Edgar Filing: CAVCO INDUSTRIES INC

10-Q

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 September 26, 2015



¨	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 October 30, 2015, 8,902,576 shares of Registrant's Common Stock, $.01 par value, were outstanding.

CAVCO INDUSTRIES, INC.

FORM 10-Q

September 26, 2015

TABLE OF CONTENTS



	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 26, 2015 (unaudited) and March 28, 2015	1
Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended September 26, 2015 and September 27, 2014	2
Consolidated Statements of Cash Flows (unaudited) for the six months ended September 26, 2015 and September 27, 2014	3
Notes to Consolidated Financial Statements	4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	43
Item 4. Controls and Procedures	44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	45
Item 1A. Risk Factors	45
Item 6. Exhibits	45
SIGNATURES	46
EXHIBIT INDEX	47

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

CAVCO INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)



	September 26, 2015			March 28, 2015
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	92,863		$	96,597
Restricted cash, current	9,644			9,997
Accounts receivable, net	30,592			26,994
Short-term investments	7,999			7,106
Current portion of consumer loans receivable, net	22,592			24,073
Current portion of commercial loans receivable, net	3,150			2,330
Inventories	89,038			75,334
Prepaid expenses and other current assets	18,890			14,460
Deferred income taxes, current	10,112			8,573
Total current assets	284,880			265,464
Restricted cash	1,081			1,081
Investments	24,887			24,813
Consumer loans receivable, net	70,550			74,085
Commercial loans receivable, net	20,624			15,751
Property, plant and equipment, net	53,479			44,712
Goodwill and other intangibles, net	80,900			76,676
Total assets	$	536,401		$	502,582
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	19,746		$	17,805
Accrued liabilities	97,385			77,076
Current portion of securitized financings and other	6,856			6,590
Total current liabilities	123,987			101,471
Securitized financings and other	56,663			60,370
Deferred income taxes	20,637			20,587

Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; No shares issued or outstanding	—			—
Common stock, $.01 par value; 20,000,000 shares authorized; Outstanding 8,890,931 and 8,859,199 shares, respectively	89			89
Additional paid-in capital	240,126			237,916
Retained earnings	95,100			81,645
Accumulated other comprehensive (loss) income	(201		)	504
Total stockholders' equity	335,114			320,154
Total liabilities and stockholders' equity	$	536,401		$	502,582

See accompanying Notes to Consolidated Financial Statements

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CAVCO INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)



	Three Months Ended						Six Months Ended
	September 26, 2015			September 27, 2014			September 26, 2015			September 27, 2014
Net revenue	$	191,964		$	139,315		$	353,632		$	278,479
Cost of sales	152,409			107,718			282,243			215,164
Gross profit	39,555			31,597			71,389			63,315
Selling, general and administrative expenses	26,571			22,270			49,230			44,478
Income from operations	12,984			9,327			22,159			18,837
Interest expense	(965		)	(1,161		)	(1,980		)	(2,337		)
Other income, net	471			534			943			1,142
Income before income taxes	12,490			8,700			21,122			17,642

Income tax expense	(4,420		)	(3,233		)	(7,667		)	(6,416		)
Net income	$	8,070		$	5,467		$	13,455		$	11,226

Comprehensive income:
Net income	$	8,070		$	5,467		$	13,455		$	11,226
Unrealized (loss) gain on available-for-sale securities, net of tax	(296		)	(102		)	(705		)	66
Comprehensive income	$	7,774		$	5,365		$	12,750		$	11,292

Net income per share:
Basic	$	0.91		$	0.62		$	1.52		$	1.27
Diluted	$	0.89		$	0.61		$	1.49		$	1.25
Weighted average shares outstanding:
Basic	8,878,075			8,852,860			8,870,862			8,850,509
Diluted	9,032,652			9,014,523			9,026,224			9,013,426

See accompanying Notes to Consolidated Financial Statements

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CAVCO INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



