME			23,139		25,890		43,935			55,794
OTHER OPERATING EXPENSES
General and administrative			223,563		269,747		547,049			468,050
Board of Trust Managers’ fees			13,300		12,300		25,200			23,700
Total other operating expenses			236,863		282,047		572,249			491,750
NET INCOME	$		646,760	$	1,050,775	$	1,214,751		$	1,798,114

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING			10,217,094		10,217,094		10,217,094			10,217,094
NET INCOME PER SHARE	$		.06	$	.10	$	.12		$	.17
DIVIDENDS PER SHARE	$		-	$	-	$	.07		$	.06


















These condensed financial statements should be read only in connection with the accompanying notes to condensed financial statements. -2-


CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Condensed Statements of Cash Flows (Unaudited)
Six-month periods ended September 30, 2006 and 2005
		Six-month periods ended September 30,
		2006		2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,214,751	$	1,798,114
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,032		1,032
Loss on sale of other real estate owned		13,317		-
Amortization of loan discounts		(9,809)		(450,794)
Changes in:
Accrued interest receivable		114,546		(83,687)
Accrued interest payable		(18,670)		18,966
Other liabilities		140,466		355,587
Other, net		(7,965)		94,627
Net cash provided by operating activities		1,447,668		1,733,845

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in mortgage and interim construction loans and church bonds		(12,186,481)		(27,638,137)
Payments received on mortgage and interim construction loans and church bonds		13,160,612		21,473,921
Payments received on notes receivable		1,902		13,896
Proceeds from sale of other real estate owned		250,607		-
Net cash provided (used) by investing activities		1,226,640		(6,150,320)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on notes payable and line of credit		15,621,751		28,682,463
Principal payments on notes payable and line of credit		(17,514,095)		(23,214,964)
Cash dividends		(715,196)		(613,024)
Net cash provided (used) by financing activities		(2,607,540)		4,854,475
Increase in cash and cash equivalents		66,768		438,000

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		128,955		60,854

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	195,723	$	498,854

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	1,343,579	$	768,859


These condensed financial statements should be read only in connection with the accompanying notes to condensed financial statements. -3-

CHURCH LOANS & INVESTMENTS TRUST

(A Real Estate Investment Trust)

Notes to Condensed Financial Statements (Unaudited)

NOTE 1 – GENERAL

See Summary of Significant Accounting Policies in the Trust’s Annual Report on Form 10-KSB for a summary of the Trust’s significant accounting policies.

The unaudited condensed financial statements included herein were prepared from the books of the Trust in accordance with generally accepted accounting principles and reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results of operations and financial position for the interim periods. Such financial statements generally conform to the presentation reflected in the Trust’s Annual Report to Shareholders. The current interim period reported herein is included in the fiscal year subject to independent audit at the end of that year and is not necessarily an indication of the expected results for the fiscal year.

NOTE 2 - WEIGHTED AVERAGE INTEREST RATES

Weighted average interest rates and net interest rate margins at September 30, 2006 and 2005, were as follows:


	Mortgage loan and church bond portfolio	Total indebtedness	Net interest rate margin
September 30, 2006	8.12%	6.96%	1.16%
September 30, 2005	8.02%	5.65%	2.37%

NOTE 3 - CONTRACTUAL MATURITIES

Scheduled principal payments on mortgage loans, church bonds and interim construction loans and indebtedness (including notes payable) outstanding at September 30, 2006, for the five twelve-month periods subsequent to September 30, 2006, follow:


Twelve-month period ending September 30,	Mortgage loans, church bonds and interim loans			Total Indebtedness
2007		$ 23,257,608	$ 18,292,766
2008		2,627,178	-
2009		2,704,955	18,705,000
2010		2,795,176	-
2011		2,969,335	-

NOTE 4 - MORTGAGE LOANS, CHURCH BONDS AND INTERIM CONSTRUCTION LOANS

Mortgage loans, church bonds and interim construction loans on which the accrual of interest had been discontinued amounted to $7,396,491 and $1,680,204 at September 30, 2006 and 2005, respectively. If interest on these mortgage loans, church bonds and interim construction loans had been accrued as earned, interest and fees on loans in the accompanying condensed statements of income would have been increased by approximately $272,000 and $91,000 for the six-month periods ended September 30, 2006 and 2005, respectively. Interest income actually recognized on such loans during 2006 and 2005 was approximately $208,000 and $74,000, respectively.

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NOTE 5 – LEGAL CONTINGENCIES

Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Trust’s financial statements.

This information is an integral part of the accompanying condensed financial statements.

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Item 2. Management’s Discussion and Analysis or Plan of Operation.

