Inventory Finance Notes Receivable and Allowance for Loan Loss

The Company’s inventory finance notes receivable balance consists of two classes: (i) amounts loaned by the Company under participation inventory financing programs; and (ii) direct inventory financing arrangements for the home product inventory needs of our independent distribution base.

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 of our products. The participation inventory finance receivables are unsecured general obligations of the independent floor plan lenders.

Under the terms of the direct inventory finance arrangements, the Company provides funds for the independent retailers’ financed inventory. The notes are secured by the inventory collateral and other security depending on the borrower’s (retailer’s) circumstances. The other terms of direct inventory finance arrangements vary depending on the needs of the borrower and the opportunity for the Company, but generally follow the same tenets as the participation programs.

Inventory finance notes receivables, net, consist of the following by class of financing notes receivable (in thousands):



	June 29, 2013			March 30, 2013
Direct inventory finance notes receivable	$	20,583		$	18,955
Participation inventory finance notes receivable	3,604			4,345
Allowance for loan loss	(210		)	(350		)
	$	23,977		$	22,950

The Company evaluates the potential for loss from its participation inventory finance 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 June 29, 2013 or March 30, 2013.

With respect to the direct inventory finance notes receivable, the risk of loss is spread over numerous borrowers. Borrower inventory levels and activity are 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 $210,000 and $350,000 at June 29, 2013 and March 30, 2013, 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 inventory finance notes receivable (in thousands):



	Three months ended
	June 29, 2013			June 30, 2012
Balance at beginning of period	$	350		$	215
Provision for inventory finance credit losses	(97		)	(19		)
Loans charged off, net of recoveries	(43		)	—
Balance at end of period	$	210		$	196

The following table disaggregates inventory finance notes receivable and the estimated allowance for loan loss for each class of financing receivable by evaluation methodology (in thousands):



	Direct Inventory Finance						Participation Inventory Finance
	June 29, 2013			March 30, 2013			June 29, 2013		March 30, 2013
Inventory finance notes receivable:
Collectively evaluated for impairment	$	13,640		$	12,708		$	—	$	—
Individually evaluated for impairment	6,943			6,247			3,604		4,345
	$	20,583		$	18,955		$	3,604	$	4,345
Allowance for loan loss:
Collectively evaluated for impairment	$	(139	)	$	(130	)	$	—	$	—
Individually evaluated for impairment	(71		)	(220		)	—		—
	$	(210	)	$	(350	)	$	—	$	—

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. Payments received on nonaccrual loans are recorded on a cash basis, first to interest and then to principal. At June 29, 2013, the Company was not aware of any potential problem loans that would have a material effect on the inventory finance 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 Inventory Finance				Participation Inventory Finance
	June 29, 2013		March 30, 2013		June 29, 2013		March 30, 2013
Risk profile based on payment activity:
Performing	$	20,334	$	18,446	$	3,604	$	4,345
Watch list	73		—		—		—
Nonperforming	176		509		—		—
	$	20,583	$	18,955	$	3,604	$	4,345

The Company has concentrations of inventory finance notes receivable related to factory-built homes located in the following states, measured as a percentage of inventory finance receivables principal balance outstanding:



	June 29, 2013		March 30, 2013
Florida	24.1	%	20.9	%
Texas	12.4	%	12.6	%
Colorado	11.2	%	5.1	%
Arizona	8.0	%	10.5	%

The states of Florida and Arizona have particularly experienced housing weakness from economic circumstances. 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 inventory finance receivables in any other states as of June 29, 2013 or March 30, 2013, respectively.