	Six Months Ended
	September 26, 2015			September 27, 2014
OPERATING ACTIVITIES
Net income	$	13,455		$	11,226
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,878			1,921
Provision for credit losses	348			(44		)
Deferred income taxes	(577		)	3,098
Stock-based compensation expense	1,117			1,114
Non-cash interest income, net	(1,068		)	(421		)
Incremental tax benefits from option exercises	(352		)	(2,916		)
Gain (loss) on sale of property, plant and equipment including assets held for sale, net	50			(269		)
Gain on sale of loans and investments, net	(3,175		)	(2,753		)
Changes in operating assets and liabilities:
Restricted cash	482			(2,359		)
Accounts receivable	1,850			(781		)
Consumer loans receivable originated	(53,912		)	(53,942		)
Principal payments on consumer loans receivable	5,275			7,028
Proceeds from sales of consumer loans	56,269			47,881
Inventories	1,568			(3,846		)
Prepaid expenses and other current assets	(344		)	(1,936		)
Commercial loans receivable	(5,731		)	(1,535		)
Accounts payable and accrued liabilities	12,685			7,283
Net cash provided by operating activities	29,818			8,749
INVESTING ACTIVITIES
Purchases of property, plant and equipment	(1,112		)	(937		)
Purchase of certain assets and liabilities of Fairmont Homes and Chariot Eagle	(28,121		)	—
Proceeds from sale of property, plant and equipment including assets held for sale	34			732
Purchases of investments	(7,410		)	(6,124		)
Proceeds from sale of investments	5,212			4,962
Net cash used in investing activities	(31,397		)	(1,367		)
FINANCING ACTIVITIES
Proceeds from exercise of stock options	741			441
Incremental tax benefits from exercise of stock options	352			2,916
Proceeds from secured financings and other	865			2,055
Payments on securitized financings	(4,113		)	(4,913		)
Net cash (used in) provided by financing activities	(2,155		)	499
Net (decrease) increase in cash and cash equivalents	(3,734		)	7,881
Cash and cash equivalents at beginning of the period	96,597			72,949
Cash and cash equivalents at end of the period	$	92,863		$	80,830
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes	$	5,459		$	4,620
Cash paid during the year for interest	$	1,926		$	2,106

See accompanying Notes to Consolidated Financial Statements

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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 March 28, 2015, filed with the SEC on June 10, 2015, as amended via a Form 10-K/A filed with the SEC on July 24, 2015 ("Form 10-K").

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 2, 2016.

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 builds a wide variety of affordable modular homes, manufactured homes and park model RVs in 19 factories located throughout the United States, primarily distributed through a network of independent and Company-owned retailers. The Company operates 45 Company-owned retail stores in the United States. The Company's mortgage subsidiary ("CountryPlace") is an approved Fannie Mae and Ginnie Mae seller/servicer and offers conforming mortgages to purchasers of factory-built and site-built homes. The Company's insurance subsidiary ("Standard Casualty") provides property and casualty insurance to owners of manufactured homes.

On March 30, 2015, the Company purchased certain manufactured housing assets and liabilities of Chariot Eagle, LLC, which produces park model RVs and manufactured homes distributed in the Southeastern United States. On May 1, 2015, the Company also purchased certain manufactured housing assets and liabilities of Fairmont Homes, a premier builder of manufactured and modular homes and park model RVs serving the Midwest, western Great Plains states, the Northeast and several provinces in Canada. These operations include manufactured housing production facilities in Ocala, Florida; Nappanee, Indiana; and two factories in Montevideo, Minnesota, and provide for further operating capacity, increased home production capabilities and distribution into new markets. Both of these acquisitions were accounted for as business combinations and the results of operations have been included since the date of their respective acquisitions. Our purchase price allocations are preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities becomes available, including additional information relating to tax matters and finalization of our valuation of identified intangible assets. Pro forma results of operations for these acquisitions have not been presented because the effects of these business combinations, individually and in aggregate, were not material to our consolidated results of operations.

