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EX-32 - EXHIBIT 32 - CAVCO INDUSTRIES INC.a20160702-exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - CAVCO INDUSTRIES INC.a20160702-exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - CAVCO INDUSTRIES INC.a20160702-exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - CAVCO INDUSTRIES INC.a20160702-exhibit101.htm

 

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 THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to

Commission File Number 000-08822
 
Cavco Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware
56-2405642
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1001 North Central Avenue, Suite 800
Phoenix, Arizona 85004
(Address of principal executive offices, including zip code)
602-256-6263
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last year)
 

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  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of August 5, 2016, 8,971,814 shares of Registrant's Common Stock, $.01 par value, were outstanding.
 





CAVCO INDUSTRIES, INC.
FORM 10-Q
July 2, 2016
TABLE OF CONTENTS




PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CAVCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
July 2,
2016
 
April 2,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
102,494

 
$
97,766

Restricted cash, current
10,133

 
10,218

Accounts receivable, net
28,329

 
29,113

Short-term investments
9,419

 
10,140

Current portion of consumer loans receivable, net
22,513

 
21,918

Current portion of commercial loans receivable, net
5,037

 
3,557

Inventories
94,796

 
94,813

Prepaid expenses and other current assets
23,908

 
22,196

Deferred income taxes, current
9,216

 
8,998

Total current assets
305,845

 
298,719

Restricted cash
1,097

 
1,082

Investments
29,108

 
28,948

Consumer loans receivable, net
65,921

 
67,640

Commercial loans receivable, net
22,070

 
21,985

Property, plant and equipment, net
56,105

 
55,072

Goodwill and other intangibles, net
80,297

 
80,389

Total assets
$
560,443

 
$
553,835

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
18,952

 
$
18,513

Accrued liabilities
102,703

 
100,314

Current portion of securitized financings and other
5,742

 
6,262

Total current liabilities
127,397

 
125,089

Securitized financings and other
53,725

 
54,909

Deferred income taxes
20,678

 
20,611

 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, $.01 par value; 1,000,000 shares authorized; No shares issued or outstanding

 

Common stock, $.01 par value; 40,000,000 shares authorized; Outstanding 8,970,314 and 8,927,989 shares, respectively
90

 
89

Additional paid-in capital
241,690

 
241,662

Retained earnings
115,629

 
110,186

Accumulated other comprehensive income
1,234

 
1,289

Total stockholders' equity
358,643

 
353,226

Total liabilities and stockholders' equity
$
560,443

 
$
553,835

See accompanying Notes to Consolidated Financial Statements

1


CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended
 
July 2,
2016
 
June 27,
2015
Net revenue
$
185,141

 
$
161,668

Cost of sales
151,889

 
129,834

Gross profit
33,252

 
31,834

Selling, general and administrative expenses
24,687

 
22,659

Income from operations
8,565

 
9,175

Interest expense
(1,161
)
 
(1,015
)
Other income, net
1,026

 
472

Income before income taxes
8,430

 
8,632

Income tax expense
(2,987
)
 
(3,247
)
Net income
$
5,443

 
$
5,385

 
 
 
 
Comprehensive income:
 
 
 
Net income
$
5,443

 
$
5,385

Unrealized loss on available-for-sale securities, net of tax
(55
)
 
(409
)
Comprehensive income
$
5,388

 
$
4,976

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.61

 
$
0.61

Diluted
$
0.60

 
$
0.60

Weighted average shares outstanding:
 
 
 
Basic
8,937,265

 
8,863,648

Diluted
9,085,042

 
9,020,261


See accompanying Notes to Consolidated Financial Statements

2


CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Three Months Ended
 
July 2,
2016
 
June 27,
2015
OPERATING ACTIVITIES
 
 
 
Net income
$
5,443

 
$
5,385

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
946

 
934

Provision for credit losses
85

 
232

Deferred income taxes
(91
)
 
418

Stock-based compensation expense
370

 
331

Non-cash interest income, net
(315
)
 
(526
)
Incremental tax benefits from option exercises
(1,946
)
 
(167
)
Gain on sale of property, plant and equipment including assets held for sale, net
(22
)
 
(16
)
Gain on sale of loans and investments, net
(2,171
)
 
(1,536
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
(296
)
 
320

Accounts receivable
791

 
4,162

Consumer loans receivable originated
(25,622
)
 
(29,045
)
Principal payments on consumer loans receivable
3,007

 
2,416

Proceeds from sales of consumer loans
25,800

 
28,491

Inventories
17

 
(6,008
)
Prepaid expenses and other current assets
(1,176
)
 
(2,513
)
Commercial loans receivable
(1,572
)
 
(4,503
)
Accounts payable and accrued liabilities
4,953

 
5,568

Net cash provided by operating activities
8,201

 
3,943

INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(1,890
)
 
(526
)
Purchase of certain assets and liabilities of Fairmont Homes and Chariot Eagle

 
(27,120
)
Proceeds from sale of property, plant and equipment including assets held for sale
25

 
26

Purchases of investments
(2,440
)
 
(4,485
)
Proceeds from sale of investments
3,093

 
2,914

Net cash used in investing activities
(1,212
)
 
(29,191
)
FINANCING ACTIVITIES
 
 
 
(Payments) Proceeds from exercise of stock options
(2,287
)
 
70

Incremental tax benefits from exercise of stock options
1,946

 
167

Proceeds from secured financings and other
294

 
447

Payments on securitized financings
(2,214
)
 
(1,817
)
Net cash used in financing activities
(2,261
)
 
(1,133
)
Net increase (decrease) in cash and cash equivalents
4,728

 
(26,381
)
Cash and cash equivalents at beginning of the period
97,766

 
96,597

Cash and cash equivalents at end of the period
$
102,494

 
$
70,216

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the year for income taxes
$
3,734

 
$
3,237

Cash paid during the year for interest
$
904

 
$
978

See accompanying Notes to Consolidated Financial Statements

3


CAVCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Cavco Industries, Inc., and its subsidiaries (collectively, the "Company" or "Cavco"), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for Quarterly Reports on Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, these statements include all of the normal recurring adjustments necessary to fairly state the Company's Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform to current period classification. The Company has evaluated subsequent events after the balance sheet date through the date of the filing of this report with the SEC; there were no disclosable subsequent events. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended April 2, 2016, filed with the SEC on June 21, 2016.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes. Actual results could differ from those estimates. The Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows for the interim periods are not necessarily indicative of the results or cash flows for the full year. The Company operates on a 52-53 week fiscal year ending on the Saturday nearest to March 31 of each year. Each fiscal quarter consists of 13 weeks, with an occasional fourth quarter extending to 14 weeks, if necessary, for the fiscal year to end on the Saturday nearest to March 31. The Company's current fiscal year will end on April 1, 2017.
The Company operates principally in two segments: (1) factory-built housing, which includes wholesale and retail systems-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance. The Company designs and builds a wide variety of affordable modular homes, manufactured homes and park model RVs in 19 factories located throughout the United States, which are sold to a network of independent retailers, through the Company's 45 Company-owned retail stores and to community owners and developers. Our financial services group is comprised of a mortgage subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), and an insurance subsidiary, Standard Casualty Co. ("Standard Casualty"). CountryPlace is an approved Federal National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") seller/servicer, and a Government National Mortgage Association ("GNMA" or "Ginnie Mae") mortgage backed securities issuer which offers conforming mortgages, non-conforming mortgages and chattel loans to purchasers of factory-built and site-built homes. Standard Casualty provides property and casualty insurance to owners of manufactured homes.