FORWARD-LOOKING STATEMENTS DISCLOSURE

The following includes forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact made in this discussion are forward-looking, which can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue” or other similar words. The forward-looking statements are based upon management’s current plans and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements, including:


		•			Competition in the business of making loans to churches;
		•			A decline in general economic conditions;
		•			A decline in real estate values affecting the value of the collateral securing our loans;
		•			A rise in interest rates resulting in higher cost of funds to us prior to the re-pricing of the loans owing to us;
		•			Our inability to borrow funds and at reasonable rates of interest;
		•			General risks of lending;
		•			Change in federal or state laws affecting our operations;
		•			Loss of critical management; and
		•			Other risks.

These risks and uncertainties are not intended to be exhaustive and should be read in conjunction with other cautionary statements made in this report.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are described in the notes to the financial statements. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions used are based on historical experience, as well as other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.

We believe that the following critical accounting policies require the most significant estimates and assumptions that are particularly susceptible to a significant change in the preparation of our financial statements.

Revenue Recognition. We accrue interest income as it is earned. All past due loans are reviewed monthly by management and the Audit Committee. A past due loan is evaluated based upon the payment history, opinion of the ultimate collectibility of the principal and interest and other experience factors. The accrual of interest is generally discontinued on loans and church bonds more than 60 days past due unless the credit is well secured and in process of collection. In all cases, loans and bonds are placed on nonaccrual or charged-off at an earlier date, if collection of principal or interest is considered doubtful.

Once a loan is placed on non-accrual, the loan will be classified as either “cash basis” or “capital recovery.” A loan is typically classified as “cash basis” if the Audit Committee believes, based upon several factors, that there is a strong likelihood that the principal of the loan will be recovered, but is concerned that all of the interest will be recovered. If a loan is classified as “cash basis,” then payments received will be applied to interest first and then to principal. A loan is typically classified as “capital recovery” if the Audit Committee believes, based upon several factors, that there is a strong likelihood that we may not be able to recover all of the principal balance of the loan. In the event that a loan is classified as “capital recovery,” then payments received are applied to principal first and then to interest.

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The actual decision to place a loan on non-accrual and the classification of the loan as either “cash basis” or “capital recovery” is made by the Audit Committee with input from management.

Non-accrual status loans are returned to an accrual status when in the opinion of the Audit Committee, based upon input from management, that such is warranted based upon the passing of a sufficient time period during which the principal and interest have become current and remain current and, therefore, the loan, both principal and interest, is anticipated to be fully collectible.

Allowance for Credit Loss. The Audit Committee reviews the allowance for credit loss at the end of each quarter. The provision for losses is based on an amount that is adequate, in the opinion of the Audit Committee, based upon input from management, to absorb losses inherent in the existing portfolio. The evaluation, which includes a review of all loans on which full collection may not be reasonably assumed, considers among other factors, general economic conditions, the fair market value or estimated net realizable value of the underlying collateral securing the loan, past experience, trends in loan delinquency and other factors that warrant recognition in providing for an adequate allowance to absorb inherent losses. The evaluation by the Audit Committee includes a review of a quarterly grading methodology performed by management on all past-due loans. The Audit Committee, based upon its evaluation and review, then makes a recommendation to the full Board of Trust Managers as to the recommended amount of the credit loss reserve. The Board of Trust Managers, based upon the recommendation of the Audit Committee, establishes the amount of the allowance for credit loss and any adjustments to such allowance.

Other Real Estate Owned. Other real estate owned (OREO) represents property acquired as a result of a foreclosure of a mortgage note(s) held by the Trust. OREO is recorded at estimated fair value at date of foreclosure, establishing a new cost basis. After foreclosure, OREO is carried at the lower of the carrying amount or estimated fair value minus estimated cost to sell. Impairment losses are charged to operations. Costs of the foreclosure, insurance and other costs associated with carrying the property are expensed.

Management has discussed our critical accounting policies and the development, selection and disclosure of the estimates and alternatives with the Audit Committee of the Board of Trust Managers and obtained their approval of the applicable disclosures contained in this report.

Overview

We were founded in May of 1959. We were organized to assist churches with the financing of purchases and construction of church facilities. We have also made loans for the financing of assisted living centers. Although we were originally organized under the corporate structure, we reorganized in 1963 as a real estate investment trust in order to take advantage of the favorable provisions of the federal tax law applicable to real estate investment trusts.

