Commitments and Contingent Liabilities

9 Months Ended

Aug. 06, 2011

Commitments and Contingent Liabilities [Abstract]

Commitments and Contingent Liabilities

11. Commitments and Contingent Liabilities

Majestic 21 — Majestic 21 was formed in 1997 as a joint venture with an unrelated entity (21^st Mortgage Corporation (“21 ^st Mortgage”)). While Majestic 21 has been deemed to be a variable interest entity, the Company only holds a 50% interest in this entity and all allocations of profit and loss are on a 50/50 basis. Since all allocations are to be made on a 50/50 basis and the Company’s maximum exposure is limited to its investment in Majestic 21, management has concluded that the Company would not absorb a majority of Majestic 21’s expected losses nor receive a majority of Majestic 21’s expected residual returns; therefore, the Company is not required to consolidate Majestic 21 with the accounts of Nobility Homes in accordance with FASB ASC 810. On May 20, 2009, the Company became a 50% guarantor on a $5 million note payable entered into by Majestic 21, a joint venture in which the Company owns a 50% interest. This guarantee was a requirement of the bank that provided the $5 million loan to Majestic 21. The $5 million guarantee of Majestic 21’s debt is for the life of the note which matures on the earlier of May 31, 2019 or when the principal balance is less than $750,000. The amount of the guarantee declines with the amortization and repayment of the loan. As collateral for the loan, 21^st Mortgage Corporation (our joint venture partner) has granted the lender a security interest in a pool of loans encumbering homes sold by Prestige Homes Centers, Inc. If the pool of loans securing this note should decrease in value so that the notes outstanding principal balance is in excess of 80% of the principal balance of the pool of loans, then Majestic 21 would have to pay down the note’s principal balance to an amount that is no more than 80% of the principal balance of the pool of loans. The Company and 21 ^st Mortgage are obligated jointly to contribute the amount necessary to bring the loan balance back down to 80% of the collateral provided. We do not anticipate any required contributions as the pool of loans securing the note have historically been in excess of 100% of the collateral value. As of August 6, 2011, the outstanding principal balance of the note was $3,235,390 and the amount of collateral held by our joint venture partner for the Majestic 21 note payable was $4,044,237. Based upon management’s analysis, the fair value of the guarantee is not material and as a result, no liability for the guarantee has been recorded in the accompanying balance sheets of the Company.

On August 6, 2011 there was approximately $754,852 in loan loss reserves or 3.22% of the portfolio in Majestic 21. The Majestic 21 joint venture partnership is monitoring loan loss reserves on a monthly basis and is adjusting the loan loss reserves as necessary. The Majestic 21 joint venture is reflected on 21st Mortgage Corporation’s financial statements which are included in the financial statements of its ultimate parent which is a public company. Management believes the loan loss reserves are adequate based upon its review of the Majestic 21 joint venture partnership’s financial statements.

Finance Revenue Sharing Agreement — The Company has a finance revenue sharing agreement with 21 ^st Mortgage Corporation. Under the Finance Revenue Sharing Agreement (“FRSA”), the Company has agreed to repurchase any repossessed homes and related collateral from 21^st Mortgage Corporation that were financed under the agreement, at any time while the loan is outstanding. Upon the repurchase of the loan, the Company receives all of the related collateral. The repurchase price is the remaining loan balance (plus 21 ^st Mortgage Corporation’s legal fees). If the loan included a mortgage on the land, the Company receives the land in addition to the home. If the loan only had the home as collateral, the Company only receives the home and is required to move it off the location where it was previously sited. After the Company re-sells the homes, the Company receives the full proceeds from the sale of the home, plus a reimbursement from 21^st Mortgage Corporation for liquidation expenses. The reimbursement covers the Company’s cost of transporting homes, repairing homes to resale condition, remarketing homes and all other liquidation expenses. The Company and 21 ^st Mortgage Corporation have agreed that the reimbursement for: (a) a home only repurchase will not exceed 60% of the Company’s purchase price nor will it be less than 40% of the Company’s repurchase price; and (b) a home and land repurchase will not exceed 45% of the Company’s purchase price nor will it be less than 25% of the Company’s purchase price.

Under the FRSA, loans that are 30 days past due are considered to be delinquent. At August 6, 2011, 14.95%, or $10,500,728, of the loans in the portfolio subject to the finance revenue sharing agreement were delinquent. At August 6, 2011, there were loan loss reserves of 9.25% of the finance revenue sharing agreement’s loan portfolio, which, based on our historical recovery ratios, are expected to be sufficient to cover our losses on the disposition of delinquent loans. The joint venture partnership is monitoring loan loss reserves on a monthly basis and is adjusting the loan loss reserves as necessary. If the fair market value of the collateral is less than the purchase price, after combining the liquidation expense reserves carried by 21st Mortgage Corporation, the Company would book a loss at that time. This loss would be reduced by any specific reversal of the guarantee liability related to the contract. See Note 2 for further discussion of the guarantee liability. The risk of loss is carried primarily by 21st Mortgage Corporation as evidenced by the loss reimbursement payment of up to 60% that the Company can use to cover any shortfall in the sales proceeds from the cost of buying the loan.