4


Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of the new revenue standard. Accordingly, the updated standard is effective for us beginning with the first quarter of the Company's fiscal year 2019, with early application permitted in fiscal year 2018. The standard allows for either "full retrospective" adoption, meaning the standard is applied to all of the periods presented, or "modified retrospective" adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is currently evaluating the effect ASU 2014-09 will have on the Company's Consolidated Financial Statements and disclosures.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 will be effective beginning with the Company's fiscal year 2019 annual report and interim periods thereafter, with early adoption permitted. In this update, entities are required to present all deferred tax liabilities and assets as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The standard can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. As this standard impacts presentation only, the adoption of ASU 2015-17 is not expected to have an impact on the Company's financial condition, results of operations or cash flows.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2019. The amendments require certain equity investments to be measured at fair value, with changes in the fair value recognized through net income. The Company is currently evaluating the effect ASU 2016-01 will have on the Company's Consolidated Financial Statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 will be effective beginning with the first quarter of the Company's fiscal year 2020, with early adoption permitted. The amendments require the recognition of lease assets and lease liabilities on the balance sheet for most leases, but recognize expenses in the income statement in a manner similar to current accounting treatment. In addition, disclosures of key information about leasing arrangements are required. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect ASU 2016-02 will have on the Company's Consolidated Financial Statements and disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation- Stock Compensation (Topic 718) ("ASU 2016-09"). ASU 2016-09 will be effective beginning with the first quarter of the Company's fiscal year 2018, with early adoption permitted. The amendment simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company is currently evaluating the effect ASU 2016-09 will have on the Company's Consolidated Financial Statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, which requires a new forward-looking impairment model based on expected losses rather than incurred losses. The guidance also requires increased disclosures. ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2021. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's Consolidated Financial Statements and disclosures.

5


From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted by the Company as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's Consolidated Financial Statements upon adoption.
For a description of other significant accounting policies used by the Company in the preparation of its Consolidated Financial Statements, please refer to Note 1 of the Notes to Consolidated Financial Statements in the Form 10-K.
2. Restricted Cash
Restricted cash consists of the following (in thousands):
 
July 2,
2016
 
April 2,
2016
Cash related to CountryPlace customer payments to be remitted to third parties
$
8,651

 
$
8,419

Cash related to CountryPlace customer payments on securitized loans to be remitted to bondholders
1,381

 
1,747

Cash related to workers' compensation insurance held in trust
728

 
728

Other restricted cash
470

 
406

 
$
11,230

 
$
11,300

Corresponding amounts are recorded in accounts payable and accrued liabilities for customer payments, deposits and other restricted cash.

6


3. Investments
Investments consist of the following (in thousands):
 
July 2,
2016
 
April 2,
2016
Available-for-sale investment securities
$
23,763

 
$
24,247

Non-marketable equity investments
14,764

 
14,841

 
$
38,527

 
$
39,088

The following tables summarize the Company's available-for-sale investment securities, gross unrealized gains and losses and fair value, aggregated by investment category (in thousands):
 
July 2, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury and government debt securities
$
650

 
$
1

 
$

 
$
651

Residential mortgage-backed securities
5,680

 
19

 
(49
)
 
5,650

State and political subdivision debt securities
7,914

 
291

 
(65
)
 
8,140

Corporate debt securities
911

 
8

 
(3
)
 
916

Marketable equity securities
5,619

 
2,138

 
(351
)
 
7,406

Certificates of deposit
1,000

 

 

 
1,000

 
$
21,774

 
$
2,457

 
$
(468
)
 
$
23,763


 
April 2, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury and government debt securities
$
1,002

 
$

 
$
(3
)
 
$
999

Residential mortgage-backed securities
5,866

 
13

 
(60
)
 
5,819

State and political subdivision debt securities
7,231

 
239

 
(49
)
 
7,421

Corporate debt securities
1,166

 
4

 
(6
)
 
1,164

Marketable equity securities
5,882

 
2,374

 
(412
)
 
7,844

Certificates of deposit
1,000

 

 

 
1,000

 
$
22,147

 
$
2,630

 
$
(530
)
 
$
24,247


7


The following tables show the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
 
July 2, 2016
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Residential mortgage-backed securities
$
3,036

 
$
(18
)
 
$
493

 
$
(31
)
 
$
3,529

 
$
(49
)
State and political subdivision debt securities
1,852

 
(29
)
 
1,734

 
(36
)
 
3,586

 
(65
)
Corporate debt securities

 

 
249

 
(3
)
 
249

 
(3
)
Marketable equity securities
1,792

 
(247
)
 
184

 
(104
)
 
1,976

 
(351
)
 
$
6,680

 
$
(294
)
 
$
2,660

 
$
(174
)
 
$
9,340

 
$
(468
)

 
April 2, 2016
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. Treasury and government debt securities
$

 
$

 
$
699

 
$
(3
)
 
$
699

 
$
(3
)
Residential mortgage-backed securities
3,436

 
(27
)
 
898

 
(33
)
 
4,334

 
(60
)
State and political subdivision debt securities
1,865

 
(29
)
 
1,257

 
(20
)
 
3,122

 
(49
)
Corporate debt securities
763

 
(6
)
 

 

 
763

 
(6
)
Marketable equity securities
1,780

 
(324
)
 
152

 
(88
)
 
1,932

 
(412
)
 
$
7,844

 
$
(386
)
 
$
3,006

 
$
(144
)
 
$
10,850

 
$
(530
)
Based on the Company's ability and intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any investments to be other-than-temporarily impaired at July 2, 2016.
As of July 2, 2016, the Company's investments in marketable equity securities consist of investments in common stock of industrial and other companies ($7.3 million of the total fair value and $348,000 of the total unrealized losses) and bank trust, insurance and public utility companies ($100,000 of the total fair value and $3,000 of the total unrealized losses).
As of April 2, 2016, the Company's investments in marketable equity securities consisted of investments in common stock of industrial and other companies ($7.7 million of the total fair value and $409,000 of the total unrealized losses) and bank trust, insurance and public utility companies ($100,000 of the total fair value and $3,000 of the total unrealized losses).