Our loan portfolio consists primarily of loans to churches and is comprised of both permanent loans and interim construction loans. Although, we have purchased existing loans from other lenders, our primary operating strategy is to originate, either through mortgage loan brokers, church bond broker-dealers or directly to churches, mortgage loans secured by a first mortgage against a church’s buildings and related facilities. We rarely, if ever, sell a loan and, therefore, we intend to hold our loan portfolio to maturity. Our underwriting standards normally include compiled, reviewed or audited financial statements depending on the size of the loan, a fair market value appraisal prepared by an independent appraiser, a first mortgage on the property of the church insured by a title insurance policy issued by a national title company, applicable fire and extended casualty insurance on the collateral and such other requirements as dete rmined by management on a case by case basis. Also, as part of our due diligence, management normally makes, prior to funding, an onsite inspection of the property that is to secure the loan.

Originally, our Declaration of Trust required a loan-to-value ratio of not greater than 66 2/3%. However, at our annual meeting of shareholders held on July 16, 2004, the shareholders approved an Amended and Restated Declaration of Trust and Bylaws that raised the loan-to-value ratio to 85% unless substantial justification exists because of the presence of other underwriting criteria. Most of our present loans were made based upon the prior 66 2/3% loan-to-value ratio.

Management is aggressively pursuing quality new loans, both interim and permanent. This is evident by the 6% increase in our loan portfolio as of September 30, 2006 as compared to September 30, 2005.

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Results of Operations—Six-month period ended September 30, 2006 as compared to six-month period ended September 30, 2005

Our revenues are derived from interest income earned on loans as well as, to a lesser degree, interest earned on church bonds and short-term investments. During the six-month period ended September 30, 2006, interest income and fees increased by $46,079 (2%) over the six-month period ended September 30, 2005.

Included in interest income and fees for the six-month period ended September 30, 2005 was $395,961 from the payment of a loan owing by St. Luke Missionary Baptist Church that was acquired by us and was previously in default. This income was characterized as discount income on mortgage loans since this loan was acquired at a price below the principal balance of the loan. Had it not been for this item, interest income and fees for the six-month period ended September 30, 2005 would have been $2,625,934. Interest income and fees for the six-month period ended September 30, 2006 as compared to the six-month period ended September 30, 2005 without inclusion of this item increased by $442,040 or 17%.

Interest income on mortgage loans increased from $1,406,397 during the six-month period ended September 30, 2005 to $1,680,875 during the six-month period ended September 30, 2006, an increase of $274,478 (20%). Interest income on interim loans increased from $848,339 during the six-month period ended September 30, 2005 to $1,000,347 for the six-month period ended September 30, 2006, an increase of $152,008 (18%). Interest income on mortgage loans and interim loans increased by $426,486 for the six-month period ended September 30, 2006 as compared to the six-month period ended September 30, 2005, an increase of 19%.

The increase in interest income and fees during the six-month period ended September 30, 2006 as compared to the six-month period ended September 30, 2005 was primarily attributable to an increase in the balance of performing mortgage loans and interim loans and a slight increase in the weighted average interest rate on our portfolio of loans.

The weighted average interest rate on our loans and church bonds increased from 8.02% as of September 30, 2005 to 8.12% as of September 30, 2006.

Although there was a slight increase in the amount of our interim loans from $20,617,332 as of September 30, 2005, to $20,619,159 as of September 30, 2006, performing interim loans decreased from $19,517,332 as of September 30, 2005 to $17,779,159 as of September 30, 2006, a decrease of $1,738,173 or 9%. During the same period, there was an increase in mortgage loans and church bonds from $45,393,626 to $49,525,098 and a slight increase in performing mortgage loans and church bonds from $44,736,920 as of September 30, 2005 to $44,923,477 as of September 30, 2006. The total mortgage loans, church bonds and interim loans, net of mortgage discounts, held by us increased from $65,934,456 as of September 30, 2005 to $70,099,127 as of September 30, 2006 (6%). However, performing mortgage loans, church bonds, and interim loans decreased from $64,254,252 as of September 30, 2005 to $62,702,636 as of September 30, 2006, a decrease of $1,551,616 or 2%.

Commitment fees earned during the six-month period ended September 30, 2005 as compared to September 30, 2006 decreased from $314,347 to $309,504, a decrease of $4,843 or 2%.

Net income for the six-month period ended September 30, 2006 was $1,214,751 ($.12 per share), a decrease of $583,363 (32%) as compared to the six-month period ended September 30, 2005. This decrease was primarily attributable to the decrease in net interest income.

Net interest income decreased from $2,234,070 for the six-month period ended September 30, 2005 to $1,743,065 for the six-month period ended September 30, 2006, a decrease of $491,005 (22%). This decrease in our net interest income for the six-month period ended September 30, 2006 as compared to the six-month period ended September 30, 2005 was primarily the result of an increase in our interest expense.