The following table summarizes certain key statistics regarding repurchased homes and subsequent sale of those homes under its finance revenue sharing agreement. These homes and land are reflected as pre-owned homes in the consolidated balance sheets (see Note 3).

	Nine Months		Fiscal Years
	8/6/2011		2010		2009		Total
Homes repurchased		44		51		74		169
Cost of repurchased homes	$	3,856,645	$	4,829,725	$	6,795,961	$	15,482,331
Homes Repurchased:
Number of loans originated from 2003-2005		3		6		17		26
Amount of loans originated from 2003-2005	$	203,867	$	430,425	$	1,089,017	$	1,723,309
Number of loans originated from 2006-2010		41		45		57		143
Amount of loans originated from 2006-2010	$	3,652,778	$	4,399,300	$	5,706,944	$	13,759,022
Number of repurchased homes sold		17		28		7		52
Cost of repurchased homes sold	$	1,504,771	$	2,177,579	$	406,715	$	4,089,065
Liquidation reimbursement from 21st Mortgage Corporation	$	584,155	$	872,144	$	189,921	$	1,646,220
Net gain on the sale of repurchased homes	$	55,202	$	250,832	$	114,383	$	420,417
Commission income	$	83,944	$	206,434	$	51,021	$	341,399

When we repossess properties under the FRSA, we may be required to purchase land on which the home is set if that transaction was initially financed as a bundled arrangement by 21st Mortgage. In the quarter ending February 5, 2011, we initiated the deferral of revenue recognition on the sale of repossessed homes that were bundled with land sales and re-financed by 21st Century Mortgage based on guidance in ASC 360 -20 (formerly FAS 66). We have determined that on such transactions that we have “continuing involvement” since under the FRSA we are required to repurchase the collateral in the financed transaction in the event of a default. Accordingly we have deferred revenue recognition on such sales transactions and included the deferred revenue in our balance sheet beginning in the quarter ending February 5, 2011 and have included the related collateral in other long-term assets. Revenue, cost of the transaction and gross profit will be recognized as the amount of the repurchase obligation is reduced based on the payoff of the loan by the customer. If losses on transactions were to occur, the collateral would be written down to reflect the loss on this collateral.

We have assessed the cumulative effects on our financial statements of not adopting this policy on previous sales transactions of this nature which occurred in fiscal 2009 and 2010 and have determined that the impact of not adopting this accounting on such transactions is not material to the financial statements. We thus believe it appropriate to adopt the above described accounting for such transactions on a prospective basis for such transactions that occurred in the quarter ending February 5, 2011 and thereafter.

The maximum future undiscounted payments the Company could be required to make under the finance revenue sharing agreement, as of August 6, 2011, is $70,254,098, in repurchase obligations, offset by payments from 21st Mortgage Corporation for the loss reserve of up to $31,614,344 and the proceeds from the sale of the homes (the collateral). The fair value of the collateral, when combined with the amount of the reserve payment from the finance revenue sharing agreement reserve for loan losses account, has historically exceeded the amount of the defaulted loan resulting in no loss to the Company. However, if the real estate market further deteriorates, the Company could experience losses on the disposition of these delinquent loans.

As discussed in Note 2, the Company has estimated the fair value of the underlying guarantees of the FRSA on a loan by loan basis. The Company estimated the fair value for the repurchase obligation based on the specific underlying characteristics of each loan, including estimated cash outflows that would be incurred by a guarantor and a premium that would be required to be paid a third party to induce that party to participate in the arrangement. The liability was $1,707,230 at August 6, 2011 and $1,682,621 at November 6, 2010.

See Note 14, Subsequent Events, for additional information regarding the FRSA.

Repurchase Agreements — The Company had only one repurchase agreement with a financial institution (floor plan lender) and that agreement was for only one manufactured housing dealer. As of August 6, 2011, the dealer had none of the Company’s homes on floor plan. The contingent liability for each home is based on the wholesale invoice price of the home-less the required curtailment from the floor plan lender that the dealer has paid per home. These arrangements, which are customary in the industry, provide for the repurchase of homes sold to independent dealers in the event of default by the independent dealer. The price the Company is obligated to pay declines over the period of the repurchase agreement (generally 18-24 months) and the risk of loss is further reduced by the sales value of any homes which may be required to be repurchased. The contingent liability under these repurchase agreements is on an individual unit basis and was $0 and $116,136 at August 6, 2011 and November 6, 2010, respectively. The Company applies FASB ASC 460-10, Guarantees, to account for its liability for repurchase commitments. Based upon management’s analysis, the fair value of the guarantee related to the Company’s repurchase agreements is not material and no amounts have been recorded related to the fair value of the guarantee in the accompanying consolidated financial statements. In addition, there were no homes repurchased under any of the Company’s repurchase agreements in the nine months ended August 6, 2011 or July 31, 2010.