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. ASU 2014-09 will be effective 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.

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):



	September 26, 2015		March 28, 2015
Cash related to CountryPlace customer payments to be remitted to third parties	$	8,037	$	8,471
Cash related to CountryPlace customer payments on securitized loans to be remitted to bondholders	1,554		1,425
Cash related to workers' compensation insurance held in trust	727		727
Cash related to retail home buyer deposits held in trust	53		101
Other restricted cash	354		354
	$	10,725	$	11,078

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

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3. Investments

Investments consist of the following (in thousands):



	September 26, 2015		March 28, 2015
Available-for-sale investment securities	$	22,455	$	21,283
Non-marketable equity investments	10,431		10,636
	$	32,886	$	31,919

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):



	September 26, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and government debt securities	$	1,502	$	1	$	(3	)	$	1,500
Residential mortgage-backed securities	5,311		25		(35		)	5,301
State and political subdivision debt securities	8,015		185		(29		)	8,171
Corporate debt securities	778		—		(3		)	775
Marketable equity securities	6,172		292		(756		)	5,708
Certificates of deposit	1,000		—		—			1,000
	$	22,778	$	503	$	(826	)	$	22,455



	March 28, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and government debt securities	$	1,952	$	1	$	(5	)	$	1,948
Residential mortgage-backed securities	4,342		23		(27		)	4,338
State and political subdivision debt securities	7,190		245		(12		)	7,423
Corporate debt securities	1,060		2		(4		)	1,058
Marketable equity securities	4,962		642		(88		)	5,516
Certificates of deposit	1,000		—		—			1,000
	$	20,506	$	913	$	(136	)	$	21,283

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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):



	September 26, 2015
	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	1,257		(8		)	253		(27		)	1,510		(35		)
State and political subdivision debt securities	1,865		(16		)	1,004		(13		)	2,869		(29		)
Corporate debt securities	523		(3		)	—		—			523		(3		)
Marketable equity securities	3,368		(687		)	194		(69		)	3,562		(756		)
	$	7,013	$	(714	)	$	2,150	$	(112	)	$	9,163	$	(826	)



	March 28, 2015
	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	$	499	$	—		$	698	$	(5	)	$	1,197	$	(5	)
Residential mortgage-backed securities	438		(2		)	330		(25		)	768		(27		)
State and political subdivision debt securities	1,099		(6		)	256		(6		)	1,355		(12		)
Corporate debt securities	247		(4		)	—		—			247		(4		)
Marketable equity securities	1,067		(85		)	100		(3		)	1,167		(88		)
	$	3,350	$	(97	)	$	1,384	$	(39	)	$	4,734	$	(136	)

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 September 26, 2015.

As of September 26, 2015, the Company's investments in marketable equity securities consist of investments in common stock of industrial and other companies ($5.6 million of the total fair value and $753,000 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 March 28, 2015, the Company's investments in marketable equity securities consisted of investments in common stock of industrial and other companies ($5.4 million of the total fair value and $85,000 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).

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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.



	September 26, 2015				March 28, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in less than one year	$	1,286	$	1,291	$	1,804	$	1,821
Due after one year through five years	3,456		3,467		2,834		2,844
Due after five years through ten years	4,069		4,037		2,467		2,452
Due after ten years	6,795		6,952		7,439		7,650
	$	15,606	$	15,747	$	14,544	$	14,767

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 and six months ended September 26, 2015 were approximately $51,000 and $231,000, respectively. Gross losses realized were approximately $66,000 and $112,000 for the three and six months ended September 26, 2015, respectively. Gross gains realized on the sales of investment securities for the three and six months ended September 27, 2014 were approximately $123,000 and $426,000, respectively. Gross losses realized were approximately $11,000 and $79,000 for the three and six months ended September 27, 2014, respectively.