Our interest expense increased from $787,825 for the six-month period ended September 30, 2005 to $1,324,909 for the six-month period ended September 30, 2006, an increase of $537,084 or 68%. This increase in our interest expense is attributable to the increase in the weighted average interest rate on our debt and the increase in our debt resulting from the funding of the increase in our portfolio of mortgage and interim loans.

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The weighted average interest rate on our debt increased from 5.65% for the six-month period ended September 30, 2005 to 6.96% for the six-month period ended September 30, 2006. Our total liabilities increased from $34,722,299 as of September 30, 2005 to $38,752,835 as of September 30, 2006, an increase of $4,030,536 or 12%.

Non-performing loans, church bonds and interim loans increased from $1,680,204 as of September 30, 2005 to $7,396,491 as of September 30, 2006, an increase of $5,716,287. The accrual of interest on these loans has been discontinued. If interest on these mortgage loans, church bonds and interim loans had been accrued as earned, interest and fees on loans would have been increased by approximately $272,000 and $91,000 for the six-month periods ended September 30, 2006 and 2005, respectively. Interest income actually recognized on such loans during 2006 and 2005 was approximately $208,000 and $74,000, respectively.

Also contributing slightly to the decrease in net income was a decrease in other income and an increase in general and administrative expenses. Other income decreased from $55,794 for the six-month period ended September 30, 2005 to $43,935 for the six-month period ended September 30, 2006, a decrease of $11,859 (21%). General and administrative expenses increased from $468,050 for the six-month period ended September 30, 2005 to $547,049 for the six-month period ended September 30, 2006, an increase of $78,999 or 17%. This increase in general and administrative expenses is primarily attributable to the payment of insurance and property taxes relating to property held as a result of the foreclosure of defaulted loans.

As of September 30, 2006, 10,217,094 shares of certificates of beneficial interest were outstanding. Net income per share decreased from $.17 per share for the six-month period ended September 30, 2005 as compared to $.12 per share for the six-month period ended September 30, 2006. This decrease was attributable to the decrease in our net income discussed above.

Results of Operations—Three-month period ended September 30, 2006 as compared to three-month period ended September 30, 2005.

During the three-month period ended September 30, 2006, interest income and fees decreased by $186,566 (11%) as compared to the three-month period ended September 30, 2005.

However, included in interest income and fees during the three-month period ended September 30, 2005 was the mortgage discount income attributable to the St. Luke loan payoff. As previously mentioned, the payment of this loan resulted in a one-time recognition of income in the amount of $395,961.

Without consideration of this item, interest income and fees actually increased by $209,395 or 16%. This increase was primarily attributable to the increase in our loan portfolio.

Also contributing to the increase in interest income and fees during the three-month period ended September 30, 2006 as compared to the three-month period ended September 30, 2005, absent the income from the St. Luke payoff, was the 10 basis point increase in the interest rates on our loan portfolio.

Our net income for the three-month period ended September 30, 2006 was $646,760 ($.06 per share), a decrease of $404,015 (38%) as compared to the three-month period ended September 30, 2005. This decrease is the result of a decrease in net interest income. Net interest income decreased from $1,306,932 for the three-month period ended September 30, 2005 to $860,484 for the three-month period ended September 30, 2006, a decrease of $446,448 (34%). This difference in net interest income for the three-month period ended September 30, 2006 as compared to the three-month period ended September 30, 2005 is caused primarily by the recognition of $395,961 in income from the St. Luke payoff during the three-month period ended September 30, 2005. The increase in interest expense also contributed to the decrease in net interest income.

Not including the St. Luke payoff discussed above, net interest income for the three-month period ended September 30, 2005 was $910,971 as compared to $860,484 for the three-month period ended September 30, 2006, a decrease of $50,487 (6%). This decrease was attributable to the increase in interest expense. Interest expense increased from $424,319 for the three-month period ended September 30, 2005 to $684,201 for the three-month period ended September 30, 2006, an increase of $259,882 or 61%. The increase in our interest expense is attributable to the increase in the weighted average interest rate on our debt and, the increase in the amount of our debt.

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Other income slightly decreased from $25,890 for the three-month period ended September 30, 2005 to $23,139 for the three-month period ended September 30, 2006, a decrease of $2,751 (11%).

Offsetting slightly the decrease in net interest income was a decrease in general and administrative expenses from $269,747 for the three-month period ended September 30, 2005 to $223,563 for the three-month period ended September 30, 2006, a decrease of $46,184 or 17%.