8


The amortized cost and fair value of the Company's investments in debt securities, by contractual maturity, are shown in the table below (in thousands). Expected maturities differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
July 2, 2016
 
Amortized
Cost
 
Fair
Value
Due in less than one year
$
1,015

 
$
1,013

Due after one year through five years
3,199

 
3,216

Due after five years through ten years
3,680

 
3,628

Due after ten years
7,261

 
7,500

 
$
15,155

 
$
15,357

Realized gains and losses from the sale of securities are determined using the specific identification method. Gross gains realized on the sales of investment securities for the three months ended July 2, 2016 were approximately $453,000. Gross losses realized were approximately $149,000 for the three months ended July 2, 2016. Gross gains realized on the sales of investment securities for the three months ended June 27, 2015 were approximately $180,000. Gross losses realized were approximately $46,000 for the three months ended June 27, 2015.
4. Inventories
Inventories consist of the following (in thousands):
 
July 2,
2016
 
April 2,
2016
Raw materials
$
29,403

 
$
28,764

Work in process
11,079

 
10,755

Finished goods and other
54,314

 
55,294

 
$
94,796

 
$
94,813

5. Consumer Loans Receivable
The Company acquired consumer loans receivable during the first quarter of fiscal 2012 as part of the Palm Harbor transaction. Acquired consumer loans receivable held for investment were acquired at fair value and subsequently are accounted for in accordance with Accounting Standards Codification ("ASC") 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). Consumer loans receivable held for sale are carried at the lower of cost or market and construction advances are carried at the amount advanced less a valuation allowance. The following table summarizes consumer loans receivable (in thousands):
 
July 2,
2016
 
April 2,
2016
Loans held for investment (acquired on Palm Harbor Acquisition Date)
$
66,968

 
$
68,951

Loans held for investment (originated after Palm Harbor Acquisition Date)
6,236

 
6,120

Loans held for sale
10,388

 
8,765

Construction advances
5,685

 
6,566

Consumer loans receivable
89,277

 
90,402

Deferred financing fees and other, net
(843
)
 
(844
)
Consumer loans receivable, net
$
88,434

 
$
89,558


9


As of the date of the Palm Harbor acquisition, management evaluated consumer loans receivable held for investment by CountryPlace to determine whether there was evidence of deterioration of credit quality and if it was probable that CountryPlace would be unable to collect all amounts due according to the loans' contractual terms. The Company also considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows. The Company determined the excess of the loan pool's scheduled contractual principal and contractual interest payments over all cash flows expected as of the date of the Palm Harbor transaction as an amount that cannot be accreted into interest income (the non-accretable difference). The cash flow expected to be collected in excess of the carrying value of the acquired loans is accreted into interest income over the remaining life of the loans (referred to as accretable yield). Interest income on consumer loans receivable is recognized as net revenue.
 
July 2,
2016
 
April 2,
2016
 
(in thousands)
Consumer loans receivable held for investment – contractual amount
$
161,570

 
$
166,793

Purchase discount
 
 
 
Accretable
(66,284
)
 
(69,053
)
Non-accretable
(27,987
)
 
(28,536
)
Less consumer loans receivable reclassified as other assets
(331
)
 
(253
)
Total acquired consumer loans receivable held for investment, net
$
66,968

 
$
68,951

Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected by CountryPlace. As of the balance sheet date, the Company evaluates whether the present value of expected cash flows, determined using the effective interest rate, has decreased from the value at acquisition and, if so, recognizes an allowance for loan loss. The present value of any subsequent increase in the loan pool's actual cash flows expected to be collected is used first to reverse any existing allowance for loan loss. Any remaining increase in cash flows expected to be collected adjusts the amount of accretable yield recognized on a prospective basis over the loan pool's remaining life. The weighted averages of assumptions used in the calculation of expected cash flows to be collected are as follows:
 
July 2,
2016
 
April 2,
2016
Prepayment rate
13.0
%
 
13.0
%
Default rate
1.0
%
 
1.0
%
Assuming there was a 1% unfavorable variation from the expected level, for each key assumption, the expected cash flows for the life of the portfolio, as of July 2, 2016, would decrease by approximately $2.3 million and $5.8 million for the expected prepayment rate and expected default rate, respectively.
The changes in accretable yield on acquired consumer loans receivable held for investment were as follows (in thousands):
 
Three Months Ended
 
July 2,
2016
 
June 27,
2015
Balance at the beginning of the period
$
69,053

 
$
73,202

Accretion
(2,515
)
 
(2,751
)
Reclassifications from non-accretable discount
(254
)
 
(190
)
Balance at the end of the period
$
66,284

 
$
70,261


10


The consumer loans held for investment have the following characteristics:
 
July 2,
2016
 
April 2,
2016
Weighted average contractual interest rate
9.01
%
 
9.05
%
Weighted average effective interest rate
9.31
%
 
9.39
%
Weighted average months to maturity
168

 
170

The Company's consumer loans receivable balance consists of fixed-rate, fixed-term and fully-amortizing single-family home loans. These loans are either secured by a manufactured home, excluding the land upon which the home is located (chattel property loans and retail installment sale contracts), or by a combination of the home and the land upon which the home is located (real property mortgage loans). The real property mortgage loans are primarily for manufactured homes. Combined land and home loans are further disaggregated by the type of loan documentation: those conforming to the requirements of Government-Sponsored Enterprises ("GSEs"), and those that are non-conforming. In most instances, CountryPlace's loans are secured by a first-lien position and are provided for the consumer purchase of a home. In rare instances, CountryPlace may provide other types of loans in second-lien or unsecured positions. Accordingly, CountryPlace classifies its loans receivable as follows: chattel loans, conforming mortgages, non-conforming mortgages and other loans.
In measuring credit quality within each segment and class, CountryPlace uses commercially available credit scores (such as FICO®). At the time of each loan's origination, CountryPlace obtains credit scores from each of the three primary credit bureaus, if available. To evaluate credit quality of individual loans, CountryPlace uses the mid-point of the available credit scores or, if only two scores are available, the Company uses the lower of the two. CountryPlace does not update credit bureau scores after the time of origination.

11


The following table disaggregates CountryPlace's gross consumer loans receivable for each class by portfolio segment and credit quality indicator as of the time of origination (in thousands):
July 2, 2016
 
Consumer Loans Held for Investment
 
 
 
 
 
 
 
Securitized
2005
 
Securitized
2007
 
Unsecuritized
 
Construction
Advances
 
Consumer Loans Held
For Sale
 
Total
Asset Class
 
 
 
 
 
 
 
 
 
 
 
Credit Quality Indicator (FICO® score)
 
 
 
 
 
 
 
 
Chattel loans
 
 
 
 
 
 
 
 
 
 
 
0-619
$
758

 
$
515

 
$
324

 
$

 
$
42

 
$
1,639

620-719
12,844

 
8,811

 
3,795

 

 
46

 
25,496

720+
14,135

 
9,055

 
2,304

 

 
754

 
26,248

Other
54

 

 
443

 

 

 
497

Subtotal
27,791

 
18,381

 
6,866

 

 
842

 
53,880

Conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619

 

 
163

 
135

 
294

 
592

620-719

 

 
1,530

 
3,781

 
6,438

 
11,749

720+

 

 
193

 
1,769

 
2,814

 
4,776

Subtotal

 

 
1,886

 
5,685

 
9,546

 
17,117

Non-conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619
87

 
578

 
1,373

 

 

 
2,038

620-719
1,350

 
5,242

 
3,635

 

 

 
10,227

720+
1,633

 
3,348

 
714

 

 

 
5,695

Other

 

 
307

 

 

 
307

Subtotal
3,070

 
9,168

 
6,029

 

 

 
18,267

Other loans
 
 
 
 
 
 
 
 
 
 
Subtotal

 

 
13

 

 