4. Inventories

Inventories consist of the following (in thousands):



	September 26, 2015		March 28, 2015
Raw materials	$	27,244	$	24,373
Work in process	10,067		7,271
Finished goods and other	51,727		43,690
	$	89,038	$	75,334

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 a manner similar to 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):



	September 26, 2015			March 28, 2015
Loans held for investment (acquired on Palm Harbor Acquisition Date)	$	73,233		$	77,670
Loans held for investment (originated after Palm Harbor Acquisition Date)	5,633			5,005
Loans held for sale	9,779			11,903
Construction advances	5,206			4,076
Consumer loans receivable	93,851			98,654
Deferred financing fees and other, net	(709		)	(496		)
Consumer loans receivable, net	$	93,142		$	98,158

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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.



	September 26, 2015			March 28, 2015
	(in thousands)
Consumer loans receivable held for investment – contractual amount	$	179,261		$	192,523
Purchase discount
Accretable	(70,450		)	(73,202		)
Non-accretable	(35,241		)	(41,305		)
Less consumer loans receivable reclassified as other assets	(337		)	(346		)
Total acquired consumer loans receivable held for investment, net	$	73,233		$	77,670

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:



	September 26, 2015		March 28, 2015
Prepayment rate	13.1	%	12.6	%
Default rate	1.3	%	1.7	%

Assuming there were a 1% unfavorable variation from the expected level, for each key assumption, the expected cash flows, as of September 26, 2015, would decrease by approximately $2.3 million and $6.0 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						Six Months Ended
	September 26, 2015			September 27, 2014			September 26, 2015			September 27, 2014
Balance at the beginning of the period	$	70,261		$	74,794		$	73,202		$	77,737
Accretion	(2,685		)	(2,849		)	(5,436		)	(5,744		)
Reclassifications from non-accretable discount	2,874			3,356			2,684			3,308
Balance at the end of the period	$	70,450		$	75,301		$	70,450		$	75,301

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The consumer loans held for investment have the following characteristics:



	September 26, 2015		March 28, 2015
Weighted average contractual interest rate	9.08	%	9.10	%
Weighted average effective interest rate	9.41	%	9.27	%
Weighted average months to maturity	174		178

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.

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The following table disaggregates CountryPlace's gross consumer loans receivable as of September 26, 2015, for each class by portfolio segment and credit quality indicator as of the time of origination (in thousands):



	Consumer Loans Held for Investment
	Securitized 2005		Securitized 2007		Unsecuritized		Construction Advances		Consumer Loans Held For Sale		Total
Asset Class
Credit Quality Indicator
Chattel loans
0-619	$	836	$	567	$	356	$	—	$	—	$	1,759
620-719	14,068		9,619		3,272		—		—		26,959
720+	15,708		10,272		2,575		—		—		28,555
Other	61		—		458		—		—		519
Subtotal	30,673		20,458		6,661		—		—		57,792
Conforming mortgages
0-619	—		—		166		217		978		1,361
620-719	—		—		1,520		3,190		5,329		10,039
720+	—		—		9		1,799		3,255		5,063
Other	—		—		—		—		217		217
Subtotal	—		—		1,695		5,206		9,779		16,680
Non-conforming mortgages
0-619	89		599		1,466		—		—		2,154
620-719	1,442		5,480		3,911		—		—		10,833
720+	1,712		3,515		834		—		—		6,061
Other	—		—		316		—		—		316
Subtotal	3,243		9,594		6,527		—		—		19,364
Other loans
Subtotal	—		—		15		—		—		15
	$	33,916	$	30,052	$	14,898	$	5,206	$	9,779	$	93,851

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-eight percent of the outstanding principal balance of consumer loans receivable portfolio is concentrated in Texas. Other than Texas, no other state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of September 26, 2015.

Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the lesser of the related loan balance or 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 cost or estimated sales price less estimated costs to sell, based on current information. Repossessed homes totaled approximately $362,000 and $582,000 as of September 26, 2015 and March 28, 2015, respectively, and are included in prepaid and other assets in the consolidated balance sheet. Foreclosure or similar proceedings in progress totaled approximately $411,000 and $650,000 as of September 26, 2015 and March 28, 2015, respectively.

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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 developer's 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):



	September 26, 2015			March 28, 2015
Direct loans receivable	$	21,926		$	15,802
Participation loans receivable	1,958			2,352
Allowance for loan loss	(110		)	(73		)
	$	23,774		$	18,081

The commercial loans receivable balance has the following characteristics:



	September 26, 2015		March 28, 2015
Weighted average contractual interest rate	6.9	%	6.5	%
Weighted average months to maturity	8		6

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 September 26, 2015 or March 28, 2015.

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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 $110,000 and $134,000 at September 26, 2015 and September 27, 2014, respectively. 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				Six Months Ended
	September 26, 2015		September 27, 2014		September 26, 2015		September 27, 2014
Balance at beginning of period	$	82	$	128	$	73	$	139
Provision for inventory finance credit losses	28		6		37		(5		)
Loans charged off, net of recoveries	—		—		—		—
Balance at end of period	$	110	$	134	$	110	$	134

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
	September 26, 2015			March 28, 2015			September 26, 2015		March 28, 2015
Inventory finance notes receivable:
Collectively evaluated for impairment	$	10,970		$	7,229		$	—	$	—
Individually evaluated for impairment	10,956			8,573			1,958		2,352
	$	21,926		$	15,802		$	1,958	$	2,352
Allowance for loan loss:
Collectively evaluated for impairment	$	(110	)	$	(73	)	$	—	$	—
Individually evaluated for impairment	—			—			—		—
	$	(110	)	$	(73	)	$	—	$	—

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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 September 26, 2015, 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 September 26, 2015, 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
	September 26, 2015		March 28, 2015		September 26, 2015		March 28, 2015
Risk profile based on payment activity:
Performing	$	21,852	$	15,728	$	1,958	$	2,352
Watch list	—		—		—		—
Nonperforming	74		74		—		—
	$	21,926	$	15,802	$	1,958	$	2,352

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:



	September 26, 2015		March 28, 2015
Texas	34.3	%	42.4	%
Arizona	11.1	%	10.4	%

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 September 26, 2015 or March 28, 2015, respectively. As of September 26, 2015 the Company had concentrations of commercial loans receivable with one independent third-party that equaled 33.3% of the principal balance outstanding, all of which was secured. As of March 28, 2015, the Company did not have concentrations in excess of 10% of the principal balance of commercial loans receivable with any one borrower.

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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):



	September 26, 2015			March 28, 2015
Property, plant and equipment, at cost:
Land	$	22,571		$	21,197
Buildings and improvements	30,623			24,288
Machinery and equipment	19,296			16,772
	72,490			62,257
Accumulated depreciation	(19,011		)	(17,545		)
Property, plant and equipment, net	$	53,479		$	44,712

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 September 26, 2015 (in thousands):



	September 26, 2015
Land	$	92
Buildings and improvements	2,033
	2,125
Accumulated amortization	(28		)
Leased assets, net	$	2,097

The minimum payments in future fiscal years under the lease as of September 26, 2015 are as follows (in thousands):



2016	$	150
2017	289
2018	277
2019	265
2020	253
Thereafter	1,721
Total remaining lease payments	2,955
Less: Amount representing interest	(867		)
Present value of future minimum lease payments	$	2,088

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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. 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 six months ended September 26, 2015 and September 27, 2014, 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 3 to 15 years.