Net income per share decreased from $.10 per share for the three-month period ended September 30, 2005 to $.06 per share for the three-month period ended September 30, 2006. This decrease was attributable to the decrease in our net income discussed above.

Financial Condition —Six-month period ended September 30, 2006 as compared to year ended March 31, 2006

Our portfolio of performing mortgage loans and church bonds decreased from $48,835,293 as of March 31, 2006 to $44,923,477 as of September 30, 2006, a decrease of $3,911,816 (8%). Our portfolio of performing interim loans also decreased during the six-month period ended September 30, 2006 from $20,268,706 to $17,779,159, a decrease of $2,489,547 (12%). All mortgage loans, interim loans and church bonds, both performing and non-performing, decreased from $71,063,449 as of March 31, 2006 to $70,099,127 as of September 30, 2006, a decrease of $964,322 (1%).

Nonperforming mortgage loans, church bonds and interim loans increased from $1,959,450 as of March 31, 2006 to $7,396,491 as of September 30, 2006. This was the result of the classification of six loans as non-performing during the six-month period ended September 30, 2006. Total performing mortgage loans, church bonds and interim loans decreased from $69,103,999 as of March 31, 2006 to $62,702,636 as of September 30, 2006, a decrease of $6,401,363 (9%). Consistent with the decrease in loans, total assets decreased from $71,491,066 as of March 31, 2006 to $70,220,073 as of September 30, 2006, a decrease of $1,270,993 (2%).

Management believes that there is sufficient collateral securing our non-performing loans such that management does not reasonably expect to realize a loss on such loans that has not been adequately reserved for in our allowance for credit losses. Management and the audit committee will continue to monitor these loans and, if necessary, will recommend to the Board of Trust Managers that additional allowances be made.

Our liabilities decreased from $40,523,383 as of March 31, 2006 to $38,752,835 as of September 30, 2006.

Shareholders’ equity increased by $499,555 from March 31, 2006 to September 30, 2006.

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements, including the repayment of borrowings by us, fund loan commitments, maintain investments and meet our general business expenses and needs. Additionally, to maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT taxable income.

We are engaged primarily in the business of making permanent and interim loans to churches and other non-profit organizations, and to other borrowers, including businesses engaged in the building and operation of assisted living centers.

Our assets primarily consist of our loan portfolio, real estate acquired through foreclosure and our office building and facilities. Our operational expenses are comprised of the maintenance of our office building, the payment of the salaries of our management and support staff, office expenses, fees paid to the Board of Trust Managers, the payment for legal and accounting services, and expenses incurred relative to real estate securing our loans or acquired through foreclosure. Substantially all of our assets are invested in the permanent and interim loans. Our only potential liquidity problems relate to the timely and proper repayment of the leveraged funds we have borrowed to make loans in excess of our capital and the ability to fund loan commitments.

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Our primary sources of funds for liquidity consist of cash reserves, net cash provided by operations, payments received from the loans comprising our loan portfolio, and funds available through debt financing, including our line of credit agreement with the Amarillo National Bank.

Our level of liquidity based upon cash and cash equivalents increased by $66,768 during the six-month period ended September 30, 2006 leaving us with cash and cash equivalents of $195,723 as of September 30, 2006. During this same period, we invested $12,186,481 in mortgage and interim construction loans using available cash of $128,955, net cash provided by operating activities in the amount of $1,447,668, principal payments received on our loan portfolio and other notes receivable in the amount of $13,162,514, and proceeds received from the sale of other real estate of approximately $250,607. The total liquidity available to invest in mortgage and interim construction loans was reduced by $715,196 paid in cash dividends during the six-month period ended September 30, 2006 and the excess of $1,892,344 in principal payments on our note payable and line of credit over the amount we borrowed on our notes payable and line of credit.

A substantial portion of our debt obligations outstanding as of September 30, 2006, will mature in fiscal 2008. These debt obligations primarily consist of our bank line of credit and Master Note Agreements. The line of credit is made pursuant to a Loan Agreement dated January 31, 2006 that provides for a line of credit up to $35,000,000, and is for a term of three years, maturing December 31, 2008.

As of September 30, 2006, our total obligations outstanding were $38,752,835. The amount owing on the line of credit as of September 30, 2006 was $18,705,000. It is anticipated that the line of credit will be renewed at the expiration of its three year term. In the event that the bank elects not to renew the line of credit, we may, under the terms of the loan agreement, retire the line of credit over a period of time, not to exceed five years, equal to the weighted average remaining term of a pool of our real estate lien notes which would be pledged to secure the remaining balance of the bank line of credit.