 
13

 
$
30,861

 
$
27,549

 
$
14,794

 
$
5,685

 
$
10,388

 
$
89,277


12


 
April 2, 2016
 
Consumer Loans Held for Investment
 
 
 
 
 
 
 
Securitized
2005
 
Securitized
2007
 
Unsecuritized
 
Construction
Advances
 
Consumer Loans Held
For Sale
 
Total
Asset Class
 
 
 
 
 
 
 
 
 
 
 
Credit Quality Indicator (FICO® score)
 
 
 
 
 
 
 
 
Chattel loans
 
 
 
 
 
 
 
 
 
 
 
0-619
$
776

 
$
543

 
$
336

 
$

 
$

 
$
1,655

620-719
13,139

 
9,100

 
3,683

 

 
96

 
26,018

720+
14,751

 
9,409

 
2,324

 

 
215

 
26,699

Other
55

 

 
447

 

 

 
502

Subtotal
28,721

 
19,052

 
6,790

 

 
311

 
54,874

Conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619

 

 
164

 
95

 
171

 
430

620-719

 

 
1,428

 
3,355

 
5,847

 
10,630

720+

 

 
320

 
3,116

 
2,436

 
5,872

Subtotal

 

 
1,912

 
6,566

 
8,454

 
16,932

Non-conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619
88

 
585

 
1,392

 

 

 
2,065

620-719
1,365

 
5,290

 
3,664

 

 

 
10,319

720+
1,684

 
3,382

 
826

 

 

 
5,892

Other

 

 
307

 

 

 
307

Subtotal
3,137

 
9,257

 
6,189

 

 

 
18,583

Other loans
 
 
 
 
 
 
 
 
 
 
 
Subtotal

 

 
13

 

 

 
13

 
$
31,858

 
$
28,309

 
$
14,904

 
$
6,566

 
$
8,765

 
$
90,402


Loan contracts secured by collateral that is geographically concentrated could experience higher rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. Thirty-nine percent of the outstanding principal balance of consumer loans receivable portfolio is concentrated in Texas and 10% is concentrated in Florida. Other than Texas and Florida, no other state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of July 2, 2016.
Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell. At repossession, the fair value of the collateral is computed based on the historical recovery rates of previously charged-off loans; the loan is charged off and the loss is charged to the allowance for loan losses. On a monthly basis, the fair value of the collateral is adjusted to the lower of the amount recorded at repossession or the estimated sales price less estimated costs to sell, based on current information. Repossessed homes totaled approximately $953,000 and $707,000 as of July 2, 2016 and April 2, 2016, respectively, and are included in prepaid and other assets in the consolidated balance sheet. Foreclosure or similar proceedings in progress totaled approximately $370,000 and $340,000 as of July 2, 2016 and April 2, 2016, respectively.

13


6. Commercial Loans Receivable and Allowance for Loan Loss
The Company's commercial loans receivable balance consists of two classes: (i) direct financing arrangements for the home product needs of our independent retailers, communities and developers; and (ii) amounts loaned by the Company under participation financing programs.
Under the terms of the direct programs, the Company provides funds for the independent retailers, communities and developers' financed home purchases. The notes are secured by the home as collateral and, in some instances, other security depending on the circumstances. The other terms of direct arrangements vary depending on the needs of the borrower and the opportunity for the Company.
Under the terms of the participation programs, the Company provides loans to independent floor plan lenders, representing a significant portion of the funds that such financiers then lend to retailers to finance their inventory purchases. The participation commercial loan receivables are unsecured general obligations of the independent floor plan lenders.
Commercial loans receivables, net, consist of the following by class of financing notes receivable (in thousands):
 
July 2,
2016
 
April 2,
2016
Direct loans receivable
$
26,085

 
$
24,392

Participation loans receivable
1,157

 
1,278

Allowance for loan loss
(135
)
 
(128
)
 
$
27,107

 
$
25,542

The commercial loans receivable balance has the following characteristics:
 
July 2,
2016
 
April 2,
2016
Weighted average contractual interest rate
6.8
%
 
6.9
%
Weighted average months to maturity
10

 
9

The Company evaluates the potential for loss from its participation loan programs based on the independent lender's overall financial stability, as well as historical experience, and has determined that an applicable allowance for loan loss was not needed at either July 2, 2016 or April 2, 2016.
With respect to direct programs with communities and developers, borrower activity is monitored on a regular basis and contractual arrangements are in place to provide adequate loss mitigation in the event of a default. For direct programs with independent retailers, the risk of loss is spread over numerous borrowers. Borrower activity is monitored in conjunction with third-party service providers, where applicable, to estimate the potential for loss on the related notes receivable, considering potential exposures, including repossession costs, remarketing expenses, impairment of value and the risk of collateral loss. The Company has historically been able to resell repossessed unused homes, thereby mitigating loss experience. If a default occurs and collateral is lost, the Company is exposed to loss of the full value of the home loan. If the Company determines that it is probable that a borrower will default, a specific reserve is determined and recorded within the estimated allowance for loan loss. The Company recorded an allowance for loan loss of $135,000 and $82,000 at July 2, 2016 and June 27, 2015, respectively.

14


The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan loss applicable to the direct programs (in thousands):
 
Three Months Ended
 
July 2,
2016
 
June 27,
2015
Balance at beginning of period
$
128

 
$
73

Provision for inventory finance credit losses
7

 
9

Loans charged off, net of recoveries

 

Balance at end of period
$
135

 
$
82

The following table disaggregates commercial loans receivable and the estimated allowance for loan loss for each class of financing receivable by evaluation methodology (in thousands):
 
Direct Commercial Loans
 
Participation Commercial Loans
 
July 2,
2016
 
April 2,
2016
 
July 2,
2016
 
April 2,
2016
Inventory finance notes receivable:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
13,485

 
$
12,761

 
$

 
$

Individually evaluated for impairment
12,600

 
11,631

 
1,157

 
1,278

 
$
26,085

 
$
24,392

 
$
1,157

 
$
1,278

Allowance for loan loss:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
(135
)
 
$
(128
)
 
$

 
$

Individually evaluated for impairment

 

 

 

 
$
(135
)
 
$
(128
)
 
$

 
$

Loans are subject to regular review and are given management's attention whenever a problem situation appears to be developing. Loans with indicators of potential performance problems are placed on watch list status and are subject to additional monitoring and scrutiny. Nonperforming status includes loans accounted for on a non-accrual basis and accruing loans with principal payments past due 90 days or more. The Company's policy is to place loans on nonaccrual status when interest is past due and remains unpaid 90 days or more or when there is a clear indication that the borrower has the inability or unwillingness to meet payments as they become due. The Company will resume accrual of interest once these factors have been remedied. At July 2, 2016, there are no commercial loans that are 90 days or more past due that are still accruing interest. Payments received on nonaccrual loans are recorded on a cash basis, first to interest and then to principal. At July 2, 2016, the Company was not aware of any potential problem loans that would have a material effect on the commercial receivables balance. Charge-offs occur when it becomes probable that outstanding amounts will not be recovered.
The following table disaggregates the Company's inventory finance receivables by class and credit quality indicator (in thousands):
 