Goodwill and other intangibles consist of the following (in thousands):



	September 26, 2015							March 28, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Indefinite lived:
Goodwill	$	69,014	$	—		$	69,014	$	67,346	$	—		$	67,346
Trademarks and trade names	7,100		—			7,100		6,250		—			6,250
State insurance licenses	1,100		—			1,100		1,100		—			1,100
Total indefinite-lived intangible assets	77,214		—			77,214		74,696		—			74,696
Finite lived:
Customer relationships	8,100		(5,257		)	2,843		6,200		(5,027		)	1,173
Other	$	1,384	$	(541	)	$	843	$	1,274	$	(467	)	$	807
Total goodwill and other intangible assets	$	86,698	$	(5,798	)	$	80,900	$	82,170	$	(5,494	)	$	76,676

Amortization expense recognized on intangible assets was $116,000 and $305,000 during the three and six months ended September 26, 2015, respectively. Amortization expense of and $344,000 and $689,000 was recognized during the three and six months ended September 27, 2014, respectively.

During the six months ended September 26, 2015, the Company acquired certain manufactured housing assets and liabilities of two companies, both of which were accounted for as business combinations. The purchase price for the assets and liabilities assumed was allocated based on their estimated fair values and is preliminary. The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require adjustments of the amounts allocated to goodwill.

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10. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):



	September 26, 2015		March 28, 2015
Salaries, wages and benefits	$	17,861	$	16,186
Unearned insurance premiums	14,417		13,556
Customer deposits	14,148		13,435
Estimated warranties	12,805		9,953
Accrued volume rebates	7,342		3,266
Company repurchase option on certain loans sold	4,947		2,063
Accrued insurance	4,271		3,068
Insurance loss reserves	3,362		1,774
Accrued taxes	2,968		1,089
Deferred margin	2,472		2,398
Capital lease obligation	2,088		—
Reserve for repurchase commitments	1,653		2,240
Other	9,051		8,048
	$	97,385	$	77,076

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						Six Months Ended
	September 26, 2015			September 27, 2014			September 26, 2015			September 27, 2014
Balance at beginning of period	$	11,057		$	9,388		$	9,953		$	9,262
Purchase accounting additions	—			—			1,111			—
Charged to costs and expenses	5,970			3,072			10,235			6,250
Payments and deductions	(4,222		)	(3,067		)	(8,494		)	(6,119		)
Balance at end of period	$	12,805		$	9,393		$	12,805		$	9,393

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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):



	September 26, 2015		March 28, 2015
Acquired securitized financings (acquired as part of the Palm Harbor transaction)
Securitized financing 2005-1	$	28,391	$	29,469
Securitized financing 2007-1	30,559		33,461
Other secured financings	4,569		4,030
Total securitized financings and other, net	$	63,519	$	66,960

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):



	September 26, 2015			March 28, 2015
Securitized financings – contractual amount	$	72,943		$	75,058
Purchase discount
Accretable	(13,993		)	(12,128		)
Non-accretable (1)	—			—
Total acquired securitized financings, net	$	58,950		$	62,930

(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						Six Months Ended
	September 26, 2015			September 27, 2014			September 26, 2015			September 27, 2014
Balance at the beginning of the period	$	10,741		$	14,268		$	12,128		$	15,199
Accretion	(741		)	(1,034		)	(1,553		)	(2,095		)
Adjustment to cash flows	3,993			1,908			3,418			2,038
Balance at the end of the period	$	13,993		$	15,142		$	13,993		$	15,142

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On July 12, 2005, prior to Fleetwood'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 September 26, 2015, the Class A-1 and Class A-2 bonds have been retired.

On March 22, 2007, prior to Fleetwood'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 expected weighted average maturity of 4.86 years. For accounting purposes, this transaction was also structured as a securitized borrowing. As of September 26, 2015, 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 September 26, 2015, the 2005-1 securitized portfolio was within the required overcollateralization level; however, a certain provision pertaining to the 2007-1 securitized portfolio exceeded a specified level, requiring additional overcollateralization. An increase in the specified level of this certain provision occurred in October 2015.