At September 30, 2006, loans to us under Master Note Agreements, which are in effect unsecured demand notes, totaled $18,292,766. In the past, we have utilized our bank line of credit and the principal paid to us upon our outstanding loan portfolio in order to meet our maturing obligations.

Although our cash and cash equivalents as of September 30, 2006 were only $195,723, the balance which could be borrowed by us upon our bank line of credit was $16,295,000. The principal payments scheduled to be received on our loan portfolio for the twelve-month period ending September 30, 2007 and 2008 are $23,257,608 and $2,627,178, respectively. Assuming all of these scheduled principal payments are received, these payments, together with the balance available to us on our bank line of credit, should provide us with sufficient funds to meet our maturing obligations and fund loan commitments without the necessity of borrowing funds from other sources. Based upon our success in obtaining borrowings in the past, we are confident that, should it be necessary, we will be able to obtain additional bank financing in the future in sufficient amounts for us to timely meet all of our obligations.

Should all the scheduled principal payments upon loans not be received, and should we be unable to borrow against our line of credit, and should borrowings from other sources not be available, it would be necessary to sell a portion of our mortgage loan portfolio in order to meet all of our financial obligations. At September 30, 2006, the principal balance of our loan and church bond portfolio was $70,099,127, net of unamortized purchase discounts. The weighted average interest rate on loans and church bonds was 8.12% per annum. In view of the normal marketability of conventional loans, we might be required to discount a majority of these loans in order for them to be attractive for purchase. The principal amount of these loans if discounted to yield a weighted average interest rate of 12%, 14% and 16% would be $47,433,743, $40,657,493, and $35,575,306 respectively. There is no assurance that we would be able to sell all, o r a portion of our portfolio of loans, in which event, it would be necessary to secure a loan, or loans, from a lender in order to meet our financial obligations. There is no assurance that we would be able to secure a loan in such instance. We have sold only one of the loans in our mortgage loan portfolio and, therefore, we have limited experience in this area.

-11-

Principal payments scheduled to be received upon our permanent loan portfolio during the twelve-month period ending September 30, 2007 and 2008, if not used to fund new loan commitments, would be used to reduce our outstanding indebtedness. Should we use the payments of principal which shall be received upon our loan portfolio to reduce our outstanding indebtedness, our interest expense will decrease. In such instance, whether the decrease in the interest income will exceed, or be less than, the decrease in the interest expense will largely be dependent upon the prime rate of interest prevailing at such time due to the fact that the interest to be earned upon our mortgage loan portfolio is generally based upon a fixed rate of interest or a variable rate of interest that periodically reprices, while the interest to be paid by us upon our outstanding debts is directly, or indirectly, tied to the prime rate of interest charged by major domestic banks.

Pursuant to the new agreement with the bank, we have pledged all of our mortgage loans, church bonds and interim construction loans to the bank to secure the line of credit. The amount owing on the line of credit must not exceed an amount equal to 85% of the outstanding principal amount of the performing mortgage loans and church bonds and 50% of the outstanding principal amount of the performing interim construction loans. Applying that borrowing limit to our loan portfolio as of September 30, 2006, we can borrow up to the entire $35,000,000 line of credit limit. However, during the term of the new loan agreement, we would not have the right to sell our loans, without the bank’s consent, since all of our loans have been pledged to the bank to secure the line of credit. Therefore, under our new loan agreement, it will be very difficult, if not impossible, to sell our loans to meet our financial obligations.

Cash flows from operating activities consist primarily of net income. The primary components of net income are interest income and expense. Interest income should continue to be the main source of cash provided by operating activities; however, the availability of this cash flow is dependent upon the ability of the borrowers to repay loans. Cash provided by operating activities has been and is expected to be a relatively stable source of cash flow.

Cash flows from investing activities results primarily from investment in and payments received on mortgage and interim construction loans and church bonds.

Cash flows from financing activities relate primarily to the borrowings and payments on notes payable and the line of credit. Borrowings are made as funds are needed to make loans or as current obligations become due. Based upon our success in obtaining borrowings in the past, we are confident that we will be able to obtain borrowings in the future in sufficient amounts, along with payments to be received on loans, to timely meet our obligations.

Inflation

At September 30, 2006, the weighted average interest rate on our mortgage loan and church bond portfolio was 8.12% per annum while the weighted average interest rate upon all our borrowings was 6.96% per annum. Although a majority of the loans constituting our loan portfolio have been made at variable rates of interest that generally reprice either daily, annually, or otherwise periodically, a portion of the loans constituting our loan portfolio have been made at fixed rates of interest and, therefore, are not subject to being increased or decreased during the term of the loan. All of our indebtedness is either directly or indirectly tied to the rate of interest charged by major banking institutions and, therefore, is subject to fluctuation.