Direct Commercial Loans
 
Participation Commercial Loans
 
July 2,
2016
 
April 2,
2016
 
July 2,
2016
 
April 2,
2016
Risk profile based on payment activity:
 
 
 
 
 
 
 
Performing
$
26,085

 
$
24,392

 
$
1,157

 
$
1,278

Watch list

 

 

 

Nonperforming

 

 

 

 
$
26,085

 
$
24,392

 
$
1,157

 
$
1,278


15


The Company has concentrations of commercial loans receivable related to factory-built homes located in the following states, measured as a percentage of commercial loans receivables principal balance outstanding:
 
July 2,
2016
 
April 2,
2016
Texas
30.3
%
 
33.2
%
Arizona
10.7
%
 
13.3
%
The risks created by these concentrations have been considered in the determination of the adequacy of the allowance for loan losses. The Company did not have concentrations in excess of 10% of the principal balance of the commercial loans receivables in any other states as of July 2, 2016 or April 2, 2016, respectively.
As of July 2, 2016 and April 2, 2016, the Company had concentrations of commercial loans receivable with one independent third-party and its affiliates that equaled 29.3% and 32.0% of the principal balance outstanding, respectively, all of which was secured.
7. Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of each asset. Estimated useful lives for significant classes of assets are as follows: (i) buildings and improvements, 10 to 39 years, and (ii) machinery and equipment, 3 to 25 years. Repairs and maintenance charges are expensed as incurred. Property, plant and equipment consist of the following (in thousands):
 
July 2,
2016
 
April 2,
2016
Property, plant and equipment, at cost:
 
 
 
Land
$
22,719

 
$
22,719

Buildings and improvements
33,187

 
32,230

Machinery and equipment
20,397

 
19,533

 
76,303

 
74,482

Accumulated depreciation
(20,198
)
 
(19,410
)
Property, plant and equipment, net
$
56,105

 
$
55,072

Included in the amounts above are certain assets under a capital lease. See Note 8 for additional information.
8. Capital Leases
On May 1, 2015, in connection with the purchase of Fairmont Homes, the Company entered into a five-year lease covering the manufacturing facilities and land in Montevideo, Minnesota, which is accounted for as a capital lease. At the end of the lease term, the landlord has the option to require the Company to purchase the leased premises at a specified price. If the landlord does not exercise this option, the Company may purchase the facilities at the termination of the lease for that price. The following amounts were recorded for the leased assets as of July 2, 2016 and April 2, 2016 (in thousands):
 
July 2,
2016
 
April 2,
2016
Land
$
240

 
$
240

Buildings and improvements
2,960

 
2,960

 
3,200

 
3,200

Accumulated amortization
(115
)
 
(90
)
Leased assets, net
$
3,085

 
$
3,110


16


The minimum payments in future fiscal years under the lease as of July 2, 2016 are as follows (in thousands):
2017
$
216

2018
277

2019
265

2020
253

2021
1,721

Total remaining lease payments
2,732

Less: Amount representing interest
(388
)
Present value of future minimum lease payments
$
2,344

9. Goodwill and Other Intangibles
Intangible assets principally consist of goodwill, trademarks and trade names, state insurance licenses, customer relationships, and other, which includes technology, insurance policies and renewal rights and other. Goodwill, trademarks and trade names and state insurance licenses are indefinite-lived intangible assets and are evaluated for impairment annually and whenever events or circumstances indicate that more likely than not impairment has occurred. During the three months ended July 2, 2016 and June 27, 2015, no impairment expense was recorded. Finite-lived intangibles are amortized over their estimated useful lives on a straight-line basis and are reviewed for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. The value of customer relationships is amortized over 4 to 15 years and other intangibles over 7 to 15 years.
Goodwill and other intangibles consist of the following (in thousands):
 
July 2, 2016
 
April 2, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Indefinite lived:
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
69,753

 
$

 
$
69,753

 
$
69,753

 
$

 
$
69,753

Trademarks and trade names
7,000

 

 
7,000

 
7,000

 

 
7,000

State insurance licenses
1,100

 

 
1,100

 
1,100

 

 
1,100

Total indefinite-lived intangible assets
77,853

 

 
77,853

 
77,853

 

 
77,853

Finite lived:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
7,100

 
(5,383
)
 
1,717

 
7,100

 
(5,329
)
 
1,771

Other
1,384

 
(657
)
 
727

 
1,384

 
(619
)
 
765

Total goodwill and other intangible assets
$
86,337

 
$
(6,040
)
 
$
80,297

 
$
86,337

 
$
(5,948
)
 
$
80,389

Amortization expense recognized on intangible assets during the three months ended July 2, 2016 and June 27, 2015 was $92,000 and $189,000, respectively.

17


10. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
 
July 2,
2016
 
April 2,
2016
Unearned insurance premiums
$
16,928

 
$
15,528

Customer deposits
15,736

 
14,039

Salaries, wages and benefits
15,702

 
20,675

Estimated warranties
13,718

 
13,371

Insurance loss reserves
7,429

 
5,990

Accrued volume rebates
5,302

 
4,647

Accrued insurance
3,765

 
3,969

Company repurchase option on certain loans sold
3,729

 
3,497

Deferred margin
3,180

 
2,823

Capital lease obligation
2,344

 
2,387

Reserve for repurchase commitments
1,741

 
1,660

Accrued taxes
1,052

 
1,282

Other
12,077

 
10,446

 
$
102,703

 
$
100,314

11. Warranties
Homes are generally warranted against manufacturing defects for a period of one year commencing at the time of sale to the retail customer. Estimated costs relating to home warranties are recorded at the date of sale. The Company has recorded a liability for estimated future warranty costs relating to homes sold based upon management's assessment of historical experience factors, an estimate of the amount of homes in the distribution channel and current industry trends. Activity in the liability for estimated warranties was as follows (in thousands):
 
Three Months Ended
 
July 2,
2016
 
June 27,
2015
Balance at beginning of period
$
13,371

 
$
9,953

Purchase accounting additions

 
1,111

Charged to costs and expenses
6,136

 
4,265

Payments and deductions
(5,789
)
 
(4,272
)
Balance at end of period
$
13,718

 
$
11,057


18


12. Debt Obligations
Debt obligations consist of amounts related to loans sold that did not qualify for loan sale accounting treatment. The following table summarizes debt obligations (in thousands):
 
July 2,
2016
 
April 2,
2016
Acquired securitized financings (acquired as part of the Palm Harbor transaction)
 
 
 
Securitized financing 2005-1
$
26,545

 
$
27,481

Securitized financing 2007-1
27,957

 
28,859

Other secured financings
4,965

 
4,831

Total securitized financings and other, net
$
59,467

 
$
61,171

The Company acquired CountryPlace's securitized financings during the first quarter of fiscal year 2012 as a part of the Palm Harbor acquisition. Acquired securitized financings were recorded at fair value at the time of acquisition, which resulted in a discount, and subsequently are accounted for in a manner similar to ASC 310-30 to accrete the discount.
The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for securitized consumer loans receivable held for investment to determine the expected cash flows on securitized financings and the contractual payments. The amount of contractual principal and contractual interest payments due on the securitized financings in excess of all cash flows expected as of the date of the Palm Harbor acquisition cannot be accreted into interest expense (the non-accretable difference). The remaining amount is accreted into interest expense over the remaining life of the obligation (referred to as accretable yield). The following table summarizes acquired securitized financings (in thousands):
 