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
	September 26, 2015						September 27, 2014
	Written			Earned			Written			Earned
Direct premiums	$	3,549		$	3,664		$	3,188		$	3,190
Assumed premiums—nonaffiliate	5,476			5,295			4,951			4,641
Ceded premiums—nonaffiliate	(2,722		)	(2,722		)	(2,448		)	(2,448		)
Net premiums	$	6,303		$	6,237		$	5,691		$	5,383

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	Six Months Ended
	September 26, 2015						September 27, 2014
	Written			Earned			Written			Earned
Direct premiums	$	7,660		$	7,257		$	6,764		$	6,264
Assumed premiums—nonaffiliate	11,265			10,378			10,250			9,012
Ceded premiums—nonaffiliate	(5,436		)	(5,436		)	(4,757		)	(4,757		)
Net premiums	$	13,489		$	12,199		$	12,257		$	10,519

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 $24.0 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 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.

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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 $45.1 million at September 26, 2015, 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 and $2.2 million at September 26, 2015 and March 28, 2015, respectively, 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.

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 lower of cost or market, 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):



	September 26, 2015			March 28, 2015
Construction loan contract amount	$	13,514		$	9,591
Cumulative advances	(5,206		)	(4,076		)
Remaining construction contingent commitment	$	8,308		$	5,515

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 $893,000 and $867,000 as of September 26, 2015 and March 28, 2015, 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.

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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 which may mitigate losses from fallout.

As of September 26, 2015 CountryPlace had outstanding IRLCs with a notional amount of $5.1 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 based on quoted market values and 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 and six months ended September 26, 2015, CountryPlace recognized gains of $13,000 and losses of $5,000, respectively, on the outstanding IRLCs. During the three and six months ended September 27, 2014, CountryPlace recognized losses of $26,000 and gains of $27,000, respectively, 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. 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 and six months ended September 26, 2015, CountryPlace recognized losses of $81,000 and $15,000, respectively, on forward sales and whole loan sale commitments. During the three and six months ended September 27, 2014, CountryPlace recognized gains of $31,000 and losses of $36,000, 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.

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16. Stockholders' Equity

The following table represents changes in stockholders' equity for the six months ended September 26, 2015 (dollars in thousands):



				Additional paid-in capital		Retained earnings		Accumulated other comprehensive income			Total
	Common Stock
	Shares	Amount
Balance, March 28, 2015	8,859,199	$	89	$	237,916	$	81,645	$	504		$	320,154
Stock option exercises, including incremental tax benefits	31,732	—		1,093		—		—			1,093
Share-based compensation	—	—		1,117		—		—			1,117
Net income	—	—		—		13,455		—			13,455
Unrealized gain (loss) on Available-for-sale securities	—	—		—		—		(705		)	(705		)
Balance, September 26, 2015	8,890,931	$	89	$	240,126	$	95,100	$	(201	)	$	335,114


(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 $1.1 million for the six months ended September 26, 2015.

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 September 26, 2015, the plans, which are shareholder approved, permit the award of up to 1,350,000 shares of the Company's common stock, of which 67,564 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 and six months ended September 26, 2015 was $786,000 and $1.1 million, respectively. The Company recorded stock-based compensation expense of $832,000 and $1.1 million for the three and six months ended September 27, 2014, respectively.

As of September 26, 2015, total unrecognized compensation cost related to stock options was approximately $2.7 million and the related weighted-average period over which it is expected to be recognized is approximately 3.19 years.