Due to the gradual re-pricing of our mortgage loans, the spread between the weighted average interest rate on our mortgage loans and church bond portfolio and the weighted average interest rate upon our borrowings has decreased from 2.37% as of September 30, 2005 to 1.16% as of September 30, 2006. Based upon our present portfolio of performing mortgage loans and church bonds, this shrinkage of the spread between the interest on such loans and the rate of interest on our debt represents a loss of $223,836 in interest income for the six month period ended September 30, 2006. Further increases in the rate of interest we are paying on our indebtedness before significant re-pricing of our mortgage loans will further shrink such interest rate spread and decrease net interest income. Our interim loans re-price daily and are not subject to a shrinking interest rate margin.

-12-

During periods of inflation, the rate of interest charged by major banking institutions, as well as the interest rate or cost of borrowing money from any lender, generally increases. Consequently, during an inflationary period our interest expense would increase. Since our interest income would not increase as rapidly, an increase in our interest expense would decrease our net income. However, interest income should subsequently increase as variable rate loans reprice. Should the amount of our loans and the amount of our notes payable and line of credit remain constant, and should the weighted average interest rate upon the indebtedness increase to approximately 16.15% per annum, our interest income and interest expense would be substantially equal.

Under the terms of the new line of credit agreement with Amarillo National Bank effective January 1, 2006, the interest rate on our line of credit adjusts, at our option, in accordance with the 30-day, 60-day, 90-day or 180-day London Interbank Offered Rates (“LIBOR”) or the J.P. Morgan Chase & Co. prime rate. The interest rate on our Master Note Agreements adjusts as and when the Prime Rate as published by the Wall Street Journal changes. Most of our loans are made on interest rates that are tied to the Prime Rate as published by the Wall Street Journal or a similar index used by major U.S. banking institutions. Therefore, our cost of funds should be tied to an index that is equal to or less than the index used to price our loan portfolio.

Our Master Note Agreements continue to be tied to the Wall Street Journal Prime Rate of Interest.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements or commitments other than our normal loan commitments.

New Accounting Standards

We do not believe the adoption of any recently issued pronouncements by the Financial Accounting Standards Board will have a significant impact on our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The primary market risk to which we are exposed is the risk associated with interest rate fluctuations as discussed in “Management’s Discussion and Analysis or Plan of Operation – Inflation.”

Item 4. Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer are charged with making an evaluation of our disclosure controls and procedures. These controls and procedures are designed to ensure that information required to be disclosed in reports mandated by the Securities Exchange Act of 1934 is recorded, communicated to management, and accurately reported within the required time periods. Our Chief Executive Officer and Chief Financial Officer have concluded, based upon their evaluation of these controls and procedures as of September 30, 2006, that our disclosure controls and procedures are effective.

There have been no significant changes in our internal controls or in the other factors that could significantly affect these controls subsequent to the date of their evaluation.

Part II. Other Information

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

There have been no material changes to the risk factors as disclosed in our Annual Report on Form 10-KSB for the year ended March 31, 2006.

-13-

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

The annual meeting of shareholders of the Trust was held on August 29, 2006. At such meeting, each of the individuals named below was elected to the Board of Trust Managers of the Trust to serve until the next annual meeting of the shareholders of the Trust:


		Number of Shares
	For		Against
B.R. McMorries	5,249,805		2,732
Larry G. Brown	5,249,477		3,060
Jack R. Vincent	5,249,805		2,732
Steven Rogers	5,249,805		2,732
Michael A. Bahn	5,249,805		2,732
Alfred J. Smith	5,249,805		2,732
Michael W. Borger	5,249,805		2,732

Additionally, shareholders voted to ratify Clifton Gunderson LLP as auditors for the year ending March 31, 2007 as follows:


For	5,202,709
Against	2,700
Abstain	47,128

Item 5. Other Information.

None

Item 6. Exhibits

The Exhibits listed on the accompanying Index to Exhibits are filed as a part of this Quarterly Report.

-14-


CHURCH LOANS & INVESTMENTS TRUST (A Real Estate Investment Trust) INDEX TO EXHIBITS Item 6
(2)	None
(3)	Amended and Restated Declaration of Trust dated July 16, 2004, previously filed as an exhibit to the Trust’s Definitive Proxy Statement, Form DEF 14A, dated June 25, 2004 (File No. 000-08117) and is incorporated by reference.