July 2,
2016
 
April 2,
2016
Securitized financings – contractual amount
$
65,961

 
$
68,673

Purchase discount
 
 
 
Accretable
(11,459
)
 
(12,333
)
Non-accretable (1)

 

Total acquired securitized financings, net
$
54,502

 
$
56,340

(1) There is no non-accretable difference, as the contractual payments on acquired securitized financing are determined by the cash collections from the underlying loans.
Over the life of the loans, the Company continues to estimate cash flows expected to be paid on securitized financings. The Company evaluates at the balance sheet date whether the present value of its securitized financings, determined using the effective interest rate, has increased or decreased. The present value of any subsequent change in cash flows expected to be paid adjusts the amount of accretable yield recognized on a prospective basis over the securitized financing's remaining life.
The changes in accretable yield on securitized financings were as follows (in thousands):
 
Three Months Ended
 
July 2,
2016
 
June 27,
2015
Balance at the beginning of the period
$
12,333

 
$
12,128

Accretion
(968
)
 
(812
)
Adjustment to cash flows
94

 
(575
)
Balance at the end of the period
$
11,459

 
$
10,741


19


On July 12, 2005, prior to the Company's acquisition of Palm Harbor and CountryPlace, CountryPlace completed its initial securitization (2005-1) for approximately $141.0 million of loans, which was funded by issuing bonds totaling approximately $118.4 million. The bonds were issued in four different classes: Class A-1 totaling $36.3 million with a coupon rate of 4.23%; Class A-2 totaling $27.4 million with a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4 totaling $27.4 million with a coupon rate of 5.20%. The bonds mature at varying dates and at issuance had an expected weighted average maturity of 4.66 years. For accounting purposes, this transaction was structured as a securitized borrowing. As of July 2, 2016, the Class A-1 and Class A-2 bonds have been retired.
On March 22, 2007, prior to the Company's acquisition of Palm Harbor and CountryPlace, CountryPlace completed its second securitization (2007-1) for approximately $116.5 million of loans, which was funded by issuing bonds totaling approximately $101.9 million. The bonds were issued in four classes: Class A-1 totaling $28.9 million with a coupon rate of 5.484%; Class A-2 totaling $23.4 million with a coupon rate of 5.232%; Class A-3 totaling $24.5 million with a coupon rate of 5.593%; and Class A-4 totaling $25.1 million with a coupon rate of 5.846%. The bonds mature at varying dates and at issuance had an expected weighted average maturity of 4.86 years. For accounting purposes, this transaction was also structured as a securitized borrowing. As of July 2, 2016, the Class A-1 and Class A-2 bonds have been retired.
CountryPlace's securitized debt is subject to provisions that require certain levels of overcollateralization. Overcollateralization is equal to CountryPlace's equity in the bonds. Failure to satisfy these provisions could cause cash, which would normally be distributed to CountryPlace, to be used for repayment of the principal of the related Class A bonds until the required overcollateralization level is reached. During periods when the overcollateralization is below the specified level, cash collections from the securitized loans in excess of servicing fees payable to CountryPlace and amounts owed to the Class A bondholders, trustee and surety, are applied to reduce the Class A debt until such time the overcollateralization level reaches the specified level. Therefore, failure to meet the overcollateralization requirement could adversely affect the timing of cash flows received by CountryPlace. However, principal payments of the securitized debt, including accelerated amounts, is payable only from cash collections from the securitized loans and no additional sources of repayment are required or permitted. As of July 2, 2016, the 2005-1 and 2007-1 securitized portfolios were within the required overcollateralization level.
13. Reinsurance
Standard Casualty is primarily a specialty writer of manufactured home physical damage insurance. Certain of Standard Casualty's premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide Standard Casualty with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Standard Casualty remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all of Standard Casualty's assumed reinsurance is with one entity.
The effects of reinsurance on premiums written and earned are as follows (in thousands):

 
Three Months Ended
 
July 2, 2016
 
June 27, 2015
 
Written
 
Earned
 
Written
 
Earned
Direct premiums
$
4,386

 
$
3,926

 
$
4,111

 
$
3,593

Assumed premiums—nonaffiliate
6,947

 
5,632

 
5,789

 
5,083

Ceded premiums—nonaffiliate
(3,220
)
 
(3,220
)
 
(2,714
)
 
(2,714
)
Net premiums
$
8,113

 
$
6,338

 
$
7,186

 
$
5,962


20


Typical insurance policies written or assumed by Standard Casualty have a maximum coverage of $300,000 per claim, of which Standard cedes $200,000 of the risk of loss per reinsurance. Therefore, Standard Casualty maintains risk of loss limited to $100,000 per claim on typical policies. Amounts are recoverable by Standard Casualty through reinsurance for catastrophic losses in excess of $1.0 million per occurrence up to a maximum of $44.0 million in the aggregate.
Purchasing reinsurance contracts protects Standard Casualty from frequency and/or severity of losses incurred on insurance policies issued, such as in the case of a catastrophe that generates a large number of serious claims on multiple policies at the same time.
14. Income Taxes
The Company's deferred tax assets primarily result from financial statement accruals not currently deductible for tax purposes and differences in the acquired basis of certain assets, and its deferred tax liabilities primarily result from tax amortization of goodwill and other intangible assets.
The Company complies with the provisions of ASC 740, Income Taxes ("ASC 740"), which clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognizing, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The amount of unrecognized tax benefits recorded by the Company is insignificant and the impact on the effective tax rate if all unrecognized tax benefits were recognized would be insignificant. The Company classifies interest and penalties related to unrecognized tax benefits in tax expense.
Income tax returns are filed in the U.S. federal jurisdiction and in several state jurisdictions. The Company is no longer subject to examination by the IRS for years before fiscal year 2013. In general, the Company is no longer subject to state and local income tax examinations by tax authorities for years before fiscal year 2012. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to the Company's financial position. The total amount of unrecognized tax benefit related to any particular tax position is not anticipated to change significantly within the next 12 months. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year.
15. Commitments and Contingencies
Repurchase Contingencies. The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent retailers of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The risk of loss under these agreements is spread over numerous retailers. The price the Company is obligated to pay generally declines over the period of the agreement (generally 18 to 36 months, calculated from the date of sale to the retailer) and the risk of loss is further reduced by the resale value of the repurchased homes. The maximum amount for which the Company was contingently liable under such agreements approximated $49.1 million at July 2, 2016, without reduction for the resale value of the homes. The Company applies ASC 460, Guarantees ("ASC 460"), and ASC 450-20, Loss Contingencies ("ASC 450-20"), to account for its liability for repurchase commitments. Under the provisions of ASC 460, the Company records the greater of the estimated value of the non-contingent obligation or a contingent liability for each repurchase arrangement under the provisions of ASC 450-20. The Company recorded an estimated liability of $1.7 million at both July 2, 2016 and April 2, 2016, related to the commitments pertaining to these agreements.
Letters of Credit. To secure certain reinsurance contracts, Standard Casualty maintains an irrevocable letter of credit of $7.0 million to provide assurance that Standard Casualty will fulfill its reinsurance obligations. This letter of credit is secured by certain of the Company's investments.