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The following table summarizes the option activity within the Company's stock-based compensation plans for the six months ended September 26, 2015:



	Number of Shares
Outstanding at March 28, 2015	506,980
Granted	86,500
Exercised	(44,875	)
Canceled or expired	(1,000	)
Outstanding at September 26, 2015	547,605
Exercisable at September 26, 2015	376,600

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				Six Months Ended
	September 26, 2015		September 27, 2014		September 26, 2015		September 27, 2014
Net income	$	8,070	$	5,467	$	13,455	$	11,226
Weighted average shares outstanding:
Basic	8,878,075		8,852,860		8,870,862		8,850,509
Common stock equivalents—treasury stock method	154,577		161,663		155,362		162,917
Diluted	9,032,652		9,014,523		9,026,224		9,013,426
Net income per share:
Basic	$	0.91	$	0.62	$	1.52	$	1.27
Diluted	$	0.89	$	0.61	$	1.49	$	1.25

Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three and six months ended September 26, 2015 were 18,962 and 23,052, respectively. There were 4,241 and 1,641 anti-dilutive common stock equivalents excluded for the three and six months ended September 27, 2014, respectively.

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19. Fair Value Measurements

The book value and estimated fair value of the Company's financial instruments are as follows (in thousands):



	September 26, 2015						March 28, 2015
	Book Value			Estimated Fair Value			Book Value			Estimated Fair Value
Available-for-sale securities (1)	$	22,455		$	22,455		$	21,283		$	21,283
Non-marketable equity investments (2)	10,431			10,431			10,636			10,636
Consumer loans receivable (3)	93,142			126,439			98,158			129,616
Interest rate lock commitment derivatives (4)	15			15			19			19
Forward loan sale commitment derivatives (4)	(68		)	(68		)	(54		)	(54		)
Commercial loans receivable (5)	23,774			23,913			18,081			18,025
Securitized financings (6)	(63,519		)	(63,235		)	(66,960		)	(67,064		)
Mortgage servicing rights (7)	750			750			475			475


(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.

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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):



	September 26, 2015
	Total			Level 1		Level 2		Level 3
Securities issued by the U.S Treasury and Government (1)	$	1,500		$	—	$	1,500	$	—
Mortgage-backed securities (1)	5,301			—		5,301		—
Securities issued by states and political subdivisions (1)	8,171			—		8,171		—
Corporate debt securities (1)	775			—		775		—
Marketable equity securities (1)	5,708			5,708		—		—
Interest rate lock commitment derivatives (2)	15			—		—		15
Forward loan sale commitment derivatives (2)	(68		)	—		—		(68		)
Mortgage servicing rights (3)	750			—		—		750


(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 six months ended September 26, 2015. 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):



	September 26, 2015
	Total			Level 1		Level 2			Level 3
Loans held for investment	$	110,893		$	—	$	—		$	110,893
Loans held for sale	10,340			—		10,340			—
Loans held—construction advances	5,206			—		—			5,206
Commercial loans receivable	23,913			—		—			23,913
Securitized financings	(63,235		)	—		(63,235		)	—
Non-marketable equity investments	10,431			—		—			10,431

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Financial instruments measured on a nonrecurring basis also include impaired loans (nonaccrual loans) disclosed in Note 5 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 September 26, 2015.

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 six months ended September 26, 2015.

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.

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	September 26, 2015			March 28, 2015
Number of loans serviced with MSRs	3,549			3,306
Weighted average servicing fee (basis points)	30.18			29.88
Capitalized servicing multiple	60.80		%	42.10		%
Capitalized servicing rate (basis points)	18.35			12.58
Serviced portfolio with MSRs (in thousands)	$	408,920		$	380,120
Mortgage servicing rights (in thousands)	$	750		$	475

20. Related Party Transactions

Third Avenue Value Fund and an affiliate (collectively, "Third Avenue") are considered a principle owner, and therefore a related party, under ASC 850, Related Party Disclosures. As of September 26, 2015, based on the latest regulatory filing available, Third Avenue and its related funds owned approximately 16.0% of our outstanding common shares.

In July 2015, the Company’s CEO made a payment of $1.1 million to the Company, representing the repayment of performance bonuses related to fiscal 2012, 2014 and 2015 that were determined to be in excess of the 2005 Stock Incentive Plan limits and made to the CEO during those periods.

21. Business Segment Information

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 following table details net revenue and income before income taxes by segment (in thousands):

Three Months Ended

Six Months Ended