	Amended and Restated Bylaws dated July 16, 2004, previously filed as an exhibit to the Trust’s Definitive Proxy Statement, Form DEF 14A, dated June 25, 2004 (File No. 000-08117) and is incorporated by reference.
(4)	None other than those listed in (3) above.
(9)	None
(10)	Loan Agreement dated January 31, 2006 entered into by and between Church Loans & Investments Trust and Amarillo National Bank included as an exhibit to Issuer’s Form 10-QSB for the quarterly period ended December 31, 2005, under File No. 000-08117 and is incorporated by reference.
(11)	Statement regarding computation of per share earnings-omitted since information necessary to make the computation is included in the Financial Statements.
(13)	None
(14)	None
(16)	None
(18)	None
(20)	None
(21)	None
(23)	None
(24)	None
(31.1)	Certification of President (Principal Executive Officer and CEO) Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
(31.2)	Certification of Senior Vice-President and CFO (Principal Financial Officer) Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
(32)	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

-15-



SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			CHURCH LOANS & INVESTMENTS TRUST

				By:	/s/ B.R. McMorries
					B.R. McMorries Chairman of the Board of Trust Managers

DATE: November 13, 2006

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


	Signature	Capacity				Date

	/s/ B.R. McMorries B.R. McMorries	Chairman of the Board of Trust Managers				11-13-06

	/s/ Larry G. Brown Larry G. Brown	Vice-Chairman of the Board of Trust Managers				11-13-06

	/s/ Alfred J. Smith Alfred J. Smith	Secretary of the Board of Trust Managers				11-13-06

	/s/ M. Kelly Archer M. Kelly Archer	President and CEO				11-13-06

	/s/ Robert E. Fowler Robert E. Fowler	Senior Vice-President and Chief Financial Officer				11-13-06

	/s/ Jack R. Vincent Jack R. Vincent	Trust Manager				11-13-06

	/s/ Steven Rogers Steven Rogers	Trust Manager				11-13-06

	/s/ Michael A. Bahn Michael A. Bahn	Trust Manager				11-13-06

	/s/ Michael W. Borger Michael W. Borger	Trust Manager				11-13-06

-16-

Service Mark and Copyright Notice

Copyright © 2006 by Church Loans & Investments Trust
This report is copyrighted material of
Church Loans & Investments Trust.

Church Loans & Investments Trust is a service mark
of the Trustees of Church Loans & Investments Trust.

The unauthorized use of the service marks and copyrights
of Church Loans & Investments Trust without the express,
written permission of Church Loans & Investments Trust,
is strictly prohibited. All rights reserved.

-17-




Commission File No. 0-8117

____________

CHURCH LOANS & INVESTMENTS TRUST					^®

(Exact name of registrant as specified in its charter)


Texas				75-6030254
(State or other jurisdiction of incorporation or organization)				(IRS Employer Identification No.)

5305 W Interstate 40, Amarillo, Texas				79106-4759
(Address of principal executive office)				(Zip Code)

(806) 358-3666
(Issuer’s telephone number including area code)

Not Applicable
(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 x No £

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 £	Accelerated filer £		Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes £ No x

Class		Outstanding at November 13, 2006
Common Stock, $0.00 par value per share		10,217,094


EXHIBIT 31.1 CERTIFICATION OF PRESIDENT (PRINCIPAL EXECUTIVE OFFICER AND CEO) PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)



I, Kelly Archer, President and Chief Executive Officer of Church Loans & Investments Trust, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Church Loans & Investments Trust;

2.	Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;

3.	Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

	(a)	Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

	(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and

	(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Trust Managers:

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	Dated: November 13, 2006		/s/ Kelly Archer Kelly Archer, President & CEO


EXHIBIT 31.2 CERTIFICATION OF SENIOR VICE-PRESIDENT AND CFO (PRINCIPAL FINANCIAL OFFICER) PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)



I, Robert Fowler, Senior Vice-President and CFO of Church Loans & Investments Trust certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Church Loans & Investments Trust;

2.	Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;

3.	Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

	(a)	Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

	(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and

	(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Trust Managers:

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	Dated: November 13, 2006		/s/ Robert E. Fowler Robert E. Fowler, Senior Vice President and CFO


EXHIBIT 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


November 13, 2006

In connection with the filing of the Quarterly Report on Form 10-Q of Church Loans & Investments Trust, a Texas real estate investment trust, (“the Trust”), for the period ending September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (“the Report”), each of the undersigned officers of the Trust certifies that, to the best of the officer’s knowledge:

	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and;

	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust as of the dates and for the periods expressed in the Report


			/s/ Kelly Archer Kelly Archer President and CEO (Principal Executive Officer) /s/ Robert E. Fowler Robert E. Fowler Senior Vice-President and CFO (Principal Financial Officer)