21


Construction-Period Mortgages. CountryPlace funds construction-period mortgages through periodic advances during the period of home construction. At the time of initial funding, CountryPlace commits to fully fund the loan contract in accordance with a predetermined schedule. Subsequent advances are contingent upon the performance of contractual obligations by the seller of the home and the borrower. Cumulative advances on construction-period mortgages are carried in the consolidated balance sheet at the amount advanced less a valuation allowance, which are included in consumer loans receivable. The total loan contract amount, less cumulative advances, represents an off-balance sheet contingent commitment of CountryPlace to fund future advances.
Loan contracts with off-balance sheet commitments are summarized below (in thousands):
 
July 2,
2016
 
April 2,
2016
Construction loan contract amount
$
15,688

 
$
15,109

Cumulative advances
(5,685
)
 
(6,566
)
Remaining construction contingent commitment
$
10,003

 
$
8,543

Representations and Warranties of Mortgages Sold. CountryPlace sells loans to GSEs and whole-loan purchasers. In connection with these activities, CountryPlace provides to the GSEs and whole-loan purchasers representations and warranties related to the loans sold. These representations and warranties generally relate to the ownership of the loan, the validity of the lien securing the loan, the loan's compliance with the criteria for inclusion in the sale transactions, including compliance with underwriting standards or loan criteria established by the buyer, and CountryPlace's ability to deliver documentation in compliance with applicable laws. Generally, representations and warranties may be enforced at any time over the life of the loan. Upon a breach of a representation, CountryPlace may be required to repurchase the loan or to indemnify a party for incurred losses. Repurchase demands and claims for indemnification payments are reviewed on a loan-by-loan basis to validate if there has been a breach requiring repurchase. CountryPlace manages the risk of repurchase through underwriting and quality assurance practices and by servicing the mortgage loans to investor standards. CountryPlace maintains a reserve for these contingent repurchase and indemnification obligations. This reserve of $816,000 and $785,000 as of July 2, 2016 and April 2, 2016, respectively, included in accrued liabilities, reflects management's estimate of probable loss. CountryPlace considers a variety of assumptions, including borrower performance (both actual and estimated future defaults), historical repurchase demands and loan defect rates to estimate the liability for loan repurchases and indemnifications.
Interest Rate Lock Commitments. In originating loans for sale, CountryPlace issues interest rate lock commitments ("IRLCs") to prospective borrowers and third-party originators. These IRLCs represent an agreement to extend credit to a loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to loan closing or sale. These IRLCs bind CountryPlace to fund the approved loan at the specified rate regardless of whether interest rates or market prices for similar loans have changed between the commitment date and the closing date. As such, outstanding IRLCs are subject to interest rate risk and related loan sale price risk during the period from the date of the IRLC through the earlier of the loan sale date or IRLC expiration date. The loan commitments generally range between 30 and 180 days; however, borrowers are not obligated to close the related loans. As a result, CountryPlace is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs unless the commitment is successfully paired with another loan that may mitigate losses from fallout.

22


As of July 2, 2016, CountryPlace had outstanding IRLCs with a notional amount of $5.8 million and are recorded at fair value in accordance with ASC 815, Derivatives and Hedging ("ASC 815"). ASC 815 clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The estimated fair values of IRLCs are recorded in other assets in the consolidated balance sheets. The fair value of IRLCs is based on the value of the underlying mortgage loan adjusted for: (i) estimated cost to complete and originate the loan and (ii) the estimated percentage of IRLCs that will result in closed mortgage loans. The initial and subsequent changes in the value of IRLCs are a component of gain (loss) on mortgage loans held for sale. During the three months ended July 2, 2016, CountryPlace recognized gains of $28,000 on the outstanding IRLCs. During the three months ended June 27, 2015, CountryPlace recognized losses of $18,000 on the outstanding IRLCs.
Forward Sales Commitments. CountryPlace manages the risk profiles of a portion of its outstanding IRLCs and mortgage loans held for sale by entering into forward sales of mortgage backed securities ("MBS") and whole loan sale commitments. As of July 2, 2016, CountryPlace had $23.9 million in outstanding notional forward sales of MBSs and forward sales commitments. Commitments to forward sales of whole loans are typically in an amount proportionate with the amount of IRLCs expected to close in particular time frames, assuming no change in mortgage interest rates, for the respective loan products intended for whole loan sale.
The estimated fair values of forward sales of MBS and forward sale commitments are based on quoted market values and are recorded within other current assets in the consolidated balance sheets. During the three months ended July 2, 2016 and June 27, 2015, CountryPlace recognized losses of $44,000 and gains of $66,000, respectively, on forward sales and whole loan sale commitments.
Legal Matters. The Company is party to certain legal proceedings that arise in the ordinary course and are incidental to its business. Certain of the claims pending against the Company in these proceedings allege, among other things, breach of contract and warranty, product liability and personal injury. Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations. However, future events or circumstances currently unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company's consolidated financial position, liquidity or results of operations in any future reporting periods.

23


16. Stockholders' Equity
The following table represents changes in stockholders' equity for the three months ended July 2, 2016 (dollars in thousands):
 
 
 
 
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive income
 
Total
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance, April 2, 2016
8,927,989

 
$
89

 
$
241,662

 
$
110,186

 
$
1,289

 
$
353,226

Stock option exercises, including incremental tax benefits
42,325

 
1

 
(342
)
 

 

 
(341
)
Share-based compensation

 

 
370

 

 

 
370

Net income

 

 

 
5,443

 

 
5,443

Unrealized loss on Available-for-sale securities

 

 

 

 
(55
)
 
(55
)
Balance, July 2, 2016
8,970,314

 
$
90

 
$
241,690

 
$
115,629

 
$
1,234

 
$
358,643

(1)
Other comprehensive income is comprised of unrealized gains and losses on available-for-sale investments. Unrealized losses before tax effect on available-for-sale securities were $112,000 for the three months ended July 2, 2016.
17. Stock-Based Compensation
The Company maintains stock incentive plans whereby stock option grants or awards of restricted stock may be made to certain officers, directors and key employees. As of July 2, 2016, the plans, which are shareholder approved, permit the award of up to 1,650,000 shares of the Company's common stock, of which 435,706 shares were still available for grant. When options are exercised, new shares of the Company's common stock are issued. Stock options may not be granted below 100% of the fair market value of the Company's common stock at the date of grant and generally expire seven years from the date of grant. Stock options and awards of restricted stock typically vest over a one to five year period as determined by the plan administrator (the Compensation Committee of the Board of Directors, which consists of independent directors). The stock incentive plans provide for accelerated vesting of stock options upon a change in control (as defined in the plans).
Stock-based compensation cost charged against income for the three months ended July 2, 2016 and June 27, 2015 was $370,000 and $331,000, respectively.
As of July 2, 2016, total unrecognized compensation cost related to stock options was approximately $2.0 million and the related weighted-average period over which it is expected to be recognized is approximately 2.53 years.

24


The following table summarizes the option activity within the Company's stock-based compensation plans for the three months ended July 2, 2016:
 
Number
of Shares
Outstanding at April 2, 2016
491,980

Granted
4,000

Exercised
(92,400
)
Canceled or expired
(3,500
)
Outstanding at July 2, 2016
400,080

Exercisable at July 2, 2016
240,125

18. Earnings Per Share
Basic earnings per common share is computed based on the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed based on the combination of dilutive common share equivalents, comprised of shares issuable under the Company's stock-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share amounts):
 
Three Months Ended
 
July 2,
2016
 
June 27,
2015
Net income
$
5,443

 
$
5,385

Weighted average shares outstanding:
 
 
 
Basic
8,937,265

 
8,863,648

Common stock equivalents—treasury stock method
147,777

 
156,613

Diluted
9,085,042

 
9,020,261

Net income per share:
 
 
 
Basic
$
0.61

 
$
0.61

Diluted
$
0.60

 
$
0.60

There were 2,147 and 14,711 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three months ended July 2, 2016 and June 27, 2015, respectively.

25


19. Fair Value Measurements
The book value and estimated fair value of the Company's financial instruments are as follows (in thousands):
 
July 2, 2016
 
April 2, 2016
 
Book
Value
 
Estimated
Fair Value
 
Book
Value
 
Estimated
Fair Value
Available-for-sale securities (1)
$
23,763

 
$
23,763

 
$
24,247

 
$
24,247

Non-marketable equity investments (2)
14,764

 
14,764

 
14,841

 
14,841

Consumer loans receivable (3)
88,434

 
125,344

 
89,558

 
126,077

Interest rate lock commitment derivatives (4)
36

 
36

 
8

 
8

Forward loan sale commitment derivatives (4)
(75
)
 
(75
)
 
(31
)
 
(31
)
Commercial loans receivable (5)
27,107

 
27,238

 
25,542

 
25,688

Securitized financings (6)
(59,467
)
 
(58,576
)
 
(61,171
)
 
(60,220
)
Mortgage servicing rights (7)
865

 
865

 
803

 
803

(1)
The fair value is based on quoted market prices.
(2)
The fair value approximates book value based on the non-marketable nature of the investments.
(3)
Includes consumer loans receivable held for investment, held for sale and construction advances. The fair value of the loans held for investment is based on the discounted value of the remaining principal and interest cash flows. The fair value of the loans held for sale are estimated based on recent GSE mortgage backed bond prices. The fair value of the construction advances approximates book value and the sales price of these loans is estimated based on construction completed.
(4)
The fair values are based on changes in GSE mortgage backed bond prices and, additionally for IRLCs, pull through rates.
(5)
The fair value is estimated using market interest rates of comparable loans.
(6)
The fair value is estimated using recent public transactions of similar asset-backed securities.
(7)
The fair value of the mortgage servicing rights is based on the present value of expected net cash flows related to servicing these loans.
In accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 –
Quoted prices in active markets for identical assets or liabilities.
Level 2 –
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 –
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

26


When the Company uses observable market prices for identical securities that are traded in less active markets, it classifies such securities as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs.
Financial instruments measured at fair value on a recurring basis are summarized below (in thousands):
 
July 2, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Securities issued by the U.S Treasury and Government (1)
$
651

 
$

 
$
651

 
$

Mortgage-backed securities (1)
5,650

 

 
5,650

 

Securities issued by states and political subdivisions (1)
8,140

 

 
8,140

 

Corporate debt securities (1)
916

 

 
916

 

Marketable equity securities (1)
7,406

 
7,406

 

 

Interest rate lock commitment derivatives (2)
36

 

 

 
36

Forward loan sale commitment derivatives (2)
(75
)
 

 

 
(75
)
Mortgage servicing rights (3)
865

 

 

 
865

(1)
Unrealized gains or losses on investments are recorded in accumulated other comprehensive income (loss) at each measurement date.
(2)
Gains or losses on derivatives are recognized in current period earnings through cost of sales.
(3)
Changes in the fair value of mortgage servicing rights are recognized in the current period earnings through net revenue.
No transfers between Level 1, Level 2 or Level 3 occurred during the three months ended July 2, 2016. The Company's policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.
Financial instruments for which fair value is disclosed but not required to be recognized in the balance sheet on a recurring basis are summarized below (in thousands):
 
July 2, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Loans held for investment
$
108,650

 
$

 
$

 
$
108,650

Loans held for sale
11,009

 

 
11,009

 

Loans held—construction advances
5,685

 

 

 
5,685

Commercial loans receivable
27,238

 

 

 
27,238

Securitized financings
(58,576
)
 

 
(58,576
)
 

Non-marketable equity investments
14,764

 

 

 
14,764


27


Financial instruments measured on a nonrecurring basis also include impaired loans (nonaccrual loans) and loans held for sale. No recent sales have been executed in an orderly market of manufactured home loan portfolios with comparable product features, credit characteristics or performance. Impaired loans are measured using Level 3 inputs that are calculated using estimated discounted future cash flows with discount rates considered to reflect current market conditions. Loans held for sale are measured at the lower of cost or fair value using Level 2 inputs that consist of commitments on hand from investors. These loans are held for relatively short periods, typically no more than 45 days. As a result, changes in loan-specific credit risk are not a significant component of the change in fair value. The cost of loans held for sale is lower than the fair value as of July 2, 2016.
ASC 825, Financial Instruments ("ASC 825"), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and the relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates and the resulting fair values. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, the Company's fair values should not be compared to those of other companies.
Under ASC 825, fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying market value of the Company.
The Company records impairment losses on long-lived assets held for sale when the fair value of such long-lived assets is below their carrying values. The Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. No impairment charges were recorded during the three months ended July 2, 2016.
Mortgage Servicing. Mortgage Servicing Rights ("MSRs") are the rights to receive a portion of the interest coupon and fees collected from the mortgagors for performing specified mortgage servicing activities, which consist of collecting loan payments, remitting principal and interest payments to investors, managing escrow accounts, performing loss mitigation activities on behalf of investors and otherwise administering the loan servicing portfolio. MSRs are initially recorded at fair value. Changes in fair value subsequent to the initial capitalization are recorded in the Company's results of operations. The Company recognizes MSRs on all loans sold to investors that meet the requirements for sale accounting and for which servicing rights are retained.
The Company applies fair value accounting to MSRs, with all changes in fair value recorded to net revenue in accordance with ASC 860-50, Servicing Assets and Liabilities. The fair value of MSRs is based on the present value of the expected future cash flows related to servicing these loans. The revenue components of the cash flows are servicing fees, interest earned on custodial accounts and other ancillary income. The expense components include operating costs related to servicing the loans (including delinquency and foreclosure costs) and interest expenses on servicer advances that the Company believes are consistent with the assumptions major market participants use in valuing MSRs. The expected cash flows are primarily impacted by prepayment estimates, delinquencies and market discounts. Generally, the value of MSRs is expected to increase when interest rates rise and decrease when interest rates decline, due to the effect those changes in interest rates have on prepayment estimates. Other factors noted above as well as the overall market demand for MSRs may also affect the valuation.

28


 
July 2,
2016
 
April 2,
2016
Number of loans serviced with MSRs
3,822